LAW OF BUSINESS ASSOCIATIONS 1

DEFINITION OF COMPANY
Definition of a Company as an artificial legal person

The word company originates from a Latin word ‘companis’ meaning people sharing
together. It relates to a group of people associating together and sharing resources to
pursue a common purpose.

S.1 (2) of The Companies Act, 2012, provides a company to be any company formed and
registered under the Act or an existing Company or a re-registered company under the
Act.

The definition given by the Companies Act is not helpful, as it does not sufficiently define
what a company is but authors have developed a definition of a Company. Professor
David Bakibinga in his book Company law in Uganda defines a Company as an artificial
legal entity separate and distinct from its members or shareholders.

This legal person is distinguishable from natural personality. Natural persons are born by
natural people/persons and their lives end at death while artificial persons (Corporations)
are created by law/statute and their existence is ended by the law.

The possession of a legal personality implies that a company is capable of enjoying rights
and being subject to duties, separately from its members. As an artificial legal person, a
Company is capable of the following;

It has an existence separate from that of the members and as such;

a) It has its own name by which it is recognized.

b) It can own its own property i.e. assets like buildings, land, bank accounts. etc
c) It can sue or be sued in its own name.
d) Even if a member or all the members die, the company will remain in existence, in
other words it has perpetual succession.
e) It can be a creditor i.e. borrow money in its own name and use its assets as security
and it will be responsible for paying back ‘such debts.
f) It can employ its own employees, including its members or shareholders.

This principle of legal personality was first distinctly articulated in the British House of
Lords Judgment in the case of SALOMON Vs SALOMON & CO. LTD (1897) AC 22.
Salomon owned a boot and shoe manufacturing business as a sole proprietor (single
trader); due to pressure from his family (his sons were demanding for a share in the

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family business), he formed a limited liability company known as Salomon & co ltd. The
company had a maximum of 7 shareholders consisting of Salomon, the wife and his five
children. Salomon owned 20001 shares of the 20007 shares while the wife and children
owned I share each. Immediately after incorporation, the company experienced
difficulties and a year later was wound up. After paying all the secured
creditors/debenture holders, he failed to pay the unsecured creditors. These creditors
then sued him personally for the repayment of the company’s debt.

At the court of first instance and appeal court, it was held that he was liable to pay the
debts of the company personally. That there was no company at all but Salomon, that the
company was a mere sham and that he employed the company as an agent and therefore
as a principal behind the company he was liable to pay its debts.

Some of the reasons given for holding him personally liable were;

a) He was the owner of the business before incorporation.

b) After incorporation he was owning a substantial part of the shares.
c) It was him who paid for all the shares even those of his wife and children.
d) He had appointed himself the managing director of the company and he alone was in
charge of the management.

He appealed further to the House of Lords and the House of Lords departed from the
decision of the lower court, Lord McNaughton held as follows;-.

I) That Salomon had followed all the formalities required to form a company and
therefore his company was a legal entity recognized by law and therefore a body
corporate capable of its own rights and liabilities separate and different from its
members.

ii) That therefore the company was a legal entity capable of a separate existence and liable
to pay its own debts, and Salomon was not personally liable to pay the debts of the
company.

iii) That a company is at law a different person altogether from the subscribers although it
may be that after incorporation, the business is exactly the same as was before, the same
persons are the managers, and the same hands receive the profits.

iv) That it does not matter whether all the members are relatives or strangers.

v) That it does not also matter, even if one of the members holds a substantial part of the
shares.

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vi) That a company being under the full control of one member does not mean that it is
not a company, as long as it is legally registered, it is a legal person different from its
members.

The importance of Salomon’s case is that the highest court in the land recognized the
necessary consequences of the distinction between a company and its members as
separate persons.

The principle has been applied in other cases, for instance in LEE Vs LEE’S AIR
FARMING LTD. (1960) 3 ALL E.R 420 Lee formed a company that was engaged in the
business of aerial crop spraying in News Zealand. The company had three thousand
shares (3000) in which he held 2999 shares and his wife (the plaintiff) held one. Lee was
sole “governing director” and controlling shareholder so he exercised full and unrestricted
control over the affairs of the company. Lee as a managing director appointed himself
chief pilot in the company’s business of aerial crop spraying. He was killed in a crash
while flying for the company. His wife sued the company for compensation under the
workmen’s compensation Act. Under the Act; one could only be entitled to compensation
if they proved that the deceased was an employee who died in the course of employment.

It was argued by the company that on him lay the duty of giving orders and obeying
them, that he acted as both employer and employee and virtually there was no employer-
employee relationship between him and the company and that therefore the wife was not
entitled to compensation.

In the House of Lords, Lord Morris held that Lee and his company were distinct legal
entities, which had entered into contractual relationships under which Lee as chief pilot
became a servant of the company.

Court also held that lee and the company were two ‘separate and distinct persons, and
that in his capacity as managing director he could appoint an employee of the company,
including himself.

It was further held that the fact that somebody is a managing director of a company does
not mean that he cannot enter into a contractual relationship with the company to serve
it.

In the case of MACAURA Vs NORTHERN ASSURANCE CO. LTD (1925) A.C.619;

Macaura was a landowner who sold the timber on his estate to a company in return for
shares in that company of which he was the sole owner and creditor. Before the sale to
the company, he had insured the timber, which lay, on his land in his own name. He did
not transfer the insurance policy to the company name. Two weeks later almost all the

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timber was destroyed by fire. He claimed for the loss under his private insurance policy.
Under that policy, before one could recover compensation, he had to prove that he had
an insurable interest, thus before Macaura could recover anything from the insurers, he
had to prove that he had an interest in the timber that was destroyed by fire.

The insurers denied liability on the grounds that he personally did not have, as insurance
law required, an insurable interest in the timber.

It was held that Macaura’s claim must fail since it was the company, which owned the
timber; Macaura merely owning the shares in the company, the timber was not effectively
covered by his insurance policy.

This case therefore upheld the principal that a company has a distinct legal existence
from that of its shareholders and as such it is capable of owning its own property and a
shareholder has no personal interest in its property, though he’ may be the controlling
shareholder.

FORMS OF BUSINESS ASSOCIATIONS/VEHICLES

1. Companies

They are business forms under the Companies Act. There are different types of
companies under the Companies Act 2012. Companies are legal entities with capacity to
sue or be sued

2. Statutory companies

These are formed by Acts of Parliament and do not go through the process of
incorporation laid out under the Companies Act. They are formed by an Act of
Parliament, Examples include Electricity regulatory Authority under the Electricity Act,
1999, National Drug Authority under the National Drug Authority and Policy Act, Cap
206, Uganda Road Fund Act, 2008

3. Corporate sole

It is one, which consists of one human member at a time, being the holder of an office.
They are established under Article 246 (3) (a) of the 1995 Constitution. Examples include
the Kabaka of Buganda, Toro and Bunyoro. S. 2(2) of the Administrator General’s Act Cap
157 establishes the Administrator Registrar General as a corporate sole.

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4. Trusts

These are established under the Trustees Incorporation Act, Cap 162 for charitable,
religious, educational purposes. The Board of Trustees who have capacity to sue or be
sued are the administrative organ of a Trust

5. Partnerships

They are business vehicles established under the Partnership Act of 2010. Partnerships
are not legal entities but forms of business organizations.

6. Non-Governmental organizations

These are governed by the Non-Governmental Organizations Act 2006 as amended.

Their purpose is mainly to provide charitable services which may be of a socio-economic
or political nature.

7. Sole Proprietorships

A sole proprietor is an individual who registers a business name for purposes of trading.
These are regulated by the Business names Registration Act. They are not legal entities
rather the natural individual is liable personally for any losses.

CATEGORIES OF COMPANIES
There are two categories of companies

1. Private companies.

2. Public companies.

Private companies
S. 5 of the Companies Act defines a private company as a Company, which by its articles

a) Restricts the rights to transfer shares of the company.

b) Limits the number of its members to 100, not including past, present employees of the
company.
c) Prohibits any invitations to the public to subscribe for any shares or debentures of the
company (investments in the company).

Public Companies
Under S. 6, a public company can offer its shares to the public. In KCC Football Ltdv
Capital Markets Authority HCCS 367 of 2007 it was held that the factors determining if
an offer is public or private are;

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 a) The number of offerees and their relationship and their relationship to each other
and to the issuer
b) The number of shares
c) The size of the offering
d) The manner of offering-public advertising is incompatible with private offering

(a) A company limited by shares

This i s a company where the members enjoy limited liability. This means that in case of
winding up of the company if the company’s assets are unable to meet the company’s
debts, then the members will only be liable to contribute to the debts of the company
only such amounts as a member may not have paid for the shares they bought. i.e., a
member will only be required to pay the balance that he did not pay on the shares he
bought. Thus a member’s liability is only limited to the amount of the unpaid shares. S.4
(2) of the Companies Act.

NOTE: Liabi1ity may arise in case of winding up. When a company is unable to go on with
its business or for some other reasons it is forced to stop operating business such a
company may go through a process called winding up. Winding up is the process of
ending a company, in this process, all its assets are sold, and the company pays off its
debts using the proceeds of its assets i.e. the money it has got from the sale of its assets.
In case that money is not enough to clear all its liabilities, then the members who have
not completed payment for their shares will be called upon to pay and that money will
also be used to clear its debts.

NOTE: A share is a unit of capital in a company. For example, if the company wants to
start business, it can decide to start up with an initial capital of 10,000, 000/=. This capital
will then be divided into a number of units, let us say 10 units. It means that each unit will
be equal to 1,000, 0000/. Therefore, since a share is a unit of capital in a company, each
share of that company will be worth 1,000, 000/=. So (a shareholder buys let us say 40
shares in that company, he will pay 40 times 1,000,000(40,000,000).

(b) A Company limited by guarantee

This is one where the liability of its members is limited to such amount, as the members
may have undertaken to contribute to the company’s assets in the event of its winding up.
This guarantee must be expressed in the memorandum of association. I.e. there must be
an express statement/undertaking by the subscribers / members that the members
guarantee that they will pay a specified amount of money in the event of winding up of
the company, if the company’s assets are not sufficient to meet its debts S 4 (2) of the
Companies Act.

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For example the articles may have a clause saying that in case of winding up of the
company, each member shall be liable to contribute only 500,0000/= in case the assets of
the company are not enough to meet its liabilities. It means that the members liability
will be limited to only that 5000, 000/= and no more.

(c) An unlimited company

This is a company in which there is no limit to the liability of the members. This means
that in the event of winding up, the members, are liable to contribute money sufficient to
cover all the company’s debts without any limitations, if the company for example the
company has debts of millions and millions of shillings, the members have to be
responsible to pay all the debts and the member’s personal estate/property can be
encroached upon to discharge the liabilities of the company. S.4 (2) of the Companies
Act.

HOLDING AND SUBSIDIARY COMPANIES S.161

A subsidiary company is one that is controlled by another company called a holding
company or its parent (or the parent company). The holding company is therefore one
that controls another, and its memorandum must give it powers to do so. The most
common way that control of a subsidiary is achieved, is through the ownership of
majority shares in the subsidiary by the parent. (Note: voting rights unless otherwise
agreed in the articles, will depend on the shares, if you have 80% of the shares in a
company, you will be entitled to 80 votes). These shares give the parent the necessary
votes to determine the composition of the board of the subsidiary, and so exercise
control. This way the holding company can dictate policy and management decisions.
This gives rise to the common presumption that 50% plus one share i.e. (more that 50%)
is enough to create a subsidiary. Thus if a company owns majority shares in another
company, that other company will be its subsidiary.

A parent company does not have to be the larger or “more powerful” entity; it is possible
for the parent company to be smaller than a subsidiary or the parent may be larger, than
some or all of its subsidiaries (if it has more than one). The parent and the subsidiary do
not necessarily have to operate in the same locations, or operate the same businesses, but
it is also possible that they could conceivably be competitors in the marketplace. In
addition, because a parent company and a subsidiary are separate entities, it is entirely
possible for one of them to be involved in legal proceedings while the other is not.

A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their
own. Subsidiaries are separate, distinct legal entities for the purposes of taxation and
regulation.

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Subsidiaries are a common feature of business life, and most if not all major businesses
organize their operations in this way. Examples include holding companies such as MTN
(Uganda) is a subsidiary of MTN (South Africa), Stanbic Bank Uganda is a subsidiary of
Standard Bank (South Africa) etc.

\PROMOTION AND FORMATION OF THE COMPANY

Promotion
A business cannot come into existence unless someone thinks of the idea and attempts to
translate it into business. The process of conceiving and translating the business
opportunity is what is called promotion.

Promoters Defined
Before a company is registered or formed, a person or persons must carry out the
preliminary work. This work includes signing contracts, arrangement for capital and
credit facilities, securing premises where the company is to be located, machinery and
equipment, preparing the necessary documents, etc. All this work is done by persons
called promoters.

A promoter has been defined judicially by Cockburn C J in the English case of;
TWYCROSS VS GRANT (1877) as-

“One who undertakes to form a company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish that purpose”.

A person is prima facie a promoter of the company, if he has taken part in setting a
company formed with reference to a given object.”

A company may have, many promoters and in the case of; RE LEADS & HANLEY
THEATRES [1902] 2 CH 809, it was held that one existing company may promote
another new company.

An employee of a promoter is not a promoter for example a lawyer or advocate or

solicitor who merely does the legal work necessary to the formation of a company is not
as such a promoter. RE GREAT WHEAL POLGOOTH LTD (1883) CR 42

A promoter may do any or more of the following activities:-

• Solicit capital

• Prepare a prospectus

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. Solicit directors for the company

• Arrange the preparation of the Memorandum and Articles of Association

• Obtain premises

• Obtain whatever equipment is necessary for the running of the business

• Negotiate contracts.

Duties of a Promoter:

A promoter is not an agent of the company which he is forming because a company

cannot have an agent before it comes into existence (KELNER Vs BAXTER (1866) and is
not usually treated as a trustee for the future company (OMINIUM ELECTRIC PALACES
LTD Vs BAINES [1914] 1 CH 332). However, from the moment he acts for the company in
mind, he owes duties to the company and they include the following;

1. Duty of good faith. A promoter stands in a fiduciary relationship (a relationship of

utmost good faith/trust) to the company and consequently owes it certain fiduciary
duties i.e. duties of disclosure and accounting and this implies that they must not make
any secret profits out of the promotion without disclosing it to the company. A promoter
must disclose a profit which he is making out of the promotion to either an independent
board of directors or the existing and intending shareholders for example by disclosure in
the prospectus.

This was illustrated in the case of; ERLANGER Vs NEW SOMBERERO Co LTD (1978)
3AC 1218. Members in a syndicate bought the lease of an island containing a phosphate
mine at £55,000. The members of the syndicate then promoted a company and appointed
themselves its directors. They sold the lease to the company for £110,000. This was
unfortunately not revealed in the prospectus inviting the public to subscribe for its shares
but was subsequently discovered. The company instituted an action to recover profits
from the promoters who in turn argued that they had made a disclosure of their profits to
a board of directors. Nevertheless, the BOD was:

i. Appointed by the promoters themselves.

ii. The first director could not attend meetings because of his state in life (ill health).

iii. The second director was not present when the profits of the promoters were approved.

iv. The third director was one of the promoters themselves.

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v. The fourth and fifth directors were ignorant of the subject matter.

The issue was whether there was a disclosure. It was held that the disclosure to only one
director who had appointed the promoters was not a proper disclosure and that the
company was entitled to rescind the contract. That the promoters must repay the
purchase price and the company in turn must re-convey the lease to the promoters so as
to restore the status quo (original position). Thus, a disclosure must be made to the
company either by making it to an entirely independent board or to the existing and
potential members as a whole. A partial or incomplete disclosure will not do, the
disclosure must be full or explicit.

2. Duty of skill and care: In the process of promotion, a promoter must carry out his
work with great care and skill and due diligence expected of a reasonable man. He should
take care not to make false representation/ misstatements for example in the prospectus.

3. Duty to act in the best interests of the company. He should not let his personal
interest conflict with those of the company for example he should not sell his own
properties to the company at an overpriced value. He should also take care not to under
negotiate contracts for example buying properties from third parties at overpriced values.

Consequences for Breach of duty

1. A promoter can be compelled to account for any secret profit made. In GLUECKSTEIN
Vs BARNES (1900) A.C 240; promoters of a company operating under a syndicate bought
property intending to sell it to a company and sold it to the company at a higher price
and made a profit on it but did not disclose this profit to the company in the prospectus,
it was held that they were liable to account for the above profits to the company.

Where promoters sell their own property to the company, the company cannot affirm the
contract and at the same time ask for an account of the profits or for damages, as this
would amount to asking Court to vary the contract of sale and order the defendant
promoters to sell their assets at a lower price.

2 Rescission: where the promoter has for example sold his own properties to the
company at an overpriced value, the company may rescind the contract and recover the
purchase price paid.

The right to rescission may be lost in a number of ways. For example;-

a) It will be lost if the parties cannot be restored to their original positions, as where
the property has been worked so that its character has been altered. LA GUNAS
NITRATE CO Vs LAGUNAS SYNDICATE [1899] 2 CH 392. However, even if

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 restitution is not strictly possible, the right to rescind will be allowed if restitution
is substantially possible.
b) It will also be lost if third parties have acquired rights for value by mortgage or
otherwise under a contract. RE LEADS & HANLEY THEATRES [1902] 2 CH 809;
where the mortgagee of the property had sold it.

3. Damages for misrepresentation where the promoter has made an actual

misrepresentation and cannot prove that he had reasonable ground to believe and did
believe up to the time the contract was made the facts represented were true.

4. Damages for failure to disclose.

5. Damages for negligence in allowing the company to purchase property at an excessive

price since they are to act with skill and care.

Remuneration of a Promoter

Promoters do not possess an automatic right to receive remuneration from the company
for their services from the company unless there is a valid contract enabling him to do so
between him and the company. Without such a contract, he is not even entitled to
recover his preliminary expenses. This is so because until a company is formed, it cannot
enter into a valid contract and the promoter has to expend the money without any
guarantee that he will be repaid.

However, in practice, the company’s articles may allow directors to pay preliminary
expenses from the company’s funds.

However, if the promoter is a professional, he will not be content merely to recover his
expenses; he will expect to be handsomely remunerated. In the case of TOUCHE Vs
METROPOLITAN RAILWAY WAREHOUSING COMPANY (1871) LR 6 CH.APP 671
Lord Hatherly said: “the services of a promoter are very peculiar, great skill, energy and
ingenuity may be employed in constructing a plan and in bringing it out to the best
advantages.” Hence, it is perfectly proper for the promoter to be rewarded provided he
fully discloses to the company the rewards, which he obtains. The remuneration must be
fully disclosed not only by the promoter to the company but also by the company in the
prospectus.

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 PRE-INCORPORATION CONTRACTS s.54
In promoting a company, promoters usually enter into contracts with third parties and
when they do so, they purport to do so on behalf of the company before it is incorporated
i.e. (unincorporated company). Such contracts are not binding on the company because it
is not yet in existence; and consequently has no capacity to contract. Herman J in the case
of; ROVER INTERNATIONAL LIMITED Vs CANNON FILMS SALES LTD F1987)1 WLR
1597 AT 1599; Observed that

“If somebody does not exist, they cannot contract”. A company comes into existence as a
legal person after it is registered/ incorporated, so agents cannot make contracts on
behalf of a company before that company is legally registered, if they do; such contracts
will be void and of no effect as against the company and the company cannot even ratify
them. To ratify a contract means to adopt or confirm. Such contracts are called pre-
incorporation contracts.

In the case of; KELNER Vs BAXTER (1866). The Gravesend Royal Alexandra Hotel
Company ltd was being formed to buy a hotel from K. At a time when all the concerned
knew that the company had not been formed, a written contract was made “on behalf of’
the proposed company by A, B & C for the purchase of wine worth 900 pounds from K.
The company was subsequently formed and the wine handed over to it and consumed.
Before payment was made, the company went into liquidation; It was held that A, B & C
were personally liable on the contract, and no ratification could release them from their
liability.

In that case, Ere J at page 183 stated thus; “where a contract is signed by one who
professes to be signing as an agent’ but who has no principal existing at the time, and the
contract would be altogether inoperative unless binding on the person who signed it, he
is bound thereby, and a stranger cannot by a subsequent ratification relieve him from that
responsibility”

Similarly in the case of ENGLISH & COLONIAL PRODUCE COMPANY LTD (1906) CH.
435 where persons who afterwards became directors of the company instructed solicitors
to prepare the memorandum and articles of association so that the company might be
formed but on formation the company failed to pay the solicitors’ charges and denied that
it was liable to do so, it was held that although the company had taken benefit of the
contract, it did not impose on it any liability to pay since the contract was made before
the company was formed and the persons who had given the solicitors the instructions
were personally responsible for paying them for the work done.

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In the Ugandan case of CENTRAL MASAKA COFFEE CO. Vs MASAKA FARMERS AND
PRODUCERS LTD (1991), ULSLR 220, it was held that a company lacked the capacity to
conclude an agreement for lease of a coffee processing factory made five days before its
incorporation. Thus if the contract was entered into by a promoter and signed by him “for
and on behalf of XX Co Ltd” then according to KELNER’S CASE, the promoter will be
personally liable.

But if the promoter signed the proposed name of the company without adding his name
to authenticate it, if they sign on behalf of the company but do not put the words “for and
on behalf’ to show that they are actually signing on behalf of that company.

This was illustrated in the case of NEWBORN Vs SENSOLID (1954) QB 45; the plaintiff
was forming a limited liability company to be called Leopold Newborn London Ltd. The
plaintiff entered into a contract with the defendants to supply them with ham and the
contract was signed as “yours faithfully, Leopold Newborn London Ltd and underneath
the signature was the plaintiffs name” The market fell and the defendants refused to take
delivery. The plaintiff sued for breach of contract. The court held that the company was
not in existence at the time of signing the contract hence there was never a contract. The
contract was never signed on behalf of the company nor was it signed by the plaintiff, and
therefore neither the company nor the plaintiff himself could sue on the contract

If a pre-incorporation contract cannot be enforced against the company, can the company
enforce such a contract?

A company cannot after incorporation enforce a contract made in its name before
incorporation or sue for damages for breach of such contract. The rationale is that the
company was not a party to that contract in the first place and secondly because it had no
capacity to contract. Thus in NATAL LAND AND COLONIZATION CO. Vs PAULINE
AND DEVELOPMENT SYNDICATE (1940) A.C. 120; N Co Ltd agreed with a person
acting on behalf of a future company P Co Ltd that N Co Ltd would grant a mining lease
to P Co Ltd. Coal was discovered in the land and N Co Ltd refused to grant P Co Ltd the
lease. P Co Ltd sued for breach of contract asking for specific performance. It was held
that P Co Ltd could not compel N Co Ltd to grant the lease and that that P Ltd’s claim
must fail as it could not adopt or ratify a contract made before it existed.

NOVATION S. 54 (2)
In order a company to be bound by a pre-incorporation contact, a fresh contract on the
same terms as the pre-incorporation contract must be entered into. This process of
entering into a new contract by the company on similar terms as those of the pre-
incorporation contract is referred to as novation.

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Usually, an agreement is entered into by the promoter, which provides that the personal
liability of the promoter will cease when the company in the process of formation is
incorporated and enters into an agreement in similar terms with the contractor.

However, there must be sufficient evidence that the company has entered into a new
contract; Mere recognition of the pre-incorporation contract by performing it or
accepting benefits under it is not enough. In RE NORTHUMBERLAND AVENUE
HOTEL CO. LTD 1886, there was a pre incorporation contract for the grant to the
company of a building lease. After incorporation, the company took possession of the
land and began to build on it but there was no new contract entered into between the
company and the owners of the land because the company believed the pre-incorporation
contract was binding on it. It was held that there was no contract between the
landowners and the company as the pre-incorporation contract could not

be retrospectively ratified by the company and the company’s adoption of it did not
amount to the making of a new contract.

In another old English case of; HOWARD B PATENT IVORY MANUFACTURING CO.
1888 where J under a pre-incorporation contract agreed to sell property to a company but
after the company had been formed the terms of the payment were modified with J
accepting part of the purchase price in debentures instead of cash as had been originally
agreed upon, it was held that the renegotiation of the contract terms of payment were
sufficient evidence of a new offer and acceptance by which a company entered into a new
contract after incorporation.

INCORPORATION OF A COMPANY
A company is formed by registering it with the Registrar of Companies and obtaining a
certificate of incorporation. The registration process goes through the following steps;

1. RESERVATION OF THE COMPANY NAME

S.36 of the Companies Act has provisions in regard to names of companies. The
promoters must choose a name of their choice and then make an application to the
registrar of companies to reserve the name for their company. The name should not be
identical with that of an existing company or so nearly resemble it as to be calculated to
deceive, it should not also Contain the words “chamber of commerce” except where the
nature of the company’s business so justifies it and lastly it should not suggests patronage
(a connection) from government or be associated, with immorality, crime or scandalous

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in nature. If the registrar is satisfied, that the name meets the above requirements, he will
approve and reserve the name, the company must then register within 60 days.

Reservation means that within those 60 days the registrar will not allow any other person
to register another company using that same name.

To guard against the possibility of a negative reply from the Registrar, promoters must
have in mind one or more suitable alternatives. Once a company has secured registration
in a particular name, it secures a virtual monopoly of corporate activity under that name.
In case the Registrar inadvertently approves a name, which by law is not adequate, then
the new company may change its name within 6 months. A company may change its
name by special resolution and with the written approval of the Registrar. Where the
registrar refuses to register a name without a good reason, an application for an order of
mandamus to compel the registrar to perform his duty and register the company can be
filed in the High Court.

EFFECT OF REGISTRATION
If the Registrar is satisfied, that the documents are in order and that stamp duties and
fees have been paid, he enters the name of the company in the register of companies,
issues a certificate of incorporation. The issue of the certificate of incorporation is
conclusive evidence that all registration requirements have been complied with and that
the association is a company authorized to be registered and is duly registered under the
Act.

In the case of JUBILEE COTTON MILLS LTD Vs LEWIS (1924) AC.958; the certificate
was dated 6th January 1920 but it was not signed and issued until 8th January. On the 6th
of January, the directors allotted shares and debentures. The allottee later refused to pay
the amount due on the shares arguing that the company did not exist on the date of issue.
It was held that the company was deemed to have come into existence on the 6th of
January 1920. Therefore, the allotment was valid and the allottee must pay for the
securities allotted to him.

Principally the effect of registration is that from the date mentioned in the certificate of
incorporation, the subscribers to the memorandum, together with such other persons
that from time to time become members of the company become a body corporate by the
name contained in the memorandum, capable of exercising all the functions of an
incorporated company, with power to hold land and having perpetual succession and a
common seal, but with such liability on the part of members to contribute to the assets of
the company in the event of it being wound up.

15
 THE MEMORANDUM & ARTICLES OF ASSOCIATION OF A COMPANY

THE MEMORANDUM OF ASSOCIATION OF THE COMPANY S.7

The memorandum of association is the most important of all the company documents
because it contains the powers of the company, it describes the company and the nature
of activities that the company is authorized to do or engage in.

Objects Clause S.7 (1)

The objects must be lawful, if they are not, the the Registrar may refuse to register the
company or if it has already been registered may de-register it. Strickv Swansea Tin Plate
(1887) 36 CH D 558- the fact that just some of the provisions in the objects clause are
illegal does not make the company itself illegal.

Cotman v Brongham (1918) AC 514- The purpose of the objects clause is to protect the
subscribers who learn from it the purposes to which their money can be applied and to
protect persons dealing with the company who can discover from it the extent of the
company’s powers.,

Contents of the Memorandum (S.7 of the Companies Act)

The memorandum of Association of a company limited by shares must state the

fol1owing:-

1. The name of the company with “Limited” as the last word in case the company is a
limited liability company..

2 The registered office of the company is situated in Uganda

3. The objects of the company.

4 A statement as to the liability of the members.

5. A statement to the nature of the company (Whether private or public).

6 The amount of share capital and division thereof into shares of a fixed amount. In
addition, the memorandum must state the names, address and descriptions of the
subscribers thereof who must be at least two for a private company and seven for a public
company and their shareholding.

1. The name

16
The name of the company should be indicated and if it is a limited company, it should
have the word limited at the end.

2. Registered office

The memorandum must state that the registered office is situated in Uganda. However,
the actual address must be communicated to the Registrar of Companies within 14 days of
the date of incorporation or from the date it commences business by registration of a
company form called Notice of situation of registered office of the company, this form
will indicate the exact location of the company e.g. plot 45 Nakasero Road, Kampala.

3 The objects clause

This sets the principle activities the company has been incorporated to pursue. For
example, trading in general merchandise, carrying on business of wholesalers and retail
traders of all airtime cards, mobile phones and all phone accessories, carrying on the
business of mobile money agents etc. The objects must be lawful and should include all
the activities, which the company is likely to pursue. The objects or powers of the
company as laid down in the memorandum or implied there from determine what the
company can do.

Consequently, any activities not expressly or impliedly authorized by the memorandum

are “ultra vires” the company. The ultra vires doctrine restricts an incorporated company
under the Companies Act to pursue only the objects outlined in its registered
Memorandum of Association.

The doctrine of ultra vires is illustrated in the case of; ASHBURY RAILWAY CARRIAGE
CO. LTD Vs RICHIE (1875). A company which was not authorized by its memorandum
of association to lend money or finance any activity made an agreement with the
defendant to provide him with finance for the construction of a railway in Belgium. Later
on, the company repudiated this agreement and did not actually provide the finances, the
defendant sued the company for breach of contract, the company in its defense argued
that financing railway construction was not one of the activities it was authorized to do, it
was held that indeed such an act was beyond the powers of the company and such an
ultra vires contract was void and un enforceable.

To evade this restrictive interpretation of the objects clause, draftsmen inserted words as
“and to do all such other acts and things as the company deems incidental or conducive
to the attainment of these objects or any of them. In BELL HOUSES LTD Vs CITY WALL
PROPERIES LTD (1962) 2 Q.B 656; in that case, both companies to the dispute carried
on business as property developers, the plaintiff company agreed to introduce the

17
defendant company to a financier who could provide a loan and the defendants promised
to pay a fee to the plaintiff. When the defendants were sued for that fee, they pleaded that
a mortgage broking transaction such as that was ultra vires by the plaintiffs and that it
was not expressly covered in the plaintiff’s company memorandum of association. The
plaintiffs on the other hand argued that the transaction was not ultra vires; they relied on
a provision in their memorandum, which provided that the company was authorized;

“to carry on any other trade or business whatsoever which can, in the opinion of
the board of directors be advantageously carried on by the company in connection with
or ancillary to the general business of the company”

Salmon J of the Court of appeal held that that provision gave the company the
necessary power. In his remark, which has been criticized as destroying the whole
doctrine of ultra vires he stated thus;

“an object of the company is to carry on any other business which the directors believe
can be advantageously carried out in connection with or ancillary to the general business
of the company. It may be that directors take the wrong view and in fact, the business in
question cannot be carried on as directors believe. But it matters not how mistaken the
directors may be provided they form their view honestly and the business is within the
company’s objects and powers.”

The Memorandum of Association spells out the main objectives and powers of the
company. However, certain powers may be implied in the Memorandum of Association.
For example, in the case of FERGUSON Vs WILSON (1866) 2CH.A 277, a power to
appoint agents and engage employees was implied in the Memorandum of Association.
This is only sensible because a company as a fictitious person can only work through
agents and employees, and therefore if such a power was not implied, then the company
could not function at all.

Similarly in GENERAL AUCTION ESTATES & MONETARY CO Vs SMITH (1891) 3CH

432, the court implied powers of borrowing money and giving security for loans.

Subsequent cases have also adopted this position. In NEWSTEAD (INSPECTJON OF

TAXES) Vs FROST (1978) 1 WLR 441 at page 449, the Court implied powers of entering
into partnership or joint venture agreements for carrying on the kind of business it may
itself carry on i.e. intra vires.

In PRESUMPTION PRICES PATENT CANDLE CO (1976), the Court implied a power of

paying gratuities to employees. A power to institute, defend and to compromise
proceedings will also be implied in the Memorandum of Association if it is not provided

18
expressly. Courts at times imply powers because the particular nature of the company’s
undertaking demands it.

However, though the Court may imply these powers in the Memorandum of Association,
it is better practice to expressly state them. This is only sensible because:-

• The company often needs powers, which the Courts have not ruled that they can only be
implied and therefore the company can only obtain them by express provisions in the
Memorandum of Association, (e.g. the power to buy a share from another company
though recognized under the Act has not yet been implied).

• To avoid uncertainties or expenses of litigation, it is safer to insert them expressly in the

memorandum of association.

4. The liability of members

The memorandum of a company limited by shares or by guarantee should indicate that

the liability of members is limited. With respect to a company limited by shares, the
liability of a member is the amount, if any, unpaid on his shares. With regard to the
liability of a member of a company limited by guarantee, this is limited to the amount he
undertook to contribute to the assets of the company in the vent of winding up. A
company may also be registered with un-limited liability, in such a situation, the
members liability is unlimited and in case the company does not have sufficient credit to
pay its creditors, then the shareholders personal property may be encroached on to pay
the company’s debts.

5. Share capital (clause)

The memorandum requires that a company having a share capital must state the amount
of share capital with which the company is to be registered and that such capital is
divisible into shares of a fixed amount. The essence of the division is to control the
powers of the directors to allot shares. The law does not prescribe the value but they are
usually small amounts to encourage people to hold as many shares as possible. The
amount of capital with which a company is to be registered and the amount into which it
is to be decided upon by the promoters will be determined by the needs of the company
and finance available. For example if a company has its initial share capital/startup capital
of 5,000,000 it can divide this into 100 shares of 50,000 each. So if a member subscribes
for 50 shares, he will contribute 2,500,000/=.

Alteration of the objects

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A company may by special resolution alter the provision in its memorandum (Sec.16 of
the Companies Act) with respect to the objects of the company

ARTICLES OF ASSOCIATION (S 11 – 17 of the Companies Act)

Articles of Association contain regulations for managing the internal affairs of the
company i.e. the business of the company. They are applied and interpreted subject to the
memorandum of association in that they cannot confer wider powers on the company
than those stipulated in the memorandum. Thus, where there is a conflict or divergence
between the memorandum and articles, the provisions of the memorandum must prevail.

Management, who will be the directors of the company, who will be, appointment of the
board of directors, qualifications of directors, the classes and rights of shareholders,
transfer of shares, auditing of books are all contained in the Articles of Association.

Contents of the Articles

 The board of directors (management) and how they will be, appointment, their
qualifications, how they can resign or be removed from office.
 The chairman of the board.
 The managing director and how he will be appointed.
 Secretary and his appointment.
 Meetings (how meetings of the company should be called and conducted and the
required quorum / number of members that must be present to conduct a valid
meeting of the company) and the different types of meeting that the company may
hold from time to time, voting rights of the members, the right to receive notice
and to attend and vote etc.
 Powers of directors.
 The different classes of shares and rights attached to different classes of shares.
 Borrowing powers of the company.
 It’s properties , control of the company finance, its bankers, dividends/profits and
how they should be distributed
 Appointment of auditors
 the company seal and how it should be used etc

The Articles must be printed in the English language, divided into paragraphs, numbered
consecutively, signed by each subscriber to the memorandum in the presence of at least
one witness who must attest the signature.

The Companies Act contains a standard form of articles (Table A of the Companies Act)
which applies to companies limited by shares (S 13 of the Companies Act). These regulate

20
the company unless it has its own special articles, which totally or partially exclude table
A. The advantages of statutory model articles are:

• That legal drafting of special articles is reduced to a minimum since even special articles
usually incorporate much of the text of the model.

• There is flexibility since any company can adopt the model selectively or with
modifications and include in its articles special articles adapted to its needs.

Alteration of the Articles S.16 of the Companies Act

It is provided that subject to the provisions of the Act and to the conditions contained in
its memorandum, a company may by special resolution alter or add to its articles. A
special resolution is one, which, is passed by a majority of not less than 75% of such
members, as being entitled to a vote in person or where proxies are allowed, by proxy at a
general meeting of which not less than twenty-One days’ notice specifying that the
intention to propose the resolution as a special one has been given.

The alteration will generally be valid unless if:

• It is illegal.

• It conflicts with provisions of the Companies Act.

• It extends or modifies the Memorandum. .

• It deprives members of rights conferred on them by the Company 2t or by court. .

• It requires a shareholder to take or subscribe for more shares or increases his liability to
contribute to the company,

• It amounts to fraud on the minority.

INTERPRETATION OF ARTICLES AND MEMORANDUM OF ASSOCIATION

1. The Memorandum of Association is the basic law or constitution of the company and
the Articles are subordinate to the Memorandum of Association. It follows therefore that
if there is a conflict, the Memorandum of Association prevails. In other words if there is a
contradiction between the provisions of the memorandum and the provisions of the
articles of association, then the provisions of the memorandum will be followed and

21
those provisions in the articles which are contradicting the memorandum will be void
and of no effect.

2. If there is no conflict, the Memorandum of Association and articles must be read

together and any ambiguity or uncertainty in either can be removed by the other e.g. in
RE SOUTH DURHAM BREWERY CO. LTD (T885) 31 CH D 261, the Memorandum of
Association was silent as to whether the company’s shares were to be all one class or
might be of different classes. It was held that the power given by articles to issue shares of
different classes resolved the uncertainty and enabled the company to issue shares of
different classes though the memorandum did not expressly state so. Also, in the case of
RAINFORD Vs JAMES KETT & BLACKMAN CO. LTD (1905) 2 CII 147, the
memorandum of Association of the trading company allowed it to do things incidental to
its objects. It was held that the provisions in the articles empowering the company to lend
money merely exemplified the general words of the Memorandum of Association and the
company was therefore entitled to lend money to its employees, a trading company has a
profit making motive, and therefore the company lending money to employees at a profit
was incidental or connected to the companies objects/activities of profit making. In
REPYLE WORKS (1891) 1 CH 173, the Memorandum of Association empowered the
company to borrow on security of its assets or credit while the articles provided that it
might borrow using the security of uncalled capital. It was held that the articles merely
made specific the general words of the Memorandum of Association and so the company
did have the power to borrow using the security of its uncalled capital since the uncalled
capital is also part of the company’s assets/credit. (Uncalled capital is that amount of
money that shareholders have not yet paid for their shares. If a shareholder is allocated
shares of 10 million shillings and out of this he pays only 6 million, the four million that
remains is called uncalled capital so, the company may call upon that shareholder at any
moment requiring him to pay that money.)

3. Though the Memorandum of Association and articles can only be read together to
remove ambiguity or uncertainty, the articles will not be resorted to, to assist in the
interpretation of the Memorandum of Association or the clause that is required in law to
be in the Memorandum of Association or the clause that is required in law to be in the
memorandum of Association.

THE CONTRACTUAL EFFECT OF THE MEMORANDUM AND ARTICLES OF

ASSOCIATION
S. 21 of the Companies Act provides that the memorandum and articles of association
shall when registered, bind the company and the members as if they had been signed and
sealed by each member and contained covenants on the part of each member to observe

22
all the provisions. Thus they have a contractual effect. The memorandum and articles
form three contracts and these are:

1. The memorandum and articles of association constitute a contract between the

company and a non-member. A member is any person who has signed the memorandum
and articles of association for purposes of formation of the company even if he or she
later does not pay for any shares in that company. A member therefore has a right to
enforce the provisions in the articles and memorandum against the company since
memorandum and articles of association constitute a contract between the members and
the company. So if the company is acting contrary to what the memorandum and articles
provide, then that member can sue the company for breach of those provisions and
likewise.

The articles of association however do not constitute a contract between the company
and a non-member. Therefore, a non member cannot enforce such contract. This was
illustrated in the English ease of WOOD Vs ODDESA WATER WORKS (1889) 42 CH.D
636, the articles of association of that defendant company empowered the directors to
declare dividends/profits to be paid to the shareholders, the company passed a resolution
not to pay dividends, Wood a shareholder was aggrieved by this resolution which was
contrary to what the articles provided, as a member and shareholder he applied to Court
for an injunction to stop the company from acting on that resolution, Stirling J held that
the articles of association constitute a contract between the company and its shareholders
and the company was in breach of that contract by not following what the articles
provided.

2. The contract created by the articles binds the company and its members only in their
capacity as members (“qua member’) and not in any other capacity.

Therefore, if a shareholder is to sue the company relying on the provisions of the articles,
he should be suing in his/her capacity as a member and not as a creditor or director or
any other capacity.

Note. That for a member to sue in their capacity as members, their claim should be based
on violation of members’ rights provided for by the articles.

In the case of HICKMAN Vs KENT (1915) 1 CH 881, Kent the defendant company had a
provision in its articles that any dispute between the association and its members should
be referred to an arbitrator. Hickman brought a claim against the company before an
arbitrator relying on this provision because the company had refused to register his sheep
in its published flock -book and threatened to expel him from membership. Court stayed
his suit against the company holding that Hickman was not suing in his capacity as a

23
member of the company and therefore he could not rely on the articles since the
company had not breached a provision in its articles. The articles did not provide for
rights of members to have their sheep registered with the company’s published flock
book.

In this case, Asbury stressed the following;

a) That the articles of association cannot constitute a contract between the company
and a non-member / third party.
b) That a member who is given a right by the articles in any other capacity other than
that of a member cannot enforce such right against the company for example if a
member is given a right by the articles as a lawyer / solicitor, promoter or director
and not in his capacity as a member he cannot enforce such right against the
company relying on the articles.
c) That the articles regulate the rights and obligations of members generally and
therefore create rights and obligations amongst; the members themselves and the
members and the company.

Also in the case of BEATTIE V.E & BEATTIE LTD (1938) CH 708, a director of a company
was sued in Court in his capacity as a director. The articles of the company provided that
any dispute between the company and its members should be referred to an arbitrator.
The director who was sued in Court sought to rely on this provision in the articles to have
his matter referred to an arbitrator. Court refused to grant his application and held that
he could not rely on this provision since it only applied to members and he was not being
sued in his capacity as a member but in his capacity as a director. Court added that
provisions in the articles constitute a contract between the company and its members in
their capacity as members and not in any other capacity.

3. The memorandum and articles also constitute a contract amongst the members
themselves (between the members “interse”). Thus, each member has a duty to observe
the provisions of the memorandum and articles of association and if they do not, any
member can sue them. In HICKMAN Vs KENT (1915) 1 CH 881, Ashbury J held that the
articles regulate the rights and obligations of members generally and therefore create
rights and obligations amongst the members themselves.

Also in the case of OBIKOYA Vs EZEWA & ORS, EZEWA and two others were all
permanent directors in a company, the company’s articles had a provision that
permanent director shall not vote for the removal of another permanent director from
office. Ezewa and the other directors disregarded this provision, purported to alter the
articles by resolution to enable them remove Ezewa from office, and there after they

24
stopped him from acting as director. He sued them in their capacity as members for
damages for breach of the provisions of the articles and asked Court for an injunction to
stop them from preventing him from acting as director. It was held that the articles were
a contract between the three members not to vote each other out of office and that the
actions of the other of keeping Obikoya out of office was in breach of the provisions of
the articles.

Membership ( the process of becoming a member)

Sec.47 of the Companies Act defines a member as a person who has signed the
Memorandum and Articles of Association with the purpose of floating a company. Any
person who applies and his name is entered on the register of members also becomes a
member. In MAWOGOLA COFFEE FACTORY Vs KAYANJA, it was held that to be a
member of a company, there must have been a valid allotment of shares to the person
and his name entered on the register. It was further observed that a certificate of
allotment of shares is the best evidence but in its absence, the register of members shall
suffice. A minor can become a shareholder but he incurs no liability until he obtains the
majority age and fails to repudiate the contract within a reasonable time.

CONSEQUENCES OF INCORPORATION
The fundamental attribute of corporate personality from which all other consequences
flow is that “the corporation is a legal entity distinct from its members”. -

Hence, it’s capable of enjoying rights and being subject to duties which are not the same
as those enjoyed or borne by its members. In other words it has a legal personality and it
is often described as an artificial person in contrast with a human being a natural person.
(SALOMON Vs SALOMON & CO)

Since the Salomon case, the complete separation of the company and its members has
never been doubted. It is from this fundamental attribute of separate personality that
most of the particular advantages of incorporation spring and these are:

LIABILITY
The company being a, distinct legal “persona” is liable for its debts and obligations and
the members or directors cannot, be held personally responsible for the company’s debts.
It follows that the company’s creditors can only sue the company and not the
shareholders. In the case of Salomon V Salomon (1897), creditors of the company sought
to have Solomon a managing director of the company personally liable for the debts of
the company but court held that the company and Solomon were two different persons
and that the company as a legal person is liable for its own debts and Solomon a
managing director could not be held personally responsible for tie debts of the company.

25
In the Ugandan case of SENTAMU Vs UCB (1923) HCB 59, it was held that individual
members of the company are not liable for the company’s debts.

The liability of the members or shareholders of the company is limited to the amount
remaining unpaid on the shares. For instance, where a shareholder has been allotted 50
shares at Shs. 100,000 each, in total he shou1d pay Sh.5,000,000 for all the fifty shares, if
he pays only Shs.4,000,000 to the company , it means that he still owes the company
Sh.1,000,000. This is what is called uncalled capital. The company may call on him to pay
it any time. If that does not happen, then at the time of winding up the company he will
be required to pay the Shs.1, 000,000.

In the case of a company limited by guarantee, each member is liable to contribute a

specific amount to the assets of the company and their liability is limited to the amount
they have guaranteed to contribute.

If the company has unlimited liability, the members liability to contribute is unlimited
and their personal property can be looked at to discharge the company creditors but that
is only after utilizing the company’s money and it is not enough to pay all the debts.

PROPERTY
An incorporated company is able to own property separately from its members, thus, the
members cannot claim an interest or interfere with the company property for their
personal gain/benefit. Thus, one of the advantages of incorporation (corporate
personality) is that it enables the Property of the company to be clearly, distinguished
from that of the members. In the case of MACAURA Vs NORTH ASSURANCE CO. (1925)
AC Lord Buckmaster of the House of Lords held that no shareholder has a right to an
item of the property of the company, even if he holds all the shares in the company.

In the case of HINDU DISPENSARY ZANZIBAR Vs N.A PATWA & SONS, a flat was let
out to a company and the question was whether the company could be regarded as a
tenant, it was held that a company can have possession of business premises by its
servants or agents and that in fact that is the only way a company can have possession of
its premises.

LEGAL PROCEEDINGS
As a legal person, a company can take action to enforce its legal rights or be sued for
breach of its duties in the Courts of law. If it is the company being sued, then it should be
sued in its registered name, if a wrong or incorrect name is used, the case will be
dismissed from Court for example in the case of DENIS NJEMANZE Vs SHELL B.P

26
PORT HARCOURT, the plaintiff sued a company called Shell B.P Port Harcourt which
was now a non existing company, counsel for the defendant company objected that there
was no such company and the suit should be dismissed, counsel for the plaintiff sought
Court’s leave to amend and put the right part but Court refused to grant the leave and
dismissed the case.

In the case of WANI Vs UGANDA TIMBER (1972) HCB, the plaintiff applied for a warrant
of arrest against a managing director of a company instead of suing the company, chief
justice Kiwanuka held that a managing director of a company is not the company and
cannot be sued personally, that if there is a case against the company then the company is
the right party to be sued not its managing director.

PERPETUAL SUCCESSION
S.18 of the companies Act provides that a company is a legal entity with perpetual
succession.

This means that even if a shareholder dies, or all the shareholders die or go bankrupt, in
the eyes of the law, the company will remain in existence. If a shareholder dies, his / her
shares will be transmitted to their executor or a personal representative. Also in case a
shareholder no longer wants to be a shareholder in a company, he will simply transfer his
shares to someone else and the company will continue to exist. The only way a company
can come to an end is by winding up, striking it off the register of companies or through
amalgamation and reconstruction as provided by the Companies Act. This was illustrated
in the case of; RE NOEL EDMAN HOLDING PROPERTY all the members were killed in a
motor accident but the Court held that the company would survive. Thus, this perpetual
succession gives the certainty required in the commercial world that even when
ownership of shares changes, there is no effect on the performance of the company and
no disruption in the company business.

TRANSFER OF SHARES
A share constitutes an item of property, which is freely transferable, except in case of
private companies. When shares are transferred, the person who transfers ceases to be a
shareholder and the person to whom they are transferred becomes the shareholder. In
private companies, there is a restriction on the transfer of shares for example one may not
transfer his shares except to an existing member or shareholder, and not to an outsider.
This is essential and is in any event desirable if such a company is to retain its character of
an incorporated private company.

27
BORROWING
A company can borrow money and provide security, in the form of a floating charge. A
floating charge is a security created over the assets of the Company. When a company
borrows money let’s say from the bank or any other creditor, it may use its assets e.g. cars,
bank accounts and ether assets as security, the security charge will then float over those
assets, in case the company defaults on payment. The charge can settle on one or all of
those assets and the bank/creditor of the company can sell those assets to recover their
money. It is called a floating charge because it floats like a cloud over the whole assets of
the company from time to time, it only settles/crystallizes if the company defaults on
payment. So before the charge settles on the assets, the company is free to deal with those
assets even to dispose them

FORMALITIES, PUBLICITY AND EXPENSES

Apart from the advantages mentioned above which arise from incorporation, there are
certain disadvantages of incorporation and these are:

1. Formalities have to be followed which are lengthy and hectic.

2. Loss of privacy because all records are kept at the company registry and any member of
the public who is interested in knowing about the company can access them, of course at
a fee.

3. The exercise is expensive right from the promotion exercise, promoters have to be paid
and if professionals like lawyers are involved, one has to pay them handsomely, one must
also pay stamp duty and registration fees.

4. The cost of winding up is higher than that of incorporation.

In these respects, a company differs from a Partnership in the sense that no formalities
are required for the formation of a Partnership. A partnership can be formed orally or by
an agreement on a half sheet of paper and one can conduct business without any
publicity and can be dissolved cheaply and informally. A company can only be wound up
and cost of winding up is more expensive than formation. Nevertheless, the policy bind
these requirements of formality, publicity is that incorporation should be accompanied by
full disclosure.

CAPACITY TO CONTRACT
On incorporation, a company can enter into any contract with third parties. In the case
of; LEE VS LEE & AIR CO. LTD (1961) A.C 12, it was Held that once a company is
incorporated, it has capacity to employ servants, even the shareholders.

28
 LIFTING THE VEIL OF INCORPORATION S.20
A company once incorporated becomes a legal personality separate and distinct from its
members and shareholders and capable of having its own rights, duties and, obligation
and can- sue or be sued in its own name. This is commonly referred to “the doctrine or
principle of corporate personality”. No case illustrated the above principles better than
noted House of Lords decision in Salomon v. Salomon. However, in some circumstances,
the Courts have intervened to disregard or ignore the doctrine of corporate personality
especially in dealing with group companies and subsidiaries and where the corporate
form is being used as a vehicle to perpetuate fraud or as a “mere façade concealing the
true facts.’ Upholding the above principle in such cases would result into and perpetuate
injustice.

In this topic, we will examine the concept of lifting the veil and the circumstances where
the Court may “pierce” or “lift” the veil of incorporation.

In DUNLOP NIGERIAN INDUSTRIES LTD Vs FORWARD NIGERIAN ENTERPRISES LTD

& FARORE 1976 N.CL.1 243, the HC of Lagos stated that in particular circumstances, e.g.
where the device of incorporation is used for some illegal or improper purpose, the
Court may disregard the principle that a company is an independent entity and lift the
veil of corporation identity so that if it is proved that a person used a company he
controls as a cloak for an improper transaction, he may be made personally liable to a
third party. The legal technique of lifting the veil is recognized under 2 heads: -

1. Statutory lifting of the veil

2. Case Law lifting of the veil

Statutory lifting of the veil

1. Where the number of members is below legal minimum

Under S. 20 of the Companies Act if a company carries on business for more than 6
months after its membership has fallen below the statutory minimum, (1 for private
companies and 2 for public companies), every member during the time the business is
carried on after the 6 months and who knows that the company is carrying on business
with less than the required minimum membership is individually liable for the company’s
debts incurred during that time.

2. Where the company is not mentioned in a Bill of Exchange

S.34 of the Companies Act provides that a bill of exchange shall be deemed to have been
signed on behalf of a company if made in the name of the company, by or on behalf of the

29
company or on account of the company by any person acting under the company’s
authority.

S. 109 (4) (b) of the Companies Act prohibits any officer of the company from signing or
authorizing to be signed a bill of exchange on behalf of the company in which the
company’s name is not mentioned in legible characters / clear letters. Any officer who
does this is personally liable on that bill of exchange for the money or goods for that
amount unless it is duly paid by the company. Therefore, in such a case the corporate veil
is lifted in order to hold that officer of the company personally liable.

3. Holding and subsidiary companies

Where companies are in a relationship of holding and subsidiary companies, group

accounts are usually presented by the holding company in a general meeting. In this
regard, the holding company and subsidiary companies are regarded as one for
accounting purposes and the separate nature of the subsidiary company is ignored. S.147
of the Companies Act requires each company to keep proper books of accounts with
respect to;

a) Money received by the company and from what source.

b) Money spent and what it was spent on.
c) All sales and purchases of goods made by the company.
d) The assets and liabilities of the company.

These accounts are meant to give a true and fair view of the state of the company’s affairs
and to explain its transactions.

Directors of the company are required at least once a year to lay before the company in a
general meeting a profit and loss account (or income & expenditure account for nonprofit
making companies) plus a balance sheet. Where at the end of each year a company has
subsidiaries, then as that parent company presents its accounts, it should also present a
group account dealing with the affairs of that parent company and its subsidiaries, the
group account consists of a consolidated balance sheet and a consolidated profit and loss
account of both the subsidiary and the parent company.

4. Reckless and Fraudulent Trading

It appears that any business has been conducted recklessly or fraudulently, those
responsible for such business may be held liable without limitation of liability for any of
the company’s debts or liabilities.

5. Taxation

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Under the Income Tax Act, the veil of incorporation may be lifted to ascertain where the
control and management of the company is exercised in order to determine whether it is
a Ugandan company for income tax purposes.

6. Investigation into related companies

Where an inspector has been appointed by the Registrar to investigate the affairs of a
company, he may if he thinks it fit also investigate into the affairs of any other related
company and also report on the affairs of that other company so long as he feels that the
results of his investigation of such related company are relevant to the main investigation.

Lifting the Veil under case law

1. Where the company acts as an agent of the shareholders

Where the shareholders of the company use the company as an agent, they will be liable
for the debts of the company. Agency is a relationship which exists whenever one person
authorizes another to act on his or her behalf. The person acting is called the agent and
the one he is acting for is called the principal. Where such a relationship exists, the acts of
the agent are taken to be the acts of the principal. Therefore, in an agency relationship,
the acts of the agent are taken to be the acts of the principal. In case of liability, it is the
principal who is held liable and not the agent. This is because of the dictum that he who
acts through another, acts for himself. Thus, where shareholders employ or use the
company as an agent, then those shareholders will be personally liable for the acts of the
company as principals behind the agent.

2. Where there has been fraud or improper conduct

The veil of incorporation may also be lifted where the corporate personality is used as a
mask for fraud or illegality. In GILFORD MOTOR CO Vs HOME [1933], CH 935 Home
was the former employee of Gilford Motor Co. He agreed not to solicit its customers
when he left employment. He then formed a company, which solicited the customers.
Both the company and Home were held liable for breach of the covenant not to solicit.
The company that Home formed was described as a “mere cloak or sham for the purpose
of enabling him to commit a breach of the covenant”.

In JONES Vs LIPMAN (19621.1 W.L.R 832 Lipman in order to avoid the completion of a
sale of his house to Jones formed a company and transferred the house to the company.
Court ordered him and the company to complete payment, even though the ownership of
the house was no longer in his names but in that of the formed Company. The company

31
was described as a creature of Lipman, a device and a sham, a mask which he held before
his face in an attempt to avoid recognition by the eyes of equity.

In RE WILLIAMS BROS LTD. (1932) 2CH.71, a company was insolvent but the directors
continued to carry on its business and purchased its goods on credit. It was held that if a
company continues to carry out business and to incur debts at a time when there is to the
knowledge of the directors no reasonable prospects of the creditors ever receiving
payments of these debts, it is in general a proper inference that the company is carrying
on business with intent to defraud. R Vs GRAHAM (1984) QB.675 makes it clear that a
person is guilty of fraudulent trading if he has no reason to believe that the company will
be able to pay is creditors in full by the dates when the respective debts become due or
within a short time thereafter.

Public interest / policy

Sometimes, Courts have disregarded the separate legal personality of the company and
investigated the personal qualities of its shareholders or the persons in control because
there was an overriding public interest to be served by doing so. In DAIMLER CO LTD Vs
CONTINENTAL TYRE AND RUBBER CO (1916) A.C 307, a Company incorporated in
England whose shares except one were held by German nationals resident in Germany.
All its directors were also German nationals resident in Germany, which was an enemy
country at the time. An action was brought and the Court disregarded the fact that the
company had a British nationality by incorporation in England and rather concentrated
on the control of the company’s business and where its assets lay, in determining the
company’s status.

4. In determining residence of a company for tax purposes

The Court may look behind the veil of the company and its place of registration so as to
determine its residence. The test for determining residence is normally the place of its
central management and control. Usually, this is the place where the board of directors
operates. But it can also be the place of business of the managing director where he holds
a controlling interest.

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COMPANY MANAGEMENT

Company management is done through holding meetings from which resolutions are
made and registered with the company registrar.

The Companies Act provides for 3 types of meetings.

i. A statutory meeting.

S. 137(1) provides for a statutory meeting and it provides that a meeting shall be held for
public companies, not more than 3 months from the date of commencement of business.

For other companies that are not public companies, the meeting is to be held upon
receiving a certificate of incorporation.

Under the statutory meeting, there is a requirement for directors to forward a statutory
report 14 days prior to the members. The format and content of such report is given in
S.137(4)(a-e). the report must be certified by not less than 2 directors especially for public
companies. (this is for proper management).

33
In addition, the section requires that the statutory report must be certified by auditors, if
any. Under S.137(6), a copy of the report must be registered with the registrar of
companies.

Under S.137(7) the directors must publish a list of what each shareholder owns and their
addresses and this list should be publicly accessible to every member.

Under S.137(8), members are free to discuss any matter in the report and any resolution
thereafter must be made after giving notice to the members, in accordance with the
articles.

S.137(9) The meeting may adjourn from time to time.

S.137(10) establishes a penalty in case of default for non-compliance with this section. This
penalty extends to non-complying officers of the company and the company itself.

ii. The Annual General Meeting (AGM)

This is a meeting which is held once a year and is applicable to both private and public
companies.

The meeting is exclusive to members of the company and shareholders. (S.138)

In this meeting adequate notice should be given of at least 21 days. (S.140)

Under S.138(2) a private company, at the requisition of a member can hold an AGM. If a
company holds its first AGM meeting, 18 months after commencement, it need not hold
another meeting in the second year. (S.138(3)

The objective of the AGM has generally been understood to mean an opportunity for the
company to deliberate on directors, to look at the balance sheets, to look at the audited
accounts of the company, to appoint a company secretary and appoint company auditors.
The AGM is technically referred to as the company meeting.

ii. The Extra-ordinary meeting

S.139. Where some matters were not discussed or if an important and emergent point
arises a resolution may be made to sit an extra-ordinary meeting.

This meeting can be by a requisition which should state the objectives of the meeting,
SUCH objectives should be deposited at the requested office of the company.

34
For a member to requisition this meeting, they should have paid up 10% of their shares.
Once the requisition for the meeting is deposited, the directors have up to 21 days to
convene this meeting.

Notice

S.140 provides for a notice to hold a company meeting not to be shorter than 21 days.
Notices are intended to give members full information, fair and reasonable disclosure, in
order that members can make a decision as to whether or not to attend the meeting.

The notice should fully have the details of what is intended to be discussed in the
meeting.

It was held in Re Pearce Duff Co Ltd (1960) 3 AII ER 222 that the mere fact that all the
members are present at the meeting and pass a particular resolution, either unanimously
or by a majority holding 95 per cent of the voting rights, does not imply consent to short
notice and anyone who voted for a resolution in these circumstances can later challenge
it.

Notice of convening a meeting must be sufficient and specific to enable members decide
whether to attend or not. Notice of a general meeting must be sent to every member of
the company and every director and if notice of a meeting is not given to every person
entitled to notice, the proceedings and any resolution passed at the meeting will be
invalid.

Young v Ladies Imperial Club [1920] 2KB 523Mrs Young, who was a member of the
club, was expelled by a resolution passed by the appropriate committee. The Duchess of
Abercorn, who was a member of the committee, was not sent a notice of the meeting, it
being understood that she would not be able to attend. In fact, she had previously
informed the chairman that she would not be able to attend. Nevertheless, in this action
which was concerned with the validity of the expulsion, it was held- by the Court of
Appeal-that the failure to send a notice to the Duchess invalidated the proceedings of the
committee and rendered the expulsion void. Per Serutton LJ:

Every member of the committee ought, in my view, to be summoned to every meeting of

the committee except in a case where summoning can have no possible result, as where
the member is at such a distance that the summons cannot effectively reach the member
in time to allow him or her to communicate with the committee. Extreme illness may be
another ground, though I should myself require the illness to be extremely serious,
because a member of the committee receiving a notice to attend may either write to ask
for an adjournment of the meeting or express his views in writing to the committee and I

35
should require the illness to be such as to prevent that form of action being taken on
receiving notice of such a meeting.

However, the accidental omission to give notice of a meeting, or the non-receipt of notice
of a meeting by any person entitled to receive notice, does not invalidate the proceedings
at that meeting and any resolutions passed.

Re West Canadian Collieries Ltd [1962] Ch 370

The company failed to give notice of a meeting to certain of its members because their
plates were inadvertently left out of an addressograph machine which was being used to
prepare the envelopes in which the notices were sent. The proceedings of the meeting
were not invalidated, it being held in the High Court to be an accidental omission within
an article of the company.

However in Musselwhite v C H Mussel & Sons Ltd [1962] Ch 964

The company failed to give notice of a general meeting to certain persons who had sold
their shares but had not been paid and remained on the register of members. The
directors believed that the mere fact of entering into a contract of sale had made them
cease to be members.

Held in the High Court- the proceedings of the general meeting were invalidated since
the error was one of law and not an accidental omission within an article of the company
similar to Table A.

In Kaye v Croydon Tramways Company [1898] Ch 358 (CA)

There was an agreement for the sale of the undertaking of one company to another,
whereby the purchasing company agreed to pay compensation to the directors of the
selling company for loss of their jobs. The agreement was conditional to its adoption by
the shareholders of the selling company. The notice convening such a meeting, described
it as an agreement for the sale of the undertaking.

It was held that the notice by reason of its omission to refer to compensation of the
directors did not fairly disclose the purpose for which the meeting was convened and was
thus misleading.

Henderson v Bank of Australasia (1890) 45 Ch D330. That case concerned a bank

which was a deed of settlement company. A proprietor brought an action to test the
validity of certain resolutions altering the deed of settlement. The advertisement of the
proposed meeting had described the proposed resolutions as ‘special resolutions’ and

36
stated that, if they should be duly passed, they would be submitted for confirmation to a
second extraordinary meeting of the proprietors, which would be subsequently convened.
It also appears that the full text of the proposed resolutions had been circulated before
the meeting was held. The plaintiff contended that the resolutions were invalid,
substantially, first on the grounds that no proper notice of the meeting was given and
secondly, that even supposing the meeting was duly summoned the resolutions passed as
it were invalid, because the chairman declined to put an amendment which the plaintiff
wished to put. The Court of Appeal, in allowing the plaintiff’s appeal from Chitty J, was
unanimously in the view that the chairman was wrong in refusing to put the amendment,
while Lopes LJ expressed doubts whether the notice was sufficient, Cotton LJ without
deciding the point, expressed the view obiter that the notice was adequate on the grounds
that it’….. fairly and reasonably expressed to the shareholders what matters were going to
be discussed at the meeting’ and Fry LJ expressed entire agreement with the judgment of
Cotton LJ

More examples of meetings held to be invalid because of inadequate or

inappropriate notice

The proceedings of general (members’) or committee meetings have been declared

invalid by courts where members have been given inadequate or inappropriate notice of
the meetings, where:

 The notice of meeting was issued by someone without proper authority (Re State
of Wyoming Syndicate [1901] 2 Ch 431),
 The notice of meeting was ambiguous or misleading (Kaye v Croydon Tramways
Company [1898] 1 Ch 358 (CA),
 The objects (scope) of the meeting was not clearly specified, for instance, saying
that the purpose of a meeting is to consider “to report and discuss the matter”
relating to X when the purpose was actually to consider X’s expulsion (Young v
Imperial Club Ltd [1920] 2 KB 523 (CA) the notice of the meeting did not
adequately disclose what business would be transacted.
 Where the business conducted was not within the substance of the notice of
meeting (Henderson v Bank of Australasia (1890) 45 Ch D330 (CA), John v
Rees [1969] 2 AII ER 274 and Malayan Breweries Ltd v Lion Corporation Ltd
(1988) 4 NZCLC 64, 344,
 The meeting was deliberately held at a time or place to prevent some members
from participating (Cannon v Trask (1875) LR 20 Eq 669), and even an
adjournment to an inconvenient time and place results in invalidity (Byng v
London Life Association [1989] 1 AII ER 560 (CA),

37
  The notice of meeting did not adequately make fair and full disclosure to members
of business proposed to be discussed at and the time and place of the meeting
(Malayan Breweries Ltd v Lion Corporation Ltd (1988) 4 NZCLC 64,344 and
Wishart v Foster (1961) 4 FLR 72),
 The period for the meeting was insufficient (Wolf v East Nigel Gold Mining
Company Limited (1905) 21 TLR 660),
 A member was not sent proper notice of the meeting (Hamilton Town Band v
Browne [1920] GLR 431, Floral Holdings Limited v Rothmans Industries
Limited (1986) 3 NZCLC 99,817 (HC) and 99,632 (CA) and John v Rees [1969] 2
AII ER 274, and
 Even where a member of a committee advised a society of that member’s intention
not to attend meetings (Young v Imperial Club Ltd [1920] 2 KB 523 (CA).

Quorum refers to the number of anybody of persons whose presence at the meeting is
required in order that the business may be validly transacted. There is no agreed number
for purposes of quorum and it is entirely dependent on the provisions of the articles in
the absence of which recourse must be had to the company’s Act or Table A, if the
company so adopted it.

S.14 (c) of the Companies Act, default position of quorum is 3 in public companies and 2
in private companies.

Sharp v Dawes (1876) 2 QBD 26

The Great Caradon Mine was run by a mining company in Cornwall and was carried on
the cost-book system, being controlled by the Stannaries Act 1869. The company had
offices in London and on 22 December 1874 notice of a general meeting was properly
given. The meeting was held but only the secretary, Sharp and one shareholder, a Mr.
Silversides who held 25 shares, attended. Nevertheless, the business of the meeting was
conducted with Silversides in the chair. Amongst other things, a call on shares was made
and the defendant refused to pay it. He was sued by the secretary, Sharp who brought the
action on behalf of the company and his defence was that calls had to be made at a
meeting and there had been no meeting on this occasion.

Held – by the Court of Appeal- the call was invalid. According to the ordinary use of the
English language, a meeting could not be constituted by one shareholder.

Duties and roles of a chairman

38
Under Table A a chairperson is elected by members present in a meeting.

The chairperson of the meeting has the responsibility of ensuring that the meeting is
properly conducted, ensured fairness throughout the meeting and being in a position of a
chairperson does not mean that the person is the decision maker. He or she is respected
to be impartial and must regulate the speakers.

The chairman should be considerate to request for adjournment.

However a chairperson has no authority to terminate the meeting at his own will and
pleasure.

In National Dwellings Society v Sykes [1894] 3 Ch 159, there was an ordinary general
meeting of a company at which a resolution was then moved for the substitution of the
main resolution of a resolution that a committee ruled this resolution be appointed to
ascertain the position of the company. The chairman, Skyes, ruled this resolution out of
order, whereupon the original resolution was put and lost. The chairman then declared
the resolution to be lost and said that he dissolved the meeting. He then vacated the chair
and left the room, being accompanied by a few shareholders. The shareholders left in the
room unanimously elected another chairman and proceeded to pass resolutions.

It was held that it is the duty of the chairman, and his function to preserve order and to
take care that the proceedings are conducted in a proper manner, and that the sense of
the meeting is properly ascertained with regard to any question which is properly before
the meeting.

Chitty J held that the meeting had validly continued despite Skye’s attempt to
adjourn it. He said at pg162

“A question of some importance has been mooted in this case, with regards to the power
of the chairman over a meeting. Unquestionably it’s the duty of the chairman, and this
function, to preserve order and take care that the proceeding are conducted in a proper
manner, and the sense of the meeting is properly ascertained with regards to any
question which is properly before the meeting. But in my opinion, the power which has
been contented for within the scope of the authority of the authority of the chairman –
namely to stop the meeting at his own will and pleasure. The meeting is called for
particular purposes of the company. According to the constitution of the company, a
certain officer has to preside. He presides with reference to the business which is there to
be transacted. In my opinion, he cannot say, after the business has been opened, ’’I will
have no more to do with it; I will not let this meeting proceed; I will stop it; I declare the
meeting dissolved, and leave the chair.’’ In my opinion that is not within the power. the

39
meeting by its self (and these articles certainly apply to what I have said) can resolve to go
on with the business for which it has been convened, and appoint a chairman to conduct
the business which the other chairman, forgetful of his duty or violating his duty, has
tried to stop because the proceedings have taken a turn which he himself does not like”.

Voting at company meetings

Voting at company meeting is by show of hands.

Article 62 table A provides for voting by show of hands

This is meant to entitle members participate in the meeting of the company and obtain
consensus. In a company with share capital, each member there has 1 vote, irrespective of
each share of that member has provided for under. S. 141(e).

For other companies without share capital, (Limited by Gurrantee) every member has 1
vote in respect of his share holding.

It should be noted that a member cannot vote unless he or she has paid up some share.

A Share holder has a right to vote as he or she wishes (general rule )

In North – West Transportation Co Ltd v Beatty (1887) 12 App Cas 589

The main question in the case was whether a share holder in a company was entitled to
vote at a meeting of the company on question in which he is personally interested

Held;
That such shareholder was entitled to exercise his voting power has a shareholder in a
general meeting to ratify such a contract; he doing could not be deemed oppressive by
reason of his individually possessing a majority votes, acquired in a manner authorized by
the constitution of the company.

Sir Richard Bagallay said:

‘The general principles applicable to cases of this kind are well established. Unless
some provision contrary is to be found in the charter or other instrument by which
the company is incorporated, the resolution of a majority of the share holders, duly
convened, upon any question with which the company is legally competent to
deal, binding upon the minority, consequently upon the company, and every

40
 shareholder has a perfect right to vote upon any such question, although he may
have a personal interest in the subject-matter opposed to or, different form, the
general or particular interest of the company.

However, there are situations where the members democratic rights to vote is interfered
with, say by count, by agreement or as may be expressly provided for in the article of
association.

Clemens v Clemens Bros [1976] 2 ALL ER 268

In this case the issued share capital of £2,000 in a small but prosperous family company
was held between the claim (45 per cent) and her aunt (55 per cent), the being one of the
five directors of the company. The director proposed to increase the company’s share
capital to £3,650 by a correction of a further 1650 voting ordinary share. The four
directors, other than the aunt, were to receive 200 shares, each, and the balance of 850
shares was not to be in the trust of the company’s long service employees. The claimant
objected to the proposed resolution to put this scheme into effect since the results would
be to reduce her shareholding to under 25per cent. At the extraordinary general meeting
called to approve the scheme, the aunt vote in the favour of her resolutions which were
passed. The claimant sought a declaration against both the company and the aunt that
the resolution should be set aside on the ground that they were very oppressive of the
claimant. The defendant contended if two share holders honestly hold differing opinions,
the view of the majority should prevail, and that share holders were entitled to consider
their own interest and to vote in any way they honestly believed proper in the interest of
the company.

Held

The aunt was not entitled as a right to exercise her majority votes as an ordinary
shareholder in any way she pleased; her right was subjected to equitable consideration
which might make it unjust to exercise in a particular way. Although it could not be
disputed that she would like to see the other directors have shares in the company and
trust set up for long service employees. The inference was irresistible that the resolution
had been formed in order to put complete control of the company in the hand of the aunt

41
and her fellow director, to deprive the plaintiff of her exercising rights as a shareholder
with more than 25 per cent of votes and ensure she will never control the company. Those
considerations were sufficient in equity to prevent her aunt using her votes as she had,
and the resolution would accordingly be aside.

The case of Pender v Lushington (1877)6 Ch D70 confirms that a company members
rights to vote may not be interfered with, because it is a right of property. Furthermore,
any interference leads to a personal right of a member to sue in his own name to enforce
his rights. As Lord Jessel MR put it, a member,

“ has a right to say, “whether I vote in the majority or minority , you shall record my vote,
as that is a right of property belonging my interest in this company, and if you refuse to
record my vote I will institute legal proceedings against you to compel you”

Voting agreement

These are treated like ordinary contracts and therefore the doctrine of freedom of the
contract arise where members in this case are presumed to have voluntarily entered into a
voting agreement, to vote in an agreed way or manner.

Non – compliance of what was agreed is taken as an ordinary breach of a contract and is
actionable with remedies such specific performance, injunctions and damages.

Where a shareholder enters into a voting agreement, his or her right to freely vote is
curtailed.

It should be noted that voting agreements to not bind subsequent purchasers of the
shares, subsequent to the voting agreement.

Under S.143, the general rule is that every shareholder must exercise their rights to vote
by themselves. However, it is possible for one to vote through someone else (proxy). A
proxy can only take part in a company meeting in so far as voting is concerned.

To a greater extent, the law agency is applicable to proxies.

To avoid any mischief to the part of the proxy, such a member intending to use a proxy
must give adequate notice to be filed with the company director before the meeting. This
sometimes is referred as the proxy instrument. There is no requirement to give reason for
such appointment and a proxy can be any person.

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In Tiessen v. Henderson (1899) 1 Ch. 861 it was held that notice of the company
meeting must be full and specific enable a shareholder to decide whether he wants to
attend or not.

Voting by poll

At common law, it is a general rule that voting in a company is by show of hands.

Re Holbur Bridge, Iron, Coal and Wason Co (1879) 11 CH 109

At a meeting at which five members were present an extraordinary resolution to wind up

the company was passed. K was then proposed as liquidator and an amendment was
moved that M should be appointed. Three of the five present be voted for M, the other
two, holding a greater number of shares than the three voted for K. A poll was not
demanded as provided for in the Company’s articles.

Held;

That a poll not having been demanded, the voting was to be by show of hands without
counting shares and that M, therefore, was duly elected.

Court stated that according to common law, votes at all meetings are taken by show of
hands. However, owing to the number of persons attending, in companies provision is
made for taking a poll and when a poll is taken, the voters are to the counted according to
the number of shares.

It is believed that voting by show of hands would enable members reach consensus
because people must be seen to have agreed.

However, there are situations where this general position is departed from and members
exercise their right to vote on the basis of one’s shareholding.

In such a situation, the votes at such a meeting are not based on the numbers of members
present in person or by proxy but on the strength of the members’ share holding

Where this takes placed the voting is said to be by a poll.

The rationale behind voting by poll is the presumption that those likely to demand a poll
are the most exposed in terms of risks, given their shareholding in a company.

Accordingly, if crucial matter surrounding the policy of the company is before the
meeting, such people may be given a chance to direct the company.

43
COMPANY RESOLUTIONS

Resolutions are conventional way by which companies take decisions. These are largely
arrived at by a vote or by voting at a properly constituted meeting of the company. It is
with these resolution that decisions take in a company meeting are embodied. The
normal rule is that a resolution is adopted if more votes are cast in favor than against,
which is usually a simple majority. If by any chance the votes are equal, then there is no
resolution. On certain specific company matters the law requires a larger majority (s. 148
which requires ¾ majority).

Some resolutions require notice period while others do not. A company’s memorandum
and articles may specify additional matters requiring special or extra ordinary resolutions.
In other resolutions like the elective resolutions, the law requires a unanimous approval
by all members. In an elective resolution there is no formal meeting and the company
either expressly or by the consent of all the members entitled to vote can opt for an
elective resolution by providing for the same in its memorandum and articles.

Types of resolutions:

1. Ordinary resolution
2. Special or extra ordinary
3. Elective resolution

This one is normally arrived at by simple majority. S 195 follows a company to remove any
director by ordinary resolution.

In Bushell v Faith (1970) AC 1099, a company passed an ordinary resolution to remove a

director, however the director had special voting rights on resolution to remove him
from office, and the resolution was rejected by court. It held that the words ‘ordinary
resolution’ in the companies Act merely cannot refer to a resolution depending for its
passing on a simple majority of votes validly cial resolution. The distinction between
special and extra ordinary resolutions appears to be in the notice period.

S.148 (1) provides, a resolution shall be special resolution when it has been passed by a
majority of not less than three fourths of such members as, being entitled so to do, vote in
person, or, where proxies re allowed, by proxy, at a general meeting of which notice
specifying the intention to propose the resolution as special resolution has been duly
given

44
If a special resolution is to be validly passed, the resolution as passed must be the same
resolution as that identified in the preceding notice, as was held in the following case.

Re Moorage Mercantile Holdings Ltd (1980) 1 WLR 227 Ch (1989) ALL ER40

A company article of association empowered it by special resolution to reduce it share

premium account. On 2 April 1979 the secretary sent a notice to each company’s members
informing them at that an extraordinary general meeting of the company would be held
on 26 April 1979 at which a special resolution would be proposed to effect that ‘ the share
premium account of the company amounting to 1356900. 48p be cancelled. At the
extraordinary meeting on 26 April the chairman, proposed that the special resolution
should be passed in the form. That the share premium account of the company
amounting to 1356900.48 p be reduced to 321.17p. Not all members of the company
entitled to vote at the meeting were present but the amended version of the resolution
was passed unanimously on show of hands by those who were there and a poll was not
demanded. By petition the company asked the court to confirm the reduction of the
company’s shares premium account.

Issue; whether resolution passed substantially the same as that proposed.

Held,

A notice of intention to propose a special resolution was valid for the purpose of s. 141(2)
of the 1948 Act only if it identified the intended resolution by specifying either the text or
the entire substance of the resolution which it was intended to propose, and a special
resolution was validly passed in accordance with S 141 (2) only if it was the same
resolution as that identified in the preceding notice.

In the instant case the resolution has not been validly passed in accordance with S 141(2)
because it differed not only in form but also in substance from the one set out in the
notice of 2 April and the members of the company had not unanimously agreed to waive
their rights to notice under S 141(2).

Accordingly the court had no jurisdiction to confirm the reduction of the share premium
account and the petition would be dismissed.

Per curiam; in the case of notice of intention to propose a special resolution nothing is
achieved by the addition of such words as ‘with such amendments and alternations as
shall be determined on at the general meeting.

Slade J stated the public policy behind this in these words.

45
It therefore all more important that each shareholder should now have clear and precise
advance notice of the substance of any special resolution which it is intended to propose,
so that he may decide whether he should attend the meeting or is content to absent
himself and leave the decision to those who do; the provisions imposed by s 141(2) of the
1948 Act must be intended as much for the protection of the members who in the event
decide to absent themselves as for those who decide to attend. If it were open to the
members who did attend to propose and vote on a special resolution differing in
substance from the resolution of which notice had been given, there would a risk of
unfair prejudice to those members who, after due consideration had deliberately absented
themselves.

Elective resolution;

Under this resolution a notice of an elective resolution must be given stating the terms of
such a resolution. The elective resolution must be agreed to by all members eligible to
attend and vote at company meetings, in person or by proxy. A requirement of notice
under elective resolutions can be waived if all the members entitled to attend the meeting
agree s. 140(4)

Byng V London life Association Ltd (1990) Ch. 170 CA (1989) ALL ER 560

A meeting of London life was called to be held at the Barbican Center in London. The
main meeting place was not large enough to hold all those who wished to attend and
audio visual linking system in the overflow rooms had broken down. The chairman
adjourned the meeting without the consent of the meeting as London Life’s Article
required. His adjournment was challenged by Mr Byng, a shareholder, because the
members had not consented. However, the Court of Appeal held that even so the
chairman could use his common law right to adjourn in the difficult circumstances of the
case. However he had not exercised it reasonably. He adjourned the meeting only until
the afternoon of the same day at the café Royal. He must have known that many people
who had tried to attend the meeting at the Barbican would be unable to neither attend at
the café royal nor be able to lodge a proxy vote in the afternoon at such short notice.
Accordingly resolutions passed at café Royal by the much dismissed number of people
who did attend were invalid. Incidentally the court also held that the meeting may be
validly held even though not everyone is in the same room, as where some are using
audio visual equipment in overflow rooms. It should be noted that a resolution is
evidence that the matter for which it has been passed was considered and due attention
was given to it by the members and or the board assented to the decision which in turn
binds the company.

46
Once the shareholders have adopted an effective resolution in a particular matter, board
is empowered and obliged to take the necessary steps to put that resolution in practice.

MINUTES OF A COMPANY.

In a company meeting the proceedings which the meeting recorded are minute in the
minute book, must be signed by the chairperson of the meeting upon approval by the
meeting as a true reflection of what transpired at the meeting.

If a minute is signed by the chairman of the meeting or the next succeeding meeting, the
minutes are prima facie evidence of the proceedings. This means that although there is a
presumption that all the proceedings were in order and that all appointments of
directors, managers or liquidators are deemed to be valid, evidence can be brought to
contradict the minutes. Thus in Re Fireproof Doors (1916) 2 Ch 142 a contract to
indemnify directors was held binding not recorded in the minutes.

On the other hand, if the articles provide that minutes duly signed by the chairman are
conclusive evidence, they can be contradicted, thus in Kerr v Mottram (1940) Ch 657 the
claimant said that a contract to sell him preference and ordinary shares had been agreed
at the meeting, there was no record in the minutes and since the articles of the company
said that minutes were conclusive evidence that court would not admit evidence as the
exercise of the contract.

DIRECTORS AND THE MANAGEMENT OF THE COMPANY

The other organ of the shareholders in the management of a company is a board of

directors. The board is entrusted with the management and administration of the
company and all doing so its affairs must be conducted with reasonable formality.
Decisions of the board will govern internal matters such as capital expenditure, personnel
policy and dealings with third parties or outsiders.

Definition

S.2 of the companies Act defines director to include any person occupying the position of
the director by whatever name called.

The word director was director was defined in the case of R v Camps (1962) EA 403 that;
a person who acts as, and performs the functions of a director, although not duly
appointed as director is occupying the position of a director and includes a de facto
director unless the context otherwise requires.

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Under s. 185 every company must have at least one director. For public companies, there
must at least be two directors. It is legal requirement for every company to have at least
one director.

Under s. 186 the company in a general meeting has a right to appoint any number of
directors and specify their general qualifications in accordance with the guidelines
specified under the law. For public companies which have a share capital or a person is
not capable of being appointed to act as a director of the company S.192

That person must have been also signed the memorandum and articles or undertaken to
pay for his or her qualification share S.192 (1) b

It should be noted that nobody fewer than 18 years or over 70 years of age can be
appointed a director in a public company or in a private company which is a subsidiary of
a public company S.196

A duty is imposed on such a person to disclose his or her age S.197

The companies Act empowers court to stop anybody from taking part in the management
of a company if such a person has been convicted of an offence related to promotion,
function management or winding up of a company. S.201

It should be noted that the companies Act has a proviso that validates the acts of a person
who acted as a director although illegally nominated or appointed.

You should note the fact that the powers of a company to its officers especially directors
are normally spelt out in the articles of association which is a public document. Therefore
third party is presumed to have such notice actual or constructive especially where the
officer has gone beyond his powers.

You need to look at the principal of limitation whereby a third party would want to fix
liability to the company for an act carried out by an officer without conforming to the
internal regulations out such an act

In trying to resolve the above situations, especially the second and the third, courts have
tried to balance the interests of the company and those of the third parties. It is clear
from all the decisions of this matter that the memorandum and association are the basic
documents of reference which a third party dealing with a company may need to know.

In the case of Ernest v Nicholls (1857) HL Cas 401, court stated that the purpose of
incorporation was to provide the world with notice as to who were the persons
authorized to bind all the shareholders and the company and if third parties choose not

48
to acquaint themselves with the powers of the directors it is their own fault and cannot
look at the company at large. The stimulations of the deed which restrict and regulate the
authority are obligatory with those who deal with the company and the directors can
make no contract so as to bind the whole body of shareholders for whose protection the
rules are made unless they are…………” this case is to the effect that all persons dealing
with a company are deemed to be familiar with the content of its public documents of the
company the most important of which were, the Memorandum of Association and the
Articles of Association, because they were available for public inspection.

In Mahony v East Holyford Mining Co, court emphasized that the articles of
association are open to all who are minded to have any dealings with the company and
those who deal with the company must be fixed with notice of all that is contained in
such a document.

THE INDOOR MANAGEMENT RULE/ THE RULE IN TARQUAND

The courts have further attempted to reconcile the interests of the company with those
who deal with the company by applying what is popularly known as the indoor
management rule which emerged from the case of Royal British Bank v Turquand
hence the rule in Turquand.

The doctrine of constructive notice by fixing contracting parties with notice of the
contents of its registered documents could have had worse commercial consequences
than it did if it were not for the rule in Royal British Bank v Turquand. This case
established that, whilst a person dealing with a company might be deemed to know of a
certain limitations and procedures contained in the constitution which had to be
followed before a company could enter into a transaction, he was not obliged to
investigate into the internal affairs of the company to see whether the requirements of the
constitution and regulations of the company had been complied with.

In this case, the company’s deed of settlement authorized the directors to borrow on
behalf of the company on bond for such sums as had been authorized resolution of the
company.

In contravention of this resolution, two directors at the company borrowed two thousand
pounds on bond from the plaintiff bank without the authority of the general meeting. The
bank demanded for payment and the company raised a defence that it was not liable
since the officers did not abide by the regulations of the company. Court reaffirmed the
principle that those who deal with an incorporated company are bound to look at the
articles of association. However, once a person dealing with a company has looked at the
company’s articles and memorandum, he is not bound to do more. In this particular case

49
since the deed of settlement gave the directors power to borrow money on bond had a
right to infer that the resolution for borrowing had been respected,

The rule in Turquand can be summarized as follows;

Whereas the person dealing with the company is fixed with notice of the contents in the
memorandum and articles, once he or she looks at these documents and found that there
is authority of a particular officer to enter into a transaction of the kind in issue, he or she
is not bound to investigate further in the absence of any facts putting him on such
investigation.

The rule in Turquand presupposes that an outsider or third part does not have to seek for
inner details like asking for notice for notice for convening a meeting or looking at the
agenda or minutes, etc the justification for the rule is based on business convenience
because businesses cannot be carried on if everybody dealing with the company had to
examine the company’s internal machinery in order to ensure that the person had actual
authority.

The rule in Turquand’s case was endorsed by the House of Lords in Mahony v East
Holyford Mining Co. and subsequently became known as the ‘indoor management rule’
According to Lord Hatherley:

“The articles and by-laws of a corporation are open to all who are minded to have any
dealings whatsoever with the company and those who deal with them must be affected
with notice of all that is contained in those two documents”

After that …. all that the directors do with reference to what I may call the indoor
management of their own concerns, is a thing known to them and known to them only;
subject to this observation, that no person dealing with them has a right to suppose that
anything has been or can be done that is not permitted by the articles or by-laws.

When there are persons conducting the affairs of the company in a manner which
appears to be perfectly consonant with the articles of association, then those dealing with
them externally are not to be affected by any irregularities which may take place in the
internal management of the company, they are entitled to presume that of which only
they can have knowledge, namely, the external acts, are rightly done, when those external
acts purport to be performed in the mode in which they ought to be performed.

Unsurprisingly, the rule will not apply where a person dealing with a corporation has
actual knowledge of the deficiency in the authority of s director or officer. It is trite that
the Turquand rule applies only when the third party is acting in good faith.

50
The rule will also not apply in suspicious circumstances that put an outsider on notice to
inquire into the actual authority of a corporate officer. As Justice Wright stated in B Ligett
(Liverpool, Limited v Barclays bank, Limited: [1928] 1 KB 48

“The rule proceeds on a presumption that certain acts have been regularly done, and if
the circumstances are such that the person claiming the benefit of the rule is really put on
inquiry, if there are circumstances which debar that person from relying on the prima
facie presumption then it is clear I think that he cannot claim the benefit of the rule”

Insiders and the rule Turquand.

The question has been discussed in relation to insider whether they should benefit under
this rule and common sense presupposes that an insider should not benefit since he or
she knows that internal regulations of the company.

The rule could not operate in favour of an insider for example a director who would be
deemed to know of any irregularity in the internal management of the company no
matter how unrealistic, in fact that might be.

In Howard v Patent Ivory Manufacturing Co. ( 1888) 38 Ch D, Court stated that the
authorities which require that somebody dealing with a company must make sure that
the internal regulations have been complied with does not apply in a case where those
seeking to enforce obligations against the company and its directors.

In Morris v Kanssen [1946] AC 459 court observed that the rule in Turquand was
designed for the protection of those who were entitled to infer since they cannot know
that such internal regulations have been complied with by the officer who is acting on
behalf of the company. That to allow directors or insiders to take benefit of this rule
would amount to encouraging ignorance and condoning a departure of looking after the
affairs of the company.

Court observed that the director is not for the purpose of the rule in Turquand in the
same position as a stranger and that it is immaterial how long he has been a director
whether he is idle or diligent, whether he is sick or hardworking as long as he is a director
he is fixed with actual or constructive notice.

In Hely Hutchinson v Brayhead Ltd, ( 1967) 2 ALL ER 14 the plaintiff was appointed a
director of the defendant company on the 14 th January 1965 although he did not attend
any board meeting until 19th May 1965. After his first meeting, there was an agreement
between the first defendant as the chairman of the board and the plaintiff where by the
latter agreed to advance money to a company of which he was the managing director and

51
in which the defendant company was a shareholder. The plaintiff sought and obtained an
indemnity from the defendant company which was reduced in writing and signed by the
chairman without a resolution of the board. The defendant company refused to honor the
indemnity arguing that since the plaintiff was its director, he must have had notice of the
fact that the chairman had no authority to give such indemnity on behalf of the company.
Court held that the directors has, by virtue of his office, the means of knowing the true
facts about the alleged authority and is not entitled to rely on the representation.

On the facts of the case Lord Denning held that Mr. Richards had ostensible or apparent
authority to make the contract and this carried with it the necessary inference that he had
also actual authority, such authority being implied from the circumstances that the board
by their conduct over many months had acquiesced in his acting as their chief executive
and committing Brayhead Ltd to contracts without the necessity sanction from the board:

Emco Plastica International Limited v Sydney Freeberne Court of Appeal For East
Africa Civil Appeal No.5 of 1971

the respondent M. Freebene was appointed secretary of the appellant company at the first
meeting of the company held on 1st October, 1965, which he attended by invitation.
Nothing was decided at the meeting as regard the respondent’s emoluments and terms of
service. Mr. Dhanani was appointed chairman of the board at the first meeting and
negotiated the terms of the contract with the secretary. In an action for the breach of
contract. It was contended that the respondent was an insider and therefore was put on
inquiry in regard to the powers of directors.

Held;

Mr. Dhanani was chairman of the appellant company and managed its affairs with full
knowledge of the board of directors, that is, he performed the functions of the managing
director,, and as the contract was of service, which a person performing the functions of
the managing director would have power to enter into a the company’s behalf, the
respondent was not, even though he was an insider, obliged to inquire whether or the
Articles of Association had been complied with before entering into the contract. The
respondent was entitled to infer that the directors held Mr. Dhanani as authorized to
enter into the contract on behalf of the appellant company. The appellant company had
to have someone conduct correspondence on its behalf; such person surely must have
authority to bind the company by letters written on its behalf. Entering into a contract is
a matter in which normally a managing director would have power to act.

It must be noted that in all these cases a director in his individual capacity can always
access information from the company and is expected to know the validity and property

52
of his actions in relation to powers of such a company and the law cannot protect him for
any questionable transaction. The rule in Turquand was meant to protect third parties
and cannot be extended to the directors who are meant to be watchdogs by giving them
an avenue of unfairly dealing with the company.

The rules of the law laid down in Turquand will not validate a forgery. A forgery is a crime
and in no senses a genuine transaction.

Ruben v Great Fingall Consolidated [1906] AC 439

Rowe was the secretary of the company and he asked the appellants, who were
stockholders, to get him a loan of $ 20,000. The appellants procured the money and
advanced it in good faith on the security of the share certificate of the company issued by
Rowe, the latter sating that the appellants were registered in the register of members,
which was not the case. The certificate was in accordance with company’s articles, bore
the company’s seal and was signed by the directors and the secretary, Rowe; but Rowe
had forged the signatures of the two directors. When the fraud was discovered, the
appellant tried to get registration and when this failed, they sued the company in
estoppels.

Held- by the house of Lord – a company secretary had no authority to do more than
deliver the share certificates, and in the absence of evidence that the company had held
Rowe out as having authority to actually issue certificate, the company was not stopped
by a forged certificate, neither was the company responsible for the fraud of its secretary
because it was not within the scope of his employment to issue certificates. This was a
matter for the directors. The Lord Chancellor, Lord Loreburn, said:

The forged certificate is a pure nullity. It is quite true that persons dealing with limited
liability companies are not bound to inquire into their indoor management, and will not
be affected by irregularities of which they had no notice. But this doctrine, which is well
established, applies only to irregularities that might otherwise affect a genuine
transaction. It cannot apply to a forgery.

Apart from the directors, there is a question as to whether officers of the company are
fixed with notice and can therefore not benefit from the rule in Turquand. In the case of
Emco Plastica international Ltd, the respondent who was the appellant company
secretary was not placed in a position different from that of an outsider and was therefore
entitled to assume in the absence of knowledge to the contrary that the director signing
the contract had authority to do so.

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However, in Panorama developments (Guildford) ford Ltd v Fildelis Furnishing
Fabrics Ltd (1971) 3 ALL ER 16, it was held that a company secretary is not just another
officer of the company. On the contrary, he is an important officer of the company with
extensive duties and responsibilities making representations on behalf of the company.
How about shareholders? Can they be put at the same level of directors in terms of having
fixed knowledge of the company’s internal affairs?

There are situations where the company’s articles are silent or are not clear about an
officer’s powers. The main question then would be how an outsider dealing with the
company could be protected. This is because the Houghton decision, above preserves the
fundamental rule that the primary agent of the company is the board of directors, which
is authorizes to manage the company by the articles; however, where the rules are silent,
then no actual authority is given to anyone else to act for the company but it may be
possible for the third party contracting the company with a person who purports to
represent the company, but who has no actual authority , to claim that the person had
apparent or ostensible authority and that , therefore the company is bound by the
agreement.

The leading case is Freeman and Lockyer v Buckhurst properties, (1906) 2 Q.B 480
where there were four directors of the company, which had the clause in its articles
allowing for the delegation of the board’s powers to a managing director. No managing
director was ever formally appointed but, in reality, one of the directors, K, ran the
business of the company. K entered into a contract with the plaintiffs, who were a firm of
architects, to carry out some work for the company. This work was carried out, but the
company subsequently refused to pay the fees, on the ground that K did not have
authority to enter into the contract on behalf of the company. It was held by the Court of
Appeal that, although K was not actually authorized, he was ostensibly authorized and
therefore the contract was binding on the company. Court laid down the instances when
a third party will succeed notwithstanding the fact that the internal regulations were
never followed and the articles are also silent about the powers of the officer. In this case
it was established as a principle that if the issue is whether the officer who purported to
act on behalf of the company exceeded his authority and if so whether the third party
who dealt with him should be bound by that act, and this will depend on whether the
officer in question had actual or apparent authority. Actual authority is that type of
authority with which an officer as an agent has been expressly authorized to act.
Ostensible or apparent authority on the other hand is that type of authority with which
the company as a principle has held out a particular officer as having to enter into such a
transaction.

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Panorama developments (Guildford) Ford Ltd v Fidelis Furnishing Fabrics Ltd
(1971) 3 ALL ER 16

Fidelis company secretary, Mr Bayne hired cars from panorama developments business,
Belgravia Executive Car rental. Bayne used the fidelis paper and represented that he
wished to hire a number of Rolls Royce’s and Jaguars for the business while his managing
director was away, he was lying and he used them himself. Bayne was prosecuted and
imprisoned, but Belgravia had outstanding 570 12 s 6d for the hired cars. Fidelis claimed
that it was not bound to the hire contracts, because Bayne never had authority to enter
them.

Held; B as a company secretary had ostensible authority to enter into the contracts for the
hire of the cars on behalf of the defendants, for a modern company secretary was not
mere clerk but an officer of the company with extensive duties and responsibilities and he
could be regarded as being held out to have authority to sign contracts connected with
the administrative side of the company’s affairs, such as ordering cars to meet customers.

Per Lord Denning;

A company secretary is a much more important person now days than he was in 1887. He
is an officer of the company with extensive duties and responsibilities. This appears not
only in the modern companies Acts, but also by the role which he plays in the day to day
business of companies. He is no longer a mere clerk. He regularly makes representations
on behalf of the company and enters into contracts on its behalf which come within the
day to day running of the company’s business. So much so that he may be regarded as
held out as having authority to do such things on behalf of the company. He is certainly
entitled to sign contracts connected with the administrative side of a company’s affairs,
such as employing staff, and ordering cars, and so forth. All such matters now come
within the ostensible authority of a company’s secretary.

The doctrine of holding out:

T his doctrine of holding out by an officer of an incorporated company is limited by two

forces;

1. You cannot be held out to have authority to do an ultra vires act

2. Since a company is not a human being there must be a human being with actual
authority.

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In the case of panorama development, court observed that somebody holding out as an
officer might be a shareholder or a subscriber to the memorandum. In emmo plastica
court held that the directors were people who actually took over the position of holding
out. In the case of Freeman and Lockyer, Lord Justice Diplock summarized the legal
position on the doctrine of holding out and said that three elements must be shown for
the doctrine to exist.

1. You must show that there was a representation that the officer had authority to
enter on behalf of the company into a transaction of the kind sought to be
enforced.
2. That such representation was made by a person who has actual authority to
manage the business of the company either generally or in respect of that
transaction.
3. That the third party was induced by such representation to enter into the
transaction and in fact relied on it.
4. That the transaction was intra vires the company.

In Walugembe Lugobe & Co Ltd v Giwa, there was an issue where one director or
shareholder purportedly acting on behalf of the company gave instructions to firm
lawyers or advocates to commence proceedings against the defendants who were also
directors or shareholders. The defendants challenged the suit for being misconceived as it
lacked the authority of the board of directors and that the directors who gave the
instructions was not the majority shareholder as decided in the case of Marshalls. This
suit was struck out for want of authority with costs. So the lawyers sued that director who
gave the instructions for the fees.

This was in the case of Kiwanuka & Co v Walugembe. In this second case, the advocates
sought to recover the damages he had paid as costs from the director who had given him
instructions. Court said that since transactions on behalf of the company could have been
given by some individual either one or all and the defendant had not misled the plaintiff,
there was no way the defendant could be made personally liable for the consequence of
the costs.

Emco Plastica International Limited v Sydney Lawrence Freeberne. Court of

Appeal for East Africa Civil Appeal No.5 of 1971

The respondent Mr. Freeberne was appointed secretary of the appellant company at the
first meeting of the company held on 1 st October, 1995 which he attended by invitation.
Nothing was decided at the meeting as regards the respondents’ emoluments and terms
of service. Mr. Dhanani was appointed chairman of the board at the first meeting and

56
negotiated the terms of the contract with the secretary. In an action for breach of
contract, the company claimed that the chairman had no authority to negotiate the terms
of the contract.

The issue was whether Mr. Dhanani had actual or ostensible authority to enter into the
contract with the respondent and on behalf of the appellant company?

Held;

That Mr. Dhanani had implied or ostensible authority to enter into the contract on behalf
of the appellant company. The basis of this would appear to be that the appellant
company held out Mr. Dhanani as the person who was managing its day to day business
and therefore had authority to enter, on its behalf, into a contract with the respondent.

Someone had to represent the appellant company in the conduct of its business,
particularly at the initial period, and such person must surely have authority to bind the
appellant company. Thus a third party dealing with the appellant company. The question
as to whether or not the Articles of Association or a resolution of the board empowered
the chairman or any other directors to enter into a contract binding the appellant
company was not a matter into which a third party should have inquired as long as he
acted on a representation that the Chairman or director had authority to bind the
appellant company.

DUTIES OF DIRECTORS:

Directors are faced with two major duties and must act in a manner that promotes the
success or business of the company S.198 (1) (b)

The directors must exercise a degree of skill and cares as any reasonable person would do
when looking after their own business.

Directors must be competent and must not be negligent in their actions. In the case Re
City Equitable Fire Insurance Ltd. in this case the chairman of the company committed
frauds by purporting to buy Treasury bonds just before the end of the accounting period
and selling them just after the audit. By this method a debt due to the company from a
firm in which the chairman had an interest was considerably reduced on the balance
sheet by increasing the gilt-edged securities shown as assets. It appeared that the
directors of this insurance company had left the management of its affairs almost entirely
to the chairman and it was perhaps because of this that he had more easily been able to
perpetrate his frauds. In the course of his judgment, Romer held that a director need not

57
exhibit in the performance of his duties a greater degree of skill than may reasonably be
expected from a person of his knowledge and experience.

This case is to effect that when dealing with duties of skill and care the nature of the
business ought to be taken into account. The mode in which the company’s work is
distributed among the directors has to be determined. When the work is divided among
many directors, the degree of skill and care is higher.

Directors are therefore expected to use an appropriate degree of skill and in assessing
their competence, the law imposes two tests. The subjective test and objectives test. In
the subjective test, it requires that the directors exercise such a degree of skill and
diligence as would amount to reasonable care that may not exhibit in the performance of
their duties a greater skill than a person of his knowledge or experience. The objective
test on the other hand treats all members or directors the same regardless of their
background or experience. All the directors will be assessed against the same benchmark
and the test here is reasonable which the conduct is expected of a reasonable prudent
person.

This test would mean that the director without skills required is obliged to acquire them
or summon them. This can be done through reading, attending board meetings, etc.
directors are also justified and will not be breach of their duty skill and care in entrusting
certain matters to other officers of the company through a delegation of their powers or
duties. However where such delegation occurs, the director acting with skill and care is
expected to continue and perform the overall supervisory role.

Dorchester Finance Co Ltd V Stebbing (1989) BCLC 489

The case concerned a money lending company, Dorchester Finance, which at all materials
times had three directors. Only one, S was involved in the affairs of the company on full
time basis. No board meetings were held and P and H, other directors made only rare
visits to the company’s premises. S and P were qualified accountants and H had
considerably accountancy experience, though he was in fact unqualified. It appeared that
S caused the company to make loans to other persons and companies with whom he had
some connection or dealing, and that he was able to achieve this, in part at least, because
P and H signed cheques on the company’s accounts in blank at his request. The loan did
not comply with the money lenders Acts and adequate securities were not taken so that
the loans could not be recovered by the company which then brought an action against
the three directors for alleged negligence and appropriation of the company’s property

Held- by foster J that all three directors were liable to damages. S who was an executive
director, was held to have been grossly negligent and P and H were also held to have

58
failed to exhibit the necessary skill and care in the performance of their duties as non
executive directors, even though the evidence showed that they had acted in good faith
throughout.

He stated that the singing of blank cheques by Hamilton and Parsons was in my
judgment negligent, as it allowed Stebbing to do as pleased. Apart from that they not only
failed to exhibit the necessary skill and care in the performance of their duties as
directors, but also failed to perform any duty at all directors of Dorchester.

In Re D’Jan of London Ltd, (1994) 1BCLC 561 a director and 99% shareholder had
signed an insurance proposal submitted by a company to the insurer, which had been
completed by another director without reading it himself. In fact, the proposal contained
inaccurate information which allowed the insurer to repudiate liability. Hoffman held
that the duty of care a director owed a company was equivalent to that contained in s.214
(4) of the solvency Act 1986. This means that a director against whom allegations of
negligence are made can be judged by an objective standard, so that his actions should be
judged against those which could be expected from a director having the general
knowledge, skill and experience that may reasonably be expected of a person carrying out
the same functions as are carried out by the director. In other words of Hoffman J both on
the objective test and on the subject test, I think that he did not show reasonable
diligence when he signed the form. He was therefore in breach of his duty to the
company.

The second duty is the duty of good faith

Under this duty, the director is required to exercise powers in good faith and for the
proper purpose. A director is said to be acting in good faith or bonafide when he puts into
account the paramount interests of the company.

In Re Lee Behrens where court held that the decision of the directors has to be of a
dominant motive.

In Re smith & Fawcett Ltd, Court held that interests of the company are that which is
not for a collateral purpose or an improper motive or self interest of a director. In this
case, Article 10 of the company’s constitution said that directors could refuse to register
share transfers .Mr. Fawcett one of the two directors and shareholders, had died.
Mr.smith co opted another director and refused to register a transfer of shares to the late
Mr. Fawcett’s Executors. Half the shares were bought and other half offered to the
executors.

Lord Greene MR held that in absence of mala fides, this was proper.

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The principles to be applied in cases where the articles of a company confer a discretion
on directors… are, for the present purposes, free from doubt. They must exercise their
discretion bona fide in what they consider not what a court may consider is in the
interests of the company, and not for any collateral purpose.

Directors must also exercise their powers for the purpose and the words ‘for the proper
purposes’ were explained in the case of Re Lee Behrens (1932) 2 Ch.D 46 was said to
refer to anything reasonably incidental to the carrying of the company business.

In this case the object clause of the company contained an express power to provide for
the welfare of employees and ex employees and also their widows, children and other
dependants by the grant of money as well as pensions. Three years before the company
was wound up, the board of directors decided that the company should undertake to pay
a pension to the widow of the former managing director but after winding up the
liquidator rejected her claim to the pension. The court held the powers of management
conferred on the directors were to be exercised for the benefit of the company and not for
their own benefit without regard to the company’s interest. That the transaction whereby
the company covenanted to pay the widow a pension was not for the benefit of the
company or reasonably incidental to its business and was therefore ultra vires and hence
null and void.

Mr. Justice Eve said that the three questions had to be asked to ascertain whether the
directors had abused their powers. Was the transaction reasonably incidental to the
carrying on of the company’s business? Was it a bona fide transaction? Was it done for
the benefit of, and to promote, the company’s prosperity.

In the case of Punt V Symons & Co. Ltd(1903) 02 Ch.506 in order to secure the passing
of a special resolution the directors issued new shares to five additional members and
court held this to be an abuse of their powers because the company was not going to
benefit from that particular resolution but only the directors.

BYRNE J

‘On the evidence I am quite clear that these issues were not issued bonafide for the
general advantage of the company, but that they were issued with the immediate object
of controlling the holders of the greater number of shares in the company, and of
obtaining the necessary statutory majority for passing a special resolution while, at the
same time, not conferring upon the minority the power to demand a poll…. A power of
the kind exercised by the directors in this case, is one which must be exercised for the
benefit of the company: primarily it is given them for the purpose of enabling them to
raise capital when required for the purposes of the company…. But when I find a limited

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issue of shares to persons who are obviously meant and intended to secure the necessary
statutory majority in a particular interest, I do not think that is a fair and bona fide
exercise of the power.

In Hogg v Cramphorn Ltd (1967) Ch 254 Mr. Baxter approached the board of directors
of cramp horn ltd to make a takeover offer for the company. The directors who were
managing director and chairman believed that the takeover would be bad for the
company. So they issued 5707 shares with ten votes each to the trustees of the employee’s
welfare scheme (cramp horn an employee and the auditor). This meant they could
outvote Baxter’s bid for majority control. A shareholder, Mr. Hogg sued alleging the issue
of the shares was ultra vires. Cramp horn argued that the director’s actions were all in
good faith. It was feared that Mr. Baxter would sack many of the workers.

Buckley J writing for the court held that the new shares issued by the directors are invalid.
The power to issue shares was a fiduciary power, and if exercised for an improper motive
the issue was liable to be set aside, it being immaterial that the issue was made in the
bona fide belief that it was in the interest of the company. The directors violated their
duties as directors by issuing shares for the purpose of preventing the takeover. The
power to issue shares creates a fiduciary duty and must only be exercised in order to raise
capital and not for any other purposes such as to prevent a takeover. This act could not be
justifiable on the basis that the directors honestly believed that it would be in the interest
of the company. The improper issuance of shares can only be made valid if the decision is
ratified by the shareholders at the general meeting, with no votes allowed to the newly
issued shares.

Court held that the directors were interested in protecting the shareholder’s interests and
not the company’s interest.

In Percival V Wright, court held that the good faith is owed to the company and not to
the individual shareholders. It was being argued that the directors were trustees both for
the company and for the shareholders, who were the real beneficiaries and therefore the
directors, owed duties to shareholders. This was easily rejected by Swinfen Eady J who
stated that directors were not under any fiduciary duty to individual shareholders.

In Allen V Hyatt, court held that the directors by their conduct placed themselves in the
position of agents for individual shareholders yet there was a fiduciary owed to the
principle. In this case the directors induced the shareholders to give them options for the
purchase of their shares so that the directors might negotiate a sale of the shares to
another company. The directors used the options to purchase the shares themselves and
then resold them at a profit to the other company.

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Held- by the Privy Council – that the directors had made themselves agents for the
shareholders and must consequently account for the profit which they had obtained.

Thirdly, directors must act honestly and not make secret profits.

Directors are agents and trustees of the company and must avoid conflict of interest when
dealing company business and contracts and if there is any conflict or secret profit it must
be disclosed.

Cook V Deeks (1916) AC 554

This action was bought in the high Court Division of the Supreme Court of Ontario by the
claimant, suing on behalf of himself and other shareholders in Toronto Construction Co
ltd, against the respondents, were directors of the company. This claimant sought a
declaration that the respondents were trustees of the company of the benefit of a contract
made between the respondents and the Canadian Pacific Railway Co for construction
work. It appeared that the respondents while acting on behalf of the company in
negotiating the contract, actually made it for themselves and not for the company, and by
their votes as holders of the three-quarters of the issued share capital subsequently
passed a resolution at general meeting declaring that the company had no interest in the
contract.

Held-by the Privy Council;

That the contract belonged in equity to the company and the directors could not validly
use their voting powers to vest the contract in themselves, in fraud of the minority.

Regal (Hastings) Ltd V Gulliver (1942) 1 A11ER 378

The regal company owned one cinema and wished to buy two others with the object of
selling all three together. The regal company formed a subsidiary so that the subsidiary
could buy the cinemas in question but the Regal company could not provide all the
capital needed to purchase them and the directors bought some of the shares in the
subsidiary themselves thus providing the necessary capital. The subsidiary company
acquired the two cinemas and eventually the shares in the Regal Company and in the
subsidiary were sold at a profit. The new controllers of the Regal Company then caused it
to bring an action to recover the profit made.

Held; by the House of Lord- that the directors must account to the Regal company for the
profit on the ground that it was only through the knowledge and opportunity they gained
as directors of that company that they were able to obtain the shares and consequently to

62
make the profit. In particular, the House of Lords stated that directors were liable to
account to the company once it was established.

That what the directors did was so related to the affairs of the company that it could
properly be said to have been done in the course of their management and in utilization
of their opportunities and special knowledge as directors and

That what they did resulted in a profit to themselves

Boardman V Phipps (1966) UKHL 2

Mr. Tom Boardman was the solicitor of a family trust. The trust assets include a 27%
holding in a company. Boardman was concerned about the accounts of the company, and
thought that to protect the trust a majority is required. He and a beneficiary, Tom Phipps,
went to a shareholders’ general meeting of the company. They realized together that they
could turn the company around. They suggested to a trustee (Mr. Fox) that it would be
desirable to acquire a majority shareholding, but Fox said it was completely out of the
question for the trustees to do so with the knowledge of the trustees, Boardman and
Phipps decided to purchase the shares themselves. They bought a majority stake. But they
did not obtain the fully informed consent of all beneficiaries. By capitalizing some of the
assets, the company made a distribution of capital without reducing the values of the
shares. The trust benefited by this distribution 47000 while Boardman and Phipps made
75000. But then John Phipps, another beneficiary, sued for their profits, alleging a conflict
of interest.

The majority of House of Lords (Lords Cohen, Guest and Hodson) held that there was a
possibility of a conflict of interest because the solicitor and beneficiary might have come
to Boardman for advice as to the purchase of the shares. They owed fiduciary duties (to
avoid any possibility of a conflict of interest) because they were negotiating over use of
the trust’s shares.

Industrial Development Consultants v Cooley (1972) 2 ALL ER 162

The defendant was an architect of considerable distinction and attainment in his own
sphere. He was employed as managing director by industrial Development Consultants
who provided construction consultancy services for gas boards. The eastern Gas Board
were offering a lucrative contract in regard to the building of four depots and IDC was
very keen to obtain the business. The defendant was acting for IDC in the matter and the
Eastern Gas Board made it clear to the defendant that IDC would not obtain the contract
because the officers of the Eastern Gas Board would not engage a firm of consultants. The
defendant realized that he had a good chance of obtaining the contract for himself. He

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therefore represented to IDC that he was ill and because IDC were of the opinion that the
defendant was near to a nervous breakdown, he was allowed to terminate his
employment with them on short notice. Shortly afterwards the defendant took steps
which resulted in his obtaining the Eastern Gas Board Contracts for the four depots for
himself. In this case DC sued the defendant for an account of the profits that he would
make on the construction of the four depots.

Held by Roskill J

While the defendant was managing director of the plaintiff a fiduciary relationship
existed between him and the plaintiffs accordingly information which came to him while
he was managing director and was of concern to the plaintiffs. He was under a duty
therefore to disclose all information which he received in the course of his dealings with
the gas board. Instead he embarked on a deliberate course of conduct which had put his
personal interests as a potential contracting party with gas board in direct conflict with
his pre existing and continuing duty as managing director to the plaintiffs. He was
therefore in breach of his fiduciary duty to the plaintiffs in failing to pass on them all the
relevant information received in the course of his dealings with the gas board and in
guarding it for his own personal purposes and profit

Because of his breach of duty the defendant was liable to account to the plaintiffs for all
the benefit he had received or would receive under the contract with the gas board. The
question whether the benefit of the contract would have been obtained for the plaintiffs
but for the defendant’s breach fiduciary duty was irrelevant, it was therefore irrelevant
that, as a result of the order to account the plaintiffs would receive a benefit which they
would not otherwise have received.

The rule against self dealing or insider trading ie contracts involving directors.

Under this rule, directors are seen to be acting on both sides of a single transaction to be
acting for the company on one hand and for themselves on the other hand. This would
create a conflict between a directors’ self interest and his duty to the company. S.225 &
Art 84. When this arises, a director is supposed to make a declaration of his/her interest
in that particular transaction.

If the director conceals that interest fraudulently or induces a company to deal in the
transaction for his/her own interest, then the director omits a role against the company.
The company can sue the director for compensation for the loss suffered or the profit
made and can seek to set aside the transaction if rescission is still available.

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In Aberdeen Rly Co V Blakie Bros, where a company entered into a contract to
purchase chairs from a partnership when, at the time one of its directors was a partner in
the partnership. It was held that the contract could be avoided by the company owing to
the conflict of interest. Lord Cranworth LC stated the rule thus:

A corporate body can only act by agents and for it is of course the duty of those agents so
to act as best to promote the interest of the corporation whose affairs they are
conducting. Such agents have duties to discharge of a fiduciary nature towards their
principal and it is a rule of universal application, that one having such duties to discharge,
shall be allowed to enter into engagements in which he has or can have a personal
interest conflicting or which possibly may conflict with the interest of those whom he is
bound to protect

Lord Pearson stated, in Hely-Hutchinson V Brayhead Ltd

If a director makes or is interested in a contract with a company, but fails duly to declare
his interest, what happens to the contract? Is it void or is it voidable at the option of the
company, or is it still binding on both parties, and what? The article supplies on answer
to these question. I think that the answer must be supplied by the general law, and the
answer is that the contract is voidable at the option of the company.

The director must account for any authorized benefit received from the company. Any
remuneration received by the director in breach of the rules or the law will be held by
him on instructive trust of the company. The receipt of such remuneration is regarded in
equity as void.

Cook V Deeks (1916) 1 AC 554

This action was bought in the High Court Division of the Supreme Court of Ontario by
the claimant, suing on behalf of himself and other shareholders in the Toronto
Construction Co Ltd, against the respondents, who were directors of the company. The
claimant sought that the respondents were trustees of the company of the benefit of a
contract made between the respondent and the Canadian Pacific Railway Co for the
construction work. It appeared that the respondents, while acting on behalf of the
company in negotiating the contract, actually made it for themselves and not for the
company, and by their votes as holders of the three- quarters of this issued share capital,
subsequently passed a resolution at the general meeting declaring that the company had
no interest in the contract.

Held- by the Privy Council

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That the contract belonged in equity to the company and the directors could not validly
use their voting powers to vest the contract in themselves, in fraud of the minority.

As Lord Buck master, who delivered the opinion of the their Lordships, stated men who
assume the complete control of a company’s business must remember that they are not a
liberty to sacrifice the interests which they are bound to protect, and while ostensibly
acting for the company, divert in their own favor business which should properly belong
to the company they represent.

However in Bell V Lever Bros, a director is not accountable for the profits of a
competing business which he may be running unless the articles or his services contract
expressly so provide, but he will be accountable if he uses the company’s property in that
business or if he uses its trade secrets or induces the company’s customers and deal with
it.

The rule in Foss V Harbottle

Although many functions are delegated to the directorate, the eventual power and
control in a person or group of persons controlling three-quarters of the votes would have
complete control of the company, and a little more than half the vote would give
considerable influence allowing for example control over appointments to the board.

The principle of majority rule is well established and is emphasized in the matter of
ligation by the rule in Foss V Harbottle,

The rule in Foss V Harbottle, states that in order to redress a wrong done to a company
or to the property of the company, or to enforce rights of the company, the proper
claimant is the company itself , and the court will not ordinarily entertain an action
brought on behalf of the company by the shareholder.

In this claimant, Foss and Turton were shareholders in a company formed to buy land for
use as Pleasure Park. The defendant were directors and shareholders of the company. The
claimant shareholders alleged that the defendants had defrauded the company in a

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number of ways including some of the defendants selling land belonging to them to the
company at an exorbitant price. The claimants sought an order that the defendants make
good the losses to the company.

Held, dismissing the action, in any action in which a wrong is alleged to have been done
to a company, the proper claimant is the company and as the company was still in
existence, it was possible to call a general meeting and therefore there was nothing to
prevent the company from dealing with the matter.

One of the clearest statements of the rule is in the judgment of Jenkins LJ in Edwards V
Halliwell (1950) 2 ALL ER 1064 where he states that;

The rule in Foss V Harbottle comes to no more than this. First the proper plaintiff in an
action in respect of a wrong alleged to be done to a company or association of the persons
is prima facie the company or association of persons itself. Secondly, where the alleged
wrong is a transaction which might be made binding on the company or association and
on all its members by a simple majority of the members no individual member of the
company or association is allowed to maintain an action in respect of that matter for the
simple reason that, if a mere majority of the members of the company is in favor of what
has been done, then cadit quaestio. No wrong has been done to the company or
association and there is nothing in respect of which anyone can sue.

Another well known examination of the rule is to be found in the Privy Council judgment
of Burland V Earle (1902) AC 83 where Lord Davey states;

It is an elementary principal of the law relating to joint stock companies that the court
will not interfere with the internal management of the companies acting within their
powers, and in fact has no jurisdiction to do so. Again it is clear law that in order to
redress a wrong done to the company or to recover moneys or damages alleged to be
duple to the company, an action6 should be prima facie be bought by the company itself.

Further on, Lord Davey turns again to the question of irregularities, stating; no mere
informality or irregularity which can be remedied by the majority will entitle the minority
to sue, if the act when done irregularly would be within the powers of the company and
the intention of the majority of the shareholders is clear.

A clear example of this is the case of MacDougall v Gardiner (1875) 1 CH D 13. Here a
company’s article gave the chairman of the general meeting power to adjourn with the
consent of the meeting. The articles also provided that a poll should be taken if one was
demanded by five or more members. During a general, a member proposed the
adjournment of the meeting. When this resolution was passed on show of hands, the

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chairman declared it to be carried. Five members then demanded that a poll be taken on
the question whether there should be an adjournment, but the chairman refused to hold
one and immediately left the room. The members then brought this action, asking for,
inter alia, a declaration that the conduct of the chairman was illegal and improper.

The action was dismissed, since Mellish LJ was of the opinion that this was a matter
which the majority of the members of the company were entitled to put right by a
resolution to the effect and there was no point allowing the action to proceed if the end
result would be that a meeting was called and ultimately the majority obtained its wishes.

Basis of the rule

Four major principles seem to be at the rule as decided cases show. The right of the
majority to rule. The court has said in some of the cases that an action by a single
shareholder cannot be entertained because the feeling of the majority of the members has
not been tested and they may be prepared if asked to waive their right to sue thus the
company can only sue if the directors pass a resolution to the effect where the power is
delegated to them or if the company expresses its desire to sue by an ordinary resolution
in general meeting, whether the power is delegated to the directors or not since the
power of the members to bring the company into court as a claimant is concurrent with
that of the directors and if the members wish to bring the company into court and the
directors do not the wish of the members by ordinary resolution will prevail.

The company is a legal person. The court has also said from time to time that since a
company is a person at law, action is vested in it and cannot be bought by a single
member.

The prevention of the multiplicity of action. This situation could occur if each individual
member was allowed to commence an action in respect of a wrong done to the company.
See James LJ in Gary V Lewis (1873) 8 CH app 1035 at p 1051- a judgment which was
particularly supportive of the multiplicity problem.

The court’s order may be made ineffective. It should noted that the court order could be
overruled by a ordinary resolution of members in a subsequent general meeting, provided
that the general meeting is not controlled by the wrongdoers. As Mellish LJ said in
MacDougall V Gardiner (1875) 1CH D 13 at p 25,

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If the thing complained of is a thing which in substance the majority of the company are
entitled to do there can be no use in having litigation about it, the ultimate end of which
is only that a meeting has to be called and ten ultimately the majority gets its wishes.

Limits to the principle of the majority rule,

There have always been a number of cases where courts have not applied the principle of
majority rule so as to preclude a minority shareholder from obtaining relief. These are
cases where either the rule has no application or the courts have developed an exception
on the ground of fraud.

Exceptions

Cases where the rules has no application

Ultra vires and illegality

The principles of majority rule have no application where bare majority shareholders have
no right to ratify and adopt a particular act for the company. So therefore, rule in Foss v
Harbottle had no application where the company was proposing to do an ultra vires or
illegal act, since the shareholder could not even by an unanimous vote, ratify an ultra
vires or illegal act. In these circumstances, the shareholder has a right to bring a personal
action, since he has a right to have the company act in accordance with the terms of its
constitution within the law. The right of the shareholder to bring an action restraining a
proposed ultra vires transaction is expressly recognized in S.51 (2) of the companies act.

Special majorities the principle of the majority rule can have no application where it is
done or proposed to be done can only be a special majority or special resolution. So for
example a shareholder is entitled to have the articles altered only on the passing of a
special resolution in accordance with S. 16 and in Edwards v Halliwell (1950) 2 ALL ER
1064 a member of a trade union was able to obtain a declaration that an alteration to the
union contributions was invalid as it had not been made following a two third majority
vote as required by the union rules.

Edwards v Halliwell (1950) 2 ALL ER 1064

A trade union had rules which were the equivalent of the articles of association, under
which any increase in member’s contributions had to be agreed by two thirds majority in
a ballot of members. A meeting decided by a simple majority tosawe45 increase the
subscription without holding a ballot. The claimants, as a majority of members applied
for a declaration from the court that the resolution was invalid. It was held that the rule
in Foss did not prevent a minority of a company or as here an association of persons, from

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suing because the matter amount which they were suing was one which could only be
done or validly sanctioned by a greater than simple majority.\

Personal rights.

More wide ranging is the shareholder’s right to enforce personal rights which accrue to
him as a shareholder. In a sense, the first two cases above are merely special features of
this general right. An example of a shareholder enforcing his rights can be seen in
Wood v Odessa Waterworks Ltd, where a shareholder enforced a right in the articles to
be paid a dividend, rather than being issued a debenture which was what the directors
proposed. Again in Oak bank Oil Ltd v Crum, a shareholder enforced the calculation of a
dividend which was provided for in the articles and in Pender V Salmon v Quin and
Axtens, a shareholder, in fact enforced his right to have the company in accordance with
the terms of the articles and forced the company to recognize a right of veto vested in the
managing director.

In Edwards v Halliwell (1950) 2 ALL ER 1064, it was held that it was implicit in the rule
in Foss V Harbottle (1843) (2 Hare 461) that the matter relied on as constituting the
clause of action should be cause of action properly belonging to the general body of
members of the association in question as opposed to a cause of action which some
individual member of the association in question as opposed to a cause of action which
some individual member could assert in his own right. In the present case, the personal
and individual rights of membership of the plaintiffs had been invaded and in particular
damage inflicted by the individual alteration of the tables of contributions, and in such
circumstances the rule in Foss v Harbottle no application to individual members who
were suing, not in the right of the union, but in their own right to protect from invasion
their individual rights as members and therefore, the plaintiffs were entitled to their
declaration.

Where there is a fraud on the minority.

The rule in Foss would create grave injustice if the majority were allowed to commit
wrongs against the company and benefit from those wrongs at the expense of the
minority simply because no claim could be bought in respect of the wrong, thus there is a
major and somewhat ill defined exception referred to as fraud on the minority for
example in Kilner House Ltd v Greater London Council (1982)1 ALL ER 437, Megary
noted that ‘it does not seem to have yet become very clear exactly what would the word
fraud means in this context; but I think it is plainly wider than fraud at common law.’
Equally in Burland v Earle (1902) AC 83, the court stated that a straightforward example

70
of fraud is’ where a majority are endeavoring directly or indirectly to appropriate to
themselves money, property or advantages which belong to the company.

As Jenkins LJ said, in Edwards v Halliwell it has been further pointed out that where
what has been done amounts to what is generally called in case a fr?aud on the minority
and the wrong doers are themselves in control of the company, the rule is relaxed in favor
of the aggrieved minority who are allowed to bring what is known as the minority
shareholder’s action on behalf of themselves and all others. The reason for this is that, if
they were denied that right their grievance could never reach the court because the
wrongdoers themselves, being in control, would not allow the company to sue.

A clear and striking example of this occurred in Cook v Deeks, where a shareholder was
allowed to bring an action against directors who were in breach of their duties to the
company in diverting to themselves a contractual opportunity which, in equity belonged
to the company. They were not allowed to use their majority voting power in general
meeting to prevent an action being bought against them.

Cook v Deeks (1916) AC 554

Three directors obtained a contract in their own name to the exclusion of the company in
breach of fiduciary duty. As holders of 75 per cent of the shares, they secured a resolution
declaring the company had no interest in the contract. Held the contract belonged in
equity to the company and the directors could not use their shares to vest it in
themselves. In the circumstances, where the board and majority shareholders were not
willing to commence an action, minority shareholders could bring an action on behalf of
the company.

Another well known example is Menier V Hooper’s Telegraph works, where H Co was
the majority shareholder in E co, which was formed to lay a telegraph cable between
Europe and South America and there was an agreement which provided that H Co would
make and lay submarine cables for E Co. the chairman of E Co appropriated to himself a
concession belonging to the company and subsequently, H Co did not support an action
by E Co to recover the concession but, instead and in agreement with the chairman, used
its voting power in general meeting to pass a resolution to wind up E Co. this released
itself from the obligation to supply cable to E Co and so it could supply another company.

The court of Appeal allowed the action to proceed, with James LJ stating that Assuming
the case to be as alleged by the bill, then the majority have put something into their
pocket at the expense of the minority. If so, it appears to me that the minority have a
right to have their share of the benefits ascertained for them in the best way which the
court can do it.

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In Alexander v Automatic Telephone Co, the scope of this exception was demonstrated
to be wider than merely fraud per se and to include cases where the directors acted in a
belief that they were doing nothing wrong. Here all charges of fraud against the directors
which were originally contained in the pleadings were dropped. The company had issued
partly paid shares and the directors made calls on all the shares except those held by
themselves and those held by persons whom they were associated with. In those
circumstances, Lindley LJ, in court of Appeal, looked for a breach of duty by the directors
and found it by the directors obtaining money from the other shareholders and paying
nothing themselves

‘The breach of duty to the company consist in depriving it of the use of the money which
the directors ought to have paid up sooner than they did. I cannot regard the case as one
of mere internal management which accordingly to Foss V Harbottle and numerous
other cases, the court leaves the shareholders to settle among themselves’

This case was followed by temple man J, in Daniels V Daniels, where he drew a
distinction between cases where directors are in breach of their duties but do not
themselves benefit from that breach and cases where directors are in breach of their
duties and even though no fraud is alleged or proven, they do benefit. In the former case,
the rule in Foss V Harbottle would preclude any action by minority shareholders against a
director, whereas, in the latter, the court would not allow the rule to defeat a claim. The
distinction can be illustrated by the facts of Pavlides V Jensen and those of Daniels v
Daniels itself. In Pavlides, the directors as a result of alleged gross negligence, sold a mine
at an under value. They did not in any way benefit from the sale. Danckwerts J held that
this case could fail within the exception to rule in Foss /v Harbottle and it was open to the
majority of shareholders, in general meeting, to decide that no proceedings should be
taken against the directors.

In Daniels V Daniels, on the other hand, the two directors, who were also the majority
shareholders, caused thee company to sell land belonging to it at an under value to one of
the directors, who then resold the land, making a substantial profit. Although there was
no fraud alleged on the part of the directors, temple man J in refusing to strike out the
claim, held that

If minority shareholders can sue if there is fraud, I see no reason why they cannot sue
where the action of the majority and the directors, though without fraud, confers some
benefit on those directors and majority shareholders themselves. It would seem to me
quite monstrous particularly as fraud is so hard to plead and difficult to prove- if the
confines of the exception to Foss v Harbottle were drawn so narrowly that directors
could make profit out of their negligence… the principle which may be gleaned from

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authority is that a minority shareholder who has no other remedy may sue where
directors use their powers, intentionally or unintentionally, fraudulently or negligently,
in a manner which benefits themselves at the expense of the company.

Control

It is essential for a minority shareholder, in order to be able to invoke the exception to the
rule in Foss v Harbottle, to show that the wrongdoers are in control. This element of
control is part of the definition of fraud on the minority and is the reason why the
company will not be allowed to bring an action to purse the wrong done to it. There is
some uncertainty as to the meaning of control for these purposes.

In Prudential Assurance Co Ltd v Newman Industries Ltd

It was argued by the plaintiff that an action could be brought to remedy a wrong done to
the company under the fraud on the minority exception, even where the defendant
wrongdoers did not have voting control in general meeting. Vinclott J, after a lengthily
examination of the authorities on the meaning of control, favored the view that such an
action would be bought where the persons against whom the action is sought to be
brought are able by any means of manipulation of their position in the company to
ensure that the action is not brought by the company, and that the means of
manipulation should not be too narrowly defined. He was of the view that there were a
great many circumstances which would lead to find control for these purposes, for
instance, the court can look behind the register to find out who the beneficial owners of
the shares are, where the registered members are holding as nominees.

LELIA KATUSIIME-FCIS

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