o behind the certificate and nullify the registra

4. Doctrine of ultra vires. A company can only trade on the business specified in its object
clause
of the memorandum of association.
5. Taxation.
A company must pay taxes as a legal person while this is not a requirement for partnerships.
6. There are many formalities before a business starts trading.
7. The winding up of a company is widely published thus exposing the property of the
company
to an insecure position.
2. CLASSIFICATION OF COMPANIES CORPORATIONS.
Corporation is a person in law i.e. quite distinct from the individuals who are its members.
Corporations can own property, have rights and are subject to liabilities.
Types of corporations:
a) Corporate sole.
Has only one member.
Can continue even after death of those members.
b) Corporation aggregate.
Have more than one member.
Are classified according to the means the artificial corporate personality has been granted: -
thus
(i) Chartered corporations
Are incorporated by the grant of a royal charter by the crown.
Nowadays charters are given to non-profit making bodies of public importance (good).
(ii) Statutory corporations
Created by passing an act of parliament e.g. the national coal board.
(iii) Registered corporations.
Are those created by compliance with the terms of an act of parliament.
8
Companies’ act 1844 provided a third and easier method of incorporation by registration
following compliance with formalities. In 1855 limited liability concept was introduced.
Types of registered companies
1. Public companies
Under section 1 (1) are formed by seven or more members, the purpose being to attract
investment from the general public.
2. Private companies.
Formed by two or more members. Defined by sec.28 (1) as a company which by its articles: -
a)Restricts rights to transfer shares e.g. by clause that members must offer their shares first to
other members or to directors or a clause under which directors have a right to refuse to
register a
transfer.
b) Limits the number of its members to 50 (excluding present or past employees). Joint
holders
of shares are treated as a single member.
c) Prohibits any invitation to the public to subscribe for its shares or debentures.
Limited companies
Liability of a company is unlimited in the sense that it must pay all debts due from it so long
as
its assets are sufficient to meet them. Liability of members may be limited when the company
is
formed by;
a) Shares.
Members are liable to the extent of the amount paid on their shares, including share premium
if
any.
There is no liability regarding unissued capital.
In case of private companies a guarantee is usually required before credit is given.
b) Guarantee
Normally these companies don’t have share capital.
They are non-profit making organizations.
Where there is no share capital, there is no liability or the members unless and until the
company
goes into liquidator in which case they were liable to the extent to which they have agreed by
the
memorandum of association to contribute to the assets of the company.
The guarantee is usually to contribute Sh1 though it may be more.
9
The guaranteed sum is payable by those who are members at the time of winding up and if
they
can’t pay the liquidator may proceed against those who were members previously but only in
respect of debts incurred while they were members.
An unlimited company may re-register as a limited company (by shares or guarantors) unless
it
has previously been converted from a limited to an unlimited company.
Members must pass a special resolution agreeing to the change, and the resolution must make
the
appropriate alterations so that it confirms to the requirements.
The special resolution is then sent to the register of company’s and re-registration is effected
by a
director or a company secretary of the company by signing an application form sending it to
the
registrar together with a printed copy of the company’s memorandum and articles in their
new
form, the register then issues a new certificate.
Unlimited companies.
There is no limit to the liability of the members.
Mostly used by stockbrokers because stock exchange can’t admit a company as a member
unless
its members are personally liable for its debts.
An unlimited company can avoid giving publicity to its financial affairs.
An unlimited company can be formed by: -
a) By being formed as such;
Either with or without share capital and as a public or private company.
Where there is no share capital members contribute equally to the debts and liabilities of the
company.
b) By being re-registered
Sec. 43 CA 1967 allows a company limited by shares or guaranteed to re-register as an
unlimited
company.
All members must consent in writing and all the consents together with a statutory
declaration by
the directors that the consents have been obtained and acopy of the memorandum and articles
altered so as to confirm to those of an unlimited company.
The registrar may then issue a certificate and publish the fact of issue in the Gazette.
Special features of unlimited companies.
10
a) It need not deliver copies of its annual accounts, directors and auditors reports to the
registrar with its annual return
●It enjoys privacy as regards its financial affairs.
●This privilege is not extended to an unlimited company, which is a subsidiary or holding
of a limited company, or unlimited company, which is potentially under control of two or
more limited companies.
b) Provisions of CA 1948 governing the alteration of capital do not apply to unlimited
companies.
●A company may alter its capital structure by a special resolution altering the articles.
●Notice of any alteration must be given to the registrar within one month unless alteration
increases the company’s nominal capital, when notice must be given within 15 days.
c) An unlimited company may acquire any of its own shares if its articles authorize it to do
so, even though it uses its own assets to purchase them. (Re Borough commercial and
building society (1893)).
If at the time it acquires the shares the company knows that its existing assets and amounts
which
it could expect to exact from its members on winding up will not be enough to satisfy its
liabilities the acquisition of the shares will be set aside as a fraud on its creditors (Mitchell vs.
city of Glasgow Bank (1879)).
d) An unlimited company need not give a more than seven days notice to its members of an
extra ordinary general meeting called to pass a resolution other than a special one. The
period for other companies is 14 days.
e) An unlimited company may issue shares of no par value.
f) An unlimited company has no statutory power to issue redeemable preference shares, but
since it can purchase its own shares if articles provide.
It could in practice issue redeemable preference shares and provision of section 58 would not
apply.
Other instances of unlimited liability.
(a) Section 31
Under this if a company carries on business for more than six months with less than seven
members (or two in a private company), every member who knows of the fact is liable for the
debts of the company which are incurred of the period of six months has expired.
The section does not apply as regards damages after awarded e.g. a breach of contract by the
company.
11
(b) Section 332
The section applies if the company is being wound up. The court must be satisfied that the
company’s business has been carried on with intent to defraud creditors.
Person carrying on business fraudulently must be made personally liable for the company’s
debts.
Example directors could be held liable if knowing that the company is unable to pay its debts
as
they fall due, they ordered goods on credit or received money from customers for goods,
which
the company might not be able to supply.
(c) Section 202
The memorandum of a company may provide or be altered to provide, that the liability of its
members shall be limited but the liability of its directors shall be unlimited. This alternative is
hardly ever adopted in practice.
Separate legal personality of a company
The case, which established the independent legal personality of a company, Salomon vs.
Salomon and company Ltd (1897) (1, 1).
Major consequences of the Salomon case.
a) It established the validity of registration as a means of creating a corporation formerly
these was done by charter for statute.
b) Registration was established as a method of creating a company with separate legal
personality.
c) A registered company has perpetual succession.
d) Separate personality is made to function by the board of directors which is the agent.
There is thus need for members to have some control over the board. Some of the ways
the member can achieve this control was:-
a. The ultra vires rule.
Shareholders can seek a court injunction wherever directors involve in transaction that are
beyond the company powers.
These days the courts construct objects clause widely so that this control is often more
apparent
than real (Re New Finance and Mortgage Co. Ltd (1975)).
12
Also acts by directors which are defective whether because of lack of authority or quorum or
because of some defect I their appointment or because of their motives were improper, can be
validated by ordinary resolution of the members after full disclosure of the facts to them in a
general meeting, provided the acts in question are not ultra vires the company (e.g. Branford
vs.
Branford (1969) Y4).
b) Accounts and audits
The board is required to account for its financial stewardship by ensuring the production of
annual accounts which must be audited and presented to the members at the
c) Sec. 184 removal of directors is made easy.
A company may by ordinary resolution remove a director before the expiration of his period
of
office regardless of the way in which he was appointed notwithstanding anything in its
articles or
any agreement in his favour section 184(1).
Special notice of 28 days to the company is required of the intention to move the resolution
(sec.184 (2)).
Following the acceptance of limited liability in Salomon, certain protections are given to
creditors and potential creditors.
a) Publicity as to financial standing - Companies must file the annual returns.
b) Share capital (creditors fund) cannot be returned to shareholders.
(i) Capital reductions must be approved by the court under section 66.
(ii) A limited company may not purchase its own shares(Trevor and Whortworth 1887
(1/6)), nor, subject to certain exceptions, lend money to persons so that they may buy
the company’s shares (s.54)
There is an exception when shares are issued as redeemable preference shares (section 58).
(iii) Dividends must be paid out of profits and not out of capital.
There are provisions to prevent the capital of a company being watered down as it comes into
the
company by the control of the issue of shares at a discount (section 57) and of underwriting
commission paid on shares on the issue of shares.
Exceptions to the rule of separate legal personality.
1. Companies act 1948
If the membership fall below the statutory minimum for six months.
There is also liability where on winding up the court is satisfied that a company’s business
has
been carried on within intent to defraud its creditors.
13
2. Public interest
Personal qualities of shareholders may be investigated in public interest (Daimler Co. Ltd vs.
continental Tyre (1916) (1/7).
3. Evasion of legal obligations
When a company is formed to evade legal obligations (e.g. Gilford motor Co. Ltd vs. Horne
(1933)) shareholders may be personally liable.
4. Personal relationship company sec. 184 of 1948 Act,
Which allows removal of a director by an ordinary resolution after 28 days has also given rise
to
abuse of the corporate entity theory in the private company. This is because a director can be
easily be removed without a mistake of in part, unless there is a special clause in articles as in
Bushell v. Feith.
However in Ebrahim vs. Westborne Leallaries (1972)(1/9) the House of Lords decided that a
removal under section 184 could be ground for winding up under section 222 in private
company. This rule applies not to all private companies but to personal relationship
companies.
Personal relationship companies are in essence partnerships where each member assumes
continuing involvement in management. In order to ascertain whether the company is a
personal
relationship company, it is necessary to lift the corporate veil and discover the hopes and
aspirations of the members.
In Re. A&B, C chewing gum (1975)1/40 the court took a view that entitlement to
management
participation was an obligation so basic that, if broken, the association must be dissolved
even
though it was not a company arising out of partnership.
2. FORMATION OF A COMPANY
Introduction
There are several formalities, which have to be followed before a company is incorporated
(formed). The process is grouped in the following stages: -
1. Promotion
2. Incorporation or Registration
3. Capital subscription
4. Commencement of business
It should be noted that a private company need only to go through the first two stages only. A
public company must go through all the four stages.
1. Promotion
14
4. A declaration that all the requirements of the companies Act and other formalities relating
to
registration have been complied with. The declaration has to be signed by an advocate, a
person
named as director or company secretary.
5. A list of the company directors and their written consent to become company directors.
Immediately after registration, the following true documents are required: -
(i)Notice of the situation of the registered office.
(ii)Particulars of directors and the secretary.
The registered office can’t be changed but if it changes notice of change must be given to the
registrar within 14 days. Particulars of the directors and the secretary need to be filed with the
registrar within fourteen days of their appointment.
d) Issuance of a certificate of incorporation
On receipt of necessary documents the registrar opens a file for the particular company. If all
requirements of the Act have been complied with, he will register the company and place, its
name in the register of companies. A certificate of incorporation will be issued where upon
the
registrar shall certify under his hand that the company is incorporated. The original copy is
given
to the promoters and a copy will be left in the company’s file (s. 12).
It should be noted that presentation of documents does not mean automatic registration of the
company. The registrar of company’s powers to refuse registration are inherent. If the
registrar’s
reasons for refusal to register acompany are not valid the promoters can seek order of
mandamus
from the high court to compel the registrar to issue the certificate.
In R vs. registrar of joint stock companies (1913) 2k B 197; the promoters of the company
sought mandamus to issue the registrar of the joint stock companies on grounds that he had
without reasonable cause refused to register their company.
It was held that where promoters are aggrieved by the decision of the registrar they can apply
for
order of mandamus to issue against the registrar. However where the registrar is justified in
law
and in fact not to issue the certificate the order of mandamus shall not be issued.
In the above case the promoters failed in their attempt because issuing the certificate would
mean
allowing an English company commits an illegality.
Section 17(1) once the certificate is issued it acts as conclusive evidence that the company
was
properly formed in accordance with all the requirements of either the company’s Act or the
company practice. If it is later found that the granting of the certificate was made in
ignorance of
some irregularity on the part of promoters; it cannot be withdrawn. Incase in this point is
Barnard’s Banking company Re Poel’s case (1867) L.R.2ch. 674. It was held by Lord Cairns
in
this case that:
17
When once the memorandum is registered and the company holds out to the world as a
company
undertaking business willing to receive shareholders and ready to contract engagements then
it would be of most disastrous consequences if at all that has been done, any person was
allowed to go back
and enter into examination of the circumstances attending original registration and the
regularity
of the execution of the documents.
The certificate cannot be disputed on any grounds and cannot be challenged even: -
a) Where the memorandum is altered after signatories put their signatures on memorandum
but before it is registered with the registrar.
b) When memorandum is signed by only one person for all the seven.
c) Where all the signatories are minors.
d) Signatures to the memorandum are forged.
Other case law relation to incorporation is Jubilee cotton mills Ltd vs. Lewis (1924) AC 958.
Circumstances when incorporation can be withdrawn: -
(i) Where it is discovered that the company was formed with blasphemous objectives.
This is the case in Bowman and others vs. the secular society limited (1917) AC 406
where the company thought against Christianity and urged its members to stop
Salvation Army members from attending their Sunday worship.
This was found that the activities of this company were blasphemous to the doctrines of that
religion and the certificate was withdrawn and cancelled. However on technical grounds the
action failed.
(ii) There the objects of the company are found to be immoral. In R vs. Registrar of joint
stock companies (Ex-parte the A.G) (1980) QBX a firm of Accountants sought to
register a company on behalf of their client. They intended to register the company in
the name “prostitutes” but the name was rejected and there served another “Hooker
Ltd, which was also refused by registrar. The accountants then submitted the name
“Lindi St. Claire French Lessons Ltd”. The registrar accepted the name and registered
the company issuing a certificate. Later it was discovered that the company’s sole
purpose was to enable clients either alone or with others provide prostitution service
for gain.
Judge Ackner LS stated that though prostitution per se was not unlawful under the English
law it
was contra Moros bonus. Hence the registrar was entitled to quash registration and withdraw
the
certificate.
(iii)Where the entity that was registered as a company is not a company in nature. In Salomon
vs. Salomon and company Ltd (1897) AG 22 Lord Parker in the course of his judgment
18
suggested that courts would be ready to go behind the certificate and nullify the registration
of a
company on the grounds that the entity which was not corporate body with the status and
capacity conferred by the Act.
(iv)Where the company to which the certificate has been issued turns out to be an enemy of
the
state. A company becomes an enemy if persons controlling it defacto are resident in an
enemy
country or wherever resident are adherent of taking instruction from or acting under the
control
of the enemy Lord Parker.
A company becomes an enemy if it draws its membership from an enemy country. A case
law
relating the above is Daimler company Ltd vs. continental Tyres company (1916) 2 AC 307.
d) Acquisition of legal personality
Where a company is registered it becomes a legal person by the name contained in its
memorandum of association. S 16 (2) incorporation of a company as a legal person was
established in the case of Salomon vs. Salomon and company Ltd (1897) AC 22. In this case
it
was held that upon incorporation and in essence of any fraud on the part of the promoters the
company becomes a legal person separate and distinct from its members, however closely it
may
be controlled by those members.
Another cases supporting the separate entity are tulstail vs. Stegmann (1962) 2QB 593. In
Lee
vs. Lee Air farming company Ltd (1960) WIR 758, Lee formed a company and he secured a
job
in his company. He died while on duty and it was held that a company being a legal person
separate and distinct from its members is capable of employing and dismissing workers. As
an
employer, the company is subject to amongst laws, the workman’s compensation law and
must compensate an injured or deceased worker (employee) accordingly. However the case
failed on a procedural technically since the widow sued on her own name. Another case in
support of separate entity is the Mc Aura vs. Northern Assurance Company Ltd 1925 AC
619. In
this case MC Aura formed a company and transferred his timber estate to it and he also
owned
the company. He affected an insurance policy on the timber in his own name with several
companies. The timber was destroyed by fire but he was not compensated for he had no
insurable
interest in the timber.
3. CAPITAL SUBSCRIPTION
This involves steps taken to raise capital for the company. Promoters are the first directors of
the
company. To raise capital directors will be called to deliberate on the following: -
a)Appointment of secretary and fixing the terms and conditions of this appointment.
b)Appointment of bankers, brokers, solicitors and Auditors.
c)Adoption of preliminary contracts entered by promoters on behalf of the company in the
per-
incorporation stage.
d) Securing underwriting contracts in order to secure minimum subscription.
19
e)Adoption of the draft prospectus or statement in lieu of prospectus.
f) Appointment of managing director or manger and other officers.
g) Approval of the design of the common seal of the company and the authorizing the
custody
thereof.
h) Listing of shares on the stock exchange.
If the directors wish to invite the public to subscribe for its shares, they will file a copy of the
prospectus with the registrar of companies. On the advertised date, the prospectus will be
issued
to the public investors can obtain the prospectus from the registered office or from the
bankers.
Investors then forward their applications for shares along with application money to the
company’s bankers’ mentioned in the prospectus. The bankers will then forward all
applications
to the company and the directors will consider the allotment of shares.
If the share applications meet a minimum subscription as disclosed in the prospectus,
directors
will allot shares to the applicants. Allotment letters are then sent to those given shares and
regret
letters to those who are not. If applications
fall below the minimum subscription as in the prospectors within 120 days after prospectus
issue,
no allotment is made and all money will be refunded.
When a public company does not intend to raise money from the public the company will file
a
statement in lien of prospectus with the registrar at least 3days before allotment of shares.
4. COMMENCEMENT OF BUSINESS.
Section 3 of the Act gives conditions and restrictions which a company must observe before
it is
allowed to start business. This includes issuance of prospectus, and whether the minimum
subscription was raised.
Form 211 which must be given to the registrar confirms the following: -
a) The minimum subscription has been raised.
b) Every director of the company has paid the company or made the shares taken or
contracted to
be taken by him.
Having given for 211 and 212 and the statement in lieu of prospectus the registrar shall
certify
that the company is entitled to commence business and issue it with a Trade certificate.
20
If the company defaults on the above, contracts entered by it will be provisional only and not
binding on it. Section 3 (b) provides a penalty for breaching the conditions (i.e. $1000 each
day
as contravention continues).
Section 3 subsections 7 exempts private companies from the conditions and restrictions thus a
private company can start business without the trading certificate.
4. PROMOTERS.
A promoter is the person who conceives the idea of forming a company and who undertakes,
does and goes through all the formalities and incidental preliminaries of incorporating a
company. Promoter help to incorporate a company, provide it with a share and loan capital
and
acquire business or properly which it is to manage.
In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD109’s Bowen
LS
stated a promoter is not a term of law but of business, usually summing up in a single word
number of business operations familiar to the commercial world by which a company is
generally brought in existence. Lord Blackburn stated that “it is a short and convenience way
of
designating those who set in motion the machinery by which the act enables them to create an
incorporated company”.
Justice Cockburn defines a promoter as “one who undertakes to form a company with
reference
to a given project and to set it going and who undertakes the necessary steps to accomplish
that
purpose”.
Section 45 (5) of the company’s act (cap 486) excludes persons acting on professional
capacity
from being called promoters.
Section 45 (5) (a) provides that promoter means a promoter who has party to the separation of
the prospectus; or the portion thereof containing the untrue statement, but does not include
any
person acting in a professional capacity for persons engaged in the formation of the company.
If
any such person acts beyond the scope of his professional duty and helps in any way in the
formation of a company or in preparations for the management of its affairs, he will become a
promoter (great wheal polgooth company Ltd; Re (1883) 53 LS Ch. 42).
N/B however a registered company may also act as a promoter.
Function of the promoters
The following are the functions of the promoters: -
1. Decide on the company name and ascertain that it is accepted by the registrar.
2. Prepare memorandum and Articles of Association.
3. Nomination of directors, Bankers, auditors and secretary and the registered office of the
company.
21
4. Printing memorandum and articles of association.
5. Registration of the company.
6. Issue of prospectus.
Legal status of promoter
In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position of a
promoter
as “although not an agent for the company, nor a trustee for it before its formation, the old
familiar principles of the law of agency and its trusteeship have been extended and very
popularly extended to meet such cases”.
A promoter is thus neither an agent nor a trustee of the company but certain fiduciary duties
have
been imposed on him under the company’s Act.
Fiduciary position of a promoter
In Erlanger vs new Sombrero Phosphate Company 1878 3A Ac 1218 Lord Cais observed that
promoters in equity cannot find the company by any contract with themselves as promoters
without fully disclosing to the company all material facts which the company ought to know.
Promoters are in a fiduciary position: -
a) Not to make profit at the expense of the company. Cape Breton company Re.(1885) 29
Ch.D 795
b) To give benefit of negotiation to the company.
Thus where the promoter purchases an item he can’t rightfully sell that item at a higher price
that
he gave in for. (Erlanger vs. new Sombrero phosphate company (1878) AC 1218). The right
of
rescission is lost if the parties cannot be relegated to their original position this happens: -
(i) Where the character of the property has been altered.
(ii) Where third parties have acquired valuable rights.
Where a promoter sells or wishes to sell his own property to the company he should: -
(i) See that there is a Board of independent persons appointed as directors of the new
company.
(ii) Disclose his interest in the property to the intended members or to the public by
means of a prospectus. He must also disclose the profit he is making out of the deal
c) To make full disclosure of interest of profit. Promoters need to fully disclose his profit and
his
personal interest in a transaction. A case in support of this is the Liluck vs. Barress AC 240.
In
22
this case a syndicate bought property worth$140000 property at $120000, which they later
sold
to a company which they formed at $180000. A prospectus was issued disclosing a profit of $
40000. it was held that the $ 20000 was a secret profit and promoters are sound to refund the
company. Lady well winning company Ltd B Brookers (1887) 35 ch. D400 in the above case
five persons bought a nine for $5000 on 1/2/1873 and sold it to a company on 4/4/1873 for
$18000, making a profit of $13000.
It was held that the vendors were not promoters when they bought the mine and they were
therefore under no fiduciary duty to disclose their interest and account for the profit they had
made.
d) Not to make unfair use of position. He must avoid seeking. He must guard against taking
advantage of position or seek under influence or participate in fraud.
Duty of promoters as regards prospectus
Promoters must ensure that a prospectus is issued (public company) and the prospectus.
(i) Contains necessary particulars
(ii) Does not contain an untrue or misleading statements or does not omit any material facts.
Section 39 of the act states that a prospectus shall be dated; and that date unless the contrary
is
proved be taken as the date of publication of the prospectus.
Section 40 provides that a prospectus issued shall state the matters specified in part 1 of the
third
schedule. Chapter 7 specifies the form and contents of a prospectus.
A prospectus must be truthful and promoters can be held responsible (liable) for any
misstatement in the prospectus. If a prospectus is found untruthful: -
a)Allotment of shares may be set a side in the case of fraudulent misrepresentation.
b) Promoters may be sued for damages.
c) They may be sued for compensation for misrepresentation.
d) They may be sued for damages by shareholders who have suffered by reason of their non-
compliance with the statutory requirements as with the contents of prospectus.
e) They may become liable for criminal proceedings.
23
The company’s act provides both criminal and civil liability for both civil and criminal
liability
for any untrue statement contained in the prospectus.
For civil liability 3. 45 (1) provide.
Section 45 (1) provides that the following persons shall be liable to pay compensation to all
persons who subscribe for any untrue statement included therein.
a) Every person who is a director at the time of issue of the prospectus.
b) Every person who has agreed to be named as a director in the prospectus or anyone who
has
agreed to be a director immediately or after an interval.
c) Every person being a promoter of the company.
d) Every person who has authorized issue of the prospectus. However an expert can only be
held
responsible for an untrue statement made by him. Section 45 (2) provides defences to
liabilities
under section 45 (1) such persons shall not be liable if he proves.
a) He withdrew from being a director before issue of the prospectus and it was issued without
his authority or consent.
b) Prospectus was issued without his knowledge or a consent and on becoming aware he gave
reasonable public notice that it was issued without his knowledge.
c) That after the issue of the prospectus and before allotment there under, then on becoming
aware of any untrue statement there in withdrew his consent there to and gave reasonable
notice
of the withdrawal and reason thereto that:-
(i) Of every untrue statement not made by an expert he had reasonable ground to believe
and did up to the time of allotment believe that the statement was true.
(ii) That he relieved on an expert and untrue statement is a fair representation of the expert
report and he had reasonable ground to believe that the person making the statement was
competent to make it.
(iii) As regards every untrue statement purporting to be a statement made by an official
person or contained in what purports to be a copy of an extract from the document.
Section 46 (1) of the Act a prospectus may attract criminal liability.
An untrue statement in prospectus may lead to imprisonment for a term not exceeding two
years
or to a time not exceeding ten thousand shillings or both unless he proves either that the
statement was immaterial or that he had reasonable ground to believe and did up to the time
of
issue, believe that the statement was true.
24
Criminal proceedings are only made where there is willful untrue statement and not
otherwise.
Remuneration of promoters
A promoter has not right for compensation unless there is a contract. In Clintons claim (1908)
2
ch. 515 promoters were unable to recover fees and stamp duty incidental to formation of the
company as there was. A promoter takes remuneration for his services in one of the following
ways: -
a) Selling his own property to the company at a profit provided there in full disclosure.
b) He may be given an option to buy shares at par.
c) He may take commission on the shares sold.
d) He may be paid a Lumpson by the company.
Article 80 table A provides that directors can pay all expenses incurred in promoting and
registering the company.
Pre-incorporation or preliminary contracts
These are contracts entered by promoters to acquire properly or some right for the company.
In
Kelner vs. Baxter (1866) LR Z. Kelner agreed to sell a hotel to Baxter who was acting agent
for
a company which was about to be formed. It was held that Baxter was personally liable on
the
contract as the company was not in existence after its incorporation.
The company is not liable for the Act of the promoters done before incorporation. In
Newborne
vs.Sensolid Ltd 1954 1Q B45 Newborne a director, entered into acontract in the name of a
company before its incorporation. He signed his name in a contract on behalf of the company.
It
was held that there was no contract.
Position of promoters as regards pre-incorporation contracts1.
Company is not bound by pre-incorporation contract even where it takes the benefit of the
contract entered into on its behalf.
A case law in this is in English and colonial produce company Ltd Re (1906) 2 ch435. A
solicitor
prepared the memorandum and articles of a company and paid necessary taxes and other
expenses to obtain the registration of the company. He did this on the instructions of
promoters.
It was held that the company was not liable to pay the solicitors’ costs although it had taken
benefit of his work.
2. The company cannot enforce pre-incorporation contract. A case law in this point is Natal
Land
and colonization company Ltd vs. Pauline Colliery and development syndicate Ltd Ac 120. a
company can’t enforce a contract made before its incorporation.
25
3. Promoters are personally liable for contracts made on behalf of the company before the
company’s incorporation.
Ratification of a pre-incorporation contract.
A company cannot ratify a contract entered into by promoters before incorporation. Where
contract is entered into by with both parties aware of the non-existence of the company, the
contract is a deserved to have been entered into personally and promoters are liable.
To validate the pre-incorporation contracts a new contract has to be entered into with the
other
party (in which case promoters cease to be liable)
For promoters acting on behalf of the company about to be formed it is safe (advisable) to
provide in the contract that: -
a) If the company makes a fresh contract in terms of the incorporation contract, the liability
of the promoters shall come to an end.
b) If the company does not make a fresh contract within a limited time either of the parties
may rescind the contract.
5. MEMORANDUM OF ASSOCIATION
A memorandum of Association sets the fundamental conditions upon which the company is
allowed to be incorporated. It defines the relationship of the company and creditors the
outside
public as well as the shareholders. It also enables creditors and the outside public knows the
range of permitted business of the company.
In Ashbury Railway Carriage and company vs. Riche it was noted that “the memorandum is
as it
were, the area beyond which the action of the company cannot go inside that area the
shareholders may make such regulations for their own government as they think fit”.
Importance of memorandum.
a) Provides basis of incorporation.
b) It determines the areas of operations of the company.
c) It defines the relationship of the company with the outsiders.
d) It is a charter of the company, which can be altered only under special circumstances.
Purpose of memorandum
There are two purposes of memorandum :
26
a) To enable shareholders know where their funds are to be used and risks they are
undertaking in making such investments.
b) To enable outsiders of the company know the objectives of the company and whether the
contracts they intend to make with the company are within the objects of the company.
Preparation of the memorandum
Schedule 1 of the act gives examples of various types of memoranda. Promoters can adopt
any of
these tables with necessary modifications. These prescribe forms of memoranda are as under:
-
Table B for a company limited by shares,
Table C for a company limited by guarantee and not having share capital,
Table D for a company limited by guarantee and having share capital,
Table E for unlimited company that has share capital.
Section 5 provides that memorandum of every company shall be in English and printed.
Section 6 states that memorandum shall be signed by each subscriber (with postal address and
occupation) in the presence of at least one witness who shall affect the signature and shall
likewise add his address and occupation if any.
Contents of memorandum
Section 5 of the companies Act stipulated the memorandum should compose the following
clauses.
Clause 1 The name
Promoters must enquire from the register as to whether the proposed name of the company is
available for registration and is not considered undesirable; this should be done before filling
the
memorandum or even before its preparation.
Section 19 provides that promoters may reserve a name pending registration of the company
for
a period of thirty to sixty days.
Section 5 (1) requires accompany if limited to use the word “limited” as the word in its name.
Section 21 provides that a company may drop the word “limited” if it obtains a license to do
so
from the Attorney General. Such license is given if the Attorney General is satisfied that: -
(i) The company to be formed is to promote commerce, art science, religion, charity or
any useful object.
(ii) it intends to apply its profits or other income to promoting its objects.
27
(iii) it prohibits the payment of any dividends to its members. Under section 20 a
company can charge its name by special resolution and with the approval of the
registrar signified in writing. A special resolution usually requires twenty-one days
not to the members and three fourths majority of the votes at general meeting.
The above section provides that the company may change its name if it is almost like that of
an
existing company, if the registrar so directs within six months of its registration.
The name does not affect any rights or obligations of the company or any legal proceedings
by or
against it (section 20 (4)).
Clause 2 Registered office
Every company must have a registered office from the day on which it begins to carry on
business or within fourteen days after incorporation whichever is earliest; to which notices
and
all communications can be made (section 107)
Section 108 states that notice of the address of the registered office, and of any change
therein,
must be given to the register within 14 days after incorporation or of the change.
The registered office is not necessarily the headquarters of the company.
Documents that must be kept at the registered office include: -
(i) Register of members and index of members, unless made up elsewhere or kept by an
agent (section 112&113).
(ii) Minute books of general meetings section 146.
(iii) The register of director’s interests in shares or debentures.
(iv) A copy of every instrument creating any charge requiring registration.
(v) The company’s register of charges affecting properly of the company.
Clause 3 the objectives of the company
Objects clause defines the sphere of the company’s activities, the aims that its formation
seeks to
achieve and the kind of activities or business that it proposes to conduct.
Objects give protection to the shareholders and creditors as they are sure where the funds will
be
applied. Objects also help outsiders know the powers of the company.
Choice of the company’s objects
28
Subscribers to the memorandum may choose any object for the proposed company. When
drawing the object the subscribers should note the following: -
(i) Objects should not include committing an illegality.
(ii) The objects should not contradict the Act.
(iii) Objects should not be against public policy.
Objects clause in the memorandum has to state.
(i) The main objects of the company and objects incidental or auxiliary to the attainment
of the main objects
(ii) Other objects of the company not included in (i) above.
A c company cannot continue to peruse subsidiary objects after the main object has come to
an
end. In crown bank Re (1890) 44 ch D634. A company objects clause enabled it to act as a
bank
and further invest in securities and land and to underwrite issue of securities. Its banking
business was abandoned and it confined itself to financial speculation. It was held that the
company was not entitled to do so.
Incidental acts: -
A company may do anything which is fairly related to its core business. Anything incidental
to
the attainment or pursuit of any of the express objects of the company will unless expressly
prohibited to be within the implied powers of the company.
1. Evans vs. Brunner, mond and company (1921) 1 ch 359.
A company engaged in manufacture of chemicals proposed to devote substantial sum of
money
to the encouragement of scientific education. It was proved that this will in the end benefit
the
company, but a shareholder objected that this was beyond the powers of the company. It was
held
that the proposal was fairly incidental to the company’s objects.
2. Foster vs. London, Chatham and Dover company (1895) 1 QB 711.
A company acquired a piece of land for the purpose of its railway. The railway was erected
on
arches. The company left the arches as workshops e.t.c. The neighbours objected of an
account
of noise and claimed that the act was ultravires to the company it was held that letting of the
arches was valid.
3. Forrest vs. Manchester etc Rly company (1861) 4 Ltd 666.
A railway company had the authority to keep boats to be supplied for a ferry. It employed the
boats for excursion trips to the sea when they were not wanted for the ferry. It was held that
the
use of the boats was incidental to the main purpose and was within the powers of the
company.
29
The following activities have also been held incidental to carrying of business: -
a) Appointing agents and hiring servants.
b) Borrowing money and giving security for loans.
c) Paying gratuities to employees.
d) Paying pensions to former officers and employees or their dependants.
In the following cases, companies were found to engage in activities beyond their powers.
1. London county council vs. Attorney General (1902) AC 165. The council had the power
to run tramways. It ran omnibuses to feed the tramways. It was held that this was outside
its powers as the omnibuses business was in no way incidental to the business of working
tramways.
2. Stephenes vs. Mysore reefs (Kangudry Mining Company Ltd (1902) 1 ch745. the
company object authorized to it acquire gold mines in Mysore and elsewhere and it had
other clauses. The company wanted to work in Ghana.
It was held that elsewhere could not be taken to mean any other place outside India.
Ways a company can engage in a wide variety of business: -a)
Inflated object clause.
Promoters have given a list of several businesses that the company may engage itself.
b) Independent object clause
Courts usually take the first object in the memorandum as the core business and others
subsidiary. To avoid this interpretation experts drafting the objects may specify;
‘Each of the foregoing clause shall in no way unless otherwise provided as forming part of or
being dependent upon or shall in no way be severally formed and object clause of an
independent
company.’
c) Subjective objects clause
Here experts can simply say that the company can engage in any business, which in the
opinion
of the directors, the company can advantageously engage in.
Clause IV. Liability clause
30
Promoters must indicate
a) Whether the liability of the company is limited or unlimited.
b) If limited, is it by shares or guarantee.
c) If the company is public promoters have to indicate the liability of directors whether
limited or unlimited.
Liability clause is entirely omitted from the memorandum in an unlimited company.
Clause V The capital clause
States the registered share capital divided into shares of a fixed amount. Registered capital is
also
called nominal or authorized capital.
The clause is omitted in the companies with unlimited liability and the companies limited by
guarantee having not shown capital.
Clause VI. Association or subscription clause.
This is a declaration by subscribers that they desire to form a company and agree to take
shares
stated against their names. The signature of each subscriber may be any of the subscribers.
Each
subscriber must indicate his address, description and occupation.
General form of clause.
If the several persons whose names and address are subscribed are desirous of being formed
into
a company in pursuance of the memorandum of association and we respectively agree to take
the
members of shares in the company set opposite of our respective names.
After registration no subscriber to the memorandum can with withdraw his description on any
ground.
Alteration of the memorandum
Section 7 provides that a company cannot alter the conditions contained in the memorandum
except in the cases; in the mode and to the extent for which express provision has been made
in
the companies Act.
Section 8 gives seven instances where a company may alter its objects after a special
resolution.
i) To enable the company carry its business more economically and efficiently.
ii) To attain its main purpose by new or more improved means.
iii) To enlarge or change the local area of its operation.
31
and the company at large and the mode and form in which business of the company is to be
carried on and the mode and form in which changes in the internal regulations of the
company
may from time to time made”.
Section 2 (1) Articles include the regulations contained in table A schedule 1 to the Act in so
far
as they apply to the company. Articles were to be framed carefully so that they do not go
beyond
the powers of the company. They should not violate any provision of the companies Act as
these
will make them null and void. In Perneril Gold mines Ltd (1898) 1 ch. 122 the articles of a
company provided that no petition for a winding up could be presented unless: -
a) Two directors consented in writing,
b) The petitioner held is of the issue of the share capital of these conditions were fulfilled. It
was held that the restrictions were invalid and petition could be presented.
Functions of the Articles of Association
1. Define duties, rights and powers of the governing body.
2. Determine the mode and the form in which the business of the company may from time
to time be made. Section 9 stipulates that the articles must be registered before
incorporation. Section 11 states a company limited by shares may adopt all or any part of
the regulations of table A are not excluded or modified, these regulations shall be the
regulations of the company so far as they are applicable.
Table A in the first schedule to the act is provided as a specimen form of articles of
association.
Part I may be adopted in whole/part by public companies and part II may be adopted in whole
part by private companies where a private company does not adopt part II of task A are
registers
its own articles they must include the restrictions required by section 30.
Section 12 provides that if special articles are registered they must be: -
a) Printed in English
b) Divided into paragraphs
c) Dated
d) Signed by each subscriber and witnessed.
Contents of Articles of Association.
As an internal constitution promoters and later the members can indicate any rules they may
wish to have so long as such rules are permissible. The following are expected to be included
in
the articles of association.
35
a) Share capital, rights of shareholders, and variation, of the rights payments of
commissions share certificates.
b) Lien on shares
c) Calls on shares.
d) Transfer of shares
e) Transmission of shares
f) Forfeiture of shares
g) Conversion of shares into stock
h) Share warrants
i) Alteration of capital
j) General meetings and proceedings there at
k) Voting rights of members voting and poll proxies.
l) Directors their appointments remuneration, qualifications, powers and proceedings of
board of directors.
m) Manager.
n) Secretary.
o) Dividends and reserves
p) Accounts, audit and borrowing powers
q) Capitalization of profits
r) Winding up.
Alteration of articles of association
Section 13of companies act cap 486 provides that a company can alter or add to its articles by
passing a special resolution. Any alteration some made in the articles shall; subject to the
provisions of the act; be as valid as if originally contained therein.
Limitations to alterations.
The following limitations should be observed regarding alteration of articles: -
a) Such alteration should not be inconsistent to the act.
i) Restrict the member’s right to petition for winding up under section 221.
ii) Authorize the company to purchase its own shares.
iii) Authorize payment of dividends out of capital.
b) It must not contradict the memorandum of association. However articles may be referred
to
where there is an ambiguity in the memorandum or where the memorandum is silent on an
issue.
c) Alteration should not sanction anything illegal.
36
d) Alteration must be made bona fide and for the benefit of the company as a whole. In Alten
vs.
Gold Reefs of West Africa Ltd (1900) ch. 656. it was observed that the power of alteration
must
be exercised subject to those overall principles of law and equity which are applicable to all
powers conferred on majorities and enabling them to bind minorities.
In Shittleworth vs. Cox bros and company (Minden-lead Ltd (1927)) 2 k B g (CA)the articles
of
a company provided that 5 and four others should be permanent directors to the company.
They
could be disqualified by any six specific events. S failed to account for the company’s money
on
twenty-two occasions within twelve months. The articles were accordingly altered and a 7th
event
disqualified a director added. The event added was that if a director was so requested in
writing
by all the other directors he should resign. S was so requested to resign, it was held that the
alteration was bona fide for the benefit of the company as a whole and was valid.
Other rulings in support of this point were made in Greenhalgh vs. Ardene cinemas ltd (1951)
ch.
286 and side Bottom vs. Kershaw Lees company Ltd(1920) 1 ch 154 (ca).
e) An alteration to increase the members’ liability will only bind those who consent to it.
Section 24 provides that no member is bound by an alteration of the memorandum or
articles which requires him to increase his holding of shares or increase his liability to pay
money to the companies unless: -
i) Alteration is made before he became a member.
ii) He agrees in writing to be bound by such alteration.
An alteration of articles subject to restrictions in section 24 may be retrospective in effect, but
this will not enable the company to achieve a lien over shares after they have been transferred
for
value by a debtor.
The relationship between the Articles and memorandum of Association.
1. The articles are subordinate to the memorandum. The memorandum states the objectives
of the company while the articles provide the manner in which the internal management
of the company is to be carried out.
2. The memorandum must be read in conjunction with articles where it is necessary to;
a) Explain any ambiguity in terms of the memorandum.
b) Supplement the memorandum on matters where it is silent but cannot extend the scope of
the memorandum.
3. The terms of the memorandum cannot be modified or controlled by the articles.
Legal effects of memorandum and articles:
37
1. Section 22 provides that after the articles and memorandum of association have been
signed by bind the members as if they have been signed by each individual member of
the company. The legal implications of the articles and memorandum may be dissolved in
four categories.
a) Members to the company.
Each member is bound to the company as if each member has actually signed the
memorandum
and the articles. In Borland Trustee vs. Steel Brus and company Ltd (1901) 1 ch. 279, the
articles
of a company were altered and provided that the shares of any member who became bankrupt
should be sold to certain persons at a fair price. B a shareholder became bankrupt and his
trustee
in bankruptcy claimed that he was not bound by the altered articles. It was held
that the articles were personal contract between B and the rest of the members and B and his
trustee was bound.
Another case law is that of Hickman vs. Kent or Romney Marsh sheep breeders Asociation
(1915) 1 ch. 881.
b) Company to the member
A company is bound to the members and the company can exercise its rights as against any
member only in accordance with the provisions in the memorandum and articles. A member
can
obtain an injunction restraining the company from doing ultra vires act.
In wood vs. Odesa water works company Ltd (1889) 42 ch. D630 the articles of company
provided that the directors may with the sanction of the company at general meeting declare a
dividend to be paid to the members.
A resolution was passed to give the shareholders debenture bonds instead of paying the
dividend
in cash. It was held that the words “to pay” meant paid in cash; and a shareholder could
restrain
the company from acting on the resolution on the ground that it contravened the articles.
A member can also obtain an injunction restraining the company from committing a breach
of
the memorandum and the articles, which would affect his rights as a member.
c) Members to members.
The memorandum and articles constitute a contract between the members and each member
is
bound to as against the other or others. Lord Herschell in Walton vs. Saffery (1897) AC 299
observed “it is quite true that the articles constitute a contract between each member and the
company and there is no contract in terms of between the individual members of the company
but the articles do not any the less, regulate their rights inter se. such rights can only been
forced
by or against a member through the company or through the liquidators; representing the
company but no member has between himself and other members any right beyond that
which
the contract of the company gives”.
38
In Ray field vs. Hands (1960) 1 is a leading case in this point.
d) Company to outsiders
The articles do not constitute any binding contract as between a company and an outsider. In
general law a stranger to a contract cannot acquire any rights under such a contract.
Cases on these points are: -
i) Brown vs. La Trinidad (1887) 37 ch. D1.
The articles of a company contained a clause whereby B was to be a director irremovable for
a
period of time. He was removed from office before the period; it was held that it could not
restrain the company from removing him as there was no contract between him and the
company.
ii) Elay vs. positive government security life Ass.Co. 1876 1 Ex D 88.
The articles of a company provided that it should be the solicitor of the company for life and
could be removed from office only for misconduct L took office and became a shareholder,
after
some time the company dismissed him without alleging misconduct. E sued the company for
damages for breach of contact. It was held that the articles did not constitute any contract
between the company and outsiders and as such no action could lie.
The case in Eley has brought in some problems. The courts have therefore in some cases
acted
on the footing that a clause in the articles not dealing with the rights of a member as such but
apparently intended to operate as a contract with him is to be regarded as the basis of a
contract.
In Swabey vs. ports Danwin Gold mining company (1889) 1 Meg 385, the articlesprovided
that a
director should receive a specified sum per annum by way of remuneration. In July, the
company
passed a special resolution reducing the sum as from the end of the proceeding year. The
plaintiff, who was a director, resigned and sued for the services, it was held that he was
entitled
to sue for remuneration up for the date of his resignation.
Constructive notice of memorandum and articles
Each person dealing with the company is assumed to know the contents of the memorandum
and
articles of association. It is presumed the individuals dealing
with the company have read and understood the documents. This is called the doctrine of
constructive notice.
Memorandum and articles are open and accessible to all special resolution become public
documents once registered and an outsider is in notice of their contents in the same way as he
is
of the articles and memorandum.
Lord Hartheley in Mahoney vs East Hollyford mining company (1875) LR7 HL869
observed.
But whether he actually reads them or not it will be presumed that he has read them. Every
joint
stock company has its memorandum and articles of association open to all who are minded to
39
have any dealings whatever with the company and those who sue deal with them must be
affected with notice of all that is contained in these two documents.
Anyone dealing with a company is presumed not only to have read the memorandum and
articles
but have understood them properly (Oak Bank Oil Co.vs. Crum (1882) 8 A. 65). The doctrine
also prevents one from alleging that he did not know that the memorandum and articles
rendered
a particular act ultravires to the company (Freeman and Lookeyer vs. Buckhusst park
properties
ltd(1964) 1 ALL ER 630).
Doctrine of indoor management.
This doctrine imposes a limitation on the doctrine of constructive notice. Persons dealing
with
the company once they are satisfied that the company has powers to enter the proposed
transaction, they are not required enquire into the regularity of any internal proceedings they
are
entitled to assume that provisions of Articles have been complied with by the company in its
internal working.
If the proposed contract is within the powers of the company the company will be bound to
the
outsider and claims of the outsider will not be affected in any way by the internal irregularity
of
the company. This is the doctrine of indoor management or the rule in royal British Bank v.
Turquand.
In Royal British Bank vs. Turquand the articles empowered the directors toborrow money
provided they were authorized by a resolution passed at a general meeting of the company.
The
directors borrowed money from T and issued a bond to him without the authority of
resolution
passed at the general meeting. It was held that the company was liable for the money to T
because once the articles authorized directors to borrow subject to a resolution of the general
meeting of the company T, was entitled to assume that the directors were borrowing on the
authority of the resolution passed at a general meeting of the company, T was not required to
enquire into the regularity of the company’s internal proceedings.
In Premier industrial Bank Ltd Vs. Calton Manufacturing company, it was stated that “if the
directors have power and authority to bind the company, but certain preliminaries are
required to
be gone through on the part of the company before that power can be duly exercised, then the
person contracting with the directors is not bound to the section, that all these preliminaries
have
been observed he is entitled to presume that the directors are acting lawfully in what they
do”.
The rule is also held in Fuontain vs. Carmarthen Rly co. (1868) LR5 ESQ 316.The general
rule
here is that persons dealing with limited liability are not bound to inquire into the regularity
of
the internal proceedings and will not be affected by irregularities of which they had no notice.
Exceptions to the Doctrine of indoor management.
The doctrine of indoor management will not apply in the following instances: -
40
i) Where the outsider has notice (actual or constructive) that the prescribed procedure
has not been complied with by the company. In Howard Patent Ivory Company, the
directors were empowered to borrow up to1000 and such further sums as the
company in the general meeting might authorize without such consent they issued to
themselves debentures for sums in excess of $1000. it was held they had knowledge
of irregularity in the internal proceedings of the company, the company would be
liable for $1000 only. Sums borrowed in excess of this were held invalid.
ii) A company cannot be held liable for forgeries committed by its officers. In Ruben vs.
Great Fingall Ltd, the company secretary issued a share certificate by forging the
signatures of the two directors under the seal of the company. The Plaintiff contended
that it was not his duty to verify the signatures. Whether signatures were genuine or
not was part of internal management. It was held that the certificate was not binding
on the company as the rule in Turquand’s case does not protect forgery. Lord
Loreburn observed in the case “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 have no notice. But this doctrine
applies only to irregularities that otherwise might affect a genuine transaction, it can
apply to forgery”.
iii) When the outsider is negligent: -
Any person entering into a contract with the company ought to make proper inquires, and in
the
absence of this he cannot claim benefit under the Turquardcase.
In Wood vs. Bank of Liverpool the sole director paid cheques drawn in the name of the
company
in his account. It was held that the bank was put upon inquiry before crediting the cheques
drawn
in favour of the company in the account of the director. The bank was not entitled to rely
upon
the ostensible authority of the director.
In Arand Bihari Lal vs. Dinshaw and company, the plaintiff accepted transfer on the
company’s
property from its accountant. The transfer was held to be void because such a transaction is
apparently beyond the scope of the accountant’s powers. It puts the person dealing with the
company into inquiry, the plaintiff should have insisted on seeing the power of Attorney
executed
in favour of the accountant by the company. Even delegation clause is not enough to make
the
transaction valid unless the accountant is in fact authorized.
iv) When an outsider does not have any knowledge of the articles. A person who did not
consult
the company’s memorandum and articles and consequently did not act in reliance on those
documents, cannot be protected under the rule inTurquand’s case.
v) Where an act is ordinarily beyond the apparent authority.
An outsider will not be protected by the rule in Turquard’s case if the act of the agent is one
which would not ordinarily be within his powers simply because under the articles the power
of
making such a contract might have been entrusted to him. The outsider can only hold the
41
company liable if only the power had infact been delegated. The facts of Anard bihari Lal vs.
Dinshaw and company illustrate this point.
Statutory declaration of compliance.
This is a document required by section 17(2) and it contains a declaration made to the
registrar of
companies telling him that the persons who have formed the company have complied with all
the
requirements of the companies Act as regards formation of a company.
The declaration should be prepared and signed by an advocate of the high court or by a
person
who was named in the articles as a director or secretary of the company. The declaration must
be
in the prescribed format usually on form 203A.
The Act requires the promoters to prepare: -
a) Written consent of every director of public companies stating that each has agreed to act
as a director.
b) A return of the first directors i.e. particulars of the first directors.
c) A statement on the authorized share capital of the company. This is required by the stamp
duty act section 39.
d) A document indicating notice of the company’s registered office (sec.108).
7. PROSPECTUS
When a company wants to raise fund from the general public it issues a prospectus. A
prospectus
is a document issued by the company to arouse public interest in the proposed company and
induce the general public to buy its shares and debentures.
A prospectus central theme is that it sets out the prospectus of the company and the purpose
for
which the capital is required. A prospectus is an invitation to treat and the application for
shares
on the basis of the prospectus is the officer.
Definition of a prospectus:
Sec.2 of companies act: -
“A prospectus means any prospectus, notice, circular advertisement or other invitation;
offering
to the public or for subscription or purchase any shares or debentures of a company”.
Any document inviting deposits from the public or inviting offers from the public for
subscription of shares or debentures of a company is a prospectus.
42
A prospectus must be in writing an oral invitation or an advertisement in television or film is
not
treated as a prospectus.
Subscription:
The word when used in relation to a prospectus means to take shares for cash. In government
stock and other securities investment company Ltd vs.Christopher an offer was made by
company A to the members of company B and C to acquire all their shares in exchange for
allotment in the company. The offer cannot be held to be an offer made to the public because
it
does not invite subscription for share since subscription means taking shares for cash. Also
this
cannot be said to be an offer to the public.
Invitation to the public:
Section 57 defines “public” as including any section of the public, whether selected as
members
or debenture holders of the company concerned or as clients of the person issuing the
prospectus
or in any other manner. The section also provides that a public offer: -
a) Must be calculated to result in the shares or debentures becoming available to persons
other than those receiving the offer.
b) Should not be a domestic concern of those making and receiving the offer or invitation.
In Nash vs. Lynde the managing director of a company prepared a document that was marked
strictly private and confidential and it did not contain particulars required to be disclosed in a
prospectus, a copy of the document along with application forms were sent to solicitor who in
turn sent it to the plaintiff. The document was held to be prospectus and as such the claim of
the
plaintiff for compensation was dismissed. In another case distribution of 3000 copies of a
prospectus among members of a certain company was held to be a public offer because
persons
other than those receiving the offer could also accept it. The main issue is that an offer
or invitation to any section of the public, whether selected as members or debenture holders
of
the company or as clients of the person making the invitation, will be deemed to be an
invitation
to the public.
Form and contents of a prospectus
A prospectus gives a picture of the company’s intended activities and position. It provides all
the
necessary and material particulars about given company. The following provisions of the act
must be observed in the preparation of the prospectus.
a) Section 43 a copy of the prospectus must be delivered to the register of companies and
must be signed by every person named therein as a director or proposed director.
b) Section39 every prospectus must be dated; and the date unless the contrary is proved, is
taken to be the date of publication of the prospectus. Its advisable to insert a date two or
three days later than actual date.
43
c) Section 40 (1) every prospectus issued must include the matters specified in part 1 of the
third schedule to the act and set out the reports specified in part 11 of that schedule.
As per third schedule to the act the prospectus must contain the following: -
1. The number of founders or management or deferred shares if any and the nature and
extent of the interest of the holders in the property and the profits of the company.
2. The minimum shares a director can have and the remuneration of directors.
3. Names, occupation and postal addresses of the directors.
4. Where shares are offered to the public for subscription, particulars as to;
a) Minimum amount that must be raised by the issue of those shares to provide funds for the
following;
i) The purchase price of property purchased or to be purchased, which is to be defrayed
in whole of the issue.
ii) Preliminary expenses payable by the company and any commission so payable to any
person in consideration of his agreeing to procure subscription for any shares in the
company.
iii) Repayment of any moneys borrowed by the company without use the issue proceeds
and sources out of which amounts are to be provided.
5. The time of the opening of the subscription lists.
6. The amount payable on applications and allotment on each share. In the case of second or
subsequent offer, the amount offered for subscription on each previous allotment made
within the two preceding years, the amount paid for the allotted shares.
7. The number, description and amount of any shares in or debentures of the company
which any person has, or is entitled to be given, an option to subscribe for; together with
the following particulars of the option: -
a) The period during which it is exercisable.
b) The prices to be paid for shares or debentures subscribed for under it.
c) Consideration (if any) given or to be given for it for the right to it.
The names and postal address of the persons to whom it or the right to it was given
44
8. The number and amount of shares and debentures issued or agreed tube issued with the
two
preceding years as fully or partly paid otherwise than in cash and the extent to which they are
paid up.
9. (i) In respect of any property to which this paragraph applies;
a) The names and postal addresses of the renders.
b) The amounts payable in cash, shares or debentures to the vendor and where there are
many vendors amount payable to each vendor.
c) Short particulars of any transaction relating to the property completed within the two
preceding years in which any vendor of the property to the company was at the time of
the transaction, a promoter or a director or proposed director of the company had any
interest direct or indirect.
(ii) The property to which this paragraph applies is property purchased or by the company or
proposed so to be purchased, which is to be paid for wholly or partly out of the proceeds of
the
issue offered for subscription by the prospectus or the purchase of which has not been
completed
at the date of the issue of the prospectus, other than property: -
a) The contract for the purchase whereof was entered in to the ordinary course of the
company’s business, the contract not being made in contemplation of the issue nor the
issue in consequence of the contract.
b) As respects which the amount of the purchase money is not material.
10. The amounts, if any, payable as purchase money in cash, shares or debentures for any
property referred to in 9 above specifically the amount of goodwill.
11. The amount if any payable or paid within the two preceding years as commission for
subscribing or agreeing to subscribe on procuring or agreeing to procure subscriptions for any
shares in or debentures of the company or the rate of any such commission.
12. The amount or estimated amount of preliminary expenses and the persons by whom any
of
those expenses have been paid or are payable and the amount of the expenses of the issue and
the
persons by whom any of those expenses have been paid or are payable.
13. Any amount or benefit paid within two preceding years or intended to be paid to any
promoter and the consideration for the payment or benefit.
14. General nature of any material contract not being a contract entered in the ordinary course
of
the business carried on or intended to be carried on by the company or a contract entered into
more than two years before date of issue of prospectus. The dates of the contract and parties
to
such contract should also be disclosed.
45
15. The names and postal address of the auditors if any by the company.
16. Full particulars of the nature and extent and interest, if any of every director in the
promotion
of or in the property proposed to be acquired by the company or where the interest of such a
director consists in being partner in affirm, the nature and extent of the interest of the firm,
with a
statement of all sums paid or agreed to be paid to him or to the firm in cash or shares
or otherwise by any person either to induce him to become or to qualify him as a director, or
otherwise for services rendered by him or by the firm in connection with the promotion or
formation of the company.
17. If the prospectus invites the public to subscribe for shares in the company and the share
capital of the company is divided into different classes of shares, the right of voting at
meetings
of the company conferred thereby, and the rights in respect of capital and dividends attached
to
the several classes of shares respectively.
18. In the case of a company which has been carrying on business or of a business which has
been carried on for less than three years, the length of time during which the business of the
company or the business to be acquired, as the case may be, has been carried on.
Reports to be set out in prospectus.
Part II of the third schedule stipulates reports to be included in the prospectus. These reports
are
prepared by the company’s auditors and state:-
i. The profits or losses of the company in each of the five preceding years.
ii. The rate of dividends paid by the company in each in respect of each class of shares in
each of those years.
iii. The assets and liabilities at the last date to which the accounts of the company were made
up.
iv. If the proceeds or parts of the proceed are to be used directly or indirectly to purchase a
business the report must be made up of the profits or losses of the business for the last
five years.
Where the company has subsidiaries the performance of such subsidiaries has to be reported
or
the consolidated accounts have to be prepared.
Reports of experts in prospectus
Section 42. A prospectus must not be issued purporting to contain a statement by an expert
unless: -
a) He has given and has not before delivery of a copy of the prospectus for registration,
withdrawn by written consent to the issue thereof with the statement included in the form
and context in which it is included.
46
b) A statement that he has given and not withdrawn his consent appears in the prospectus
Experts:
Refers to any person whose profession gives authority to a statement made by him. Experts
include engineers, valuers and accountants.
Exemption from requirements of third schedule matters and reports.
Requirements of the third schedule do not apply in the following: -
a) Where the prospectus is used to existing holders of shares or debentures (whether
allotment letters are renounceable or non-renounceable).
b) Where prospectus relates to shares or debentures similar to shares or debentures
previously issued.
A prospectus thus issued without the requirements of the third schedule is called a bridged
prospectus.
Issue of forms of application;
Forms of application must be accompanied with a prospectus. This requirement does not
apply
where the form of application was issued either: -
In connection with a bonafide invitation to a person to enter into an underwriting agreement
with
respect to shares or debentures.
In relation to shares or debentures which were not offered to the public section40 (3)(ii) (iii).
Issuing of shares to the public:
Issuing shares to the public is done by public companies wishing to raise capital through;
a) Public issue by prospectus,
Done through a direct invitation,
To the public to subscribe for its shares or debentures invitation is made through a
prospectus,
which specified the purpose for which the capital will be used.
b) Offer for sale
The provisions relating to the prospectus are cumbersome and companies in the past used
evaded
the requirements by allotting the whole of an issue of shares and debentures to an issuing
house
at a certain price. The issued house then published an advertisement in the nature of an offer
for
47
sale inviting the public to buy shares from it at a higher price. Section 47 of the act provides
that
a document by which an offer for sale is made to the public is within the definition of
prospectus.
An allotment with a view to offer for sale is evidenced when;
a) An offer of shares or debentures was made within six months after allotment or
agreement to allot.
b) At the date when the offer was made the whole consideration to be received by the
company had not been received per section 47 (2).
In addition to complying with requirements of section 40 matters to be stated and reports to
be
made out in prospectus an offer for sale must state: -
a) The net commission received or receivable in respect of shares or debentures to which the
offer relates.
b) The place and time at which the contract of allotment or shares or debentures may be
respected per section 47 (3).
An offer for sale must be signed by two directors of the company or not less than half of two
partners of the issuing form that a partner may sign through an agent. Persons making the
offer
are prima facie liable to pay compensation under section 45 caused by misstatements in the
offers as if they were directors.
Placings:
This case when a company issues its shares through one or more stockholders who sell them
to
clients. This method is ideal when making a small issue of shares.
Companies raising money through placing are required by stock exchange to make a
substantial
proportion of their securities available to the general market.
Prospectus and duty of disclosure:
A part from requirements set out under section 40 any other information may be volunteered.
The intending purchaser of shares is entitled to all true disclosure in the prospectus.
In New Brunswick and Canada Rly and land Co. vs. Muggeridge (1860) VCKindersley said.
“Those who issue prospectus holding out to the public the great advantages which will accrue
to
persons who will take shares in a proposed undertaking and inviting them to take shares on
faith
of the representations therein contained are bound to state everything with strict and
scrupulous
accuracy and not only to abstain from stating as fact that which is not so but to omit no one
fact
within their knowledge the existence of which might in any degree affect the nature or extent
and
48
quality of the privileges and advantages which the prospectus holds as inducement to take
shares”.
Effects of disclosure
Misstatement and non-disclosure are both fatal to the validity of the contract and a subscriber
for
shares or debentures may rescind the contract within reasonable time before the company
goes
into liquidation.
The contract can be rescinded if the following conditions are satisfied: -
a) The statement must be a material misrepresentation of fact
. In Greenwood vs. Leather shod Wheel Company (1900) as company formed to manufacture
leather tyre wheels for trolleys issued a prospectus stating enlarge type “orders have already
been
received from the house of the house of commons to be followed by large orders later”. Infact
all
orders received were trial orders and no customers had yet expressed any intention to buy in
large-scale. It was held that the prospectus was misleading.
Statements of the fact can lead to the rescission of a contract but opinions in prospectus
cannot
nullify a contract.
In Edington vs. Fizmaurice (1825) a company issued a prospectus inviting subscriptions for
debentures. The object of the issue was stated to be that the money would be used for
effecting
certain alterations in the company’s building sand for developing the business of the
company.
The money however was needed to pay off pressing liabilities. The plaintiff applied for
debentures in reliance on the statements in the prospectus. It was held that the plaintiff could
rescind the contract and directors were liable.
Other cases where subscribers were given the right to rescind the contract for misleading
prospectus are: -
1. Kerberg’s case Re Metropolitan coal consumer’s Association (1882).
2. Ross vs. Estates investment company (1868).
b) The statement must have induced the shareholder to take shares.
In Jennings vs. Brought, (1854) LJ ch. 999. A subscriber for shares in a mining company
offered
by a prospectus which inaccurately described the capacity of the company’s mine. He
inspected
the mine himself. It was held that he was not entitled to rescind the contract to take shares as
he
had inspected the mine himself. It was held that he was not entitled to rescind the contract to
take
the shares as he had inspected the mine himself and must have therefore, relied on his own
observation and not on the content of the prospectus.
c) The statement must be untrue.
49
A statement is untrue if it is misleading in the form and context in which it is included or
where
the omission from a prospectus of any matter is calculated to mislead. A mere non-disclosure
does not amount to misrepresentation unless the concealment has prevented an adequate
appreciation of what was stated.
A statement can be false because of what it has said, concealed, omitted or implied. In Rex
vs.
Lord Kylsant (1932) KB 442 a prospectus was issued by a company stating that the company
had
paid a dividend every year between 1921 and 1927(years of depression) thus giving the
impression that the company was stable. However, the company had in fact incurred
considerable trading losses and was able to pay dividends only out of realized capital profits.
This fact was not disclosed. It was held that the prospectus was false in material particular in
that
it conveyed a false impression.
d) The deceived shareholder is an allotee and he must have relied on the statement in the
prospectus.
If a person purchases shares in the open market he has no right against the company.
In Peck vs. huirney (1873) LR 6HL, 377, a company issued a prospectus with a misstatement.
A
relying on the misstatement applied and was allotted shares, which he later sold to P. The
company was wound up and P had to pay $100 and as a contributory. P sought an indemnity
for
his loss from the directors; it washed that the directors were not liable to P.
Lord Claemosford observed “the office of a prospectus is to invite persons to become
allotees,
and the allotment having been completed, such office is exhausted and the liability to allotees
does not follow the shares into the hands of the subsequent transferees. Directors cannot be
made
liable “ad infinitum” for all the subsequent dealings, which may take place with regard to
those
shares upon the stock exchange.
e) The omission of material fact must be misleading before recession is granted.
If a person relies as aground for the rescission of a contract on the omission of a statement, he
must show that the omission of the statement makes what is stated misleading. An omission
must
be of such a nature to make a statement actually misleading.
In Coles vs. White Greyhound Assn Ltd (1929) 45 TLR 230. a prospectus described land as
eminently suitable for Greyhound racing, local authority refused approval, it was held that he
description of land was misleading andrescission was granted.
f) The proceedings of rescission must be started as soon as the allotee comes to know of a
misleading statement and before the company goes into liquidation.
Where an allotee decides to rescind a contract on grounds of fraudulent mispresentation, a
mere
notice to the company is not enough. He must make effective steps for the rectification
of register of members and removal of his name there from.
Loss of rights of rescission:
The right to rescind a contract based on fraudulent statement or withholding material fact is
lost
in the following instances: -
50
1. When after discovering the misstatement he treats the contract as subscribing or does any
act adopting the contract by: -
a) Attempting to sell the shares.
b) Executing a transfer.
c) Paying calls or receiving dividends.
d) Attending and voting at a general meeting of the company in person or by proxy.
2. When there is unreasonable delay upon discovering a misstatement. A delay of 15 days
may be
held to be too long and amounted to waiver of the right to rescind (Scottish petroleum co. Re.
Wallace’s case (1883) 23 ch 413).
3. Where the winding up of the company has commenced and the rights of the creditors of the
company have intervened, the right of rescission is lost. Where the shareholder has started
active
proceedings to be relieved of his shares, passing of the winding up order during their
pendency
would not prejudice his right of getting relief.
Damages for deceit
Anyone induced by fraudulent statement to take share is entitled to sue the company for
damages. He cannot both retain the shares and get damages against the company.
Liability for false statement in prospectus
Section 46 where a prospectus has any untrue statement any person who authorized its issue
is
liable for convictions, to a term of two years imprisonment or five to ten thousand unless he
proves.
a) That the statement was immaterial.
b) That he had reasonable ground for believing and did believe up to the time the issue of
prospectus that the statement was true.
In Derry vs. Peek (1889) the court held that the directors might not be liable on a statement
contained in a prospectus, which in their honest opinion was true and not made carelessly.
Section 45 also provides that civil liability to pay damages may be incurred by: -
i) Directors of the company
ii) Persons who have agreed to become directors at a later date.
iii) Promoters
iv) Other persons who have authorized the issue of the prospectus.
Defences for directors or promoters:
51
Section 45 (2) provides the following defences, which the directors have to establish to avoid
liability: -
a) That one had withdrawn his consented to become a director before the issue of prospectus
and it was issued without his consent.
b) That the issue was made without his knowledge or consent and that on becoming aware
of the issue, he forth with gave reasonable public notice of the fact.
c) That he withdrew his consent after the issue of the prospectus and gave reasonable public
notice before allotment.
d) He had reasonable ground to believe that the statements were true and believed them to
be true.
e) That the statement was correct and fair summary of an experts report or a statement made
by official or in an official documents.
Expert’s liability:
An expert who gives a report to be included in the prospectus is placed in a similar position
for
untrue statement like the person who authorized the issue of the prospectus; section 45 (3)
provides the following defences to an expert: -
1. That he withdrew his consent in writing before the registration of the prospectus.
2. That offers registration sued before allotment, on becoming aware of the untrue
statement, he withdrew his statement in writing and gave reasonable public notice of such
withdrawals and the reason for it.
3. That he was competent to make the statement and up to the time of allotment he believed
on reasonable grounds that it was true.
STATEMENT IN LIEU OF PROSPECTUS
A statement in lieu of prospectus is to be filled with registrar on two occasions. Under section
50
a public company having privately arranged for its capital subscription need not issue a
prospectus, but in that event a statement in lieu of prospectus must be filled with the registrar
three days before any allotment of any shares or debentures can be made.
Under section 32 if a company alters its articles such that provisions of section30 are
excluded,
the company will cease to be a private company and must within fourteen days after the said
date
file with the registrar a statement in lieu of prospectus.
52
For a public company a statement in lieu of prospectus has to be in the form of the fourth
schedule while in the case of a private company it has to be in the form of the second
schedule.
Form of statement:
The statement must be signed by every person named therein as a director or proposed
director
or his agent authorized in writing. The statement must contain same information as a
prospectus
complying with the third schedule.
Section 50 provides that if a statement in lien of prospectus includes any untrue statement, the
directors and others who authorized its delivery for registration are liable to imprisonment up
to
two years or a fine up to ten thousand shillings or both, unless it is established by the person
liable that: -
i) The untrue statement was immaterial.
ii) He had reasonable ground to believe that such a statement was
true.
Contents of statement in lieu of prospectus:
Contents of this statement depend on whether that statement is delivered under section 32 (1)
or
section 11 (2). A statement delivered under section 32 (1) must contain the following
particulars.
The nominal share capital of the company and shares into which it is divided.
The amount (if any) of the capital constituted by redeemable preference shares.
The earliest date in which the company has power to redeem the redeemable preference
shares, if
any.
a) Names, occupation and postal address of directors or proposed directors.
b) Amount of issued shares and commission or discount allowed therewith.
c) Amount of preliminary expenses and by whom they have to be paid or are payable.
d) Amount given or any other benefit given to any promoter and the consideration for the
payment of the benefit.
e) Voting, capital and dividend attached to the different classes of shares.
f) Shares and debentures issued in the preceding two years as fully paid-up otherwise than for
cash and consideration for the issue.
g) Number description and amount of any shares which any person has or is entitled to be
given
an option to subscribe for and the period the option is exercisable.
53
h) Name and postal address of vendors of the property of the company the amount payable
for
any such property to each separate vendor.
i)Dates, parties to and general nature of material contracts, and the time and place at which
the contract
or copies thereof may be.
j) Names and address of auditors.
k) Full particulars of the nature and extent of the interest of every director in any of the
interests
of every director in any property of the company purchased or acquired by the company
within
the preceding two years.
l) Rates of dividend (if any) paid by the company in respect of each class of shares in the
company in each of the five financial years immediately preceding the issue of the statement
or
financial years immediately preceding the issue of the statement or since incorporation of the
company, whichever period is short and particulars.
m) The case in which no dividend have been paid in any class of shares in any of these years.
STOCK EXCHANGE REQUIREMENTS:
The stock exchange is a market where stocks or shares are bought and sold through
stockbrokers.
The stock exchange is governed by governed by a council elected by the members from
amongst
themselves.
The following conditions are fulfilled before a company is listed in the stock exchange: -
a) A completion of an application form and signing an agreement.
b) A short history of the company.
c) A certificate from the auditors that the company is public within the terms of the
companies act.
d) Issued share capital must not be less than $ 25000.
e) Payment of a hearing fee of five hundred shillings.
f) Further five hundred shillings for all quotations granted.
g) Council has to be satisfied that a reasonable number of shares are offered in order to start
a market.
h) Submission of three copies of the articles of association, which may be referred after
perusal by the committee members.
54
ALLOTMENT OF SHARES ACT ON STOCK EXCHANGE
Section 53 where a prospectus states that application has been made for permission for the
shares
or debentures offered thereby to be dealt in any stock exchanges, allotment made will be void
if:
-
a) The permission has not been applied for before the third day after the first issue of the
prospectus.
b) Permission has been refused before the expiration of three weeks from the date of the
closing of the subscription list or such longer period not exceeding six weeks.
Section 53 (2) states that where the permission has not been applied for or has-been refused,
the
company must immediately repay all money received from applicants. But if such money is
not
paid within eight days after the company became liable to repay the directors became liable
to
pay with interest at five percent per annum from the expiration of the eight day, unless a
director
can prove that the default was not due to any misconduct or negligence on his part.
Section 53 provides further that all money received from applicants must be kept in a
separate
account so long as the company may become liable to repay it.
Underwriting commission
Underwriting refers to a situation where one agrees to take shares or debentures specified in
an
agreement. If the public fails to subscribe for them, consideration for this undertaking is
commission. Section 55 provides that a company may pay a commission to any person
inconsideration of his subscribing or agreeing to subscribe or his procuring or agreeing to
procure subscriptions for shares in or debentures of the company.
Before commission is paid the following conditions have to be fulfilled: -
i) The payment of commission should be authorized by the articles.
ii) Commission cannot exceed ten percent the price of shares.
3. The amount and rate of the commission and number of shares which underwriters have
agreed
to subscribe must be disclosed as: -
a) In the case of shares offered to the public for subscription, the disclosure must be in the
prospectus.
b) In the case of shares not offered to the public for subscription, the same disclosure must
be made in the statement in the prescribed from delivered to the registrar before payment
of the commission.
Section 55 (4) a vendor or promoter of a company or any other person who receives payment
in
money or shares from the company, has power to apply any part of the money or shares so
55
received in payment of any commission, the payment which if made by the company would
have
been legal under this sections.
A part from the above exceptions no company may apply its shares or capital to pay
commission
discount or allowance to any one in consideration of his subscribing or agreeing to subscribe
for
any shares in the company.
Section 55 applies to private and public companies alike.
Brokerage
Section 55 permits companies to pay brokerage if its articles so provide. Brokers are
professional
persons such as stockbrokers, bankers who exhibit prospectus and send them to their
customers
and by whose mediation the customers are induced to subscribe unlike underwriters brokers
do
not undertake to subscribe shares or debentures, which are not subscribed by the public.
Brokerage must be payable to brokers only: -
In Andreae vs. Zinc mines of Great Britain Ltd (1918) 2 KB 454. A company agreed to pay a
lady ten percent commission on any capital the company as a result of an introduction by her.
The lady was not carrying on any business as a broker, it was held that she could not recover
the
agreed sum as she did not carry on business as a broker and it was a mere accident that she
came
into the company’s office and was consulted on this matter.
8. MEMBERSHIP
A person is a member of a company if the subscribes to the memorandum of association of a
company and upon registration his name entered in the register of members. Members are
also
called cooperators or shareholders.
A shareholder is a person who holds shares in a company while a member is one whose name
appears in the register of members.
The terms members and shareholders are used synonymously specifically in the case of a
company limited by guarantee and having a share capital and unlimited company whose
capital
is held in definite shares. There are circumstances whereas person may become a member of
a
company without being its shareholder without being a member.
The following are instances where a person becomes a member without being a shareholder
of
the company.
1) In the case of companies limited by guarantee or unlimited companies because such
companies may not have share capital.
2) A deceased member continues to be a member as long as his name is on the register of
members, but he cannot be a shareholder of the company.
56
3) A transferor of shares continues to be a member until the transfer is registered and the
name replaced.
4) Subscribers to the memorandum are treated as members by the fact of subscription on
registration of the company they are entered in the members register even before they are
allotted any shares.
The following are instances where a person becomes a shareholder of a company without
being
its member.
a) A person who holds a share warrant.
b) A transferee or legal representative of deceased or insolvent member is not a member
until his name appears in the register although he is a shareholder.
Modes of acquiring membership:
Section 28 of the companies act provides that a person may become a member of a company
by:
-
a) Subscription to the memorandum:
Subscribers to the memorandum are deemed to have agreed to become members. The names
are
entered in the register of members upon registration of the company.
In official liquidation vs. Suleman Bhai, S subscribed to a company’s memorandum for two
hundred shares, but actually took 20 shares. It was held that he was liable in the winding up
of
the company for all the 200 shares, as he became a member by the very fact of subscription.
A subscriber to the memorandum cannot rescind the contract to take shares on the ground of
misrepresentation made by a promoter (metal constituents Ltd, ReLord Lurgen’s case (1902)
Ich
707 because: -
i) By his name act he brought the company into existence.
ii) The company could not appoint an agent before it came into existence and it is
therefore not liable for the Promoters acts
iii) By signing the memorandum he became bond as between himself and the company and
also
between himself and other persons who became members.
b) Agreement and registration:
Every person who agrees in writing to become a member and whose name is entered in the
register of members is a member of the company. Registration of a name as a member of a
company may be obtained through: -
57
1. Application and allotment.
An application for shares is an offer to take shares; allotment is acceptance of that offer by
the
company, which creates a binding contract between the applicant and the company. An
application may be absolute or conditional. If conditional the allotment must be in accordance
to
the terms of the application (Aldborough Hotel Co. Re. Simpson’s case (1986) 4 ch. 484).
2. Transfer.
One becomes a member when the transfer of shares is affected and his name is entered in the
register of members.
3. Succession.
The company has power to register any person as a shareholder to whom the right to any
shares
(or debentures) in the company has been transmitted by the operation of law, and in such a
case
an instrument of transfer is not necessary.
c) Qualification shares:
Before one is appointed a director of a public company, he must take or sign an agreement to
take and pay for qualification shares (if any) in which case he is in the same position as a
subscriber to the memorandum.
d) Estoppel:
Anyone who allows his name to remain in the register of members or otherwise holds himself
out or allows himself to be held out as a member is estopped from denying being a member
of
the company.
CESSATION OF MEMBERSHIP
A person ceases from being a member once his name is removed from the register. A
shareholder
may cease from being a member of a company by: -
1. An act of the parties.
2. Operation of law.
1. Act of parties.
The following are instances where a person may cease to be a member through act of parties:
-
a) If one transfers his shares to another.
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b) If one’s shares are forfeited.
c) If the company sells the person’s shares under a provision in the articles.
d) If one rescinds the contract to take shares on grounds of misrepresentation.
e) If redeemable preference shares are redeemed.
f) If one surrenders his shares, if such is permitted by articles.
g) If share warrants are issued in exchange of fully paid shares.
2. Operation of law.
One may cease membership through operation of law in any one of the following ways:-
a) Insolvency –
Shares of insolvent vest in the official receiver or assignee.
b) Death –
Shares of the deceased are vested in the legal representative, however the deceased’s estate
remain liable as long as the name of the deceased is in the register.
c) Sales of shares in execution of a court decree.
d) Winding up of a company.
Rights and liabilities of members.
Rights of members.
The rights are conferred either by company’s act, the memorandum and articles of association
or
by the general law. Rights conferred by the companies act are called the statutory rights. The
following are statutory rights: -
(1) Right to obtain copies of the memorandum and articles on request and on payment of the
prescribed fee.
(2) Right in priority to have shares offered in case of increase of capital.
(3) Right to transfer shares.
(4) Right to vote on resolutions at meetings of the company.
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(5) Right to apply to court to have any variation of his rights set aside by the court section 7
(4).
(6) Right to have a share certificate for shares held.
(7) Right to inspect register of members, register of debenture holders and copies of annual
return.
(8) Right to receive a copy of the statutory report.
(9) Right to apply to the BOD to call an annual general meeting when the company fails to
call such a meeting.
(10) Right to receive notice of meetings, attend and vote at meeting.
(11) Right to appoint a proxy and inspect proxy register.
(12) Right to demand poll alone or with others.
(13) Right of a body corporate to appoint a representative to attend and vote at the
general meetings.
(14) Right to require the company to circulate resolution.
(15) Right to have any request minutes of proceedings of a general meeting.
(16) Right to receive dividends when declared.
(17) Right to receive copies of annual accounts of the company with the auditors’
report.
(18) Right to participate in the appointment of directors and auditors in the annual
general meetings.
(19) Right to petition to the court for the winding up of the company.
(20) Right to share surplus. The rights conferred on members by memorandum of
association are called documentary rights, while rights conferred on members by the
general law are called legal rights.
Liability of members
Liability of members depends on the nature of the nature company. Liability maybe
summarized
as follows: -
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1. For unlimited companies each member is liable in full for all the debts contracted by the
company during the period he was a member.
2. In case of limited by shares each member is liable to pay the full nominal value of the
shares held by him.
3. For a deceased member, his estate is liable in respect of partly paid shares and where
the shares have been registered to the name of representatives they become liable.
4. When one (a member) is adjudicated bankrupt, the official receiver may sell the partly
paid shares in which case the buyer becomes liable thereof or he may disclaim them as
onerous property.
5. When membership is reduced below seven and two for public and private companies,
every member aware of the fact becomes severally liable for the payment of debts of the
company after six months of trading from such reduction in number.
6. For companies limited by guarantee each member is liable to contribute the amount
guaranteed by him to be paid in the event of winding up.
Register of members.
Section 112 requires every company to maintain a register with the following particulars:-
a) The name and address of each member.
b) For a company with share capital, shares held by each member distinguished each share
by its number and extent to which the shares have been paid up.
c) The date each person was entered in the register as a member.
d) The date on which any person ceased to be a member.
Where the company has converted any of its shares into stock a notice of the conversion has
to
be given to the registrar. If default is made in maintaining the register, the company and every
officer in default shall be liable to a default fine.
Section 114 provides that on issue of a share warrant, the company must strikeout of the
register,
the name of the member because of the issue of the share warrant he ceases to be a member
in
which case the following particulars should be entered in the register: -
a) The fact of the issue of the warrant.
b) Statement of the shares included in the warrant
c) Date of issue of the warrant
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Index of members.
Section 113 states that every company with more than fifty members is required to keep an
index
that may be in the form of a card index. The index should be kept where the register is kept.
Any
alteration in the register should be noted in the index within fourteen days. Failure to comply
with any of the above may attract a fine.
Location of the register.
Section 112 (2) requires that the register must be kept at the company’s registered office. It
may
be kept elsewhere provided.
a) The work of making it up is done at another office.
b) The register is prepared by another person.
Inspection of register of members.
Inspection of the register of members and debenture holders is open to the public for at least
two
hours a day.
Inspection is free for members and a fee of Ksh 2 is charged for every inspection. The right to
inspect includes the right to make extracts from the register. A fine of Ksh 40 is imposed for
refusal to inspect or refusal to supply extracts. The object of inspecting the register is
immaterial.
Extracts have to be supplied within fourteen days upon receipt of the demand.
The right to inspect ceases upon the commencement of winding up and an order of the court
must be obtained if inspection is required after that date.
Closure of register of members.
Under section 117 a company can close a register for 30 days after an advertisement in a
local
daily. Closure is usually done prior to payment of dividends or issue of new shares.
Rectification of register of members
Section 118 provides that courts can order rectification of register of members in the
following
cases: -
a) Where one’s name is entered or omitted from the register of members without any
sufficient
cause.
b) Where default is made or unnecessary delay takes place in entering on the register the fact
that
any person having ceased to be a member. Courts may require companies to pay damages to
the
aggrieved person.
No notice of trust on register.
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Section 119 states that no notice of any trust express, implied or constructive, shall be entered
on
the register of members or debenture holders.
The trustee can be entered in the register in his personal capacity and not as a trustee, and he
will
exercise the rights of a shareholder, and is alone liable for shares calls and to be put in the list
of
contributories.
Branch register.
Section 121 a company carrying business outside Kenya in any part of the commonwealth
countries may keep a branch register in that part.
Notice must be given to the registrar of the situation of the office where a branch register is
kept
within one month of the opening of the office and any change in its situation or
discontinuation
of such a register.
A branch register is deemed to be part of the company’s register of members.
Annual return.
Section 125 provides that every company with share capital must file an annual return with
the
register once in every year. The return must be filed with the registrar forty two days after the
annual general meeting (sec. 127).
The following particulars must be included in the annual return in accordance to part of the
fifth
schedule.
1. The address of the registered office.
2. The place where the register of members or debenture holders is kept is not kept at the
registered office.
3. Summary distinguishing between shares issued for cash and shares issued as fully paid or
otherwise than in cash specifying.
a) Amount of share capital and the number of shares.
b) The number of shares taken up to date of the return.
c) The amount called up, received and unpaid.
d) Commission and discount in respect of shares or debentures.
e) The total number of shares forfeited.
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f) Total amount of shares for which share warrants are outstanding, the number of shares
compared in each warrant and the amount of share warrants issued and surrendered since
the last return.
4. The total amount of indebtedness in respect of all registrable charges.
5. A listing containing: -
a) The names and addresses of those who are members on the fourteenth day after the
annual general meeting and those who have ceased to be members since the date of the
last return.
b) The number of shares held by each member.
c) Particulars of the directors and the secretary.
Section 125 (1) if the company has converted its shares into stock, the return should give the
same particulars with regard to the stock as required for shares.
Section 126 for a company with no share capital, the following facts should be included: -
a) The situation and the postal address for the registered office.
b) The address of the place if the register of member is kept elsewhere.
c) The address and place if the register of debenture holders is kept elsewhere.
d) Particulars relating to directors and the company secretary.
A statement containing the particulars of the total amount of in indebtness of the company in
respect of all charges which are or were required to be registered with the registrar under the
act.
Documents to be annexed to annual return.
Sec 128(1) the following documents must be annexed to the annual return.
a) A copy of the balance sheet with all notes thereto duly certified by a director or company
secretary.
b) A copy of auditor’s report and director’s report certified by a director and company
secretary.
Section 156(1) the profit and loss account and group account should be annexed to the
balance
sheet.
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Section (129) requires that also a private company must also submit with annual return the
following certificates:-
a) The company has not invited the public to subscribe its shares or debentures.
b) Any excess of fifty members consists of entirely present and ex-employees.
9. SHARES
Shares are indivisible units of the capital of the company. Fawell I in Barland’strustee vs.
Steel
Bros (1901) 1 ch. 279 defined a share as the interest of a shareholder in the company
measured
by a sum of money for the purpose of liability in the first place, and of interest in the second
place, but also consists of a series of mutual covenants entered into by the shareholders “inter
se”
in accordance with section 22 of the company’s act.
Shares represent the equal portions into which capital is divided each shareholder is entitled
to a portion of a company’s profits in proportion to the number of shares held by him.
A shareholder’s liability is usually measured against his indebtedness to the company on the
amount unpaid on shares held by him.
Section 76 requires that each class of shares be distinguished by its appropriate number. The
distinction is not necessary if all shares rank equally.
SHARE CAPITAL
Capital is a particular amount of money with which a business is started. For accompany is
usually called share capital.
Types of capital
1. Authorized or nominal capital
This is the nominal value of the shares which a company is authorized to issue by its
memorandum of Association. It is the maximum amount of capital which the company will
have.
This amount can be increased or reduced only if the company changes the memorandum.
Nominal capital is also called
Registered capital.
2. Issued capital
This is the nominal value of the shares which are offered to the public for subscription. It
represents the portion of the nominal capital that has been given out to be subscribed by the
public or by any persons concerned.
3. Subscribed capital
65
This is the part of issued capital which has been taken up by the public. When all the issued
capital has been subscribed then subscribed and issued capital are equal.
4. Called up capital
This is part of the issued capital which has been called up on the shares. This is the part of the
issued capital which shareholders are liable to pay as and when called.
5. Paid up capital
This is part of the issued capital which has been paid up by the shareholders. When calls are
made on the shares and shareholders fail to pay up the amount thus owing is called calls in
arrears or “calls unpaid”.
6. Reserved capital
This is any part of the company’s share capital which a company may resolve by a special
resolution not to be called except in the event of a winding up. Section62 of the companies
Act
provides that a company by special resolution determine that any portion of its uncalled
capital
be reserve capital.
Reserve capital can only be turned into uncalled capital by leave of the court. Reserve capital
is
different from reserves or reserve fund. Reserve fund or reserves refers to undistributed
profits
kept by the companies to cater for emergencies.
Application and allotment of shares:
Application is an offer by a prospective shareholder in lieu of a prospectus issued by the
company. Allotment is the acceptance of an application and it results to a contractual
relationship
between the company and the applicant,
Allotment of shares is an allocation (appropriation) by the board of directors of a given
number
of shares in response to an application.
As the post is the medium of communication allotment is deemed completely on the instant,
the
letter of allotment is posted even though the allotment letter is delayed in the post or it never
reaches the offeree (applicant) household fire insurance Co. vs. Grant (1879) 4 Ex. 216.
Provisions regarding allotment
1. Allotment must be by a resolution of the board of directors unless there is clause in the
articles providing otherwise.
66
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