Business Associations Forms and Types

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BUSINESS ASSOCIATIONS 1
SSOZI RAJJABU
LLB (IUIU), LLM (Geneva, LLM (KIU), DLP. PHD CADT., (DER-SALAM
UNIVERSITY)
ADVOCATE OF THE HIGH COURT OF UGANDA
Business Associations 1 By Ssozi Rajjabu

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INTRODUCTION TO VARIOUS FORMS OF BUSINESS ASSOCIATIONS
 Types of Business Organizations

 Forms of Business Organizations
 Historical Foundation of Company Law
A business entity is an organization that uses economic resources or inputs to provide goods or
services to customers in exchange for money or other goods and services.
Business organizations come in different types and different forms of ownership.
Each form has distinct advantages and disadvantages for the life of the business, the ability of the
business to raise cash, and taxes.
A key observation is that as a firm grows, the advantages of the corporate form may come to
outweigh the disadvantages.
TYPES AND FORMS OF BUSINESS ORGANISATION
Types of Business
There are three major types of businesses:
1. Service Business
A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.
Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and
law firms.
2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail price. They are
known as "buy and sell" businesses.
They make profit by selling the products at prices higher than their purchase costs.
A merchandising business sells a product without changing its form. Examples are: grocery
stores, convenience stores, distributors, and other resellers.

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3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the intention of
using them as materials in making a new product. Thus, there is a transformation of the products
purchased.
A manufacturing business combines raw materials, labour, and factory overhead in its production
process. The manufactured goods will then be sold to customers.
Hybrid Business
Hybrid businesses are companies that may be classified in more than one type of business. A
restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a cold
bottle of wine (merchandising), and fills customer orders (service).
Nonetheless, these companies may be classified according to their major business interest. In that
case, restaurants are more of the service type – they provide dining services.
FORMS OF BUSINESS ORGANISATION
In business, one of the first decisions to be made is how the business should be structured.
All businesses must adopt some legal configuration that defines the rights and liabilities of
participants in the business’s ownership, control, personal liability, life span, and financial
structure.
This decision will have long-term implications.
These are the basic forms of business ownership:
1. Sole Proprietorship
2. Partnerships
3. Corporations

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SOLE PROPRIETORSHIP
The vast majority of small businesses start out as sole proprietorships.
These firms are owned by one person, usually the individual who has day-to-day responsibility
for running the business.
Sole proprietorships own all the assets of the business and the profits generated by it.
They also assume complete responsibility for any of its liabilities or debts.
In the eyes of the law and the public, you are one in the same with the business.
Advantages of a Sole Proprietorship
Easiest and least expensive form of ownership to organize.
Sole proprietors are in complete control, and within the parameters of the law, may make
decisions as they see fit.
Profits from the business flow-through directly to the owner’s personal tax return.
The business is easy to dissolve, if desired.
Quick decision making as there is less bureaucracy
Cheap labour as mostly family members are engaged
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for all debts against the
business.
Their business and personal assets are at risk.
May be at a disadvantage in raising funds and are often limited to using funds from personal
savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.

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Some employee benefits such as owner’s medical insurance premiums are not directly deductible
from business income (only partially as an adjustment to income).
Rushed decisions affect the business
Die alongside the sole proprietor
PARTNERSHIPS
In a Partnership, two or more people share ownership of a single business.
Like proprietorships, the law does not distinguish between the business and its owners.
The Partners should have a legal agreement( partnership deed) that sets forth the following:
i. how decisions will be made;
ii. how profits will be shared;
iii. how disputes will be resolved;
iv. how future partners will be admitted to the partnership;
v. how partners can be bought out, or what steps will be taken to dissolve the partnership
when needed; and
vi. how much time and capital each will contribute, etc.
Advantages of a Partnership
Relatively easy to establish; however time should be invested in developing the partnership
agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners’ personal tax return.
Prospective employees may be attracted to the business if given the incentive to become a
partner.
The business usually will benefit from partners who have complementary skills.

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Disadvantages of a Partnership
Partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Types of Partnerships
1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or loss
according to their internal agreement.
Equal shares are assumed unless there is a written agreement that states differently.
2. Limited Partnership and Partnership with Limited Liability
“Limited” means that most of the partners have limited liability (to the extent of their
investment) as well as limited input regarding management decision, which generally encourages
investors for short term projects, or for investing in capital assets.
This form of ownership is not often used for operating retail or service businesses.
Forming a limited partnership is more complex and formal than that of a general partnership.
3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single project.
If the partners in a joint venture repeat the activity, they will be recognized as an ongoing
partnership and will have to file as such, and distribute accumulated partnership assets upon
dissolution of the entity.
CORPORATIONS
A Corporation, chartered by the state in which it is headquartered, is considered by law to be a

unique entity, separate and apart from those who own it.

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A Corporation can be taxed; it can be sued; it can enter into contractual agreements.
The owners of a corporation are its shareholders.
The shareholders elect a board of directors to oversee the major policies and decisions.
The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
Shareholders have limited liability for the corporation’s debts or judgments against the
corporation.
Generally, shareholders can only be held accountable for their investment in stock of the
company. (Note however, that officers can be held personally liable for their actions, such as the
failure to withhold and pay employment taxes.
Corporations can raise additional funds through the sale of stock.
A Corporation may deduct the cost of benefits it provides to officers and employees.
Disadvantages of a Corporation
The process of incorporation requires more time and money than other forms of organization.
Corporations are monitored by the State and as a result may have more paperwork to comply
with regulations.
HISTORICAL FOUNDATION OF COMPANY LAW
According to Musisi, belongs to an era of class divided society and that commodity production
was very essential in the evolution of company law.
In other words when society was divided into producers and non-producers, exchange developed
and this development necessitated or called in evolution of business structure and the law.
The Guild
During the middle-ages, craft (those engaged in any trade, taken collective) and mercantile
(merchants) were common.

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From the 12th century onwards, relatively small local associations were formed by the traders.
The associations regulated trade in the local markets and members of the various guilds
exercised monopolies save for the monarchs.
They set qualifications for the guild members and ensured that the product quality satisfied the
set standards.
They also controlled competition by limiting the working hours of their members.
The guild became a powerful institution and its members became rich and prosperous.
Many of the guilds obtained charters from the crowns for the purpose of obtaining monopolies
for particular product or branches of trade.
However, they were not incorporated or registered since each member traded on his own account
under the guidance of the guild regulations.
Trading on joint account was carried out through partnerships and later the chartered companies.
The first form of business association was known as ‘comedas and socioetas’.
The comedas allowed sleeping partners where one person provided money and others provided
skill and time.
The comedas were not so popular in the UK but very popular in the rest of Europe and
sometimes they traded overseas.
The socioetas were a more solid association and were forerunners of the modern partnership and
the partners was an agent of all others and all partners were vicariously liable for all the debts
incurred on the part of the partnership.
The other form of business structure in this period was the chattered company formed under the
royal charter and the process of forming the company led to incorporation.
These companies were first used by merchants and adventurers abroad e.g. to India or America.
Chartered companies were formed in the form of an international guild in the sense that they
were genuine associations of people for a common purpose of trading with individual stock and
capital.

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The chartered companies only provided a framework for the collective action e.g. by providing
rules and regulations and premises.
The crown benefited a lot from the actions of the chartered companies by controlling and
regulating overseas trade.
During the 17th century, it became apparent that the chartered companies could pool their goods
or stock instead of trading as individuals and this led to what was referred to as ‘Joint Stock
Companies’.
Joint stock companies like East India Company and North Eastern Pacific were formed and by
1692 individual overseas trading had been declared illegal.
Under JSC, the risk and reward of trading were standard i.e. shared in terms of one’s
contribution or proportion to the respective business.
Company Structures and Personalities
During the 2nd half of the 17th century JSC were now registered under seal.
These registered corporations would exist in perpetuity and it would also sue outsiders and its
own members but the idea of limited liability was never emphasized at the time.
Even after incorporated companies became common, the bulk of trading was still done by sole
proprietors and partners.
Soon later, wealthy individuals loaned capital to traders in return for profit or they bought shares
and become sleeping partners.
They were however liable for the acts of the active members and this discouraged investment
since the investors wanted to make profit from their money at no cost.
Despite the risk of personal liability, unincorporated partnerships were also common.
At the end of the 17th century, a distinction was recognised between the acts of the company and
those of the members involved.
The formal company was for the first time recognised as owning property and able to sue in its
own name.

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This development was necessary to compel business structures under mercantilism and the
company started to develop characteristics of indefinite existence even after the existence of its
founders and owners.
Hence evolved the idea perpetual existence.
Furthermore, companies became liable for their own liability and debts and by necessary
implications, members liability became limited i.e. the concept of limited liability.
Accordingly in cases of insolvency, the respective creditors or claimants against the company
had access to the company assets and not individual owners, though it didn’t’t work in practice.
The unwillingness to allow the limited liability was the fact that it was likely to be abused by
spectators e.g. those who are not skilled in the business could hide behind this exercise.
The South Sea Company (Bubble Scandal)
The 1st part of the 18th century marked an increase in the registration of companies. Many
investors put a lot of money in speculative ventures and this period turned out to be known as the
period of the BUBBLE.
Most of the companies registered had legally inflated share prices and in particular, the
BUBBLE scandal arose out of a company known as the South Sea Company.
The promoters of the company acquired the whole of the national debt which at the time stood at
£31,000,000 by either buying out of the holders of the debt or exchanging their holding for the
company shares.
The company promoters had hoped that being in possession of an interest bearing bond own by
the State was the sole basis for them to raise vast sums of money elsewhere.
But the company had little trade and paid vast sums of money to out beat its competitors and in
bribery.
This was meant to get the company a monopoly of trade and state protection.
They purchased all the shares of the major companies and as a result there was a rapid fall in the
shares of those companies and those companies became unsellable as they had no resale value
and the company had to collapse.

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The government attempted to redeem this company since it controlled the economy but in vain
and the bubble burst with so much loss to the shareholders and the creditors.
After the collapse of the South Sea Company in 1720 government passed a law to deter
swindling, speculation and gambling and it was called the Bubble Act.
The Act was passed with a view of protecting public trade and commerce of the Kingdom.
The Bubble Act led to the collapse of many businesses since it made it difficult to gain a charter
and to incorporate.
Accordingly, many incorporated companies became the dominant form of business by the end of
the 18th century.
During the existence of the Bubble Act, businessmen sidestepped the Act by setting up trusts
which were regulated under deeds of settlement regulations and they were more or less
partnerships and they lacked limited liability.
Business was slow and the Bubble Act did not achieve most of the goals and was later repealed.
The State intervened and created the Board of Trade.
In 1825, the Board of Trade took over the crowns chartered companies. Companies applied to be
chartered by patent rather than by royal charter of Act of Parliament.
In 1837, the BOT was allowed to incorporate limited liability.
In 1843, a committee was set up to handle matters relating to joint stock companies headed by
William Gladstone.
The committee made the first examination of company law and provided the basis of the Joint
Stock Companies Act 1844 which effectively established the modern companies Act.
The Act had three basic principles which persist to date:
1. It made incorporation easy by establishment of registration;
2. It formally established JSC and partnerships;
3. It forced incorporated companies to account for their activities and it required that:

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i. Companies to have a director and secretary;
ii. Companies were to hold regular meetings of shareholders and to appoint a chairman for
those meetings; and
iii. Companies were avail accounts and audited reports to the shareholders.
Though the Act was a positive development in company law, it did not lead to immediate rise in
the number of companies registered and it did not allow limited liability to operate to the extent
that creditors could still sue and recover from individual shareholders notwithstanding that the
company was registered.
The State later intervened and allowed limited liability to operate but before the intervention by
the crown, 900 companies had been registered but after the intervention, 2400 companies were
registered.
A new Act was then introduced in 1862 which required that for a company for a company to be
formed the founders had to subscribe their names in the memorandum and articles of association
of the company.
The company was also required to hold a meeting every year and the BOT was empowered to
appoint inspectors to examine the affairs of the company.

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TYPES OF COMPANIES
 Introduction
 Definition
 Types of Companies
 Formation of Company
INTRODUCTION
The word company is derived from the Latin word ‘Companis’ which means people sharing
together.
Hence a company is a group of people associating together and sharing resources to pursue a
common interest.
The concept of a registered company was introduced in Uganda by the colonialists who
recognised companies as economic units used for conducting trade and business.
As soon as colonialism had been completed and imperialism was in control, there was surplus
capital in Europe which had to be remitted to the colonies and the proper means of channeling
this capital was through corporations.
Before colonialism, Africans did not have any associations similar to the modern day companies’
structures and accordingly the companies structures in East Africa has its foundation rooted in
the colonialism era.
In the few societies which attempted a state structure, some form of commercial activity was
carried out but in a primitive nature through barter trade and the village acted as the market
place.

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The only form of commercial activity at the time equivalent to the European guilds was that of
the clans e.g. Bunyoro Kitara Kingdom.
Clans had monopoly over iron making and smelting and divided themselves into two groups, i.e.
smelter and the other the blacksmiths and they were trading with the Baganda.
It must be noted that the law relating to company structures in East Africa as they operate today
is not indigenous in the area.
This is not to say that a structure equivalent to companies in Europe would not have evolved, the
stage of development was hijacked.
In Uganda for example, the earliest legislation was the Indian Companies Act of 1882 governing
companies, which legislation itself was a replica of the English Companies Act.
That remain in operation for about 40 years until it was repealed by the company’s ordinance in
1922.
In 1935, a new legislation, the Company’s Ordinance of 1935 was enacted and it operated up to
1958 when the present Companies Act replaced it.
The economic base of the region was firmly integrated with that of the British to the extent that
none of them could develop its own legislation.
The statute therefore became very difficult to understand by an ordinary businessman because it
was not developed basing on the circumstances in Uganda.
Since 1844, companies have been created by registration under the Companies Act of Uganda,
now Cap 85, Vol. III, Laws of Uganda.
This Act is a combination of the English Law and the principles of equity and natural justice.
See the following cases:
1. Edmunds v. Brown & Tillard (1668)1 Lev 837
2. Katate v. Nyakatura (1956) U.L.R 47
3. Mengo Builders & Contractors Ltd. v. Kasibante (1958) E. A 591

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4. Salomon v. Hamborough Co. (1971) 1 Ch. Cas 204
5. Salomon v. Salomon & Co. Ltd (1897) A.C 22
DEFINITION OF A COMPANY
A company is a legal entity, a fictitious person/body, separate and set apart from its members or
shareholders. This legal personality is an artificial one, with powers to sue or be sued and
transact business. It is brought into being by the registration procedures laid down by the
Companies Act.
The main purpose of Company Law is to regulate the formation, activities, officials and the
winding up (closing down) of the Company, as regulated by the Companies Act.
TYPES OF COMPANIES
According to Gower, a company has three functions:
1. There are companies formed for purposes other than making profit for the owners or
members e.g. charitable organizations. Company limited by guarantee.
2. A company formed between small groups of people basically called a private company or
a close corporation for profits in most cases.
3. Companies formed in order to involve the public in investment and share the profit
without necessarily getting involved in the management thereof. These are called public
companies.
It should be noted that (2) and (3) are limited by shares and liability is limited to the shares
allotted to a particular member in the event of liquidation.
The primary motive of a company limited by share is to carry out trade for a profit.
The distinction between company limited by shares and company limited by guarantee is that in
limited by shares, the working capital will be contributed by the members.

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Additionally, in the event of financial problems, the creditors can be compensated from the
members’ contributions.
In company limited by guarantee, the members undertake to pay or indemnify up to a specific

amount, i.e. guarantee.
Under Section 4(1) of the Companies Act, provision is made for the types of Companies that can
be lawfully formed in Uganda. Principally these can be divided into 2 broad categories.
1. Private Companies
2. Public Companies
PRIVATE COMPANIES
Section 5 of the Companies Act defines a private company as a Company, which limits the
number of its members to 100 excluding past and present employees of the company who are
shareholders, and which by its articles restricts the rights to transfer shares of the company to the
public.
Ordinarily, these are companies whose required minimum number of members is two people.
This can be seen in the case of Lutaya v. Gandesha (1987) HCB 49 where a man and his wife
formed a private company with 1500 shares, of which the wife held only 2 shares.
However, under the Companies Act one person can incorporate a company.
Where two or more persons hold one or more shares in a company jointly, they shall be treated
as a single member. See S. 4(2) Companies Act.
They also prohibit any invitations to the public to purchase or subscribe for any shares or
debentures of the company, and private companies commence business immediately, on
incorporation.
PUBLIC COMPANIES
Under the Companies Act, any company which is not a private company is a public company.
See S. 6

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Its Memorandum of Association must state that it is to be a public company and its registered
name normally ends with the words public limited company (plc.).
A public company must have at least 2 directors though for a private company, the statutory
minimum is one director.
A public company may offer its shares/debenture to the public for subscription or purchase; but
the offer is in a prospectus to which elaborate rules are applied.
A company registered as a public company on its original incorporation may not do business nor
exercise any borrowing powers unless they are provided in its Memorandum of Association and
articles.
To sum up, the decisive advantage of a public limited company over a private company is its
right to raise capital from the public.
A private company may be converted into a public company by altering its Articles to exclude
the restrictive provisions on the transfer of shares.
LIMITED AND UNLIMITED LIABILITY COMPANIES
Under S. 4 (2) of the Companies Act, a Company whether public or private may be:
1. Limited by shares;
2. Limited by guarantee; or
3. Unlimited company
A Company Limited by Shares
This is a company whose Memorandum of Association limits the liability of its members to the
amount unpaid on their shares.
A Company Limited by Guarantee
Here, the liability of the members is limited to such amount as they may have undertaken to
contribute to the assets of the company in the event of its being wound up.

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These are commonly found in charitable organizations, religious institutions, research

institutions, etc.
This in essence shows that they are mostly the current bodies referred to as NGO's.
Unlimited Liability Companies
This is one where there is no limit on the liability of the members. The members are therefore
liable for all the debts of the company, on winding up.
HOLDING AND SUBSIDIARY COMPANIES
A company may hold the majority shares in another company or several other companies where
its Memorandum of Association gives it express power to do so.
In such a case, the companies stand in the relationship of holding company and subsidiary
company, with the holding company being the one that holds the majority shareholding in the
other company, (subsidiary company).
See S. 161
Subsidiary status may be acquired by purchase or takeovers.
FORMATION OF A COMPANY
The process if referred to as incorporation and it involves a number of steps from the initial
meeting of promoters, then drafting of the relevant documents, organising and payment of the
relevant fees and then actual registration of the company.
It should be ascertained whether the proposed company is to be a private or a public company.
The law specifically states that any associations, either partnership or a company, for the
purposes of carrying out any business with an object of gain has to be registered in accordance
with the Companies Act.
MEMBERSHIP

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According to S. 4(1) of the Companies Act, anyone or more persons but not exceeding 100, may
for a lawful purpose, by subscribing their names to a memorandum of association and otherwise
complying with the requirement of the Act in respect of registration.
Under S. 5(1), a private company means a company which by its articles:
1. restrict the transfer of its shares and securities;
2. limits the number of its members to 100 excluding its employees and persons who have
been formally employed by the company;
3. Prohibit any member of the public to subscribe for its shares; and
4. Where two or more persons hold one or more shares in a company jointly, they shall be
treated as a single member.
Whereas any company that is not a private company under S. 5 is a public company under S. 6.
For a public company, the presumption is that one is free to transfer the shares subscribed at any
time without any restrictions.
The restriction in a private company is meant to avoid a situation where an individual or a new
comer in the company may disturb the operations of the company.
The commencement of business is effective from the date of issuance of a certificate by the
Registrar for a private company. See S. 22(1).
For public companies, incorporation and registration per say is not sufficient as one should
satisfy other processes.
Before commencement of business public company must issue a prospectus inviting the public to
subscribe for shares and must obtained from the Registrar of Companies a certificate of
commencement of business.
There is a statutory meeting every public company must hold within three months from the date
it is supposed to commence business and 14 days before the meeting, all the members entitled to
attend and vote in the meeting must be given a statutory report which must be signed by at least
two directors giving the details of the status of the company. See S. 137.

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Failure to comply with the requirement of the statutory meeting makes one liable to payment of a
fine.
For a private company, the statutory meeting may not be held and the statutory report may not be
issued.
A private company must have at least one director but for a public company, the minimum
number of directors is two. See S. 185.
For a private company, if it has only one director, he cannot act as the secretary at the same time.
See S. 187(1).
For public companies, there are fixed qualifications for one to be a director and they must be
contained in the articles of associations. Example may be that of holding shares or having
substantial shareholding in the company.
For public companies, members must sign and deliver for registration consent in writing an
undertaking to act as a director and showing that the director has either:
i. sign the memorandum of association undertaking to pay the qualification shares; or
ii. has actually paid the qualification shares.
These provisions however, do not apply to private companies.
It is also important that after determining whether the company is to either be private or public, it
should be determined whether the company should have limited or unlimited liability of its
members.
As a general requirement, members of a limited liability company are not liable for the
company’s debts beyond the amount which is still unpaid on the share he or she holds.
Once that amount is paid, he cannot be called upon by the creditors to meet company’s debts.
There are situations where a company can have unlimited liability and in such situations, such
members become liable for the company’s debts if its assets cannot sufficiently pay off the
creditors and liabilities. See S. 4(2) (c).
MEMORANDUM OF ASSOCIATION

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S. 7 provides that every company must have a memorandum of association which shall be
printed in English and must state the name of the company.
It must also state whether the company is limited by shares or by guarantee and the word
“limited” must appear at the end of the name of all limited companies.
However, this requirement may be dispensed with if the Minister is satisfied upon application
that the company:
i. is being promoted for promoting commerce, art, science, education, religion, charity, or
any other essential object which that company intends to promote; and
ii. apply its profits to promote such plans and to prohibit payment of any dividends to its
members.
Such companies also enjoy such privileges and rights of limited companies and are also subject
to the obligations of limited companies.
It is an offence for a company to omit the word “limited” at the end without any prior exemption
by the Minister.
The memorandum of association must indicate the registered office, its location and it must
indicate the objects for which the company is being formed.
The memorandum of association must state the share capital and the nominal value of the share
in their fixed amount.
It must be dated and signed by all the shareholders indicating their full names, occupations and
addresses and it must be witnessed and such witness must state their occupation and address.
ARTICLES OF ASSOCIATION
S. 11 states that it shall be lawful for a company to register in addition to its memorandum and
articles of association, such regulations of the company as the company may deem necessary.
Articles of Association must be in English and signed by all the subscribers of the memorandum
of association and they must indicate their postal addresses and occupations.
It must be attested by a witness who must also indicate their addresses and occupations.

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MEMBERSHIP OF THE COMPANY
S. 47(1) provides that all persons who may have subscribed to the memorandum of the
company shall be member of the company and when the company is registered, the names
shall be entered on the register of the members.
This provision indicates subscribers to the memorandum are members of the company and
even if a member is not entered on the register of members, he is still a member of the
company.
Therefore payment of shares par se does not make one a member of the company
automatically but only a shareholder.
Apart from subscribers to the memorandum, the Companies Act provides for other two
categories of people who can be deemed members of the company:
1. The first category includes directors of the company who are supposed to take up
qualifications shares. See S. 182.
2. The second category is that of individuals who have paid up for share and upon
allotment and upon subscription.
It must be noted that courts have been a little bit relaxed when it comes to enforcement of
S. 47.
In Mawogola Farmers & Growers Ltd. v. Kayanja & Others (1971) E.A 272
Where the respondents had contributed money on an understanding that they will be
allotted shares in the company. After the incorporation, they were never allotted shares
and they sued the company for the allotment. In the trial and appellate courts, the
company sought to rely on S. 47 that for one to be a member of a company there must have
been an agreement to that effect and his name must have been entered on the company
register and that these two were cumulative. Courts unanimously held for the respondents
and they quoted “Buckley on the Company Act” that “The register of the company is most
important but not conclusive”
PROCEDURE FOR INCORPORATION

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1. RESERVATION OF COMPANY NAME
In the process of incorporation, it’s important to consider the name with which the company is to
be registered.
In the first place it is a requirement of the law that a company must register its business name
prior to incorporation.
The name must be reserved on a written application to the registrar inquiring whether the
proposed name is available.
The registrar by searching his register, ascertains whether the name is available or not.
If it’s valid, then one’s reservation of the name remains valid for a period of 30 days but this time
may be extended by the registrar up to 60 days for a special reason.
Mere choice of a name and its reservation with the registrar is not sufficient to ensure that such a
name would be allowed by the law.
The registrar has wider powers to refuse the registration of any name which in his opinion is
undesirable. See S. 36(1).
Accordingly, any name which is similar or identical to that already registered, or that which has
any connotations or referring to any government company, commonwealth country or contrary to
law or morality shall not be registered.
The registrar on his own motion may direct a company’s name to be changed where he or she
feels that the proposed name is misleading or harmful to the public. See. S. 37.
Examples of undesirable names:
1. If it is like the name of an existing company or other business entity
In Lagos Chamber of Commerce (Inc.) v. Registrar of Companies (1952) 14 WACA 197:
This was an application by Lagos Chamber of Commerce for an injunction to prevent the
Registrar from registering a Company called „Africa Chamber of Commerce‟ claiming that the
names were similar. It was held that the phrase “Chamber of Commerce” was generic and

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descriptive and the addition of the word “Africa” was enough to distinguish the two. Injunction
was denied.
In Niger Chemists Ltd v. Nigeria Chemists [1961] 1 All NLR 171:
“Niger Chemists Ltd” traded all over Nigeria since 1954. The name “Niger” came from the river
that flowed near the head office. It was popularly known as “Niger Chemists”. In 1957, a firm
registered “Nigeria Chemists” as a trading name.
Held: It is not necessary to prove that there was an intention to deceive or that any deception has
actually taken place though such evidence will be accepted. The name used by the defendants
was so similar to that of the plaintiffs as to cause confusion. The words “Niger” and “Nigeria”
were not descriptive of the business carried out. There is no absolute right in law to use the name
of a country or place by people who live there.
In Standard Signs (U) Limited v. Fred Leo Ogwang & Shandard Signs Ltd HCCS No. 0240
of 2006:
Held: The natural consequence of what the 2nd defendant did was to present its products as the
plaintiff’s. The whole intention would be for passing off the goods or products or services in
respect of which the plaintiff’s trademark was registered.
A permanent injunction issued to restrain the defendants, their assignees, transferees, successors
in title, servants and or agents or otherwise however, from trading in the name “Shandard Signs
(Uganda) Ltd” or any other name similar to that of the plaintiff.
In Ewing v. Buttercup Magarine Co. Ltd [1917] 2 Ch. 1:
The plaintiff who carried on business under the trade name of the Buttercup Dairy Company was
held entitled to restrain a newly registered company from carrying on business under the name of
the Buttercup Margarine Co. Ltd on the ground that the public might reasonably think that the
registered company was connected with his business.
In North Cheshire and Manchester Brewery Co. v. Manchester Brewery Company [1899] AC

83:

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The Manchester Brewery Co. had carried on business under the name for 8 years when the
defendant firm adopted the name North Cheshire and Manchester Brewery. There was no doubt
that the defendants carried on business in North Cheshire and Manchester. Held: Despite
carrying on business in North Cheshire and Manchester as the name suggested and despite the
considerable difference in names, the injunction was granted to avoid confusion.
However, in Dunlop Pneumatic Tyre Co. Ltd v. Dunlop Motor Co. Ltd [1907] AC 430 (HL)
Held: The companies were in different businesses with the first dealing in tyres and the second in
motor-repair therefore confusion was not likely to arise so an injunction will not be granted.
Similarly, in Aerators Ltd v. Tollit [1902] 2 Ch. 319:
Aerators Ltd were unable to prevent the registration of Automatic Aerators Patents Ltd because
the word “aerator” was a word in common use in the English Language and Aerators Ltd had no
monopoly of it.
See also the following:
1. Waring & Gillow Ltd v. Gillow & Gillow Ltd (1916) 32 TLR 389
2. Exxon Corp v. Exxon Insurance Consultants Int. Ltd [1982] Ch. 199
3. Automobile Association of Nigeria v. Registrar of Business Names 1968 (2) ALR Comm.
343 (High Court of Lagos State)
4. K.G. Khosla Comressors Ltd v. Khosla Extraktions Ltd (1986) 1 Com LJ 211
5. Methodist Church in India v. Union of India [1985] 57 Comp. Cas. 443 (Bom.
2. If it is a misleading name e.g. a company likely to have small resources suggests that it
is going to trade on a great scale over a wide field.
In London Overseas Trading Company Ltd vs The Raleigh Cycle Company Ltd [1959] 1 EA
1012:

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Appellant applied for registration of the word “Lale” in the register of Trade Marks. The
respondents opposed the application on the ground that the word “Lale” was phonetically
identical to the word “Raleigh”. Held: It was likely to deceive or cause confusion.
3. If it suggests some connection with the government.
4. If it is misleading as to the nature of the business.
In Societe Anonyme des Anciens Etablissements Panhard et Lavassor v. Panhard Levassor

Motor Co. Ltd [1901] 2 Ch. 513:
The claimant was a French company whose cars were sold in England. It wanted to set up an
English Co. to improve sales. The defendant registered a company of the same name to prevent
this. Held: The defendant company had to change names or be deregistered.
5. If it includes a surname which is not that of a proposed
director, unless circumstances justify the inclusion.
6. If it includes words which might be trademarks or might amount to passing off.
In Asprey & Garrard Ltd v. WRA (Guns) Ltd & Another [2001] EWCA Civ. 1449:
The plaintiff trading since 1781 was in the business of selling luxury goods like jewelry,
antiques, silverware, watches and leather goods. In 1990, the plaintiff acquired Garrard & Co and
the plaintiff’s name was changed to Asprey & Garrard Ltd. The Asprey family ran the business
till 1995, when it was sold off. The second defendant, William R. Asprey, a 7th generation
member of the Asprey family, was an employee of the plaintiff since 1990. He left in1999 and
incorporated WRA (Guns) Ltd and in September 2000 set up a shop near the plaintiff’s store
under the trade name “William R. Asprey Esquire” in competition with the plaintiff.
Held: In the context of passing off, the “own name” defence has never been held to apply to
names of new companies as otherwise a route to piracy would be obvious. For the same reason, a
trade name (in this case, “William R. Asprey Esquire”), other than its own name (“WRA (Guns)
Ltd”), newly adopted by a company could not avail the defence.

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1. Atlas Cycles (Haryana) Ltd v. Atlas Products Pvt Ltd 146 (2008) DLT 274 (DB)
2. Hotel Cipriani Srl & Ors v. Cipriani (Grosvenor Street) Ltd & Ors [2010] EWCA Civ.

110
3. Halifax plc & Ors v Halifax Repossessions Ltd & Ors [2004] 2 BCLC 455 (“Halifax
case”)
4. Wise Property Care Ltd vs White Thomson Preservation Ltd 2008 CSIH 44
5. Turton vs Turton (1889) 42 Ch. D 12
7. If the name is prohibited by statute.
See S. 38 on prohibition on trading under misleading name.
In Cotronic (UK) Ltd v. Dezonie [1991] BCLC 721
Held: Although it is an offence to use the words “limited” or “public limited company” where
the user is not entitled to do so, such misuse does not invalidate any contracts made in the course
of business.
8. If the name suggests connection with unlawful activity or is offensive.
See S. 37(1)
In R v. Registrar of Companies (unreported) QBD Dec. 17/ 1980:
Held: 2 women forming a company for their personal services were not allowed to use the
name “prostitutes Ltd”.
9. If a name includes the words ‘limited’ or ‘ltd’ other than at the end
See S. 39 on prohibition of improper use of “limited”.
In Durham Fancy Goods Ltd v. Michael Jackson (Fancy Goods) Ltd [1968] 2 QB 839

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Held: The word “limited” is included in a company’s name by way of description and not
identification. Accordingly a generally accepted abbreviation will serve the purpose as well
as the word in full. The rest of the name serves as a means of identification.
Change of name by a company does not affect rights or obligations of the company. See S.
40(5)
Oshkosh B’Gosh Inc. v. Dan Marbel Inc. Ltd [1989] BCLC 507
Held: A company may change its name by special resolution but it remains the same legal
person so that the change of name does not affect any rights or obligations of the company
or affect any legal proceedings which are or could be brought against it.
1. East African Electric Company Ltd v. The Registrar of Companies for The Colony

and Protectorate of Kenya (1952) 25 (1) KLR 2
2. Muhammed Zziwa Kizito & 30 Ors v. Spidiqa Umma Foundation HCT CV 12/2008
3. Fam International Ltd & Ahmed Farah v. Mohamed El-Faith [1994] III KALR 108
(SCCA)
4. Malhati Tea Syndicate v. Revenue Officer (1973) 43 Comp Cas 337
5. Pioneer Protective Glass Fibre (P) Ltd v. Fibre Glass Pilkington Ltd (1986) 60 Com

Cases 707(Cal)
6. Solvex Oils & Fertilizers vs Bhandari Cross-Fields (P) Ltd (1978) 48 Com Cases 260

(P &H)
On formation of a company see generally the following cases:
1. B.H Sakhani & Anor v. P.H Lakhani Civ. App. No.23/75 (EACA) Bannax Ltd. v.
Mullika (1989) KALR 138, HCCS 184/88
2. In the matter of an Application by A. Abanya Company Cause No.1/1997
3. In the matter of Naama Coffee Works Company Cause No.2/1991 S.C

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4. In the Matter of Allied Food Product Ltd. [1978] H.C.B 294
5. London Overseas Trading Co. Ltd v. The Raleigh Cycle Co. Ltd.[1959] E.A 101
6. Lutaaya v. Gandesha &Anor (1986) H.C.B 47
7. Mawogola Farmers & Growers Ltd. v. Kayanja & Others (1971) E.A 272
8. Nampeera Trading Co. Ltd v. Yusufu Semwanje & Anor [1974] HCB 184
9. R v. Registrar of Companies Exparte More [1931] 2. K.B 197
10. Re Kasiita Estates Ltd.(982) H.C.B 102, Companies Cause 3/82
11. Re Sekiumba Estate Ltd.(1978) H.C.B 285, Companies Cause 1/1978 Salomon v.
Salomon & Co. Ltd (1897) A.C 22
12. In the matter of Kavuma Motors Ltd. Companies Cause No. 6/1989
See also the following statutory provisions
1. Ss 4 – 48, 115 – 131; Second Schedule; Tables A,B,C,D,E, & F of Companies Act,
2012;
2. The Companies (Fees) Rules SI 110-3;
3. Order 38 Rules 3 & 4 Civil Procedure Rules SI 71-1.
2. PRESENTATION OF THE REQUIRED DOCUMENTS BEFORE THE

REGISTRAR FOR REGISTRATION.
Within 60 days after the reservation of the name, the promoters will then present the
following documents to the registrar to have their company registered.
 Memorandum of Association
 Articles of Association
 A statement of nominal capital
 A statutory declaration of compliance
 A statement with the names and particulars of directors and secretary

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 The prospectus.
The Memorandum of Association of the company: This is the most important of all the
company documents because it contains the powers of the company, it describes the
company and the nature of activities that the company is authorized to do or engage in.
The Articles of Association: This document regulates the internal activities of the members
and the directors.
It contains information on, management, who will be the directors of the company, who
will be the managing director, secretary, appointment of the board of directors,
qualifications of directors, the chairman of the board, meetings (how meetings of the
company should be called and conducted).
It contains information on the classes and rights of shareholders, transfer of shares ,

borrowing powers of the company, its properties, control of the company finance,
dividends/profits and how they should be distributed auditing of books, the company seal
and how it should be used etc.
A Statement of Nominal Capital: This is a statement which shows the capital with which the
company is starting with. I.e. the initial capital of the company.
Declaration of Compliance: This is a statement declaring that all the necessary requirements
of the Companies Act with regard to the formation of the company have been duly
complied with and that the directors agree to continue complying with them.
List of Names and Particulars of Directors and Company Secretary: This document contains
the details of the names, age, addresses, occupations of the directors and company
secretary of the company.
It should also contain an undertaking by the directors to take and pay for the qualification
shares if any that such persons may be required to acquire.
A Prospectus: If the company is a public company, it must in addition to the above

documents also issue a prospectus which must also be registered with the companies’
registry.

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It is a document setting forth the nature and objects of a company and inviting the public
to subscribe for shares in the company.
It sets out the number of the founders/management, the share qualification of directors,
names, description and addresses of directors, the shares offered to the public for
subscription, property acquired by the company, the auditors, etc.
The purpose of the prospectus is to provide the essential information about the position of a
company when it is launched so that those interested in investing in it can properly assess
the risk of investment.
3. PAYMENT OF STAMP DUTY AND REGISTRATION FEES.
The registrar will then assess how much duty is to be paid on registration of that company;
it is sassed basing on the capital that the company is starting with, the more the capital the
greater the stamp duty. Registration fees are also paid.
4. ISSUANCE OF A CERTIFICATE OF INCORPORATION.
After all these requirements, a certificate of registration is issued if the Registrar is

satisfied.

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CORPORATE PERSONALITY
 Corporate Personality
 Consequences of Incorporation
CORPORATE PERSONALITY
Corporate personality is the fact stated by the law that a company is recognized as a legal entity
distinct from its members.
A company with such personality is an independent legal existence separate from its
shareholders, directors, officers and creators.
This is famously known as the veil of incorporation.
As a result of corporate personality, a company has perpetual succession. It simply means the
company is everlasting and will continue to do business until it is properly wound up.
As a separate legal person, a company will not be affected by changes such as death, transfer of
shares or resignation of any members but will continue to exist despite the number of times the

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changes of membership occur. Even if all the members die, it will not influence the privileges,
immunities, estates and possessions of a company.
The principle of perpetual succession is clearly illustrated in the case of Re Noel Tedman
Holdings Pty Ltd (1967)
Hence it’s capable of enjoying rights and being subject to duties which are not the same as those
enjoyed or borne by its members.
In other words it has a legal personality and it is often described as an artificial person in contrast
with a human being-a natural person.
It has no limited liability, but under the corporate entity doctrine it will have separate legal
personality.
In practice, most companies are limited companies and so corporate personality and limited
liability tend to go hand in hand.
The principle was established in the landmark case of Salomon v A Salomon & Co Ltd (1897).
The facts of this case were that Salomon had incorporated his boot and shoe repair business,
transferring it to a company.
He took all the shares of the company except six, which were held by his wife, daughter and four
sons.
Part of the payment for the transfer of the business was made in the form of debentures (a
secured loan) issued by the company to Salomon.
Salomon transferred the debentures to Broderib in exchange for a loan. Salomon defaulted on
payment of interest on the loan and Broderib sought to enforce the security against the company.
Unsecured creditors tried to put the company into liquidation.
A dispute ensued as to whether Broderib or the unsecured creditors had priority in relation to
payment of the debts.
It was argued for the unsecured creditors that Salomon’s security was void as the company was a
sham and was, in reality, the agent of Salomon. This was upheld at the trial and court of appeal.

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The House of Lords held that this was not the case and the company had been properly
incorporated and that, therefore, the security was valid and could be enforced.
The case is the most important case in company law since it is from this case that many of the
principles of British company law flow.
However, it has not been universally followed and there are exceptions to the Salomon principle
where the corporate veil is lifted.
See the following provisions:
1. Ss 4, 50 – 53, 55-59, 161 of Companies Act, 2012
2. Order 29 rr.1 & 2 Civil Procedure Rules SI 71-1
Before turning to the exceptions, it is worth noting some applications of this basic principle.
CONSEQUENCES OF INCORPORATION
Upon incorporation, a company is deemed to be immortal and to exist beyond its founders.
The fundamental attribute of corporate personality from which all other consequences flow is
that “the corporation is a legal entity distinct from its members”.
Hence it’s capable of enjoying rights and being subject to duties which are not the same as those
enjoyed or borne by its members.
In other words it has a legal personality and it is often described as an artificial person in contrast
with a human being – a natural person.
It is from this fundamental attribute of separate personality that most of the particular advantages
of incorporation spring and these are:
1. Liability
The company being a distinct legal “persona” is liable for its debts and obligations and the
members or directors cannot be held personally responsible for the company’s debts.

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It follows that the company’s creditors can only sue the company and not the shareholders.
In Sentamu v UCB (1983) HCB 59, it was held that individual members of the company are not
liable for the company’s debts.
The facts of the case are that the plaintiff obtained a loan of 250,000 as the MD Bunyoro
Stationers and Printers Limited. The loan was for the company and he negotiated with the Bank
in his capacity as the MD. In July and August the Bank wrote three threatening letters to the
plaintiff to the effect that the plaintiff would be arrested by military personnel unless the loan
was paid. The 2nd defendant knew that the company was a limited liability company. The
plaintiff was arrested and locked up on the orders of the servants of the 1 st defendant. He was
released after the debt was paid up by a friend. He sued the defendant. The issue was whether the
defendant was liable to pay the company debt as an individual.
It was held that a LLC is a separate entity from its directors, shareholders and members and its
individual members are not liable for the debts of the company. Even as the MD, the plaintiff
could not be personally liable for the company’s debts and that the 2 nd defendant’s action in
holding the plaintiff so liable was unjustifiable and unlawful.
2. Property
An incorporated company is able to own property separately from its members.
Thus, the members cannot claim an interest or interfere with the company property for their
personal gain/benefit.
Thus, one of the advantages of incorporation (corporate personality) is that it enables the
property of the company to be clearly, distinguished from that of the members.
In Macaura v. Northern Assurance Co. Ltd & Others [1925] A.C 619:
Lord Buckmaster of the House in Lords held that no shareholder has a right to any item of the
property of the company, even if he holds all the shares in the company.
In Hindu Dispensary Zanzibar v. N.A Patwa & Sons:

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A flat was let out to a company and the question was whether the company could be regarded as
a tenant. It was held that a company can have possession of business premises by its servants or
agents and that in fact that is the only way a company can have possession of its premises.
3. Legal Proceedings
As a legal person, a company can take action to enforce its legal rights or be sued for breach of
its duties in the courts of law.
If it is the company being sued, then it should be sued in its registered name. If a wrong or
incorrect name is used, the case will be dismissed from court.
In Dennis Njemanze v. Shell B.P Port Harcourt (1966) All NLR 8
The plaintiff sued a company called Shell B.P Port Harcourt which was a non-existing company.
Counsel for the defendant company objected that there was no such company and the suit should
be dismissed. Counsel for the plaintiff sought courts leave to amend and put the right party but
court refused to grant the leave and dismissed the case.
In Wani v. Uganda Timber & Joiners Ltd. HCCS No. 989 of 1972
The plaintiff applied for a warrant of arrest against a managing director of a company instead of
suing the company, Chief Justice Kiwanuka held that a managing director of a company is not
the company and cannot be sued personally. That if there is a case against the company then the
company is the right party to be sued not its managing director.
4. Perpetual Succession
This means that even if a shareholder dies, or all the shareholders die or go bankrupt, in the eyes
of the law, the company will remain in existence.
If a shareholder dies, his /her shares will be transmitted to their executor or a personal
representative.
Also in case a shareholder no longer wants to be a shareholder in a company, he will simply

transfer his shares to someone else and the company will continue to exist.

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The only way a company can come to an end is by winding up, striking it off the register of
companies or through amalgamation and reconstruction as provided by the Companies Act.
This was illustrated in the case In Re Noel Tedman Holdings Pty Ltd (1967) QdR 561:
Noel Tedman and his wife were the only shareholders and officers of two companies. They were
killed as a result of a road traffic accident. An infant child survived the deceased. Their death did
not cause the dissolution of the companies’ legal existence. The personal representatives of the
deceased shareholders sought the Court to make an order to enable them to appoint the new
directors of the companies so as to realize the property for the benefit of the deceased estates.
The court held that the personal representative of the deceased shareholders could appoint the
directors so that these new directors could assent to the transfer of the shares to the beneficiary.
This perpetual succession gives the certainty required in the commercial world even when
ownership of shares changes there is no effect on the performance of the company and no
disruption in the company business.
5. Transfer of Shares
A share constitutes an item of property, which is freely transferable, except in the case of private
companies.
When shares are transferred, the person who transfers ceases to be a shareholder and the person
to whom they are transferred becomes the shareholder.
In private companies, there is a restriction on the transfer of shares for example one may not
transfer his shares except to an existing member or shareholder, and not to an outsider.
This is essential and is in any event desirable if such a company is to retain its character of an
incorporated private company.
6. Borrowing
A company can borrow money and provide security in the form of a floating charge.

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A floating charge is a security created over the assets of the company.
When a company borrows money let’s say from the bank or any other creditor, it may use its
assets e.g. cars, bank accounts and other assets as security, the security/ charge will then float
over those assets.
In case the company defaults on payment, the charge can settle on one or all of those assets and
the bank/creditor of the company can sell those assets to recover their money.
It is called a floating charge because it floats like a cloud over the whole assets of the company
from time to time, it only settles/crystallizes if the company defaults on payment.
So before the charge settles on the assets, the company is free to deal with those assets even to
dispose them off in the usual course of business.
7. Capacity to Contract
On incorporation, a company can enter into any contract with third parties.
See S. 50 (1) of Companies Act.
In Lee v. Lee & Air Farming Co. Ltd (1961) A.C 12:
The applicant husband was the founder of the respondent company and was also the controlling
shareholder and governing director. He was also employed as the company’s chief pilot and was
paid wages for that purpose. In the course of his employment he was killed and the applicant, the
widow sought compensation under the Workman’s Compensation Act. For this to succeed, she
had to prove that her husband was a worker within the meaning of the Act.
Court of Appeal of New Zealand held that the husband could not have been an employee of the
company in the light of the special circumstances in this particular case. The court argued that if
there was a contract of employment between Lee and the company, Lee had the duty of giving
orders and obeying them at the same time. That there could be no power of control and the
relationship of mater-servant could not be deemed to exist.
The Privy Council disagreed with the Court of Appeal and observed that the mere fact that one is
a director of the company cannot be an impediment to one’s capacity to enter into a contract to
serve the company.

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It was therefore held that the deceased and the company were separate and distinct legal entities
and there was no reason to deny the existence of the contractual relationship.
In Re Air Safaris (1969) EA 595:
It was held that a company can enter into a valid and effective contract with one of its members
even if such a member is a principle shareholder or even the MD as long as it is within the
objects of the company.
COMPANY CONSTITUTIONAL DOCUMENTS
 Memorandum of Association
 Articles of Association
MEMORANDUM OF ASSOCIATION
The Memo which is required to be registered for purposes of incorporation, is regarded as the
company’s most important document in the sense that it determines the powers of the company.
In Guinness v. Land Corporation of Ireland (1882) 22 Ch. D 349, it was established that the
Memorandum contains the fundamental conditions upon which alone the company is allowed to
be incorporated.

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They are conditions introduced for the benefit of the creditors and the outside public as well as
the shareholders.
Consequently, a company may only engage in activities and exercise powers, which have been
conferred upon it expressly by the memorandum or by implication therefrom.
Contents of the Memorandum
Under S. 7 CA: The Memorandum of Association of a company limited by shares must state the
following:-
1. The name of the company with “Limited” as the last word.
2. The registered office of the company is situated in Uganda.
3. The objects of the company.
4. A statement as to the liability of the members.
5. A statement to the nature of the company (whether private or public).
6. The amount of share capital and division thereof into shares of a fixed amount. In
addition, the memorandum must state the names, address and descriptions of the
subscribers thereof.
The name: The name of the company should be indicated and if it is a limited company, it
should have the word “limited” at the end e.g. Stanbic Bank Uganda Ltd.
Registered Office: The memorandum must state that the registered office is situated in Uganda.
However, the actual address must be communicated to the Registrar within 14 days of the date of
incorporation or from the date it commences business.
This is done by registration of a company form called Notice of Situation of Registered Office of
the Company, this form will indicate the exact location of the company e.g. No. 8 industrial Ave.
Kampala.
The Objects Clause: This sets out the principal activities the company has been incorporated to
pursue.

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For example; trading in general merchandise, carrying on business of wholesalers and retail
traders of all airtime cards, mobile phones and all phone accessories, carrying on the business of
mobile money agents etc.
The objects must be lawful and should include all the activities which the company is likely to
pursue.
The objects or powers of the company as laid down in the memorandum or implied therefrom
determine what the company can do.
Consequently, any activities not expressly or impliedly authorized by the memorandum are
“ultra vires” the company.
The ultra vires doctrine restricts an incorporated company under the Companies Act to pursue
only the objects outlined in its registered Memorandum of Association.
The doctrine of ultra vires is illustrated in Ashbury Railway Carriage Co. Ltd v. Rich (1875).
A company which was not authorized by its memorandum of association to lend money or
finance any activity made an agreement with the defendant to provide him with finance for the
construction of a railway in Belgium.
Later on the company repudiated this agreement and did not actually provide the finances, the
defendant sued the company for breach of contract.
The company in its defense argued that financing railway construction was not one of the
activities it was authorized to do
It was held that indeed such an act was beyond the powers of the company and such an ultra
vires contract was void and unenforceable.
To evade this restrictive interpretation of the objects clause, draftsmen inserted words as “and to
do all such other acts and things as the company deems incidental or conducive to the attainment
of these objects or any of them”.
In Bell Houses Ltd v. City Wall Properties Ltd (1966) 2 QB 656:

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A company was formed to carry on the business of General Civil Engineering contracts and in
particular to build houses. It had power to carry on any other trade and to do any other things that
are incidental to the above company’s objects.
The Court held that the company could lawfully contract for a fee to procure loans to other
concerns, from any business whatsoever which it can in the opinion of the board of directors be
advantageously carried out as sources of finance which it had resorted to in the past. It further
held that cementing good relations with the financiers would be valuable when the company
needed finances for its activities.
The Memorandum of Association spells out the main objectives and powers of the company.
However, certain powers may be implied in the Memorandum of Association.
For example, in Ferguson v. Wilson (1866) LR 2 Ch. A 77,
A power to appoint agents and engage employees was implied in the Memorandum of
Association. This is only sensible because a company as a fictitious person can only work
through agents and employees; and therefore if such a power was not implied, then the company
could not function at all.
Similarly in General Auction Estates & Monetary Co. v. Smith (1891) 3 Ch 432, the court
implied powers of borrowing money and giving security for loans.
Subsequent cases have also adopted this position. In Newstead (Inspection of Taxes) v. Frost
(1978)1 WLR 441, the court implied powers of entering into partnership or joint venture
agreements for carrying on the kind of business it may itself carry on i.e. intra vires.
In Hampson v. Price’s Patent Candle Co (1876) 45 LJ Ch 437 the court implied a power of
paying gratuities to employees.
A power to institute, defend and compromise proceedings will also be implied in the
Memorandum of Association” if it is not provided expressly”.
Courts at times imply powers because the particular nature of the company’s undertaking
demands it.
In Evans v. Brunner, Mond & Co Ltd [1921] 1 Ch 359:

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The court observed that a company formed to manufacture chemicals had powers to make grants
to Universities and other scientific institutions to facilitate scientific research and training
scientists although it may not obtain any immediate financial benefit from the venture.
Therefore before the court implies powers it seems:
1. There must be some reasonable connection between the company’s objects and the power
it seeks to exercise. It is not sufficient for it to merely show that it will benefit in some
way by exercising that power.
2. It is important to show that the company will in fact benefit in some way even though
remote in the exercise of the power (see Evans, (above).
However, though the Court may imply these powers in the Memorandum of Association, its
better in practice to expressly state them. This is only sensible because:-
1. The company often needs powers which the courts have not ruled that they can be
implied and therefore the company can only obtain them by express provisions in the
Memorandum of Association, (e.g. the power to buy a share from another company
though recognized under the Act has not yet been implied).
2. To avoid uncertainties or expenses of litigation, it is safer to insert them expressly in the

memorandum of association.
The Liability of Members: The memorandum of a company limited by shares or by guarantee

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

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Share Capital (Clause): The memorandum requires that a company having a share capital must
state the amount of share capital with which the company is to be registered and that such capital
is divisible into shares of a fixed amount.
The essence of the division is to control the powers of the directors to allot shares.
The law does not prescribe the value but they are usually small amounts to encourage people to
hold as many shares as possible.
The amount of capital with which a company is to be registered and the amount into which it is
to be divided are matters to be decided upon by the promoters and will be determined by the
needs of the company and finance available.
For example if a company has its initial share capital/ startup capital of 5,000,000 it can divide
this into 100 shares of 50,000 each. So if a member subscribes for 50 shares, he will contribute
2,500,000/=.
Alteration of the Memorandum of Association
Alteration of Memorandum of Association can take place in the following ways:
1. Alteration of the Objects Clause under S. 10.
There are a number of requirements which must be satisfied before a company can alter its
objects clause.
There must be a special resolution.
A special resolution is that resolution which requires 3/4 of the majority of all members to vote
and the notice of the meeting in which it was passed was not less than 28 days prior to the
meeting. Otherwise, non-compliance renders the resolution ordinary.
Such alteration is limited to the objects of the company, (S. 10 (1)).
Alteration can be carried out to enable the company to: -
a) carry on the company’s business more economically or more efficiently;
b) attain its main purpose by new or improved means;

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c) enlarge or change the local area of its operations;
d) carry on some business which under existing circumstances may conveniently or

advantageously be combined with the business of the company;
e) restrict or abandon any of the objects specified in the memorandum;
f) sell or dispose of the whole or any part of the undertaking of the company; or
g) amalgamate with any other company or body of persons.
Some of the interpretations of S. 10 are as follows:
1. To carry its business more economically and more efficiently.
In Re Dalmia Cement (Bharat) Ltd. (1964) 34 Comp. Cas. 729:
The court observed that whether a company can carry on its business more economically or more
efficiently is a matter for the judgment of the directors. If the directors consider that under the
existing circumstances, it will be convenient and advantageous to combine the new objects and
existing objects, and if it appears that such a conclusion may be fairly arrived at, the court would
not go behind it and hold an inquiry as to whether the opinion of the directors is well-founded or
is justified.
A fundamental change in the object may be permitted, if it makes possible the carrying on of the
business more economically or efficiently.
In Re Scientific Poultry Breeders Association (1933) 3 Comp. Cas. 89:
A company’s memo prohibited payment of remuneration to the members of its governing body.
It wanted for efficient management, amendment in the memorandum to enable it to pay
remuneration to its governing body members which was allowed.
However, new powers completely incompatible with the original powers would not be permitted.
In Re Cylist Touring Club (1907) 1 Ch. 269;
The object was to promote and assist the use of the bicycles and other similar vehicles on the
roads and to protect the members against motorists. The company purported to alter the object to
allow motorists to join it. The court refused to allow the alteration because the change would

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have fundamentally altered the character of the club activities and the protection of the members
against motorists was one of its original objects, hence the new activities would have been
inconsistent with the original purpose of the club.
2. To attain its main purpose by new or improved means.
For companies registered under the Companies Act there is no difficulty in ascertaining the main
purpose because the Memo would state it. But for the companies registered earlier, one has to
look not only to the Memo but also to what has actually been done.
3. To Enlarge or change local area of its operation.
The court may make the changing of the company’s name a condition before permitting the
alteration of the objects, so that the new name is more indicative of the changed object.
In Re Indian Mechanical Gold Extracting Co. (1891) 3 Ch. 538:
The company’s business was confined to the ‘Empire of India’. It wanted to enlarge its
operations by dropping these words. It was allowed to do so on the condition that the word
‘Indian’ was also dropped from its name.
4. To carry on some business which under existing circumstances may conveniently or

advantageously be combined with the business of the company
Most of the amendments sought in object clause are based on this ground.
This clause enables a company to diversify.
The working of the clause makes its scope very wide in as much as any activity which may either
conveniently or advantageously be combined with the existing business may be allowed.
Thus a company formed for generating power was allowed to carry on ‘cold storage and other
allied businesses.
See Re Ambala Electric Supply Co. Ltd. (1963) 33 Comp. Cas. 585.
In Re Parent Tyre Co. Ltd. (1922) 2 Ch. 222,
A tyre company was allowed to take power to undertake financial operations.

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Similarly, a company formed for business in Jute was allowed to add business in rubber.
See Juggilal Kamlapat Jute Mills v. Registrar of Companies (1966) 1 Comp. L.J 292.
However, in Punjab Distilling Industries Ltd. v. Registrar of Companies (1963) 83 Comp. Cas.
811:
The plaintiff was engaged in carrying on Distillery business and other allied objects was not
allowed alteration of its objects so as to include a cinema business. The Punjab HC held that it
was not business which could conveniently be combined with the existing business.
See also Re Cylist Touring Club (1907) 1 Ch. 269
5. To restrict or abandon any of the objects specified in the memorandum
In Re Hamstead Garden Suburb Trust Ltd. (1963) 33 Comp. Cas. 166:
One of the objects of the company was that the surplus in the event of winding up was to be
given or transferred to some institution or institutions having objects similar to the objects of the
company, and in default, to some charitable object. It was sought to be amended so as to give or
transfer the said balance to H Ltd. The company’s contention was that the alteration by a special
resolution was within its powers as the alteration was to ‘restrict or abandon any of the objects of
the company’.
It was held that what was sought to be done by alteration was, first, to exclude all together any
institution or institutions having objects similar to the objects of this company, and secondly, to
make the balance go to a specified charity i.e. one of the class of beneficiaries. This virtually
amounted to destruction of the objects and could in no way be regarded as restricting or
abandoning any of the objects.
6. To sell or dispose of the whole or any part of the undertaking of the company
Where a company wishes to adopt a cut-back or retrenchment strategy i.e. where it feels that it
has either grown too big or diversified in various directions that managing becomes difficult or
uneconomical, it may alter its object to sell or dispose of any of its undertakings.
7. To amalgamate with any other company or body of persons
See the following cases:

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1. Hari Krishna Lohia v. Hoolungoree Tea Co. Ltd. (1970) 40 Comp. Cas. 458
2. Nagaisuree Tea Co. Ltd v. Ram Chandra Karnani (1966) 2 Comp. L.J. 208
Under S.10 (2) (a) and (b) the locus standi of those who can challenge the company is laid
down.
1. If they are shareholders, they must constitute not less than 15% in nominal value of the
company’s issued share capital or any class of them. If the company is not limited by
shares, not less than fifteen percent of the company’s members.
2. Creditors owning not less than 15% of the company's debentures can also challenge the
alteration of the objects clause.
They must do so within 21 days of the resolution.
Alteration in Respect of the Company Share Capital
The Memorandum can be altered where the share capital of the company is being altered.
This is subject to the following:-
1. Applicable to companies limited by shares or by guarantee or
2. According S. 71, such alterations of the share capital must have been authorised by the
Articles of Association by:-
a) increasing its share capital by new shares of such amount as it thinks expedient;
b) consolidating and dividing all or any of its share capital into shares of larger amount than
its existing shares;
c) converting all or any of its paid up shares into stock and reconverting that stock into paid
up shares of any denominations;
d) subdividing its shares or any of them, into shares of smaller amount than is fixed by the
memorandum;

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e) Canceling shares which, at the date of the passing of the relevant resolution have not been
taken or agreed to be taken by any person and diminishing the amount of its share capital
by the amount of the shares cancelled.
This shall be done by the company in a general meeting.
ARTICLES OF ASSOCIATION
The Articles of Association contains regulations for managing the internal affairs of the company
i.e. the business of the company.
They are applied and interpreted subject to the Memorandum of Association in that they cannot
confer wider powers on the company than those stipulated in the memorandum.
Thus, where there is a conflict or divergence between the memorandum and articles, the
provisions of the memorandum must prevail.
Contents of the Articles
1. The board of directors (management) and how they will be appointed, their
qualifications, how they can resign or be removed from office.
2. The Chairman of the Board.
3. The Managing Director and how he will be appointed.
4. Secretary and his appointment.
5. Meetings (how meetings of the company should be called and conducted and the required
quorum) and the different types of meeting that the company may hold from time to time,
voting rights of the members, the right to receive notice and to attend and vote etc.
6. Powers of Directors
7. The different classes of shares and the rights attached to different classes of shares.
8. Borrowing powers of the company.
9. Company’s properties, control of the company finance, its bankers, dividends/profits and
how they should be distributed

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10. Appointment of Auditors
11. The Company seal and how it should be used etc.
The Articles must be printed in the English language, divided into paragraphs, numbered
consecutively, signed by each subscriber to the memorandum in the presence of at least one
witness who must attest the signature.
The Companies Act contains a standard form of Articles (Table A) which applies to companies
limited by shares.
These regulate the company unless it has its own special articles which totally or partially
exclude Table A.
The advantages of statutory model articles are:
1. That legal drafting of special articles is reduced to a minimum since even special articles
usually incorporate much of the text of the model.
2. There is flexibility since any company can adopt the model selectively or with
modifications and include in its articles special articles adapted to its needs.
INTERPRETATION OF ARTICLES AND MEMORANDUM OF ASSOCIATION
The Memorandum of Association is the basic law or constitution of the company and the articles
are subordinate to the Memorandum of Association.
It follows therefore that if there is a conflict, the Memorandum of Association prevails.
In other words if there is a contradiction between the provisions of the memorandum and the
provisions of the articles of association, then the provisions of the memorandum will be followed
and those provisions in the articles which are contradicting the memorandum will be void and of
no effect.
In Guinness v. Land Corporation of Ireland (1882) 22 Ch.D. 349,
It was held that if there is any conflict between the terms of the memorandum and the articles,
those of the memorandum shall prevail.

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If there is no conflict, the Memorandum of Association and articles must be read together and
any ambiguity or uncertainty in either can be removed by the other
Effect of Memorandum and Articles of Association
Under S. 21(1), the memorandum and articles shall, when registered, bind the company and the
members of the company to the same extent as if they had been signed and sealed by each
member and contained covenants on the part of each member to observe all the provisions of the
memorandum and articles.
This means that:
1. The company is bound to the members;
2. The members are bound to the company; and
3. The members are bound to the other members by whatever is contained in these
documents.
Company Bound to Members
The company is bound not only to the ‘members as a body’ but also to the individual members as
to their individual rights.
The members can restrain a company from spending money on ultra vires transactions.
An individual member can make the company fulfil its obligations to him, such as to send the
notice for the meetings, to allow him to cast his vote in the meetings.
In Wood v. Odessa Waterworks Co. (1889) 42 Ch. D. 636
The director proposed to pay dividend in kind by issuing debentures. The Articles provided for
payment of dividend. The court held that payments means payment in cash and therefore the
company could be compelled to pay dividend in terms of the Articles.

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Members Bound to Company
Each member must observe the provisions of the Articles and Memorandum.
For instance, a company has a right of lien on member’ share or to forfeit the shares on non-
payment of calls.
In Borland Trustees v. Steel Bros Co. Ltd. (1901) 1 Ch. 279:
The Articles of a company contained a clause that on the bankruptcy of a member, his shares
should be sold to other person and at a price fixed by the Directors. ‘B’, a shareholder was
adjudicated bankrupt. His trustee in bankruptcy claimed that he was not bound by these
provisions and should be at liberty to sell the shares at the true value.
It was held that the trustee was bound by the Articles, as shares were purchased by ‘B’ in terms
of the Articles.
Each member is not only bound by the covenant of memo and articles as originally framed but as
altered from time to time in accordance with the provisions of the Companies Act.
Shareholders cannot among themselves enter into an agreement which is contrary to or

inconsistent with the Articles.
Member Bound to Member
The Articles bound the members inter se i.e. one to another so far as rights and duties arising
from the Articles are concerned.
It is well settled that the Articles of Association will have a contractual force between the
company and its members as also between the members inter se in relation to the rights as such
members.
In Rayland v. Hand (1960) Ch. 1:
The Articles of a company provided that whenever any member wished to transfer his shares, he
was under an obligation to inform the directors of his intention and the directors were under an

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obligation to take the said shares equally between them at a fair value. The directors refused to
take the shares of a particular member on the ground that the Articles did not impose an
enforceable liability upon them.
It was held that the directors were under an obligation to purchase the shares, as members of the
company, in terms of the provisions of the company. There was a personal liability of members
inter se.
See the following:
1. A. O. Obikoya v. Ezenwa & Ors (1964) 2 All NLR 133
2. Hickman v. Kent or Romney March Sheep Breeders Association (1915) 1 Ch. 881
Effects of Articles Incorporated into or Underlying Contracts
It is possible for a contract to be entered into between a company and person who is not a
shareholder.
The terms regulating such a contract can be based on the company’s Articles.
The effect of this would be to incorporate the terms of the articles expressly or by implications
into the contract.
In New British Iron Co. Exparte Beckwith (1898) 1 Ch. 324:
The claimant had served the company as director without any express agreement for
remuneration. However, para. 62 of the company’s articles provided that the remuneration of the
Board of Directors should be an annual sum of GBP 1000. They claimed arrears of fees during
the winding up of the company. It was held that they could succeed because the service contract
incorporated para. 62 or parts of its terms.
However see Eley v. Positive Government Security Life Assurance Co. (1876) 1 Ex. D. 88
1. Survey v. Port Darwin Gold Mining Co. (1889) 1. Meg. 385
2. Bailey v. British Equitable Assurance Co. (1904) 1 Ch. 374

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3. Southern Foundries Ltd. v. Shirlaw (1940) 2 All ER 445
Alteration of Articles of Association
A company may by special resolution alter or add to its articles.
An alteration so effected would be valid unless:
i. It is illegal;
ii. It conflicts with provisions in the Companies Act;
iii. It extends or modifies the Memo;
iv. It deprives members of rights conferred on them by the Act which deals with class rights
or by the court;
v. Requires a shareholder to take or subscribe, for more shares or increases his liability to
contribute to the company;
vi. It amounts to a fraud on the minority.
CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES
S. 264(1) (a) allows any person to inspect any documents kept by the Registrar on payment of
the prescribed fee.
Therefore any person who contemplates entering into a contract with the company has the means
of ascertaining and is thus presumed to know the powers of the company and the extent to which
they have been delegated to the directors.
In other words, every person dealing with the company is presumed to have read these
documents and understood them in their true meaning.
This is known as the Doctrine of Constructive Notice.
Even if the party dealing with the company does not have actual notice of the contents, it is
presumed he has constructive notice of them.

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For example, one of the articles of a company provides that a bill of exchange to be effective
must be signed by two directors. A bill of exchange is signed only by one of the directors. The
payee cannot claim under the bill.
DOCTRINE OF INDOOR MANAGEMENT
The doctrine of constructive notice throws a burden on people entering into contract with the
company that they are presumed to have read the documents, though in fact they might have not
read them.
On the other hand the doctrine of indoor management allows all those who deal with the
company to assume that the provisions of the Articles have been observed by the officers of the
company.
In other words, they are not bound to inquire into the regularity of internal proceedings.
An outsider is not expected to see that the company carries out its internal regulations.
In The Royal British Bank v. Torqued (1856) 6 E & B 327
The directors of a company were authorized by the Articles to borrow on bond such sums of
money as should from time to time, by a resolution of the company in general meeting, be
authorized to be borrowed. The directors gave a bond to ‘T’ without the authority of any such
resolution. The question arose whether the company was liable on the bond.
It was held that the company was liable on the bond, as ‘T’ was entitled to assume that the
resolution of the company in general meeting had been passed.

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PROMOTION AND PRE-INCORPORATION CONTRACT
 Introduction
 Promoters
 Pre-incorporation Contracts
INTRODUCTION
Before a company can be legally established, some person(s) must carry out the preliminary
work.
This would include all the arrangements incidental to setting up any business, such as agreeing
contracts, arranging for capital and credit facilities, planning in respect of premises, machinery
and equipment, staff, etc.
At this stage, the person concerned are acting as individuals but they must also be planning to set
up a body with a constitution.
They would attend to such matters as the drafting of the memo and articles; nominating directors,
auditors, solicitors, bankers and the secretary; preparing a prospectus if a public issue was
planned; and the registration of the company.
PROMOTERS
The above functions would be carried out by persons generally referred to as ‘promoters’.
The promoter may be the vendor of the business which it is intended the company will purchase
or it may be another person or persons. Frequently the promoter is a company.

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No precise definition of ‘promoter’ exists and it is a question of fact in any particular instance as
to whether or not a person is a promoter.
In Twycross v. Grant (1877) 2 CPD 469, a promoter has been described as ‘one who undertakes
to form a company with reference to a given project and to set it going, and who takes the
necessary steps to accomplish that purpose’.
In Whaley Bridge Calico Printing Co. v. Green (1880) 5 QBD 109, a further description was:
‘the term “promoter” is a term not of law but of business, usefully summing up in a single word a
number of business operations familiar to the commercial world by which a company is brought
into existence’.
However, the term promoter does not include those who act merely in professional capacity
acting on the instructions of a promoter for example a solicitor or an accountant.
Duties of Promoters
1. Duty of Disclosure
A promoter is not an agent for the company which he is forming, because a company cannot
have an agent before it comes into existence.
Furthermore, he is not a trustee for the company because there is no company yet in existence.
A promoter stands in a fiduciary relation to the company it promotes and to those persons whom
he induces to become shareholders in it.
He must therefore act in good faith and ensure that there is no conflict of interest.

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This is a position akin to quasi-trusteeship and the most important implication is that the
promoter cannot make a profit from establishing the company, without full disclosure of that
profit to either an independent board of directors or to subscribers of shares in the company.
The latter method is the most usual practice and many of the regulations concerning prospectuses
are designed to ensure full disclosure of the interest of promoters.
If disclosure is made to the BOD, the BOD must be independent – This means that a director
must not have also been a promoter of the company.
In Erlanger v. New Sombrero Phosphate Co (1878)
A syndicate took steps to form a company. They bought an island and sold it to the company.
Disclosure was made to directors. There were five directors. Two were overseas and another two
were part of the syndicate. The fifth director, who was the Mayor of London, was too busy to
give attention to the company’s affairs.
 It was held that disclosure was not made to an independent board of directors but
to the two directors who were also the promoters. Therefore, the promoters are in
breach of their fiduciary duties.
Disclosure must be full and not partial. In Gluckstein v. Barnes (1900) AC 240
The Defendants bought debentures cheaply in a Company at a time when the Company was
faring very badly. Later they bought over the Company for 140,000 pounds. The debentures
were redeemed at full value and they made a good profit. Here they made a profit of 20,000
pounds. Later still, they formed another company and sold the Company to a new Company at a
profit of 40,000 pounds. This profit was disclosed in the prospectus but not the amount of profit

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they made on the redemption of the debentures (20,000 pounds). The Court held that they were
in breach of their duties as promoters and the Company was entitled to recover the profit from
them.
The Company can recover the secret profit even though they chose not to rescind the contract.
The liability of the promoters is "joint or several".
A Promoter who is found liable may recover contributions from the other promoters
See also Re Leeds and Hanley Theatre of Varieties Ltd (1902) 2 Ch 809.
Other duties include:
2. Duty not to make a secret profit at the expense of the company.
3. Duty to make a true and honest account to the company for his dealings on behalf of the
company that is being set up.
4. Duty not to defraud the company by active concealment of any affairs relating to the
company.
5. Duty not to disclose confidential information to third parties.
6. Duty not to hide any personal interests.
Remedies for Breach of Duty by a Promoter
There are three remedies available where a promoter has breached his fiduciary duty:
1. Rescission of the contract: the contract between the company and the promoter is
cancelled and any money will be repaid and property returned.

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2. Damages for breach of fiduciary duty: the company can claim damages for any loss
suffered.
This is especially in cases where the property was bought at a high value resulting in loss to the
company.
In Re Leeds & Hanley Theatre of Varieties Ltd (1902),
The promoter sold a property to the company, which he formed at an overvaluation. The court
held that it was a breach of duty by the promoter. Therefore, he is liable to pay damages to the
company. The damages are based upon the loss suffered by the company.
3. Recovery of the secret profit: even if the promoter did not make secret profit, he could
be made liable if there was no full disclosure
Since the duty is owed to the company, action can only be brought after the company is formed
and only by the company.
If a promoter who is in breach of his duty is in control of the company’s management and the
voting power at the general meeting and he uses that influence and control to prevent the
company from bringing an action against him, a minority shareholder may bring an action under
one of the exceptions to Foss v Harbottle (1843).
PRE-INCORPORATION CONTRACTS
A pre-corporation contract is one which is entered into when the company is in the process of
being incorporated but is not yet completed.
The pre-incorporation contract will be entered into by the person acting on behalf of the
company yet to be formed. This person would be the promoter.

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Position at Common Law
At common law such contracts were held to be void, as the company is not yet in existence.
However, the person who purports to contract on behalf of the unborn company may be held
personally liable and may be able to sue on the contract depending on the nature of the contract.
In Kelner v Baxter (1866) LR 2 CP 174:
The promoters of a hotel company entered into a contract on its behalf for the purchase of wine.
When the company formally came into existence it ratified the contract. The wine was consumed
but before payment was made the company went into liquidation. The promoters, as agents, were
sued on the contract. They argued that liability under the contract had passed, by ratification, to
the company.
It was held, however, that as the company did not exist at the time of the agreement it would be
wholly inoperative. It was binding on the promoters personally and a stranger cannot by
subsequent ratification relieve them from that responsibility.
Further such pre-incorporation contract cannot be ratified after its incorporation by its agent
since there is no principal in existence.
1. Natal Land & Colonisation Co v Pauline Colliery Syndicate (1904).
2. Newborne v Sensolid Ltd (1955)
3. Kepong Prospecting Ltd & Ors v Schmidt (1968)
In Newborne v. Sensolid (Great Britain) Ltd,

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Court of Appeal interpreted the finding of Kelner v Baxter in a different way and developed the
principle further. In this case an unformed company entered into a contract, the other contracting
party refused to perform his duty. Lord Goddard observed that before the incorporation the
company cannot be in existence, and if it is not in existence, then the contract which the
unformed company signed would also be not in existence. So company cannot bring an action
for pre-incorporation contract, and also the promoter cannot bring the suit because they were not
the party to contract.
This case created some amount of confusion that, if the contract was sign by the agent or
promoter, then he will be liable personally and he has the right to sue or to be sued.
But if a person representing him as director of unformed company enters into the contract then
the contract would be unenforceable.
This distinction was found objectionable by Windeyer J. in Black v. Smallwood and this was
also criticized by Professor Treitel in the Law of Contract.
Later in Phonogram Limited v. Lane, Lord Denning settled the position, he found that if an
unformed company enters into the contract, then it cannot bind the company, but the legal effect
of contract does not entirely lack. And even in that situation the promoter or representor are
personally liable for the pre-incorporation contract.
In Phonogram Limited v Lane,
A person was attempting to form a company which was going to run a pop artists group and that
person arranged financial assistance from a recording company. But this company never came in
existence, and the amount was due. The recording company brought an action against the person
who represented the unformed company. Lord Denning analyzed Kelner v Baxter, Newborne v

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Sensolid, and Black v Smallwood and the section 9(2) of the European Communities Act, 1972,
and found that the promoters are personally liable for the pre-incorporation contract.
If the company wants to take benefit of the contract, it must enter into a new contract on the
same terms as the pre-incorporation contract.
This process is known as novation.
Novation of contract is defined in Scarf v. Jardine as:
‘Being a contract in existence, some new contract is substituted for it either between the same
parties (for that might be) or different parties, the consideration mutually being the discharge of
the old contract'.
Novation is different from the Ratification; because in Novation, a new contract is made on the
same terms but this time between the company and the third party, whereas in Ratification, dates
back to the time of the act ratified, so that if the company ratifying, who is not in existence,
cannot itself have then performed the act in question, its subsequent ratification of it is
ineffective.
In the situation of Novation of Contract, the Company can replace the promoter from the pre-
incorporation contract. But one might say that such contract would not be called pre-
incorporation contract, but it should be called post-incorporation contract; because novation of
contract result into a new contract.
In Howard v Patent Ivory Manufacturing, the English Court accepted the novation of contract.
The first problem with common law’s position is unnecessary costs. This is because to deal with
the risk of a potentially unenforceable contract, both parties will have to take costly precautions.

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Second, the promoters might then incorporate the corporation but fail to put any assets in the
corporation, leaving creditors to sue an empty shell company.
For example in Black v Smallwood (1966) the outsider entered into a pre-incorporation contract
only to find that no one was under an obligation to perform the contract.
Ugandan Position
Ugandan position is more favourable. The law allows a company to ratify any contract or other
transaction incurred before incorporation.
The Ugandan position is governed by S. 54 of the Companies Act.
This section puts an innocent outsider in a far more satisfactory position than under the common
law by enabling the outsider to enforce the contract.
S. 54(2) states that a company may adopt a pre-incorporation contract with its formation and
registration made on its behalf without a need for novation.
Once ratified the contract becomes valid and binding between the parties. Both the company and
other party will be able to enforce it.
In S. 54(3) states that in all cases where the company adopts a pre-incorporation contract, the
liability of the promoter of that company shall cease.

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LIFTING THE CORPORATE VEIL
 Introduction
 Judicial Lifting of the Veil
 Statutory Lifting of the Veil
INTRODUCTION
Incorporation of a company by registration was introduced in 1844 and the doctrine of limited
liability of a company followed in 1855.
Subsequently in 1897 in Salomon v. Salomon & Company, the House of Lords effected these
enactments and cemented into English law the twin concepts of corporate entity and limited
liability.
In that case the apex Court laid down the principle that a company is a distinct legal person
entirely different from the members of that company.
This principle is referred to as the ‘veil of incorporation’.
The chief advantage of incorporation from which all others follow is the separate entity of the
company.
In reality, however, the business of the legal person is always carried on by, and for the benefit
of, some individuals.
In the ultimate analysis, some human beings are the real beneficiaries of the corporate
advantages, “for while, by fiction of law, a corporation is a distinct entity, yet in reality it is an
association of persons who are in fact the beneficial owners of all the corporate property."

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And what the Salomon case decides is that ‘in questions of property and capacity, of acts done
and rights acquired or, liabilities assumed thereby…the personalities of the natural persons who
are the companies corporators is to be ignored".
This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based.
Instances are not few in which the Courts have successfully resisted the temptation to break
through the corporate veil.
But the theory cannot be pushed to unnatural limits. “There are situations where the Court will
lift the veil of incorporation in order to examine the ‘realities’ which lay behind.
Sometimes this is expressly authorized by statute…and sometimes the Court will lift its own
volition".
The human ingenuity however started using the veil of corporate personality blatantly as a cloak
for fraud or improper conduct.
Thus it became necessary for the Courts to break through or lift the corporate veil and look at the
persons behind the company who are the real beneficiaries of the corporate fiction.
DEFINITION
Lifting of the corporate veil means disregarding the corporate personality and looking behind the
real person who are in the control of the company.
In other words, where a fraudulent and dishonest use is made of the legal entity, the individuals
concerned will not be allowed to take shelter behind the corporate personality.
In this regards the court will break through the corporate shell and apply the principle of what is
known as “lifting or piercing through the corporate veil."
In United States v. Milwaukee Refrigerator Co. 142 F. 247, the position was summed up as
follows:
“A corporation will be looked upon as a legal entity as a general rule……but when the notion of
legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the
law will regard the corporation as an association of persons."

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 In Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 1

WLR 1241, Denning observed as follows:
“The doctrine laid down in Salomon v. Salomon and Salomon Co. Ltd, has to be watched very
carefully. It has often been supposed to cast a veil over the personality of a limited liability
company through which the Courts cannot see. But, that is not true. The Courts can and often do
draw aside the veil. They can and often do, pull off the mask. They look to see what really lies
behind".
 Similarly, in Dunlop Nigerian Industries Ltd. v. Forward Nigerian Enterprises

Ltd. & Farore, it was observed that in particular circumstances, e.g. where the
devise of incorporation is used for some illegal or improper purpose, the court
may disregard the principle and lift the veil.
 The veil may be lifted by the judiciary or by statute.
JUDICIAL LIFTING OF THE VEIL
It is difficult to be precise about the circumstances in which a judge will lift the corporate veil.
However, what is clear is that on occasions the Salomon decision has caused problems and the
courts have had to remove the veil of incorporation to enable them to see the commercial reality
behind the corporate personality.
But, it is important to bear in mind that there are only a few examples of the courts removing the
veil of incorporation.
The overriding concern is to protect the corporate form; there is a great reluctance by the courts
to depart from the Salomon principle.
Yet, it is clear that the courts will remove the veil of incorporation in cases where the
incorporator is trying to avoid an obligation or achieve an unfair advantage.
There are some occasions where it is clear that the courts will ‘remove’ the veil, yet the
important thing to remember is that any list, including the one that follows, is not exhaustive and
it is not known where the boundary lies between a court lifting/removing a veil of incorporation
and leaving it intact.

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Instances of Judicial Lifting of Corporate Veil
1. Fraud or Improper Conduct
The Courts have been more than prepared to pierce the corporate veil when it feels that fraud is
or could be perpetrated behind the veil.
The Courts will not allow the Salomon principle to be used as an engine of fraud.
In Gilford Motor Company Ltd v. Horne (1933) Ch. 935:
Mr. Horne was an ex-employee of The Gilford motor company and his employment contract
provided that he could not solicit the customers of the company. In order to defeat this, he
incorporated a limited company in his wife's name and solicited the customers of the company.
The company brought an action against him. The Court of appeal was of the view that "the
company was formed as a device, a stratagem, in order to mask the effective carrying on of
business of Mr. Horne" in this case it was clear that the main purpose of incorporating the new
company was to perpetrate fraud. Thus the Court of appeal regarded it as a mere sham to cloak
his wrongdoings.
In Jones v. Lipman (1962) 1 W.L.R. 832:
A man contracted to sell his land and thereafter changed his mind in order to avoid an order of
specific performance he transferred his property to a company. Russel J. specifically referred to
the judgments in Gilford v. Horne and held that the company here was "a mask which (Mr.
Lipman) holds before his face in an attempt to avoid recognition by the eye of equity". Therefore
he awarded specific performance both against Mr. Lipman and the company.
2. Agency or Trust
Where a company is acting as agent for its shareholder, the shareholders will be liable for the
acts of the company.
It is a question of fact in each case whether the company is acting as an agent for its
shareholders.
There may be an Express agreement to this effect or an agreement may be implied from the
circumstances of each particular case. In Re: F.G. Films Ltd. (1953) 1 W.L.R. 483:

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An American company financed the production of a film in India in the name of a British
company. The president of the American company held 90 per cent of the capital of the British
company. The Board of Trade of Great Britain refused to register the film as a British film.
It was held that the decision was valid in view of the fact that British company acted merely as
the nominee of the American Company.
3. Single Economic Entity
Sometimes in the case of group of enterprises the Salomon principal may not be adhered to and
the Court may lift the veil in order to look at the economic realities of the group itself.
As such, corporate veil may be pierced where groups of companies can be treated as partners.
In D.H.N. Food Products Ltd. v. Tower Hamlets (1976) 1 WLR 852:
DHN was the holding company in a group of three companies. There were two subsidiaries,
wholly owned by DHN. One subsidiary owned land used by DHN, the other owned vehicles
used by DHN. The land was subject to compulsory purchase, and DHN sought compensation for
disturbance of its business. In the Court of Appeal, Lord Denning MR said:
These subsidiaries are bound hand and foot to the parent company and must do just what the
parent company says … this group is virtually the same as a partnership in which all the three
companies are partners. They should not be treated separately so as to be defeated on a technical
point.
It was therefore held that DHN was entitled to claim. The separate corporate personality was
overridden.
However, whether the Court will pierce the corporate veil depends on the facts of the case.
The nature of shareholding and control would be indicators whether the Court would pierce the
corporate veil.
4. Public Interest
The Courts may lift the veil to protect public policy and prevent transactions contrary to public
policy.

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The Courts will rely on this ground when lifting the veil is the most ‘just’ result, but there are no
specific grounds for lifting the veil.
Thus, where there is a conflict with public policy, the courts ignore the form and take into
account the substance.
5. Illegality
The courts have been prepared to draw aside the veil of incorporation in order to establish that a
company was owned by nationals of an enemy country so that to do business with it would be
illegal because it would be trading with the enemy.
In Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd [1916] 2 AC 307:
A company was incorporated in England for the purpose of selling in England, tyres made in
Germany by a German company which held the bulk of shares in the English company. The
holders of the remaining shares, except one, and all the directors were Germans, residing in
Germany. During the First World War, the English company commenced action for recovery of
a trade debt. Held, the company was an alien company and the payment of debt to it would
amount to trading with the enemy, and therefore, the company was not allowed to proceed with
the action.
6. For Benefit of Revenue
The Court has the power to disregard corporate entity if it is used for tax evasion or to
circumvent tax obligations.
A clear illustration is Re Dinshaw Maneckjee Petit;
The assessee was a wealthy man enjoying huge dividend and interest income. He formed four
private companies and agreed with each to hold a block of investment as an agent for it. Income
received was credited in the accounts of the company but the company handed back the amount
to him as a pretended loan. This way he divided his income into four parts in a bid to reduce his
tax liability.

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But it was held that, “the company was formed by the assessee purely and simply as a means of
avoiding super tax and the company was nothing more than the assessee himself. It did no
business, but was created simply as a legal entity to ostensibly receive the dividends and interests
and to hand them over to the assessee as pretended loans".
STATUTORY LIFTING OF THE VEIL
A good starting point for the discussion of such statutory provisions is Lord Diplock’s statement
in Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427 when he observed:
‘The corporate veil in the case of companies incorporated under the Companies Acts is drawn by
statute and it can be pierced by some other statute if such statute so provides; but, in view of its
raison d’etre and its constant recognition by the courts since Salomon v A. Salomon & Co Ltd,
one would expect that any parliamentary intention to pierce the corporate veil be expressed in
clear and unequivocal language.’
1. Reduction of Number of Members
Under S. 20 CA, the High court may, where a company or its directors are involved in acts
including tax evasion, fraud or where, save for a single-member company, the membership of the
company falls below the statutory minimum, lift the veil.
First, and perhaps least important, is S. 49 which provides that, if a company, other than a private
company limited by shares or by guarantee, carries on business without having at least two
members and does so for more than six months, a person who, for the whole or any part of the
period that it so carries on business after those six months, is a member of the company and
knows that it is carrying on business with only one member, is jointly and severally liable with
the company for the payment of the company’s debts contracted during the period or, as the case
may be, that part of it.
2. Provisions in Relation to Names

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Under S. 117 CA, the advantages of the corporate form can be removed where the director or
other officer does not maintain the company’s name outside its place of business or where the
company’s name does not appear on the company’s letters, notices and bills, etc.
3. Investigation into Related Companies
Under S. 175, where an inspector has been appointed by the Registrar to investigate the affairs of
a company, he may if he thinks it fit also investigate into the affairs of any other related company
and also report on the affairs of that other company so long as he feels that the results of his
investigation of such related company are relevant to the main investigation
4. Taxation
Under the income tax Act, the veil of incorporation may be lifted to ascertain where the control
and management of the company is exercised in order to determine whether it is a Ugandan
company for income tax purposes.
5. Holding and Subsidiary Companies
Where companies are in a relationship of holding and subsidiary companies, group accounts are
usually presented by the holding company in a general meeting.
In this regard, the holding and subsidiary companies are regarded as one for accounting purposes
and the separate nature of the subsidiary company is ignored. S.157 of the Companies Act
requires each company to keep proper books of accounts with respect to:
 Money received by the company and from what source.
 Money spent and what it was spent on.
 All sales and purchases of goods made by the company.
 The assets and liabilities of the company.
These accounts are meant to give a true and fair view of the state of the company’s affairs and to
explain its transactions.

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Directors of the company are required at least once a year to lay before the company in a general
meeting a profit and loss account (or income & expenditure account for nonprofit making
companies) plus a balance sheet.
In this regard the holding and subsidiary companies are regarded as one for accounting purposes,
and the separate nature of the subsidiary company is ignored.
CONCLUSION
Thus it is abundantly clear that incorporation does not cut off personal liability at all times and in
all circumstances. “Honest enterprise, by means of companies is allowed; but the public are
protected against kitting and humbuggery".
The sanctity of a separate entity is upheld only in so far as the entity is consonant with the
underlying policies which give it life.
Thus those who enjoy the benefits of the machinery of incorporation have to assure a capital
structure adequate to the size of the enterprise.
They must not withdraw the corporate assets or mingle their own individual accounts with those
of the corporation.
The Courts have at times seized upon these facts as evidence to justify the imposition of liability
upon the shareholders.
The act of piercing the corporate veil until now remains one of the most controversial subjects in
corporate law.
There are categories such as fraud, agency, sham or facade, unfairness and group enterprises,
which are believed to be the most peculiar basis under which the Law Courts would pierce the
corporate veil.
But these categories are just guidelines and by no means far from being exhaustive.

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DOCTRINE OF ULTRA VIRES

 Introduction
 Meaning
 Distinction from Illegality
 Importance
 Establishment
 Ascertainment
 Effects
 Position in Uganda
INTRODUCTION
The effects of the company’s constitution on the relationship between the directors and the
shareholders have been noted.
Equally significant, however, is the effect which it has on the powers of the company and on the
powers of its agents.
The first of these matters has given rise to the ultra vires doctrine which has bedevilled company
law for over a century and in a ghastly way continues to do so despite various efforts of the
legislature to ameliorate it.
MEANING OF ULTRA VIRES.

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The object clause of the memorandum of association of a company contains the object for which
the company is formed. An act of a company must not be beyond the object clause otherwise it
will be ultra vires.
The expression ultra vires means beyond powers.
Therefore an act or transaction that is beyond the powers of the company as stated in the objects
clause of the memorandum is an ultra vires act or transaction, such an act that is ultra vires is
void and cannot be ratified by the company.
Sometimes the term ultra vires is also used to describe a situation where the directors of a
company have exceeded the powers delegated to them.
Where a company exceeds the powers conferred upon it by its Memo, it is not bound by it
because it lacks the capacity to incur responsibility for that action. But when the directors of a
company exceed the powers delegated to them, the company in a general meeting may choose to
ratify their act or omission.
DISTINCTION FROM ILLEGALITY
An ultra vires act or transaction is different from an illegal act/transaction, although both are
void. They attract different legal consequences and the law treats them differently.
An act of a company which is beyond its object clause is ultra vires and therefore void even if it
is legal.
Similarly an illegal act done by a company will be void even if it falls squarely within the objects
of the company.
IMPORTANCE OF THE DOCTRINE.
The doctrine of ultra vires was developed to protect the investors and creditors of the company.
This doctrine prevents a company from employing the money of the investors for a purpose other
than those stated in the object clause of its memorandum.
Thus the investors of the company are assured that their money will not be employed for
activities which they did not have in contemplation at the time they invested their money into the
company.

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This doctrine also protects the creditors of the company by ensuring that the funds of the
company to which they must look to for payment are not dissipated in unauthorized activities.
ESTABLISHMENT OF THE DOCTRINE.
The doctrine was established in Ashbury Railway Carriage Co. Ltd. v. Riche (1875) LR 7 HL
653:
A company which was not authorized by its memorandum of association to lend money or
finance any activity made an agreement with the defendant to provide him with finance for the
construction of a railway in Belgium.
The directors made this ultra vires contract on behalf of the company but subsequently the
company ratified this contract in a meeting. Later on, the company repudiated this agreement and
did not actually provide the finances. The defendant sued the company for breach of contract.
The company in its defense argued that financing railway construction was not one of the
activities it was authorized to do.
It was held that indeed such an act was beyond the powers of the company and such an ultra
vires contract was void and could not be enforced against the company.
Court also held that an ultra vires contract cannot even be ratified by the company and that the
subsequent act of the company purporting to ratify this contract in a meeting was void. Court
emphasized that an ultra vires contract is void and cannot even be ratified by a unanimous
decision of all the members of a company.
 The HOL expressed the view that a company incorporated under the Companies
Act had power to do only those things which are authorized by its object clause
and anything outside that, is ultra vires and cannot be ratified by the company.
 Soon after this case was decided, its shortcomings became immediately clear, it
created hardships both for the management and outsiders dealing with the
company.
 The activities of the management of the company were subjected to strict

restrictions, at every step of transacting the business of the company; management

Page 77 of 82
was required to ascertain whether the acts which were sought to be done were
covered by the object clause of its memorandum of association.
 The business men thought this unduly restricted the frequency and ease of
business, if the act was not covered by the memorandum, it would mean having to
alter the object clause to add that activity and alteration of the memorandum
required a lengthy procedure.
 Later in 1972, in England this doctrine was modified, and subsequently the courts
have developed principles to reduce the rigors of the doctrine of ultra vires. They
include the following:
 Powers Implied By Statute
 According to this principle, a company has powers to do an act or exercise a

power which has been conferred on it by the Companies Act or any other Act of
Parliament even if such act is not covered by the object clause in the Memo.
1. The Principal of Implied and Incidental Powers
2. This principal was established in the case of Attorney General v. Great Eastern
Railway Co (1880) 5 AC 473:
In this case the HOL affirmed the principle laid down in the earlier case of Ashbury Railway
Carriage Co. Ltd v. Riche but made a slight departure and held that the doctrine of ultra vires
ought to be reasonably and not unreasonably understood and applied. Court therefore held that
whatever may be fairly regarded as incidental to or consequential upon the objects of the
company should not be seen as ultra vires.
 That case therefore led to a clear conclusion that that a company incorporated
under the Companies Act has power to carry out the objects set out in its
memorandum and also everything that is reasonably necessary to enable it carry
out those objects.
ASCERTAINMENT OF THE ULTRA VIRES DOCTRINE
An act is therefore intra vires (within the powers) the company if:

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1. It is stated in the object clause of the memorandum of association of that company.
2. It is authorized by the Companies Act or by any other Act of parliament.
3. If it is incidental to the main objects of the company or reasonably necessary to enable it

carry out those objects.
In the case of Attorney General v. Mersey Railway Co (1907) 1 Ch. 81:
A company was incorporated for carrying on hotel business. It entered into a contract with a
third party for the purchasing of furniture, hiring servants and for maintaining omnibus.
The purpose or object of the company was only to carry on a hotel business and it was not
expressly mentioned in the objects clause in the memorandum of the company that they could
purchase furniture or hire servants. The contract was challenged on the ground that this act of the
directors was ultra vires.
The issue before court was whether the transaction was ultra vires.
Court held that a company incorporated for carrying on a hotel business can purchase furniture
or hire servants and maintain an omnibus to attend at the railway station to take or receive the
intending guests to the hotel because these objects are reasonably necessary to effectuate the
purpose for which the company has been incorporated, and consequently such acts are within the
powers of the company, although these may not be expressly mentioned in the objects clause of
the memorandum of association of that company.
However not every act that is beneficial to the company is intra vires. It is not enough that the
act is beneficial to the company.
The act must be reasonably necessary for the company to carry out the activities mentioned in
the memorandum.
EFFECT OF ULTRA VIRES TRANSACTIONS UNDER COMMON LAW
1. Ultra Vires Contracts
These are void and cannot be enforced by or against the company.
In Re Jon Beaufore (London) Ltd (1953) Ch. 131:

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It was held that ultra vires contracts made with the company cannot be enforced against a
company. Court also held that the memorandum of association is constructive notice to the
public and therefore if an act is ultra vires, it will be void and will not be binding on the
company and the outsider dealing with the company cannot take a plea that he had no knowledge
of the contents of the memorandum because he is deemed to know them.
In England, the European Communities Act 1972 has lessened the effect of application of the
Ultra vires doctrine in this manner.
In England, third parties dealing with the company in good faith are protected and can enforce an
ultra vires contract against the company if the third party acted in good faith and the ultra vires
contract has been decided by the directors of the company.
2. Ultra Vires Borrowing
A borrowing that is ultra vires is void and cannot be ratified by the company and the lender is not
entitled to sue the company for the return of the loan.
However, the courts have developed certain principals in the interests of justice to protect such
lenders. The reliefs include:
Injunction. If the money lent to the company has not been spent, the lender can apply to court for
an injunction to prevent the company from spending the money.
Tracing. The lender can recover his money as long as it can still be found in the hands of the
company in its original form.
3. Property Acquired Under Ultra Vires Transactions
Where the funds of the company are applied in purchasing some property, the company’s right
over that property will be protected even though the expenditure on such purchasing has been
ultra vires.
4. Judgments from Ultra Vires Transactions.

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Because the law considers ultra vires acts void by their very nature, the company and third
parties cannot even with consent attempt to validate an ultra vires act.
In Re Jon Beaufore (London) supra,
Builders of a factory for purposes which were apparently ultra vires demanded for their money
and by consent it was ordered that the company should pay, on winding up, the liquidator refused
to pay that debt that was arising out of an ultra vires transaction. The court held that the
liquidator was well entitled to reject the claim as a company cannot do what is beyond its legal
powers by simply going into court and consenting.
LIABILITY OF DIRECTORS ON ULTRA VIRES TRANSACTIONS
1. Liability Towards the Company
It is the duty of the directors to ensure that the funds of the company are used only for legitimate
purposes of the company.
Consequently if the funds of the company are used for a purpose foreign to its memorandum, the
directors may be held personally liable to restore to the company the funds used for such
purpose.
Thus a shareholder can sue the directors to restore to the company funds which they employed in
transactions which the company is not authorized to engage in.
2. Liability Towards Third Parties
The directors of a company are treated as agents of the company and therefore have a duty not to
go beyond the powers that the company gives them.
Where directors represents to a third party that the contract entered into by them on behalf of the
company is within the powers of the company while in reality the company does not have such

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powers under its memorandum, the directors may be held personally liable to the third party for
the loss on account of breach of warranty of authority.
However to make the directors liable, the following conditions must be fulfilled:
i. There must be a representation of authority by the directors. It should be a representation

of fact not law.
ii. By such representation, the directors must have induced the third party to make a contract
with the company in respect of a matter beyond the powers of the company.
iii. The third party must have acted on such inducement to enter into the contract and must
prove that if it had not been for that inducement, he would not have entered into that
contract.
iv. That as a result, the third party suffered loss.
POSITION UNDER UGANDAN COMPANIES ACT
The doctrine of 'Ultra Vires' has been repealed by the Companies Act.
Section 51 of the Act states that, any act done by the company shall not be called into question
on the ground of lack of capacity or by reason of anything contained in the Memo.
This reflects the indoor management rule at common law.
It does however provide for an avenue for the members of the company to nevertheless bring
proceedings to restrain a company from engaging in an action beyond the companies' capacity.
S.51 (2) also provides that a member of the company may bring proceedings to restrain the
undertaking of an act which but for subsection (1) would be beyond the company’s capacity
except if the act is undertaken in the fulfilment of a legal obligation arising from a previous act
of a company. Subsection (1) provides that the power of the board of directors to bind the
company or authorise others to do so in favour of a person dealing with the company in good
faith shall not be limited by the company’s memorandum.

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Directors are further mandated to observe limitations on the memorandum and ratification of
their acts requires a special resolution by the company.
Section 52(4) also provides for the restraint of directors in particular by a member from
doing ultra vires acts in similar terms as Section 51(2).
The above provisions offer more protection to the unsuspecting public who deal with director in
good faith while also giving members power to question directors’ acts in management.
Section 52(1) of the Act additionally provides for the power of the board of directors to bind a
company in favour of a person dealing with the company in good faith and such power shall not
be limited by the memorandum.
Section 53 of the Act provides that a party to a transaction with a company is not bound to
inquire whether it is permitted by the company‘s memorandum or as to any limitation on the
powers of the board of directors to bind the company or authorize others to do so.

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Page 1 of 82

ADVOCATE OF THE HIGH COURT OF UGANDA

Business Associations 1 By Ssozi Rajjabu

INTRODUCTION TO VARIOUS FORMS OF BUSINESS ASSOCIATIONS

 Types of Business Organizations

Business organizations come in different types and different forms of ownership.

TYPES AND FORMS OF BUSINESS ORGANISATION

There are three major types of businesses:

A service type of business provides intangible products (products with no physical form).

Business Associations 1 By Ssozi Rajjabu

FORMS OF BUSINESS ORGANISATION

This decision will have long-term implications.

These are the basic forms of business ownership:

Business Associations 1 By Ssozi Rajjabu

The vast majority of small businesses start out as sole proprietorships.

Advantages of a Sole Proprietorship

Easiest and least expensive form of ownership to organize.

The business is easy to dissolve, if desired.

Quick decision making as there is less bureaucracy

Cheap labour as mostly family members are engaged

Disadvantages of a Sole Proprietorship

Their business and personal assets are at risk.

Business Associations 1 By Ssozi Rajjabu

Rushed decisions affect the business

Die alongside the sole proprietor

In a Partnership, two or more people share ownership of a single business.

i. how decisions will be made;

ii. how profits will be shared;

iii. how disputes will be resolved;

iv. how future partners will be admitted to the partnership;

Business Associations 1 By Ssozi Rajjabu

Profits must be shared with others.

Since decisions are shared, disagreements can occur.

2. Limited Partnership and Partnership with Limited Liability

A Corporation, chartered by the state in which it is headquartered, is considered by law to be a

Business Associations 1 By Ssozi Rajjabu

The owners of a corporation are its shareholders.

Corporations can raise additional funds through the sale of stock.

HISTORICAL FOUNDATION OF COMPANY LAW

Business Associations 1 By Ssozi Rajjabu

Business Associations 1 By Ssozi Rajjabu

Company Structures and Personalities

Business Associations 1 By Ssozi Rajjabu

Hence evolved the idea perpetual existence.

The South Sea Company (Bubble Scandal)

Business Associations 1 By Ssozi Rajjabu

In 1837, the BOT was allowed to incorporate limited liability.

The Act had three basic principles which persist to date:

1. It made incorporation easy by establishment of registration;

2. It formally established JSC and partnerships;

Business Associations 1 By Ssozi Rajjabu

i. Companies to have a director and secretary;

Business Associations 1 By Ssozi Rajjabu

Business Associations 1 By Ssozi Rajjabu

See the following cases:

1. Edmunds v. Brown & Tillard (1668)1 Lev 837

2. Katate v. Nyakatura (1956) U.L.R 47

3. Mengo Builders & Contractors Ltd. v. Kasibante (1958) E. A 591

Business Associations 1 By Ssozi Rajjabu

4. Salomon v. Hamborough Co. (1971) 1 Ch. Cas 204

5. Salomon v. Salomon & Co. Ltd (1897) A.C 22

According to Gower, a company has three functions:

Business Associations 1 By Ssozi Rajjabu