Professional Documents
Culture Documents
1. Definition of a Company.
A company as an artificial legal person.
2. Types of Companies.
i) Registered company.
ii) Statutory company.
iii) Chattered company.
iv) Corporate sole.
3. Registered Companies.
i) Private company.
Limited liability Company/
(Company limited by shares).
Un limited liability company
Company limited by guarantee.
ii) Public company.
DEFINITION OF COMPANY:
Definition of a company as an artificial legal person.
The word company originates from a latin word ‘com panis’ meaning people
sharing together. It relates to a group of people associating together and sharing
resources to pursue a common purpose.
The Companies Act Cap 110 definition section states that “company” means a
company formed and registered under the Act or an existing company.
The companies Act does not sufficiently define what a company is but authors
have developed a definition of a company. Professor David Bakibinga in his
book company law in Uganda at page 2 defines a company as an artificial legal
entity separate and distinct from its members or shareholders.
This legal person is distinguishable from natural personality. Natural persons are
born by natural people/persons and their lives end at death, artificial persons
(corporations) are created by law and their existence is ended by the law.
H e appealed further to the House of Lords and the House of Lords departed from
the decision of the lower courts, lord Macnaghten held as follows;-
i) That Salomon had followed all the formalities required to form a
company and therefore his company was a legal entity recognised by
law and therefore a body corporate capable of its separate existence,
capable of having its own rights and liabilities separate and different
from its members.
ii) That therefore the company was a legal entity capable of a separate
existence and liable to pay its own debts, and Salomon was not
personally liable to pay the debts of the company.
iv) That it does not matter whether all the members are relatives or
strangers.
v) That it does not also matter even if one of the members holds a
substantial part of the shares.
vi) That a company being under the full control of one member does not
mean that it is not a company, as long as it is legally registered, it is a
legal person different from its members.
The importance of Salomon’s case is that the highest court in the land recognized
the necessary consequences of the distinction between a company and its members
as separate persons.
The principle has been applied in other cases, for instance in Lee Vs. Lee’s Air
Farming Ltd. (1960) 3 All E.R.420 Lee formed a company that was engaged in
the business of aerial crop spraying in Newzealand. The company had three
thousand shares (3000) in which he held 2999 shares and his wife (the plaintiff)
held one. Lee was sole “governing director” and controlling share holder so he
exercised full and unrestricted control over the affairs of the company. Lee as
managing director appointed himself chief pilot in the company’s business of
aerial crop-spraying. He was killed in a crash while flying for the company. His
wife sued the company for compensation under the workmen’s compensation Act.
Under the Act; one could only be entitled to compensation if they proved that the
deceased was an employee who died in the course of employment.
It was argued by the company that lee had appointed himself and that on him lay
the duty of giving orders and obeying them, that he acted as both employer and
employee and virtually there was no employer employee relationship between
him and the company and that therefore the wife was not entitled to compensation.
In the House of Lords, Lord Morris held that Lee and his company were distinct
legal entities which had entered into contractual relationships under which Lee as
chief pilot became a servant of the company.
It was further held that the fact that somebody is a managing director of a
company does not mean that he cannot enter into a contractual relationship with
the company to serve it.
In the case of Macaura Vs. Northern Assurance Co. Ltd (1925) A.C.619
Macaura was a landowner who sold the timber on his estate to a company in return
for shares in that company of which he was the sole owner and creditor. Before the
sale to the company, he had insured the timber which lay on his land in his own
name. He did not transfer the insurance policy to the company name. Two weeks
later almost all the timber was destroyed by fire. He claimed for the loss under his
private insurance policy. Under that policy before one could recover
compensation, he had to prove that he had an insurable interest, thus before
Macaura could recover anything from the insurers, he had to prove that he had an
interest it the timber that was destroyed by fire.
The insurers denied liability on the grounds that he personally did not have, as
insurance law required, an insurable interest in the timber.
It was held that Macaura’s claim must fail since it was the company which owned
the timber; Macaura merely owning the shares in the company, the timber was not
effectively covered by his insurance policy.
This case therefore upheld the principal that a company has a distinct legal
existence from that of its shareholders and as such it is capable of owning its own
property and a shareholder has no personal interest in its property, though he may
be the controlling shareholder.
TYPES OF COMPANIES.
1. Registered companies
A registered company is a company that is registered with the registry of
companies. The companies Act provides for the registration of a company.
Therefore for one to have a company that is legally recognised under the
Companies Act, that person must register that company with the registry of
2. Statutory companies
These are formed by Acts of Parliament and do not go through the process of
incorporation laid out under the Companies Act. They are formed by an Act of
Parliament. Examples include NWSCO under the National Water and Sewerage
Corporation Act Cap 317, New Vision formed under the New Vision Printing and
Publishing Corporation Cap 230; others include NWSCO, URA, UWLA, UNRA
etc.
3. Chartered companies
This relates to companies granted a Royal Charter in England by the Crown under
the Royal Prerogative or special powers. The charter normally confers corporate
personality. Examples of these are Colleges of Oxford and Cambridge.
All the types of corporate bodies described above are classified as corporations
aggregate. This distinguishes them from some offices (such as those of traditional
rulers) which exist separately from the individual who for the time being holds the
office. This latter category is called a corporation sole since only one person fills
the office at one time e.g the office of the Kabaka of Buganda, the Omukama of
Toro, the Kyabazinga of Busoga, the Archbishop Etc.
4. Corporate sole
It is one which consists of one human member at a time, being the holder of an
office. They are mostly created by Acts of Parliament but may also be created by
the Constitution or common law. Examples include the office of the Bishop
(Common Law), the President or the Kabaka (Constitution) and the Administrator
or Registrar General (Acts of Parliament)
REGISTERED COMPANIES.
Under the Companies Act, provision is made for two major types of registered
Companies, which can be lawfully formed in Uganda. Principally these can be
further divided into 2 broad categories.
PRIVATE COMPANIES
Where a private Company does not comply with these requirements, it loses
exemptions and privileges conferred on a private company. This failure can only
be remedied upon showing court that it was caused by accident or inadvertence or
some other sufficient cause.
PUBLIC COMPANIES
The minimum required number for public companies is 7 and it goes up to infinity
in other words there is no limit as to the maximum number of members a public
company can have. A public company should be a limited liability company. Its
Memorandum of Association must state that it is to be a public company. Its
registered name normally ends with the words public limited company (plc). A
Company, which has obtained registration as a public company, its original
certificate of incorporation or subsequent certificate of registration issued by the
registrar must state that it is a public company.
3. There must be a minimum of two directors 3. Only one director can suffice
Under the Companies Act, Companies in Uganda can also be further divided into:
Limited by shares
Limited by guarantee
Unlimited companies
This means that in case of winding up of the company if the company's assets are
unable to meet the company's debts, then the members will only be liable to
contribute to the debts of the company only such amounts as a member may not
have paid for the shares they bought. i,e., a member will only be required to pay
the balance that he did not pay on the shares he bought. Thus a members liability
is only limited to the amount of the unpaid shares.
NOTE: Liability may arise in case of winding up. When a company is unable
to go on with its business or for some other reasons it is forced to stop operating
business, such a company may go through a process called winding up. Winding
up is the process of ending a company, in this process all its assets are sold, and
the company pays off its debts using the proceeds of its assets i.e. the money it has
got from the sale of its assets. In case that money is not enough to clear all its
Besides the private and public companies, in Uganda we also have the following
companies;
The most common way that control of a subsidiary is achieved, is through the
ownership of majority shares in the subsidiary by the parent. (Note: Voting rights
will depend on the shares, if you have 80% of the shares in a company, you will be
entitled to 80 votes.) These shares give the parent the necessary votes to determine
the composition of the board of the subsidiary, and so exercise control. This way
the holding company can dictate policy and management decisions.
This gives rise to the common presumption that 50% plus one share ie (more that
50%) is enough to create a subsidiary. Thus if a company owns majority shares in
another company, that other company will be its subsidiary.
A parent company does not have to be the larger or "more powerful" entity; it is
possible for the parent company to be smaller than a subsidiary or the parent may
be larger than some or all of its subsidiaries (if it has more than one). The parent
and the subsidiary do not necessarily have to operate in the same locations, or
operate the same businesses, but it is also possible that they could conceivably be
competitors in the marketplace. Also, because a parent company and a subsidiary
are separate entities, it is entirely possible for one of them to be involved in legal
proceedings while the other is not.
A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries
of their own. Subsidiaries are separate, distinct legal entities for the purposes of
taxation and regulation.
Subsidiaries are a common feature of business life, and most if not all major
businesses organize their operations in this way. Examples include holding
companies such as MTN (Uganda) is a subsidiary of MTN (South Africa), Stanbic
Bank Uganda is a subsidiary of Standard Bank (South Africa).
Promotion:
Promoters Defined:
Before a company is registered or formed, some person or persons must carry out
the preliminary work. This work includes signing contracts, arrangement for
capital and credit facilities, securing premises where the company is to be located,
machinery and equipment, preparing the necessary documents, etc. All this work
is done by persons called promoters.
Case law has defined who a promoter in the English case of TWYCROSS VS
GRANT (1877) as “any person who undertakes to form a company, or who, with
regard to a proposed newly formed company, undertakes part in raising capital for
it. A person is prima facie a promoter of the company, if he has taken part in
setting a company formed with reference to a given object.”
Duties of a Promoter:
The issue was whether there was a disclosure. It was held that the
disclosure to only one director who had appointed the promoters was not a
proper disclosure and that the company was entitled to rescind the contract.
That the promoters must repay the purchase price and the company in turn
must convene the lease to the promoters so as to restore the status quo
(original position)
2. Duty of skill and care: In the process of promotion, a promoter must carry out
his work with great care and skill and due diligence expected of a reasonable
man.
3. Duty to act in the best interests of the company. He should not let his personal
interest conflict with those of the company.
Solicit capital
Prepare a prospectus
Solicit directors for the company
Arrange the preparation of the Memorandum and Articles of Association
Obtain premises
Obtain whatever equipment is necessary for the running of the business
Remuneration of a Promoter:
PRE-INCORPORATION CONTRACTS:
In promoting a company, promoters usually enter into contracts with third parties
and when they do so, they purport to do so on behalf of the company before it is
incorporated ie ( unincorporated company). Such contracts are not binding on the
Similarly in the case of English & Colonial Produce Company Ltd (1906) Ch.
435 where persons who afterwards became directors of the company instructed
solicitors to prepare the memorandum and articles of association so that the
company might be formed but on formation the company failed to pay the
solicitors’ charges and denied that it was liable to do so, it was held that although
the company had taken benefit of the contract, it did not impose on it any liability
to pay since the contract was made before the company was formed and the
persons who had given the solicitors the instructions were personally responsible
for paying them for the work done.
In the Ugandan case of Central Masaka Coffee Co. V. Masaka Farmers and
Producers Ltd (1991) ULSLR 220 it was held that a company lacked the
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capacity to conclude an agreement for lease of a coffee processing factory made
five days before its incorporation.
Thus if the contract was entered into by a promoter and signed by him “for and on
behalf of XX Co Ltd” then according to Kelner’s case, the promoter will be
personally liable.
But if the promoter signed the proposed name of the company adding his name to
authenticate it ie if they sign on behalf of the company but do not put the words
“for and on behalf” to show that they are actually signing on behalf of that
company in the following manner;-
then there is no contract at all. This is because the contract is not signed on behalf
of the company and neither is it in the names of the promoter alone.
NOVATION
Usually an agreement is entered into by the promoter which provides that the
personal liability of the promoter will cease when the company in the process of
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formation is incorporated and enters into an agreement in similar terms with the
contractor.
However there must be sufficient evidence that the company has entered into a
new contract. Mere recognition of the pre-incorporation contract by performing it
or accepting benefits under it is not enough.
In another old English case of Howard B Patent Ivory Manufacturing Co. 1888
where J under a pre-incorporation contract agreed to sell property to a company
but after the company had been formed the terms of the payment were modified
with J accepting part of the purchase price in debentures instead of cash as had
been originally agreed upon, it was held that the renegotiation of the contract
terms of payment were sufficient evidence of a new offer and acceptance by
which a company entered into a new contract after incorporation.
The promoters must choose a name of their choice and then make an application to
the registrar of companies to reserve the name for their company. The name
should not be identical with that of an existing company or so nearly resemble it as
to be calculated to deceive, it should not also Contains the words “chamber of
commerce” except where the nature of the company’s business so justifies it and
To guard against the possibility of a negative reply from the Registrar, promoters
must have in mind one or more suitable alternatives. Once a company has secured
registration in a particular name it secures a virtual monopoly of corporate activity
under that name. In case the Registrar inadvertently approves a name which by
law is not adequate, then the new company may change its name within 6 months.
A company may change its name by special resolution and with the written
approval of the Registrar. ‘Where the Registrar refuses to register a name without
good reason, an application for an order of mandamus to compel the registrar to
perform his duty and register the company can be filed in the High Court.
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
The prospectus.
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,
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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), 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
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.
This is a statement which shows the capital with which the company is starting
with.ie the initial capital of the company.
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
It is a document setting forth the nature and objects of a company and inviting the
public to subscribe for shares in the company.
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.
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.
If the Registrar is satisfied that the documents are in order and that stamp duties
and fees have been paid, he enters the name of the company in the register of
companies and issues a certificate of incorporation. The issue of the certificate of
incorporation is conclusive evidence that all registration requirements have been
complied with and that the association is a company authorized to be registered
and is duly registered under the Act.
In the case of Jubilee Cotton Mills Ltd V Lewis (1924) A.C.958 the certificate
was dated 6th January 1920 but it was not signed and issued until 8th January. On
the 6th of January the directors allotted shares and debentures. The allottee later
refused to pay the amount due on the shares arguing that the company did not exist
on the date of issue. It was held that the company was deemed to have come into
existence on the 6th of January 1920. Therefore, the allotment was valid and the
allottee must pay for the securities allotted to him.
The basic role of registrars is to ensure that business entities are formed with
proper documents, ensure compliance with the law in the process of registration
and thereafter. Where the registrar is not satisfied with the documentation, he/she
can decline to register the business/company.
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The Registrar may also refuse to register a company whose objects are unlawful.
In the of R. V Registrar of Companies Exparte More (1931) 2 K. B. 197 the
Registrar’s refused register to sell tickets in a lottery because the lottery was illegal
in England.
Provision of Copies
Any member of the company may under Sect. 26 (1) of the Act may require the
company to supply him with a copy of the Memorandum of Association and the
articles at a nominal fee. A penalty for failure to comply is spelt out in Sect 26 (2).
Under Sect 27(1), the issued copies of the Memorandum of Association must
contain any alterations if any and under Sect 22(2), penalties for the company and
the defaulting officers are set. Therefore, getting these copies by a member is a
right and it is hereby submitted that these can be enforced as a personal right.
1. 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 eg Stanbic Bank
Uganda Ltd.
2. Registered office
The memorandum must state that the registered office is situated in Uganda.
However, the actual address must be communicated to the Registrar of Companies
within 14 days of the date of incorporation or from the date it commences business
by registration of a company form called Notice of situation of registered office of
the company, this form will indicate the exact location of the company eg plot 8
industrial area Kampala.
This sets out the principle activities the company has been incorporated to pursue.
For example; trading in general merchandise, carrying on business of wholesalers
and retail traders of all airtime cards, mobile phones and all phone accessories,
carrying on the business of mobile money agents etc. The objects must be lawful
and should include all the activities which the company is likely to pursue. The
objects or powers of the company as laid down in the memorandum or implied
there from determine what the company can do.
The Memorandum of Association spells out the main objectives and powers of the
company. However, certain powers may be implied in the Memorandum of
Association. For example, in the case of FERGUSON V WILSON (1866)
2CH.A 277, a power to appoint agents and engage employees was implied in the
Memorandum of Association. This is only sensible because a company as a
fictitious person can only work through agents and employees; and therefore if
such a power was not implied, then the company could not function at all.
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
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.
management, who will be the directors of the company, who will be, appointment
of the board of directors, qualifications of directors, the, the classes and rights of
shareholders, transfer of shares , , auditing of books,
Contents of the Articles
The board of directors (management) and how they will be appointed, their
qualifications, how they can resign or be removed from office.
The chairman of the board.
The managing director and how he will be appointed.
Secretary and his appointment.
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:
That legal drafting of special articles is reduced to a minimum since even
special articles usually incorporate much of the text of the model.
There is flexibility since any company can adopt the model selectively or
with modifications and include in its articles special articles adapted to its
needs.
4. A contract with non members may be implied. The Articles do not constitute
a contract between the company and third parties. A clause in the Articles
may however form the basis of a contract. Eg, if the Articles set out the terms
as to remuneration to be paid to directors and the director takes office on that
basis, the court will infer that the terms are part of his contract with the
company. Re New British Iron Company; Exparte Beckwith (1898)1 Ch. 3.
The memorandum and articles form three contracts and these are:
This was illustrated in the English case of Wood v Oddesa Water Works (1889)
42 CH.D 636, the articles of association of the defendant company empowered the
directors to declare dividends/profit to be paid to the shareholders, the company
passed a resolution not to pay dividends, wood a shareholder was aggrieved by
this resolution which was contrary to what the articles provided, as a member and
shareholder he applied to court for an injunction to stop the company from acting
on that resolution, Stirling J held that the articles of association constitute a
contract between the company and its shareholders and the company was in breach
of that contract by not following what the articles provided.
2. The contract created by the articles binds the company and its members only in
their capacity as members (“qua member’) and not in any other capacity.
Note. That for a member to sue in their capacity as members, their claim should be
based on violation of members’ rights provided for by the articles.
In the case of Hickman V Kent (1915) 1 CH 881, Kent the defendant company
had a provision in its articles that any dispute between the association and its
members should be referred to an arbitrator. Hickman brought a claim against the
company before an arbitrator relying on this provision because the company had
refused to register his sheep in its published flock book and threatened to expel
him from membership. Court stayed his suit against the company holding that
Hickman was not suing in his capacity as a member of the company and therefore
he could not rely on the articles since the company had not breached a provision in
its articles. The articles did not provide for rights of members to have their sheep
registered with the company’s published flock book.
In this case, Astbury J stressed the following;-
a) That the articles of association cannot constitute a contract between the
company and a non member/ third party.
b) That a member who is given a right by the articles in any other capacity
other than that of a member cannot enforce such right against the company
for example if a member is given a right by the articles as a
Also in the case of Beattie V E. & Beattie Ltd (1938) Ch 708, a director of a
company was sued in court in his capacity as a director. The articles of the
company provided that any dispute between the company and its members should
be referred to an arbitrator. The director who was sued in court sought to rely on
this provision in the articles to have his matter referred to an arbitrator. Court
refused to grant his application and held that he could not rely on this provision
since it only applied to members and he was not being sued in his capacity as a
member but in his capacity as a director. Court added that provisions in the articles
constitute a contract between the company and its members in their capacity as
members and not in any other capacity.
3. The memorandum and articles also constitute a contract amongst the members
themselves.( between the members “interse”). Thus each member has a duty to
observe the provisions of the memorandum and articles of association and if
they do not, any member can sue them. In Hickman V Kent (1915) 1 CH
881, Astbury J held that That the articles regulate the rights and obligations of
members generally and therefore create rights and obligations amongst the
members themselves.
Also in the case of Obikoya V Ezewa & ors, Ezewa and two others were all
permanent directors in a company, the company’s articles had a provision that a
permanent director shall not vote for the removal of another permanent director
from office. Ezewa and the other directors disregarded this provision, purported to
alter the articles by resolution to enable them remove Ezewa from office, and there
after they stopped him from acting as director. He sued them in their capacity as
members for damages for breach of the provisions of the articles and asked court
for an injunction to stop them from preventing him from acting as director. It was
held that the articles were a contract between the three members not to vote each
other out of office and that the actions of the other of keeping Obikoya out of
office was in breach of the provisions of the articles.
Membership:
Sec.27 of the Companies Act defines a member as a person who has signed the
Memorandum and Articles of Association with the purpose of floating a company.
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Any person who applies and his name is entered on the register of members also
becomes a member. In MAWOGOLA COFFEE FACTORY VS KAYANJA, it
was held that to be a member of a company, there must have been a valid
allotment of shares to the person and his name entered on the register. It was
further observed that a certificate of allotment of shares is the best evidence but in
its absence, the register of members shall suffice. A minor can become a
shareholder but he incurs no liability until he obtains the majority age and fails to
repudiate the contract within a reasonable time.
CONSEQUENCES OF INCORPORATION
Since the Salomon case, the complete separation of the company and its members
has never been doubted. It is from this fundamental attribute of separate
personality that most of the particular advantages of incorporation spring and these
are:
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. It follows that the company’s
creditors can only sue the company and not the shareholders. In in the case
of Salomon V Salomon (1897), creditors of the company sought to have
Solomon a managing director of the company personally liable for the debts
of the company but court held that the company and Solomon were two
different persons and that the company as a legal person is liable for its own
debts and Solomon a managing director could not be held personally
responsible for the debts of the company. In the Ugandan case of Sentamu
v UCB (1983) HCB 59, it was held that individual members of the
company are not liable for the company’s debts.
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 the case of MACAURA Vs NORTH ASSURANCE CO.
(1925) AC (see page 3 for facts). In that case 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 the case of Hindu Dispensary Zanzibar v N.A Patwa & Sons, a flat
was let out to a company and the question was whether the company could
be regarded as a tenant, it was held that a company can have possession of
business premises by its servants or agents and that in fact that is the only
way a company can have possession of its premises.
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 the company
being sued, then it should be sued in its registered name, if a wrong or
incorrect name is used, the case will be dismissed from court for example in
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the case of Denis Njemanze V Shell B.P Port Harcourt, 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 part but court refused to
grant the leave and dismissed the case.
In the case of Wani V Uganda Timber, 1972 HCB the plaintiff applied for
a warrant of arrest against a managing director of a company instead of
suing the company, chief justice Kiwanoka 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.
5. PERPETUAL SUCCESSION:
s.15 of the companies Act provides that a company is a legal entity with
perpetual sucession.
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 share
holder 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 to company will
continue to exist.
The only way a company can come to an end is by winding up, striking it off the
register of companies or through amalgamation and reconstruction as provided by
the Companies Act. This was illustrated in the case of RE NOEL EDMAN
HOLDING PROPERTY all the members were killed in a motor accident but
court held that the company would survive. Thus, 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:
6. BORROWING:
A company can borrow money and provide security in the form of a floating
charge.
A floating charge is a security created over the assets of the company.
When a company borrows money let’s say from the bank or any other cerditor, 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.
6. CAPACITY TO CONTRACT.
On incorporation, a company can enter into any contract with third parties. In the
case of Lee V Lee & Air Farming Co. Ltd (1961) A.C 12, it was held that a
company was it is incorporated it has capacity to employ servants, even the
shareholders.
Apart from the advantages mentioned above which arise from incorporation, there
are certain disadvantages of incorporation and these are:
An act is therefore intra vires (within the powers) the company if;
It is stated in the object clause of the memorandum of association
of that company.
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.
Disadvantages
Unlimited liability means that if the business gets into debt a personal
trader’s personal wealth can be lost.
Expansion of the business is only possible if the profits are ploughed back
into the business.
Since the business depends on an individual it means long working hours
and difficulty if the individual is indisposed or incapacitated.
The death of the proprietor normally results in the death of the business.
The individual may lack technical skills to effectively manage the business.
Disadvantages associated with small size, lack of diversification, absence of
economies of scale, problems of raising finance etc.
2. PARTNERSHIPS
Under section 2(1) of the Partnership Act of 2010, partnership is the
relation which subsists between persons carrying on a business in common
with a view of profit.
Advantages
Two or more persons can provide more capital than a sole trader.
Responsibilities are shared between the partners.
Partners contribute a wider range of skills and experience to the
business.
The affairs of the business are private and no one except the partners has
any right to inspect the accounts.
Disadvantages
No separate legal entity.
Unlimited liability for the debts of the business.
Change of partners is a termination of the old firm and the beginning of
a new one.
Partners cannot provide security by a floating charge on goods.
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There is no distinction between the property of the partners and that of
the partnership.
Some independence is lost since decisions must be made jointly.
4. Cooperative Societies
This is any society that has as its object the promotion of the economic
interests of its members in accordance with cooperative principles.
Cooperative societies are registered with or without limited liability. Upon
registration the cooperative society becomes a corporate body with
perpetual succession and a common seal with power to hold movable and
immovable property of every description, to enter into contracts, to institute
and defend suits and other legal proceedings and to do all things necessary
for the purpose of its constitution. To be registered a society must have at
least 30 members.
5. Unit Trusts
A “unit” means a right or interest whether described as a unit, as a subunit
or otherwise, which may be acquired under a scheme and “a unit trust
scheme” is any arrangement made for the purpose or having the effect of
providing for persons having funds available for investment, facilities for
the participation by them, as beneficiaries under a trust, in profit or income
arising from the acquisition, holding, management or disposal of any
property.
The managers have power from time to time to increase the number of units
by vesting additional securities in the trustees, The managers also provide a
market for unit holders by buying back and reselling units. In practice the
trust deed is for a fixed period at the end of which the underlying
investments are realized and the unit holders repaid unless they elect to
continue the trust.
5. 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.
In Re Williams Bros Ltd. (1932) 2ch.71, a company was insolvent but the
Directors continued to carry on its business and purchased its goods on
credit. It was held that if a company continues to carry out business and to
incur debts at a time when there is to the knowledge of the directors no
reasonable prospects of the creditors ever receiving payments of these
debts, it is in general a proper inference that the company is carrying on
business with intent to defraud. R V Graham (1984) QB.675 makes it clear
that a person is guilty of fraudulent trading if he has no reason to believe
that the company will be able to pay is creditors in full by the dates when
the respective debts become due or within a short time thereafter.
MANAGEMENT OF A COMPANY
1. Statutory Meetings: These are provided for under S130 of the Companies Act
which requires every public ltd company to hold such type of meeting within 30
days from the date of commencement of business. The meeting is held once in
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the company's life and never again. The meeting is a must hold for all public
companies, private companies are not required to hold this meeting.
The aim of the meeting is to enable the members to review the progress report
from the directors and the promoters, thus at least 14 days before the meeting
the directors must send a statutory report to every member giving details of
Shares allotted
The no of shares which were paid up and those which were not.
Those shares paid for in cash and those paid up in some other form of
consideration.
The total amount of money received from the allotment.
The names and descriptions of the directors, and secretary.
Contract descriptions of any contract intended to be discussed at the
meeting that will need to be approved at the meeting.
In this meeting members are at liberty to discuss matters arising from the report and
any other matter related to the formation of the company. The directors must also
send this report to the registrar of companies so that it can be registered and put on
the file of that company.
4. General meeting convened under court orders (S. 135). It provides that if for
any reason it is impracticable to call a meeting of the company in any manner in
which meetings of the company may be called, the court may on application of
any director or member of the company who would be entitled to attend and vote
at the meeting order a meeting of the company to be called, held and conducted
in any manner that the court thinks fit, and court may for that matter direct that
only one person present at the meeting shall constitute quorum.
In the case of Re Sombrero Ltd (1958) Ch.900, the applicant was a holder of 900
shares in a private company and the 2 respondents who were the only directors
were each holding 50 shares. The respondents did not arrange or call for any
annual general meeting or file a statutory report. They refused to call any meeting
the reason being that the inevitable result of convening any meeting would be
that they would find when they have ceased to be directors because the applicant
who held majority shares would vote them out of office. When he applied to
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court to have a meeting convened, it was held that in the circumstances it was
impracticable for the meeting to be held and this was a case where the court
would intervene and order that the meeting be carried out and one member i.e.
the applicant could carry out the meeting alone.
1. NOTICE OF MEETINGS.
s.133 provides that any meeting of a company must be called by a notice of a period
not shorter than 21 days and any provision in that articles providing for a shorter
notice is void and of no effect. The notice may be in writing or it can take any other
form like word of mouth, radio or TV announcements, newspapers etc., it must
state the exact date time and place where the meeting will take place and what is
intended to be discussed at that meeting, if the notice does not indicate the above
then it is not a proper notice and if any shareholder is absent from the meeting
because his notice had not fully disclosed the agenda, he can seek a court order to
declare such a meeting null and void.. However a meeting may be called by a
shorter notice than 21 days if all the members entitled to attend and vote at the
meeting agree to such a shorter notice.
2. QUORUM.
This relates to the minimum number of members that must be present at a meeting of
the company for it to be a valid meeting. The company’s articles will normally
provide for the required quorum but where they are silent on this, s.134 (c) of the Act
provides for the requisite quorum as 2 members present in case of a private company
and in any other case three members personally present. Quorum need not be
maintained throughout the meeting though at the beginning it must be there.
4.VOTING.
S.134 provides that every member shall have one vote in respect of each share he
has and in case of a company having a share capital and in other cases every
member shall have 1 vote.
Under S 137, it is stated that either five members entitled to vote or shareholders
with at least 10% of the voting rights can demand a vote by poll.
1. Board of Directors
There is no definition of a director whether in the Act or by case law. Nevertheless,
S2 of the Act states that a director includes any person occupying the position of a
director by whatever name called. In most private companies directors are usually
share holders and in public companies , there is a requirement that directors must
take up qualification shares, which is not the case in private companies unless the
articles provide for it. According to S 177, a public company must have at least 2
directors. It’s an offence to have one director. Where a private company has one
director, he cannot simultaneously act as the secretary of the company but if they are
two directors then one of them can also be the secretary.
Under the act, a director is defined as “any person occupying the position of a
director by whatever name called” this definition includes a “de jure director”
meaning one who is duly appointed to act as such and a “defacto director” meaning
one who is not appointed as director but acts as one.
Therefore defect in appointment of one as a director doenot affect the validity of all
the things such a person does while acting as director. In R V. Camps [1962] EA 243
in this case the articles of association of a company required every director to hold at
least 1 qualification share. Camps as a director did not acquire his qualification share
and the question was whether under the circumstances he was actually a director. It
Qualifications of directors.
1. S 182 requires that before a person can be appointed a director of a company
with share capital, he must have: -
Signed and delivered for registration his consent to act as a director.
Signed a Memorandum of Association of his qualification share and
paid or agreed to pay for those shares. A qualification share is that no
of shares that a director must acquire in a company in order to qualify
as one.
2. According to S 186 a director of a public ltd company or a private company
which is a subsidiary of a public company must be aged between 21-70 years.
3. S 188 disqualifies an un discharged bankrupt. An un discharged bankrupt
does not qualify to become a director or else he is liable to a fine of not
exceeding 10,000/= or imprisonment of 2 years or both.
4. Under S 183, any director who is required to hold qualification shares must
acquire those shares within 2 months of his appointment, otherwise he must
quit.
REMUNERATION OF DIRECTORS.
The companies Act is silent on renumeration of directors but it is the law that a
director has no automatic right to remuneration and as it was emphasized in Re
George Newman & Co. (1895) 1 ch.674 that the directors have no right to be paid
for their services and cannot pay themselves or each other or make presents to
themselves out of the company's assets unless authorised so to do by the articles or
by the shareholders at a properly convened meeting.
PROCEEDINGS OF BOD
The rule is that directors must act collectively and any director who is prevented
from carrying out his duties can seek an injunction from court to restrain his co-
directors. However, there is no legal requirement that in the discharge of their duties,
directors must meet formally. However directors can agree to carry out a meeting at
any place or time as long as they agree, thus in the case of Barrow Vs Porter (1914)
1 ch.895. In this case, the company had only 2 directors who developed personal
differences to the extent that they could no longer meet. One director, staying in
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town wanted to carry out a transaction. He waited for the other village director at the
railway station and told him about an incumbent meeting which the other one never
agreed with. The town director met alone and elaborated on many issues and
purported to have resolved together with the director in the village. The Court held
any of those resolutions that the town director purported to pass were invalid
because the directors never agreed on the mode of the meeting.
As between shareholders and directors, the issue of who has the final say in the
management of the company will depend on the articles of association. Where the
company adopts article 80 of table A, which provides that the business of the
company shall be managed by the directors who may exercise all such powers as are
not required by the Act to be exercised by the company in a general meeting. This
means that the board is left with wide powers to do all those things which the general
meeting is not authorised to do.
This refers to the liability of the company for the acts of its officers.
The company will be held liable for the acts of its officers if that officer was at the
time acting as the “directing mind and will of the company”. Since a company is
an artificial person with no mind and will of its own, officers who act for it have its
directing mind and will. An officer is said to have the directing mind and will of the
company if:-
1. He has authority to act on behalf of the company given by the share holders in
a meeting.
2. He has authority from the directors of the company.
3. He has been mandated to act on behalf of the company by a provision in the
company’s articles of association.
Therefore if an officer of a company incurs liability in the course of duty under the
above circumstances it is the company that will be held responsible not that officer.
In the case of Lennard Carrying Co V. Asiatic Petroleum [1915] AC 705, the
company owned a ship and Lennard as the company director took the active role of
the management of the company’s ship. In the course of work the ship caught fire
and all the cargo on it was destroyed, the owners of the cargo wanted to recover
from the company as ship owner, under the Shipping Act a ship owner was not
responsible /was not liable for any loss or damage to cargo happening without his
fault, the company relied on this provision and argued that it was not responsible for
the loss because when the cargo got destroyed it was not its fault but that of Lennard,
court held that Lennard’s fault had to be attributed to the company since a company
was an abstruct artificial person and could not act on its own but through its
officers. Court further stated that Lennard acting with the authority of the company
became the directing mind and will of the company and therefore the company was
liable for the acts of its officer while transacting business on its behalf.
1. Express Actual
2. Implied actual
3. Ostensible authority/ apparent authority/authority by estopple.
LIMITATIONS
The doctrine of holding out is inapplicable to ultra-vires transactions.
It’s not applicable unless a competent officer or organ has carried out
the holding out. The officer being held out must be purporting to
occupy a position or an office who according to normal trade usage
that can enter into such a contract. Therefore according to the case of
Freeman & Lockyer Vs Burckhurst, before the doctrine of holding out
can be used against the company, the following tests must be satisfied:
The Doctrine of Indoor Management lays down that persons dealing with a
company having satisfied themselves that the proposed transaction is not in
its nature inconsistent with the memorandum and articles, are not bound to
inquire into the regularity of any internal proceeding. In other words, while
persons contracting with a company are presumed to know the provisions of
the contents of the memorandum and articles, they are entitled to assume
that the officers of the company have observed the provisions of the articles.
It is no part of duty of any outsider to see that the company carries out its
own internal regulations.
The rule had its genesis in the case of ROYAL BRITISH BANK V
TURQUAND (1856) ALLER 435. In this case the Directors of the
Company were authorized by the articles to borrow on bonds such sums of
money as should from time to time be authorized to be borrowed by a
special resolution of the Company in a general meeting. A bond under the
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seal of the company, signed by two directors and the secretary was given by
the Directors to the plaintiff bank to secure the drawings on current account
without the authority of any such resolution. When the company was sued, it
alleged that under its registered deed of settlement (the articles of
association), directors only had power to borrow what had been authorised
by a company resolution. A resolution had been passed but not specifying
how much the directors could borrow.
The Court of Exchequer Chamber overruled all objections and held that the
bond was binding on the company as Turquand was entitled to assume that
the resolution of the Company in general meeting had been passed. The
relevant portion of the judgment of Jervis C. J. reads:
"The deed allows the directors to borrow on bond such sum or sums of
money as shall from time to time, by a resolution passed at a general
meeting of the company, be authorized to be borrowed and the replication
shows a resolution passed at a general meeting, authorizing the directors to
borrow on bond such sums for such periods and at such rates of interest as
they might deem expedient, in accordance with the deed of settlement and
Act of Parliament; but the resolution does not define the amount to be
borrowed. That seems to me enough......We may now take for granted that
the dealings with these companies are not like dealings with other
partnerships, and the parties dealing with them are bound to read the statute
and the deed of settlement. But they are not bound to do more. And the party
here on reading the deed of settlement, would find, not a prohibition from
borrowing but a permission to do so on certain conditions. Finding that the
authority might be made complete by a resolution, he would have a right to
infer the fact of a resolution authorizing that which on the face of the
document appear to be legitimately done." Pollock CB, Alderson B,
Cresswell J, Crowder J and Bramwell B concurred.
The rule in Turquand's case was not accepted as being firmly entrenched in
law until it was endorsed by the House of Lords. In MAHONY V EAST
HOLYFORD MINING CO Lord Hatherly phrased the law thus:
“ When there are persons conducting the affairs of the company in a manner
which appears to be perfectly consonant with the articles of association,
those so dealing with them externally are not to be affected by irregularities
which may take place in the internal management of the company.’’
The plaintiff contended that whether the signature were genuine or forged
was apart of the internal management, and therefore, the company should be
estopped from denying genuineness of the document. But, it was held, that
the rule has never been extended to cover such a complete forgery.
Lord Loreburn said: “It is quite true that persons dealing with limited
liability companies are not bound to enquire into their indoor management
and will not be affected by irregularities of which they have no notice. But,
this doctrine which is well established, applies to irregularities, which
otherwise might affect a genuine transaction. It cannot apply to Forgery.”
Here one G was director of the company. The company had managing
agents of which also G was a director. Articles authorised directors to
borrow money and also empowered them to delegate this power to any or
more of them. G borrowed a sum of money from the plaintiffs. The company
refused to be bound by the loan on the ground that there was no resolution of
the board delegating the powers to borrow to G. Yet the company was held
bound by the loans. “Even supposing that there was no actual resolution
authorizing G to enter into the transaction the plaintiff could assume that a
power which could have been delegated under the articles must have been
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actually conferred. The actual delegation being a matter of internal
management, the plaintiff was not bound to enter into that.”
Thus the effect of a “delegation clause” is “that a person who contracts with
an individual director of a company, knowing that the board has power to
delegate its authority to such an individual, may assume that the power of
delegation has been exercised.”
It was held that the defendant company was not bound by the agreement.
Slade J’, was of the opinion that knowledge of articles was essential. “A
person who at the time of entering into a contract with a company has no
knowledge of the company’s articles of association, cannot rely on those
articles as conferring ostensible or apparent authority on the agent of the
company with whom he dealt.” He could have relied on the power of
delegation only if he knew that it existed and had acted on the belief that it
must have been duly exercised.
While holding the directors liable for breach of duty of skill and care, the court laid
down two criteria against which the standard of duty of a director must be judged.
It pointed out that we have to look at the nature of a company's business. Where
such a company is a small concern, the standard of duty expected of a director is
not as high as in a big company.
The mode in which the company's work is distributed among various officers has
to be determined e.g. directors of operations, finance, etc. Where the company's
operations are divided among many directors duty of skill and care is higher than
otherwise.
A director is not expected to exhibit a greater degree of skill and care beyond that
which is reasonably expected of a person with similar qualifications, knowledge or
skill and experience and he is not bound to give continuous attention provided he
attends the meetings, unless he is a full time director.
1. Use of director’s powers. Directors must always put the company's interests first
and in the exercise of their powers, they must do so for proper purposes
otherwise they are held liable. A director should not also divert or destroy a
particular opportunity being pursued by the company for his personal benefit.
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In Cooks v Deeks above three directors of the company obtained a contract in
their own names and diverted it to themselves at the exclusion of the company,
it was held that they were in breach of the duty they owed the company since
as directors they were entrusted with the affairs of the company but instead
used their position to exclude the company from the benefits of a contract
whose interest they were supposed to protect.
2. Dealing with the company's properties. Directors have a duty to protect the
company's properties and not to expend them anyhow or use them for their
personal purposes. If they do so, they are liable to make good the loss. In the case
of Re George Newman , when directors made presents to themselves out of
company assets, they were held liable for misappropriation of company property.
The term company's property is widely defined to include contracts to which the
company is entitled even if the company has lost no funds at all.
In Cooks Vs Deeks (1916) AC 554 the court held that the company's property
belongs to the company both at law and equity, and that the directors cannot
appropriate such property.
3. Making Secret Profits out of the Company. A director being in a fiduciary
position is accountable to the company for any secret profits which he has
made by reason of his position as director. A director is free to trade with the
company but he must ensure that he does not make a secret profit at the
expense of the company. Thus a director should not act in a transaction where
there is a conflict of interest unless he discloses that interest to the company.
S.200 and art 84 allows a director to take part in a contract with a company
in which he has personal interests as long as he discloses this interest to the
company. Where a director has not disclosed his interest the contract is not
void but voidable.
Under S206, any provision in the articles or in a contract which exempts any officer
from liability or indemnifies him due to:-
i. his negligence
ii. breach of duty
iii. breach of trust
is void. There are 2 exceptions to this,
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1. That S.206 does not apply to such provision if it was made before the
commencement of the Companies Act i.e. before 1950. This provision
however is redundant for the act came into force a long time ago. The action
or breach must have been done before the Companies Act. (However, this
provision is of relevance even before 1950 because some companies are as
old as before 1950, when they were governed by the laws of England).
In the case of Customs And Excise Vs Alpha Ltd (1991) IQB 549
It was held that section 405 is applicable only where the company is making claims
against the officer and is not applicable if other people are making such
claims.
Other sections are 322 & 329. According to S.322, criminal action can lie against
any office for failure to disclose relevant information during the winding up of the
company. Under S 323, any officer who falsifies companies accounts or books with
an intention to defraud any person is also criminally liable. Under S 324, any officer
who acts in a fraudulent manner in relation to the property of the company being
wound up or fails to account for the loss of the property (S 328) or who is a barrier to
the carrying out of the company's affairs for any fraudulent (S 327) which is also
applicable for lifting of the veil) or who is a party to the non-keeping of proper books
of accounts (S329) is criminally liable.
In public companies, any officer or servant of that company or any person who is a
partner or in employment of an officer or servant of that company or in any body
corporate is not qualified to be appointed as auditors (s.159), to avoid conflict of
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interests. The general rule here is that an auditor is appointed by the general
meeting, which is also responsible for fixing remuneration. However, under
certain circumstances, the registrar of companies or the directors can appoint an
auditor and fix the remuneration. Similarly s.160 provides that an auditor can only
be removed by the general meeting and where such resolution has been made a
copy of the resolution is sent to the auditor who has the right to make
representations as redeems fit.
Duties: s 162
Basically, an auditor is to investigate and examine the company's accounts. His
report is to be read at the company's general meeting and an auditor has a right to
attend all such relevant general meetings. The standard of duty has been set by the
court in Re London And General Bank Case. That an auditor must be honest and
must exercise reasonable care and skill in what he certifies.
It was further stated in the case that an auditor is not bound to do more than exercise
reasonable care and skill in making inquiries and investigations even in the case of
suspicion.
It is the duty of an auditor to exercise skill, care and caution a cautions auditor would
use. In the case of Formento (Steeling Area) Vs Selsdon Fountain Pen Co Ltd
(1958)1 ALLER where Lord Denning stated that an auditor is not to be confined to
checking vouchers and adding or subtracting figures but he must take care that errors
are not made and that he should approach his duty suspecting that someone may
have made a mistake and that a check must be taken to ensure that none has been
made. That his vital task is to take care that errors of omission or commission or
down right untruths are not done.
In the case of Roberts Vs Hopwood (1925) AC 578 and in Re Ridsell (1914) CH. 59,
it was stated that where an auditor does not have sufficient legal knowledge to deal
with a matter as accountants do, he is entitled to take legal advice. In the case of
BEVAN VS WEBB (19010) 2 Ch. 59, it was held that "permission to a man to do
an act which he cannot do effectually without the help of an agent carries with it the
right to employ an agent”. According to S.328, an auditor is an officer of the
company. His duty is to ascertain and state the true financial position of the company
at the time of audit but not to care about declaring dividends. In the case of Re
Kingston, it was stated that he is a watchdog but not a blood-bound but if there is
anything calculated to excite suspicion, he should probe it to the bottom but he does
not guarantee the discovery of all fraud.
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Nevertheless, an auditor will not be made liable for not tracking out ingenious and
carefully laid schemes of fraud, when there is nothing to arouse suspicion, and when
those frauds are perpetuated by tried servants of the company who are undetected for
years by the directors.
INSTITUTION OF SUITS
Although the Secretary is the officer mainly charged with the duty to institute suits
on behalf of the company and it was the earlier judicial view in the decision in
Bugerere Coffee Growers Ltd. V Zukuberi Kikuya and Another [1970] EA
147. These have been held as no longer good law by the Court of Appeal of
Uganda in the case of M/s Tatu Naiga & Emporium V Uverjee Brothers (U)
Ltd (C.A-U), citing United Assurance Co. Ltd V Attorney General, Civil
Appeal No. 1/1986 which overturned those earlier decisions. Any authorised
director can give the necessary authority to institute a suit in the name of the
company.
Furthermore, a secretary can be held criminally liable under the sections already
discussed in respect of directors.
Then courts will interfere with a member's right of voting since such voting amounts
to fraud on the minority.
It was held that the defendant company as a majority shareholder had benefited
from the contract, which was the property of its subsidiary. The minority
shareholders were entitled to participate in the benefits of the contract which the
defendant company had misappropriated. However, winding up had already
taken place and there was no alternative remedy.
Release of directors' duties of good faith
A general meeting cannot authorize directors to breach their duty of good faith
nor can it ratify any such breach. Once it does so, that will amount to a fraud on
the minority and the transaction in issue will be set aside. But the general meeting
can legally release the Director of the duty of skill and care (S 206).
Expropriation of members' property
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Majority shareholders must not use their powers to expropriate the shares of
minority shareholders. If they do so, that will amount to a fraud and the
transaction will be set aside. In Brown Vs British Wheel Co (1979) 1 ch 290, the
majority shareholders wanted to buy the minority shareholders out and the court
held that the action was not bonafide to the company as a whole.
Companies are time and time again faced with the challenge of raising capital for the
growth of the company. For an existing company, new capital for such a company
can be raised through ploughing back profits without declaring any dividends.
Alternatively, the company may decide to offer its securities to the public, by
floating new shares. Also, the company may decide to borrow from the bank or the
government or insurance companies or finance houses.
METHODS OF ISSUE
There are different was of inviting the public to subscribe for shares in a company.
1. Placings (private)
2. Offer by tender.
3. Rights issue
4. Bonus Issue
5. Offers for sale
6. Direct offers e.g. by issuing prospects
Placings
These take place in the issuing house. A company issues securities, placing them in
the issuing house for purposes of the issuing house selling them to its clients. The
issuing house (may purchase securities and place them with clients) or may not place
them with the clients. When it purchases the securities, then it ceases to be an agent
of the company.
Bonus issue
Like the rights issue, the bonus issue method is an internal affair of the company
concerned. Under this method, instead of the company paying to shareholders a
dividend it may have declared, it holds on to those funds by issuing shares to the
shareholders.
Direct issue
The company itself deals with the public without an intervention of the issuing
house. This method is cumbersome for a number of reasons.
1. The company has to use a prospectus i.e. legal liability are conferred upon a
company.
2. The company bears a risk of unsuccessful issue.
3. Although it may protect itself against unsuccessful issue by underwriting such
issue, the underwriters have to be paid a commission for that issue. S. 55
provides that the commission must not exceed 10% of the price at which the
shares are issued and that there must be authority from the Articles to pay that
commission. This means that a company cannot transact with underwriters
who demand more than 10% of the price. Again according to S. 55, if the
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Articles authorise more than 10% the company cannot exceed such figure.
And such payment must be disclosed in the prospectus.
THE PROSPECTUS
According to S.2, a prospectus means any document, prospectus, notice, circular,
advertisement or other invitation or offering to the public for subscription of the
securities of a company.
The definition in S.2 is very vague and consequently the courts have come up with
some guidelines to be employed in determining whether an invitation amounts to a
prospectus or not. Firstly, according to Nash Vs Lynd (1929) AC 158, for a
document to amount to a prospectus, not only must it be delivered but also there
must be some publicity with the aim of inducing subscription e.g. if a thief stole
the document and publicized the issue of shares which the public purport to buy,
the document does not amount to a prospectus.
Secondly, the invitation must be one inviting the public to subscribe or purchase the
securities. The terms subscribe or purchase means taking or agreeing to take
securities for cash.
Criminal liability
s. 46 provides that where a prospectus issued includes any untrue statement, any
person who authorised its issue is liable on conviction to imprisonment for a term not
exceeding 2 years or to a fine not exceeding 10,000/= or both. The only way such a
person can escape liability is to prove that at the time the statement was issued, they
reasonably believed that the statement was true.
Civil liability.
Civil liability for the defective prospectus exists under both the Act and common
law.
Under the Companies Act, s.45 provides that if a prospectus contains false or untrue
statements, the civil liability will be borne by the persons responsible for its issue to
pay compensation to all those persons who rely on it to subscribe for shares. The
compensation will be for any loss or damages those persons have suffered by reason
of relying on such a false statement. The persons that will be held liable include
The directors of the company at the time of issue.
Any other person who authorised himself to be indicated as a director in the
company at the time of issue.
Promoters of the company.
Any other person that authorised the issue.
The only way such person can escape liability is to prove that although they had
authorised to be named as directors, they withdrew their consent before the
prospectus was issued or that it was issued without their knowledge or consent or
that after the issue when they became aware of the defect in it, they withdrew their
consent and gave notice of the false statement to the public.
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Civil liability at common law.
ALLOTMENT OF SHARES
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Private Companies. This is the process through which a potential shareholder or
subscriber is given the number of shares which he has successfully applied for.
Private companies under S. 30 restrict the issue of new shares by requiring that:-
a private company is not entitled to invite the public to subscribe to any of its
securities.
a private company must in its Articles of Association contain a clause
restricting the right of transferability of its securities as far as its shares are
concerned.
Such clauses are called pre-emptive clauses. Lack of such a pre-emptive clause
automatically makes the company a public ltd company.
i. The purchase price of any property bought if the price of such property is to
be paid out of the issue of securities.
ii. The preliminary expenses payable by the company and any commission
payable by the company to persons who have agreed to subscribe or to induce
subscriptions for the company's securities.
iii. The working capital - there must be enough resources from the minimum
subscriptions for the day to day running of the business on the short run.
iv. S. 49(3) say that at least 5% of the total nominal amount must have been paid
for in respect of each share applied for.
Where the above limitation is contravened after 60 days after the prospectus has been
issued, then the company becomes liable to repay the money to the applicants
without interest. If 75 days elapse before payment of such money, after issue of the
prospectus, then the directors become jointly liable to pay the money with interests at
the rate of 5% p.a. Any allotment which may have been made is voidable at the
instance of the applicant.
A share certificate with a company seal is prima facie evidence that the owner has
title to the shares. Prima facie evidence is evidence, which can be rebutted i.e. it is
evidence on the face of it, in other words it is not conclusive.
SHARE WARRANTS
A company can choose to issue either share certificates or share warrants. S. 85
provides that if the Articles of Association authorise, a company may instead of
issuing a share certificate, issue a share warrant in respect of any fully paid shares.
There are two advantages of a warrant over a share certificate:
1. A Warrant is a share warranty that the bearer is the owner of shares indicated
while the share certificate is prima facie evidence that the holder is the owner
of shares. Prima facie evidence can be rebutted but a company cannot deny
that the bearer of a warrant is the owner. This thus makes the warrant more
important.
2. A purchaser of a share warrant takes the shares concerned free of equities, i.e.
he is a bonafide purchaser and his interest cannot be challanged, while a
purchaser of a certificate must first be registered as shareholder before he can
1. Ordinary shares. This is the basic category. If all shares in the company are
issued without classification or categorisation or differentiation, then they are
all ordinary shares. If the shares are divided into classes and special rights of
some shares are set out, then the remaining shares without any special rights
are ordinary shares.
2. Preference shares. These shares will usually be entitled to have dividends
paid at a pre determined rate eg at a rate of 10% on their nominal value in
priority to any dividends on ordinary shares.
3. Deferred shares. These are sometimes known as founders shares, they
normally they normally enjoy rights after the preference and ordinary shares,
they have inferior rights.
4. Redeemable shares. These are created on the terms that they shall be bought
back by the company at a future time at the option of the company or the
members.
5. Non voting shares. These may be issued to restrict control of the company to
the holders of the remaining shares. This is quite commonly desired when
family controlled company is involved and looks to outside investors for
additional capital although it may of course find that the investors are not
prepared to put their money on those terms.
6. Shares with limited voting rights or enhanced voting rights.
7. Employee shares. Issued to employees and are ordinary in nature just that
they enjoy tax advantages.
2. DEBENTURE STOCKS.
A private company is not allowed to raise money by borrowing from the public. As
such, instead, the company may decide to create a debenture stock. A debenture
stock is a loan fund which is created by the company and which can be divisible
among various creditors who each hold a debenture stock certificate. For example, a
private company with debenture stock, can obtain money from several banks which
could each hold a debenture stock certificate.
3. FLOATING CHARGE.
A charge is a security created over the assets of the company. Security is that
asset of a debtor that a creditor is authorised to resort to in case the debtor
fails to pay back their money. A floating charge was defined in the case of
Illingworth V Houldsworth as “a security created over the assets of a
company and by its nature leaves the company at liberty to deal with the
assets charged in the ordinary course of business.’’
A floating charge floats over all the assets of the company even those
acquired after it was created and the company is at liberty to deal with those
assets in the course of it s business while the charge is still on them, as such
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the company can even sell them and replace them with new or different
assets.
A floating charge will settle on the assets of the company if something
happens for example if the company starts to wind up and in that case it
becomes a fixed charge.
4. A FIXED CHARGE.
This one was also defined in the above case of Illingworth V Houldsworth
as a specific charge that fastens / is fixed on an ascertained asset(s) of the
company and as such the company has no liberty to deal with such assets
without the consent of the creditor as long as the charge still exists.
Under S. 96, all charges must be registered in 42 days lest they are deemed void.
MAINTENANCE OF CAPITAL
1. Share Capital
Amount contributed by members entitling them to a dividend as a return to the
member.
2. Loan Capital.
Loan given to a company as capital. It is that returnable portion of capital that
entitles interest to the creditor.
3. Nomial capital.
4. Issued capital.
Nominal value of shares availed for subscription and which has been allotted.
5. Capital at call.
Issued capital that is not yet paid for.
6. Called up capital.
Portion of the issued capital that the company has requested for settlement. It is the
portion of issued capital that the company has requested for settlement from the
holder of shares that have not been fully paid for who is entitled to all benefits as if
the shares were fully paid provided the Articles of association allow.
MAINTENANCE OF CAPITAL
This illustrates the concern of the law to see that the capital of the company is
maintained in the company by ensuring;-
1. That those who take up shares in the company do in fact contribute their
subscriptions by paying them in money or money’s worth.
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2. That this sum of money or its equivalent once received by the company is as
far as possible maintained in the company consistently with regard to all the
risks associated with any business venture.
3. And that in particular that money is not returned to the members themselves
directly or indirectly except through some procedure provided by law.
The rationale for this strict rule is that to safeguard the interests of the creditors of the
company and other people whose interests would be negatively affected by the
reduction in the company’s capital or assets. The House of Lords explicitly explained
this in the case of Trevor V Whiteworth thus
In order to ensure strict observance of this the law has come up with rules and
provisions on maintenance of capital. They include the following.
3. A company must not give financial assistance for the acquisition of its
own shares.
A company is prohibited from giving financial assistance for the acquisition
of its shares to a person whether directly or indirectly. S. 56 provides that it
shall not be lawful for a company to give whether directly of indirectly any
financial assistance for the purpose of or in connection with a purchase or
subscription made or to be made by any person of any share sin the company
or its subsidiary or holding company. Examples of such instances include the
following;-
A company lending money to A so that to put A in funds so that he
can buy shares from the existing members.
A company lending to C money so that C can repay a loan provided
earlier by C’s bank which C has already used to buy shares in the
company.
A company buys a piece of land from D knowing that D will use that
same purchase price he receives to pay for shares in the company that
he already agreed to buy.
Exceptions to this rule/ instances where the company may give financial
assistance.
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Where the lending of the money is part of the ordinary business of the
company.
Where the company gives loans to persons with in the employment of the
company other than the directors with a view to enabling those persons to
subscribe for fully paid up share in the company for their beneficial interest.
4. If a company is to pay dividends then they can only be paid out of the
company’s profits but not out of its working capital.
Dividends are any return paid/given to a shareholder on his
investment/shareholding in a company. Unless the Articles state otherwise, a
shareholder receives dividends on his shares. A share holder is not entitled to
payment unless the directors have declared the dividends and authorised payment
of the same to the shareholders. In Makidayo Oneka Vs Wines And Spirits (U)
Ltd And Another (1974) HB.2, the principle was laid that unless the articles and
terms of the issue of shares confer a right upon a shareholder to compel a company
to pay a dividend; it is the discretion of the directors to recommend to a general
meeting that a dividend be declared.
If the company adopted table A, Article 116 provides that a company shall only
pay dividends out of profits. Furthermore, where a company has an article
equivalent to article 114 of table A, if the directors have recommended a certain
sum for dividend, the general meeting has no discretion to increase that sum.
However, a shareholder or a debenture holder can seek a court injunction to
restrain a company from declaring a dividend.
5. A company may not pay interest out of its capital except as authorised by
law.
s. 67 of the Act provides that a company may pay interest out of its capital in certain
cases in particular where shares were issued so that the company can raise money to
cover expenses of construction of any works or buildings. The shareholders who
paid for the shares may be given interest on the money they paid and this interest
may be paid out of the company’s capital. However the payment is subject to the
following conditions.
The payment must have been authorised by the articles or by a special
resolution.
The payment must have also been sanctioned/ authorised by the registrar of
companies.
The registrar may first make an inquiry into the circumstances surrounding
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the entire transaction before he authorises the payment and he can charge the
cost of the inquiry on the company.
The payments must be made within the period fixed by the registrar.
The rate of interest must not exceed 5% per year.
We are here concerned with the avenues through which members can enforce their
rights e.g. payment of declared dividends, removal of incompetent directors, etc.
This can be done under statute law or under common law.
1. COMMON LAW
a. PERSONAL ACTION: at common law a member who is aggrieved by the
acts of the directors can bring his personal action against those directors on
behalf of himself and on behalf of the company. However there is a
limitation on members liberty to institute such actions. Whether or not an
aggrieved shareholder can have his complaint entertained at common law,
will depend on the rule in Foss V Harbottle. In this case a plaintiff instituted a
suit a against the directors of a company who had sold their land to the
company at an overpriced value, it was held that court will not ordinarily
intervene in a matter which is competent for the company to solve itself and
that where it is alleged that a wrong has been done to the company, prima
facie, the only proper plaintiff to sue is the company itself. As we saw ealier,
officers of the company like a secretary or the directors are the ones with
authority to sue on behalf of the company.
The rational for this rule is to avoid a multiplicity of suits where any
member may sue when a wrong is done to a company and when an
action of one member fails another one sues and on and on.
However, there may be instances where by an injustice has been done to the
company and the officers are the ones in the wrong yet they are the ones who
can authorise the institution of the suit on behalf of the company, they will
definitely never sue themselves on behalf of the company. For that matter, if
ii. Illegal/Ultra vires transactions: where the act being complained of is illegal
or an ultra vires transaction, any aggrieved shareholder can proceed to court
notwithstanding the rule in Foss. Vs Harbottle e.g. in the case of Hurton V
Westcork (1883) 23 Ch.D.654 court held that since the company was
involved in an ultra vires transaction, the plaintiff a member of the company
could bring an action against the directors.
b. DERIVATIVE ACTION:
This is a relatively recently developed action where a shareholder who cannot
proceed under common law because of the rule in Foss Vs Harbottle or under Statute
can take a complaint to court for the wrongs committed in his company.
c. Representative Action
This is a hybrid of the two actions above. In all the above actions, the plaintiff
must have clean hands.
2. STATUTORY LAW
1. Winding up the company under the just and equitable Clause (S222):
I. Deadlock between directors who are also the only shareholders: In Reyenidje
Tobacco Co Ltd (1916) 2 Ch.426; two directors who were also the only
shareholders only communicated through a secretary. The directors hated
each other and it was held that in the circumstances winding up was the best
option and court agreed.
II. Expulsion from office due to the bad intentions of those carrying out the
expulsion: If A is a director per se and he is kicked out of office, he cannot
apply S222(F) unless he is a shareholder.
III. Loss of substraturn of the company (i.e. object for which the company was
formed): Where a company was formed for an illegal or fraudulent purpose, it
can be wound up under the just and equitable laws. The above is just a sample
of wrongs that are entertained under S222(f).
In the case of RE Ibrahim West Bond Gaurages (1973) AC 360, it was held that a
petitioner may rely on circumstances of justice and equity affecting the relationship
with the company.
Before the shareholder can have the matter entertained under this section, he must
satisfy the following conditions:
The law on winding up of companies is governed by the companies
Act and winding up rules. Winding up basically means liquidation of
a company. Its a process by which the company’s life is brought an
end and its property managed for the benefit of its creditors and members. It
involves an operation of putting to an end the transactions of
the company, realizing the assets and discharging its liabilities.There
are two types of winding up.
1. Voluntary winding up
2. Compulsory winding up
Voluntary winding up occurs when the company decides by itself to wind up
its affairs and therefore passes a resolution to that effect. A company may be
wound up voluntarily under the following circumstances.
(i) When the period fixed by the articles for the duration of the company or if the
company was set up for a specific activity and that activity has been accomplished.
In such cases the company may pass an ordinary resolution to windup.
(iii) If the company feels that it can not continue operating by reason
that its liabilities are continuously exceeding the assets, it can by
ordinary resolution wind up its business . Voluntary winding up in its
nature also takes two forms .It can be members voluntary winding up
or creditors voluntary winding up.
As soon as the liquidator has finished his work and fully wound up
the affairs of the company, then he must make a full account of his
work to the company in a general meeting showing how he
conducted it, how he disposed of the company’s assets and send a
copy of this report to the registrar.
Three months after the liquidators final report is filed, the company
will be deemed finally dissolved/woundup.
At the meeting the directors shall give a full statement of the position of the
company’s affairs and a list of the creditors of the company and their
respective claims.
If the winding up continues for more than a year, the liquidator must call a
general meeting of the company at the end of each year and give an account
of the work he has so far done.
As soon as the liquidator has finished his work and fully wound up the
affairs of the company, then he must make a full account of his work to the
creditors in a meeting showing how he conducted it, how he disposed of the
company’s assets and send a copy of this report to the registrar.
Three months after the liquidators final report is filed, the company will be
deemed finally dissolved/woundup.
3. If the company does not commence business within a year from the date of
incorporation or suspends its business for a whole year.
4. Where the number of members has reduced below the legal minimum i.e.
2 in case of private companies and 7 in case of public companies.
- the company has failed to pay a creditor, the creditor has demanded for
payment and the company has failed to pay for a period of three weeks and
above.
-an order of court has been made for the company to pay a given debt and it
has been returned to court unsatisfied.
6. Where it is just and equitable to do so under the just and equitable clause.
Situations which fall under this clause are, when there is a deadlock in
management, where there is justifiable lack of confidence in the
management of the company, where there has been loss of substratum i.e.
failure of the whole purpose for which the company was set and lastly
where the company is carrying out business in an unlawful manner or for
fraudulent purposes.
The co then prepares a statement of its affairs and submits the same to the
official receiver.
Court may then appoint a liquidator who does the actual winding up.
The creditors in order to make sure that the liquidator does his work
diligently may appoint a committee of inspection. To act with the
liquidator. After the liquidator has accomplished his work he calls a final
meeting of the creditors and lays before them a report of his work and files
the same and the company is finally dissolved.
-No legal proceedings can be instituted against the company without the leave
(permission) of court
-The directors of the company employees are dismissed although they may be
re-employed by the liquidator
(a) Fraudulent trading. If in the course of winding up, it appears that any of the
company’s business has been carried on with the intention to defraud creditors or
for any fraudulent purpose, a court may on application order that any person who
has the knowledge be made personally liable for the debts of the company without
limitation of liability.
The effect of preference is that it enables a creditor to get more than what he
would be entitled if he had not been paid until the winding up.
APPOINTMENT OF A LIQUIDATOR
The liquidator is also empowered to sell the real or personal property of the
company by public auction or private treaty with the power to transfer the same
to any person or company.
He can execute all deeds, receipt and other documents and as such to use them
when necessary. He can appoint an agent to do all the work he cannot do himself
or to do any other such thing as may be necessary for winding up the affairs of the
company and distributing its assets. These powers are controlled by court and any
creditor or contributory can apply to court for redress in case of abuse of the
powers.
Accordingly, the liquidator’s duties include taking into the custody or control the
company’s property. He has an obligation of identifying the contributories,
collecting the company’s assets , paying of debts and distributing the surplus
assets among the members according to their rights.
The liquidator must keep proper accounts which subject to courts control may be
open to inspection by any creditor or contributory received by him in the
companies liquidation account.
POWERS OF A LIQUIDATOR.
1. The liquidator can bring or defend any action or other legal proceedings in
the name of the company.
2. The liquidator has power to carryon business of the company as far as may
be necessary for the benefit of winding up. Ordinarily once winding up
commences the company is required to stop operating business, however
the liquidator has powers to continue operating the business of the company
if in his opinion it is beneficial to the winding up process. He is deemed to
be an agent of the company and can conclude all transactions on its behalf
for the purposes of effective winding up.
9. A liquidator has the power with special leave of court to rectify the register
of members.
The liquidator must exercise high degree of care and diligence in his dealings if he
is to escape liability. If he fails to seek the necessary legal advice and negligently
causes loss to the company and creditors he will be held liable in damages.
The liquidator must act in good faith. He should be honest and avoid making a
secret profit and conflict of interest. Where he fails to act bonafide, he can be
made to account for any unfair benefit obtained from the liquidation
1. In the first place the assets should be applied to meet the costs, charges and
expenses of winding up including the liquidator’s disbursement and
remuneration. However, remuneration of the liquidator should be
reasonable and where it is proved excessive and unjustifiable court
can interview and require him to submit his bill for taxation during taxation
some of the money claimed is reduced.
2. The second priority is given to preferred creditors. The priority with
regard to the preferential creditors is determined as follows:
Wages and salaries of any clerk or servant for services rendered for
the previous four months.
Deferred creditors.
READING MATERIALS.
1. David Bakibinga, Company Law in Uganda
2. Gower L.C. B., The Principles of Modern Company Law, Stevens and Sons,
third Edition (1969)
3. Musisi James, Company Law in East Africa
4. Seally L.S; Cases and Materials in Company Law, C.U.P (1971)
5. The Companies Act Cap 110 Laws of Uganda.
6. Notes prepared for class.