Business Association Complete Notes

THE LAW OF BUSINESS ASSOCIATIONS
Company means as 'a company formed and registered under this Act or
an existing company. This is a very vague definition, in the statute the
word company is not a legal term hence the vagueness of the definition.
The legal attributes of the word company will depend upon a particular
legal system.
In legal theory company denotes an association of a number of persons

for some common object or objects in ordinary usage it is associated
with economic purposes or gain. A company can be defined as an
association of several persons who contribute money or money’s worth
Lubogo Isaac C lecturer notes Business Association Complete Notes [Type text] Page
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into a common stock and who employ it for some common purpose.
Our legal system provides for three types of associations namely
1. Companies
2. Partnerships.
3. Upcoming is the cooperative society.
The law treats companies in company law distinctly from partnerships

in partnership law. Basically company law consists partly of ordinary
rules of Common law and equity and partly of statutory rules. The
common law rules are embodied in cases. The statutory rules are to be
found in the Companies Act.
Exceptions to the Rules are stated in the Act but not the rules
themselves. Therefore fundamental principles have to be extracted from
study of numerous decided cases some of which are irreconcilable.
The true meaning of company law can only be understood against the
background of the common law.
FUNDAMENTAL CONCEPTS OF COMPANY LAW

There are two fundamental legal concepts
1. The concept of legal personality; (corporate personality) by
which a company is treated in law as a separate entity from the
members.
2. The concept of limited liability;
Concept of legal personality

(i) A legal person is not always human, it can be described as any
person human or otherwise who has rights and duties at law; whereas all
human persons are legal persons not all legal persons are human
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persons. The non-human legal persons are called corporations. The
word corporation is derived from the Latin word Corpus which inter
alia also means body. A corporation is therefore a legal person brought
into existence by a process of law and not by natural birth. Owing to
these artificial processes they are sometimes referred to as artificial
persons not fictitious persons.
LIMITED LIABILITY
Basically liability means the extent to which a person can be made to
account by law. He can be made to be accountable either for the full
amount of his debts or else pay towards that debt only to a certain limit
and not beyond it. In the context of company law liability may be
limited either by shares or by guarantee.
Under Section (2) (a) of the Companies Act, in a company limited by

shares the members liability to contribute to the companies assets is
limited to the amount if any paid on their shares.
Under Section 4 (2) (b) of the Companies Act in a company limited by

guarantee the members undertake to contribute a certain amount to the
assets of the company in the event of the company being wound up.
Note that it is the members’ liability and not the companies’ liability
which is limited. As long as there are adequate assets, the company is
liable to pay all its debts without any limitation of liability. If the assets
are not adequate, then the company can only be wound up as a human
being who fails to pay his debts. Note that in England the Insolvency
Act has consolidated the relationships relating to …. That does not
apply here.
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Nearly all statutory rules in the Companies Act are intended for one or
two objects namely
1. The protection of the company’s creditors;
2. The protection of the investors in this instance being the
members.
These underlie the very foundation of company law.
FORMATION OF A LIMITED COMPANY

This is by registration under the Companies Act
In order to incorporate themselves into a company, those people

wishing to trade through the medium of a limited liability company
must first prepare and register certain documents. These are as follows
a. Memorandum of Association: this is the document in
which they express inter alia their desire to be formed into a company
with a specific name and objects. The Memorandum of Association of
a company is its primary document which sets up its constitution and
objects;
b. Articles of Association; whereas the memorandum of
association of a company sets out its objectives and constitution the
articles of association contain the rules and regulations by which its
internal affairs are governed dealing with such matters as shares, share
capital, company’s meetings and directors among others;
Both the Memorandum and Articles of Associations must each be

signed by seven persons in the case of a public company or two persons
if it is intended to form a private company. These signatures must be
attested by a witness. If the company has a share capital each
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subscriber to the share capital must write opposite his name the number
of shares he takes and he must not take less than one share.
c. Statement of Nominal Capital – this is only required if the

company has a share capital. It simply states that the company’s
nominal capital shall be xxx amount of shillings. The fees that one pays
on registration will be determined by the share capital that the company
has stated. The higher the share capital, the more that the company will
pay in terms of stamp duty.
d. Declaration of Compliance: this is a statutory declaration

made either by the advocates engaged in the formation of the company
or by the person named in the articles as the director or secretary to the
effect that all the requirements of the companies Act have been
complied with. Where it is intended to register a public company,
Section 184 (4) of the Companies Act also requires the registration of a
list of persons who have agreed to become directors and Section 182 (1)
requires the written consents of the Directors.
These are the only documents which must be registered in order to

secure the incorporation of the company. In practice however two other
documents which would be filed within a short time of incorporation
are also handed in at the same time. These are:
1. Notice of the situation of the Registered Office which

under Section 108(1) of the statute should be filed within 14 days of
incorporation;
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2. Particulars of Directors and Secretary which under
Section 201 of the statute are normally required within 14 days of the
appointment of the directors and secretary.
The documents are then lodged with the registrar of companies and if
they are in order then they are registered and the registrar thereupon
grants a certificate of incorporation and the company is thereby formed.
Section 16(2) of the Act provides that from the dates mentioned in a
certificate of incorporation the subscribers to the Memorandum of
Association become a body corporate by the name mentioned in the
Memorandum capable of exercising all the functions of an incorporated
company. It should be noted that the registered company is the most
important corporation.
STATUTORY CORPORATIONS
The difference between a statutory corporation(or parastatal) and a
company registered under the companies Act is that a statutory
corporation is created directly by an Act of Parliament. The Companies
Act does not create any corporations at all. It only lays down a
procedure by which any two or more persons who so desire can
themselves create a corporation by complying with the rules for
registration which the Act prescribes.
TYPES OF REGISTERED COMPANIES

Before registering a company the promoters must make up their minds
as to which of the various types of registered companies they wish to
form.
1. They must choose between a limited and unlimited

company; Section 4 (2) (c) of the Companies Act states that ‘a company
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not having the liability of members limited in any way is termed as an
unlimited company. The disadvantage of an unlimited company is that
its members will be personally liable for the company’s debts. It is
unlikely that promoters will wish to form an unlimited liability
company if the company is intended to trade. But if the company is
merely for holding land or other investments the absence of limited
liability would not matter.
2. If they decide upon a limited company, they must make up

their minds whether it is to be limited by shares or by guarantee. This
will depend upon the purpose for which it is formed. If it is to be a non-
profit concern, then a guarantee company is the most suitable, but if it is
intended to form a profit making company, then a company limited by
shares is preferable.
3. They have to choose between a private company and a

public company. Section 30 of the Companies Act defines a private
company as one which by its articles restricts
(i) the rights to transfer shares;
(ii) restricts the number of its members to fifty (50);
(iii) prohibits the invitation of members of the public to
subscribe for any shares or debentures of the company.
A company which does not fall under this definition is described as a

public company.
In order to form a public company, there must be at least seven (7)

subscribers signing the Memorandum of Association whereas only two
(2) persons need to sign the Memorandum of Association in the case of
a private company.
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ADVANTAGES OF INCORPORATION
A corporation is a legal entity distinct from its members, capable of
enjoying rights being subject to duties which are not the same as those
enjoyed or borne by the members.
The full implications of corporate personality were not fully understood

till 1897 in the case of Salomon v. Salomon [1897] A C 22
Facts of the case
Salomon was a prosperous lender/merchant. He sold his business to

Salomon and Co. Limited which he formed for the purpose at the price
of £39,000 satisfied by £1000 in cash, £10,000 in debentures conferring
a charge on the company’s assets and £20,000 in fully paid up £1
shares. Salomon was both a creditor because he held a debenture and
also a shareholder because he held shares in the company. Seven
shares were then subscribed for in cash by Salomon, his wife and
daughter and each of his 4 sons. Salomon therefore had 20,001 shares
in the company and each member of the family had 1 share as
Salomon‘s nominees. Within one year of incorporation the company
ran into financial problems and consequently it was wound up. Its
assets were not enough to satisfy the debenture holder (Salomon) and
having done so there was nothing left for the unsecured creditors. The
court of first instance and the court of appeal held that the company
was a mere sham an alias, agent or nominee of Salomon and that Mr.
Salomon should therefore indemnify the company against its trade loss.
The House of Lords unanimously reversed this decision. In the words

of Lord Halsbury “Either the limited company was a legal entity or it
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was not. If it was, the business belonged to it and not to Salomon. If
it was not, there was no person and no thing at all and it is impossible
to say at the same time that there is a company and there is not”
In the words of Lord Mcnaghten “the company is at a law a different
person altogether from the subscribers and though it may be that after
incorporation the business is precisely the same as it was before, and
the same persons are managers, and the same hands receive the profits,
the company is not in law the agent of the subscribers or trustee for
them nor are the subscribers as members liable in any shape or form
except to the extent and manner prescribed by the Act … in order to
form a company limited by shares the Act requires that seven (7)
persons who are each to take one share at least should sign a
Memorandum of Association. If those conditions are satisfied, what can
it matter, whether the signatories are relations or strangers? There is
nothing in the Act requiring that the subscribers to the Memorandum
should be independent or unconnected or that they or anyone of them
should take a substantial interest in the undertaking or that they should
have a mind and will of their own. When the Memorandum is duly
signed and registered though there be only seven (7) shares taken the
subscribers are a body corporate capable forthwith of exercising all the
functions of an incorporated company.
… The company attains maturity on its birth. There is no period of

minority and no interval of incapacity. A body corporate thus made
capable by statutes cannot lose its individuality by issuing the bulk of its
capital to one person whether he be a subscriber to the Memorandum
or not.”
There were several other Law Lords who decided business in the
House.
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The significance of the Salomon decision is threefold.
1. The decision established the legality of the so called one

man company;
2. It showed that incorporation was as readily available to the
small private partnership and sole traders as to the large private
company.
3. It also revealed that it is possible for a trader not merely to
limit his liability to the money invested in his enterprise but even to
avoid any serious risk to that capital by subscribing for debentures
rather than shares.
Since the decision in Salomon’s case the complete separation of the

company and its members has never been doubted.
Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619

The Appellant owner of a timber estate assigned the whole of the timber
to a company known as Irish Canadian Saw mills Company Limited for
a consideration of £42,000. Payment was effected by the allotment to
the Appellant of 42,000 shares fully paid up in £1 shares in the
company. No other shares were ever issued. The company proceeded
with the cutting of the timber. In the course of these operations, the
Appellant lent the company some £19,000. Apart from this the
company’s debts were minimal. The Appellant then insured the timber
against fire by policies effected in his own name. Then the timber was
destroyed by fire. The insurance company refused to pay any indemnity
to the appellant on the ground that he had no insurable interest in the
timber at the time of effecting the policy.
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The courts held that it was clear that the Appellant had no insurable
interest in the timber and though he owned almost all the shares in the
company and the company owed him a good deal of money,
nevertheless, neither as creditor or shareholder could he insure the
company’s assets. So he lost the Company.
Lee v Lee’s Air Farming Ltd. (1961) A.C. 12

Lee’s company was formed with capital of £3000 divided into 3000 £1
shares. Of these shares Mr. Lee held 2,999 and the remaining one share
was held by a third party as his nominee. In his capacity as controlling
shareholder, Lee voted himself as company director and Chief Pilot. In
the course of his duty as a pilot he was involved in a crash in which he
died. His widow brought an action for compensation under the
Workman’s Compensation Act and in this Act workman was defined as
“A person employed under a contract of service” so the issue was
whether Mr. Lee was a workman under the Act? The House of Lords
Held:
“ ... That it was the logical consequence of the decision in Salomon’s

case that Lee and the company were two separate entities capable of
entering into contractual relations and the widow was therefore entitled
to compensation.”
Katate v Nyakatukura (1956) 7 U.L.R 47A

The Respondent sued the Petitioner for the recovery of certain sums of
money allegedly due to the Ankole African Commercial Society Ltd in
which the petitioner was a Director and also the Deputy Chairman. The
Respondent conceded that in filing the action he was acting entirely on
behalf of the society, which was therefore the proper Plaintiff. The
action was filed in the Central Native Court. Under the Relevant Native
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Court Ordinance the Central Native Court had jurisdiction in civil cases
in which all parties were natives. The issue was whether the Ankole
African Commercial Society Ltd of whom all the shareholders were
natives was also a native.
The court held that a limited liability company is a corporation and as

such it has existence that is distinct from that of the shareholders who
own it. Being a distinct legal entity and abstract in nature, it was not
capable of having racial attributes.
ADVANTAGES OF INCORPORATION
1. Limited Liability – since a corporation is a separate person
from the members, its members are not liable for its debts. In the
absence of any provisions to the contrary the members are completely
free from any personal liability. In a company limited by shares the
members liability is limited to the amount unpaid on the shares whereas
in a company limited by guarantee the members liability is limited to
the amount they guaranteed to pay. The relevant statutory provision is
Section 213 of the Companies Act.
2. Holding Property: Corporate personality enables the property

of the association to be distinguishable from that of the members. In an
incorporated association, the property of the association is the joint
property of all the members although their rights therein may differ
from their rights to separate property because the joint property must be
dealt with according to the rules of the society and no individual
member can claim any particular asset to that property.
3. Suing and Being Sued: As a legal person, a company can take

action in it’s own name to enforce its legal rights. Conversely it may be
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sued for breach of its legal duties. The only restriction on a company’s
right to sue is that a lawyer in all its actions must always represent it.
In East Africa Roofing Co. Ltd v Pandit (1954) 27 KLR 86. Here the
Plaintiff a limited liability company filed a suit against the defendant
claiming certain sums of money. The defendant entered appearance and
filed a defence admitting liability but praying for payment by
installments. The company secretary set down the date on the suit for
hearing ex parte and without notice to the defendant. This was contrary
to the rules because a defence had been filed. On the hearing day the
suit was called in court but either party made no appearance and the
court therefore ordered the action to be dismissed. The company
thereafter applied to have the dismissal set aside. At the hearing of that
application, it was duly represented by an advocate. The only ground
on which the company relied was that it had intended all along to be
represented at the hearing by its manager and that the manager in fact
went to the law courts but ended in the wrong court. It was held that a
corporation such as a limited liability company cannot appear in person
as a legal entity without any visible person and having no physical
existence it cannot at common law appear by its agent but only by its
lawyer. The Kenya Companies Act does not change this common law
rule so as to enable a limited company to appear in court by any of its
officers.
4. PERPETUAL SUCCESSION As an artificial person, the

company has no body, mind or soul. It has been said that a company is
therefore invisible immortal and thus exists only intendment
consideration of the law. It can only cease to exist by the same process
of law that brought it into existence otherwise; it is not subject to the
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death of the natural body. Even though the members may come and go,
the company continues to exist.
5. TRANSFERABILITY OF SHARES Section 75 of the

Companies Act states as follows “ The Shares or any other interests of
a member in a company shall be moveable property transferable in the
manner provided by the Articles of Association of the Company.” In a
company therefore shares are really transferable and upon a transfer the
assignee steps into the shoes of the assignor as a member of the
company with full rights as a member. Note however that this
transferability only relates to public companies and not private
companies.
6. BORROWING FACILITIES: in practice companies can

raise their capital by borrowing much more easily than the sole trader or
partnership. This is enabled by the device of the ‘floating charge’ a
floating charge has been defined as ‘a charge which floats like a cloud
over all the assets from time to time falling within a certain
description but without preventing the company from disposing of
these assets in the ordinary course of its business until something
happens to cause the charge to become crystallized or fixed.’ The
ease with which this is done is facilitated by the Chattels Transfer Act
that exempts companies from compiling an inventory on the particulars
of such charges and also by the Bankruptcy Act that exempts companies
from the application of the reputed ownership clause. As far as
companies are concerned the goods in the possession of the company do
not fall within the reputed ownership clause.
The only disadvantages are three:

(i) Too many formalities required in the formation of the company,
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(ii)There is maximum publicity of the company’s affairs;
(iii) There is expense incurred in the formation and in the management
of a company.
In order to form a company, certain documents must be prepared

whereas no such documents need to be prepared to establish business as
a sole proprietor or partnership and throughout its life a company is
required to file such documents as balance sheets and profits and loss
accounts on dissolution of the company it is required to follow a certain
stipulated procedure which does not apply to sole traders and
partnerships.
IGNORING THE CORPORATE ENTITY (LIFTING THE VEIL OF

INCORPORATION)
Although Salomon’s case finally established that a company is a
separate and distinct entity from the members, there are circumstances
in which these principle of corporate personality is itself disregarded.
These situations must however be regarded as exceptions because the
Salomon decision still obtains as the general principle
Although a company is liable for its own debt which will be the logical
consequence of the Salomon rule, the members themselves are held
liable which is therefore a departure from principle. The rights of
creditors under this section are subject to certain limitations namely
(under statutory provision)
REDUCTION IN THE NUMBER OF MEMBERS - Section 33 refers to

membership that has fallen below the statutory minimum in a public
company. The Act provides that only those members who remain after
the six month during which the company has fallen below the provided
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minimum period can be sued; Even these members are liable if they
have knowledge of the fact and only in respect of debts contracted after
the expiration of the six months. Moreover the Section is worded in
such a way as to suggest that the remaining members will be liable only
in respect of liquidated contractual obligations.
FRAUDULENT TRADING – the provisions of Section 323 of the

Companies Act come into operation here. It is provided that if in the
course of the winding up of the company it appears that any business
has been carried on with the intent to defraud the creditors, or for any
fraudulent purpose, the courts on the application of the official receiver,
the liquidator or member may declare that any persons who are
knowingly parties to the fraud shall be personally responsible without
any limitation on liability for all or any of the debts or other liabilities of
the company to the extent that the court might direct the liability. This
Section does not define the term fraud nor have the courts defined it.
However, in Re William C. Leitch Ltd (1932) 2 Ch. 71 the company
was incorporated to acquire William’s business as a furniture
manufacturer. The directors of the company were William and his wife
and they appointed William as the Managing Director at a Salary of
£1000 per annum. Within the period of one month, the company was
debited with an amount which was £500 more than what was actually
due to William. By that time the company had made a loss of £2500.
Within 2 years of formation, and while the company was still in
financial problems, the directors paid to themselves the dividends of
£250. By the end of the 3rd year since incorporation the company was
in such serious difficulties such that it could not pay debts as they fell
due. In spite of this William ordered goods worth £6000 which became
subject to a charge contained in a debenture held by them. At the same
time he continued to repay himself a loan of £600 (six hundred pounds)
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which he had lent to the company at the beginning of the 4 th year the
company with the knowledge of William owed £6500 for goods
supplied. In the winding up of the company the official receiver applied
for a declaration that in no circumstances William had carried on the
company’s business with intent to defraud and therefore should be held
responsible for the repayment of the company’s debts. It was held that
since that company continued to carry on business at a time when
William knew that the company could not comfortably pay its debts,
then this was fraudulent trading within the meaning of Section 323 and
William should be responsible for repaying the debts. These are the
words of Justice Maugham J. “if a company continues to carry on
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 those debts, it is in general a proper inference that the
company is carrying on business with intent to defraud.”
The test is both subjective and objective. In the Case of Re Patrick

Lyon Ltd (1933) Ch. 786 on facts which were similar to the Williams
case, the same Judge Maugham J. said as follows: “the words fraud
and fraudulent purpose where they appear in the Section in question
are words which connote actual dishonesty involving according to the
current notions of fair trading among commercial men real moral
blame. No judge has ever been willing to define fraud and I am
attempting no definition.”
The statutes are not clear as to the meaning of fraud the question arises
that once the money has been recovered from the fraudulent director, is
it to be laid as part of the company’s general assets available to all
creditors or should it go back to those creditors who are actually
defrauded.
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In the case of Re William Justice Eve J. stated that such money should
form part of the company’s general assets and should not be refunded to
the defrauded creditors.
In the case of Re Cyona Distributors Ltd (1967) Ch. 889 the Court of
Appeal ruled that if the application under Section 323 is made by the
debtor then the money recovered should form part of the company’s
general assets but where the application is made by a creditor himself,
then that creditor is entitled to retain the money in the discharge of the
debts due to him.
Lifting the Veil – Lifting the veil of corporate entity under statute
- lifting the veil of corporate entity under common
law.
HOLDING AND SUBSIDIARY COMPANIES

One of the most important limitations imposed by the Companies Act
on the recognition of the separate personality of each individual
company is in connection with associated companies within the same
group enterprise. In practice it is common for a company to create an
organisation of inter-related companies each of which is theoretically a
separate entity but in reality part of one concern represented by the
group as a whole. Such is particularly the case when one company is
the parent or holding company and the rest are its subsidiaries.
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Under Section 154 of the Companies Act Cap 486 a company is deemed
to be a subsidiary of another if but only if
(a) That other company either
(i) is a member of it and controls the composition of its board of
directors or
(ii) Holds more than half in nominal value of its equity share
capital or
(b) The first mentioned company is a subsidiary of any company which

is that other’s subsidiary.
Under Section 150 (1) where at the end of the financial year a company
has subsidiaries, the accounts dealing with the profit and loss of the
company and subsidiaries should be laid before the company in general
meeting when the company’s own balance sheet and profit and loss
account are also laid. This means that group accounts must be laid
before the general meeting.
The group accounts should consist of a consolidated balance sheet for

the company and subsidiary and also of a consolidated profit and loss
account dealing with the profit and loss account of a company.
Section 151(2) – it may be observed that the treatment of these accounts

in a consolidated form qualify an old rule that each company constitutes
a separate legal entity. The statute here recognises enterprise entity
rather than corporate entity i.e. the veil of incorporation will be lifted so
that they will not be regarded as separate legal entities but will be
treated as a group.
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MISDESCRIPTION OF COMPANIES
Under Section 109 of the Companies Act it requires that a company’s
name should appear whenever it does business on its Seal and on all
business documents. Under paragraph 4 of this Section, if an officer of
a company or any person who on its behalf signs or authorises to be
signed on behalf of the company any Bill of Exchange, Promissory
Note, Cheque or Order for Goods wherein the Company’s name is not
mentioned as required by the Section, such officer shall be liable to a
fine and shall also be personally made liable to the holder of a Bill of
Exchange Promissory Notes, Cheque or order for the goods for the
amount thereof unless it is paid by the company. The effect of this
section is that it makes a company’s officer incur personal liability even
though they might be contracting as the company’s agents. Liability
under this Section normally arises in connection with cheques and
company officers have been held liable where for instance the word
limited has been omitted or where the company has been described by a
wrong name.
IGNORING THE CORPORATE ENTITY UNDER COMMON

LAW
WHERE THERE IS AN AGENCY RELATIONSHIP
Generally there is no reason why a company may not be an agent of its
share holders. The decision in Salomon’s case shows how difficult it is
to convince the courts that a company is an agent of its members. In
spite of this there have been occasions in which the courts have held
that registered companies were not carrying on in their own right but
rather were carrying on business as agents of their holding companies.
Reference may be made to the case of
Smith Stone & Knight v. Birmingham Corporation (1939) 4 All E.R.
116
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In this case the Plaintiffs were paper manufacturers in Birmingham
City. In the same city there was a partnership called Birmingham
Waste Company. This partnership did business as merchants and
dealers in waste paper. The plaintiffs bought the partnership as a going
concern and the partnership business became part of the company’s
property. The plaintiffs then caused the partnership to be registered as a
company in the name of Birmingham Waste Company Limited. Its
subscribed capital was 502 pounds divided into 502 shares. The
Plaintiff holding 497 shares in their own name and the remaining shares
being registered in the name of each of the Directors. Thereafter the
Directors executed a declaration of trust stating that their shares were
held by them on trust for the Plaintiff company. The new company had
its name placed upon the premises and on the note paper invoices etc. as
though it was still the old partnership carrying on business. There was
no agreement of any sort between the two companies and the business
carried on by the new company was never assigned to it. The manager
was appointed but there were no other staff. The books and accounts of
the new company were all kept by the plaintiff company and the
manager of this company did not know what was contained therein and
had no access to those books. There was no doubt that the Plaintiff
Company had complete control over the waste company. There was no
tenancy agreement between them and the waste company never paid
any rent. Apart from the name, it was as if the manager was managing
a department of the plaintiff company.
The Birmingham Corporation compulsorily acquired the premises upon

which the subsidiary company was carrying on business and the
Plaintiff company claimed compensation for removal and disturbance.
Birmingham Corporation replied that the proper claimants were the
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subsidiary company and not the holding company since the subsidiary
company was a separate legal entity.
If this contention was correct the Birmingham Corporation would have

escaped liability for paying compensation by virtue of a local Act which
empowered them to give tenants notice to terminate the tenancy.
The court held that occupation of the premises by a separate legal entity
was not conclusive on a question of a right to claim and as a subsidiary
company it was not operating on its own behalf but on behalf of the
parent company. The subsidiary company was an agent. Lord
Atkinson had the following to say
“It is well settled that the mere fact that a man holds all the shares in a
company does not mean the business carried on by the company is his
business nor does it make the company his agent, for the carrying on of
that business. However, it is also well settled that there maybe such an
arrangement between the shareholders and the company as will
constitute the company. The shareholders agents for the purpose of
carrying on the business and make the business that of the
shareholders. It seems to be a question of fact in each case and the
question is whether the subsidiary is carrying on the business as the
parents business or as its own. In other words who is really carrying
on the business.
His Lordship then stated that in order to answer the question six
points must be taken into account.
1. Are the profits treated as the profits of the parent

company?
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2. are the persons conducting the business appointed by
the parent company?
3. Is the parent company the head and brain of the trading
venture?
4. Does the parent company govern the venture decide
what should be done and what capital should be embarked on in the
venture?
5. Does the company make the profits by its skill and
direction?
6. Is the company in effectual and constant control?
If the answers are in the affirmative, then the subsidiary company is an

agent of the parent company.
Reference may also be made to the case of
RE F G FILMS LTD [1953] 1 W.L.R.

Here a British company was formed with a capital of 100 pounds of
which 90 pounds was contributed by the president of an American Film
Company. There were 3 directors, the American and 2 Britons. By
arrangement between the two companies, a film was shot in India
nominally by the British Company but all the finances and other
facilities were provided by the American Company. The British Board
of Trade refused to recognize the Film as having been made by a British
company and therefore refused to register it as a British film.
The court held that insofar as the British company had acted at all it had
done so as an agent or nominee of the American company which was
the true maker of the film.
23
Firestone Tyre & Rubber Company v. Llewellin (1957) 1 W.L.R 464
Again in this case an American company had an arrangement with its
distributors on the European continent whereby the distributors obtained
the supplies from the English manufacturers who were a wholly owned
subsidiary of an American company. The English subsidiary credited
the American company with a price received after deducting costs and a
certain percentage. It was agreed that the distributors will not obtain
their supplies from anyone else. The issue was whether the subsidiary
company in Britain was selling its own goods or whether it was selling
goods of an American company.
The court held that the substance of the arrangement was that the
American company traded in England through the subsidiary as its
agent and that the sales by their subsidiary, were a means of furthering
the American company’s European interests.
There have been cases where Salomon’s case has been upheld that a
company is a legal entity.
Ebbw Vale UDC V. South Wales Traffic Authority (1951) 2 K.B 366
Lord Justice Cohen L.J “Under the ordinary rules of law, a parent
company and a subsidiary company even when a hundred percent
subsidiary are distinct legal entities and in the absence of an agency
contract between the two companies, one cannot be said to be an agent
of the other.”
2. FRAUD & IMPROPER CONDUCT

Where there is fraud or improper conduct, the courts will immediately
disregard the corporate entity of the company. Examples are found in
24
those situations in which a company is formed for a fraudulent purpose
or to facilitate the evasion of legal obligations.
Re Bugle Press Limited [1961] Ch. 270

This was based on Section 210 of the Companies Act where an offer
was made to purchase out a company if 90% of shareholders agreed.
There were 3 shareholders in the company. A, B and C.
A held 45% of the shares, B also held 45% of the shares and C held the
remaining 10% of the shares. A and B persuaded C to sell his shares to
them but he declined. Consequently A and B formed a new company
call it AB Limited, which made an offer to ABC Limited to buy their
shares in the old company. A and B accepted the offer, but C refused.
A and B sought to use provisions of Section 210 in order to acquire C’s
shares compulsorily.
The court held that this was a bare faced attempt to evade the
fundamental principle of company law which forbids the majority
unless the articles provide to expropriate the minority shareholders.
Lord Justice Cohen said “the company was nothing but a legal hut.
Built round the majority shareholders and the whole scheme was
nothing but a hollow shallow.” All the minority shareholder had to do
was shout and the walls of Jericho came tumbling down.
Gilford Motor Co. v. Horne (1933) Ch. 935

Here the Defendant was a former employee of the plaintiff company
and had covenanted not to solicit the plaintiff’s customers. He formed a
company to run a competing business. The company did the
solicitation. The defendant argued that he had not breached his
25
agreement with the plaintiffs because the solicitation was undertaken by
a company which was a separate legal entity from him.
The court held that the defendant’s company was a mere cloak or sham
and that it was the defendant himself through this device who was
soliciting the plaintiff’s customers. An injunction was granted against
the both the defendant and the company not to solicit the plaintiff’s
customers.
Jones v. Lipman (1912) 1 W.L.R. 832

This case the Defendant entered into a contract for the sale of some
property to the plaintiff. Subsequently he refused to convey the
property to the plaintiff and formed a company for the purpose of
acquiring that property and actually transferred the property to the
company. In an action for specific performance the Defendant argued
that he could not convey the property to the Plaintiff as it was already
vested in a third party.
Justice Russell J. observed as follows
“the Defendant company was merely a device and a sham a mask which
he holds before his face in an attempt to avoid recognition by the eye of
equity”
GROUP ENTERPRISE
In exercise of their original jurisdiction, the courts have displayed a
tendency to ignore the separate legal entities of various companies in a
group. By so doing, the courts give regard to the economic entity of the
group as a whole.
Authority is the case of Holsworth & Co. v. Caddies [1955]1W.L.R.

352
26
The Defendant Company had employed Mr. Caddies as their Managing
Director for 5 years. At the time of that contract the company had two
subsidiaries and Caddies was appointed Managing Director of one of
those subsidiaries. He fell out of favour with the other Directors
consequent upon which the board of directors stated that Caddies should
confine his attention to the affairs of the subsidiary company only. He
treated this as a breach of contract and sued the company for damages.
It was held that since all the companies form but one group, there was
no breach of contract in directing Caddies to confine his attention to the
activities of the subsidiary company.
DETERMINATION OF A COMPANY’S RESIDENCE

De Beers Consolidated Mines Ltd (1906) K.C. 455
Lord Lorenburn said “in applying the conception of residence to a

company, we ought to proceed as nearly as possible on the analogy of
an individual. A company cannot eat or sleep but it can keep house or
do business. A company resides for purposes of Income Tax where its
real business is carried on. The real business is carried on where the
central management and control actually abides.”
The courts also look behind the façade of the company and its place of
registration in order to determine its residence.
THE DOCTRINE OF ULTRA VIRES

A Company which is registered under the Company’s Act cannot
effectively do anything beyond the powers which are either expressly or
by implication conferred upon in its Memorandum of Association. Any
purported activity in excess of those powers will be ineffective even if
27
agreed to by the members unanimously. This is the doctrine of ultra
vires in company law.
The purpose of this doctrine is said to be twofold
1. It is said to be intended for the protection of the investors

who thereby know the objects in which their money is to be applied. It
is also said to be intended for the protection of the creditors by ensuring
that the Company’s assets to which the creditors look for repayment of
their debt are not wasted in unauthorised activities. The doctrine was
first clearly articulated in 1875 in the case of Ashbury Railway Carriage
v. Riche (1875) L.R. CH.L.) 653
In this case the Company’s Memorandum of Association gave it powers

in its objects clause
1. To make sell or lend on hire railway carriages and wagons.
2. To carry on the business of mechanical engineers and
general contractors
3. to purchase, lease work and sell mines, minerals, land and
realty.
The directors entered into a contract to purchase a concession for

constructing a railway in Belgium. The issue was whether this contract
was valid and if not whether it could be ratified by the shareholders.
The court held that the contract was ultra vires the company and void so
that not even the subsequent consent of the whole body of shareholders
could ratify it. Lord Cairns stated as follows:
“The words general contractors referred to the words which went
immediately before and indicated such a contract as mechanical
28
engineers make for the purpose of carrying on a business. This contract
was entirely beyond the objects in the Memorandum of Association. If
so, it was thereby placed beyond the powers of the company to make
the contract. If so, it was not a question whether the contract was ever
ratified or not ratified. If the contract was going at its beginning it was
going because the company could not make it and by purporting to
ratify it the shareholders were attempting to do the very thing which by
the act of parliament they were prohibited from doing.”
The courts construed the object clause very strictly and failed to give
any regard to that part of the Objects clause which empowered the
company to do business as general contractors. This construction gave
the doctrine of ultra vires a rigidity which the times have not been able
to uphold. At the present day, the doctrine is not as rigid as in
Ashbury’s case and consequently it has been eroded.
The first inroad into the doctrine was made five years later in the case of
Attorney General V. Great Eastern Railway 1880) 5 A.C. 473
Lord Selbourne stated as follows:
“the doctrine of ultra vires as it was explained in Ashbury’s case should
… but this doctrine ought to be reasonably and not unreasonably
understood and applied and whatever may fairly be regarded as
incidental to or consequential upon those things that the legislature has
authorised ought not to be held by judicial construction to be ultra
vires.”
An act of the company therefore will be regarded as intra vires not only
when it is expressly stated in the object’s clause but also when it can be
interpreted as reasonably incidental to the specified objects. As a result
of this decision, there is now a considerable body of case law deciding
29
what powers will be implied in a case of particular types of enterprise
and what activities will be regarded as reasonably incidental to the act.
However businessmen did not wish to leave matters for implication.

They preferred to set up in the Memorandum of Association not only
the objects for which the company was establish but also the ancillary
powers which they thought the company would need. Furthermore
instead of confining themselves to the business which the company was
initially intended to follow, they would also include all other businesses
which they might want the company to turn to in the future. The
original intention of parliament was that the companies object should be
set out in short paragraphs in the Memorandum of Association. But
with a practice of setting out not only the present business but also any
business which the promoters would want the company to turn to, the
result is that a company’s object’s clause could contain about 30 or 40
different clauses covering every conceivable business and all that
incidental powers which might be needed to accomplish them.
In practice therefore the objects laws of practically every company does

not share the simplicity originally intended in favour of these practice it
may be argued that the wider the objects the greater is the security of
the creditors since it will not be easy for the company to enter into ultra
vires transactions because every possible act will probably be covered
by some paragraph in the Objects clause.
Unfortunately this does not ensure preservation of the Companies assets

or any adequate control over the director’s activities thus the original
protection intended vanishes, the highpoint of this development came in
1966 in the case of
30
Bellhouse v. City Wall Properties (1966) 2 Q.B 656 In this case the
Plaintiff company’s business was requisitioned for vacant land and the
erection thereon of Housing Estates. Its objects as set up in the
Memorandum of Association contained the Clause authorising the
company to “carry on any other trade or business whatsoever which can
in the opinion of the Board of Directors be advantageously carried on
by the company in connection with or as ancillary to any of the above
businesses or a general business of the company”.
In connection with its various development skills the company’s

managing director met an agent of the Defendants who required some
finance to the tune of about 1 million pounds. The Plaintiff’s Managing
Director intimated to the Defendant’s agent that he knew of a source
from which the Defendant could obtain finance and accordingly
referred them to a Swiss syndicate of financiers. In this action the
Plaintiffs alleged that for that service, the Defendants had agreed to pay
a commission of 20,000 pounds and in the alternative they claimed
20,000 pounds for breach of contract. The Defendants argued that there
was no contract between the parties. In the alternative they argued that
even if there was a contract such contract was in effect one whereby the
Plaintiffs undertook to act as money-brokers which activity was beyond
the objects of the plaintiff company and which was therefore ultra vires.
The issues were

1. Whether the contracts were ultra vires
2. Whether it was open to the defendant to raise this point;
The court of first instance decided that the company was ultra vires and
it was open to the defendant to raise the defence of ultra vires.
However a unanimous court of appeal reversed the decision and hailed
31
that the words stated must be given their natural meaning and the
natural meaning of those words was such that the company could carry
on any business in connection with or ancillary to its main business
provided that the directors thought that could be advantageous to the
company.
Lord Justice Salomon L.J stated as follows:

“It may be that the Directors take the wrong view and infact the
business in question cannot be carried on as they believe but it matters
not how mistaken they might be provided that they formed their view
honestly then the business is within the plaintiff’s company’s objects
and powers.”
ULTRA VIRES DOCTRINE

The courts have introduced 2 methods of curbing the evasion of the
ultra vires doctrine.
1. The ejusdem generis rule is also referred to as the main
objects rule of construction. Here a Memorandum of Association
expresses the objects of a company in a series of paragraphs and one
paragraph or the first 2 or 3 paragraphs appear to embody the main
object of the company all the other paragraphs are treated as merely
ancillary to this main object and as limited or controlled thereby.
Business persons evaded this method by use of the independent objects
clause. The objects clause will contain a paragraph to the effect that
each of the preceding sub-paragraphs shall be construed independently
and shall not in any way be limited by reference to any other sub-clause
and that the objects set out in each sub-clause shall be independent
objects of the company. Reference may be made to the case of Cotman
v. Brougham [1918]A.C. 514
32
In this case the objects clause of the company contained 30 sub-clauses.
The first sub-clause authorised the company to develop rubber
plantations and the fourth clause empowered the company to deal in any
shares of any company. The objects clause concluded with a
declaration that each of the sub clauses was to be construed
independently as independent objects of the company. The company
underwrote and had allotted to it shares in an oil company. The
question that arose was whether this was intra vires the company’s
objects. The court held that the effect of the independent objects clause
was to constitute each of the 30 objects of the company as independent
objects. Therefore the dealing of shares in an oil company was within
the objects and thus intra vires. However the power to borrow money
cannot be construed as an independent object of the company in spite of
this decision.
Re Introductions (1962) W.L.R. 791

In this case the company was formed to provide accommodation and
services to those overseas visitors going to a festival in Britain. The
company did this during the first few years of existence. Later the
company switched over to pig breeding as its sole business. While so
engaged it borrowed money from a bank on a security of debentures.
The bank was given a copy of the company’s Memorandum of
Association and at the material time knew that the company’s sole
business was that of pig breeding. The issue was, whether the loan and
debentures were valid in view of the fact one of the sub clauses
empowered the company to borrow money and the last sub clause was
an independent object clause.
33
The court held that borrowing was a power and not an object. The
power to borrow existed only for furthering intra vires objects of the
company and was not an object in itself. Therefore
1. The exercise of powers which will be intra vires is exercised
for the objects of the company and is ultra vires only if used for the
objects not covered by the company’s Memorandum of Association.
2. Even an independent object clause cannot convert what are in
fact powers into objects.
2. LOSS OF SUBSTRATUM
Where the main object of a company has failed, a petitioner will be
granted an order for the winding up of a company. Such a petitioner
must however be a member or shareholder in the company.
The object of the ultra vires rule is to make the members know how and
to what their money is being applied. This is the rationale of members’
protection.
RE GERMAN DATE COFFEE CO. (1882) 20 Ch. 169

In this case the major object of the company was to acquire a German
Patent for manufacturing coffee from dates. The German patent was
never granted but the company acquired a Swedish Patent for the same
purpose. The company was solvent and the majority of the members
wished to continue in business. However, two of the shareholders
petitioned for winding up of the company on the grounds that the
company’s object had entirely failed.
The court held that upon the failure to acquire the German patent, it was
impossible to carry out the objects for which the company was formed.
34
Therefore the sub stratum had disappeared and therefore it was just
inevitable that the company should be wound up.
Kay J. stated “where a company is formed for a primary purpose, then

although the Memorandum may contain other general words which
include the doing of other objects, those general words must be read as
being ancillary to that which the Memorandum shows to be the main
purpose and if the main purpose fails and fails altogether, then the sub-
stratum of the association fails.”
This substratum rule is too narrow and cannot sufficiently uphold the
ultra vires rule. Questions are, are members or shareholders really
protected? Do they know what the objects are? The Directors may
choose any amongst the many.
Secondly a member has to petition first and the court has to decide
John Beauforte (1953) Ch.d 131

A company was authorised by its Memorandum of Association to carry
on the business of costumiers, gown makers and other activities
ejusdem generis. The company decided to undertake the business of
making veneered panels which was admittedly ultra vires and for this
purpose, it constructed a factory at Bristol. The company later went
into compulsory liquidation. Several proofs of debts were lodged with
the liquidator which he rejected on the ground that the contracts which
they related to were ultra vires.
Applications by way of Appeal were lodged by the 3 creditors one of

whom had actual knowledge that the veneer business was ultra vires.
The 3 creditors were a firm of builders who built the factory, a firm
35
which supplied the veneers to the company and a firm which had
contractual debts with the company.
The courts held dismissing the applications that no judgment founded

on an ultra vires contract could be sustained unless it embodied a
decision of the court on the issue of ultra vires or a compromise on that
issue. The contracts being founded on an ultra vires transaction were
void.
3. GRATUITOUS GIFTS
Can a company validly make a gift out of corporate property or asset?
The law is that a company has no power to make such payments unless
the particular payment is reasonably incidental to the carrying out of a
company’s business and is meant for the benefit and to promote the
property of the company.
This issue was first decided in the case of Hutton V West Cork Railway
Co. (1893) Ch.d
A company sold its assets and continued in business only for the
purpose of winding up. While it was awaiting winding up, a resolution
was passed in the company’s general meeting authorising the payments
of a gratuity to the directors and dismissed employees.
The court held that as the company was no longer a going concern such
a payment could not be reasonably incidental to the business of the
company and therefore the resolution was invalid. In the words of the
Lord Justice Bowen said
36
“The law does not say that there are not to be cakes and ale but
there are to be no cakes and ale except such as are required for the
benefit of the company”
The question is, suppose there is a clause in the Memorandum of

Association that such payments shall be made, is payment ultra vires?
The authority that dealt with this position was the case of
RE LEE BEHRENS & CO. [1932] 2 Ch. D 46

The object clause of the company contained an express power to
provide for the welfare of employees and ex employees and also their
widows, children and other dependants by the grant of money as well as
pensions. Three years before the company was wound up, the Board of
Directors decided that the company should undertake to pay a pension
to the widow of a former managing director but after the winding up the
liquidator rejected her claim to the pension.
The court held that the transaction whereby the company covenanted to
pay the widow a pension was not for the benefit of the company or
reasonably incidental to its business and was therefore ultra vires and
hence null and void.
Justice Eve stated as follows

Whether they reneged an express or implied power, all such grants
involved an expenditure of the company’s money and that money can
only be spent for purposes reasonably incidental to the carrying on of
the company’s business and the validity of such grants can be tested by
the answers to three questions:
(i) Is the transaction reasonably incidental to the carrying on
of the company’s business?
37
(ii) Is it a bona fide transaction?
(iii) Is it done for the benefit and to promote the prosperity of
the company?
These questions must be answered in the affirmative. The question may

be posed as to whether these tests apply where there is an express
power by the objects. This is one area where the courts are still
insistent that creditors’ security must be reserved.
Sometimes ultra vires can be excluded by good and clever

draftsmanship
Parke v. Daily News [1962] 2 Ch.d 927

In this case the company transferred the major portion of its assets and
proposed to distribute the purchase price to those employees who are
going to become redundant after reduction in the stock of the company
of the company’s business. The company was not legally bound to
make any payments by way of compensation. One shareholder claimed
that the proposed payment was ultra vires.
The court held that the proposed payment was motivated by a desire to
treat the ex-employees generously and was not taken in the interest of
the company as it was going to remain and that therefore it was ultra
vires.
The Court observed as follows “the defendants were prompted by
motives which however laudable and however enlightened from the
point of view of industrial relations were such as the law does not
recognise as sufficient justification. The essence of the matter was that
the Directors were proposing that a very large part of its assets should
be given to its employees in order to benefit those employees rather
38
than the company and that is an application of the company’s funds
which the law will not allow.”
Evans v. Brunner Mound & Co. 1921 Ch.d 359

The company carried on the business of chemical manufacturers. Its
object clause contained a power to do all such things as maybe
incidental or conducive to the attainment of its objects. The company
distributed some money to some universities and scientific institutions,
which was meant to encourage scientific education and research. The
company thereby hoped to create a reservoir of qualified scientists from
which the company could recruit its staff.
The court held that even though the payment was not under an express
power, it was reasonably incidental to the company’s business and
therefore valid.
This is one of the few cases where payment was recognised as being
valid.
THE RIGHTS OF THE COMPANY & 3 RD PARTIES UNDER

ULTRA VIRES TRANSACTIONS:
These are remedies
Whether or not a contract is ultra vires depends on the knowledge of the
party’s dealing with that company. Such is the case as regards
borrowing contracts. Consider the case of
David Payne & Co. (1904) 2 Ch.d 608

X was a director of company B and at the same time had some interests
in company A. He learnt that company B wished to borrow some
money which it intended to apply to unauthorised activities. He urged
39
company A to lend the money on the security of debentures. The issues
were
(a) Whether the debentures were valid security;
(b) Whether the knowledge of X as to the intended application of the
money could be imputed to the company.
The court held that X was not company A’s agent for obtaining such
information and therefore his knowledge was not the company’s
knowledge and consequently the debentures were valid security.
This loophole however will be applied very rarely because everybody is

presumed to know the contents of a company’s public documents.
Where a contract with that company is ultra vires, generally speaking
the party dealing with that company has no rights under the contract.
The transaction being null and void cannot confer rights on the 3 rd party
nor can it impose any obligation on the company.
In many instances however, property will be transferred under an ultra
vires transaction. Such transaction cannot vest rights in the transferee
and cannot divest the transferor of his rights.
1. At common law therefore, the first remedy of a person who parts

with property under an ultra vires transaction is that he has a right to
trace and recover that property from the company as long as he can
identify it.
This principle also applies to money lent to the company on an ultra

vires borrowing so long as the money can be traced either in law or in
equity. The basis of this principle is that the company is deemed to
hold the money or the property as a trustee for the person from whom it
was obtained.
40
Therefore, if the money received is paid into a separate account, or is
sufficiently earmarked e.g by the purchase of some particular items, it
can be followed and claimed by the lender. Where tracing is
impossible, because the money has become mixed with other money,
the lender is entitled in equity to a charge on the mixed fund together
with the other creditors according to the respective amounts otherwise
money obtained on ultra vires transaction generally cannot be followed
once it has been spent. But if such money has been spent by
discharging the company’s intra vires debts then the lender is entitled to
rank as a creditor to the extent to which the money has been so applied.
Since the company’s liabilities are not increased but in fact decreased,
equity treats the borrowing as valid to the extent of the legal application
of such money.
2. The 3rd party has a personal right against the directors or other
agents with whom he has dealt. The rationale is that such directors or
other agents are treated as quasi trustees from which it follows that a 3 rd
party is entitled to a claim against them for restitution.
TO WHAT EXTENT ARE MEMBERS PROTECTED BY THE

ULTRA VIRES DOCTRINE
The intra vires creditor does not have the locus standi to prohibit ultra
vires actions. Again there is the presumption of knowledge of a
company’s documents and activities. In spite of the fact that the
doctrine of ultra vires is over due for reform, it has not undergone any
reform in Kenya unlike in the United Kingdom where it has been
severely eroded.
41
All the company can do is to alter its objects under the power conferred
by Section 8 of the Companies Act Cap 486. The effect of the Section
is that a company may by special resolution alter the provisions in its
Memorandum with respect to the objects of the company.
Section 141 defines Special Resolution as a resolution which is passed

by a majority of not less than three quarters of those members voting at
a company’s general meeting either in person or by proxy and of which
notice has been given of the intention to propose it as a special
resolution.
Within 30 days of the date on which the resolution altering the objects
is passed, an application for the cancellation of the Resolution may be
made to Court by or on behalf of the holders who have not voted in
favour of the Resolution, of not less than 15% of the nominal value of
the issued share capital of any class and if the company does not have a
share capital, the application can be made by at least 15% of the
members of the company.
If such an application is made, the alteration will not be effective except

to the extent that it is confirmed by a court. Normally a court has an
absolute discretion to confer, reject or modify the alteration.
Re Private Boarding House Limited (1967) E.A. 143

In this case, it was held that the registrar of companies is entitled to
receive a notice of any such application and to appear and be heard at
the hearing of the Application on the ground that such matters affect his
record.
42
Under Section 8 (9) of the Companies Act Cap 486 if no application is
made to the court, within 30 days the alteration cannot subsequently be
challenged. The effect of this provision is that as long as an alteration is
supported by more than 85% of the shareholders or so long as no one
applies to the court within 30 days of the resolution, companies have
complete freedom to alter their objects.
Note however, that such alterations do not operate retrospectively.

Their effect relates only to the future.
ARTICLES OF ASSOCIATION
A Company’s constitution is composed of two documents namely the
Memorandum of Association and the Articles of Association. The
Articles of Association are the more important of the two documents in
as much as most court cases in Company Law deal with the
interpretation of the Articles.
Section 9 of the Companies Act provides that a Company limited by

guarantee or an unlimited company must register with a Memorandum
of Association Articles of Association describing regulations for the
company. A company limited by shares may or may not register
articles of Association. A Company’s Articles of Association may
adopt any of the provisions which are set out in Schedule 1 Table A of
the Companies Act Cap 486.
Table A is the model form of Articles of Association of a Company

Limited by Shares. It is divided into two parts designed for public
companies in part A and for private companies in part B (II) thus a
company has three options. It may either
43
(a) Adopt Table A in full; or
(b) Adopt Table A subject to modification or
(c) Register its own set of Articles and thereby exclude Table A
altogether.
In the case of a company limited by shares, if no articles are registered

or if articles are registered insofar as they do not modify or exclude
Table A the regulations in Table A automatically become the
Company’s Articles of Association.
Section 12 of the Companies Act requires that the Articles must be in

the English language printed, divided into paragraphs numbered
consecutively dated and signed by each subscriber to the Memorandum
of Association in the presence of at least one attesting witness.
As between the Memorandum and the Articles the Memorandum of

Association is the dominant instrument so that if there is any conflict
between the provisions in the Memorandum and those in the Articles
the Memorandum provisions prevail. However if there is any
ambiguity in the Memorandum one may always refer to the Articles for
clarification but this does not apply to those provisions which the
Companies Act requires to be set out in the Memorandum as for
instance the Objects of the Company.
Whereas the Memorandum confers powers for the company, the

Articles determine how such powers should be exercised.
Articles regulate the manner in which the Company’s affairs are to be

managed. They deal with inter alia the issue of shares, the alteration of
44
share capital, general meetings, voting rights, appointment of directors,
powers of directors, payment of dividends, accounts, winding up etc.
They further provide a dividing line between the powers of share

holders and those of the directors.
LEGAL EFFECTS OF THE ARTICLES OF ASSOCIATION

Under Section 22 of the Companies Act it is provided that subject to the
provisions of the Act, when the Memorandum and Articles are
registered, they bind the company and the members as if they had been
signed and sealed by each member and contained covenants for the part
of each member to observe all their provisions. This Section has been
interpreted by the courts to mean that the Memorandum gives rise to a
contract between the Company and each Member.
Reference may be made to the case of
Hickman v. Kent (1950) 1 Ch. D 881

Here the Articles of the Company provided that any dispute between
any member and the company should be referred to arbitration. A
dispute arose between Hickman and the company and instead of
referring the same to arbitration, he filed an action against the company.
The company applied for the action to be stayed pending reference to
arbitration in accordance with the company’s articles of association.
The court held that the company was entitled to have the action stayed
since the articles amount to a contract between the company and the
Plaintiff one of the terms of which was to refer such matters to
arbitration.
Justice Ashbury had the following to say: “That the law was clear and
could be reduced to 3 propositions
45
1. That no Article can constitute a contract between the
company and a third party;
2. No right merely purporting to be conferred by an article
to any person whether a member or not in a capacity other than that of
a member for example solicitor, promoter or director can be enforced
against the company.
3. Articles regulating the right and obligation of the
members generally as such do not create rights and obligations between
members and the company”.
Eley v. Positive Government Security Life Association Co. (1876) Ex

88
In this case, the company’s articles provided that Eley should become
the company Solicitor and should transact all legal affairs of the
company for mutual fees and charges. He bought shares in the
company and thereupon became a member and continued to act as the
company’s solicitor for some time. Ultimately the company ceased to
employ him. He filed an action against the company alleging breach of
contract.
The court held: that the articles constitute a contract between the
company and the members in their capacity as members and as a
solicitor Eley was therefore a third party to the contract and could not
enforce it. The contract relates to members in their capacity as
members and the company so its only a contract between the company
and members of that company and not in any other capacity such as
solicitor. But note that there can be an intra member contract.
46
Wood v. Odessa Waterworks Company [1880] 42 Ch. 636
Here the Plaintiff who was a member of the company petitioned the
court to stay the implementation of a resolution not to pay dividends but
issue debentures instead. Holding that a member was entitled to the
stay of the implementation of the Resolution Sterling J. had the
following to say: “the articles of association constitutes a contract not
merely between shareholders and the company but also between the
individual shareholders and every other.”
This case was followed in
Rayfield v. Hands (1960) Ch.d 1

Here the company’s articles provided that every member who intends to
transfer his shares shall inform the directors who will take those shares
between them equally at a fair value. The Plaintiff called upon the
directors to take his shares but they refused. The issue was did the
articles give rise to a contract between the Plaintiff and the directors. In
their capacity as directors they were not bound.
The court here held that the Articles related to the relationship between
the Plaintiff as a member and the Defendants not as directors but as
members of the company. Therefore the Defendants were bound to buy
the Plaintiff shares in accordance with the relevant article.
ALTERATION OF ARTICLES
Section 13 of the Companies Act gives the company power to alter the
articles by special resolution. This is a statutory power and a company
cannot deprive itself of its exercise. Reference may be made to the case
of
47
Andrews v. Gas Meter Co. (1897) 1 Ch. 361
The issue herein was whether a company which under its Memorandum
and Articles had no power to issue preference shares could alter its
articles so as to authorise the issue of preference shares by way of
increased capital
The court held that as long as the Constitution of a Company depends

on the articles, it is clearly alterable by special resolution under the
powers conferred by the Act. Therefore it was proper for the company
to alter those articles and issue preference shares. Any regulation or
article which purports to deprive the company of this power is therefore
invalid, on the ground that such an article or regulation will be contrary
to the statute. The only limitation on a company’s power to alter
articles is that the alteration must be made in good faith and for the
benefit of the company as a whole.
Allen v. Gold Reefs of West Africa (1900) 1 Ch. 626

In this case the company had a lien on all debts by members who had
not truly paid up for their shares. The Articles were altered to extend
the Company’s lien to those shares which were fully paid up.
The court held that since the power to alter the Articles is statutory, the
extension of the lien to fully paid up shares was valid. These were the
words of Lindley L.J.
“Wide however as the language of Section 13 mainly the power
conferred by it must be exercised subject to the general principles of
law and equity which are applicable to all powers conferred on
majorities and enabling them to bind minorities. It must be exercised
48
not only in the manner required by law but also bona fide for the benefit
of the company as a whole.”
Further reference may be made to the case of

Shuttleworth v. Cox Brothers Ltd (1927) 2 KB29
Here the Articles of the Company provided that the Plaintiff and 4
others should be the first directors of the company. Further each one of
them should hold office for life unless he should be disqualified on any
one of some six specified grounds, bankruptcy, insanity etc. The
Plaintiff failed to account to the company for certain money he had
received on its behalf. Under a general meeting of the company a
special resolution was passed that the articles be altered by adding a
seventh ground for disqualification of a director which was a request in
writing by his co-directors that he should resign. Such request was duly
given to the Plaintiff and there was no evidence of bad faith on the part
of shareholders in altering the articles.
The Plaintiff sued the company for breach of an alleged contract

contained in their original articles that he should be a permanent
director and for a declaration that he was still a director.
The court held that the contract if any between the Plaintiff and the
company contained in the original articles in their original form was
subject to the statutory power of alteration and if the alteration was bona
fide for the benefit of the company, it was valid and there was no breach
of contract. Lord Justice Bankes observed as follows
“In this case, the contract derives its force and effect from the
Articles themselves which may be altered. It is not an absolute contract
but only a conditional contract.”
49
The question here is who determines what is for the benefit of the
company? Is it the shareholders or the Courts?
Scrutton L.J. had the following to say
“to adopt such a view that a court should decide will be to make the
court the manager of the affairs of innumerable companies instead of
shareholders themselves. It is not the business of the court to manage
the affairs of the company. That is for the shareholders and the
directors.”
Sidebottom v. Kershaw Leese & C0.[1920]1 Ch. 154

Director controlled share company had a minority shareholder who was
interested in some competing business. The company passed a special
resolution empowering the directors to require any shareholder who
competed with the company to transfer his shares at their fair value to
nominees of the directors. The Plaintiff was duly served with such a
notice to transfer his shares. He thereupon filed an action against the
company challenging the validity of that article.
The court held that the company had a power to re-introduce into its
articles anything that could have been validly included in the original
articles provided the alteration was made in good faith and for the
benefit of the company as a whole and since the members considered it
beneficial to the company to get rid of competitors, the alteration was
valid..
Contrast this case with that of
Brown v. British Abrasive Wheel Co. (1990) 1 Ch. 290

Here a public company was in urgent need of further capital which the
majority of the members who held 98% of the shares were willing to
50
supply if they could buy out the minority. They tried persuasion of the
minority to sell shares to them but the minority refused. They therefore
proposed to pass a Special Resolution adding to the Articles a clause
whereby any shareholder was bound to transfer his shares upon a
request in writing of the holders of 98% of the issued capital.
The court held that this was an attempt to add a clause which will
enable the majority to expropriate the shares of the minority who had
bought them when there was no such power. Such an attempt was not
for the benefit of the company as a whole but for the majority. An
injunction was therefore granted to restrain the company from passing
the proposed resolution.
EFFECT OF ALTERATION ON CONTRACT OF DIRECTORS

Sometimes the Articles may be altered in such a way that the
implementation of those articles in the altered form would give rise to
breach of an existing contract between the company and a third party
and particularly so as regards contracts between companies and their
directors.
A director may hold office either
1. Under the Articles without a service contract;
2. Under a contract of service which is entirely independent of
the articles; or
3. Under a service contract which expressly or by implication
embodies the relevant provisions in the Articles.
Where a director holds office under the Articles without a contract of

service, then his appointment is conditional on the footing that the
articles may be altered at any time in exercise of statutory power.
51
If however, a director’s appointment is entirely independent of the
articles then any alterations which affects his contract with the company
will constitute a breach of contract for which the company will be liable
in damages.
Southern Foundries v. Shirlaw (1940) A.C. 701

The Plaintiff by a written contract was appointed the company’s
Managing Director for 10 years. The agreement was not expressed to be
subject to the Articles in any way. The Articles provided various
grounds for the removal of a director from office subject to the terms of
any subsisting agreement. The Articles further provided that if the
Managing Director ceased to be a director, he would ipso facto cease to
be Managing Director. The Company’s Articles were subsequently
changed to give the Directors power to remove a fellow director from
office by notice. Such notice was given to the Plaintiff who thereupon
filed an action claiming damages from the company for breach of
contract.
It was held that since his appointment was not subject to the articles, he
could only be removed from office in accordance with the terms of his
appointment and not by way of alteration of the articles. Damages were
therefore payable.
Lord Atkins said “if a party enters into an arrangement which can only
take effect by the continuance of an existing state of circumstances there
is an implied undertaking on his part that he shall be done of his own
motion to put an end to that state of circumstances which alone the
arrangement can be operative.”
52
If a director is appointed in very general terms and without limitation of
time, then the provisions in the Articles are deemed to be incorporated
in the appointment and in the absence of any provision in the articles to
the contrary, the company may dismiss him at any time and even
without notice.
Read v. Astoria Garage (1952) 1 All.E.R 922

A Company’s Articles provided that the appointment of a Managing
Director shall be subject to termination if he ceases for any reason to be
a director or if the company in general meeting resolved that his tenure
of office as managing director be terminated. The Plaintiff was
appointed as the company’s Managing Director 17 years later the
directors decided to relieve him of his duties as Managing Director.
The decision was subsequently ratified by the company in general
meeting. He claimed damages for wrongful dismissal.
The court held that on a true construction of the company’s articles the
Plaintiff’s appointment was immediately and automatically terminated
on passing of the Resolution at the general meeting since the company
had expressly reserved to itself the power to dismiss the Managing
Director.
The question is, can a company be restrained by injunction from

altering its articles if the alteration is likely to give rise to a breach of
contract?
Part of the answer to this question was given in the case of
British Murac Syndicate Ltd v. Alperton Rubber Co. Ltd. 1950 2 Ch.
186
53
By an agreement binding on the Defendant company it was provided
that so long as the operative syndicate should hold over 5000 shares in
the Defendant’s company, the Plaintiff’s syndicate should have the right
of nominating two directors on the Board of the Defendant Company.
A clause to the same effect was contained in Article 88 of the
Defendant Company’s Articles of Association.
Another Article provided that the number of directors should not be less
than 3 nor more than 7. The Plaintiff syndicate had recently nominated
2 persons as directors. The Defendant company objected to these two
persons as directors and refused to accept the nomination and a meeting
of shareholders was called for the purpose of passing a special
resolution under Section 13 of the Companies Act cancelling the article.
The court held that the defendant company had no power to alter its
articles of association for the purpose of committing a breach of
contract and that an injunction ought to be granted to restrain the
holding of the meeting for that purpose.
Punt v. Symens & Co. 1903 2 Ch.d 506

This case had words to the effect that the company cannot be restrained
but this was overruled in the case of British Equitable Assurance Co. v.
Baily (1906) S.C. 35
Allen v. Goldreef
In this case an article was altered in such a way as to prejudice one
shareholder. The article gave a lien on partly-paid shares for debts of
members. Zuccani owed money in respect of unpaid calls on partly-
paid shares but was the only holder of fully paid shares as well. The
court held that it was for the benefit of the company to recover moneys
54
due to it and the alteration in its terms related to all holders of fully-paid
shares. The fact that Zuccani was the only member of that class at that
moment did not invalidate it.
VARIATION OF CLASS RIGHTS

Although the Companies Act recognises the existence of class of
shareholders, it does not define the term ‘class’ the best definition is
found in the case of
Sovereign Life Assurance Co. v. Dodd (1892) 2 QB 573

In that case Bowen L.J. stated as follows: “The word Class is vague it
must be confined to those persons whose rights are not dissimilar as to
make it impossible for them to concert together with a view to their
common interest.”
Under Article 4 of Table A where the Share Capital is divided into

different classes of Shares, the rights attached to any class may be
varied only with a consent in writing of the holders of three quarters of
the issued share of that class or with assumption of a special resolution
passed at a separate meeting of the holders of the shares of that class.
However, under Section 25 (2) if the rights are contained in the

Memorandum of Association and if the Memorandum prohibits
alteration of those rights, then class rights cannot be varied.
THE COMPANIES ORGANS & OFFICERS

Since a company is an artificial person, it can only act through an
agency of a human person. For this purpose, a company has two
primary organs.
55
1. The general Meeting;
2. The Board of Directors.
The authority to exercise a company’s powers is normally delegated not
to the members nor individual directors but only to the directors as a
Board. The directors may however delegate powers to an individual
Managing Director.
Section 177 of the Companies Act requires every public company to

have at least two directors and every private company at least one
director. The Act does not provide for the means of appointing
Directors but in practice the Articles of Association provide for initial
appointments by subscribers to the Memorandum of Association and
thereafter to annual retirement of a certain number of directors and the
filling of vacancies at the annual general meeting.
Under Section 184 (1) of the Companies Act every appointment must
be voted on individually except in the case of private companies or
unless the meeting unanimously agrees to include two or more
appointments in the same resolution. The appointment is usually
effected by an ordinary resolution. However, no matter how a director is
appointed, under Section 185 of the Companies Act he can always be
removed from office by an ordinary resolution in addition to any other
means of removal which may be embodied in the articles.
Unless the Articles so provide Directors need not be members of a

company, but if the articles require a share qualification, then the shares
must be taken up within two months otherwise the office will be
vacated. Undischarged Bankrupts are not allowed to act as directors
without leave of the court. A director need not be a natural person. A
company may be appointed a director of another. The disqualifications
56
of directors are set out in article 88 of Table A. The division of powers
between the general meeting and the Board of Directors depends
entirely on the construction of the Articles of Association and generally
where powers of management are vested in the Board of Directors, the
general meeting cannot interfere with the exercise of those powers.
Automatic Self-cleaning Filter Syndicate v. Cunningham (1906) A.C.

442
The company’s articles provided that subject to such regulations as
might be made by extra ordinary resolution, the Management of the
company’s affairs should be vested in the Directors who might exercise
all the powers of the company which were not by statute or articles
expressly required to be exercised by the company in general meeting.
In particular the articles gave the directors power to sell and deal with
any property of the company on such terms as they must deem fit. At a
general meeting of the company, a Resolution was passed by a simple
majority of the members for the sale of the company’s assets on certain
terms and instructing the directors to carry the sale into effect. The
Directors were of the opinion that a sale on those terms was not of any
benefit to the company and therefore refused to carry it into effect. The
issue was, whether the directors were under an obligation to act in
accordance with the directives.
The court held that the Articles constituted a contract by which the
members had agreed that the Directors alone should manage the affairs
of the company unless and until the powers vested in the Directors was
taken away by an alteration in the Articles they could ignore the general
meeting directives on matters of management. They were therefore
entitled to refuse to execute the sale.
57
The division of the power to manage the company’s affairs is embodied
in Article 80 of Table A which states that the business of the company
shall be managed by the directors who may exercise all such powers of
a company as are not by the Act or by these regulations required to be
exercised by the company in general meeting. Where this article is
adopted as it is invariably done in practice the general meeting cannot
interfere with a decision of the directors unless they are acting contrary
to the provisions of the Companies Act or the particular company’s
articles of association.
Shaw & Sons Ltd v. Shaw (1935) 2 KB 113

Here the Directors were empowered to manage the company’s affairs.
They commenced an action for and on behalf of the company and in the
company’s name, in order to recover some money owed to the
company. The general meeting thereafter passed a resolution
disapproving the commencement of the suit and instructing the
Directors to withdraw it
It was held that the resolution of the general meeting was a nullity Greer
L.J. stated
“A company is an entity distinct from its shareholders and its

directors. Some of its powers may be according to its articles exercised
by the Directors and certain other powers may be reserved for
shareholders in general meeting. If powers of management are vested in
the Directors, they and they alone can exercise these powers. The only
way in which the general body of the shareholders can control the
exercise of the powers vested by the articles in the directors is by
altering the articles or if opportunity arises under the articles by
refusing to re-elect the directors or whose actions they disapprove.
58
They cannot themselves reserve the powers which by themselves are
vested in the Directors any more than the directors can reserve to
themselves the powers vested by the articles in the general body of
shareholders.”
To this there are two exceptions

1. in relation to litigation – here a general meeting can institute
proceedings on behalf of the company if the board of directors refuses
or neglects to do so.
2. When there is a deadlock in the Board of Directors as for
instance in the case of
Barron v. Porter (1914) 1 Ch. 895

The articles of association vested the power to appoint additional
directors in the Board of Directors. There were only two directors
namely, Barron and Porter and the conduct of the company’s business
was at a standstill as Barron refused to attend any Board meeting with
Porter.
The court held that it was competent for the general meeting to appoint
additional directors even if the power to do so was by articles vested in
the Board of Directors.
CORPORATES’ LIABILITIES FOR ACTS OF ITS

ORGANS & OFFICERS
There are certain situations in which the law does not recognise
vicarious liability but insists on personal fault as a prelude to liability.
In such cases a company could never be liable if the courts applied
rigidly the rule that a company is an artificial person and therefore can
only act through the directors. In practice and for certain purposes the
59
courts have elected to treat the acts of certain officers as those of the
company itself. This is sometimes referred to as THE ORGANIC
THEORY OF COMPANIES.
The theory sprung from the case of Lennard’s Carrying Co. v. Asiatic
Petroleum Co. Ltd. (1950) A.C. 705. In this case a ship and her cargo
were lost owing to unseaworthiness. The owners of the ship were a
limited company. The managers of the company were another limited
company whose managing director a Mr. Lennard managed the ship on
behalf of the owners. He knew or ought to have known of the Ship’s
unseaworthiness but took no steps to prevent the ship from going to sea.
Under the relevant shipping Act the owner of a sea going ship was not
liable to make good any loss or damage happening without his fault.
The issue was whether Lennard’s knowledge was also the company’s
knowledge that the ship was unseaworthy. The court held that Lennard
was the Directing mind and will of the company his knowledge was the
knowledge of the company, his fault the fault of the company and since
he knew that the ship was unseaworthy, his fault was also the
company’s fault and therefore the company was liable. As per Viscount
Haldane “My Lords a corporation is an abstraction. It has no mind of its
own anymore than it has a body of its own. Its active and directing will
must consequently be sought in the person of somebody who for some
purposes may be called an agent but who is really the directing mind
and will of the corporation, the very ego and centre of the personality of
the corporation.
Bolton Engineering Co. v. Graham

Here the Plaintiffs who were tenants in certain business premises were
entitled to a renewal of their tenancy unless the landlords who were a
limited company intended to occupy the premises themselves for their
60
business purposes. The issue was whether the Defendant company had
effectively formed this intention. There had been no formal general
meeting or Board of Directors meeting held to consider the question but
the managing director’s clearly manifested the intention to occupy the
premises for the company’s business.
The court held that the intention manifested by the Directors was the
company’s intention and therefore the tenants were not entitled to a
renewal of the tenancy.
Denning L.J. as he then was stated as follows:

“a company may in many ways be likened to a human being. It has
a brain and nerve centre which controls what it does. It also has hands
which hold the tools and act in accordance with the directions from the
centre. Some of the people in the company are mere servants and
agents who are nothing more than hands to do the work and cannot be
said to represent the mind and will of the company. Other are directors
and managers who represent the directing mind and will of the company
and control what it does. The state of mind of these managers is the
state of mind of the company and are treated by the law as such.
Whether their intention is the company’s intention depends on the
nature of the matter under consideration, the relative position of the
officer or agent and other relevant facts and circumstances of the case.”
RULE IN TURQUAND’S CASE

Crossly connected with this aspect is the so called rule in Turquand’s
case:
This rule deals with a company’s liability for acts of its officers. The
question as to whether or not the company is bound or not depends on
the normal agency principles. If a company’s officer or a company’s
61
organ does an act within the scope of its authority, the company will be
bound. The problem which might arise is that even if the Act in
question is within the scope of the organs or officers authority, there
might be some irregularity in the action of the organ concerned and
consequently in the exercise of authority. For example, if a particular
act can only be valued if done by the Board of Directors or the general
meeting, the meeting might have been convened on improper notice or
the resolution may not have been properly carried. In the case of the
Directors, they may not have been properly appointed. In these
circumstances can the company disclaim an act which was so done by
arguing that the meeting was irregular? Must a third party dealing with
the company always ascertain that the company’s internal regulations
have been complied with before holding the company liable?
The answer to this question was given in the negative in the case of
The Royal British Bank v. Turquand (1856) 6 E & B 327

Here under the Company’s constitution the directors were given power
to borrow on bond such sums of money as from time to time by a
general resolution be authorised to be borrowed. Without any such
resolution having been passed, the directors borrowed a certain sum of
money from the Plaintiff’s bank. Upon the company’s liquidation the
bank sought to recover from the liquidator who argued that the Bank
was not bound to recover it as it was borrowed without authority from
the general meeting.
The court held that even though no resolution had been passed, the
company was nevertheless bound by the act of the directors and
therefore was bound to repay the money.
The words of Jarvis C.J. were as follows:
62
“a party dealing with a company is bound to read the company’s
deed of settlement (Memorandum of Association) but he is not bound to
do more. In this case a third party reading a company’s documents will
find not a prohibition from borrowing but permission to do so on
certain conditions. Finding that the authority might be made complete
by resolution, he would have had a right to infer the fact of a resolution
authorising that which on the face of the document appeared to be
legitimately done.”
This is the rule in Turquand’s Case which is often referred to as the rule
as to indoor management.
This rule is based not on logic but on business convenience.
1. A third party dealing with a company has no access to the
company’s indoor activities;
2. It would be very difficult to run business if everyone who
had dealings with the company had first to examine the company’s
internal operations before engaging in any business with the company;
3. It would be very unfair to the company’s creditors if the
company could escape liability on the ground that its officials acted
irregularly.
But should the company always be held liable for the act of any people
purporting to act on the company’s behalf? Suppose these persons are
impostors, what happens?
In order to avoid this some limitations have been imposed on the rule.
Later cases have refined the rule to a point where the position appears to
that ordinary agency principles will always apply
63
Anybody dealing with a company is deemed to have notice of the
contents of the company’s public documents. Therefore any act which
is contrary to those provisions will not bind the company unless it is
subsequently ratified by the company acting through its appropriate
organ. The term public document is not defined in the companies Act
but so far as registered companies are concerned, the expression is not
restricted to the Memorandum and Articles but it also includes some of
those documents filed at the companies registry. These include special
resolutions, particulars of directors and secretary, charges etc. provided
that everything appears to be regular, so far as can be checked from the
public documents, a third party dealing with a company is entitled to
assume that all internal regulations of the company have been complied
with unless he has knowledge to the contrary or there are suspicious
circumstances putting him on inquiry. Reference is made to the case of
Mahoney v. East Holyford Mining Co. (1875) L.R. 7 HL 869

Here a mining company was founded by W and his friends and
relatives. Subscriptions were obtained from applicants for shares.
These monies were paid into the bank which had been described in the
prospectus as the company’s bank. The communication of the letter
was sent to the Bank by a person describing himself as the Company’s
secretary to the effect that in accordance with a resolution passed on
that day, the bank was to pay out cheques signed by either two of the
three named directors whose signatures were attached and
countersigned by the Secretary. The bank thereafter honoured cheques
so signed. When the company’s funds were almost exhausted, the
company was ordered to be wound up. It was then discovered that no
meeting of the Shareholders had been held, and no appointment of
Directors and Secretary met but that with his friends and relatives, W
had held themselves to be secretary and directors and had appropriated
64
the subscription money. The issue was whether the Bank was liable to
refund the money it had paid back to the borrower.
The court held that the bank was not liable to refund any money to the
company as it had honoured the company’s cheques in reliance on a
letter received and in good faith.
Lord Hatherly stated
“When there are persons conducting the affairs of a company in a
manner which appears to be perfectly consonant with the articles of
association, then those dealing with them externally are not to be
affected by any irregularities which may take place in the internal
management of the company.”
Directors will not necessarily and for all purposes be insiders. The test
appears to be whether the acts done by them are so closely related to
their position as directors as to make it impossible for them not to be
treated as knowing the limitations on the powers of the officers of the
company with whom they have dealt. Otherwise a third party dealing
with a company through an officer who is or is held out by the company
as a particular type of officer e.g. a Managing Director and who
purports to exercise a power which that sort of officer will usually have
is entitled to hold the company liable for the officer’s acts even though
the officer has not been so appointed or is in fact exceeding his
authority as long as the third party does not know that the company’s
officer has not been so appointed or has no actual authority.
A third party however, will not be protected if the circumstances are

such as to put him on inquiry. He will also lose protection if the public
documents make it clear that the officer has no actual authority or could
not have authority unless a resolution had been passed which requires
65
filing in the Companies Registry and no such resolution had been filed.
These are normal agency principles.
Freeman & Lockyer V Buckhurst Park Properties (1964) 2 Q.B. 480

In this case Kapool & Hoon formed a private company which purchased
Buckhurst Park Estate. The Board of Directors consisted of Kapool,
Hoon and two others. The Articles of the company contained a power
to appoint a Managing Director but none was appointed. Though never
appointed as such, Kapool acted as Managing Director. In that capacity
he engaged the Plaintiffs who were a firm of Architects to do certain
work for the company which was duly done. When the Plaintiff’s
claimed remuneration, according to the agreement, the company replied
that it was not liable because Kapool had no authority to engage them.
The Court held that the act of engaging Architects was within the
ordinary ambit of the authority of a Managing Director of a property
company and the Plaintiffs did not have to inquire whether a person
with whom they were dealing with was properly appointed. It was
sufficient for them that under the Articles, the Board of Directors had
the power to appoint him and had in fact allowed him to act as
Managing Director. Four conditions must however be fulfilled in order
to entitle a third party to enforce a contract entered to on behalf of the
company by a person who has no actual authority.
1. It must be shown that there was a representation that the

agent had authority to enter into a contract of the kind sought to be
enforced;
2. Such representation must be made by a person or persons
who had actual authority to manage the company’s business either
generally or in respect of those matters to which the contract relates;
66
3. It must be shown that the contract was induced by such
representation;
4. It must be shown that neither in its Memorandum or under
its Articles was the company deprived of the capacity either to enter
into a contract of the kind sought to be enforced or to delegate authority
to do so to the agent.
Emco Plastica International vs Freeberne (1971) E.A. 432

Here by a resolution of the company at a meeting of the Board of
Directors, the Respondent was appointed as the company’s secretary.
Nothing was decided at the meeting as regards his remuneration or
other terms of service. The terms of his appointment were contained in
a letter signed on behalf of the company by its Managing Director
which provided that the appointment was for a maximum period of 5
years. The Managing Director dealt with the day to day affairs of the
company but had no express authority to appoint a Secretary or to offer
such unusually generous terms as contained in the letter. After two
years service the company purported to dismiss the Respondent by five
days notice. The Secretary sued for benefits under the Contract. The
Company contended that the Managing Director had no authority from
the Company to offer the terms of the contract. There being no
resolution of the board to support it and nothing in the company’s
articles conferring any such powers on a Managing Director.
The court held that as a chairman he performed the functions of the

Managing Director with a full knowledge of the Board of Directors and
that a contract of service as the one entered into with the Secretary was
one which a person performing the duties of a Managing Director
would have power to enter into on behalf of the company. Therefore,
the contract was genuine, valid and enforceable. If however, the officer
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is purporting to exercise some authority which that sort of officer would
not normally have, a third party will not be protected if the officer
exceeds his actual authority unless the company has held him out as
having authority to act in the matter and the third party has relied
thereof i.e. unless the company is estopped. However, a provision in
the Memorandum or Articles or other public document cannot create an
estoppel unless the third party knew of the provision and has relied on
it. For this purpose, regulations at the Companies Registry do not
constitute notice because the doctrine of constructive notice operates
negatively and not positive. If a document purporting to be received by
or signed on behalf of the company is proved to be a forgery, it does not
bind the company. However, the company may be estopped from
claiming the document as a forgery if it has been put forward as genuine
by an officer acting within his usual or ostensible authority.
Look at
Rama Corp v Proved Tin & General Investment (1952) 2 Q.B. 147
PROMOTERS
The Companies Act does not define the term promoter but Section
45(5) says
“A promoter is a promoter who was a party to the preparation of the
prospectus. Apart from the fact that this definition does not speak much,
it nevertheless shows that the definition is only given for the purposes
of that section.
At common law the best definition is that by Chief Justice Cockburn in

the case of
68
Twyfords – v – Grant (1877) 2C.P.D. 469
Cockburn says “a promoter is one who undertakes to form a company

with reference to a given project and to set it going and who takes the
necessary steps to accomplish that purpose.”
The term is also used to cover any individual undertaking to become a

director of a company to be formed. Similarly it covers anyone who
negotiates preliminary agreements on behalf of a proposed company.
But those who act in a purely professional capacity e.g. advocates will
not qualify as promoters because they are simply performing their
normal professional duties. But they can also become promoters or find
others who will. Whether a person is a promoter or not therefore, is a
question of fact. The reason is that Promoter of is not a term of law but
of business summing up in a single word the number of business
associations familiar to the commercial world by which a company is
born.
It may therefore be said that the promoters of a company are those

responsible for its formation. They decide the scope of its business
activities, they negotiate for the purchase of an existing business if
necessary, they instruct advocates to prepare the necessary documents,
they secure the services of directors, they provide registration fees and
they carry out all other duties involved in company formation. They
also take responsibility in case of a company in respect of which a
prospectus is to be issued before incorporation and a report of those
whose report must accompany the prospectus.
DUTIES OF A PROMOTER
69
His duty is to act bona fide towards the company. Though he may not
strictly be an agent, or trustee for a company, anyone who can be
properly regarded as a promoter stands in a fiduciary relationship vis-à-
vis the company. This carries the duties of disclosure and proper
accounting particularly a promoter must not make any profit out of
promotion without disclosing to the company the nature and extent of
such a Promotion. Failure to do so may lead to the recovery of the
profits by the company.
The question which arises is – Since the company is a separate legal

entity from members, how is this disclosure effected?
Erlanger v New Sombrero Phosphates Co. (1878) 3 A.C. 1218

The facts were as follows
The promoters of a company sold a lease to the company at twice the
price paid for it without disclosing this fact to the company. It was held
that the promoters breached their duties and that they should have
disclosed this fact to the company’s board of directors. As Lord Cairns
said
“the owner of the property who promotes and forms that company to
which he sells his property is bound to take care that he sells it to the
company through the medium of a Board of Directors who can exercise
an independent judgment on the transaction and who are not left under
belief that the property belongs not to the promoters and not to another
person.”
Since the decision in Salomon’s case it has never been doubted that a
disclosure to the members themselves will be equally effective. It
would appear that disclosure must be made to the company either by
70
making it to an independent Board of Directors or to the existing and
potential members. If to the former the promoter’s duty to the company
is duly discharged, thereafter, it is upon the directors to disclose to the
subscribers and if made to the members, it must appear in the
Prospectus and the Articles so that those who become members can
have full information regarding it.
Since a promoter owes his duty to a company, in the event of any non-
disclosure, the primary remedy is for the company to bring proceedings
for
1. Either rescission of any contract with the promoter or
2. recovery of any profits from the promoter.
As regards Rescission, this must be exercised with keeping in normal
principles of the contract.
1. the company should not have done anything to ratify the action
2. There must be restitutio in intergram (restore the parties to their
original position),
REMUNERATION OF PROMOTERS
A promoter is not entitled to any remuneration for services rendered for
the company unless there is a contract so enabling him. In the absence
of such a contract, a promoter has no right to even his preliminary
expenses or even the refund of the registration fees for the company. He
is therefore under the mercy of the Directors. But before a company is
formed, it cannot enter into any contract and therefore a promoter has to
spend his money with no guarantee that he will be reimbursed.
But in practice the articles will usually have provision authorising

directors to pay the promoters. Although such provision does not
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amount to a contract, it nevertheless constitutes adequate authority for
directors to pay the promoter.
PRELIMINARY CONTRACTS BY PROMOTERS

Until a company is formed, it is legally non-existent and therefore
cannot enter into any contract or even do any other acts in law. once
incorporated, it cannot be liable on any contract nor can it be entitled
under any contract purported to have made on its behalf before
incorporation.
Ratification is not possible when the ostensible principle is non-existent

in law when the contract was entered into.
Price v. Kelsall (1957) E.A. 752

One of the issues in this case was whether or not a company could ratify
a contract entered into on its behalf before incorporation. The alleged
contract was that the Respondent had undertaken to sell some property
to a company which was proposed to be formed between him and the
Appellant. In holding that a company cannot ratify such an agreement,
the Eastern Africa Court of Appeal as then constituted O’Connor
President said as follows
“A company cannot ratify a contract purporting to be made by
someone on its behalf before its incorporation but there may be
circumstances from which it may be inferred that the company after its
incorporation has made a new contract to the effect of the old
agreement. The mere confirmation and adoption by Directors of a
contract made before the formation of the company by persons
purporting to act on behalf of the company creates no contractual
relations whatsoever between the company and the other party to the
contract.”
72
However, acts may be done by a company after its formation which
give rise to an inference of a new contract on the same terms as the old
one.
The question whether there is a new contract or contracts is always a

question of facts which depends on the circumstances of each individual
case.
Mawagola Farmers & Growers Ltd. V Kanyanja (1971) E.A. 272

Here, prior to the incorporation of a company the promoters held public
meetings at which members of the public were asked to purchase shares
in a proposed company. The Respondents paid for the shares both
before and after incorporation of the company but the company did not
allot any shares to them. Instead after incorporation, it allotted shares to
other people.
The Respondents filed actions praying for orders that the shares they
paid for be allotted to them and the company’s registered members be
rectified accordingly.
The Company argued that as the Respondents had paid money for the
purchase of their shares before incorporation, their claim could only be
directed against promoters because no pre incorporation agreement
could bind the company and the company could not even after
incorporation ratify or adopt any such contract.
Mustafa J.A. replied as follows:

“in order that the company may be bound by agreements entered
into before incorporation, there must be a new contract to the same
73
effect as the old agreements. This contract may however be inferred
from the acts of the company when incorporated.”
The allotment of shares to the Respondents after the incorporation was

held to be sufficient evidence of a new contract between the company
and the Respondents. Therefore the Respondents were entitled to be
allotted the shares agreed upon.
If any preliminary arrangements are made, these must therefore be left

to mere gentlemen’s agreements or otherwise the promoters might have
to undertake personal liability.
Although the principle is clear, those engaged in the formation of

companies often cause contracts to be entered into on behalf of their
proposed companies.
As to whether the promoters will be personally liable on such contracts

of nought might depend on the terminology employed. In the case of
Kelner v. Baxter (1886) L.R. 2 C.P. 174

In this case, A, B and C entered into a contract with the Plaintiff to
purchase goods “on behalf of the proposed Gravesand Royal Alexandra
Hotel Company” the goods were duly supplied and consumed. Shortly
after incorporation the company in question collapsed and the Plaintiff
sued A B and C for the price of the goods supplied.
It was held that A B and C were liable. Chief Justice Erne stated as
follows:
“where a contract is signed by one who professes to be signing as
agent but who has no principal existence at the time, then the contract
74
will hold together the inoperative unless binding against the person who
signed it. He is bound thereby and a stranger cannot by subsequent
ratification relieve him from that responsibility. When the company
came afterwards into existence, it had rights and obligations from that
time but no rights or obligations by reason of anything which might
have been done before.”
Contrast this case with the case of Newborn v. Sensolid (G.B Ltd)
(1954) 1 Q.B. 45
Here a contract was entered into between Leopold Newborn London
Ltd and the Defendant for purchase of goods by the latter. The
defendant subsequently refused to take delivery of the goods and an
action was commenced by Leopold Newborn Ltd.
It was discovered that at the time the contract was entered into, the
company had not been incorporated. Leopold Newborn thereupon
sought personally to enforce the contract.
It was held that the signature on the document was the company’s
signature and as the company was not in existence when the contract
was signed, there never was a contract and Mr. Newborn could not
come forward and say that it was his contract. The fact was that he
made a contract for a company which did not exist.
PROSPECTUSES
Basically when the public is asked to subscribe for shares or debentures
in a company the invitation involves the issue of documents which set
out the advantages to accrue from an investment in the company. This
document is called a prospectus and may be issued either by the
75
company itself or by a promoter. It is only in the case of a public
company that a prospectus may be issued.
A private company must always raise its capital privately as required by

Section 13 of the Companies Act Cap 486.
Section 20 of the Statute defines Prospectus as “any prospectus notice

circular advertisement or other invitation offering to the public for
subscription or purchase of any shares or debentures in the company.”
The word invitation and offering in that definition are loosely used
because when a company issues a prospectus it does not offer to sell
any shares but rather invites offers from members of the public. A
prospectus is therefore not an offer but an invitation to treat.
The word prospectus is thus a vague and uncertain term. Whether an

invitation is made to members of the public is always a question of fact.
The question “public” is not restricted to a certain section of the public
but includes any members of the general public. Reference may be
made to the case of
Re South of England Natural Gas Co. (1911) 1 Ch. 573

A newly formed company issued 3000 copies of a document which
offered for subscription shares in a company and which was headed “for
private circulation only”. These copies were then circulated to the
shareholders of a number of gas companies and the question arose Was
this a prospectus?
The court held that this was an offer to the public and therefore
constituted a prospectus.
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CONTENTS OF A PROSPECTUS
The object of the Companies Act is to compel a company to disclose in
a prospectus all the necessary information which will enable a potential
investor in deciding whether or not to subscribe for a company shares or
debentures. Therefore Section 40 requires that every Prospectus shall
state the matter specified in Article 1 of the 3 rd Schedule to the Act and
that it will also set out the report specified in Part II of that Schedule.
The provisions in that Schedule are designed mainly to provide
information about the following matters:
1. Who the directors are; and What benefits they will get
from the Directorship;
2. In the case of a new company, what profits are being
made by the promoters;
3. the amount of capital required by the company to be
subscribed, the amount actually received or to be received, the precise
nature of the consideration which is not paid in cash;
4. In the case of an existing company, what the company’s
financial records has been in the past.
5. the company’s obligations under any contracts it has
entered into;
6. the voting and dividend rights of each class of shares;
7. If a Prospectus includes any statement by an expert, then
the expert must have given his written consent to the inclusion of the
statement and the prospectus must state that he has done so as per
Contravention of these requirements renders the company and every
person who was knowingly a party to the issue of the prospectus to a
fine not exceeding 10,000/-
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Section 42 defines Expert as including “Engineer, Valuer, Accountant
or any other person whose profession gives authority to the statement
made by him.”
In addition to these requirements the prospectuses must also be dated

and the date stated therein is taken to be the date of publication of the
prospectus. However, there are two instances when a prospectus need
not contain the matter set out in Schedule III namely
1. When the prospectus is issued to existing members or
shareholders of the company;
2. When the prospectus relates to shares or debentures uniform
with previously issued shares or debentures.
LIABILITY IN RESPECT OF PROSPECTUS

If a prospectus contains untrue statements, the Companies Act
prescribes both penalty at Criminal Law and also Civil Liability for
payment of damages. As concerns Criminal Liability, under Section 46
where a prospectus includes any untrue statement, any person who
authorised the issue of the prospectus is guilty of an offence and liable
to imprisonment of a term not exceeding two years or a fine not
exceeding 10,000/- or both such a fine and imprisonment unless he
proves either that the statement was immaterial or that he had
reasonable grounds to believe and did up to the time of issue of the
prospectus that the statement was true.
A statement is deemed to be untrue if it is misleading in the form and

context in which it is included.
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R. v. Kylsant (1932) 1 K.B. 442
In this case the company had sustained continuous loses for over 6 years
from 1921 to 1927. The company issued a prospectus which in all
material facts was correct. It further specified that the dividends being
paid were high. But these dividends were being paid out of abnormal
profits made after World War 1. Therefore the Prospectus was
misleading in its context.
CIVIL REMEDIES
There are two primary remedies for those who subscribe for shares in a
company as a result of a misrepresentation in a prospectus
(a) Damages;
(b) Rescission of any resulting contract.
DAMAGES
Section 45 provides for compensation to all persons who subscribe for
any shares or debentures on the faith of the Prospectus for loss or
damage they may have sustained by reason of untrue statements
included therein. If the statement is false to the knowledge of those
who made it, then this amounts to fraud and damages will be
recoverable from all those who made the statement intending it to be
acted upon. Refer to the case of
Derry v. Peek (1889) 14 A.C. 337

Herein a company had power to construct tramways to be moved by
animal power and with the consent of the British Board of Trade by
steam or mechanical power. The Directors issued a prospectus stating
that the company had power to use steam or mechanical power.
79
In reliance on this misrepresentation, the Plaintiff bought shares in the
company. Subsequently the Board of Trade refused to give consent to
the use of Steam or mechanical power and as a result the company was
wound up. The Plaintiff brought an action for deceit alleging fraudulent
misrepresentation.
The Court held that the Defendants were not liable as they had made the
incorrect statement in the honest belief that it was true. Lord Herschell
said “the authorities establish two major propositions.In order to sustain
an action of Deceit, there must be proof of fraud and nothing short of
that will suffice;
(i) Fraud is proved when it is shown that a false
representation has been made either;
(a) Knowingly or
(b) Without belief in its truth; or
(c) Recklessly not caring whether it be true or false.
In order to succeed in an action for damages for fraud the plaintiff must
show that the Misrepresentation was made to him or that he was one of
a class of persons who were intended to act upon it. The ordinary
purpose of a prospectus is to invite members of the public to become
allottees of shares in a company. Once the shares have been allotted
therefore the prospectus will have served its purpose and thereafter it
cannot be used as a ground for filing an action for fraud in respect of
shares bought at a later date from another source. Reference made to
the case of
Peek v. Gurney (1873) L.R. 377

The allotment of shares in the company began on July 24th and was
completed on 28th July. In October, the Plaintiff bought shares on the
stock exchange. He subsequently found that the prospectus issued in
80
July contained some untrue statements and therefore brought an action
in respect thereof.
The issue was could he sue?
The court held that the Plaintiff could not base his action on the
prospectus which was intended to be addressed only to the original
company subscribers to the company shares. The Directors of a
company are not liable after the full original allotment of shares for all
the subsequent dealings which may take place with regard to those
shares on the stock exchange.
However, the rule in Peek v. Gurney will not apply where a prospectus
is intended to induce not only the original subscribers for the company
shares but also to influence the subsequent purchase of those shares
Andrews v. Mockford (1896) 1 QB 372

Here the Plaintiff alleged that the Defendant sent him a prospectus
inviting him to buy shares in the company which they knew would be a
sham but the Plaintiff did not subscribe for the shares. The prospectus
eventually produced a very scanty subscription and the Defendant
caused a telegram to be published in the local Newspaper to the effect
that they had struck a vain of Gold. And this they alleged had
confirmed the statistics in the prospectus.
The Plaintiff immediately bought shares on this basis. The company

was wound up. The question arose, Had the Prospectus served its
purpose.
81
The court held that the prospectus was intended to induce the Plaintiff
both to subscribe for shares initially and also to buy them in the Market
thereafter. The telegram was part of the prospectus.
Lord Justice Smith stated as follows

“there was proved against the Defendant a continuous fraud on their
part commencing with ascending of the prospectus to the Plaintiff and
culminating in the direct lie told in a telegram which was intended by
the defendant to operate upon the Plaintiff’s mind and minds of others
and did so operate to his prejudice and the advantage of the Defendant.
In this case the function of the prospectus was not exhausted and a false
telegram was brought in to play by the Defendant to reflect back upon
and countenance the false statements in the prospectus.”
The purchaser of shares induced to buy shares by the misstatement in

the prospectus has an action for damages in negligence. He has also an
action for negligent misstatement under the Hedley Byrne & Co. v.
Heller & Partners (1974) A.C. 465 All these actions are directed to the
Directors personally.
RESCISSION
As against the company a person induced to buy shares by a
misrepresentation in the prospectus may rescind the contract. On
buying shares ones contract is with a company itself. The remedy is
available only against the company. To be entitled to this remedy, it is
not necessary for the purchaser of the shares to show that the statement
was fraudulent or negligent. Even if the misrepresentation was
innocent, rescission lies. However, the rights to rescind is subject to
two limitations
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1. The allotee loses the right to rescind if he shows any election
to affirm the contract; e.g. by attending and voting at the company’s
meetings or by accepting dividends or by selling or attempting to sell
the shares.
2. If the allotee does not rescind the contract before the

company is wound up, he loses the right to do so as from the moment
the winding up proceedings commenced. The rationale is the protection
of the other company’s creditors.
DIRECTORS DUTIES
First, three preliminary observations
1. Whereas the Directors’ authority to bind the company
depends on their acting collectively as a Board, their duties to the
company are owed by each Director individually. These duties are
owed to the company and the company alone and not to individual
shareholders.
Percival v. Wright (1902) 2 Ch. 421

Certain Shareholders wrote to the Company’s Secretary asking if he
knew anyone willing to buy their shares. Negotiations took place and
eventually the company chairman and two other directors bought the
Plaintiff Shares at £12 10s per share. The Plaintiff subsequently
discovered that prior to and during their own negotiations for sale, the
Chairman and the Board of Directors had been approached by 3 rd Party
with a view to the purchase of the entire company’s assets at more than
the price of 12 pounds 10 shillings per share.
83
The Plaintiff brought an action to set aside the share sales on the ground
that the directors owed them a duty to disclose the negotiations with the
3rd Party.
It was held that the Directors were not agents for the individual
shareholders and did not owe them any duty to disclose. Therefore the
sale was proper and could not be set aside. However, if the Directors
are authorised by the members to negotiate on their behalf e.g. with a
potential purchaser then the Directors will be in a position of agents for
such members and will owe them a duty accordingly.
Allen v. Hyatt (1914) 30 T.L.R. 444

These duties except where expressly stipulated in the Companies Act
are not restricted to directors alone but apply equally to any officials of
the company who are authorised to act as agents of the company and in
particular to those acting in a managerial capacity. This is particularly
so as regards fiduciary duties.
DIRECTORS’ DUTIES PROPER

These fall into two broad categories
1. duties of care and skill in the conduct of the company’s
affairs; and
2. Fiduciary duties of loyalty and good faith.
DUTIES OF CARE & SKILL

Duties of care and skill were summed up by Romer J. in the case of
Re City Equitable Fire Insurance Co. (1925) Ch. D 447

Here the Directors of an insurance company left the management of the
company’s affairs almost entirely to the Managing Director. Owing to
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the managing Director’s fraud, a large amount of the company’s funds
disappeared. Certain items appeared in the balance sheet under the
heading “loans at call or short notice and “Cash in Bank or in Hand”.
The Directors did not inquire how these items were made up. If they
had inquired they would have found that the loans were chiefly to the
Managing Director himself and to the Company’s General Manager and
the cash at Bank or in hand included some £13,000 in the hands of a
firm of stockbrokers at which the managing director was a partner.
On the company’s winding up, an investigation of its affairs disclosed a

shortage in its funds of more than £1.2 million incurred mainly due to
the delinquent fraud of the Managing Director for which he was
convicted and sentenced. The other Directors had all along acted in
good faith and honestly but the liquidator sought to make them liable
for the damages.
It was held that the Directors were negligent. Justice Romer reduced
the Directors duties of care and skill as follows
“A Director need not exhibit in the performance of his duties a greater
degree of skill than may reasonably be expected from a person of his
knowledge and experience.”
This proposition prescribes the standard of skill to be exhibited in

actions undertaken by directors. The test is partly objective and also
partly subjective because a reasonable man would be expected to have
the knowledge of a director with his experience. Refer to
Re Brazilian Rubber & Plantations Estates Ltd. (1911) 1 Ch. 405

In this case a company had five directors and one of them confessed
that he was absolutely ignorant of business. A second one was 75 years
85
old and very deaf. A third one said he only agreed to become a director
because he saw one of his friends names on the list of directors. The
other two were fairly able businessmen. The directors caused a contract
to be entered into between the company and a certain syndicate for
purchase by that company of some rubber plantation in Brazil. The
prospectus issued by the company contained false statements about the
acreage of the Plantation, the types of trees and so forth. The
information given therein was given to the Directors by a person who
had an original option to purchase that property. He had never been to
Brazil and the data was based on his own imagination. The Directors
caused the company to purchase the property. The question arose, were
they negligent in so doing?
The court held that their conduct did not amount to gross negligence.
Neville J. had the following to say:
“It has been laid down that so long as they act honestly, Directors
cannot be made responsible in damages unless they are guilty of gross
negligence. A Director’s duty requires him to act with such care as is
reasonably expected from his having regard to his knowledge and
experience. He is not bound to bring any special qualifications to his
office. He may undertake the Management of a Rubber Company in
complete ignorance of anything connected with Rubber without
incurring responsibility for the mistakes which may result from such
ignorance. While if he is acquainted with the Rubber business, he must
give the company the advantage of his knowledge when transacting the
company’s business. He is not bound to take any definite part in the
conduct of the company’s business but insofar as he undertakes it he
must use reasonable care. Such reasonable care must be measured by
the care an ordinary man might be expected to take in the same
circumstances on his own behalf.”
86
3. A director is not bound to give continuous attention to the
affairs of his company. His duties are of an intermittent nature to be
performed at periodical Board Meetings and at meetings of any
committee of the Board on which he is placed. He is not bound to
attend all such meetings though he ought to attend whenever in the
circumstances he is reasonably able to do so. Refer to the case of
Re Denham & Co. Ltd (1883) 2 Ch. D 752

Here a company was incorporated in 1873. Under the Articles 3
Directors were appointed namely, Denham, Taylor and Crook. A fourth
Director was appointed later. The articles conferred on Denham
supreme control of the company’s affairs. He was given power to
override decisions of the general meeting and a Board of Directors. He
was responsible for declaring dividends and he managed the company’s
affairs entirely alone and without consulting the other directors.
Between 1874 and 1877 a dividend of 15% per annum was
recommended and paid and the total amount paid was some £21,600. In
1880 the company went into liquidation and an investigation revealed
that the money paid as dividends had been paid not out of profits but out
of capital. Thereafter Denham became bankrupt, Taylor was dead and
his estate was worthless and the third man was a man of straw. The
creditors directed their claims against Crook who had property. Crooks
argued that since the formation of the company, he had never attended
Board Meetings and therefore could not be accountable for fraudulent
statements in the Company’s Balance Sheets. He attended one meeting
in 1876 where he formally put forth a Resolution for the payment of a
dividend for that year.
87
The Court held that a Director is not bound to attend every Board
meeting and that he is not liable for misfeasance committed by his co-
directors at Board meetings at which he was never present.
Marquis Of Butes (1892) 2 Ch. 100

Here the Director never attended any Board meetings for 38 years. It
was held that he was not liable.
3. In respect of all duties which having regard to all exigencies of

business and articles of association may properly be left to some other
official. A Director in the absence of grounds for suspicion will not be
liable in trusting that other official to perform that other duty honestly.
Dovey v. Cory (1901) A.C. 477

A bank sustained heavy losses by advances made improperly to
customers. The irregular nature of advances was concealed by means of
fraudulent Balance Sheets which were the work of the General Manager
and the Chairman in assenting to the payment of dividends out of
capital and those advances on improper security were done on the
advice of the general manager and chairman.
The court held that the reliance placed by the co-director on the general
manager and chairman was reasonable. He was not negligent and
therefore was not liable for not having discovered the fraud as he was
not in the absence of circumstances of suspicion bound to examine
entries in the Company’s Books to see that the Balance Sheet was
correct.
It may be said that the duties of care and skill appear to be negative
duties. What about fiduciary duties?
88
FIDUCIARY DUTIES
Basically a Director’s fiduciary duties are divisible into 4 sub categories
1. The Directors must always act bona fide in what they

consider and not what the courts may consider to be in the best interest
of the company. In this context, the term company means the present
and future members of the company on the basis that the company will
be continued as a going concern thereby balancing long-term view
against short term interests of existing members.
2. The directors must always exercise their powers for the

particular purpose for which they were conferred and not for extraneous
purposes even if the latter are considered to be in the best interests of
the company. For example the Directors are invariably empowered to
issue capital and this power should be exercised for only raising more
funds when the company requires it. Hence it will be a breach of the
Directors’ duties to issue the company shares for the purpose of
entrenching themselves in the control of the company’s affairs. Refer to
the case of Punt v. Symons (1903) 2 Ch. 506 in this case the directors
issued shares with the object of creating a sufficient majority to enable
them to pass a special resolution depriving the other shareholders of
some special rights conferred upon them by the company’s articles. It
was held that a power of a kind exercised by the Directors in this case
was a power which must be exercised for the benefit of the company.
Primarily this power is given to them for the purpose of enabling them
to raise capital for the purposes of the company. Therefore a limited
issue of shares to persons who are obviously meant and intended to
secure the necessary statutory majority in a particular interest was not a
fair and bona fide exercise of the power.
89
Piercy v. Mills & Co. (1920) 1 Ch. 78
A company had two directors. They fell out of favour with the majority
of the shareholders who were therefore threatened with the election of 3
other directors to the Board. The directors issued shares with the object
of creating a sufficient majority to enable them to resist the election of
the 3 additional directors whose election would have put the two
directors in the minority on the Board.
The Court held that the Directors were not entitled to use their powers
of issuing shares merely for the purpose of maintaining their control or
the control of themselves and their friends over the affairs of the
company or even merely for the purpose of defeating the wishes of the
existing majority of shareholders. The Plaintiff and his friends held the
majority of shares in the company and as long as that majority
remained, they were entitled to have their wishes prevail in accordance
with a company’s regulations. Therefore it was not open to the
directors for the purpose of converting a minority into a majority and
purely for the purpose of defeating the wishes of the existing majority to
issue the shares in dispute.
In those circumstances where the directors have breached their duty to

exercise their powers for the proper purpose, the shareholders may
forgive them by ratifying their action
Hogg v. Cramphorn Ltd. (1967) Ch. 254
In this case the company had two classes of shares, ordinary and
preference shares. Each share carried 1 vote. The power to issue the
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company shares was vested in the Directors. They learnt that a takeover
bid was to be made to the Shareholders. In the Bona fide belief that the
acquisition of control by the prospective take over bidder will not be the
interest of the company or its staff. The Directors decided to forestall
this move. They therefore attached 10 votes to each of the unissued
preference shares and allotted to a trust which was controlled by the
Chairman of the Board of Directors and one of his partners in the
company’s audit department and an employee of the company. To
enable the trustees to pay for the shares, the directors provided them
with an interest free loan out of the company’s reserve fund.
An action challenged by the Plaintiff who was an associate of the

prospective take-over bidder and registered holder of 50 ordinary shares
in the company was started. After finding that it was improper for the
directors to attach such special voting rights, the Court stood over the
action in order to enable a general meeting to be held and to debate
whether or not to ratify the Director’s actions. The general meeting
ratified the action.
Bamford v. Bamford (1969) 1 All ER. 969
There were similar facts as in the former case but a meeting was held
before proceeding to court and that general meeting ratified the
Director’s action. The question also arose in this case, could a decision
of the general meeting cure the irregularity?
The court held if the allotment was made in bad faith, it was voidable at
the instance of the company because it was a wrong done to the
company and that being so, the company which has the rights to recall
91
the allotment has also the right to approve it and forgive the breach of
duty.
3. They must not fetter their displeasure to act for the company
for example, the directors cannot contract either among themselves or
with third parties as to how they will vote at future Board meetings.
However, where they have entered into a contract on behalf of the
company they may validly agree to take such further action at Board
meetings as maybe necessary to carry out such a contract.
FIDUCIARIES CONTINUED
4. As fiduciaries the Directors must not place themselves

without consent of the company in a position in which there is a conflict
between their duties to the company and their personal interests. Good
faith must not only be done but it must also manifestly be seen to be
done. The law will not allow the fiduciary to place himself in a position
where he will have his judgments to be biased and then argue that he
was not biased. This principle applies particularly when a Director
enters into a contract with his company or where he makes any secret
profit by being a Director. As far as contracts are concerned a contract
entered into by the Board on behalf of the company and another
Director is governed by the equitable principle which ordains that a
fiduciary relationship between the Director and his company vitiates
such contracts. Such contract is therefore voidable at the instance of the
company. Reference may be made to the case of
Aberdeen Railway v. Blaikie (1854) 1 Macc. 461
92
The Defendant company entered into a contract to purchase a quantity
of chairs from the Plaintiff partnership. At the time that the contract
was entered into a Director of the company was also one of the partners.
The issue was, was the company entitled to avoid the contract? The
court held that the company was entitled to avoid the contract. The
Judge said that as a body corporate can only act by agents and it is the
duty of those agents so to act as best to promote the interests of the
corporation whose affairs they are conducting. Such an agent has a
duty of a fiduciary nature to discharge towards his principal. It is a rule
of universal application that no one having such duties to discharge
shall be allowed to enter into or can have a personal interest conflicting
or which may possibly conflict with the interests of those whom he is
bound to protect. This principle is strictly applied no question is
entertained as to the fairness or unfairness of the contract so entered
into. However, it is possible for such contract to be given effect by the
articles of association. At their narrowest the Articles might provide
that a Director who is interested in a Company contract should disclose
his interests and he will not be counted to decide that a quorum is raised
and his votes will also not be counted on the issue. At their widest the
articles might allow the director to be counted at Board meeting.
In order to create a balance between these two extremes and ensure that
a minimum standard prevails Section 200 was incorporated into the
Companies Act. Under this Section it is the duty of a director who is
interested in any contract or proposed contract to disclose the nature and
extent of his interest to the Board of Directors when the contract comes
up for discussion. Failure to do so renders the defaulting director liable
to a fine not exceeding 2000 shillings. In addition the failure also brings
in the equitable doctrine whereby the contract becomes voidable at the
93
option of the company and any profit made by the director is
recoverable by the company.
The shortcoming of the Section is that the Director has to disclose to the
Board of Directors and not to the general meeting. It is not sufficient
for a Director to say that he is interested. He must specify the nature
and extent of his interests. If the company’s articles take the form of
Article 84 of Table ‘A’ then a Director who is so interested is required
to abstain from voting at the Board meeting and his vote will not be
taken in determining whether or not there is a quorum on the Board.
Once the Director has complied with Section 200 and Article 84 then he
can escape liability.
In respect of all other profits which a Director may make are out of his
position as a Director the equitable principle which requires the
Directors to account for any such profits is vigorously enforced. This is
because the Courts have equated Directors to trustees and their duties
have also been equated to those of Trustees. The question is, are they
really trustees?
Selanger United Rubber Estates v. Craddock (1968) 1 All E.R. 567
Re Forest of Dean Coal Mining Company (1879) 10 Ch. D 450

In the latter case, the directors of a company were seen to be trustees
only in respect of the company’s funds or property which was either in
their hands or which came under their control. But this does not
necessarily make directors trustees. There are two basic differences
between Directors as Trustees and Ordinary Trustees.
(a) The function of ordinary trustee is to preserve the Trust
Property but the role of a director is to explore possible channels of
94
investment for the benefit of the company and these necessitates some
elements of having to take a risk even at the expense of the company’s
property.
(b) Whereas trust property is vested in the Trustees, a
company’s property is held by the company itself and is not vested in
the trust.
Nevertheless if the directors make any secret profits out of their

positions then the effect is identical to that of ordinary trustees. They
must account for all such profits and refund the company.
Regal Hastings v. Gulliver (1942) 1 All E.R. 378

Herein the company owned a cinema and the directors decided to
acquire two other cinemas with a view to the sale of the entire
undertaking as a going concern. Therefore they formed a subsidiary
company to invite the capital of 5000 pounds divided into 5000 shares
of 1 pound each. The owners of the two cinemas offered the directors a
lease but required personal guarantees from the Directors for the
payment of rent unless the capital of the subsidiary company was fully
paid up. The directors did not wish to give personal guarantees. They
made arrangements whereby the holding company subscribed for 2000
shares and the remaining shares were taken up by the directors and their
friends. The holding company was unable to subscribe for more than
2000 shares. Eventually the company’s undertakings were sold by
selling all the shares in the company and subsidiary and on each share
the Directors made a profit of slightly more than two pounds. After
ownership had changed the new shareholders brought an action against
the directors for the recovery of profits made by them during the sale.
95
The court held that the company as it was then constituted was entitled
to recover the profits made by the Directors. Lord Macmillan had the
following to say:
“The directors will be liable to account if it can be shown that what

they did is so related to the affairs of the company that it can properly
be said to have been done in the course of their management and in
utilisation of the opportunities and special knowledge and what they did
resulted in a profit to themselves.”
Phipps v. Boardman (1966) 3 All E.R. 721

In this case Boardman was a solicitor to the trust of the Phipps family.
The trust held some shares in the company. Boardman and his
colleagues were not satisfied with the company’s accounts and therefore
decided to attend the company’s general meeting as representatives of
the Trust. At the meeting they received information pertaining to the
company’s assets and their value. Upon receipt of the information, they
decided to buy shares in the company with a view to acquiring the
controlling interest. Their takeover bid was successful and they
acquired control. Owing to the fact that Boardman was a man of
extraordinary ability, the company made progress and the profits
realised by Boardman and his friends on the one hand and the trusts on
the other were quite extensive. One of the beneficiaries of the Trust
brought an action to recover the profits which were realised by
Boardman and his friends.
The court held that in acquiring the shares in the company, Boardman
and his friends made use of information obtained on behalf of the trust
and since it was the use of that information which prompted them to
acquire the shares, then the shares were also acquired on behalf of the
96
trust and thus the solicitors became constructive trustees in respect of
those shares and therefore liable to account for the profits derived
therefrom to the trust.
Peso Silver mines v. Cropper (1966) 58 D.L.R. 1

The Defendant was the company’s Managing Director. The Board of
Directors was approached by a prospector who offered to sell his claims
to the company. The company’s consulting geologists advised that it
was in order for the company to acquire the claims. The directors
decided that it was inadvisable for the company to acquire the same
mainly because of its strained financial resources. Subsequently at the
suggestion of the geologists, some of the Directors agreed to purchase
the claims at the price at which they had been offered to the company.
Thereafter they formed a company which took over the claims and a
second company for developing the resources. After the control of Peso
Silver Mines had changed the new directors brought an action against
the Defendant to account to the company for the shares held by them in
the new companies. But here the court held that since the company
could not have taken over the claims, there was no conflict of interest
between the Directors and the Company and therefore the Defendant
was not liable to account for the shares.
Directors may make use of opportunities originally offered to the

company and thereby make profits provided that some 4 conditions are
satisfied namely
1. The opportunity must have been rejected by the company;
2. If the directors acted in connection with that rejection, they
must have acted bona fide in the best interests of the company.
3. The information about that opportunity should not have been
given to them confidentially on behalf of the company.
97
4. Their subsequent use of that information must not relate to
them as directors but as any other ordinary person.
Industrial Development Consultants v. Cooley (1972) 2 All E.R. 162

The Defendant who was an architect was appointed the company’s
Managing Director. The company’s business was to offer design and
construction services to industrial enterprises. One of the defendant’s
duties was to obtain new business for the company particularly from the
gas companies where he had worked before joining the Plaintiff. While
the Defendant was still so employed by the Plaintiff a representative of
one gas company came to seek his advice on some personal matters. In
the course of their conversation the Defendant learnt that the gas
company in question had various projects all requiring design and
construction services of the type offered by the Plaintiff. Upon
acquiring this information and without disclosing it to the company, the
Defendant feigned illness as a result of which he was relieved by the
company from his duties. Thereafter, he joined the gas company and
got the contract to do the work. Two years previously, the Plaintiff had
unsuccessfully tried to obtain that work. After the Defendant acquiring
the contract, the company sued him alleging that he obtained the
information as a fiduciary of the company and he should therefore
account to the company for all the remuneration fees and all dues
obtained.
The court held that until the Defendant left the Plaintiff, he stood in a
fiduciary relationship to them and by failing to disclose the information
to the company, his conduct was such as to put his personal interests as
a potential contracting party to the gas company in conflict with the
existing and continuing duty as the Plaintiff’s Managing Director.
98
Roskill J.
“It is an overriding principle of equity that a man must not be allowed to
put himself in a position where his fiduciary duty and interest conflict.
It was the defendant’s duty to disclose to the plaintiff the information he
had obtained from the Gas Board and he had to account to them for the
profits he made and will continue to make as a result of allowing his
interests and duty to conflict. It makes no difference that a profit is one
which the company itself could not have obtained. The question being
not whether the company could have acquired it but whether the
defendant acquired it while acting for the company.”
CONTROLLING SHARE HOLDERS

By controlling share holders is meant those who hold the majority of the
voting rights in the company. Such share holders can always ensure
control of the company’s business by virtue of their voting power to
ensure that the controlling shareholders do not use their voting power
for exclusively selfish ends, the Law requires that in exercise of their
voting power, these shareholders must not defraud a minority. For
example by endeavouring directly or indirectly to appropriate to
themselves any money property or advantage which either belong to the
company or in which the minority shareholders are entitled to
participate.
Brown v. British Abrasive Wheel Co. (1919) 1 Ch. 290
Menier v. Hoopers Telegraphy Works (1874) L.R. Ch. A 350

In the latter case the company brought action against its former
Managing Director for a declaration that the concessions for laying
down a telegraph cable from Portugal to Brazil was held by that former
Director as a trustee for the company. While this action was still
99
pending, the Defendants who were the majority shareholders in the
company approached that former Managing Director with a view to
striking a compromise. It was agreed between the parties that if that
director surrendered the concessions to the Defendants then the
Defendants would use their voting power to ensure that the action was
discontinued. At a subsequent general meeting of the company, by
virtue of the defendant’s voting power, a resolution was passed that the
company should be wound up.
The court said that the resolution was invalid since the defendants had
used their voting power in such a way as to appropriate to themselves
the concessions which if the earlier action had succeeded should have
belonged to the whole body of shareholders and not merely to the
majority. Lord Justice Mellish stated as follows:
“although the shareholders of the company may vote as they please
and for the purpose of their own interest, yet the majority of the
shareholders cannot sell the assets of the company itself and give the
consideration but must allow the minority to have their share of any
consideration which may come to them.”
Cook v. Deeks (1916) 1 A.C. 554

The Toronto Construction Company carried on business as Railway
Construction contractors. The Shares in the company were held equally
among Cook, G S Deeks and G M Deeks. And another party called
Hinds. The company carried out several large construction contracts for
the Canadian Pacific Railway. When the two Deeks and Hinds learnt
that a new contract was coming up, they obtained this contract in their
own names to the exclusion of the company and then formed a new
company to carry out the work. At a general meeting of the
shareholders of Toronto Construction company a resolution was passed
100
owing to the two powers of Deeks and Mr. Hinds declaring that the
company was not interested in the new contract of the Canadian Pacific
Railway. Cook brought an action and the court held: that the benefit of
the contract belonged properly to the Company and therefore the
Directors could not validly use their voting power as shareholders to
vest it in themselves.
ENFORCEMENT OF DIRECTORS DUTIES

As the company is a distinct entity from the members and since
directors owed their duties to the company and not to individual
shareholders, in the event of breach of those duties any action for
remedies should be brought by the company itself and not by any
individual shareholder. The company and the company alone is the
proper Plaintiff. This is generally referred to as the rule in Foss V.
Harbottle (1843) 2 Hare 461
In this case the Directors who were also the company’s promoters sold
the company’s property at an undisclosed profit. Two shareholders
brought action against them alleging that in so doing, that the directors
had breached their duties to the company. It was held that if there was
any breach of duty, it was a breach of duty owed to the company and
therefore the Plaintiffs had no locus standi for the company was the
proper plaintiff. This rule has two practical advantages namely:
1. Insistence on an action by the company avoids multiplicity
of actions;
2. If the irregularity complained of is one which could have
been effectively ratified by the company in general meeting, then it is
pointless to commence any litigation except with the consent of the
general meeting.
101
However there are four exceptions to this rule in which an individual
member may bring action against the directors namely:
(a) Where it is complained that the company through the
directors is acting or proposing to act ultra vires;
(b) Where the act complained of even though not ultra
vires, the company can effectively be done by a special resolution;
(c) Where it is alleged that the personal rights of the
Plaintiff have been infringed and/or are about to be infringed;
(d) Where those who control the company are perpetuating
the fraud on the minority;
The problem likely to arise is that if the directors themselves are also
controlling shareholders, the rule in Foss v. Harbottle if strictly applied
in exercise of their voting powers, the Directors may easily block any
attempt to bring an action against themselves. In such cases a
shareholder will be allowed to bring an action in his own name against
the directors even if the wrong complained of has been done to the
company. Such an action is called a derivative action.
In order to be entitled to commence a Derivative Action, it must be

shown that
1. The wrong complained of was such as to involve a fraud on

the minority which is not ratifiable by the company in general meeting;
2. It must be shown that the wrong doers hold the controlling
interests
3. The company must be joined as a nominal defendant;
4. The action must be brought in a representative capacity on
behalf of the plaintiff and all other shareholders except the Defendant.
The question is are these exceptions effective?
102
There are situations where the rule does not apply.
Another remedy against directors for breach is found in Section 324 of

the statute which provides as follows:
“If in the course of the winding up of the company it appears that
any person who has taken part in the formation or promotion of the
company or any past or present director has misapplied or retained any
money or property of the company, or been guilty of any breach of trust
in relation to the company on the application of the liquidator, a creditor
or member or a court may compel such person to restore the money or
property to the company or to pay damages instead.”
This section is designed to deal with actual breaches of trust which

come to light in the winding up proceedings or during the winding up
proceedings but winding up itself may be used as a means of ending a
course of oppression by those formally in control. Among the grounds
for the winding up is one which is particularly appropriate for such
circumstances.
Under Section 219 (f) of the Companies Act the court may order a
company to be wound up if it is of the opinion that it is “just
unequitable” the courts have so ordered when satisfied that it is
essential to protect the members or any of them from oppression in
particular they have done so when the conduct of those in control
suggests that they are trying to make intolerable the position of the
minority so as to be able to acquire the shares held by the minority on
terms favourable only to the majority. But a member cannot petition
under this section if the company is insolvent. If the company is solvent
103
to wind it up, contrary to the majority wishes will only be granted where
a very strong case against the majority is established.
Winding up a company merely to end oppression appears rather

awkward as it may not be of any benefit to the petitioners themselves.
Owing to these shortcomings, Section 211 was incorporated into the
Companies Act as an alternative remedy for the minority of the
shareholders. Section 211 provides that any member who complains
that the affairs of a company are being conducted in a manner
oppressive to some part of the members including himself may petition
the court which if satisfied that the facts will justify a winding up order
but that this will unduly prejudice that part of the members, may make
such order as it thinks fit. Such an order may regulate the conduct of
the company’s affairs in the future or may order the purchase of
member shares by others or by the Company itself. This remedy is
available only to the members. An oppressed director or creditor cannot
obtain any remedy under Section 211 of the Companies Act for this is
expressly restricted to oppression of the members even if a director or
creditor also happens to be a member.
Elder V. Elder & Watson (1952) AC 49

The two Plaintiffs were the company director and secretary and factory
manager respectfully. As this was a small family concern, serious
differences arose between the plaintiffs and the beneficial owners of the
undertaking. Consequently the Plaintiff brought action under Section
211 alleging oppression. It was held that if there was any oppression of
the Plaintiffs, it related to them as directors and the remedy under
Section 211 is only available to members. The suit was dismissed.
WHAT IS OPPRESSION
104
This term has been defined to mean something burdensome, harsh or
wrongful.
Scottish Cooperative Wholesale Society v. Meyer (1959) AC 324

Here the Society wished to enter into the retail business. For this
purpose a subsidiary company was formed in which the two
Respondents and 3 Nominees of the Society were the directors. The
society had majority shareholders and the Respondents were the
minority. The Company required 3 things namely;
1. Sources of supplies of raw material;
2. A licence from a regulatory organisation called cotton
control
3. Weaving Mills.
The Respondents provided the first two but weaving Mills belonged to
the society. For several years, the business prospered because of mainly
the knowhow provided by the Respondent. The company paid large
dividends and accumulated substantial results. Due to the prosperity,
the society decided to acquire more shares and through its nominee
directors offered to buy some of the shares of the Respondent at their
nominal value which was one pound per share but their worth was
actually 6 pounds per share. When the Respondents declined to sell
their shares to the society, the society threatened to cause the liquidation
of the company. About 5 years later, Cotton control was abolished
which meant that the society would obtain the raw materials and weave
cloth without a licence. It accordingly started to do the same and also
started starving the subsidiary by refusing to manufacture for it except
for an economic crisis. As all the other Mills were fully occupied, the
subsidiary company was being starved to death and when it was nearly
105
dead the Respondent brought the petition claiming that the affairs of the
company were being conducted in an oppressive manner.
It was held that by subordinating the interests of the company to those

of the society, the nominee directors of the society had thereby
conducted the affairs of the company in a manner oppressive to the
other shareholders. The fact that they were perhaps guilty of inaction
was irrelevant. The affairs of the company can be conducted
oppressively by the Directors doing nothing to protect its interests when
they ought to do so.
Re Hammer(1959) 1 WL.R. 6
In this case Mr. Hammer senior was a Philatelist (stamp collector)
dealer and incorporated business in 1947 forming a company with two
types of ordinary shares class A shares which were entitled to a residue
of profit and Class B Shares carrying all the votes. He gave out the
shares to his two sons and at the time of the petition each son held 4000
Class A shares and the father owned 1000 shares. Of the Class B
Shares, the father and his wife held nearly 800 to the 100 held by each
son. Under the Company’s articles of association, the father and two
sons were appointed directors for life and the father was further
appointed chairman of the Board with a casting vote. The father
assumed powers he did not possess ignored decisions of the Board and
even in court, during the hearing asserted that he had full power to do as
he pleased while he had voting control. He dismissed employees using
his casting vote to co-opt self directors, he prohibited board meetings,
engaged detectives to watch the staff and secured payment of his wife’s
expenses out of the company’s funds. He negotiated sales and vetoed
leases all contrary to the decisions and wishes of the other directors.
106
The sons filed an action claiming that the father had run the affairs of
the company in a manner oppressive to them. The father was 88 years.
The court held that by assuming powers which he did not possess and
exercising them against the wishes of those who had the major
beneficial interests, Mr. Hammer senior had conducted the company’s
affairs in an oppressive manner.
These two cases are among the few where an application under Section
211 has succeeded. This is because section 211 has been subjected to a
very restrictive meaning. To succeed under Section 211, one must
establish a case of oppression.
There is no clear definition of the term and therefore it is not easy to tell
when a company’s affairs are being conducted oppressively. For
example in the case of Re Five Minute Car Wash Ltd (1966) 1 W.L.R.
745
The petitioner alleged oppression on grounds that the company’s
Managing Director was extremely incompetent. The court ruled that
even though the allegation suggested that the Managing Director was
unwise inefficient and careless in the performance of his duties, this did
not mean that he had at any time acted unscrupulously, unfairly or with
any lack of probity towards the petitioner or to other members of the
company. Therefore his conduct was not oppressive.
1. The conduct which is complained of must relate to the
affairs of the company and must also relate to the petitioner in his
capacity as a member. Personal representatives cannot petition nor can
trustees in bankruptcy petition.
107
2. the wording of the section suggests that there must be a
continuous cause of conduct and not merely isolated acts of
impropriety.
3. The conduct must be such as to make it just and equitable to

wind up the company. In other words, the members must be entitled to
a winding up order.
Re Bella Dor Sick Ltd (1965) 1 All E.R. 667

In a small family concern, there developed two factions among
shareholders. Owing to these personal differences the petitioner filed a
petition under Section 211 complaining inter alia that the distribution of
profits had not been fairly made. That he had been excluded from the
Board of Directors and that the affairs of the company were being
conducted irregularly. In particular, he alleged that the company had
failed to repay its debts to another company in which he had some
interests.
It was held that the petitioner had not made a case of oppression and the
petition must be dismissed.
Three reasons were given

(a) This petition had been brought for the collateral purpose
of enforcing repayment of debts to some third party;
(b) The conduct complained of and particularly the removal
of the petitioner from the Board related to him as a director not as a
member;
(c) That the circumstances were not such as to justify a
winding up order at the instance of the petitioner because the company
was insolvent and therefore the shareholders had no tangible interests.
108
It is an unfortunate mistake to link up Section 211 with winding up.
The courts are construing the Section very restrictively. Section 211
has therefore failed to live up to expectations. It is no real remedy.
RAISING AND MAINTENANCE OF CAPITAL

The basis of the whole concept or a company’s capital was explained by
Jessel M.R. in the Flitcrafts Case 1882 21 Ch. D 519 in this case for
several years the directors had been in the habit of laying before the
meeting of shareholders reports and balance sheets which were
substantially untrue inasmuch as they included among other assets as
good debts a number of debts which they knew to be bad. They thus
made it appear that the business had produced profits whereas in fact it
had produced none. Acting on these reports, the meetings declared
dividends which the directors paid. It was held here that since the
directors knew that the business had not made any profit, they were
liable to refund to the company the monies paid by way of dividends.
Jessel M.R said as follows “when a person advances money to a

company, his debtor is that artificial entity called the corporation which
has no property except the assets of the business. The creditor therefore
gives credit to that capital or those assets. He gives credit to the
company on the faith of the implied representation that the capital shall
be applied only for the purposes of the business and he has therefore a
right to say that the corporation shall keep its capital and shall not return
it to the shareholders.”
The capital fund is therefore seen as a substitute for unlimited liability

of the members. Courts have developed 3 basic principles for ensuring
109
that the company’s represented capital is actually what it is and for the
distribution of that capital.
1. Once the value of the company’s shares has been stated it
cannot subsequently be changed the problem which arises in this respect
is that shares may be issued for non-monetary consideration. For
instance for services or property in such cases the company’s valuation
of the consideration is generally accepted as conclusive. If the property
has been over valued, provided the valuation has been arrived at bona
fide, the courts will not question the adequacy of the consideration but
if it appears on the face of the transaction that the value of the property
is less than that of the shares, then the court will set aside that
transaction. For this reason the shares in a company must be given a
definite value. The law tries to ensure that the company initially
receives assets at least equivalent to the nominal value of the paper
capital. Refer to Section 5 of the Companies Act. Unfortunately if in
the insistence that shares do have a definite fixed value is not an
adequate safeguard because there is no legal minimum as to what the
nominal value of the shares should be.
2. The Rule in Trevor v. Whitworth [1887] 12 A.C 449 Under

this rule a company is not allowed to purchase its own shares even if
there is an express power to do so in its Memorandum of Association as
this would amount in a reduction of its capital. This principle is now
supplemented by Section 56 of the Companies Act which prohibits any
direct or indirect provision of any form of assistance in the purchase of
the company shares. However, there are 3 exceptions to this broad
prohibition.
a. where the lending of money is part of the ordinary

business of the company;
110
b. Where the company sets a trust fund for enabling the
trustees to purchase or subscribe for the company shares to be held or
for the benefit of the employees of the company until where the
company gives a loan to its employee other than directors to enable
them to purchase shares in the company.
3. Payment of Dividends: In order to ensure that the company’s capital is

not refunded to the shareholders under the guise of dividends, the basic
principle is that dividends should not be paid otherwise than out of
profits. Refer to Article 116 of Table A of the Companies Act. The
legal problem in this respect has been the lack of an adequate definition
of what constitutes profits. To avoid the problem of definition the
courts have formulated certain rules for the payment of dividends.
These are as follows
(i) Before a company can declare dividends, it must be solvent. Dividends
will not be paid if this will result in the company’s inability to pay its
debts as and when they fall due;
(ii) If the value of the company’s fixed assets has fallen

thereby causing a loss in the value of those assets, the company does not
need to make good that loss before treating revenue profits as available
for dividends. It is not legally essential to make provision for
depreciation in the fixed assets. However Losses of circulating assets in
the current accounting period must be made good before a dividend can
be declared. The realised profits on the sale of fixed assets may be
treated as profit available for distribution as a dividend. Unrealised
profits on evaluation of the company’s assets may also be distributed by
way of dividends. Refer to Dimbula Valley (Ceylon) Tea Co. V. Laurie
[1961] Ch. D 353 Losses on circulating assets made in previous
accounting periods need not be made good. The dividend can be
111
declared provided that there is a profit on the current year’s trading.
Each accounting period is treated in isolation and once a loss has been
sustained in one trading year, then it need not be made good from the
profits over subsequent trading periods. Undistributed profits of past
years still remain profit which can be distributed in future years until
they are capitalised by using them to pay a bonus issue.
CORPORATE SECURITIES
Basically securities is a collective description of the various forms of

investment which one can buy for sale at the stock exchange. A
company can issue two primary classes of securities. These are shares
and debentures. The basic distinction between a share and a debenture
is that a share constitutes the holder. A member of the company
whereas a debenture holder is a creditor of a company and not a
member of it.
The best definition of the term share is that given by Farwell J. in the
case of Borlands Trustee v. Steel [1901] Ch. D 279 stated “ a share is
the interest of a member in a company measured by a sum of money for
the purpose of liability in the first place and of interest in the second and
also consisting of a series of mutual covenants entered into by all the
shareholders among themselves in accordance with Section 22 of the
Companies Act.”
The contract contained in the Articles of Association is one of the

original incidents of a share. A share is therefore not a sum of money
but an abstract interest measured by a sum of money and made up of
various rights contained in a contract of membership.
112
In contrast a debenture means a document which either creates or
acknowledges a debt and any document which fulfils either of these
conditions is called a debenture. A debenture may take any of 3 forms
1. It may take the form of a single acknowledgment under seal

or the debts;
2. It may take the form of an instrument acknowledging the
debt and charging the company’s property with repayment; or
3. It may take the form of an instrument acknowledging the
debt charging the company’s property with repayment and further
restricting the company from creating any other charge in priority over
the charge created by the debenture.
The indebtedness acknowledged by a debenture is normally but not

necessarily secured by charge over the company’s property. Such
charge could either be a specific charge or a floating charge. Both
were defined by Lord Mcnaghten in the case of Illingsworth v.
Houlsworth [1904] A.C. 355 AT 358 He stated
“ a specific charge is one that without more fastens on
ascertained and definite property or property capable of being
ascertained and defined. A floating charge on the other hand is
ambulatory and shifting in its nature, hovering over and so to speak
floating with the property which it is intended to affect until some event
occurs or some act is done which causes it to settle and fasten on the
subject of the charge within its reach or grasp.”
A floating charge has 3 basic characteristics.
113
1. It must be a charge on a class of a company’s assets both
present and future;
2. That class must be one which in the ordinary cause of
business of the company keeps changing from time to time;
3. By the charge it must be contemplated that until future step
is taken by or on behalf of those interested, the company may carry on
its business in the ordinary way as far as concerns the particular class of
the assets charged.
CRYSTALISATION
A floating charge will crystallise under the following
(a) Where the company defaults in the payment of any portion

of the principal or interest thereon, when such portion or interest is due
and payable. In that event however, the debenture holders rights will
not crystallise automatically. After the expiry of the agreed period for
repayment, the debenture still remained a floating security until the
holders take some step to enforce that security and thereby prevent the
company from dealing with its property;
(b) Upon the appointment of a receiver in the course of a
company’s winding up;
(c) Upon commencement of recovery proceedings against the
company;
(d) If an event occurs upon which by the terms for the debenture
the lender’s security is to attach specifically to the company’s assets.
Section 96 of the Companies Act requires every Charge created by a

company and conferring security on the company’s property to be
registered within 42 days. Under this Section what must be registered
114
are the particulars of the charge and the instrument creating it. Failure
to register renders the charge void as against the liquidator or any
creditor of the company.
Under Section 99 of the Companies Act the registrar is under a duty to

issue a certificate of the registration of a charge and once issued, that
certificate is conclusive evidence that all the requirements as to
registration have been complied with.
Re C.L. Nye [1970] 3 AER 1061
National Provincial & Union Bank V. Charmley [1824] 1 KB 431
SHARES
In a company with a share capital it is obvious that the company must

issue some shares and the initial presumption of the law is that all the
shares so issued confer equal rights and impose equal liabilities.
Normally a shareholder’s right in a company will fall under 3 heads.
1. Payment of dividends;
2. Refund of Capital on winding up;
3. Attendance and voting at company’s general meetings.
Unless there is indication to the contract all the shares will confer the
same rights under those heads. In practice companies issue shares
which confer on the holders some preference over the others in respect
of either payment of dividends or capital or both. This is the method by
which classes of shares are created i.e. by giving some of the
shareholders preference over others.
115
In practice therefore most companies with classes of shares will have
ordinary shares and preference shares. The preference shares being
those that enjoy some preference with reference to voting rights, refund
of capital or payment of dividends.
There are certain rules that courts use to interpret or construe on shares.
(a) Basically all shares rank equally and therefore if some

shares are to have any priority over the others, there must be provision
to this effect in the regulations under which these shares were issued.
Refer to the case of Birch V. Cropper (1889) 14 AC 525 here the
company was in voluntary winding up. The company discharged all its
liabilities and some money remained for distribution to the members.
The Articles being silent on the issue, the question was on what
principle should the surplus be distributed among the preference and
ordinary shareholders? The ordinary shareholders argued that they
were entitled to all the surplus. Alternatively the division ought to be
made according to the capital subscribed and not the amount paid on the
shares. It was held that once the capital has been returned to the
shareholders, they thereafter become equal and therefore the
distribution of the surplus assets should be made equally between the
ordinary and preference shareholders.
(b) However if the shares are expressly divided into separate

classes thereby rebutting the presumed equality, it is a question of
construction in each case what the rights of each class are. Hence if
nothing is expressly said about the rights of one class in respect of
either dividends, return of capital or attendance and voting at meetings,
then that class has the same rights in that respect as the other
shareholders. The fact that a preference is given in respect of any of
116
these matters does not imply that any right to preference in some other
respect is given e.g. a preference as to dividends will not apply a
preference as to capital i.e. the shares enjoy only such preference as
may be expressly conferred upon them.
(c) If however, any rights in respect of any of these matters

are expressly stated, the statement is presumed to be exhaustive so far
as that matter is concerned. For instance the preference dividend is
presumed to be non-participating in regard to other dividends. Refer to
Re Isle of Thanet Electricity Supply Co. (1950) Ch. 1951 where Justice
Wynn Parry stated “the effect of the authorities as now in force is to
establish two principles. First that in construing an article which deals
with the rights to share all profits, that is dividend rights and rights to
shares in the company’s property in liquidation, the same principle is
applicable and secondly that principle is that where the articles sets out
the rights attached to a class of shares to participate in profits while the
company is a going concern or to share in the property of a company in
liquidation, prima facie the rights so set out are in each case
exhaustive.”
(d) Where a preferential dividend is provided for it is

presumed to be cumulative for instance if no preferential dividend is
declared the arrears of dividend are carried forward and must be paid
before any dividend is paid on the other shares. But these presumption
may be rebutted by words tending to show that the shares are not
intended to be cumulative or words indicating that the preferential
dividend is only to be paid out of the profits of each year i.e. if the
company sustains any financial loss during any year, there will be no
dividend for that year. Even then preferential dividends are payable
only if and when declared. Therefore arrears of cumulative dividends
117
are not payable on winding up unless the dividend has been declared.
Thix presumption could be rebutted by any indication to the contrary.
WINDING UP
Section 212 of the Companies Act provides that a company may be

wound up as follows
1. Voluntarily;
2. Order of the Court;
3. By supervision of the Court.
The circumstances under which the company may be voluntarily wound

up are outlined in Section 217 of the Companies Act. Here a company
may be wound up
a. When the period fixed for its duration by the articles

expires or the event occurs on the occurrence of which the articles
provide that the company is to be dissolved and thus a company passes
a resolution in general meeting that it should be wound up voluntarily;
b. If it resolves by special resolution that it should be
wound up voluntarily;
c. If the company resolves by special resolution that it
cannot by reason of its liabilities continue its business and that it be
advisable that it be wound up.
Basically the second circumstance is the most important because in

practice at least the first circumstance does not arise and in the 3 rd
circumstance the creditors themselves will resolve that the company be
wound up.
118
In any winding up those in need of protection are the creditors and the
minority shareholders. Where it is proposed to wind up a company
voluntarily Section 276 of the Companies Act requires the directors to
make a declaration to the effect that they have made a full inquiry in to
the affairs of the company and having so done have found the company
will be able to pay its debts in full within such period not exceeding one
year after the commencement of the winding up as may be specified in
the declaration. Such declaration suffices as a guarantee for the
repayment of the creditors. If the directors are unable to make the
declaration, then the creditors will take charge or the winding up
proceedings in which case they may appoint a liquidator.
WINDING UP BY THE COURT
Winding up after an order to that effect by the court is the most

common method of winding up companies.
Section 218 of the Companies Act gives the High Court jurisdiction to
wind up any company registered in Kenya. The circumstances under
which a company may be wound up by a court order are spelt out in
These cover situations in which

1. the company has by special resolution resolved that it be
wound up by court;
2. Where default is made by the company in delivering to the
registrar the statutory report or on holding the statutory meeting;
3. When the company does not commence business within one
year of incorporation or suspends its business for more than one year;
119
4. Where the number of members is reduced in the case of a
private company below 2 or in the case of a public company below 7;
5. Where the company is unable to pay its debts;
6. Where the court is of the opinion that it is just and equitable
to wind up the company;
7. In the case of a company registered outside Kenya and
carrying on business, the court will order the company to be wound up
if winding up proceedings have been instituted against the company in
the country where it is incorporated or in any other country where it has
established business.
Under Section 221 of the Companies Act an Application for winding up

by an order of the court may be presented either by a creditor or a
contributory. However a contributory cannot make the application
unless his name has appeared on the register of members at least 6
months before the date of the application and in any event he can only
petition where the number of members has fallen below the statutory
minimum.
In practice the creditors will petition for a compulsory winding up

where the company is unable to pay its debts. The company’s inability
to pay its debts under Section 220 is deemed in the following
circumstances
1. If a creditor to whom the company is indebted in a sum

exceeding 1000 shillings demands payment from the company and 3
weeks elapse before the company has paid that sum or secured it to the
reasonable satisfaction of a creditor;
120
2. If execution issued on a judgment against the company is
returned unsatisfied;
3. If it is proved by any other method that a company is

unable to pay its debts.
Before a creditor can petition it must be shown as a preliminary issue

that he is in fact a creditor or a company creditor. This is a condition
precedent to petitioning and the insolvency of the company is a
condition precedent to a winding up order.
PETITION BY A CONTRIBUTOR
Section 221 of the Companies Act speaks not of members but of
contributories.
Section 214 defines the term contributory as follows “every person

liable to contribute to the assets of the company in the event of its being
wound up”. The persons falling under this category are defined in
section 213 of the Companies Act and include both present and past
members. A past member however, is not liable to contribute if he
ceased to be a member one year or more before the commencement of
the winding up and he is not liable to contribute for any debt or liability
contracted after he ceased to be a member. Even then he is not liable to
contribute unless it appears to the court that the existing members are
unable to satisfy the contributions required.
The most important limitation on liability of contributories is found in

Section 213 (1) (d) of the Companies Act. Under that clause no
contribution shall be required from any member exceeding the amount
121
unpaid on their shares in respect of which he is liable as a present or
past member.
The petitioning contributor must establish that on winding up there will

be prima facie a surplus for distribution among the members i.e. he
must establish a tangible interest. If therefore the company’s affairs
have been so managed that there would be no assets available for
distribution among the members then a shareholder has no locus standi
and will not be allowed to petition for winding up.
Another possible limitation is that stated under Section 22(2) of the Act.
Here the court has a discretion not to grant the winding up order where
it is of the opinion that an alternative remedy is available to the
petitioners and that they are acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.
WINDING UP ON JUST AND EQUITABLE GROUNDS
It is now established that the just and equitable clause in Section 219 of
the Act confers upon the court an independent ground of jurisdiction to
make an order for the compulsory winding up of the company. The
courts have exercised their powers under this clause in the following
circumstances:
1. In order to bring to an end a cause of conduct by the

majority of the members which constitutes operation on the minority;
2. The courts have also exercised this power where the
substratum of the company has disappeared;
122
3. The courts have applied the partnership analogy to the small
private companies particularly those of a kind which makes an analogy
with partnerships appropriate.
In case of domestic private companies, there is normally an

understanding between the members that if not all of them, then the
majority of them will participate in the management of the company’s
affairs. Such members impose mutual trust and confidence in one
another just as in the case of partnerships.
Also usual in such companies is the restriction of the transfer of a

member’s shares without the consent of all the other members.
If any of these principles were violated in a partnership, the courts will

readily order the partnership to be dissolved. In the case of a small
private company, the courts have also held that such companies are run
on the same principles as partnerships and therefore if the company was
run on such principles it is just and equitable to wind it up where a
partnership would have been dissolved in similar circumstances.
RE YENIDGE TOBACCO CO. LTD [1916] 2 Ch. 426
Here W and R who traded separately as Tobacco and Cigarette

manufacturers agreed to amalgamate their business. In order to do so,
they formed a private company in which they were the only
shareholders and the only directors. Under the Articles both W and R
had equal voting powers. Differences arose between them resulting in a
complete deadlock in the management of the company. The issue was
whether it was just and equitable to wind up the company. Lord Justice
Warrington stated as follows
123
“It is true that these two people are carrying on business by
means of the machinery of the limited company but in substance they
are partners. The litigation in substance is an action for dissolution of
the partnership and we should be unduly bound by matters of form if we
treated the relations between them as other than that of partners or the
litigation as other than an action brought by one for the dissolution of
the partnership against the other.”
The Model Retreading Co. [1962] E.A. 57
Here the petitioner who was a shareholder in a small private company

petitioned for winding up mainly on the ground that this was just and
equitable. The Affidavits sworn by the petitioner and his co-
shareholders disclosed that there had been bitter and unresolved
quarrelling between the parties going to the root of the companies
business but none of these stated that the company’s affairs had reached
a deadlock. It was however conceded by all the parties that as a result
of the quarrelling the petitioner had been prevented from participating
in the management of the company’s affairs.
The issue was it just and equitable to wind up the company? Sir Ralph
Winndham C.J. said as follows:
“in these circumstances the principle which must be applied is that
laid down in re-Yenidge Tobacco namely that in the case of a small
private company which is in fact more in the nature of a partnership a
winding up on the just and equitable clause will be ordered in such
circumstances as those in which an order for dissolution of the
partnership would be made. In that case the shareholders were two and
they had quarrelled irretrievably. In the present case, if this were a
partnership an order for its dissolution ought to be made at the instance
124
of one of the quarrelling partners. The material point is not which party
is in the right but the very existence of the quarrel which has made it
impossible for the company to be ran in the manner in which it was
designed to be ran or for the parties disputes to be resolved in any other
way than by winding up.
Mitha Mohamed V. Mitha Ibrahim [1967] EA 575
4. Finally the just and equitable clause will also be applied

where there is justifiable loss of confidence in the manner in which the
company’s affairs are being conducted Continuous Cause of Conduct
CONSEQUENCES OF A WINDING UP ORDER
Once a company goes into liquidation, all that remains to be done is to

collect the company’s assets, pay its debts and distribute the balance to
the members.
Under Section 224 of the Companies Act, in a winding up by the Court,

any dealing with the company’s property after the commencement of
the winding up is void except with the permission of the court.
The purpose is to freeze the corporate business in order to ensure that

the company’s assets are not wasted. Once the company has gone into
liquidation, the directors become functus officio.
Thereafter a liquidator is appointed whose duty is to collect the assets,

pay the debts and distribute the surplus if any. In so doing, he must
always have regard to the interests of the creditors.
125
The powers of the liquidator are set out in Section 241 of the companies
Act.
126

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THE LAW OF BUSINESS ASSOCIATIONS

In legal theory company denotes an association of a number of persons

The law treats companies in company law distinctly from partnerships

FUNDAMENTAL CONCEPTS OF COMPANY LAW

Concept of legal personality

Under Section (2) (a) of the Companies Act, in a company limited by

Under Section 4 (2) (b) of the Companies Act in a company limited by

These underlie the very foundation of company law.

FORMATION OF A LIMITED COMPANY

In order to incorporate themselves into a company, those people

Both the Memorandum and Articles of Associations must each be

c. Statement of Nominal Capital – this is only required if the

d. Declaration of Compliance: this is a statutory declaration

These are the only documents which must be registered in order to

1. Notice of the situation of the Registered Office which

TYPES OF REGISTERED COMPANIES

1. They must choose between a limited and unlimited

2. If they decide upon a limited company, they must make up

3. They have to choose between a private company and a

A company which does not fall under this definition is described as a

In order to form a public company, there must be at least seven (7)

The full implications of corporate personality were not fully understood

Facts of the case

Salomon was a prosperous lender/merchant. He sold his business to

The House of Lords unanimously reversed this decision. In the words

… The company attains maturity on its birth. There is no period of

1. The decision established the legality of the so called one

Since the decision in Salomon’s case the complete separation of the

Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619

Lee v Lee’s Air Farming Ltd. (1961) A.C. 12

“ ... That it was the logical consequence of the decision in Salomon’s

Katate v Nyakatukura (1956) 7 U.L.R 47A

The court held that a limited liability company is a corporation and as

2. Holding Property: Corporate personality enables the property

3. Suing and Being Sued: As a legal person, a company can take

4. PERPETUAL SUCCESSION As an artificial person, the

5. TRANSFERABILITY OF SHARES Section 75 of the

6. BORROWING FACILITIES: in practice companies can

The only disadvantages are three:

In order to form a company, certain documents must be prepared

IGNORING THE CORPORATE ENTITY (LIFTING THE VEIL OF

REDUCTION IN THE NUMBER OF MEMBERS - Section 33 refers to

FRAUDULENT TRADING – the provisions of Section 323 of the

The test is both subjective and objective. In the Case of Re Patrick

HOLDING AND SUBSIDIARY COMPANIES

(b) The first mentioned company is a subsidiary of any company which

The group accounts should consist of a consolidated balance sheet for

Section 151(2) – it may be observed that the treatment of these accounts

IGNORING THE CORPORATE ENTITY UNDER COMMON

The Birmingham Corporation compulsorily acquired the premises upon

If this contention was correct the Birmingham Corporation would have

1. Are the profits treated as the profits of the parent

If the answers are in the affirmative, then the subsidiary company is an

Reference may also be made to the case of

RE F G FILMS LTD [1953] 1 W.L.R.

2. FRAUD & IMPROPER CONDUCT

Re Bugle Press Limited [1961] Ch. 270

Gilford Motor Co. v. Horne (1933) Ch. 935

Jones v. Lipman (1912) 1 W.L.R. 832

Authority is the case of Holsworth & Co. v. Caddies [1955]1W.L.R.

DETERMINATION OF A COMPANY’S RESIDENCE

Lord Lorenburn said “in applying the conception of residence to a

THE DOCTRINE OF ULTRA VIRES