Nkumba University

School of Law and Institute of Criminal Justice

COURSEWORK
Index number:

Course: Bachelors of Law (LLB)

Year: Third year second semester

Course Unit: Company Law 2

Lecturer: Doctor Christopher Lubogo Isaac

MAKERERE UNIVERSITY COMPANY LAW 2023 QUESTION PAPER AND ANSWERS.

QUESTION; 2

YOU ARE RETAINED EXTERNAL COUNSEL FOR Anaka Private Limited Liability Company
Incorporated .WHILE CARRYING OUT DUE DILIGENCE FOR THE YEAR 2022, YOU
ENCOUNTER THE ABOVE FILE.RENDER THE COMPANY A DETAILED OPINION ON THE
PROPRIETY OF THE SALE AND ACTION,SHOWING AREAS OF POTENTIAL EXPOSURE
AND REMEDIES AVAILABLE IF ANY.

BRIEF FACTS;

Rolland owned by Jack Okwero who is a 40% shareholder, business associate and …Mathew Okai
10% Mark Lapolo 6% Abednego Otim 5%,Peter Okech 4% Yunia Akello 5%,Jackson Lomela
30% .the biggest shareholders agreed ,board of directors(bog)for avote by poll in ameeting for the
sale of Anaka to Roland aka—buyer in 2020 at 150,000,000 when the resolution was presented to the
other share holders for ratification, the other shareholders objected to and protested the said resolution
by walking out of the meeting saying they were not bound by it for being fraudulent. The two brothers
have since warned them saying that they would deal with for protesting. The company has since been
sold to Jack Okwero who owns Rolland company.

Roland the buyer, has since sold and transferred the said property (ANAK) to Dally Kimoko
comprised at Mbaguta Rd Kampala

ISSUES;

Whether the propriety of the sale and transfer of title is valid

Whether or not the shareholders can sue the BOD.

Whether or not the minority shareholders have remedies

RESOLUTIONS.

AS THE LAWYER FOR ANAK IF I HAVE ENCOUNTERED SUCH A FILE WOULD

SECTION 5 (1) of Defines a private limited company as:

Restricts the right to transfer its shares and securities Limits membership to One
Hundred

Section 250 (company) means any corporate body which is liable to be wound up by this act.
Minority shareholders are defined by the company’s act 235 as shareholders who do not own
more than 10 % of the shares of the company. Apart from the two brothers Jack Lomera
40%shares and Jackson Lomera 30%, the rest of the shareholders of Anaka Private Limited
Liability Company Incorporated are classified as Minority Shareholders.

1 Whether or not the property in sale and transfer is valid

According to the facts presented in the case above, all management powersof a company are vested in
the Board of Directors, article 80 of Table A. by the shareholders in the general meeting. In the
process of managing corporate affairs the minority shareholders are bound if aggrieved by an
omission or commission by their fellow shareholders decision taken or made in the company. The
minority shareholders have control over the conduct of their fellow shareholders. Power lies with the
Majority and the minority must in principle accept the decision of the Majority. Anaka sale to Rolland
is bound to have been invalid. When issues that involve sale, amalgamation of any company
shareholders/ members have a right to block a business sale winding up, voluntary liquidation and
large scale investment. This right calls for all shareholder in a meeting to actively participate in
making this resolution but in this case the Board of Directors made the resolution and wanted the
minority shareholders to ratify it, when they walked out, the two brothers (majority shareholders)
threatened to work on them.

It’s pertinent to note that Rolland who bought Anak Uganda Ltd was a shareholder and business
associate in Anak had notice during the purchase so he cannot claim ignorance of the discrepancy in
the company sale. This made this particular transaction Fraudent / invalid and if the other
shareholders did not ratify the resolution. Rolland had notice when he paid for Anak the title he got
was not a good title which makes him a purchaser with notice. The title he passed to Dally Kimoka
(Local Artist) was questionable If the Minority wants to bring a change, then it is open for them to
seek it through the normal democratic processes which include lobbying, persuasion and publicity.

However, if the Title Dally Kikoma attained was a good title (bonafide purchaser without notice)
then he can be protected by the indoor rule where the third party dealing with accompany in good
faith, needs not to dig into the daily dealings of the company, he assumes that the company is in order
he may defend his good title by the indoor rule as a bonafide purchaser without notice and could hold
onto the Title legally.

2. Whether the minority shareholders have a right to sue.

 The issue then is whether members have a right to sue the Directors who manage the company.
Courts have generally held that they can’t ascertain such a suit because the wrong has been done to a
company and the proper plaintiff to sue for the wrong is the company and not shareholders. This is
referred to as the Proper Plaintiff Principle derived from the CASE OF FOSS VS HARBOTTL
(1843) 2 HARE 461,67ER 189. Where the plaintiffs brought an action against the Directors of a
company who had sold their own land to a company at an overpriced value, Court held that if this
allegation was true, if something Injurious had been done to a company then the proper plaintiff to sue
is the Company and not individual shareholders.

However, in MACDOUGAL VS GARDENER (1875) 1 CH 13 Court observed that they would have
many cases if every dispute about internal management of a company had to be brought to court, the
rationale of FOSS VS HARBOTTLE is to prevent the company from unnecessary suits and to protect
the principle of corporate personality.

At common law, the following circumstances would allow an Individual shareholder to sue for
wrongs committed against the company, if there was an infringement of personal rights of a member,
the aggrieved and threatened shareholder can bring a personal action even when the company would
be aggrieved too. If the act being complained of is illegal or ultra vires and the aggravated shareholder
can proceed to court. In the CASE OF MAWANDA It was stated that violation of section 7, 8, 13
and 14 of the Companies Act are ultra vires and the aggrieved shareholder could sue….HARTON VS
WEST CORK the company entered into an agreement that would lead to winding up by selling its
major assets. After the sale the shareholders passed a resolution to effect compensation to the
company employees and pay its Directors.

A personal action was brought since the action was Ultra vires and court held that the plaintiff action
was in order even when, the payment was to affect the company primarily. Fraud on Minority
shareholders, there must be fraud/ ultra vires acts being carried out in the company, those committing
the act of Fraud must be in control of the company as Board of director or Majority shareholders,
violating duties of Good Faith but also in the interest of justice. Courts will entertain any action of a
shareholder which entails the above exceptions if it is in the interest of justice. IN DANIELS CASE
—a Shareholder that the majority shareholders (Board of Directors) negligently sold another plot to
another Director, the judge said that it is one thing to Put up foolish Directors but also another thing to
put up Directors who are too foolish to enter such Transaction in their place (lifting the corporate veil)

A general meeting cannot authorize directors to breach their duty of good faith and cannot ratify it.
Once it does that will amount to Fraud on the minority and the transaction in sue will be set aside. The
minority shareholders bearing in mind all these provisions of Law can sue the BOD for acting
Fraudulent, for infringement of the minorities’ shareholders rights to vote, to information, threatened
them, for engaging in actions that led to the fraudulent sale of ANAKA property.

3. Whether or not the minority shareholders have Remedies.

In Anaka company the minority shareholders who are Mathew Akai 10% Mark Lapolo 6%,Abdnego
Otim 5% Peter Oketch 4%,Yunia Akello 5% have a right as minority shareholders to petition the
register under section 247(1) of the company act 2012, Which provides for a member of the
company who complains that the affairs of the company are being conducted in a mannar oppressive
to some part of the members including himself may make a complain to the registrar by petitioning
for an order under this Section 248 (1) of the Companies act 2012 protects members against
Prejudicial conduct.

Bearing in mind that the company resolution of sale was objected to by the Minority shareholders
who walked out of the meeting, when the right of Vote by poll was violated, there was illegality in the
sale of Anaka and no Transparency in the company. Directors have an Obligation not to be oppressive
to anyone in the company but also act in good faith. Much as their right to effective participation to
attend meetings was granted, the issue of sale of Anaka required shareholders consent which the
Minority shareholders expressively objected to.

SECTION 148 ( 1) of the company act 2012 guarantees that minority shareholders can sue in court
in matters of prejudice and unfair that court orders the company to refrain from such unfair acts
therefore could block a business sale, merging, winding up, voluntary liquidation and large scale
investment. Therefore a court can be compelled to order an Injunction for sale of Anaka due to lack of
Transparency and damages from a sale for less value ( if proved) from those responsible
Directors(Jackson and Jack) could be a warded to Minority shareholders and could be entitled to
proceeds of their share of the market value.

In conclusion, therefor Anaka company and the issue of its sale and transfer to Rolland was done
fraudulently, Rolland didn’t acquire a good Title and if he had not sold it to an innocent Delly, court
would have ordered an injunction to the activities of the BOD. The fact that Delly got a good title
from a fraudent seller Rolland, His Title would be subject to verification or challenged in court but his
Title is protected by the indoor management rule. Delly becomes a bonafide purchaser without notice
and therefore holds a good title from the of Anaka. The Laws of Uganda have ensured that the rights
of all shareholders are not violated by the board of directors, but when violated the shareholders will
be entitled to the proceeds of the sale according to the market value. They are also entitled to award of
Damages for the loss from the responsible Board members, Restitution if they successfully sue in
courts of law when the corporate Vail is lifted and individual directors are charged with fraud and
unfair treatment of shareholders in the said transaction to ensure fairness, Transparency, acting in
good faith to avoid mismanagement of registered companies. Court through orders have set precedent
cases to follow, the registrar also exercise t her authority granted by the law to regulate company
activities that are not fair and can orders to refrain oppression in the management, I so submit.
Number 3

“Whenever the courts have determined the issue of liability of a company, the minds and bodies
of the officers and servants of the company have been taken to supply its mental and physical
faculties.” Discuss the above statement clearly showing how you would ascertain the mind and
will of the company and circumstances when the courts may disregard it.

A company is defined in section 2 of the Companies Act 2012 as a company formed and registered
under this Act or an existing company or a re-registered company under the Act. A company is also
defined as legal entity separate and distinct from its members or shareholders.

The phrase minds and bodies in this case refers to the individuals who make up a company. When
court determines the issue of liability of a company, it means that court has found the company
responsible for something like a breach of contract or negligence. To ascertain the mind and body of
the company one should refer to the governing documents like the memorandum and the articles of
association because these provide details on how decisions are made and who is authorized to make
them.

Section 7 of the Act provides that the memorandum of a company which is required to be registered
for purposes of incorporation, is regarded as the company’s most important document in the sense that
it determines the power of the company.

A company being an artificial person, it commits crimes and civil wrongs and its mind has to be
thought to be directing will of the officer involved in the wrong committed. Officers may be thought
as the BOD, accountants and as was illustrated in the case of Smithfield Butchery Co. v Rep (1939)
23 KLR 81, that wrongful acts committed by the subordinate staff of the company wouldn’t attach
liability to a company. To determine whether a company is liable for the acts of its officers, one has to
consider 2 issues;

First is whether the officer was authorized to enter into the transaction, under common law,
accompany is liable for the acts of the officers but the company’s liability is based on the principle of
attribution. In Leonard’s case, the HOL held that Leonard’s default was attributed to the company
and couldn’t rely on this provision. Lord viscount said that the company is abstraction, it has no mind
of its own, its acting and directing will must be sought in the person of somebody who for some
purposes may be called an agent.

In HL BOTON & JJGRAHAM [1957]1 ALLER 624, it was held that a company may in many
ways be like a human being, it has a brain and nerve center which controls what it does, it also has
hands which hold the tools and act in accordance with the directions from the center that some of the
people in the company like directors and managers do represent the directing mind and will of a
company and control what it does.

In the case of Tesco Supermarkets v Nattrass [1972] AC 153, it was held that the directing mind
can be employees to whom managerial powers have been delegated but it should be noted that it is
only those managers who are entrusted with significant degree of freedom from supervision of high
authority who are so regarded.

However, there are circumstances where the court can disregard the mind and will of the
company, even if it is reflected in its governing documents and these include;

Acts against public policy, if the decisions or acts taken by the company goes against public policy,
court will ignore the form and take into account the substance.

In cases of fraud or improper conduct, the court can disregard the company’s decision or action. In the
case of Gilfort Motor Co Ltd v Horne (1933) Ch 935 Court of appeal held that the company was
formed as a device to mask the effective carrying on of the business of Mr. Horne, it was found out
that the main purpose of incorporating the new company was to perpetrate fraud and thus the court of
appeal regarded it as a mere sham to cloak his wrongdoings.

In cases of illegalities, court will disregard the will a mind of the company to establish that the
company was owned by nationals of any enemy country so to do business with it would be illegal
because that would be trade with an enemy. In Daimler Co Ltd v Continental Tyre &Rubber Co
(Great Britain) Ltd [1916] 2 AC 307, it was held that the company was an alien company and the
payment of the debt to it would amount to trading with an enemy and therefore the company was not
allowed to proceed with the action.

In cases of Ultra vires actions, if the company’s decisions or action is outside its legal power or its
ultra vires, the court can disregard it.

Also under the act, section 20 of the CA provides that the High Court may, where a company or its
directors are involved in acts including tax evasion, fraud or where save for a single member company
the membership of the company falls below statutory minimum lift the veil.

Section 117 of the CA provides that the advantages of the company form can be removed where the
directors or other officer doesn’t maintain the company’s name outside its place of business or where
the company’s name doesn’t appear on the company’s letters, notice and bills.
In conclusion, while the company’s governing documents provide insight into the company’s mind
and will, the court can disregard it in situations where the decision or action is against public policy,
fraudulent among others as discussed above.
QUESTION 4

“If something has been done irregularly, which the majority are entitled to do regularly, there
can be no use having litigation about it…”, Mellish LJ in MacDougall vs Gardiner (1875) Ch. D
13 at 25. With the help of case law and public policy on the matter, discuss the above statement
highlighting instances where the courts of law have disregarded it.

MacDougall vs Gardiner (1875) Ch. D 13 at 25, a poll was demanded but wrongfully refused by the
chairman. A shareholder suing on behalf of himself and all other shareholders except those who were
directors brought an action against the directors and the company for a declaration that the chairman’s
conduct was illegal and an injunction to restrain the directors from carrying out certain arrangements
without the shareholders approval. Court held that the action could not be brought by a
shareholder if the chairman was wrong, the company alone could sue and that it was an internal
matter for the decision of the majority and not a matter for the litigation. If something has been
done irregularly, which the majority are entitled to do regularly, or if something is done illegally
which the majority of the company are entitled to do legally, there can be no use having litigation
about it the ultimate end of which is that a meeting is called and then ultimately the majority gets its
wishes. Doubtless it is futile to allow the minority to sue where the majority have the retrospective
power, by ratifying what has been done, to nullify any decision that a court may give in favour of the
minority.

This case brings out the principle of non-interference by the court and affirms the principle of
the supremacy of the majority.

The same was decided in Rajahmundry Electric Supply Corporation v A. Nageshwara Rao, the
supreme court held that the courts in general will not intervene at the instance of shareholders in the
matters of internal administration and management of the company by the directors so long as they
within their powers and if the directors enjoy the support of the majority shareholders, the minority
shareholders cannot do anything about it.

These cases state that the company is the proper plaintiff and not the others if the decision is of
disadvantage to the company because the law recognizes the companies separate legal personality.
This was clearly stated in the case of Foss v Harbottle (1843) 67 ER 189, where the court held that
when a company is wronged by its directors it is the company that has a standing to sue.

However, there are exceptions or instances where the courts of law have disregarded Mellish
LJ’s statement in MacDougall vs Gardiner (1875) 1 Ch D 13 at 25.
Ultravires acts. A shareholder can bring an action in matters which are ultravires that no majority can
sanction. According to section 51(2) Companies Act 2012, a member of a company may bring
proceedings to restrain the doing of ultravires acts unless the act is to be done in fulfillment of a legal
obligation of the company.

In Simpson v Westminster Palace Hotel Co. (1860) 8 HL, court held that the funds of a company
established for the purpose of one under taking cannot be applied to another. If an attempt to do so is
made, such an attempt would be ultravires although sanctioned by all directors and by a large majority
of the shareholders, therefore any single shareholder has a right to resist it.

Fraud on the minority. In Greenhalgh v Arderone Cinemas Ltd, it was laid down that, “a special
resolution would be liable to be impeached if the effect of it were to discriminate between the
majority and minority shareholders, so as to give to the former an advantage of which the latter
were deprived.”

In Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 ALLER437, it was stated
that fraud on a power means an abuse or misuse of power.

In Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350, court held that the majority of
shareholders in a company have no right to use their votes in such a way as to compromise a suit
instituted for the benefit of the company and to retain the benefits by the compromise for themselves
to the exclusion of the minority. Where an attempt is made to do so by the majority, aa bill filed by a
shareholder on behalf of himself and other shareholders to enforce the rights of the minority would be
entertained.

Invasion of individual rights. In Pulbrook v Richmond Consolidated Mining Co [1878] 9 Ch. D

610, the directors refused to permit the claimant who held the requisite number of shares to act as a
director. Court held a director of a company, can if qualified sustain an action in his own name
against the other directors on the ground of individual injury.

The wrongdoers are the ones in control. The court can entertain an action brought by the minority
shareholders if the ones in control of the company are the wrongdoers so as to prevent the
manipulation of the minority shareholders by the majority shareholders.

Actions requiring a special majority. The Companies act 2012, Articles of Association or
Memorandum of Association may require a special resolution for certain matter. If the required
procedure is waived or ignored, the minority shareholders may complain to the courts1.

1
Rukundo Solomon, Company Law in Uganda: A Casebook Guide to the Companies Act 2012, page 286
In Musa Misango vs Musigire and others [1966] 1 EA 390, the plaintiff, a director and the largest
single shareholder had been deprived of his office by special resolution as a result of changes in the
articles of the company which changes were made at meetings convened by members and non-
members who had insufficient shares to requisition the meetings or alter the Articles. Court held that
the case fell within the exception to the general rule that the court would not interfere with the internal
management of a company acting within its powers: a member can bring proceedings when acts the
complained of injure him or are either fraudulent or ultravires.

In conclusion, although Mellish LJ in MacDougall vs Gardiner (1875) 1 Ch D 13 at 25 said, “If

something has been done irregularly, which the majority are entitled to do regularly, there can be no
use having litigation about it”, there are exceptions to this rule as seen above.
Question 5.

With the aid of authorities, discuss the legal nature of an auditor’s duty, showing the extent of
legal exposure in the course of their duty?

An auditor is a person appointed to audit or check the company accounts, the audit is a check on the
activities of the directors and the company officers. It gives confidence to shareholders that their
investments aren't being mismanaged or misappropriated2. It is provided for under section 1423 that
every officer must appoint an auditor to hold office from the conclusion of that general meeting until
the conclusion of the next annual general meeting. This is evident in the famous case of Institute of
Chartered Accountants vs Jnanendra Nath Saikia4 where, it was held that the appointment of the
auditor by is mandatory in the Annual General meeting.

The registrar has powers to appoint an auditor where at an annual general meeting, no auditors are
appointed or re appointed. Following Section 139 (1)5 provides the grounds who aren't eligible for
appointment as auditors namely; officer or servant of the company, a person who is a partner or is in
the employment of the company’s officer or servant. The company shall inform the auditor
concerning of his or its appointment, and also file a notice of such appointment with the Registrar
within fifteen days of the meeting in which the auditor is appointed. A body corporate also can’t be
appointed as an auditor. A retiring auditor may be reappointed, however, at any annual general
meeting, a retiring auditor, however appointed will be deemed to be reappointed without any
resolution being passed. This follows the famous case of Comptroller and Auditor General of India
vs Kamlesh Vadilal Mehta6 where, it was held that once a person is qualified as a certified
accountant, experienced and efficient there is no ground for discrimination against him. Therefore, for
one to qualify as an auditor to be appointed by the company must be registered as an associate
Accountant or a firm each of whose partner is a member of the Institute of certified Public
Accountants of Uganda registered under the Accountants Act.7

There are many duties of the auditor explained as follows:

2
Tonny Okwenye, Company Law in Uganda, Lecture notes5, Page 242.
3
Companies Act 2013.
4
Gauhati High Court, May 20, 1954.
5
Companies Act 2013.
6
(2003)(1) Scale 351
7
Tonny Okwenye, Company Law in Uganda, Lecture notes5, Page 244.
He or she audits the company accounts including its annual balance sheet and profit and loss
statement, to prepare a report showing if reports have been well prepared and if they give a true and
fair view of the company’s accounts, and to carry out investigations to determine if proper accounting
records have been kept and whether they comply with the entities.

One gets to be a qualified Auditor if one is appointed as an auditor of a company unless he is a person
registered as an associate Accountant or a firm each of whose partner is a member of the Institute of
Certified Public Accountants of Uganda registered under the Accountants Act.

There are many duties of the auditor explained as follows; to audit the company accounts including its
annual balance sheet and profit and loss statement. Prepare a report showing if reports have been well
prepared and if they give a true and fair view of the company’s accounts, he / she should carry out
investigations to determine if proper accounting records have been kept and whether they comply
with the entries.8

An auditor therefore has two main duties, which are to audit the accounts of the company, and the
other is to report to members of the company on the accounts. In carrying out these duties, the auditor
has a duty of care by ascertaining the true financial position of the company at the time of the audit,
this was emphasized in the famous case of Re: London and General Bank9. An auditor may have to
value shares where as an expert, he will be liable by negligence under the rule in Hedley Byrne & Co
vs Heller & Partners10 and in Baber vs Kenwood Manufacturing Co.11 , it was held that it must be
ascertained what parties have agreed to remit to the expert, this is ascertainable by reference to the
contract; and if there is a mistake in the valuation it must be ascertained if that mistake is attributable
to the expert departing from his institution in a material respect. For example, if the expert valued the
wrong number of shares, or valued the shares in the wrong company either party would be able to say
that the valuation was not binding because the expert had not done what he was appointed to do.12

In JEB Fastener Ltd vs Mark, Bloom& Co13., it was held that the auditor could reasonably foresee
that a takeover company would rely on the audited accounts and therefore suffer a loss if they were
inaccurate, therefore an auditor should act so careful and reasonable.

8
Tonny Okwenye, Company Law in Uganda, Lecture notes5, Page 245.

9
[1895] 2 Ch 166.
10
[1963] 2 All ER575.
11
(1978) Lloyd’s Rep.
12
Rukundo Solomon, Company Law in Uganda, A casebook Guide to the Company Act 2012, page231.
13
[1931] 3 All ER 289.
In Westminster Road Construction and Engineering Company Ltd 14 , it must be generally accepted
that an auditor should not rely on the accuracy and advise from other persons as he should carry out
proper cheques and balances on the basis of his knowledge.

In Re; Thomas Gerrard & Son. Ltd [1968], it was held that it was no defence and the auditors must
repay the dividends, the cost of recovering the extra tax and any of the extra tax not recoverable. If
directors do not allow auditors adequate time to make proper investigations, they must either refuse to
make a report at all or qualify it. Once they were on notice of the altered invoice, they had a duty to
make an exhaustive inquiry.

Following the duty of accounts and audit, every auditor has a right of access to the books and
accounts and is entitled to require from the officers such information and explanation as he or she
thinks necessary, this is evident under section 170 (3) on access to the accounts. This is emphasized in
the famous case of Re Rocksteady Services Ltd.15 Failure to comply might end the company in the
public interest following the case of Secretary for Trade and Industry vs Leyton Housing Trustees
Ltd [2000] 2 BCLC 808. In M’Cusker vs M’Rae 1966 S.C.253, it was held that Court may, on the
petition of a director order in company to make the accounting records available for inspection by the
director and by a named accountant on his behalf.

In Burn vs London & South Wales Coal Co. and Risca Investments Co,16 it was held that a director
has a right to see and take copies of documents belonging to his company and the right exists not at
meetings only. So, there is a special right to inspect under the company Act and members don’t have a
right to inspect unless provided by the article and have no right to inspect books.

Balanced sheet is therefore signed by two of the directors of the company and if not, it can be signed
by the one director if available. Per section 155 (1) (3) accounts must be laid before the general
meeting with the balancing of all profits and losses made and per Section 135, the balance sheet is to
be annexed to the Annual Return on filing. Per the famous case of Bugerere Coffee Growers Lts vs
Sebaduka and another [1970] 1 EA 147.

Under Section 163, the auditor’s unqualified report is stretched as per the famous case of Re:
Precision Dippings Ltd [1985] and finally the auditor has to make a report following the Directors
report according to Section 170. And the report therefore shall be open to inspection by any member.

In conclusion, a company auditor isn't an officer of the company as stated under section 2
Companies Act. Where he is, however, an officer of the company for any tort, crime or misfeasance

14
(1932)
15
[2001]1 BCL.C 84.
16
(1820) 7 TL.R 118.
he commits in the course of his duties, the auditor has to prepare an auditor's report to be submitted to
the general meeting for consideration, the auditor’s report had to be open to inspection by any
member, auditors are entitled to remuneration for their services to the company and the auditor’s
remuneration has to be fixed by the person appointing him.
QUESTION 6

Examine the foundational legal concepts underlying the “Proper plaintiff Rule” in Foss v
Harbottle (1844) Hare 22 and their application in corporation law.

The issue is whether the member had the right of suing the directors who are managing the Company.

It should be noted that all powers of the company rest with one or the other of the two organs ie
shareholders in the general meeting or the board of directors. That in taking decisions, the two
organs base on the majority rule i.e. the decisions of the general meeting is the decision of the
majority – 51% of the votes or shares are what constitutes the majority.

Therefore, power lies with the majority and the minority must in principle, accept the decisions of
the majority

Decisions of the general meetings are the decisions of 51% of the shareholders are what constitutes
the majority. The general rule is that the Majority take decisions once 51% or more agrees on a
particular, it shall stand as decided by the majority shareholders.

They must acknowledge that this power enjoyed by the majority is a fact of business life and it is also
democratic. That if the minority want to bring about change, and then it is open for them to seek
for change through the normal democratic processes which are; Lobbying, persuation and publicity.

The rule in FOSS Vs HARBOTTLE consists of two complimentary arguments/ principles:

a) the right of the majority to bar a minority action whenever they might lawfully ratify an
alleged misconduct

b) the exclusive right of the company to sue upon a corporate course of action as a person

(SLAOMON Vs SALOMON) and this is referred to as the proper plaintiff principle.

The following are circumstances under which an individual shareholder is allowed to sue on his
behalf notwithstanding the fact that the wrong was committed against the company.

Infringement of personal rights of the member:

The infringement of personal rights is considered as the most important exception. Where and once
the rights of a personal shareholder have been infringed or threatened, the aggrieved shareholder
can bring a personal action notwithstanding the fact that the company is aggrieved as well. This
action relates to constitutional rights of a shareholder. It is limited to constitutional rights of a
shareholder ie the basic rights under the Companies Act e.g. the right to vote. If the wrong being
 complained of amounts to an infringement of the personal rights of a shareholder, he can petition
under a personal action notwithstanding that the company had been wronged.

In Misango Vs Musigire (1966) E.A. 390, a general meeting purported to alter Articles of
Association to the detriment of the plaintiff. Nine (9) shareholders attended that meeting and
voted in favour of the resolution. Sir Udo Udoma C.J, held that the action could be determined in so
far as what was complained of infringed on the rights of the plaintiff.

Where there is an illegal or ultra vires transaction.

Where the act being complained of is illegal or ultra vires, any aggrieved shareholder can
proceed to court notwithstanding the rule in Foss. Vs Harbottle, forexample in Mawanda's
case, it was held that contravention of S.7,8,13 & 14 of the Act is an ultra vires act and any
aggrieved shareholder could sue on it. In HUTTON Vs WESTCOKE, the company entered
into an agreement which would lead to its winding up by selling its major assets. After the sale,
the shareholders passed a resolution to effect compensation to the company’s employees and
remuneration to its directors. A personal action was brought since this was ultravires. The court
held that the plaintiff’s action was in order although the payment was to affect the company
primarily.

Fraud on the minority shareholder; This has been described as the true exception to the rule in
FOSS Vs HARBOTTLE and it includes two components:

a) There must be a fraudulent act being carried out in the company

b) Those committing the act are the people in control either as majority shareholders or board
of directors.

What constitutes control may include defacto as well as dejure control. Control is defined in
PRUDENTIAL ASSURANCE where court concluded that it is necessary to prove that the
breach/fraud was committed by the people in control.

In North West Transport Company Vs Beatty (1887) AC 589 a, he court held that every
shareholder has a right to vote on any question even if he has a personal interest, which is
opposed to the interests of the company. However, there are a number of
instances when the right of voting can be restricted and this is when the “majority” are

said to have committed a "fraud" on the "minority". According to the case of Borland Vs Earle
(1902) AC 83, fraud does not mean deceit, rather it means an abuse of power as well as acts of a
fraudulent nature e.g. when the majority are attempting to appropriate themselves money, property or
advantages belonging to the company, the minority shareholders are entitled to participate.
Consequently, the courts have held that where there is:-

o expropriation of the company's properties

o release of director's duty of good faith

o expropriation of members' property.

Then courts will interfere with a member's right of voting since such voting amounts to

fraud on the minority.

Expropriation of member’s property such as declared dividends;

Under this, majority shareholders must not use their powers to expropriate the shares of
minority shareholders. If they do so, that will amount to a fraud and the transaction will be set
aside. In the case of Brown Vs British Wheel Co (1979) 1 ch 290, the majority shareholders wanted
to buy the minority shareholders out and the court held that the action was not bonafide to the
company as a whole.

Breach of Articles of Association:

If a breach of articles takes place, any aggrieved shareholder can proceed to court notwithstanding
that the company itself may have been prejudiced. In Edwards Vs Hallowell, where the Court
held that a breach of the articles by a company or any other shareholder can be challenged
by any member without the restrictive effect of the rule in Foss vs. Harbottle.

Interests of justice: Courts are ready to entertain any action of a shareholder which falls

outside the above exceptions if it is in the interests of justice e.g. in Daniel's case where
the issue before the court was whether suit should be maintained in light of the rule in Foss Vs
Harbottle since there was no allegation of fraud. It was held that the shareholders could
maintain the suit. The judge said that it is one thing to put up foolish directors but it is another
thing to put up directors who are so foolish to enter such a transaction.
Release of directors' duties of good faith

A general meeting cannot authorize directors to breach their duty of good faith nor can it ratify any
such breach. Once it does so, that will amount to a fraud on the minority and the transaction in issue
will be set aside. But the general meeting can legally release the Director of the duty of skill
and care.

Expropriation of the company's property

This can be illustrated by the case of Munier V Hoopers Telegraphic Works (1874)L.R,

9 Ch.1) APP 350, where it was held that the defendant company as a majority shareholder had
benefited from the contract, which was the property of its subsidiary. The minority shareholders were
entitled to participate in the benefits of the contract which the defendant company had
misappropriated. However, winding up had already taken place and there was no alternative remedy.
QUESTION 7
Write short notes on the following;

(a) Enlightened share holder value

(b) Internal management rule
(c) Presumption laws in shares
(d) Director’s duty to the creditors.
Answers

(a) Enlightened share holder value.

Here, the directors of a company have a fundamental duty to promote its long-term success
for the benefit of the members as a whole. In fulfilling it, the directors should have regard to
the non exhaustive list of factors and stake holders, suppliers, customers and the likely
consequence and impacts of board decision on the community and the environment.

Section 198(a) of the companies’ act provides for the duties of directors and states that, the
director shall act in a matter that promotes success of the business of the company.

Emphasized by lord Grene MR in Re Smith and Faucet ltd, that directors are enjoined to
exercise their power bonafide in what they consider not what a court may consider in the
interest of the company, thus they must exercise in a discretionary way based on their
judgment that they have acted in consideration of making the success of the company their
priority.

(b)Internal management rule.

This rule originated from a landmark case of Royal British Bank v Turquand
(1856)6E&B327. The articles of the company provides for the borrowing of money on
bonds, which requires a resolution to be passed in the general meeting. The director did
acquire the loan but failed to pass the resolution. The repayment on loan defaulted and the
company was held liable. The share holders refused to accept the claim in absence of
resolution and it was held that the company shall be liable since the person dealing with the
company is entitled to assume that there has been necessary compliance with regard to
internal management.

The role was further emphasized in the House of Lords in Mahony v East Holyford Mining
co (1875) LR7 HL869. Here the articles of a company provided that the cheque shall be
signed by two directors and countersigned by the secretary. It later came to light that neither
of the director or secretary was appointed properly en it was held that the person receiving
such cheque shall be entitled to the amount since the appointment of directions is as part of
the internal management of the company and the person dealing with the company and not
required to enquire about it.

The role provides that the third party who enters into a contract with the contract is protected
against any irregularities in the internal procedure of the company. The third party cannot
find out internal irregularities that take place in a company hence a company held liable for
any loss suffered.

(c) Presumption laws in shares.

Section 2 of the companies act 2012 defines it to mean share in the share capital of a
company and includes stock and share capital except where distinction between shares and
stock expressed.

Article 2 table A of the companies act 2012 provides that shares may be issued with special
right relating to payment of dividend, voting, return of capital shares etc.

Section 67(1) companies act 2012 provides that a company may issue at discount shares in
the company of a class already existed and subsection a-d provides for exceptions.

Section 67(2) of the companies act provides that where a company has passed a resolution
authorizing the issue of shares at a discount, it may apply to court for an order approving the
issue and upon such application to the court.

Section 66 companies act 2012 provides for application of a premium received on issue of
shares.

Allotment of shares. Refers to process through which the company distributes the shares for
successful applicants that is to say the potential share holder /subscribers given the number of
shares which has been successfully applied by section 61.

Section 91(1) of the act provides that a company shall, within sixty days after the allotment
of any of its shares, debentures or debentures stock and within two months after the date on
which a transfer of shares is logged within the company.
(d) Director’s duties to creditors

Common law developed duties and concepts which vested upon directors with specific
responsibilities revolve around the director’s role in the management of the assets of the
company on behalf of other share holders.

The responsibilities also took into account the fact that the company was recognized a
separate entity from its members; the directors are the trustees for shareholders/creditors.

As far as they are concerned, below are the duties owed to the creditors;

Section 198 of the companies act 2012 provides for the duties of the directors and includes
the following;

(a) To act in a manner that promotes the success of the business of the company.
(b) Exercise a degree of skill and care as a reasonable person would do looking after their
own business.
(c) To act in good faith in the interest of the company as a whole that is to say treating all
shareholders equally, avoiding conflicts of interests, declaring any conflicts of interest, not
making personal profits at the company’s expense.
MAKERERE UNIVERSITY COMPANY LAW 2016 QUESTION PAPER AND
ANSWERS.

QUESTION 1

THE PRINCIPLE THAT DIRECTORS ARE TO ACT HONESTLY AND IN GOOD

FAITH WITH VIEW TO BEST INTERESTS OF A COMPANY IS AN
UNNECESSARY FETTER OF THE DIRECTORS’ ROLE IN THE MANAGEMENT
OF A COMPANY. DISCUSS

In my opinion I think the principle that directors are to act honestly and in good faith in
the interests of a company is not unnecessary fetter because , it would lead to success of a
company for the benefits of its members as a whole. In this success will mean long term
increase in value but fundamentally it is up to each director to decide in good faith whether
its appropriate for the company to take a particular course of action. The fiduciary duty
imposed on directors requires them to act bona fide and in the best interests of the company.
Additionally, they must exercise their powers for the proper purposes for which they were
conferred and not for any collateral or improper purpose. It is important to distinguish these
two different aspects of the fiduciary duty because, in any given situation where the question
is raised of whether or not a director is in breach of his duties, they require the application of
a different test.

Directors owe the company a duty of skill and care and as such, if the directors are negligent,
they are liable in negligence to damages for the loss occasioned to the company. This duty
arises both in equity and in the common lad of tort.

In Dorchester finance co. ltd vs stebbing [1989]BCLC 498, The Plaintiff was a money
lending company with three directors. Two of the directors were never involved in the
management of the affairs of the company and they left all the decision making and
management of the company in the hands of one director. The Directors even never met to
discuss affairs of the company. The one director who was managing the company only lent
money to companies employed by himself, his clients or his brother in contravention of the
statutory controls of money lending business and so the loans were unenforceable.
All the three directors were held liable for negligence.
Now when it comes to the standard of care that the directors owe the company, courts have
differed on several occasions on whether to apply the subjective or the objective test but in all
cases, the standard of care in each particular case is determined from the circumstances of
that particular case.
In Re City Equitable Fire Insurance Co. Ltd[1925] Ch 407, Romer J said that;
A director need not exhibit in the performance of his duties, a great degree of skill than may
reasonably be expected from a person of of his knowledge and experience

The definition of what amount to reasonable was highlighted in Re Brazilian rubber

plantation and estate Limited[1911]1 ch 425, where Neville J stated that;
Such reasonable care must I think be measured by the care an ordinary man misg be
expected to take in the same circumstances on his own behalf. He is clearly I think not
responsible for damages occasioned by error of judgment.

However, in the Brazilian Rubber Plantation and estates limited, Neville J went on to say
that a company director who does have special knowledge relevant to the company business
is bound to give the company the advantage of the knowledge when transacting its business.

A dual standard was applied in the case of Normanvs Theodore Goddard [1991]BCLC 1028,
WHERE Hoffman J stated that the degree of care which a director of a company owes a duty
to take when carrying out functions in relation to the company is the care that would be taken
by a reasonable diligent person having both;

a) a general knowledge , skill and experience that may reasonably be expected of a

person carrying on the same functions as are carried out by that director in relation to
the company(the objective)
b) The general knowledge, skill & experience that that director has(subjective test)

The issue of collateral and improper purposes will be addressed separately below but the
general obligation to act bona fide and in the best interests means that a director is bound to
act in what he perceives, and not what a court may perceive, to be in the best interests of the
company at the time. The essentially subjective approach has to be circumscribed to a certain
extent, otherwise a lunatic
director acting bona fide but completely irrationally could give away the company’s money.
So, for example, in the words of Pennycuick J, in Charterbridge Corporation Ltd v Lloyds
Bank Ltd: [1970] Ch 62. The proper test ... must be whether an intelligent and honest man in
the position of a director of the company concerned, could, in the whole of the existing
circumstances have reasonably believed that the transactions were for the benefit of the
company.

As long as a reasonable director could have believed what was done was for the benefit of the
company, then the director under scrutiny can claim he has acted bona fide and escape
liability. Additionally, a director owes a duty to act fairly between different shareholders or
classes of shareholders in the company. Mutual Life Insurance Ltd v Rank Organization
Ltd [1985]

The directors of a company are under obligation to act bonafide in the interest of the
company. According to Re Smith and Forcett [1942]ch 304, it was held that directors have
to act bonafide in what they consider is in the best interest of the company and not for any
collateral purposes.

The holding from this case gives the directors the powers and the discretion to determine
what is in the best interest of the company. The court therefore is more inclined to respect
the business and commercial judgment of the company directors.
With regard to the word Bonafideas used in the case, it had been previously observed in an
earlier case of Hutton Vs West cock railway [1883]23 CH 654, that bonafide cannot be the
sole test otherwise a lunatic conducting the affairs of the company and paying away its
money in a manner perfectly bonafide yet perfectly inaccurate.
Still in the same case, Bowen J. said that;
“The test is not whether the acts were bonafide but whether as well as being bonafide, it is
done within the ordinary scope of the company business and whether its reasonably
incidental to the carrying on the business of the company and for the benefit of the company .
From the above dictum, the directors duty to act honestly and in good faith is pegged to the
execution of their functions in pursuance of the business of the company. Some of the
guidelines of what may amount to acting in good faith include that the director must have in
regard to; The likely consequences of any decision in the long term, the interests of the
company’s employees, the need to act fairly as amongst the members of the company. etc.
In Re WM Looth (1967)1 WLR 32 where the controlling shareholder and director of two
companies wished to make provisions for his wife without giving her shares In the company.
He entered into a service contract with one of these companies where on his death, she was to
be entitled to a pension for life.
Court on being satisfied that no consideration had been given, in deciding as to whether the
arrangement was in the best interest of the company found that the sole object of the
arrangement was to make provisions for the widow and therefore could not bind the
company.

In Mills Vs Mills [1938]60 LCR 150, where the Plaintiff and the Defendant were two of the
directors and the largest shareholders of the family company. The defendant who was the MD
of the company held mostly ordinary shares and the plaintiff held mostly preference shares. A
resolution was passed by the majority of the directors including the Defendant by which the
accumulated profits which would have been paid to ordinary shareholders as dividends were
instead capitalized and distributed to the ordinary shareholders in the form of full paid-up
bonus shares.
The resolution greatly strengthened the voting powers of the ordinary shareholders and in
particular, the power of the defendant.
The lower court held that the majority of the directors had acted honestly in what they
believed to be in the best interest of the company. The lower court further held that merely
because the defendant stood to gain from the decision did not invalidate it.
LATHAM CJ stated that most sets of articles of association actually require that directors
are shareholders of the company and it is generally desired by shareholders of the company
that directors should have a substantial interest in the company so that the interest may be
identified with that of the shareholders of the company. Ordinarily therefore, in promoting
the interest of the company, a director will also promote his own interest. I do not read the
general phrases which are to be found in the authorities with reference to the obligations of
the directors to act solely in the best interest of the company as meaning that they are
prohibited in any matter where their own interest is affected by what they do as directors.
Very many actions of directors who are at the same time shareholders have a direct or
indirect relationship to their own interest. It would be ignoring realities and creating
impossibilities in the administration of companies to require that directors should not
consider the effect of a particular decision upon their own interest as shareholders. A rule
which laid down such a principle would paralyze the management of the company in many
directions.

In conclusion, the duty to act in good faith is rather of great significance to the company
because it gives the director an obligation to work in the best interest of the company and
therefore ha to work effectively in order to promote the reputation of the company and
maintain a high standard of business conduct and to act fairly amongst the members of the
company. This is called the enlightened shareholder value and therefor if the director is
successful with this it therefore results into long term value.
QUESTION 2

The statement that "Article 80 of Table A in a nutshell resolves the apparent conflict of
roles between the shareholders and the board of directors" requires deeper analysis in
the context of principles of corporate governance and relevant case law.

Article 80 of Table A provides that "the business of the Company shall be managed by the
directors, who may exercise all such powers of the Company as are not, by the Act or by
these Articles, required to be exercised by the Company in general meeting, subject,
nevertheless to any regulations of these Articles, to the provisions of the Act and to such
regulations, being not inconsistent with the aforesaid regulations or provisions, as may be
prescribed by the Company in general meeting; but no regulation made by the Company in
general meeting shall invalidate any prior act of the directors which would have been valid if
that regulation had not been made."

This provision appears to resolve the apparent conflict of roles between shareholders and the
board of directors by granting the board of directors broad powers to manage the business of
the company, while also recognizing the overall authority of the shareholders to make
regulations for the directors to follow. However, this is subject to certain limitations and may
not always resolve conflicts.

In reality, the relationship between the shareholders and the board of directors is more
complex and nuanced. Principles of corporate governance require that the board act in the
best interests of the company and its shareholders, while also being accountable to them. The
board should therefore be independent and act with integrity, while also being responsive to
shareholder concerns and engaging in effective communication.

There have been several cases that illustrate the importance of proper corporate governance
practices. For example, in the case of Royal Brunei Airlines v Tan, the court held that a
director must not put himself in a position where his personal interests conflict with his duty
to the company. In the case of Re Smith and Fawcett Ltd, the court held that directors must
act in good faith and in the interests of the company as a whole, rather than favoring one
group of shareholders over another.

In conclusion, while Article 80 of Table A provides a framework for resolving the apparent
conflict of roles between shareholders and the board of directors, this is subject to certain
limitations and may not always be sufficient to ensure proper corporate governance practices.
Principles of corporate governance require that the board act in the best interests of the
company and its shareholders, while also being accountable to them. This requires a balance
between the powers of the board and the rights of shareholders, as well as transparency,
integrity, and effective communication.
Question; 4

Persons dealing with a company in good faith can assume that it is in order that is
which is opposed to be in order. Critically analyze this statement in the light of the rule
of Turquand

The Turquand rule also known as the indoor management rule is meant to protect third
parties dealing with the company in good faith by not being bound by the internal
management of the company, that is to say that he is not bound to dig deep into the
memorandum or articles of association or other bylaws.

The third party assumes that the internal affairs of a company have been fully and properly
followed by the person acting or representing the company in the business transaction. The
indoor management rule will provide that if a third party transacted with no notice of lack of
authority by the company’s representative will not be liable for any breaches.

Nectar Uganda limited and another Vs crane bank ltd Misc, Appl No 470 of 2021. The
borrowing powers were vested in the company’s board of directors and who passed a special
resolution offering the company’s property to secure a loan. The resolution stated that the
directors had resolved to offer their property as security for the requested overdraft but did
not state whether it was passed at the meeting of a company or by circulations, the amount to
be borrowed, nor the date or place where it was signed. Even when the resolution was signed
by one director and the secretary of the company, the company itself contested that the
resolution was not passed at a formal setting of any organ of the company as required by their
articles of association which required that if such happened that the resolution had to be
signed under the hand of all Directors therefore it was invalid. The bank protested under the
indoor management rule that having received a signed and registered resolution from the
company, the bank was entitled to rely on it without need for further investigations of the
circumstances under which the resolution was signed. On appeal the court established that the
company’s act SEC 2 (special resolution) is one passed by 75% of shareholders at a general
meeting. Court also established in the articles of association that borrowing powers of the
company was vested in the board of directors. Court should there have found that the
resolution to borrow was invalid to authorize a borrowing because it was passed contrary to
the AOA of that company, this would perhaps have been a stronger ground to rely on.

CTM(U) LTD and 2 ors Vs Allmuss properties(2018) The Nectar decision contradicts the
CTM decision where the contest was over a board resolution used to change the name of a
company ,,the resolution had been accepted by the registrar and the certificate of change of
name issued by the registry. However, the company contested that its managing director had
fraudulent presented the board resolution well knowing that by law a special resolution by the
shareholders was required to change the name of the Company. Court upon review of the law
on indoor management rule and the company’s act stated that, persons dealing with a
company in good faith would have to ascertain for themselves that the internal procedures of
the company have been complied with before they conclude a transaction. The Court, while
acknowledging that the company’s act requires a special resolution and not a board resolution
to support a change of name refused this argument on the basis of indoor management rule
and refused to hold against the third parties dealing with companies in good faith.

Charles Harry Twagira VS Dfcu Bank ltd (civil suit 188 of 2018) the borrower (plaintiff)
denied giving a bank resolution to authorize its borrowing and challenged the leading as
illegal, void and therefore non payable. This was despite having signed for the facility
agreement and taken bank Monies. To the bank there was no law prohibiting it from the
borrower who has not provided a resolution. The high court quickly swept these objections
away using the indoor management rule. Court also relied on the company’s act and refused
to accept the plaintiffs excuse having taken the loan sum without passing a resolution to
escape paying obligations. Documents requiring authentication by a company may be signed
by a director, secretary or any other authorized officer and need not to be under its common
seal

Company’s act, court was inclined to agree with the decision of CTM that it would be too
much burden for persons relying on the company’s documents to be required to make further
inquiries and establish the bona fides of the document. How would a prospective lender
determine that the resolution in the Nectar decision was passed without a formal meeting?
Would he have asked for minutes of the board meeting? Would the lender verify the
signatures of the directors attending? Where does the lender stop? The receiver of the
company’s document signed a prescribed by law and company’s articles of association
should be entitled to full reliance upon it as good for the law and good for business.

The good news for the bank is that regardless of how this contest over the indoor
management rule ends, none of the borrowers in the above cases got away without payment
of the loan. The clear sign of the court is that the finer point of the law and procedure may
well be urged but a loan once taken must be paid. When a representative of accompany acts
fraudulent and not in good faith, the company has a right to lift the corporate veil and
incriminate the fraudulent officer sec 20 of the company’s act 2012 but it should be noted
that the condition for this is that the third party should never have heard notice or knowledge
that the officer acting on behalf of the company was fraudulent or had no authority. However,
the indoor rule limits the third party during due diligence to dig for information in assumption
that the company is in order and is doing its management rightly

The indoor rule protects third parties from the internal restrictions of the company so they can
rely on apparent authority, makes it very easy to transact with companies and finally protects
against fraudulent representatives, It should be noted that the indoor rule has disadvantages
too which include the limitation to information by the third party makes contracts impossible
to execute /enforce due to shallow, Information during due diligence.it lacks flexibility to the
terms of contracts limiting ability to modify bargaining or negotiation for better terms of a
contract because of lack of information,

All in conclusion therefore the indoor rule lacks consistency in interpretation of contracts
sometimes confusing also breeds grounds for ambiguity encouraging passing off fraudulent
behavior, it is uncertain, limited ability to be relied on, difficult to modify contract terms,
therefore gives no alternative for dealing with pertinent issues at hand in a timely manner.,
even when the indoor rule has provided solutions in case officers of companies act
fraudulent, it has also escalated issues that end in court that would have been dealt with very
easily in time during due diligence because of how much information should be given to a
third party. Even when all management of the company has not been complied with during a
transaction, the indoor rule has provided measures to gurd against a third party that transacts
with such a company so that no loss is registered, court has always ensured compliance to
this rule and protects the company from un necessary loss of business and third parties are
safe under it as a remedy
QUESTION 5
Brief facts

Memory Ltd is a private limited company established to manufacture a memory enhancing

drink. It has 5 board of directors. Aduti one of the board members entered into a contract to
purchase empty bottles at a price above the market rate on behalf of the company without any
other board members involvement. Aduti has also resigned and incorporated his own
company and pursued a contract with Omondi a long-standing customer of Memory Ltd.
Former customers of memory ltd have shifted their loyalty to aduti’s new company. Two the
directors of memory ltd agreed to get into a joint venture with aduti’s company and want to
develop a similar drink to that of Memory ltd the other board members are aggrieved and are
not helped by the chairperson BOD of memory ltd while other shareholders are reluctant to
take any measures. Also, the directors paid themselves weekend allowances without
involvement of other shareholders.

Issues raised

1. Whether Aduti’s contract without involvement of other directors to purchase empty

bottles is void and if the 2 members who agreed to work with him secretly have a
binding contract.
2. Whether the directors paying themselves allowances without involvement of other
shareholders is legal
3. Remedies available for Memory Ltd

Law applicable

The Companies Act 2012

Resolution of the issues raised

Issue 1. Whether Aduti’s contract without involvement of other directors to purchase

empty bottles is void and if the 2 members who agreed to work with him secretly have a
binding contract.

Section 198 of the Companies Act provides for the duties of directors which include (a)
act in a manner that promotes the success of the business of a company (b) exercise a degree
of skill and care as a reasonable person would do looking after there own business (c) act in
good faith in the interests of the company as a whole and this should include treating all
shareholders equally, avoiding conflicts of interest, declaring and conflict of interest, not
making personal profits at the company’s expense, not accepting benefits that will
compromise him or her from third parties and ensure compliance with this Act and any other
law.

In the case of Cooks v Deeks [1916] AC 554, Deeks as a director entered into a contract for
himself rather than the company and cooks co director sued. It was held that deeks had
breached the duty of good faith and he paid the proceeds to the company.

Also, in the case of Aberdeen Rail Co v Blaike Bros. [1843] AER “R” 249,it was stated
that since a director is in a fiduciary relationship, he is not allowed to enter into any
transaction in which he has a personal interest.

Article 84 (1) of Table A and section 218 (1) of the Companies Act provides that a director
who is in any way whether directly or indirectly interested in a contract or proposed contract
with the company shall declare the nature of his of his or her interest at a meeting of the
directors.

In this case, Aduti didn’t introduce the contract matter to the other board members hence
breaching a duty of good faith and he therefore has to pay the proceeds.

The two other directors Namara and Were are also not allowed to enter into any transactions
in which they have personal interests against the company they work for and if they want to
engage in anything away from the company, they have a duty to disclose to the rest of the
board members through a meeting.

ISSUE 2 Whether the directors paying themselves allowances without involvement of

other shareholders is legal

It is by law that directors have no right of payment for their services while performing their
functions thus a director has no automatic tight to renumeration. This was emphasized in Re
George Newman & Co [1985] 1 Ch 674, where it was stated that directors have no right to
be paid for their services and cannot pay themselves or each other or make presents to
themselves out of the company’s assets unless authorized so to do by the instruments which
regulate the company or by the shareholders at a properly convened meeting.

Therefore, the allowances that the directors paid themselves without involvement of the
shareholders were illegally paid and should be refunded back to the company.
Issue 3 The remedies available for Memory Ltd.

Dismissal of the directors, section 195 (1) and Article 96(1) of Table A provides that a
company may by ordinary resolution remove a director before the expiration of his or her
period of office, not withstanding anything in its articles or in any agreement between the
company and the director but this subsection shall not in the case of a private company
authorize the removal of a director holding office for life at the commencement of this Act
whether or not subject to retirement under an age limited by virtue of the articles or
otherwise.

Memory Ltd can succeed in dismissing the directors that breached the provisions set under
the memo and articles of association of the company.
QUESTION 6

Brief facts

The Memorandum of Association of Spotless Ltd states that its object is to “provide cleaning
and related domestic services.” The Articles of Association contain an article to the effect
that any contract or loan with a value of more than shs.3,000,000 must be approved by the
Board of Directors and loan documents to be signed by a director and counter-signed by the
Secretary.

Albert is the Chairman/managing director of the company and also holds 80% of the shares.
The remaining shares are held by Lola, Albert’s sister with 10% and Muzamira with 10%, the
two are also directors of the company. Albert, who rather dislikes cleaning but loves animals
has opened a pet home in the company’s premises to accommodate pets on a temporary basis.
To do so he had to take out a loan in the company’s name of shs.10,000,000 with the
company’s bank (DFCU).

Unfortunately, SPOTLESS LTD was unable to meets its repayment obligations to the bank
and the bank is threatening to exercise its rights under the mortgage. In a related development
there is a tradition that the chairmanship of the board of directors rotate among the founder
members every five years. But Albert has refused to honour this tradition and threatened to
“sell” all shares of any member proposing a rotation in his capacity as chairman. Albert using
her voting power is intending to pass a resolution doing away with company meetings and
vesting authority to determine company matters solely in the chairman.

Issues

Whether there are any available remedies.

Law Applicable

Companies Act 2012

Common Law and Equity
Case Law
MAKERERE UNIVERSITY COMPANY LAW 2013/ 2014 QUESTION PAPER AND
ANSWERS.

Question 1

The principle that Directors are to act honestly and I good faith with a view to the best
interests of the company, unnecessary fetter of the directors’ role in the management of
the company.

In accord to the famous case of Aberdeen Railway Company vs Blaike Brothers (1854), it
was held that Directors are a body to whom is delegated the duty of managing the general
affairs of the Company. A director is similar to an agent, he can bind his principal company
by his acts without incurring personal liability. Also like trustees as they owe fiduciary duties
to the company. However, they aren't true trustees as the legal title of the company’s property
is vested in the company and not the directors. Directors aren't servants of the company
unless they have a separate contract of service with the company. The number of Directors is
provided for under section 185, therefore, every public company must have at least two
directors and every private company at least one. Table 4 provides that for all companies, the
number is not less than two unless decided otherwise by ordinary resolution. Section 187
provides that every company shall have a secretary and a sole director shall not also be
secretary.

Following the methods of Appointment, First Directors, a statement of the first directors and
secretary must be delivered during the company’s registration process, it must contain their
signed consent to act in their relevant, capacity and upon incorporation, they are deemed to
have been appointed as its first directors and secretary. With Subsequent Directors, the
usual method of appointment is by an ordinary resolution in a general meeting which is
followed by retiring directors are eligible for re-election. Section 194 provides that the
appointment of directors must be voted on individually, these directors must be elected in
accord to their individual merits.

Casual Vacancies occur between general meetings e.g. due to the death or resignation of a
director. Table A empower the board to fill casual vacancies and to appoint additional
directors up to a maximum specified in the company’s directors. A person appointed by the
board holds office until the next AGM. He will then be eligible for re-election and his
appointment won’t be considered in determining who will retire by rotation.
Directors have the following common law duties, Section 198 provides that for the duties of
directors namely; to act in a manner that promotes the success of the company’s Business, to
exercise a degree of full skill and care as a reasonable person would do looking after their
own business, to act in good faith in the interest of the company as a whole. Section 198
(c) then elucidates good faith as treating all shareholders equally, avoiding conflicts of
interests, declaring any conflicts of interest, not making personal profits at the company’s
expense, non-acceptance of benefits that will compromise him from third parties and Section
198(d) provides for the director’s duty to comply with the Act and any other law. Directors
have the same fiduciary duties as agents or trustees, it is based on the principal of trust,
honesty and utmost good faith towards the company in their dealings on the company’s
behalf.

The duties only apply to the director’s activities without the company’s concurrence in the
general meeting and the directors may profits from their decision, however they mustn't make
a secret profit, following the famous case of Oyester International Ltd Vs. Air Avide
Services Ltd (1995), Ntabgoba J, on the authority of Parker Vs. Lewis Boston Deep Sea
fishing company (1888) held that any secret benefit obtained by a director by reason of his
position or in the course of company’s business whether it takes the form of a commission or
a qualification shares or a sum of cash or any other sort of benefit renders the director
accountable to the company for the value of benefit. Although the authority of directors to
bind the company is collective as a board, fiduciary duties are owed by each director
individually. Fiduciary duties are owed to the company but not to individual shareholders.

Directors must have regard to the company’s employees as well as the interest of the
members, the duty is owed to the company and is enforceable in the same way as any other
duty owed to the company by its directors. Directors must consider the interests of
shareholders and employees so as to discharge their duties to the company as a whole. This
means that the directors must consider the interests of the present and future members of the
company. They must view the company as a going concern and balance this long term view
against the interests of the present member.

Directors who act dishonestly act in bad faith and to the company’s detriment. A director who
acts honestly in the company’s best interests may still be liable if he uses his powers for the
wrong purposes. Following the case of Hogg Vs Camphorn (1967), it was held that since the
proper purposes of issuing shares is to raise capital, issues made to forestall a takeover bid
was a breach of the director’s fiduciary duties however, the issue was within the power of the
company and could therefore be ratified at a general meeting. The principles also apply to
other powers vested in the directors which don’t require the company’s authority e.g. the
power to make calls, forfeit shares and register transfers.

Directors can’t validly contract with each other or third parties on how to vote at future board
meetings, although a lender insists that his representative sits on the board of the borrowing
company while advancing a loan, in theory, such a director owes his duty to the board and
not the person responsible for their nomination. Following section 198(c) (ii) and (iii), a
director must not misuse corporate information or opportunity, this is provided for in the case
of Industrial Development Consultants Vs Cooley (1972) it was held that a director must
account for a profit although it’s not made at the company’s expense. This principle stands
although the other party refuses to contract with the company and even if the company was
legally unable to acquire the benefit in coercion.

In the case of Oyster International Ltd Vs Air Guide Services Ltd, Court held that a
director stands in a fiduciary relationship to the company. He must account to the company
for any benefit that accrues to him through his dealings with third parties in which he deals
with them purportedly on the company’s behalf and a director must not compete with the
company because this amounts to a conflict of both personal and company interest. The case
of Peso Silver Mines vs. Cropper (1966) also explains the principle. There is very little
obligation on a director to display any skill and diligence, this is in contrast to their duties of
utmost faith and loyalty.

These duties were laid down in the case of Re: City equitable fire insurance (1925) A
director must exhibit the degree of skill reasonably expected from a person of his knowledge
and experience, the standard is one of a reasonable man in financial matters, the director is
expected to be a qualified accountant. Directors aren't bound to attend all board meetings but
they should attend when reasonable to do so. Directors are entitled to trust the company’s
officers to perform their duties properly, directors aren't liable for acts of co-directors or other
officers unless he participates in the wrong. Under section 198 (a), it’s one of the core duties
of directors. It’s a day to day basis duty, it relates to acting in good faith in the company’s
best interests per the case of Brady vs. Brady (1998)
Conclusively, Directors are hindered in their performance while administering their roles in
the management of the company as they must not place themselves in situations of conflict of
their personal interests with company interests and during their performance, good faith must
not only be done but must manifestly be seen to be done. Directors are fiduciaries. They must
not make biased decisions, this follows the famous case of Abardeen Railway vs. Blaikie
(1854), where Cranworth L.C- Court held that a corporate body can only act by agents who
have to promote its best interests. Such agents have a fiduciary duty towards their principal.
They aren't allowed to enter into engagements in which they have a personal interest
conflicting with the interests of the company, the director is in breach of duty provided there
is conflicts of interest which isn't just fanciful. Self-dealing is a requirement of disclosure to
the board.
QUESTION 2

The statement that "Article 80 of Table A in a nutshell resolves the apparent conflict of
roles between the shareholders and the board of directors" requires deeper analysis in
the context of principles of corporate governance and relevant case law.

Article 80 of Table A provides that "the business of the Company shall be managed by the
directors, who may exercise all such powers of the Company as are not, by the Act or by
these Articles, required to be exercised by the Company in general meeting, subject,
nevertheless to any regulations of these Articles, to the provisions of the Act and to such
regulations, being not inconsistent with the aforesaid regulations or provisions, as may be
prescribed by the Company in general meeting; but no regulation made by the Company in
general meeting shall invalidate any prior act of the directors which would have been valid if
that regulation had not been made."

This provision appears to resolve the apparent conflict of roles between shareholders and the
board of directors by granting the board of directors broad powers to manage the business of
the company, while also recognizing the overall authority of the shareholders to make
regulations for the directors to follow. However, this is subject to certain limitations and may
not always resolve conflicts.

In reality, the relationship between the shareholders and the board of directors is more
complex and nuanced. Principles of corporate governance require that the board act in the
best interests of the company and its shareholders, while also being accountable to them. The
board should therefore be independent and act with integrity, while also being responsive to
shareholder concerns and engaging in effective communication.

There have been several cases that illustrate the importance of proper corporate governance
practices. For example, in the case of Royal Brunei Airlines v Tan, the court held that a
director must not put himself in a position where his personal interests conflict with his duty
to the company. In the case of Re Smith and Fawcett Ltd, the court held that directors must
act in good faith and in the interests of the company as a whole, rather than favoring one
group of shareholders over another.

In conclusion, while Article 80 of Table A provides a framework for resolving the apparent
conflict of roles between shareholders and the board of directors, this is subject to certain
limitations and may not always be sufficient to ensure proper corporate governance practices.
Principles of corporate governance require that the board act in the best interests of the
company and its shareholders, while also being accountable to them. This requires a balance
between the powers of the board and the rights of shareholders, as well as transparency,
integrity, and effective communication.
Question; 4

Persons dealing with a company in good faith can assume that it is in order that is
which is opposed to be in order. Critically analyze this statement in the light of the rule
of Turquand

The Turquand rule also known as the indoor management rule is meant to protect third
parties dealing with the company in good faith by not being bound by the internal
management of the company, that is to say that he is not bound to dig deep into the
memorandum or articles of association or other bylaws.

The third party assumes that the internal affairs of a company have been fully and properly
followed by the person acting or representing the company in the business transaction. The
indoor management rule will provide that if a third party transacted with no notice of lack of
authority by the company’s representative will not be liable for any breaches.

Nectar Uganda limited and another Vs crane bank ltd Misc, Appl No 470 of 2021. The
borrowing powers were vested in the company’s board of directors and who passed a special
resolution offering the company’s property to secure a loan. The resolution stated that the
directors had resolved to offer their property as security for the requested overdraft but did
not state whether it was passed at the meeting of a company or by circulations, the amount to
be borrowed, nor the date or place where it was signed. Even when the resolution was signed
by one director and the secretary of the company, the company itself contested that the
resolution was not passed at a formal setting of any organ of the company as required by their
articles of association which required that if such happened that the resolution had to be
signed under the hand of all Directors therefore it was invalid. The bank protested under the
indoor management rule that having received a signed and registered resolution from the
company, the bank was entitled to rely on it without need for further investigations of the
circumstances under which the resolution was signed. On appeal the court established that the
company’s act SEC 2 (special resolution) is one passed by 75% of shareholders at a general
meeting. Court also established in the articles of association that borrowing powers of the
company was vested in the board of directors. Court should there have found that the
resolution to borrow was invalid to authorize a borrowing because it was passed contrary to
the AOA of that company, this would perhaps have been a stronger ground to rely on.

CTM(U) LTD and 2 ors Vs Allmuss properties(2018) The Nectar decision contradicts the
CTM decision where the contest was over a board resolution used to change the name of a
company ,,the resolution had been accepted by the registrar and the certificate of change of
name issued by the registry. However, the company contested that its managing director had
fraudulent presented the board resolution well knowing that by law a special resolution by the
shareholders was required to change the name of the Company. Court upon review of the law
on indoor management rule and the company’s act stated that, persons dealing with a
company in good faith would have to ascertain for themselves that the internal procedures of
the company have been complied with before they conclude a transaction. The Court, while
acknowledging that the company’s act requires a special resolution and not a board resolution
to support a change of name refused this argument on the basis of indoor management rule
and refused to hold against the third parties dealing with companies in good faith.

Charles Harry Twagira VS Dfcu Bank ltd (civil suit 188 of 2018) the borrower (plaintiff)
denied giving a bank resolution to authorize its borrowing and challenged the leading as
illegal, void and therefore non payable. This was despite having signed for the facility
agreement and taken bank Monies. To the bank there was no law prohibiting it from the
borrower who has not provided a resolution. The high court quickly swept these objections
away using the indoor management rule. Court also relied on the company’s act and refused
to accept the plaintiffs excuse having taken the loan sum without passing a resolution to
escape paying obligations. Documents requiring authentication by a company may be signed
by a director, secretary or any other authorized officer and need not to be under its common
seal

Company’s act, court was inclined to agree with the decision of CTM that it would be too
much burden for persons relying on the company’s documents to be required to make further
inquiries and establish the bona fides of the document. How would a prospective lender
determine that the resolution in the Nectar decision was passed without a formal meeting?
Would he have asked for minutes of the board meeting? Would the lender verify the
signatures of the directors attending? Where does the lender stop? The receiver of the
company’s document signed a prescribed by law and company’s articles of association
should be entitled to full reliance upon it as good for the law and good for business.

The good news for the bank is that regardless of how this contest over the indoor
management rule ends, none of the borrowers in the above cases got away without payment
of the loan. The clear sign of the court is that the finer point of the law and procedure may
well be urged but a loan once taken must be paid. When a representative of accompany acts
fraudulent and not in good faith, the company has a right to lift the corporate veil and
incriminate the fraudulent officer sec 20 of the company’s act 2012 but it should be noted
that the condition for this is that the third party should never have heard notice or knowledge
that the officer acting on behalf of the company was fraudulent or had no authority. However,
the indoor rule limits the third party during due diligence to dig for information in assumption
that the company is in order and is doing its management rightly

The indoor rule protects third parties from the internal restrictions of the company so they can
rely on apparent authority, makes it very easy to transact with companies and finally protects
against fraudulent representatives, It should be noted that the indoor rule has disadvantages
too which include the limitation to information by the third party makes contracts impossible
to execute /enforce due to shallow, Information during due diligence.it lacks flexibility to the
terms of contracts limiting ability to modify bargaining or negotiation for better terms of a
contract because of lack of information,

All in conclusion therefore the indoor rule lacks consistency in interpretation of contracts
sometimes confusing also breeds grounds for ambiguity encouraging passing off fraudulent
behavior, it is uncertain, limited ability to be relied on, difficult to modify contract terms,
therefore gives no alternative for dealing with pertinent issues at hand in a timely manner.,
even when the indoor rule has provided solutions in case officers of companies act
fraudulent, it has also escalated issues that end in court that would have been dealt with very
easily in time during due diligence because of how much information should be given to a
third party. Even when all management of the company has not been complied with during a
transaction, the indoor rule has provided measures to gurd against a third party that transacts
with such a company so that no loss is registered, court has always ensured compliance to
this rule and protects the company from un necessary loss of business and third parties are
safe under it as a remedy
QUESTION 5
The memorandum of Associoation of spotless Ltd states that its object is to provide
cleaning and related domestic services. The articles of association contain an article to
the effect that any contract or loan with a value of more than 3,ooo,oooshs must be
approved by the Board of Directors and loan documents to be signed by a director and
counter signed by the secretary .
Albert is the chairman/managing director of the company and also holds 80% of the
shares. The remaining shares are held by Lola, Albert’s sister with 10% and Muzamir
with 10%, the two are also directors of the company Lola has not taken a great interest
in the company’s business, so she is taken by surprise when she finds out the following
events
Albert who rather dislikes cleaning, but loves animals opened a pet home in the
companies’ premises to accommodate pets on a temporary basis. To do so he had
extensive building work done to the company’s premises. For that he had to take out a
loan in the company’s name of shs 10,000,000shs with the company’s bank (DFCU)
which is secured by a mortgage over the property and Albert executed the relevant
documentary The bank knew of the articles requiring the approval of the board but
assumed that Albert had received the approval as he had on two previous occasions
obtained loans of shs 50,000,000 each in the company name under similar
circumstances. Unfortunately, spotless Ltd was unable to meet its repayment
obligations to the bank, and the bank is threatening to exercise its rights under the
mortgage. Ina related development , there is a tradition that the chairmanship of the
board of directors rotates among the founder members every five years , but Albert
refused to honor this tradition and threatens to sell shares of any member proposing a
rotation in his capacity as chairman in fact, he has issued a memo ordering Muzamir to
sign bank transfer forms with a view of offering his shares to other prospective
shareholders , Further , Albert using his voting power is intending to pass a resolution
doing away with company meetings and vesting authority to determine company
matters solely in the chairman.

Lola and Muzamir are furious that Albert has become a dictator. They seek your advice
on this matter and any legal remedies against the bank and or Albert.
BRIEF FACTS

The memorandum of Association of Spotless Ltd provides that its major object is to provide
cleaning and domestic services and the Articles of association contain a clause that loans
more than 3,ooo,oooshs must be approved by the Board of Directors and loan documents to
be signed by a director and counter signed by the secretary. But Albert one of the directors
also the chairman of the board of directors used part of the company premises to
accommodate pets. He also secured loans above 3million on three occasions from DFCU
bank without the approval of the board of directors but in the company name. However, the
bank also knew about the articles requiring approval by the board of directors. Albert also
refused to honor the tradition of the chairmanship rotating among the board members every
5yrs. He also failed to pay the loan and also threatened the other members to give up their
shares . And he also passed a resolution to vest the power in him and do away with company
meetings. This has made Lola and Muzamir furious and seeking for legal advise.

ISSUES

1. Whether Albert acted Ultra vires?

2. Whether the loan was lawfully acquired?
3. Whether there are any Remedies available for the parties?

RESOLUTION

ISSUE 1

Sections 51 to 52 of the company Act 2012 clearly spell out acts which are ultra vires.
This basically means acting beyond power and it includes acts that are ultravires to the
memorandum and Articles of association and also acts which are ultra vires to the company
directors. A case that clearly brings out the doctrine of ultra vires is the case of According to
the facts above when Albert borrowed a loans without approval of the other board members
as stipulated in the articles of association he acted ultravires to the articlesof Association .
Acase that clearly brings out the doctrine of ultra vires is Ashbury Railway Carriage & Co
v Richie

ISSUE 2
 According to the facts above its important to note refer to the indoor management rule.
This rule was clearly spelt out in the case of Turquand also known as the Turquand rule

The rule in Turquand was originally intended to limit the inquiries that a person dealing with
the company had to make. In Royal British Bank V Turquand (1856) 6 EL 327, 119 ER
886, the directors of the company had on its behalf, borrowed money from the Royal British
bank and had affixed the company seal to a bond for 2,000 pounds to secure payment of the
borrowing. Under the company deed of settlement, borrowing had to be approved by a
resolution of the members and the company, (through its liquidator, Turquand) claimed that
no resolution had been adopted to cover this borrowing. When the bank was sued, it was
urgued that the company should not be held liable because the bank was deemed to be
informed of the contents of the company deed of settlement and should have inquired as to
whether the appropriate resolution had been adopted.

Court held that those who dealt with an incorporated company are bound to look at the
articles of the company. That once a person dealing with the company has looked at the
articles of association, he is not bound to do more. That in the instant case, since the deed of
settlement gave powers to directors to borrow money on bond, the bank had a right to infer
that the resolution to borrow had been made.

Jervis LJ stated that.”the party here on reading the deed of settlement could find not a
prohibition from borrowing but a permission to do so on a certain condition. Finding that
the authority might be made complete by a resolution , he would have a right to infer the fact
of the resolution authorizing that which on the face of the document appears to be
legitimately made”

The effect of this decision hence he rule is that whereas a person dealing with a company is
fixed with notice of the contents of the memorandum and articles of association, once he has
looked at these documents he is not bound to investigate further unless there are other facts
putting him o such investigation. The case therefore renders ineffective any limitation in a
company constitution on the powers of its directors to bind the company

In Mahony Vs East HolyfordMinning Co. (1875)LR 7 HL 869 at p. 894 it was stated that
all that the directors do with reference to which I may call the indoor management of their
own concern is a thing known to them and to them alone.That when are persons conducting
the affairs of the company in a manner which appears to be sufficiently consonant with the
articles of association, then those so dealing with them externally are not to be affected by
any irregularity which may take place in the internal management of the company. They are
entitled to presume that of which only they can have knowledge, namely, the external
acts……..

In this case the company's bank made payments based on a formal copy of a resolution of the
board authorizing payments of cheques signed by any two of three named "directors" and
countersigned by the named "secretary". The copy was itself signed by the secretary. It came
out subsequently that neither the directors nor the secretary had ever been formally appointed.
According to the articles, the directors were to be nominated by the subscribers to the
memorandum and the cheques were to be signed in such manner as the board might
determine.
It was held by the House of Lords that since the bank had received formal notice in the
ordinary way of the board's decision, it was not bound to enquire further.

The provision under the Companies Act which directly imbibes the Turquand rule is section
190.
Therefore according to the above rule , the Bank knew about what was spelt out in the
company’s Articles of Association but still went on to conduct the transaction with a sol
director however, the Bank could seek for remedies under the protection of the indoor
management rule because it was upon the board of directors to decide before acquiring the
loans.
ISSUE 3
According to the facts above its important to note that Alberts acted fraudulently and
borrowed loans without approval of the board of directors and also the company secretary
and therefore he breached his duties as a director and these include the dutie to act in good
faith and also and also to act with reasonable skill and care therefore he didn’t act out of
integrity.
Therefore, for the bank to claim its loan repayment, the corporate veil of the company has
to be lifted and therefore Albert shall face charges in his own capacity because he conducted
all these activities for his own interests and not he interests of the company.
 And the only remedies for Acts that are ultra vires include tracing, sabrogation and
injuction and these were laid out in the case of Beaudeford lond ltd 1935 CHD 131.
Whereas for the board of directors they can also sue for damages for Faud.
In conclusion , it is important to note that Albert breached all his duties as a director and for
any action it should be addressed to him and not in the company’s name thus the corporate
veil can be lifted.
QUESTION 6
Brief facts

Feelings Ltd had been experiencing several financial difficulties but its directors, Nabila and
Imran continued to trade, hoping that the company’s trading position would improve
although they thought it unlikely that the company would be able to pay its debts unless there
was a massive upturn in business. They gave up the struggle and called a meeting to wind up
the company. Feelings Ltd.’s fixed assets are valued at 80m, additionally its plant and
machinery have an estimated value of 20m. the company’s liabilities include 90m loan owed
to Big Bank Ltd, 40m overdraft owed to Small Bank Ltd and 70m to the employees. In
November 2013, Imran negotiated the sale of computers to the company, for which he was
paid a commission by Hannah making a profit of 20m, he has not disclosed this profit to the
other shareholders. Jamila contacted the other shareholders for a meeting on the matter and
other issues of mismanagement but her attempts have been blocked by Imran who owns 70%
shares in Feelings Ltd. Imran has threatened to dispose of all the movable asset of the
company to finance his daughter’s wedding.

Legal issues

1. Whether or not feelings limited is liable for the acts of Imran.

2. Whether or not Imran is acting ultra vires
3. Whether or not feelings ltd can be declared insolvent.
4. Whether or not feelings ltd can continue in business.
Law applicable

Companies act 2012

Insolvent act 2011 with

Common law and equity

Case law

Resolution of legal issues

1. Whether or not feelings ltd Is liable for the acts of Imran.

A company being an artificial person commits crimes and civil wrongs and its mind has to be
thought to be the directing will of the officer involved in the wrong committed. In Smith
Butchery co v Rep (1939) KLR, it was held that wrongful acts committed by the
subordinate staff of the company would not attach liability to a company, the law of agency is
applied.

In reference to the provided facts, Imran being the holder of the big percentage 70%, blocked
all the meeting called by Jamila, sold a computer making profits of 20m , thus in conclusion,
Imran is liable for his acts to the company.

2. Whether or not Imran is acting ultra vires.

The object clause of the memorandum of association of a company contains the object for
which a company is formed, an act of a company must not be beyond the object clause and it
will be ultra vires.

Ultra vires means beyond powers and such act is void and cannot be ratified by the company.
When the directors of the company exceed the powers conferred to them, the company in a
general meeting may choose to ratify their acts or omission.

It is the duty of directors to ensure that the funds of a company are used only for legitimate
purposes of the company that is to say if the funds of the company are used for purposes
foreign to its memo, the directors may be held liable to restore to the company that is to say if
the funds of the company are used for purpose foreign to its memo, the directors may be held
liable to restore to the company funds used for such purposes.

In reference to the facts given, Imran using his power as a director blocked all the meetings
called by Jamila, he sold the company computer making profits of 20m, he wanted to spend
the company money to finance his daughter’s wedding.

In conclusion, Imran is acting ultra vires and can be ratified to restore the company funds.

3. Whether or not feelings ltd can be declared insolvent and wind up.
This is a process by which the company’s life is brought to an end and its property managed
for the benefit of its creditors and members.

It involves an operation of putting an end the transactions of the company releasing the assets
and discharging its liabilities.

Section 272 of the insolvent act 2011 provides that where a company passes a resolution for
voluntary winding up of the company in accordance with this act, the provisions of the
insolvency act relating to liquidation shall, with necessary modification apply to voluntary
winding up of the company. This is in that the company can no longer pay its creditors, off
the objectives of its memo, can no longer make profits etc.

In reference to the provided facts, feelings ltd had 90m loan owed to big bank secured by
fixed charge, 40m overdraft to small bank ltd, 70m owing to employers.

In conclusion, section 79 to 86 of the insolvency act 2011, provides for members and
creditors voluntary liquidation that is to say feeling limited has to be declared insolvent and
wind up.

4. Whether or not feelings ltd can continue in business.

Capital refers to the net worth of the business that is to say the amount of property that has
been invested in business. Dimbula valley tea co ltd v Laurie (1961)ch353, A realized
profit on the sale of a company’s assets can be treated as profits available for a dividend
provided the company’s liabilities are less than the value of its fixed assets and circulating
assets.

In reference to the provided facts, the company fixed assets equalled 80m, of which the
liabilities were higher than fixed assets that is to say the company owed 90m by big, 70m by
the employees.

In conclusion, feelings ltd cannot continue in business.