Company Law Notes (Pursuant to the 2015 Companies Act)

INTRODUCTION

 

This course is primarily concerned with companies as defined in the companies Act, Cap. 2015 of the Laws of Kenya.  These  are companies which are formed and registered under that Act.  There are companies incorporated otherwise than under the companies Act.  Some Companies are formed under specific Acts of Parliament.  The Parastatal bodies were created under statutes as bodies corporate.  Most companies derive their existence via the process of registration under the companies Act, 2015.

 

EARLY FORMS OF BUSINESS ORGANISATIONS

Early forms business organisation owing their existence to Royal Charter were primarily Ecclesiastical bodies or public bodies such as boroughs.  Trading on Joint Account was accomplished through forms of partnerships known as the commenda and the societa and later, through the company.  The commenda was a partnership in which one of the partners supplied the capital in money or goods without personally taking part in the management of the venture.  The financier advanced a sum of money to the active trader upon the understanding that he should share in the profits of the enterprise, but with no liability beyond the capital advanced.

 

The societies was a form of Association which developed into the present day partnership, each partner being an agent of the others and liable to the full extent of his private fortune and partnership debts charters of incorporation were sought in order to give members a monopoly over the trading and to give the Government authority to regulate and control foreign trade and colonisation.  In this form of organisation, the proprietors pooled their stock and traded on the basis of the joint stock.  This is developed.  It received its charter in 1600, granting it monopoly of trade with the East Indies.  This kind of Company represented state interests, formed primarily for the government of a particular trade and the more modern type of company, designed to trade for the profit of its members.  On the other hand, charters of incorporation conferred certain advantages.  A corporation was capable of existing in perpetuity, it could sue outsiders and its own members, and the possession of a common seal facilitated the distinction between the acts of the company and those of its members.

 

COMPANY:  A DEFINITION

The companies Act, 2015 Section 3 defines a company to mean “a company formed and registered under this Act or an existing company”.  This definition is vague.  In legal theory the word company demands an association of a member of persons who come together for some common object or objects.  A company is an artificial legal person created by complying with the provisions of the companies Act, 2015 of the Laws of Kenya.

 

FUNDAMENTAL CONCEPTS

IN COMPANY LAW

There are two fundamental concepts on the operational aspects of company law.  These are the concept of

Legal personality:  A company must be treated as a person in its own right.  This separates and creates a distinction between the personalities which constitutes the created entity.  This concept also incorporates other aspects such as life and death.  A legal person is any person, human or otherwise which has rights and duties. The Non human persons are called corporations.  The word corporation derives from the latin word,  ‘corpus’ meaning body.  These are legal persons brought into being by artificial process of the law

 

Limited liability: Liability means the extent to which a person can be called upon to  account for something. A person can be called upon to pay the amount of the debt or to account for a debt upto a certain amount.  In the context of company Law, liability can be limited by shares or guarantee.  A share is an interest which an investor has in a particular company.  Under Section 6 of the companies Act, Cap. 2015 a limited liability company is one in which the liability of its members is limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.  This is a company limited by shares.  A share is the interest which someone has in a company measured in monetary terms.

 

The members in a company may sometimes enter an agreement where they may agree to contribute towards the company’s assets while they are still members to enable the company to discharge its debts.  They cannot be called upon to pay more than they undertook to pay.  Such a company is limited by guarantee.  Under section 7 of the companies Act, Cap. 2015, a company limited by guarantee is a company having the liability if its members limited by the memorandum to such amount as the members may respectively thereby  undertake to contribute to the assets of the company in the event of its being wound up.

 

In the event that a company does not have this guarantee or liability then it is an unlimited company.  Thus section 8 of the companies Act, 2015 defines an unlimited company as “a company not having any limit on the liability of its members.”

Nearly all principles in company law are meant for:

(a)   Protection of creditors

(b)   Protection of investors.

 

These are the only groups of people protected by the Act.  However, when a company is formed its activities may affect the public or its employees.  Whether or not companies should have the interest of the community put into account is still a matter of debate.

 

FORMS OF BUSINESS ORGANISATIONS

There are various legal forms that a business may take VIZ:

(a)   Sole Trader

(b)   Partnerships with 2 or more people

(c)   Limited liability company

SOLE TRADER:

The sole trader is the single owner of the business.  He may be on his own or may be assisted by other people mainly members of his family.  He procures the necessary capital on his own, makes all the decisions necessary in running the business.  He gets the profits alone and equally shoulders any houses.  Since a sole trader has no Association in law, he is not in any way regulated by any special rule of law.

 

PARTNERSHIPS

A Partnership is a relationship that subsists in an association of between two and twenty members in a trading partnership, two or more professional business persons with a view to showing profits.  Firms of professional persons like dentists, lawyers, Accomutants and surveyors have no limitation of membership.  The partnership Act, Cap. 29 defines a partnership as the relation that subsists between two or more persons carrying on business in common with a view to profit.  Under Section 389 of the companies Act, Cap. 486, “No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under [the] Act.  The effect of this section is to prohibit the formation of a partnership of more that 20 people.  In case of Forth Hall Bakery Ltd v. Wangoe the Plaintiffs brought an action to recover certain sums of money from the Defendant.  During the hearing, evidence disclosed that the Plaintiffs were an association consisting of more than 45 people trading in partnership for gain and that the firm was not registered under the registration of Business Names Ordinance.  The counsel for the Defendant thereupon submitted that the action was not properly before the court; that the association was illegal as the companies ordinance prohibited an association or partnership consisting of more than twenty persons formed for the purpose of business that has for its object the acquisition of gain unless it is registered as a company under the ordinance and that the court had no power to grant relief held;

i)               The Plaintiffs could not be recognised as having any legal existence; were incapable of maintaining the action and therefore, the court would not allow the action to proceed.

ii)             Since a non existent Plaintiff can neither pay not receive costs, there could be not order as the costs.  Suit was struck out.

Why should the partnership number be limited at all?  The number should be limited for public policy reasons.  Lord Justice James in Smith v. Anderson (1880) 15 ch. 247 at P. 273 explained this public policy as hereunder:

          “The Act was intended to prevent the mischief arising from large trading undertakings being carried on by large fluctuating bodies so that persons dealing with them did not know with them did not know with whom they were contracting and may be put to great difficulty and expense”

This was a public mischief to be redressed.  However an unregistered foreign company sue or grounds of public policy.  In Paul Gardette v. Republic (1960) EA 728, the appellant was convicted by the supreme court of Seychelles on two counts of stealing by agent and on three counts of fraudulent false accounting while employed as an Accountant by cable and wireless Ltd., and was sentenced to 2 years imprisonment.  An appeal against conviction and sentence one of the principal grounds of appeal was that since cable and wireless Ltd had not been authorised by the Government to do business it had no legal existence and could not own property in Seychelles.  It was held that an unauthorised foreign company has not legal existence and can enforce no rights in Seychelles but since as a matter of public policy a citizen can never the less enforce rights against such a company, it would also be contrary to public policy to allow it assets which would otherwise be available to satisfy legitimate claims to be embezzled or stolen with impurity.

 

Partnerships are fowarded or mutual trust and confidence.  The rights of the partners are regulated by an agreement and if this agreement is in writing it is referred to as the Articles of Partnership or the partnership Deed.  The provisions of the partnerships Act govern whatever the partners may have left out in the partnership Deed.  A Partnership need not be formed formally.  It need not even be in writing.  It can be formed orally or may be referred from the conduct of the parties.  In Mohammed v. Hussein [1950] 17 EACA1, there was a verbal partnership between the parties and it did not contain any term as to how the partnership could be dissolved.  One party owned the premises or which the business was carried on but the terms of occupation by the partnership were not clear.  The defendant forcibly ejected the plaintiff from the premises and refused him to take part in the management of the business.  Every partner is entitled by law to take part in the management of the business.  In holding that this action terminated the partnership Sir Paul Grayham said, “A partnership…is determinable at any moment by one partner by notice to the other.  The notice need to be in any particular form or in writing as long as it amounts to an unambiguous intimation of a final intention to dissolve the partnership.  Forcible ejection and refusal to allow one partner to take part in the management of a business is a definite intimation of such intention”

Under Section 11 of the partnership Act, every partner in a firm is liable  jointly with other partners for all the obligations and debts of the firm incurred while he is a partner.  This is in contract to companies.  Companies are thus better organ for doing business.

 

Where an action is brought against a partnership, it is one against all the partners.  For this reason, where a sole trader carries or business in a name other than his own name he cannot commence action in that name in V.A. Patel v. National contractors (1954) 21 EAACA 39, National contractors took objection proceedings by originating summons in the name of national contractors as plaintiffs in respect of certain properties seized in execution by the appellant in respect of a decree against one Devrah Ramji, on the ground that National contractors was a partnership between Devraj Ramji and one J.P. Patel, at the time of execution that the goods were partnership property and that they were not subject to attachment for the separate debt of Devraj Ramji.  There was evidence that J.P. Patel had retired from the partnership and that Devrj Ramji had notice of the retirement.  It was held that an individual had no right to institute legal proceedings in his business name.

 

LIMITED LIABILITY COMPANIES:

If promoters wish to carry on business through the medium of limited liability companies they must choose which one of the various types of company they wish to form.  The first choice is for the promoters to consider between limited and unlimited companies.  If a company is limited it could be by shares or guarantee, if not limited it would be an unlimited company.  Section 8 of the companies Act provides that for purposes of the Act, a company is an unlimited company if:

a)      There is no limit on the liability of  its  members.

b)    Its certificate of incorporation states that the liability of its members is unlimited.

c)     Its certificate of incorporation states that it is a private company.

 

“Any seven or more persons or where the company to be formed will be a private company, any two or more persons associated for any lawful purpose may by subscribing their names to a memorandum of Association and otherwise complying with the requirements of this Act in respect of registration from an incorporated company with or without limited liability.”

 

If the company is a profit making concern then it is wise to have a company limited by shared if not the company limited by guarantee is more suitable.

 

The promoters must also decide whether the company is to be private or public.  Section 9 of the companies Act, defines a private company to mean a company which by its Articles 

(i)    Restricts the right to transfer its shares.

(ii)   Limits the number of its members to filling not including persons who are the company and persons who having been formally in the employment of the company were while in that employment, and have continued after the determination of that employment to be members of the company.

(iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

(iv) Is not a company limited by gurantee.

 

Any company which does not fall in this definition is a public company.  In order to form a public company, there must be at least seven persons to sign the memorandum of Association.

 

 

 

REGISTRATION OF THE COMPANY

Under section 11 of the companies Act, In order to secure  registration of a company, one or more persons must prepare subscribe their wrong to a

 

(a)   Memorandum of Association in which they express interalia their desire to be formed into a company with a specific name and objects.  They declare their intention to be formed into a company.

And a copy up the propsed

(b)   Articles of Association

These documents must be signed by at least seven or two persons where it is a public or private company as the case may be.

 

The signatures must be attested by a witness.

 

A person so signing the memorandum is referred to as a subscriber.  If the company has a share capital each subscriber must state opposite his name the member of shares he takes and must not take less than one share.  Section 5 (4) (b) of the companies Act states that no subscriber to the memorandum shall take less than one share. 

 

STATEMENT OF NOMINAL CAPITAL – required only in the case of a company with share capital.  This is used to compute the stamp duty as per sections 13(4) (a) and 14 of the Companies Act. 

 

DECLARATION OF COMPLIANCE.  This is a statutory declaration made either by the Advocate engaged in the or by a person named in the Articles as a director or secretary to the effect that all the requirements of the companies Act have been complied with in the case of public companies only the other document is a list of persons who have agreed to become the directors and also the written consent of the directors to act.  These are the only documents which are to be lodged with the registrar of companies so as to have the company registered.  There are other documents which the law requires to be filed on incorporation these include: 

Notice of the situation of the Registered office.  Under S. 108 (1)

“Notice of the situation of the registered office and the registered postal address, and of any change therein, shall be given within 14 days after the date of incorporation of the company or of the change as the case may be, to the registrar, for registration”.

 

The statement of proposed officers as per section 16 of the Act

“The company shall within a period of 14 days from the date of the appointment of the first directors, deliver to the registrar for registration a return in the prescribed, form containing the particulars specified in the register and a notification in the prescribed form of any change among its directors or in its secretary or in any of the particulars contained in the register specifying the date of the change”.

 

These documents are lodged with the Registrar of companies who sensitizes them and on finding then in order he registers then and issues a certificate of incorporation and the company is thereby formed as per section 17 of the Companies Act.

 

Under section 17 from the date of incorporation mentioned in the certificate the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum, capable of exercising all the form actions of an incorporated company with power to own land and having perpetual succession and a common seal under section 19.  A certificate of incorporation given by the registrar in respect of any association shall be conclusive merits of this Act, in respect of the registration and of matters precedent and incidental thereto have been complied with and that the association is a company authorised to be registered and duly registered under this Act.  This is intended to clear any doubts that may arise thereafter.  Together with registered companies, we also have statutory corporations.  The difference between the two is that a statutory corporation is created by an Act of Parliament.  The companies Act does not create a company as such but merely lays down the process by which two or more persons may create such a corporation by complying with the rules set by the Act.

 

 

 

CONSEQUENCES AND ADVANTAGES OF INCORPORATION

LEGAL PERSONALITY:  The most fundamental attribute of incorporation from which all the other consequences and advantages flow is that a company is regarded in law as having its own legal personality distinct and separate from its members.  It is therefore capable of enjoying rights and being subject to duties.  The company is a legal entity in its own right.  The full implications of legal personality were never understood fully not even by the courts until the case of Solomon v. Salomon & Co. (1897) A.C. 22 Salomon was a leather merchant an both manufacturer.  He sold his business to a company, Solomon & Co. Ltd which he had formed for {300,000.  The company had a membership of seven being Salomon, his wife, daughter and four sons.  The shares were allortted as hereunder:

 

Salomon took 20,000 ordinary shares of { 1 each plus a debenture worth {10,000 against the assets of the company.

The rest owned one share of {1 each.  Later, there were industrial strikes which pushed the company into in solemnly and was finally wound up.  The company’s assets proved inadequate to pay the {10,000 worth debentures owed to unsecured creditors.  Solomon took {10,000 before paying the creditors.  The unsecured creditors sought legal action entitled to the assets of the company before Solomon, the debentures holder could be paid.  They said Solomon & Co. Ltd were really the same person with Solomon, and argued that Solomon could not owe money to himself.  In the HighcourtUpjohn J. Stated;

              “Really, I find no difference between Salomon and

               Salomon & Co. Ltd.” He decided that the

Unsecured creditors be paid first.  Salomon appealed to the court of Appeal which upheld the decision of the High Court stating that the company was a were agent for Salomon and that he must pay the {7000 to unsecured creditors.  Salomon appealed again to the House of Lords which overruled the decision of the Lower Courts and held:

(i)             Salomon & Co. Ltd is a separate and distinct entity from Salomon and any other member.

(ii)           Salomon as a debenture holder/secured creditor) has a priority claim over the assets of Salomon & Co. Ltd before any unsecured creditors.

Lord MCNanghten put it this:

In order to form a company limited by shares the companies Act requires that a memorandum of Association should be signed by seven persons who are each to take one share at least.  If those conditions are complied with, what can it matter whether the signatures are relatives or strangers?.  There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected or that they or any one of them should take a substantial interest in the undertaking or that they should have a mind of their own or that there should be anything like a balance of power in the constitution of the company when the memorandum is duly signed and registered, through there may be only 7 shares taken, the subscribes are a body corporate capable forthwith of exercising all the functions of an incorporated company.  These are strong words.  The company attains maturity at its birth.  There is no period of minority no interval of incapacity.  A body corporate thus made capable by statute cannot loose its individuality by issuing the bank of its capital to one person, whether he be a subscriber or not.

 

            The company is at law a different person altogether from the subscribers,

             though it may be that after in corporation, the business is precisely the same

             as it was before and the same persons are managers and the same hands

             receiver the profit the company is not in law an agent or trustee for them. 

             Nor are the subscribers as member liable in any shape or from except to the

             extend and the manner provide by the Act”.

As is illustrated by the following case, the assets of the company belong to it and not to the members.  Shareholders do not have an insurable interest in other assets nor do creditors unless they have a security.

 

Macaura v. Northern assurance co. Lts [1925] a.c 619.  Macaura owned  a timber estate in Britain.  He formed an Estate company and sold the timber by obtaining 42000 fully paid up shares of {1 each.  The total was issued to Macaura and his nominees.  He was also an unsecurred creditor for {19000. 

 

He took out an insurance policy bearing his own name to secure the company.  Later, most of the timber was gutted by fire and Macaura went to the insurance company and claimed compensation or against the fire in his own name.  It was held that Macaura as a person had no insurable interest in the estate either as a creditor or as a shareholder.

 

In Ratate v. Nyakatukura (1956) 7 YLR 47, the Respondent sued the petitioner for the recovery of Uganda shillings 2,255/= alleged to belong to the Angole African Commercial Society Ltd. It was alleged that while he was a director and Deputy  Chairman of the company the petitioner had collected various sums of money from debtors of the company and failed to pay them over to the company or to account for them.  The action was filed in the Native court.  The relevant stature, the jurisdiction of the Native courts Act was limited to those cases in which all the parties  were natives.  In suing the petitioner the respondent admitted quite frankly that he was acting on behalf of Angole African Society Ltd as an agent.  The problem was Angole African commercial society Ltd was or was not a native.  It was held that a limited liability company is a corporation and as such has an existence distinct from the shareholders who own it.  The distinct legal entity is not capable of having racial attributes and was not therefore a native, even if all the shareholders were natives.  Another case explaining the concept of corporate personality is Lee v. Lee’s Air farming Ltd. Lee formed the (1961) (A.C) 12 respondent company for the purpose of carrying on the business of aerial top dressing method of farming of praying crops from the air the nominal capital of the company was {3000 divided into 3000 shares of {1 each.  Lee owned 2999 of the shares and the remaining shares was held by a solicitor in trust for him.  Lee was therefore the beneficial owner of all the shares.  Lee was appointed the company’s director and employed at a salary as the chief pilot.  Ac was killed in an aircraft while working for the company.  His widow claimed compensation under the workmens compensation Act.  The issue was whether Lee was entitled to any compensation and whether he was a worker.  A worker was defined as a person who had entered into a contract of service with an employer as per the stature.  Had Lee entered into a contract with the company or the company was another face of Lee?  It was held that it was a logical consequences of the decision of Salomon v. Salomon & Co. Ltd., that a company is separate from its members and that Lee and the company were two different persons capable of establishing contractual relationships between them.  The deceased was a workman and his widow qualified for compensation.

 

LIMITED LIABILITY:  Since a company is a corporation it has a separate legal personality and the members are not liable for the company’s debts.  In the case of a company limited by shares a member will be liable only for the amount payable on his shares if the company is limited by guarantee, then the liability is limited to the amount quarantined to be paid.  Section 213 of the companies Act provides;

         Under Section 5 of the Companies Act 2015, a company is a company limited by shares if the

            liability of its members is limited by the Company’s Articles to any amount unpaid on the

            shares held by the members.

 

(c)   in the case of a company unlimited by shares no contribution shall be required from any member exceeding the amount if any unpaid on the shares in zrespect of which he is liable as a present or past member.

(d)   In the case of a company limited by guarantee, no contribution shall be required from any member exceeding the amount, if any unpaid on the shares in respect of which he is liable as a present or past member.

(e)   In the case of a company limited by guarantee no contribution shall be required from any member exceeding the amount undertaken to be contributed by him to the assets of the company on its being wound up.  How does this compare with unincorporated Associations?

 

In the case of clubs and society’s, there will be an implied term that the members are not personally liable for obligations on behalf of the clubs.  In Bradley Egg farm Ltd. v. Clifford & others (1943) 2 LLER 378 the Plaintiffs wanted their poultry to be tested for bacillary white Diarrhea.  They contracted with a society was not incorporated.  The society official who carried out the test was negligent and as a result some of the poultry died and the Plaintiff sought to recover damages from the society.  The issue was that since the society did not have a separate legal existence from the members who was liable for the negligence of the official  was it the society or the executive committee?  It was held that to make all the members liable will amount to giving the society the status of separate legal entity which they did not have.  The society therefore was not liable only the Executive Committee was liable where such a committee of an unincorporated association is found liable it will be entitled to be indemnified from the funds of the Association.

 

3.  HOLDING OF PROPERTY

Corporation personality enables the company to hold property in its own name distinct from that of its members.

 

4.  SUING AND BEING SUED

The company being a separate legal personality may sue to enforce its rights and it may also be sued for breaching its own legal duties.  Unincorporated associations can sue under a representative capacity, where one party represents the rest in a representative capacity.  At commonlaw, a company is not allowed to appear otherwise than by an Advocate, and not by an official such as a manager.  In East African Roofing Co. Ltd. v. Dandit (1954)27 JKR 86, the Plaintiff company filed an action for the recovery of money from the Defendant.  The Defendant entered appearance and filed a defence admitting liability, but praying to be allowed to pay the money by instalments.  The Company secretary thereby took a hearing date exparte.  On the hearing date no appearance was made by either party and the court dismissed the action.  The company opted to set aside the exparte dismissal.  At the hearing the company was represented by an Advocate.  The only ground for setting aside was that the company had hoped to be represented by their manager who had gone to court but was in the wrong court room at the first hearing.  It was the first hearing.  It was held that a corporation such as a limited liability company can only be represented by a Lawyer.  This was the commonlaw position.  To remove this commonlaw rule Order 3 Rule 4 of the civil procedure rules provides that appearance in respect of a corporation may be made by an officer of the corporation duly authorised under the corporate seal.  There must be a written message  under seal, otherwise representation should be by Advocates.

 

5.  PERPETUAL SUCCESSION

Since a company is a corporation and an artificial person it has no body, mind or soul but it rests only on the intendment and consideration of the law.  It can not die like a human person since it is born by a process of law it can only be destroyed by the same process.  Unless and until that process is brought into play, it cannot be brought to an end hence a company has perpetual succession and hives indefinitely.

 

6. TRANSFER OF SHARES

Section 326 of the company’s Act , provides: 

“The shares and any other interest of a member in a company are transferable in accordance with the company’s Articles”.

 

This however, is subject to section 30 of the companies Act shares in a company are freely transferable and the transferee steps into the shoes of the transferor as a member.  Section 30 provides that private companies should restrict the right to the transfer of shares.  One must comply with conditions under the Articles in case of private companies.  In a partnership one partner cannot assign his interest except with the consent of all the other parties.  Even then, the outgoing partner continues to be liable for all the debts and obligations of the firm incurred while he was a partner.  The only way he can escape liability for such debts is by entering a tripartite agreement between himself, the remaining partners and the creditors whereby he will be released from liability for the debts of the firm.  This agreement is referred to as a oration.

 

7.  BORROWING FACILITIES

A company can borrow money much more easily than sole traders and partnerships.  This is facilitated by the device of a floating charge.  A floating charge is “a charge which floats like a cloud over all the assets of the company from time to time falling within a generic description but without preventing company from disposing of those assets in the ordinary course of business until something causes it to crystallise and fasten on the assets”. A floating charge is an equitable security.  It does not attach on any property at all as opposed to the legal charge which is attached to a particular property of the company. 

 

The company is not limited from disposing such a charge.  Sole traders and partnerships are not allowed to do so.  Anything in the possession of the bankrupt can be attached but this provisions does not apply to companies.

 

DISADVANTAGES OF INCORPORATION:

The disadvantages of incorporation are: 

(i) Formality

(ii) Expense

iii) Publicity

 

In order to form a company the promoters must prepare and register certain documents.  Throughout its life a company is required to file certain documents like annual returns balance sheets and profit and loss Accounts.  These are public Documents and may be examined by any member of the public on paying of an examination fee.  Their preparation requires the payment of money.  The company’s affairs are therefore publicised and there is no more privacy, as there is a lot of interference in the company’s affairs.

Even in liquidation, a company must follow a particular procedure this is a legal formality under the Act.

 

Companies are also subject to the partnership doctrine to which partnership and sole proprietorships are not subject.

 

 

 

LIFTING THE VEIL – IGNORING THE CORPORATE ENTITY

Although Salomon’s case finally established that a company is a separate and distinct legal person, there are situations in which this fundamental principle of corporate personality is ignored. In such situations, the law ignores the corporate entity of the company and instead pays regarded to the surrounding economical realities.

These situations must be referred to as exceptions to the instances under which  the corporate personality is ignored are provided for under statue and by commonlaw. 

 

Under section 129 of the companies Act 2015 a company is required to have at least one director who is a natural person.  This is complied with if the office of director is held by a natural person as cooperation sole.

 

1. NEGLIGENCE

Under section 194 (2) a provision in the company’s constitution, contract or scheme of management that purports to exempt a director from any liability that would otherwise attach to the director in connection with any of text on relation to the company is void.

 

2.  INDEMNITY

Under section 194 (3) provision by which a company provides directly or indirectly for an indemnity for a director of the company or an associated company against a liability attaching to the director in connection with any negligence, default or breach of duty or trust in relation to the company is void.  However under section 194 (4) the company may purchase insurance against any such liability.

 

3.  ACCOUNTS

Under section 630 of the companies Act, every company shall keep its accounting records at its registered office and ensure that the records are open to inspection by the officers of the company for a period of not less than seven years.  Under section 631, of the company does not comply, then the company and each officer of the company who is in default commits an offence and is liable, in the case of the corporate body to a tune of Kshs.2,000,000.  In the case of a natural person to a tune not exceeding Kshs.1000,000/= or to imprisonment for a term not exceeding 2 year or to both.

 

2. FRAUDULENT TRADING

Under sectiuob323 (I) (a)

 “If in the course of the winding up of a company it is shows that proper works of account were not kept by the company at any time during the period of two years immediately proceedings the commencement of winding up, whichever is the shorter every offices of the company who is in default shall unless he shows that he acted honestly in which the business of the default is excusable is liable on connection to imprisonment for a term not exceeding three years”.

 

It is shown that any person has been carrying on business with intend defraud creditors or for  any fraudulent purpose, the courts in the application of the  official receiver or liquidator or creditor may declare that any person who were knowingly parties to the fraud shall be personally responsible for the debts or any others liabilities of the company incurred fraud however, us a difficult allegation to prove.

In Re William Leibech Brothers Ltd (1932)2.,ch.71, The company wads incorporated in 1926 to quire williams business as a perambulator and furniture manufacture. The directors of the company william and this brother appointed william as the managing director with a salary of {1000 p.a. Within he first six months, the company was debited with the whole of that salary which was more than he should have got.  During that period the company made a loss of {2200.  During that year when the company was still in financial problems the directors paid themselves {250 dividends.  Towards the end of 1929 to March 1930 the company was in serious financial troubles that it could not pay its dents as they dell due.  Inspite of this William ordered goods worth {6000 which became the substance of a charge contained in a debenture held by him.  Around the same time William continued to repay himself a loan of {600 which he had lent to the company.  By mid 1930, the company with the knowledge of William Owed about {5600 for goods supplied.  Dividends, by law are not declared when the company is making losses.   William continued doing this and ordered goods making the company to incur debts.    The liquidator applied for William to be held liable under section 323 in that he knew that the company could not pay debts, he was doing so fraudulently and should be personaally liable.

It was held that for the company to carry on business yet William knew, was fraudulently and William was personally liable to the credidors. In the words of Justice Mongham:

                    “If a company continues to carry on business and incurs debts at a time when

                      there is, to the knowledge of the directors, no reasonable prospects of the

                      creditors receiving payments of the debt, it can generally be inferred that

                       the company is carrying on business with intention to defraud.”

In Re Patrick and Lyon LTD(1933) CH. 786,  A Company had financial problems and incurred debts. The same judge ruled;

                      “The word fraud and fraudulent purpose where they appear in the section are words which

                           connote actual dishonesty involving, according to the  correct notions of fair trading

                           among commercial men real moral blame.  No Judge has even been willing to define fraud

                           and I am attempting no definition.”   

 

In Re Cyona Distributors, Ltd [1967] Ch. 889 an application to court was made by a creditor and it was held that the creditor was to be paid his money for the discharge of his debt.  Because the creditor made the application he was entitled to payment.  Loard Denning held that where the application is made by the official receiver or liquidator, then the money will from part of the general assets liable for distribution to the creditors.

 

3.  HOLDING AND SUBSIDIARY COMPANIES

Officers have been held liable for the omission of the word Ltd.  The importance of the word limited is that it is a red flag warning that members enjoying limitation of liability.  The idea of this provision is to secure positive identification of the company in a transaction.  In F. Goldsmith (Secklesmere) Ltd v. Baxter engaged in the business of bus and coach contractor.  Locally it was venom as Goldsmith & coaches and this was the name printed at its premises.  It purchased some property which was registered in the name Goldsmith’s coaches (Sicklesmere) Ltd. It then entered into a contract for the sale of that property to the defendant.  When the defendant realised that there was no company under that name he refused to finalise the contract.  Meanwhile a supplementary conveyance was made in favour of the Plaintiff in its proper name.  The Plaintiff sued for specific performance.  Held, applying the rule that a contract is to be construed on reference to the surrounding circumstances as in the light of known facts it was clear that holdsmith coaches (sicklesmere) Ltd was an inaccurate description of the Plaintiff company.

 

A limited company like a natural person has characteristics other than its name. Such as a business place shareholders and Directors by which it could be identified.  It is not essential to the validity of a contract made on behalf of a limited company that the company should be described with precision.  The Plaintiff company was entitled to an order of specific performance. 

 

 

4.  HOLDING AND SUBSIDIARY COMPANIES

A subsidiary company is defined under section 154 of the companies Act to be a subsidiary of another if that other either:

 

(i)             is a member of it and controls the composition of its Board of Directors.

(ii)           Holds more than half in nominal value of its equity share capital or

(iii)         The first mentioned company is a subsidiary of any company which is that other’s subsidiary.

The Accounts of the holding company may not give the proper picture of the economic situation of the entire group.  Thus, section 150 provides:

              “150(1) where at the end of its financial year, a company has subsidiaries,  accounts or

                 statements (in this Act, referred to as group Accounts) dealing as hereinafter mentioned with the

                 state of affairs and profit or loss of the company   and the subsidiaries shall .. be laid before the

                 company in general meeting when  the company’s own balance sheet and the profit and loss

                 account are so laid”.

 

Under Section 151, the group Accounts should consist of:

 

(a)   a consolidated balance sheet dealing with the state of affairs of the company and all the subsidiaries to be dealt with in group accounts.

(b)   A consolidated profit and loss Account dealing with the profit or loss of the company and those subsidiaries.

 

SITUATION IN WHICH THE CORPORATE ENTITY IS IGNORED AT COMMONLAW

1. AGENCY  RELATIONSHIPS 

Logically, there is no reason why a company may not act as an agent of another.  Where there is an agency relationship, the courts will ignore the separate entity of each company and instead give effect to the economic reality behind the legal theory.  The best example of agency relationship is where one company is a subsidiary of another. In Smithstone & Knight Ltd. v. Birtningham corporation [1939] 4 ALIER 116, the Plaintiffs were paper manufacturers in Birningham.  In the same city there was a partnership called Birningharm Waste Co. which did business as merchants and dealers in waster paper.  The Plaintiffs bought out the partnership as a going concern and caused it to be registered as a company.  The share capital of the newly formed company was {502 divided into 502 shares of {1 each.  The Plaintiffs beneficially owned all the shares.  The newly formed company carried on business which previously belonged to the Plaintiffs.  It occupied business premises as tenants of the Plaintiff but never paid any rent.  It employed no separate staff, kept no books of accounts: such books being kept by the Plaintiffs.  All the profits made by the company was credited to the Plaintiffs.  Birningharm corporation purported to acquire compulsorily the previous which the subsidiary carried on business.  Thereupon, the Plaintiffs claimed compensation for removal and disturbances.  The issue was who would be entitled to the compensation.  Under the legislation giving the corporation the power to make a compulsory purchase order an occupier could not  claim for compensation unless it enjoyed a tenancy for a period longer than one year.  The subsidiary’s tenancy was a one year.  The Plaintiff, the parent company argued that it was really the person in occupation.  It was held that while the subsidiary was a separate legal entity it might be acting as the agent of its shareholders in this case the Plaintiff company.  Further more the occupation of the premises by the subsidiary was technical only and solely for the purposes of the parent company.  The Plaintiff could therefore maintain a claim for compensation.

 

 

 

SITUATIONS WHERE THE COMPANY FORMED FOR DRADULENT PURPOSES

Re F.G. Films Ltd [1953]I Alier 615; [1953] Iwlr 483 The company was incorporated in England.  Its capital was {100 in {1 shares; 90 of which were held by the President of an American company and 10 were held by another director a British Subject.  The company contended that it was the maker of a film which should therefore be registered as a British film.  The court refused to agree that the film was made by the British company whose participation in it was so small as to be practically negligible; the company was merely the nominee or agent of the United States company which had provided {80000 for the making of the film and which had brought the British company into existence for the sole purpose of enabling the film.  The modest capital of the British company and its shareholding were treated by the court as evidence that the British company had been formed with the view to evading the legislation in issue.

 

Another case which explains this point is RE BUGLE PRESS LTD [1961) Ch. 270. A, B and C were the only shareholders in a company.  A held 45% of the shares, B held 45% of the shares.  The remaining 10% were held by C.

 

A & B persuaded C to sell his shares to them but he refused to do so.  A and B thereupon formed another company, AB Ltd. which made an offer to the shareholders of ABC Ltd. The offer was accepted by A & B.  They then incurred section 200 of the companies Act, which provides that if one company makes an offer to take the shares of one company and if the offer is accepted and it gets 90% of the shares by buying out the shareholders, then it can buy up the remaining 10%.  Upon inworking section 210, they took all the shares.  It was held that this was a far fetched attempt to evade the fundamental rule of company law which for bade the majority shareholders from expropriating the minority.  The courts will not recognise the corporate entity in such a case.  Similarly, the separate legal entity principle was ignored in GILFORD MOTOR CO. LTD v. HERWE [1935] ch. 935 where the company was formed to avoid the burden of a covenant restricting the businesses which could be carried on by the company’s former Managing Director in in competition with it.

In ones v. Lipman. [1962] IWLR 832 the Defendant entered into a contract to sell property to the Plaintiffs.  He later refused to convey the property to the Plaintiffs but formed a company for the purpose of acquiring that property and he transferred the property to the company.  The Plaintiff sued for specific performance.  In ordering specific performance, Mr. Justice Russell described the defendant company as

            “a creative of the Defendant, a device and a sham, a mark which he holds before his face in an

               attempt to avoid recognition by the eye of equity.”

 

GROUP ENTERPRISE 

There is a general tendency by the courts to ignore the legal entity of various companies within a group and instead at the economic reality of the entire group.  In doing so, the courts are following the interpretation of the legislature under s. 150 – 154 where group Accounts are needed in respect of associated companies.  In Holdsmith & Co. v. Caddies [1955 IWLR 352, the Plaintiff was appointed Managing Director of the Defendant company for a period of 5 years.  At that time the defendant company controlled three subsidiary  in terms that he should perform his duties and exercise his powers in relation to the company and its existing subsidiaries which from time to time may be assigned to him by the Board of Directors.  One year later, the Board of Directors of the Defendant company resolved that the Plaintiff should confine his attention to only one of the company’s subsidiaries.  The Plaintiff regarded this as a breach and sued for damages.  It was held that in essence, the subsidiary company and the Plaintiff were one economic entity and there was no breach of contract.

 

RESIDENCE

The issue of the residence of a company is important for taxation purposes.  In De Beers Consolidated mines Ltd. v. Howe [1906] A.C. 455, the appellant company was registered in South Africa.  Its general meetings were always held there.  Some of the directors lived in Smith Africa.  Its meetings were hold in Kinmberley and in London.  However, a majority of the directors lived in London and most of the director’s meetings were held there.  Most of the Chief operations of the company were controlled from London.  It was held that the company was resident in the Unlimited Kingdom for purposes of taxation.  Lord Loveburn L.C. stated:

 

             “A company cannot eat or steep; but it can keep house and do business. We ought therefore to see

             where it kept house and did business.  A company’s  real business is carried on where the control

             management and control actually  resides.”

 

THE MEMORANDUM OF ASSOCIATION

Under Section 13 (2) (a) of the Companies Act requires an application for registration of company should be in the English language printed and should state:

1.      The name of the company with limited as the last word of the name in case of a

       company limited by shares or by guarantee.  The name clause is the first clause in the

        memorandum. Ltd is an accepted abbreviation.  In Stacey & Co. v. Wallis [1912]

       106 LT 554 Lord Justice Sconteon decided that Ltd. was an accepted abbreviation

        for limited.  However, where it is proved that an Association about to be formed as a

        limited company is to promote commerce, Arts, Peligium, Charity, science or any

        other useful object and intends to apply its profits in the promotion of those objects

        and prohibit the payment of those dividends to its members, then under section 21 of

         the companies Act, the minister may direct that the Association may be registered

         as a company with limited liability without adding the word limited in its name. 

         This is an exception.  Even so, the company still remains with limited liability but

        this is not reflected in its name.  The name is chosen by the promoters who write to

        the registrar to reserve such name for a period of 30 days pending registration or

        such longer period not exceeding 60 days as the registrar may decide.  During that

        period, no company may be registered with that name by anybody else.  Under S.

        20, the company may change its name by special resolution and with the approval of

        the registrar signified in writing.  The registrar should be notified within 14 days and

        he will issue a certificate of change of name and enter the new name in the register

        in place of the old.  The company will be notified by notice in the Kenya Gazette. 

       Within 6 months of the registration of a company the registrar may compel a

        company to change its name if it is too similar to that of an existing company.  In

         default of doing so, every member of the company is liable to a fine of Kshs. 100/=

          for every day dinning which the default continues.  However any change of the

          name of the company does not affect the existing liabilities obligations and existing

          rights of the company.

2.      The second clause shall state that the Registered office of the company shall be

       situate in the Republic of Kenya.  The Registrar shall be notified of the actual place

       after incorporation pursuant to the requirements of  S. 108 of the companies Act. 

       This will enable the office of the Registrar of the Registrar to know where notices

        and legal process may be notified to the company.  It will enable members and other

        authorised persons to know the location of the various registers required to be kept

        there which must be available for inspection at spevified times.  The statutory books

        which must be kept at the Registered office are:

a)     The register of charges

b)    Minute books of general meetings

c)     Register of directors and secretaries.

Other books which may be kept there are:

a)     The Register of members

b)    The register of directors interests in shares or debentures of the company and associated companies.

c)     Register of debenture holders.

d)    The books of Account

3.      The third and perhaps the most important clause is the objects clause.  It states the objects for which the company is incorporated.  A company is not allowed to do any activity beyond its objects or else any such activity will be deemed to be null and void.  It will be ultra vires the company.

The purpose of the doctrine of ultravires is two told.

(i)             It is intended to protect the investors by ensuring that they know the objects to which their money is to be applied.

(ii)           It is for the protection of creditors by ensuring that the company’s assets to which they look for the repayment of their debts are not wasted in unpaying ventures.  In ashbury Railway carriage Co. Ltd v. Riche (1875)LR 7 HL 653, the memorandum of Association gave the company power to:

(i)             Make and sell, or lend on hire railway carriage or wagons.

(ii)           To carry on the business of mechanical Engineers and general contractors.

(iii)         To purchase, lease, work and sell mines, minerals land and buildings.

The directors entered into a contract to purchase a concession for the construction of a railway in Belgium.  The issue was whether it this contract was valid and if not, whether it could be ratified as the shareholders had already  met to do so.  Held that since the memorandum did not contain any provision for the purchase of concession or the construction of a railway, the purchase was ultra vires so that even the subsequent asset of the whole body of the shareholders could not ratify it.  Although mechanical Engineers and general contractors, they  could not do so.  Loard Cains stated:

      “The words general contractors referred to the words which went

        immediately before and denoded such contracts which mechanical

        engineers make for the purpose of carrying on business.

         This contract was not in the memorandum of Association.  If so it

         was placed beyond the powers of the company to make the contract

         …..it is not a question whether the contract ever was ratified or was not. 

         If the contract was void at the beginning it was void because the company

          could not make the contract.”

Today this doctrine is not as rigid as it used to before.  It has been eroded.  The first in road was made in Attorney General v. Eastern Railway Co. (1880) 5 A.C. 473.  The company was incorporated to acquire the undertaking of two existing railway companies and construct and non certain other railways.  The company entered into a contract with another company to supply that other company with tonomotive power.  For five years and wagon carriage for 2 years.  Was this ultra vires?  It was held that the activities in question were within the express powers of the company selborne LJ.

            “The doctrine of ultra vires, as was explained in Ashbury’s case should be

             maintained but this doctrine ought to be reasonably and not unreasonably be

             understood and applied and whatever may be regarded as incidental to or

             consequential upon those things that the legislature authorised ought not unless

             expressly held to be ultra vires.” The company can therefore undertake acts

             reasonably incidental to express stipulations.

The original intention of parliament was that the company’s objects be stated in one short paragraph but with the practice of including in the objects clause not only the immediate business but also further businesses and all ancillary powers, the memoranda of practically every  company do not share the simplicity intended by parliament, with this practise of incorporating many objects clause does this objects the greater the security of the creditors because the chances as that every transactions is covered by the objects clause and is ultra vires and the creditor cannot lose.  The untra vires doctrine has been eroded by judicial acceptance of subsequently worded objects clause.

In Bell Houses Ltd. v. City Wall properties Ltd [1966] 2 QB 656; [1966] 2 ALLER 674 the main business of the Plaintiff company was the development of housing estates.  The chairman of the Board of Directors to whom the Board had delegated the management of the company acquired knowledge of an skill in securing finance for the company’s operations. A contract was made between the Plaintiff and defendant companies for the payment of a fee for arranging finance for one of the defendant company’s schemes of development.  When the Plaintiff company brought action for its fee, the defendant alleged that the making of the agreement was ultra vires the plaintiff company.  Mortgage brooking was not a stated object of the company’s memorandum.  Clause 3 (c) thereof however authorised the company to carry on any trade or business whatever which could in the opinion of the director’s be advantageously carried  on by the company in connection with or ancillary to any of the businesses specified in the object clause.  The court of Appeal held that the memorandum, once registered, is deemed to have complied with the provisions of the companies Act that the question was one of construction, and that the bonafide opinion of the Board expressed through the chairman to whom management had been delegated determined whether the activity was intravires.  The Plaintiff company thus succeeded in its action.

Salomon L.J. stated:

                  “  As a matter of pure construction the meaning of these words seems to me to be abvious:  An object of the Plaintiff’s company is to carry on any business which the directors genuinely believe can be carried on advantageously in connection with or ancillary to the general business of the company.  It may be that the directors their own view and infact the businesses in question cannot be carried on as the directors believe but it matters not how mistaken the directors may be provided  they from their view honestly.    The object is within the company’s objects and power.  This is the natural and ordinary language of subclause ‘C’ that  I would refuse to construe it differently unless compelled to do so by the clearest authority and there is no such authority indeed, the authorities put that the obvious meaning which I have referred is in law, the true meaning of the words.”

As long as the directors form their opinion honestly it is the director’s judgement that matters.  In Re Crown Bank (1890) 44 ch. 634 Mr. Justice North expressed the view that a clause which states that the business of the company is to carry on any business which the directors consider beneficial to the company is not a statement of the company’s objects as required by the Act.  As per section 17 of the companies Act the Registrar’s certificate of incorporation is conclusive evidence that the company has stated its objects clearly.  If the objects clause were to state for example, “that the company will do anything beneficial to the company”, then it need not be registered The registrar  need not register as this may lead to ultravires trains action. This is subjective clause and the company can do anything that is ultravires.The doctrine of ultravires is thus long over due for amendments

The counts have made sure that companies do not evade this need. The counts use several methods to control misuse of the rule. These rules are:

(a)   The Ejusdem geneis rule or the main objects rule of construction

(b)  The loss of substation rule.

 

EJUSDEM GENERIS OR MAIN OBJECTS  RULE

This is where the memorandum of association expresses the objects of the company in a series of paragraphs and one paragraphs or the first, second and third paragraphs appear embody the main objects of the company or the other paragraphs will be treated as merely ancillary to these main objects and as  limited or controlled thereby. However not withstanding these rules the business community has invented the independent objects. This is a situation where the promoters state at the bottom of the memorandum that each of the objects is independent and each of the subclauses should be created as equally important. The leading interpretation is cotman v  brongham (1918)A C 514, The company was formed to acquire certain members and tabacco estates.The objects clauses clause contained clause 8 giving the power to promote and form companies and deal in the stock and shares of such companies clause is giving a general power to deal in stocks and shares and clause 30 which provided:

(a)   That the objects specified in any clause were not to be restrictively construed by reference to the contents of any other subclause and

(b)  That no object should be construed  as subsidiary or ancillary to any other entry in the objects clause.  The company underwrote shares in another company dealing in oil into liquidation and was placed on the list of contributions- It applied to be struck off that list on the ground that the entire transaction was ultravires.  The house of Lords concluded however that the underwriting transactions were authorised by clauses 8 and 12 which by clause 30 had to be given primary effect as separate and independent objects.  As per Lord Parker, the result was the:

                  “..modern memorandum of Association with its multi farious list of objects

                  and powers specified as objects and its clauses designed to prevent any

                   specified object being read as ancillary to any other object.”

However, the independent objects clause cannot turn powers into objects.  Thus, a power of borrowing cannot be an object.  Inreintroductions ltd. v. National Provincial Bank Ltd [1969] 2 WLR 791 the company was created with objects enabling it to provide services and accommodation to overseas visitors.  Some years later, after a change in management it begun pig farming.  The objects did not include the power to carry on pig farming but they did enable the company to borrow money contained a subjective ancillary clause enabling the company to carry on any trade or business which in the opinion of the directors could be advantageously carried on in connection with or as ancillary to the business of the company and provided that all the items in the objects clause were to be construed as separate and independent objects.  The bank knowing that the company was engaging in pig farming, and knowing of the objects clause, advanced money to the company on the security of a debenture was resisted by the liquidator.  It was held that not withstanding the ancillary clause and the clause requiring each itemto be read as an independent object, the entry relating to borrowing was a power rather than an object that borrowing for any purpose not warranted by the objects clause was utravires and that the bank could not rely on the debenture.

 

THE SUBSTRATION RULE

Under this rule if the main object of the company fails then the rest of the objects also fail.  Such an object is the substratum meaning the main object of the company.  If the main object fails, then the company subject to winding up.  In Re German Date Coffee Co. Ltd (1882) 20 ch. D. 169 The major object of the company was to acquire a German patent to manufacture coffee from dates.  The German patent was not granted but the company obtained a Dutch patent for the same purpose.  Two shareholders petitioned the court for a winding up order on the grounds that the company’s object had failed.  It was held that the substration had failed as it was not possible to carry out the objects for which the company was formed and therefore it was just and equitable for the company to be wound up.  See S. 219 of the companies Act.  Kay J. stated that where the company was formed for a primary purpose:

       “…then, although the memorandum may contain other general words, which include

       the doing of the other objects, those general words must be read as being ancillary to

       that which the memorandum shows to be the main purpose and if the main purpose

       fails altogether then…the substration of the association fails.

However, the substration of the association may fail but the court will not make an order until members of the company petition for a winding up order if members denied not to petition them then the company continues in business.  The ultra vires doctrine is to protect members and creditors.  The creditors unless they are secured cannot sue on ultra vires transactions perse.  The doctrine, under current business practices has been prejudicial to creditors.  This is illustrated by Re jon Beanforte London Ltd. [1953] ch. 131 [1953] I ALLER 634 the company was empowered to carry on business as manufacturers of womens clothing. Later it begun to manufacturer veneer plywood panelling.  The company later went into liquidation.  A supplier of coal later claimed inter alier on the ground that the fuel supplied by him could have been used for an intravires purpose and that he ought therefore to recover.  Unfortunately, the company’s  letterhead disclosed that the company was carrying on the business of plywood manufacturers.  It was held that the supplier was fixed with knowledge of the memorandum which did not empower the company to carry the plywood business and had actual knowledge that the company was carrying on business that was ultra vires.  Although the supplier could have recovered had he had no notice of the purpose for which the coal was being used, he could not having such knowledge from the letter head prove for the debt which was incurred on an ultravires contract.

 

There are areas where the doctrine is vigorously enforced.  This is mainly in the field of gratuitous payments.  A company cannot effectively make gratuitous payments rules these are made for the benefit of the company.  In Huthon C. Wstcork the company (1883) 23 ch. D. 654 the company had disposed of the whole of its undertakings and it was no longer a going concern as  trading body.  It existed only for purposes of winding up.  In its general meeting it resolved to expend part of the purchase money on gratuitous payments to directors and other officials.  It was held that since the company was no longer a going concern the resolution was invalid.

L.J. Bowen stated:

        “The law does not say that there are to be no cakes and ale…except such as are

         required for the benefit of the company.  Charity has no business to sit with the

        Board of Directors”

Suppose there was an express provision in the company’s memorandum providing for this, would this be ultra vires?  This was decided in RE LEE BEHRENS [1832]2 CH. 36.  The objects clause contained an express power to provide for the welfare of the employees ex employees, widows, children and other dependents by granting money or pensions.  Three years before the company was wound up, the Board of Directors decided that the company should enter into a contract for the payment of pension to the widow of a former managing Director.  The liquidator rejected the pension on grounds that it was ultravires it was held that the transaction was not for the benefit of the company or reasonably incidental to the carrying on of the company’s business and was ultravires, null and void.  The question of whether this was going to be beneficial to the company in any way never presented itself in any way.  The payment was therefore outlawed.

 Eve J. stated:

             “But whether it be made under an express or implied power all such grants

              involve an expenditure of the company’s money and that money can only be

             spent for purposes reasonably incidental to the carrying on of the company’s

             business and the validity to such grants is to be tested by the answers to three

             pertinent questions:

 

(a)   is the transaction reasonably incidental to the carrying on of the company’s business?

(b)   Is it a bonafide transaction?

(c)   Is it done for the benefit and to promote the prosperity of the company”

Should the courts interfere and direct the activities of companies?  In charterbridge corporation v. Lloyds bank [1970] ch. 62, the case is one in which directors have abused the powers entrusted to then, but have acted within the ambits of powers possessed by the company.  In this case castleford, a company in group of companies executed first and second mortgages on its freehold property in order to guarantee the indebtedness of other companies in the group of which it was a member.  A second mortgage was executed in favour of the bank.  Castleford had express power to mortgage its properties to secure the obligations of any other person or company with whom it had dealings or in whose business it was concerned.  Ultimately castleford sold the mortgaged property to the Plaintiff company but failed to pay off the mortgage to the bank.  The bank threatened to realize its security and the Plaintiff company thereupon brought action for a declaration that the mortgage in favour of the bank was ultravires.  The ground upon which the Plaintiff company relied was that the directors of castleford in granting the mortgage acted ultravires in not considering whether the granting of the mortgage was for the benefit of the castleford company alone.  The action was dismissed.

Pennyanick J. held that:

1.     the directors in considering the transaction could have regard not only to the affairs of the company considered in isolation but also to its affairs as a member of the group.

2.     Where the directors act under an express power, the disposition cannot be ultravires but it may be voidable where in so acting the directors bade themselves upon considerations which they are not entitled to take into account when determining whether the transaction is for the benefit of the company.  In Parke v. Daily News Ltd (1962) ch. 927 A shareholder sued to restrain the company from distributing among its former employees a sum in excess of {1,000,000 which was to be received from the sale of Newspapers owned by it.  The payments were to be in addition to payments made to employees in lieu of notice in respect of pension money and in respect of holiday money.  The company ws under no obligation to make such payments.  It was held that proposed payment was ultrvires and that the proposed payment accordingly could not be ratified by a majority of the shareholders.

Mr. Justice Phoman said:

      “The defendants were prompted by motives which however londable and however enlightened from the point of view of indutrial relations were such as the law would not recognise as a sufficient justification.  Stipped of all its side issue, the essence of the matter is this: that the directors of the defendant company are proposing that a very large part of its funds should be given to its former employees rather than the company and that is an application of the company’s funds which the law will not allow”.

In another illustrative case, Re. Toth (1967) I WLR 432 Roith was the major shareholder of two companies which he operated.  As a result of poor heath, he consulted his solicitor about possible arrangements after his death.  The solicitor advised that Toith should enter into a service agreement with any of the two companies.  Consequently, at an extra ordinary general meeting of one of the companies, the memorandum was altered by the inclusion of a new clause permitting the company to “give pension gratuitous pay or any charitable and to any person who may have served the company or presecessor”.

A service agreement was entered between Roith and the company.  Roith promised that as general manager he would devote the whole of his time and ability to the company’s business.  In return the company promised to make pension payments to Mrs. Roith.  Roith died after about one year.  Four years later the company went into liquidation widows claim.  The company’s memorandum provided for the situation expressly and the issue was whether the agreement between Roith and the company was ultravires.  It was held that the pension had not bee made bonafide for the benefit of the company and to promote the prosperity of the company but rather the whole object of the amendment was to benefit Mrs. Roith.  If directors act malafide they are in breach of their duty to the company.  One of the cases in which the courts have interpreted the ultravires doctrine in favour of the transaction in issue is Evans v. Brunermound & Co. [1921] 1 ch. 359.  The principal object of the company was to carry on business as chemical manufacturers.  There were various other ancillary objects enabling the company to do all such business as may be incidental or conducive to the attainment of the other objects.  A meeting of the company authorised the directors to distribute {10,000 to universities or scientific institutions as they may select for the furtherance of scientific education and research.  A shareholder petitioned the court that this resolution was ultrvires.  It was held that the proposed expenditure was anticipated to create a trained reserviour of the company could draw its personnel in future and the expenditure was beneficial to the company and conducive to its progress as a chemical manufacturer.  It was held to be intravires.  What attitude should the courts in this country adopt in respect of the payment of funds gratuitously? The judicature Act, allows us to apply English law to suit our requirements.  There is however, no authority on this matter in this country.  The socio-economic conditions will require us to apply, English law to suit our conditions – see Nyali Ltd. v. Attorney General [1957] I ALLER 646; [1956]IQB1.

 

REMEDIES TO ULTRAVIRES

TRASANSCTION VICTIMS:

Whether a contract is ultravires or not will depend on the knowledge of the party dealing with the company.  In Re David Payne [1904] 2 ch. 608 X who was a director of a company, A and who was also interested in company B learnt in his private capacity that company B, which had general borrowing powers proposed to borrow a loan for purposes outside its business.  It induced company A, to make a loan to company B, which used the money as proposed.  The money was borrowed on the security of a debenture.  Was this debenture valid?  The money was borrowed for a purpose outside the objects of the company and yet the directors knew this.  This court held that where a company has a general power of borrowing for its purposes, where the company borrows within the limits of that power the person who lend the money is not bound to inquire for what purpose the borrowing company is to apply the money so borrowed.  The director’s private knowledge could not be imputed to the company. L.J. Romer hled.

         “Where you have a limited company with a memorandum of association

          authorising the company to embark on a series of transactions, and among

          those purposes you find a power to borrow generally for the purposes of the

          company, I take it to be clear beyond controversy that when money is being

          borrowed within the limits of the power of borrowing, the person who lent the

          money is not bound to inquire to what purpose the borrowing company is about

           to apply the money so borrowed"

In respect of property transferred under an ultravires transaction, since the effect of ultravires is to render the whole transaction null and void it follows that the purchaser shall not acquire any rights in such property.  This also applies to any money lend to the company, on an ultravires borrowing.  So long as the money can be traced, in law or in equity.  If the money has been paid into the account of a separate transaction it may be traced into such an account.  If the money is mixed up with other funds and leases to be identifiable in equity, the lender is still entitled to a charge on the mixed fund proportionate to his own share if there are other claimants.  The directors are treated as trustee and the money is treated as trust money.

 

A third party may also bring a personal action against the directors with whom he had dealt. The third parties have an equitable claim against them for restitution.

 

WHAT REFORMS TO ULTRA VIRES

In 1945 in England, the cohen committee proposed that as regards third parties, a company should have all the powers of a natural person and the objects clause in the memorandum should operate only as a contract between the company and the members regarding the scope of the authority vested in the directors.

      This recommendation overlooked the fact that third parties dealing with the company will still be presumed to have constructive knowledge of the company’s public documents and that they will be presumed to know when the directors exceed their authority.

 

        In 1962.  The Jenkins committee recommended that even the constructive notice rule should also be abolished so that even the abolish so that even actual knowledge of the contents of the memorandum and Articles should not deprive a third party of the right to renounce a contract if he reasonable failed to appreciate that this precluded the company or its officers from  entering the contract.  The constructive notice rule has now been abolished in England, but it still remains the law in this country.  In order to avoid the ultra vires rule, the objects clause may be amended by the company.  Section 8 of the companies Act, empowers a company by special resolution to alter its objects.  So long as 85% of the shareholders of the issued sharecapital support a proposed alteration, companies can easily alter their objects clauses and thereby avoid the trap of ultravires.  Such alterations only operate in future and not retrospectively.

      The next clause in the memorandum states the nominal capital to which the company wishes to be registered and the division thereof into shares of fixed amounts.

      The last clause states that the liability of the members shall be limited.

 

ARTICLES OF ASSOCIATION

The Articles of Association is one of the important documents relating to the company’s constitution section 9 of the companies Act, states that a company limited by guarantee must register with the registrar Articles for the company.  Under Section 10 it is provided that in the case of an unlimited company the Articles should state the number of members with which the company proposes to be registered.

      A company limited by shares or may not register Articles of Association.  The Articles so registered may adopt all or any of the regulations in schedule 1 Table A of the companies Act.  Table A is a model form of Articles of Association for a company limited by shares.  It is in two parts; part 1 is designed for public companies and part 2 for private companies.  In registering its Articles, a company has those options:

a)     it may adopt table A in full.

b)    It may adopt table A subject to amendments.

c)     It may register its our set of Article and exclude table A altogether.  In the case of a company limited by shares if Article are not registered or even if Articles are registered in so far as they do not modify or exclude table A, then the regulations in Table A automatically become the company’s Articles of Association in the same manner and to the same extent as if they were contained in the duly registered Articles.

Section 12 requires that the Articles must be:

i)               in English language.

ii)             Printed

iii)           Divided into paragraph numbered consecutively

iv)            Dated

v)             Signed by each subscriber to the memorandum of Association in the presence of at lease one witness who should attest the signatures and add his occupation and address whereas the memorandum confers powers upon the company the Articles determines how such powers shall be exercised.  In other words, the Articles regulate how the internal affairs shall be managed.  Among other things, the Articles deals with:

-       the issue of shares.

-       Alteration of share capital

-       Transfer of shares

-       General meetings

-       Voting rights

-       Appointment of directors

-       Payment of dividends

-       Accounts

-       Winding up and other miscellaneous matters.

The Articles also provide the dividing live between the powers of shareholders and those of directors.

THE JURIDICAL EFFECT OF THE ARTICLES

Under section 22 of the companies Act, subject to the provisions of the Act when the memorandum and Articles are registered they bind the company and the members as if they had been signed and sealed by each member and contain covenants on the part of each member to observe all the provisions.  This section has been interpreted to mean that once the Article have been registered they constitute a contract between the company and each individual member.  In Hrkman v. Kent or Romney  Marsh sheep Breeders Association Ltd [1915] I ch. 881, the Articles of the company provided for reference of disputes between a member and the company to arbitration.  A dispute arose between Hickman who was a shareholder and the company.  Hickman filed a court action against the company.  The company contended that the court action was premature since Hickman was bound under the Articles to refer the matter to arbitration.  The company applied for the action to be stayed.  It was held that the company was entitled to have the action stayed as the Articles amounted to a contract between the company and Hickman to refer disputes between them to arbitration.  The court decided, as per Justice Astbury that:

i)               No Article can constitute a contract between the company and a third party.

ii)             No right merely purporting to be given by an Article to a person whether member or not in capacity other than that of a member as for instance, solicitor promoter or director can be enforced against the company.

iii)           Article regulating the rights and obligations of the members, generally as such do create rights and obligations between them and the company.  It is a basic rule that the Articles do not confer rights upon an outsider or upon a member who claims rights in a capacity other than a member e.g as a director.

Eley v. Positive government security life Assurance Co. Ltd [1876] I Ex. D. 88

The Articles provided that the Plaintiff should be the company’s solicitor for life removable only for misconduct.  He became the solicitor and a member.  Later the company terminated his employment.  The Plaintiff sued the company for breach of the contract contained in the Articles could function as an agreement between the members to appoint the Plaintiff, or a director tot he directors to appoint him but the Articles did not, of themselves constitute a contract between the plaintiff in his capacity as solicitor and the company.

There is a dicta in the cases that the contract in the Articles of Association is not amerely a contract between the company and the members, but also among the members amongst themselves.

In word v. odessa waterworks Co. (1889) 42 ch. D. 636, the plaintiff, who was a member of the company petitioned the court to stay the implementation of a resolution not too pay a dividend but to issue debentures instead.  The shareholder challenged this resolution. Conceding that the shareholder was entitled to the remedy, sterling J. said,

          “The Articles of Association constitute a contract not merely between the shareholder and the company, but also between the individual shareholder and every other”. This is the legal effect of section 22.  

 

In Ray field v. Hands, [1960] ch. 1 a member of a company in an action against the directors sought to compal the directors to purchase his shares in terms of the Article.  The company was not joined as a party.  Article 11 of the company’s Article provided”

         “Every member who intends to transfer shares shall inform the directors who will

           take the set shares equally between them at a fair value.

The Plaintiff called upon the directors to take his shares at a fair value but they declined to do so.  The issue was whether the plaintiff could enforce this Article against the directors.  It was held that the Articles bound the defendant directors to bury the plaintiff’s shares and related to the relationship between the Plaintiff as a member and the defendant, not as directors, but as members of the company, the Article amounted to a contract, between the directors in their capacity as members and in that capacity they were bound to take up the shares.

 

ALTERATION OF THE ARTICLES

Section 13 of the companies Act, empowers a company by special resolution to alter or add to its articles.  Any such alteration or addition is as valid as if it was originally contained in the Articles.   Special resolution is defined in section 141 as a resolution supported by ¾ of the members voting, either in person or by proxy, at a general meeting of which twenty one days notice of the intention to propose the resolution as a special resolution has been given.  In Andrews v. has meter Co. Ltd [1897]I ch. 361, the issue was whether a company, which under its memorandum and Articles had no power to issue preference shares could alter its articles so as to authorise the issue of such shares by way of increased capital.  Held, that on so far as the company’s constitution depends on the Articles of Association, it is clearly alterable by a special resolution under powers conferred by the Act.  The power to alter the Articles is a statutory power and the company cannot deprive itself of the right to exercise that power.

 

Although companies have power to alter their Articles, there are limitations to this power.  A resolution to alter the Articles of a company must not:

1.     Be inconsistent with any statute.

2.     Exceed conditions contained in the memorandum

3.     Increase liability of a member or require him to take more shares, unless he agrees to do so in writing – see S. 24.

4.     Remove the restrictions contained in section 30, if the company is to remain a private company.

5.     The variation of the Articles must not conflict with section 74 of the companies Act, as to the rights of shareholders affected by a variation of class rights to apply to the court for cancellation of the variation.

6.     The resolution must not be incusion tent with an order of the court made under section 211 dealing with cases of oppression by the majority of the minority in a company.  Anybody claiming that there is oppression can petition the court to bring to an end.  Once the court makes such an order, the company cannot alter its articles to contravene that order.

7.     The alteration of the Articles must be in good faith and for the benefit of the company as a whole.  In Allen v. the hold Reefs of West Africa [1900] ch 656, The company had by its articles given itself a lieu on all the shares which were not fully paid.  The company sought to extend the lieu to all the shares by an alteration of the articles.  It was held that the company was entitled to extend the lieu by an alteration of the articles, in exercise of statutory power Lord hindley M.R. stated:

            “Wide however as the language of section 13(a), the powers conferred by it must

              like all other powers be exercised subject to those general principles of law and

              equity which are applicable to all powers conferred on majorities and enabling

              them to build minorities.  It must be exercised  not only in the manner required

              by law but also bonafide as required for the benefit of the company as a whole”

Similarly in shuttleworth v. Cox Brothers [1927] 211 B9 The Articles of Association of the company stated that the Plaintiff and four others should be the first directors of the company and that they should be entitled to hold office as long as they hived unless the director was disqualified on any one of some six stated grounds:

 

1.     bankruptcy

2.     insanity

3.     Connection on a criminal offence

4.     Failure to acquire the necessary share quantification

5.     Absence from directors meetings for more than six months.

6.     Resignation.

The plaintiff failed to account to the company for certain monies he had received on its behalf.  At a general meeting of the company a special resolution was passed that the Articles should be altered to add a 7^th ground for the disqualification of a director.  The was a request in writing by all the directors that a director should vacate office on such request.  Such request was subsequently made to the Plaintiff.  He brought action upon the company for breach of an alleged contract contained in the original Articles to the effect that the Plaintiff was to be a permanent director and that he was still a director of the company.  There was no malafides on the part of the directors.  It was held that the contract, if any between the Plaintiff and the company contained in the Articles in their original form was subject to the statutory power of alteration and if the alteration was made bonafide for the benefit of the company, then it was valid and there was no breach of contract Bank L.J. stated:

            “In this case the contract denies its force and effects from the Articles itself

            which may be altered.  It is not an absolute but a conditional contract”

The court had to decide the meaning of what is beneficial to the company, L.J. Scotton observed:

         “It is not the business of courts to manage the affairs of the company.  That is for

           the shareholders and their directors.  The absence of any reasonable grounds for

           deciding that a certain course of actin is conducive to the benefit of the company

            may be a ground for finding lack of good faith or for finding that the shareholders,

            with the best motives have not considered the matters which they ought to have

            considered …But I should be sorry to see the courts go beyond these and take

             upon itself the management of concerns which others may understand better than

              the court does”.

It is not for the court to decide what is of benefit to the ompany.  In side bottom v. Pershow Leese & Co. [1920] I ch. 154 in a director controlled private company a minority shareholder was interested in some competing business.  The company passed a special resolution empowering the directors to require any shareholders who competed with the company to transfer the shares at a fair value to a nominance of the directors.  The plaintiff was served with such a request to transfer his shares.  He filed a court action challenging the validity of the new Article.  It was held that the company had a power to introduce into its article anything that could have been validity included in the original article provided that the alteration was made in goodfaith and for the benefit of the company as a whole.  Since it was beneficial for the company to get ride of competitors among its members, the alteration was valid.

 

In Brown v. British Abrassive Wheel Co. [1919]I ch. 290, A public company was in urgent need of further capital which the majority holding 98% of the shares were willing to supply provided that they could buy out the minority.  The tried to persuade the minority to sell their shares to them but the minority refused.  They proposed to pass a special resolution adding to the Articles a clause whereby any shareholder was bound to transfer his shares upon request by the holders of 90% of the issued share capital.  It was held that this was an attempt to add the new clause in order to acquire compulsively the shares of the minority when there was no such power.  Such an attempt was not for the benefit of the company as a whole but only for the benefit of the majority.  An injunction was issued to stop the company doing so.

 

EFFECT OF ALTERATION ON CONTRACT

Sometimes, the Articles may be altered in such a way that implementation in their altered form might lead to a breach of contract such is particularly the case as regards contracts of between companies and their Directors. Can a company alter its Articles in such a way as to dismiss a director from office? A director may hold office in one of three ways:  He may hold office either.

1.     under the Articles without any contract of service.

2.     Under a service contract which is entirely independent of the Articles.

3.     Under a service contract which expressly or by implication embodies the relevant provision of the Articles.  Where a director holds office under the Articles without a service contract then his service is conditional that the Articles may be altered at anytime in exercise of the statutory power.  If however, the directors appointment is entirely independent of the Articles then any alteration which affects his contract with the company will constitute a breach of contract in respect of which the company will be liable in damages.  In Southern Foundries v. Shirlaw [1940]A.C. 701 H.L. The Plaintiff was by a written contract appointed a managing Director of the company for a period of 10 years.  The agreement was not expressed to be subject to the Articles any way.  The original Articles set out grounds on which the office of the director should be vacated subject to this terms of any subsisting agreement.  The Articles also provided that should the MD cease to be a director he should also be a director he should also cease upso facto to hold office as MD.  As a result of some company reorganisation, new Articles were subsequently readopted removal of any director by notice.  Persuant to this Article the company purported to remove the Plaintiff from his office of director with the consequence that his appointment as Managing Director was also terminated.  There was a contract independent of the Articles.  The Plaintiff brought action for breach of contract.  Held, Plaintiff entitled to damages for breach of contract.  Lord Atkin, stated,  “If a party enters into an arrangement which can only

                                                           take effect by the continuance of an existing state of

                                                           circumstances, the law is that there is an implied

                                                           engagement on his part that he shall do nothing of

                                                            his own motion to put an end to that state of

                                                            circumstances under which the arrangement can be

                                                            operative.      

This decision was followed in shindler v. Northern Raincoat Co. Ltd [1960] IWLR 1038.  The Plaintiff was engaged by the defendant company as managing Director under a 10 year written service agreement.  Four months later, the share capital of the company was sold by the existing holding  company to another company which did not wish to retain the Plaintiff’s services.  The company accordingly passed a resolution removing him as director where he ceased being managing Director.  He bought an action for wrongful dismissed.  Held, that where a director has an express contract for a specified period, there is an implied undertaking that the company will not revoke his appointment as a director during that period.  If the company therefore alters its article in a manner that breaches an independent contract, it will be liable for damages in that breach.  Where a Director is appointed in general terms and without limitation of time the company may dismiss him at any time and he is not entitled to notice.  In Read v. Astoria Garage Ltd [1952]ch. 637 one of the Articles of the company stated that the appointment of the Managing Director shall be subject to determination if he cease for any cause to be a director of the company or if the General  meeting resolves that his term of office as Managing Director be determined.  The Plaintiff was appointed and served as managing Director for 17 years.  Thereafter the directors decided to relieve him of his position as Managing Director.  This decision was subsequently ratified by the General meeting.  The  Plaintiff claimed damages for wrongful dismissed.  Held, that it was not a breach of contract for the company to dismiss the Plaintiff without notice because on the time constructions of that Article , the company had expressly reserved to itself the power to do so and therefore the Plaintiff’s appointment was immediately and automatically determined on the passing of the resolution at the General meeting.  When a company proposes to alter its Articles in a manner which may give rise to breach of contract can it be restrained for taking a course of action? There are two conflicting cases.  Point v. Symon [1903]2 ch. 506.  It was held that be granted because the company had a statutory right to alter its articles and could not contract out of that right.  In British out of that right.  In British Murac Syndicate v. Alperton Pubber Co. Ltd [1915] 2 ch 186 the court granted an injunction restraining of contract.  In Southern Foundries v. Shirlaw, Lord Porter stated;

             ‘ A company cannot be precluded from altering its articles thereby giving itself

                power to act upon the provisions of the altered articles but, so to act, may

                nevertheless be a breach of contract if it is contrary to a stipulation to contract

                validly made before the alteration nor an injunction be made to grant an

                adoption of the new Articles of Association but the company to act upon them

                 will nevertheless render it liable in damages if such action is contrary to the

                  provisions engagement of the company”    

 

VARIATION OF CLASS RIGHTS

Class rights in company law recognises the existence of clauses of shareholders in the company.  Bowen L.J. in sovereign Life Assurance Co. v. Dodd [1892] 2 QB 513 defined the word class.  He stated:

                 “The word class is vaque.  It must be confirmed to those persons whose rights

                   are not so dissimilar as to make it impossible for them to consult together

                   with a view to their common interest.  “The term relate to those people whose

rights are similar to the extent that they can consolidate them together.  In the case itself, it was held that policy holders whose rights had matured, were a different class from those whose policies had not matured.

Article 4 of Table A provides that where the share capital is divided into different classes of shares, may be varied with the consent in writing of the holders of ¾ of the issued shares of that class or with, the sanction of a special resolution passed at a separate general meeting of the holders of the shares of class.

 

Under s. 74 within 30 days of the day the consent was given or the resolution was passed an application may be made in court for the variation to be cancelled.  Such an application can only be made by way of petition by the holders of at least 15% of the issued shares of that class which did not consent to or vote in favour of the variation.  Where such an application is made the variation will not have any effect unless and until it is confirmed by the court.  Class   rights may be set out in the Articles of Association or in the Memorandum of Association s.5(2) of the companies Act, states that if class rights are contained in the memorandum or if the memorandum prohibits alteration , then these rights cannot be altered.  The company can entrench these rights such that there is no alteration.

 

COMPANIES ORGANS AND OFFICERS

Since a company is an Artificial person, it can only act through the agency of natural or human persons.  The decisions of the majority of the members of the company in the General meeting is deemed to be the decision of the company.  In practice, it is impossible for the company’s day to day position to attend to the company’s meetings and this rule had to be changed.  The constitution of the  company provides for a Board of Directors which delegates powers of management to a managing Director.  For this reason companies have two main organs:  General meeting and the Board of Directors.  The authority to exercise the company’s powers is delegated to the Directors acting as a Board.

 

BOARD OF DIRECTORS:  s. 177-205 Under s. 177 every public company must have at lease two directors and every private company must have at lease two directors.

In practice, the first directors of a company are appointed by being: 

i)               named in the Articles of Association.

ii)             Manner laid down in the Articles

Article 75 of table A states that the names of the first Directors shall be determined in writing by the subscribers of the memorandum shall be the first directors.

   In the case of a public company, with a share capital section 182 requires that a person may not be appointed a director by the Articles unless on registration of the Article, he has:

1.     Signed and delivered to the registrar a consent in willing to act as a director.

2.     (a)  Signed the memorandum for a number of shares not less than his qualification if any.

(c)   Taken from the company or paid or agreed to pay for his qualification shares.

(d)  Signed and delivered to the registrar an undertaking to take from the company and pay for his qualification shares, if any.

(e)   Made and delivered to the registrar a statutory declaration that the number of shares not less than the qualification, if any are registered in his name.

After the initial appointment, it is usual for Articles to provide for an annual retirement of directors and filling of vacancies at the annual General Meeting.

 

Under s. 185 a director can be removed by an ordinary resolution in addition to other means of removal embodied in the Articles.  Subject to any modification or exclusion of Table A Article 88 requires the office of director to be vacated if the director:

(a)   Ceases to be a director by virtue of section 183 relating to share qualification or S. 186, removal on attainment of 70 years.

(b)   If he becomes bankrupt or makes any arrangement or composition of his creditors.  An undercharged bankrupt is not allowed to act as a director without leave of the court.  A bankrupt is looked upon as a person not able to manage himself.

(c)   Becomes prohibited from being a director by an order under s. 189 which empowers the court to restrain the person from managing the company.

(d)   Is of unsound mind.

(e)   Resigns his office by notice in writing.

(f)    Absents himself without permission from directors meeting for more than six months.  Where the Articles require a share qualification, then s. 183, requires, the shares to be taken up within two months  or else the office will be vacated if they are not taken or subsequently relinguished.  A director need not be a natural person.  A company can be appointed a director of another company.

 

DIVISION OF POWERS BETWEEN THE GENERAL MEETING AND THE BOARD OF DIRECTORS:

Until the end of the 19^th century, it was generally assumed that the general meeting was the company and the directors were merely the agents of the company.  Although this view held sway for a longtime, it was modified on the advent of the 20^th century.  The earliest authority or the relationship between the General Meeting and the Board of Directors is Automatic Self Cleansing Filter Syndicate v. Cunning Game [1906] 2 ch. 34.  The court of Appeal made it clear that the division of powers between the Board and the General Meeting depends in the case of registered companies entirely on the Articles of Association and where the powers have been vested on the Board by  the Articles then the General Meeting cannot interfere with the exercise of those powers.  The company’s relevant Articles provided  that subject to such regulations as might be made by extra ordinary resolution the management of the company shall be vested in the directors who might exercise all the powers of the company which were not by statute expressly required to be exercised by the company in the General meeting.  Another Article expressly empowered the directors to deal with any property of the company on such terms and conditions as they might deem fit.  At the general meeting of the company, a resolution was passed by a simple majority of the shareholders directing the Board shareholders directly the Board to sell the company’s assets on specified terms.  The directors were of the opinion that a sale on those terms was not of benefit to the company, and therefore declined to carry out the sale.  Were the directors bound to carry out the directives of the General Meeting? It was held that the Articles constituted a contract by which the members had agreed that the Directors and the directors alone shall manage the affairs of the company.  Unless and until the powers vested in the directors were reduced by an extra ordinary alteration of the Articles, they could ignore resolutions of the General Meeting on matters of management.  They were entitled to refuse to carry out the Sale Agreement adopted by an ordinary resolution of the General Meeting.

 

The division of the powers between the General meeting and the Board of Directors in respect of the company’s management is found in Article 80 of Table A which states:

 

          “The Business of the company shall be managed by the directors who many exercise all such powers of the company as are not by the Act or by these regulations required to be exercised by the company in the general meeting.”  In QUIN & AXTENS V. SALMON [1909] A.C. 442.  It was established that where the formula contained in Article 80 is employed as invariably is in practice, the general meeting cannot interfere with a decision of the directors unless they are acting contrary to the provisions of the Act or the Articles.  The company’s two managing Directors who were Axtens and Salmon held between then the bulk of the company’s ordinary shares.  One of the Articles provided that the company’s business should be managed by the directors who might exercise all the powers of the company subject to such regulations be inconsistent with the provisions of the Articles as may be prescribed by the company in the General meeting.  Another Article stated that no resolution of a meeting of the directors having for its object, the acquisition or letting of certain premises should be valid if either Salmon or Axtens dissented.  The directors resolved to acquire and to let certain properties but Salmon dissented.  An extra ordinary General meeting was held at which the shareholders by a majority passed similar resolutions.  Upholding the court of Appeal, the A.L. held that the shareholders resolutions were inconsistent with the Articles and granted an injunction restraining the company from acting.

 

In Shaw Sons Ltd v. Shaw [1935] 2 ub 113  The Directors were empowered to manage the company’s affairs.  They decided to commence an action for and on behalf of the company and in the company’s name in order to recover moneys owed to the company by the two defendants.  The General meeting passed a resolution disapproving of the commencement of the action resolving that the proceedings was part of the management of the company's affairs, since the power to manage was vested in the directors, the resolution of the general meeting was a mullity.  Lord Justice Greer summarized:

          “A company is an entity distinct alike from its shareholders and its directors.

            Some of its powers may according to its articles be exercised by directors, certain

            other powers may be reserved for the shareholders in the General meeting.  If

             powers of management are vested in the directors they and alone can exercise

             those powers.  The only way in which the General meeting of shareholders can

             control the exercise of powers vested by the Articles in the directors is by altering

              the Articles or if the opportunity arises under the Articles by refusing to reelect

              the directors of whose actions they disapprove.

The inability of the General Meeting to useup the powers of the directors was recognised in Scott v. Scott [1943] I ALLIER 582 The company’s Articles consisted of the reegulation contained in Table A.  The relevant Article was in terms of Article 115 of our Table A.  It provided that the directors may from time to time pay to the members such interim dividend as appears to the directors to be justified by the profits of the company.”  The shareholders resolved in the General meeting that the directors should declare the dividends.  It was held that it was quite clear that the payment of interim dividend was a matter which by the Articles was placed in the exclusive power of the directors.  By passing the resolution the general meeting encroached on the sphere of activity which in most express terms was confirmed in the directors.  The conclusion is that with the Articles of Association in the formal of table A, it becomes difficult for the members in the General meeting to give directions on how the affairs of the company are to be managed.

The General meeting retains the ultimate control but only through its process to amend the articles thereby taking away the Director’s power, and also through its process to remove the directors from office and appointing new ones. Unless any of these is taken, the directors can, if they so wish, disregard the wishes and instructions of the members in all matters not specifically reserved by the Act, or Articles to the General meeting. The old idea that the General meeting is the Company and the Directors merely agents or servants of the Company, subservient to the General meeting is no longer the law.

                      EXCEPTIONS

1.LITIGATION: Although the General meeting cannot restrain the director’s from conducting litigation in the name of the company, the General meeting can institute proceedings on behalf of the Company if the directors neglect or refuse to. This situation changes if the directors know that they are the ones on the wrong. Marshalls Value Gear Co vs. Manning Wardle & Co. [1909] 1 Ch 267 . Marshalls was the majority shareholder Managing Director of the plaintiff company which was formed to exploit an invention which he had patented. On the board he was outvoted by the other three directors who were interested in the defendant company. The latter was infringing the plaintiff’s patent and Marshall’s inspite of the opposition of his co-directors instituted the action to restrain the infringement. HELD: that as the majority shareholders, he had a right to bring the action.

Grant v. United Kingdom suitchback Railways (1988) 40 ch. D. 135 C.A is authority that the company, in its general meeting many, by an ordinary resolution ratify an act of the directors.  Baniford v. Baniford [1970] ch. 212 the General meeting may also ratify an act of the directors which is voidable as an abuse of its powers.

2. Where there is deadlock in the management of the board so that any material respect then the power to do so reverts back to the general meeting. In Bannon v Potter(1914)inch 895, the company articles provided that the number of the directions should not be less than two or more than ten and that quantum for the directors for transacting business should be 2 two years after the company’s incorporation the company had two directors.  Mr. Porter as chairman and M.D and colonel Bawon.  The two directors were not on talking terms and colonel Bawon refused to attend any board meeting  with Mr. Potter.  The company’s affairs came to a standstill the only solution would have been to appoint additional directors but the power to do so was vested by the Articles in the Board of Directors.  There was therefore no Board meeting.  It was held that where the Articles give the Board of Directors the Power of appointing additional directors owing to differences between the directors no Board meeting can be held, the  company had the power of appointing additional Directors at the General meeting.

 

  DIVISION OF POWERS BETWEEN THE BOARD OF DIRECTORS AND THE MANAGING DIRECTOR

Article 107 of table A allow directors to appoint one or more of their number to the office of Managing Director for such period and on such terms as they may think for.  The main duty of the M.D is to exercise some or all of the directors powers of management.  This is sanctioned by Article 109 which authorises the Board to delegate to a managing Director all their powers.  The wording of Article 109 suggests that the Board of Directors may effectively divest itself of its powers in favour of the managing Director.

 

THE COMPANY SECRETARY

s. 178 of the companies Act requires every company to have a company secretary.  The Secretary must not be the sole director.  If anything is required to be done by a director and the secretary, it cannot be done by the same person acting as both.  Under S. 177 a private company should have at least one director while it is at least 2 in a public company.  The secretary is appointed by the Board and not by the General meeting.  Generally speaking, the secretary’s duties are managerial for Administrative.  The traditional view is that he does not normally have authority to enter contracts (Managerial) on behalf of the company.  In Bamett Hoares & Co. v. London Granrays Co. (1887) 18 QBD 815 Lord Escher said” A Secretary is a mere servant.  His position is that he is to do what he is told and no person can assume that he had any authority to represent any thing at all.”

 

In the past the secretary has been treated as a subordinate servant without authority to commit the company by his actions except the engagement of clerical staff.  In Panorama investments v. Fidelis Furnishing Fabrics Ltd (1971) 2QB 711 C.A.  It was held that where the company secretary ordered self driven cars for his own purposes but Atensibly for the business purposes of the Defendant company who were his employer the defendant was liable to the care hire company.  Loard Deming said;

               “But times have changed.  A company secretary is a much more important person than he was in 1887- (Bamett’s case).  He is an officer of the company with extensive duties and responsibilities.  This appears not only in the modern companies Acts but also by the role which he plays in the day to day business of the company.  He is no conger a mere clerk; he regularly makes representations on behalf of the company and enters into contracts on its behalf which come within the day to day running of the company so much that he may be held out as having authority to do such things o behalf of the company.  He is certainly entitled to sign contracts connected with the Administrative side of the company's affairs such as employing staff and ordering cars etc.  All such matters now come within the ostensible authority of the company secretary”.

 

Sahmon C.J. described the company secretary as the Chief Administrative Officer of the company.  It is the Secretary’s responsibility to ensure that all the company’s documentation is in order that the relevant returns have been made and that the company’s registers have been properly maintained.  The company’s Articles also provides that the company’s seal should be affixed in his presence.

 

THE ORGANIC THEORY

In respect of the law of Agency as applied to company law the company is bound by the activities of its officers.  However, there are situations in which the law refuses to recognise the concept of vicarious liability and instead insists on the personal fault as a prelude to liability.  For certain purposes the court have elected to treat the actions of certain officers in the company as those of the company itself.  This position sprang from the words of viscount Haldane in Leonards carrying Co. Ltd v. Asiatie Petroleum Co. [1915] A.C 705 H.L. under the relevant section of the merchant shipping Act, the owners of any sea going versel loss which occurred without their personal fault or privity.  Leonard was the managing director of the company.  He knew that the ships boilers were faulty and he led the ship put to sea.  As a result of the fault in the boilers, the ship was destroyed and the Cargo of the Asiatie Petroleum company destroyed.  Could the company escape liability? It was held that since Leonard was the managing Director, his knowledge was the company’s and the company was delivered to have known that the ship was unseaworthy  and the company could not escape  liability .  The knowledge of the managing Director must be insisted upon the company which was therefore liable.  Viscount Haldane said,

My Lords, a corporation is an abstraction.  It has no mind of its own any more than it has a body of its own.  Its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent but who is really the directing mind and will of the corporation …if Mr. Leonard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all have been an action which was of the company itself within the meaning of the section.”

In Bolton Engineering Co. v. Grayham & Sons [1957] 1QB 159 certain business premises were owned by a company.  The tenants were entitled to a renewal of their lease unless the landlord intended to occupy the premises.  Would this intention be regarded as that of the company where  no general meeting of the company was held but the directors were of the opinion that the company should occupy the premises.  It was held that it was the company that had manifested an intention to occupy the premises and the Plaintiffs were not entitled to a renewal of the lease.  Deming L.J. stated,

            “A company many in many ways be likened to a human body.  It has a brain and

            a remove centre which controls what it does.  It also has hands which hold the

             tools and act in accordance with directions from the centre.  Some of the people

             in the company are mere servants or agents who are nothing more than hands to

             do the work and cannot be said to represent the mind or will.  Others are directors

              and managers who represent the directing mind and controls what is does.  The

               state of mind of these managers, is state of mind of the company, and is treated

                by the law as such.  The intention of the company can be derived from the state

                of mind of its officers  and agents.”

 

THE RULE IN TURQUANDS CASE

The rule deals with the liability of the company for the acts of its officers.  The question as to whether or not the company is bond  by such actions depends on normal agency situations of an officer or responsible organ  acts   within the scope of his authority then the company will be bound.  However, the problem  which might arise is that even if the act in question is within the scope of the officer’s or organs authority, there might be some irregularity in the operation of the organ concerned. 

 

In some occasions, certain actions may be carried out by the company’s organs irregularly.  For example, the Board meeting may not have been convened with proper notice or the particular act may not have been passed  by a proper resolution.  In these circumstances on the company disclaim liability by alleging that the meeting was irregular? Is the company bound by an at in which its officers have acted irregularly? Must a third party dealing with the company satisfy himself that there was no irregularity, in the board of Directors meeting? Must the third party satisfy himself that the regulations up the company have been  complied with without access to the documents? These questions were negatively assured in Royal British Bank v. Traguand [1856] 6 E & B 327.  The directors of the company were authorised by the company’s Articles to borrow on bond time be authorised by a resolution, the directors borrowed some money from the Plaintiff bank.  When the company went into liquidation the bank sought to recover.  The liquidator argued that since there was no resolution authority the borrowing it was irregular and the company was not bound to repay  the money.  It was held that even through there was no resolution to back up the borrowing the company was nevertheless bound to refund the money to the bank .  Jervis C.J. said,

      “ A party dealing with a company is bound to read the deed of settlement (Articles

       and memorandum) but he is not bound to do more.  In this case, a third party reading

        the deed of settlement would find not a prohibition from borrowing, but permission

        to do so on certain conditions.  Finding that the authority might be made complete

        by a resolution, he would have the right to infer the resolution on the face of the

        document which appears to be legitimately done”.

This rule is also referred to as the indoor management rule.  The is because whatever happens in the company does not bind third parties dealing with the company.  The rule is based on business convenience.  It would be difficult if anybody who had business  with the company.  Satisfy himself that the requirements have been followed before he contracts with the company.  The rules also protects  the creditors, of the company it would be unfair if the company was to deny liability on its contracts on the footing of internal irregularities occasioned by the management.

However, for the purposes of the protection of the company, the rule had had to be subjected to limitations.  Today, whether the company is liable or not depends on ordinary agency principles.  These may be summarised as hereunder: 

 

1.     Anyone dealing with a company is deemed to have notice of the contents of its public documents.  Any act which is contrary to these documents will not bind the company, unless it is subsequently ratified by the company in the General meeting.  The company’s public documents are not confirmed to the memorandum and Articles of  Association but also includes other documents which are filed at the company’s registry and these are such documents as special and secretary and charges.

2.     An outsider dealing with the company is entitled to assume that all the internal regulations of the company are being complied with unless he had knowledge to the contrary or suspicious circumstances