INTRODUCTION
This course is primarily concerned with companies as defined in the
Companies Act Cap 486. 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 are created under statute as bodies corporate. Most companies
derive their existence through a process of registration under the Companies
Act cap 486.
EARLY FORMS OF BUSINESS ORGANISATIONS
Early forms of business organizations owing their existence to royal
charter was primarily ecclesiastical bodies or public bodies such as boroughs.
Trading in joint account was accomplished through types of partnerships known
as the commenda and the societus…and later through the limited liability
company. A commenda was a formal partnership in
which one of the partners supplied 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 societus was a form of
association which developed into the present age partnership. Each
partner, being an agent of the others is liable to the full extent of his
private fortune and partnership debts.
Company; the Companies Act Cap 486 Sec 2 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 denotes an
association of a number 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.
FUNDAMENTAL CONCEPTS IN COMPANY LAW
There are 2 fundamental concepts;
a.
Legal
personality
A company must be treated as a person in its own right. This separates
and creates a distinction between the personalities which constitute the
created entity. This concept also incorporates other aspects such as life and
death. A legal person is any person human or otherwise. 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
processes of the law.
- Limited
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 a debt or to
account for a debt up to a certain amount. In the context of company law,
liability can be limited by shares or by guarantee. A share is an interest
which an investor has in a particular company. Under Sec 2(4) (a) 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 share respectively held by them. This is a company limited by
shares.
The members in a company may sometimes enter into an agreement where
they may 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. See
Sec 4(2) (b) of the companies Act. In the event that a company does not have
this guarantee or liability then it is a limited company. Sec. 4(2) (c).
Nearly all the principles of 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 employees. Whether or
not companies should have the interest of the community put into account is
still a matter for debate.
He procures the necessary capital alone. He gets the profits alone and
equally shoulders any losses. Since a sole trader has no association in law, he
is not in any way regulated by any special rules of law.
Partnerships
Is a relationship that subsists in an association or between 2 and 20
members in a trading partnership, 2 or more profession business persons with a
view to sharing profits. Firms or professional persons like lawyers,
accountants and surveyors have no limitation of membership. The Partnerships
Act cap 29 defines a partnership as a relation
that subsists between 2 or more persons carrying on business in common with a
view to profit. Under sec 389 of the companies act, “no company
association or partnership consisting of more than 20 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 therefore to prohibit the formation of a
partnership of more than 20 persons.
In the case of; Fort Bakery-Vs-Wangui
The plaintiffs brought an action to recover certain sums of money from
the defendants. During the hearing, evidence disclosed that the plaintiff were
an association comprising of more than 45 people trading in partnership for
gain and that their 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 company’s ordinance prohibited
an association or a partnerships consisting of more than 20 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 could not
therefore grant relief. It was held;
a.
That the plaintiffs could not be recognized as
having any legal existence, were incapable of maintaining their action and
therefore the court would not allow the action to proceed.
b.
Since a non-existent plaintiff could not pay nor
receive cost there could be no order as to cost. The suit was struck out.
See; Smith-Vs-Anderson
Unregistered foreign companies
See; Paul gardete-Vs-republic
Partnerships are founded on 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 partnerships or the partnerships 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 it may be inferred from the
conduct of the parties.
In Mohammed vs Hussein
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 on 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 by law is entitled to take part in the management of
the business. In holding that these actions terminated the partnership, the
judge stated “a partnership is determinable at any moment by one partner by
notice to the other. The notice need not 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 sec 11 of the partnerships act, every partner is liable jointly
with other partners for all the obligations and the debts of the firm incurred
while he is a partner.
Where an action is brought against a partnership it is one against all
the partners. For this reason, where a sole trader carries his own business in
a name other than his own name, he cannot commence action in that name. See; patel-vs-national
contractors
LIMITED LIABILITY COMPANIES
If promoters wish to carry on business through the medium of limited
liability company 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 by guarantee. If not limited it would be an unlimited company. Section 4(1)
of the companies act provides “any 7 or more persons, or where the company to
be formed could be a private company any 2 persons 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 form 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 shares. If not, then the company limited by guarantee is
more suitable. The promoters must also decide whether the company is to be
private or public. Sec 30 of the companies act defines a private company to
mean, “a company which by its articles;
a.
Restricts the right to transfer its shares.
b.
Limits a number of its members to 50 not including
persons who are in the employment of the company and persons who having been
formerly in the employment of the company and while in that employment have
continued after the determination of that employment to be members of the
company.
c.
Prohibits any invitation to the public to subscribe
for any shares or debentures of the company.
Any company which does not fall in this definition is a public
company.
REGISTRATION OF THE COMPANY
In order to secure the registration of a company the promoters must
prepare and register certain documents;
a.
Memorandum of association-in which they express inter alia their desire to be formed in a company
with a specific name and objects. They declare their intention to be formed in
a company.
b.
Articles of association- in which they set out rules for the internal management of the
company. These documents are signed by at least seven or two persons where it
is a public or a private company as the case may be. The signatures must be
attested by a witness. The person so signing the MOA is referred to as a
subscriber. If the company has a share capital each subscriber must sate
opposite his name the number of shares he takes and must not take less than one
share. Sec 5(4) (b) of the companies Act.
c.
Statement of nominal
capital- this is required only in the case of a company
with shared capital. It is used for the purposes of computing the stamp duty
payable.
d.
Declaration of compliance- is a statutory declaration made either by the advocate engaged in the
formation of the company 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, the other documents
required is a list of persons who have agreed to become directors and their
written consent to act as such.
There are other documents which the law requires to be filed on
incorporation. These are:
a.
Notice of the situation of
the registered office of the company under Sec 108 of the companies
act.
b.
The particulars of the directors and the secretary
under Sec 201 (4).
These documents are lodged with the registrar of companies who
scrutinizes them and on finding them in order he registers them and issues a
certificate of incorporation and the company is thereby formed. Under Sec
16(2) of the Companies, 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 functions of an incorporated
company with power to own land and having perpetual succession and a common
seal. Under Sec 17(1), a certificate of incorporation given by the
registrar in respect of any association shall be conclusive evidence that all
the requirements 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 authorized to be registered and duly registered under
the act.
CONSEQUENCES AND ADVANTAGES OF INCORPORATION
a.
Separate
legal entity
Legal personality- the most fundamental
attribute of incorporation from which all other consequences and advantages
flow is that the 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 implication so legal personality was never understood
fully not even by the courts until the celebrated case of;
Salomon vs. Salomon and co ltd. (1897) A.C 22 H.L.
Salomon was a leather merchant and a goods manufacturer. He sold his
business to a company Salomon and co ltd which he had formed for sterling
pounds 30,000. The company had a membership of seven being Salomon, his wife,
daughter and four sons. The shares were allotted as hereunder; Salomon took
20,000 ordinary shares of sterling pounds 1 plus, a debenture worth sterling
pounds 10,000 against the assets of the company. The rest owned one share of
sterling pounds one each. Later, there were industrial strikes which pushed the
company into insolvency and was finally wound up. The companies’ assets proved
inadequate to pay the sterling pounds 10,000 worth of debenture owed to salomon
together with sterling pounds 7,000 owed to unsecured creditors. Salomon took
sterling pounds 10,000 before paying the creditors. The unsecured creditors
sought legal action contenting that they were entitled to the assets of the
company before Salomon, the debenture holder could be paid. They stated that
Salomon and co ltd were really the same person with Salomon and argued that
Salomon could not owe money to himself. In the high court, Upjohn J stated,
“Really, I find no difference between salomon and salomon and 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 mere agent of Salomon and that he must pay the sterling pounds
7,000 owed to unsecured creditors. Salomon appealed again to the House of Lords
which overruled the decision of the lower courts and held;
a.
Salomon and co ltd is a separate and distinct
entity from Salomon and any other member.
b.
Salomon as a debenture holder (secured creditor)
has a priority claim over the assets of the Salomon and co ltd before any
unsecured creditors.
Lord Manhatten put the rule first, “in order to form a company
limited by shares the companies act requires that a MOA should be signed by 7
persons who are each to take one share at least. If those conditions are
complied with, what can it matter whether the signatories 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, though there may be only 7 shares
taken, the subscribers 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, nor interval of
incapacity. A body corporate thus made capable by state cannot lose its
individuality by issuing the bulk of its capital
to one person whether he’ll be a subscriber or not. The company is at
law a different person altogether from the subscribers though it may be that
after incorporation the business is precisely the same as it was before and the
same persons are managers and the same hands that received the profits, the
company is not in law an agent or trustee for them. Nor are the subscribers
liable in any shape or form except to the extent and the manner provided by the
Act.”
Macaura-vs-Northern assurance co. ltd 1925 AC 619
Macaura owned a timber estate in Britain. He formed a company and sold
the timber for sterling pounds 42,000 to that co. by obtaining 42,000 fully
paid up shares of sterling pounds 1 each. The total was issued to macaura and
his nominees. He was also an unsecured creditor for sterling pounds 19,000. He
took out an insurance policy bearing his own name to secure the co. Later, most
of the timber was gutted by fire and macaura went to the insurance company and
claimed compensation against the fire in his own name. It was held that he as a
person had no insurable interest in the estate either as a creditor or
as a shareholder.
Katate-vs-Nyakatukura 1956 vol 70 ULR pg 47
The respondent sued the petitioner for the recovery of Ush 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 amounts 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 statute, the jurisdiction
of the native courts Act, was limited to those cases in which the
parties were natives. In suing the petitioner, the respondent admitted quite
frankly that he was acting on behalf of the Angole African Commercial Society
ltd as their agent. The issue was whether the Angole African Commercial Society
ltd was or was not a native. It was held that a limited liability company is a
corporation and has existence distinct from the shareholders who hold its
shares. The distinct legal entity is not capable of having racial attributes. It
was not therefore a native even if all the shareholders were natives.
Lee-vs-Lees air farming co. ltd
Lee formed the respondent company for the business of aerial top
dressing. It’s a method of farming from the air. The nominal capital of the
company was sterling pounds 3000 divided into 3000 shares of sterling pounds
one each. Lee held 2999 of the shares and the remaining one share was held by a
solicitor in trust for him. Lee was therefore the beneficial owner of all the
shares. He was appointed the companies director and employed at a salary as the
chief pilot. He was killed in an aircraft while working for the company. His
widow claimed compensation under the workmates compensation Act. The
issue was whether Mrs Lee was entitled to any compensation and whether lee
himself was a worker. A worker was identified as a person who entered into a
contract with an employer. Had lee entered into a contract of service with the
company or the company was just another face of lee. It was held that it was a
logical consequence of the decision in salomon-vs-salomon that the company is
separate from its members and that lee and the company were two different
persons capable of establishing contractual relations between them. The
deceased was therefore a workman and his widow therefore 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 companies’ 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 guaranteed to be paid. See; insolvency bill; Sec 213(1) (a&b)
Bradley egg farm ltd-vs-Clifford 1943 vol 2 AER 348
The plaintiffs wanted their poultry to be tested for white diarrhea.
They contracted with a society to carry out the test. 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, 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 would amount to giving the society the status of a
separate legal entity which they did not have. The society was therefore not
liable but the executive committee was.
- Holding
of property
Corporate personality enables the company to own property in his own
name distinct from that of its members.
- Suing
and being sued
A company being a separate legal personality may seek 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 suit. At common law, a company
was not allowed to appear otherwise than by an Advocate and not by an official
such as a manager. See; East African roofing co ltd-vs- 1954 KLR pg 86; Order 3
Rule 4 of the civil procedure rules.
In East Africa Roofing Co. Ltd v Pandit (1954) 27 KLR 86,
Here the Plaintiff a limited liability company filed a suit against the
defendant claiming certain sums of money. The defendant entered
appearance and filed a defence admitting liability but praying for payment by
installments. The company secretary set down the date on the suit for
hearing ex parte and without notice to the defendant. This was contrary
to the rules because a defence had been filed. On the hearing day the
suit was called in court but no appearance was made by either party and the
court therefore ordered the action to be dismissed. The company
thereafter applied to have the dismissal set aside. At the hearing of
that application, it was duly represented by an advocate. The only ground
on which the company relied was that it had intended all along to be
represented at the hearing by its manager and that the manager in fact went to
the law courts but ended in the wrong court. It was held that a
corporation such as a limited liability company cannot appear in person as a
legal entity without any visible person and having no physical existence it
cannot at common law appear by its agent but only by its lawyer. The
Kenya Companies Act does not change this common law rule so as to enable a
limited company to appear in court by any of its officers.
- Perpetual
succession
Since a company is a corporation and an artificial person it has no
body, mind or soul but is dressed only on the intendment and the consideration
of the law. It cannot die like a human person since it’s born by a process of
law. It can only be destroyed by that process. Unless and until that process is
brought into play it cannot be brought to an end and hence the company has
perpetual succession and exists indefinitely.
- Transfer
of shares
Sec 70 of the companies Act
provides; “the shares or rather interest of any member in a company shall be movable property transferable in the manner
provided by the articles of the company” this however is subject to Sec 30
of the same Act. Shares in a company are freely transferable and the transferee
steps in the shoes of the transferor as a member. Sec 30 provides that
private companies should restrict the right of transfer of their shares. One
must comply with the conditions under the articles in the case of private
companies.
- 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. This 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 the company
from disposing of those assets in the ordinary course of business until
something causes it to crystallize and fasten on the assets. A floating charge
is an equitable security, it does not attach to any property at all as opposed
to the legal charge which is attached to some particular property of the
company. The company is not prevented from disposing of such a charge. Sole
traders and partnerships are not allowed to do so. Under sec 43(a) of the
Bankruptcy Act, anything in the possession of a bank can be attached and these
provisions do not apply to a company.
DISADVANTAGES OF INCORPORATION
These are;
- Formality
- Expense
- Publicity
In order to form a limited liability 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 maybe examined by any member of the public on paying an examination fee.
Their preparation requires the payment of money. The companies’ affairs are
therefore publicized and there is no more privacy. Even in liquidation, a
company must follow a particular procedure. Companies are also subject to the
ultra vires doctrine which partnerships and sole proprietorships are not
subject to.
Although Salomon’s case established that a company is a separate and
distinguished person, there are situations where this fundamental principle of
personality is ignored. In such situations the law ignores the corporate entity
of the company and instead pays regard to the surrounding economic realities.
These situations must be referred to as exceptions to the rule. Instances under
which the corporate personality is ignored are provided for under statutes and
the common law.
a.
Under the companies Act.
Reduction in number of members- Sec
33 of this act provides, “if at any time the number of members of a
company is reduced in the case of a private company below 2 or in the
case of any other company below 7 and it carries on business for more than 6
months while the number is so reduced, every person who is a member of the
company during the time that it so carries on business with fewer membership
and is cognizant of the fact that it is carrying on business with fewer than 2
members or 7 as the case maybe, shall be severally liable for the payment of
the whole debts of the company contacted during that time and may be severally
sued therefore.
Fraudulent trading- under Sec 23(1)(a), if in the course of the winding up of
a company it is shown that proper books of account were not there at any time
during the period of 2 years immediately preceding the commencement of the
winding up or the period between the incorporation of the company and the
commencement of the winding up whichever is the shorter, every officer of the
company who is in default shall, unless he shows that in the circumstances in
which the business of the company was started on the default is excusable, be
liable for a term not exceeding 3 years.
In Re William 1932
The company was incorporated in 1926 to acquire William’s business as a
perambulator and a furniture manufacturer. The directors of the company,
William and his brother appointed William as the Managing director of the
company with a salary of sterling pounds 1000 per annum. Within the first 6
months the company was debited with the whole of that salary which was sterling
pounds 500 more than he should have got. During that period, the company made a
loss of sterling pounds 2200. During that year when the company was still in
financial problems the directors paid themselves sterling pounds 250 dividends.
Towards the end of 1929 to march 1930 the company was in serious financial
trouble that it could not pay its debts as they fell due. In spite of this, William
ordered goods worth sterling pounds 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 sterling pounds 600 which he had lend the company.
By mid-1930, the company with the knowledge of William owed about sterling
pounds 1500 for goods supplied. The liquidator applied for William to be held
personally liable under sec 3 (23) that he knew that the company could not pay
debts and he was doing so fraudulently and he should personally be liable. It
was held that for the company to carry on business yet William knew this was
fraudulent and William was personally liable to the creditors. In the words of
justice morgam, “If a company continues to carry on business and to incur debts
at a time when there is to the knowledge of the directors no reasonable
prospects of the creditors receiving payment of the debt, it can generally be
inferred that the company is carrying on business with intent to defraud.
Re Patrick and lion limited
Re Sayona distributers limited 1967.
Misdescription of the company-Sec
109(4) of the companies Act requires that the companies name should
appear whenever it carries own business on its seal and on all business
documents and letters. If an officer of a
company or any person on his behalf signs or authorizes to be signed on behalf
of the company any bill of exchange, promissory note, cheque or order for goods
where the companies name is not stated, such officer is liable to the true owner
and will also be personally liable to the holder of a bill of exchange,
cheque or promissory note or order for the amount thereof unless it is paid by
the company.
Sicklesmear vs buckstar 1970
Holding and subsidiary companies-It is
common for a company to form a pyramid of interrelated companies, each of which
in theory is a separate legal entity but in reality part of one concern is
represented by the group as a whole. This is particularly the case where one
happens to be the parent while the rest are subsidiary companies. A subsidiary
company is defined under sec 154 of the companies act to be a subsidiary of
another if that other either;
·
Is a member of it and controls the composition of
its board of directors.
·
Holds more than half in nominal value of its equity
share capital.
·
The first mentioned company is a subsidiary of any
company which is that others subsidiary.
The accounts of the…holding company may not be a proper picture of the
economic situation of the entire group thus sec 150(1) provides, “where at the
end of its financial year a company has subsidiaries, accounts for statements
referred to as group accounts in this act dealing as herein after mentioned
with the state of affairs and the profits and loss of the company and the
subsidiaries shall be laid before the company in the general meeting when the
companies own balance sheets and profit and loss accounts are so laid.
COMMON LAW SITUATION
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 relationships is where one
company is a subsidiary of another.
In smithstone & knight ltd-vs-Birmingham Corporation 1839,
The plaintiffs were paper manufacturers in Birmingham. In the same city
there was a partnership called Birmingham waste company which did business as
merchants and dealers in waste paper. The plaintiffs bought off the partnership
as a going concern and registered it as a company. A share capital of the new
reformed company was sterling pounds 502 divided into 502 share of sterling
pounds one each. The plaintiffs beneficially owned all the shares. The new
reformed 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 and kept no books of accounts such
books being kept by the plaintiffs. Birmingham Corporation purported to acquire
compulsorily the premises which the subsidiary carried on business. Thereupon,
the plaintiffs claimed compensation for removal and disturbance. 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
1 year. The subsidiaries tenancy was a 1 year one. The plaintiff, the current
company argued that it was really the person in occupation and therefore
entitled to compensation. 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 a
plaintiff company. Further, the occupation of the premises by the subsidiary
was technical only and solely for the purposes of the plaintiff company. The
plaintiff could therefore maintain a claim for compensation.
Situations where the company is formed for fraudulent purposes
Re FG films ltd 1953(1) AELR
A company was incorporated in England. Its capital was sterling pounds
100 in sterling pounds one share, 90 of which were held by the president of an
American company and 10 were held by another director, a British subject. The
company contented that it was the maker of a film which therefore should be
registered as a British film. The court refused to agree that a 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 the agent of the
USA company which had provided sterling pounds 8000 for the making of the film
and which had brought the British company into existence for the sole purpose
of enabling the British company to claim that the film was its own. The modest
capital and its shareholding were treated by the court as evidence that the
British company had been formed with a view to evading the legislation in
issue.
Re bugle press ltd 1961 CH 270
A, B and C were the only shareholder sin a company. A held 45% of the
shares and B held 45%. The remaining 10 % were held by C. A and 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 and B. they then evoked the equivalent of sec 210 of
the companies act which provides that if one company makes an offer to take the
shares of another company and if that offer is accepted by at least 90% of the
shares by buying out the shareholders then it can buy up the remaining 10%.
Upon evoking sec 210. A and B took all the shares. It was held that this was a
farfetched attempt to evade the fundamental rule of company law which forbid
the majority shareholders from expropriating the minority. The courts will not
recognize the corporate entity in such a case.
Gilford motor company ltd-vs-Horne 1935 CH 935
Jones-vs-Lipman 1962 WLR 832
Group enterprise
There is a general tendency by the courts to ignore the legal entity of
various companies within a group and instead look at the economic reality of
the entire group. In doing so, the courts are merely following the
interpretation of the legislature under Sec 150-154 where group accounts
are needed in respect of associated companies.
Holdsworth-vs-caddies 1955 WLR 352
Residents
The issue of the residents of a company is important for taxation
purposes.
In De beers consolidated-vs-Howe 1906 AC
The appellant company was registered in South Africa. Its general
meetings were always held there. Some of the directors lived in South Africa.
Its meetings were held in Kimberly and in London. However a majority of the
directors lived in London and most of the directors 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 UK for purposes of taxation. Lord
Lorban stated, “a company cannot eat or sleep but it can keep house and do
business. We ought therefore to see where it kept house and did business. A
companies’ real business is carried on where the central management and control
actually resides.”
MEMORANDUM OF ASSOCIATION
Sec 5 of the companies Act requires that the memorandum of every company
should be in the English language, printed and should state;
a.
The name clause
The name of the company with limited as the last
word of the name in the case of a company limited by shares or guarantee.
Dcc
The name clause is the first clause in the memorandum. Ltd is an
accepted abbreviation of limited.
Stacy and company-vs-Wallace 1912 vol 106 LT 544
Lord Justice Scruton 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 or commerce, art, religion, charity, science or
any other useful object and intends to apply its profits in the promotion of
those objects and to prohibit the payment of its dividends to its members then
under Sec 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 to its name. The name of a company can also be changed.
- The
registered copies clause
This 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 Sec 108 of the
companies Act. This will enable the office of the registrar to know where
notices and legal processes may be served on 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
specified times. The statutory books which must be kept at the registered
office are;
·
The register of charges,
·
Minute books of general meetings,
·
Register of directors and secretaries.
Other books may be kept are;
·
The register of members
·
The register of directors interests in shares or
debentures of the company
·
Register of debenture holders
·
The books of account.
- The
objects clause
The third and perhaps the most important 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
ultra vires is 2 fold;
·
It is intended to protect the investors by ensuring
that they know the objects to which their money is to be applied.
·
It is for the protection of the creditors by
ensuring that the companies’ assets to which they look to for the repayment of
their debts are not wasted in unpaying ventures.
In Ashbury Railway and carriage company limited-vs-Riche 1875 LR pg 653
The MOA gave the association power to;
- Make
and sell or lend on hire railway carriages or wagons
- To
carry on the business of mechanical engineers and general contractors.
- To
purchase lease, work and sell mines, minerals and buildings.
The directors entered into a contract to purchase a concession for the
construction of a railway in Belgium. The issue was whether this contract was
valid and if not whether it could be ratified as the shareholders had already
made to do so. It was held that since the memorandum did not contain any
provision for the purchase of a concession or building of a railway the
purchase was ultra vires so that even a subsequent assent of the whole body of
the shareholders could not ratify it. Although mechanical contractors they
could not do so. Lord Cairnes stated; “the words general contractors referred
to the works which went immediately before and denoted such contracts which
mechanical engineers make for the purposes of carrying on business. The
contract was not in the MOA. If so, it was placed beyond the powers of the
company to make the contract. It is not a question whether the contract 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, the doctrine of ultra vires is not as rigid as it used to be
before.
The first inroad was made in; Attorney General-vs-Eastern Railway Co.
1880 vol 5 AC 473
The company was incorporated to acquire the undertaking of two existing
railway companies and to construct and run other companies. The company entered
into a contract with a company to supply that other company with locomotive
power for 5 years and work on carriages for 2 years. It was held that the
activity in question were within the express powers of the company. Selbournd
LJ stated; “the doctrine of ultra vires as explained in Ashbury’s case should
be maintained. But this doctrine ought to be reasonably and not unreasonably be
understood and applied. Whatever maybe adapted 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.
Bell houses ltd-vs-City Wall properties ltd 1966 2QB 656/vol 2 ALR 674
Re town bank 1890 44 CD 634
As per Sec 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 was to state for example that the company will
do anything beneficial to the company then it need not be registered. This is a
subjective clause and the company can do anything which may be ultra vires. The
courts have made sure that companies do not evade this rule. The courts use
several methods to control misuse of the rule;
- The
Ejusdem generis rule and The main objects rule of construction
- The
laws of substratum rule.
The Ejusdem generis rule
This is where the MOA expresses the objects of the company in a series
of paragraphs and one paragraph or the firs second and third paragraphs appear
to embody the main objects of the company and the other paragraphs will be
treated as merely ancillary tool. These main objects. However not withstanding
these rules, the business community has invented the independent objects rule
of interpretation. This is a situation where the promoter’s state at the bottom
of the memorandum that each of the objects is independent and each of the sub
clauses should be treated as equally important. The leading authority on this
aspect of interpretation is
Cottman-vs-Bravam 1918 AC 514
The company was formed to acquire certain rubber and tobacco estates.
The objects clause 8 contained giving the power to promote and form companies
and to deal in the stocks and shares of such companies.; clause 12; giving a
general power to deal in the stocks and shares clause 30; which provided;
- That
the objects specified in any clause were not to be strictly construed by
reference to the contents of any other sub-clause.
- That
no object should be construed a subsidiary or ancillary to any other entry
in the objects clause.
The company underwrote shares in another company dealing in oil which
went into liquidation and it was placed in the list of contributories. It
applied to be struck off that list on the ground that the entire transaction
was ultra vires. 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, a separate and independent objects. As per Lord Parker,
the result was; “a modern memorandum of association with its multi-various
objects of lists 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.
See; Introductions ltd-vs-The National Provincial Bank 1969 2 WLR 791
The laws of substratum 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 and if the main object fails then the company is subject to
winding up;
In Re German date coffee co. ltd 1882 Vol 20 CH 1969
The major object of the company was to acquire a German patent to
manufacture coffee from dates. The German patent was not granted and 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 companies’
objects had failed. It was held that the substratum of the company had failed
and it was not possible to carry out the objects for which the company was
formed and therefore it was just an equitable for the company to be wound up. See
Sec 219 of the companies Act
Re Jon Beauforte London ltd 1953 CH 131
There are areas where the doctrine of ultra vires is vigorously imposed.
This is mainly in the field of gratuitous payments. A company cannot
defectively make gratuitous payments unless these are made for the benefit of
the company.
In Hutton-vs-WestCorn Railway company 1883 23 CH 18864
The company had disposed of all of its undertakings and was no longer a
going concern as trading body. It existed only for the 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. Lord
Justice 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.”
Re Lee behrels 1832 2CH 836
Re Ray
Nyali ltd-vs-AG 1957 1AER 646
Remedies to ultra vires transaction victims
Whether a contract is ultra vires or not will depend on the knowledge of
the party dealing with the company
Re David Payne 1904 2CH 608
X, who was interested in company B learned in his own 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 in the security of a
debenture. Was this debenture valid? The money was borrowed for a purpose
outside the objects of the company yet the directors knew this. The court held
that where a company has a general power of borrowing for its own purposes and
where the company borrows within the limits of that power the person who lend
the money is not bound to enquire for what purpose the borrowing company is to
apply the money so borrowed. The director’s private knowledge could not be
imputed in the company. Romer LJ held; “where you have a limited company with a
MOA authorizing the company to embark on a series of transactions and among
those purposes you find the power to borrow generally for the purposes of the
company, I take it to be clear beyond controversy that when the money is being
borrowed within the limits of the power of borrowing, the person who lend the
money is not bound to enquire to what purpose the borrowing company is about to
apply the money so borrowed.”
In respect to property transferred under an ultra vires transaction
since the effect of ultra vires 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 ultra vires
borrowing. So long as the money can be traced in law or 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 trustees and the money
is treated as trust money. A third party may also bring a personal action
against the directors with whom he has dealt with. The third parties have an
equitable claim against them for specific restitution.
What reforms to ultra vires
In 1945 in England, the cohen committee proposed that as regard 3rd
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 3rd parties
dealing with the company will still be presumed to have constructive knowledge
of the companies’ public documents and 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 be abolished so that even the
actual knowledge of the memorandum of articles should not deprive a 3rd
party of the right to renounce a contract if he reasonably failed to appreciate
that this precluded the company or its officers from entering into the
contract. The constructive notice rule has now been abolished I 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. Sec 8 of the Companies Act
empowers the company by special resolution to alter or add to its objects
so long as 85% of the shareholders of the issued share capital support a
proposed alteration companies can easily alter their objects clauses and
thereby avoid the trap of ultra vires.
- The
nominal capital clause
States the nominal capital to which the company wishes to be registered
and the division thereof into shares of fixed amounts.
- Liability
clause
States that the liability of the members shall be limited or as the case
may be.
ARTICLES OF ASSOCIATION
The articles of association is one of the important documents relating
to the companies constitution. Sec 9 of the Companies Act states that a
company limited by guarantee must register with the registrar articles of
association prescribing articles for the company. Under sec 10 the
articles of a private company should state the number of members with which the
company proposes to be registered. A company limited by shares may or may not
register articles of association. The articles so registered may adapt all or
any of the regulations in schedule one table a of the companies act. Table A is
the model form of articles of association for a company limited by shares. It
is in two parts; part one is designed for public companies and part two for
private companies. In registering its articles of association a company may
take one or three options;
a.
It may adopt table A in full.
b.
It may adopt table A subject to amendments
c.
It may register its own set of articles and exclude
table A altogether.
Sec 12 requires that the articles must be
i.In the
English language
ii.Printed
iii.Divided
into paragraphs numbered consecutively
iv.Dated
v.Signed
by each subscriber to the memorandum of association in the presence of at least
one witness who should attest the signatures and add his occupation and
address.
Whereas the MOA confers powers in the company the articles determines
how such powers shall be exercised. In other words they regulate how the
internal affairs of the company shall be managed. Among other things the
articles deals with;
i.The
issue of shares,
ii.Alteration
of the share capital,
iii.Transfer
of shares, general meetings,
iv.Voting
rights,
v.Appointment
of directors,
vi.Payment
of dividends,
vii.Accounts,
winding up and other miscellaneous matters.
The articles also provide the dividing line between the powers of the
shareholders and those of the directors.
The juridical effect of the articles.
Under Sec 22 of the Companies Act, subject to the provisions of
the Act, when the memorandum and the 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 articles have been
registered, they constitute a contract between the company and each individual
member.
Hickman-vs-Kent/Romney
marsh sheep breeders association ltd 1951 1CH881
The articles of the company provided for the reference of a dispute
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 contented that the court acti on 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 mounted to a contract
between the company and Hickman to refer disputes between them to arbitration.
The court decided as per Justice Asberry that;
a.
No article can constitute a contract between the
company and a third party.
b.
No right merely purporting to be given by an
article to a person whether he’s a member or not in a capacity other than that
of a member as for instance; solicitor, promoter or director can be enforced
against a company.
c.
Articles regulating the rights and obligations of
the members generally as such do create rights and obligations between them and
the comgpany. It is a basic rule that the articles do not confer rights upon an
outsider or upon a member in a capacity other than that of a member for example
as a director.
Eli-vs-Positive
government security life assurance company ltd 1876 vol 1
The articles provided that the plaintiff should be the companies’
solicitor for life removable only for misconduct. He became a solicitor and a
member. Later the company terminated his employment. He sued the company for
breach of the contract contained in the articles. It was held that the articles
would function as an agreement between the members to appoint the plaintiff or
a direction to the directors to appoint him but the articles did not of
themselves constitute a contract between the plaintiff in his capacity as a
solicitor and the company. This is so because articles confer rights only to
members of a company and not third parties.
Wood-vs-Odessa water works company 1889 vol 42 CHD636
Reifill-vs-h 1960 CH pg 1
ALTERATION OF THE ARTICLES
Sec 13 of the Companies Act empowers
a company by a 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 Sec 141 of the Act as
a resolution supported by ¾ of the members voting either in person or by proxy
at a general meeting of which 21 days’ notice of the intention to propose a
resolution as a special resolution has been given.
Andrews-vs-Gas
Knitter company ltd 1897 CH 361
The issue was whether the company which under its memorandum and
articles had no power to issue preference shares could alter its articles so as
to authorize the issue of such shares by way of increased capital. It was held
that in so far as the companies’ constitution depends on the articles of
association it was 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 the articles there are limitations to this power. A
resolution to alter the articles of a company must not;
- Be
inconsistent with any statute.
- Exceed
the conditions contained in the memorandum.
- Increase
the liability of a member or require him to take more shares unless he
agrees to do so in writing. See. Sec 24 of the Companies Act.
- Remove
the restrictions contained in Sec 30 if the company is to remain a private
company.
- The
variation of the articles must not conflict with Sec 74 of the Companies
Act as to the rights of the shareholders affected by a variation of class
rights to apply to the court for a cancelation of the variation.
- The
resolution must be not inconsistent with an order of the court made under
Sec 211 of the companies act dealing with cases of oppression by the
majority of the minority a company.
- The
alteration of the articles must be in good faith and for the benefit of
the company as a whole.
In
Allen-vs-The Gold reeves of West Africa. 1900 1CH656
The company had by its articles given itself a lien on all the shares
which were not fully paid for. The company sought to extent the lien to all the
shares by an alteration of the articles. It was held that the company was
entitled to extent the lien by an alteration of the articles in exercise of the
statutory power. Lord Linley 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 the majority and enabling them to bind minorities. It
must be exercised not only in the manner required by law but also bonafide (in
good faith)
See; Shuttleworth-vs-Coxbrothers 1927 vol 2QP pg 4
Sidebottom-vs-Casua & company 1920 1 CH 154
Brown-vs-British abrasive wheel company 1919 1 CH 290
Sometimes the articles may be altered in such a manner that the
implementation in their altered form may lead to a breach of contract. Such is
particularly the case as it regards contracts of service between companies and
their directors and servants. 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;
a.
Under the articles without any contract of service.
b.
Under a service contract which is entirely
independent of the articles.
c.
Under a service contract which expressly or by
implication embodies the relevant provisions 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
any time in exercise of the statutory power. If however the director’s
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 (1926) Ltd v Shirlaw 1940 AC 701
The plaintiff was by a written contract appointed managing director of
the company for a period of 10 years. The agreement was not expressed to be
subject to the articles in any way. The original articles set out grounds upon
which the office should be vacated subject to the terms of any subsisting
agreement. The articles also provided that should the managing director seize
to be a managing director then he should also seize ipso facto to hold office
as managing director. As a result of some company to the organization, new
articles were subsequently to be adapted one of which recommended the removal
of any director by notice. Pursuant to this article, the company purported to
remove the plaintiff from his office of director with the result that his appointment
as managing director was also terminated. There was a contract independent of
the articles. The plaintiff brought an action for breach of contract. It was
held that he was entitled to damages for a breach of contract. Lord Atkins
stated, “If a party enters into an arrangement which can only take effect by
exercise 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.”
Vs- northern railport company ltd 1962 WLR 1038
Read-vs-astoria garage ltd. 1942 CH 637
Punt-vs-symons 1903 2CH 506
British murac syndicate-vs-Alperton rubber co ltd 1915 Vol 2CH 186
Variation of class rights
Classifieds in company law recognizes existence of classes of
shareholders in the company. Bowen LJ in sovereign life assurance company
ltd-vs-Dold 1892 2QB 513 defined the word class. He stated; “the word class
is vague. It must be confined to those persons whose rights are not so
dissimilar as to make it impossible for them to consult together with a view of
common interest.” The term relates to those persons 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 are not mature.
Art 4 of table A provides that where the share capital is divided into
different categories of shares, the rights attached to any class 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 solution passed at a separate general
meeting of the holders of the shares of the class.
See sec 74 and 5(2) of the Companies Act.
COMPANIES ORGANS AND OFFICERS
Since the company is an artificial person it can only act through the
agency or natural persons. The decisions of the majority of the members of the
company in the general meetings is deemed to be the decision of the company. In
practice, it is impossible for the company’s day to day position to be attended
to by all the members 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 companies’ powers is delegated to the
directors acting as a board.
THE BOARD OF DIRECTORS.
Under Section 177 every public company must have at least 2
directors and every private company must have at least 1 director. In practice,
the first directors of a company are appointed by;
a.
Being named in the articles of association.
b.
In the manner laid down in article
75 of table A which states that the names of the 1st directors
shall be determined in writing by the subscribers to the memorandum of
association or the majority of them. Until such determination, the 1st
signatures to the MOA, shall be the 1st directors.
In the case of a public company with a share capital section 182
requires that a person may not be appointed as a director by the articles
unless on registration of the articles;
i.He has
signed and delivered to the registrar a consent in writing to act as a
director.
ii.Signed
the memorandum for a number of shares not less than his qualification if any.
iii.Taken
from the company or paid or agreed to pay for his qualification shares.
iv.Signed
and delivered to the registrar an undertaking to take from the company and pay
for his qualification shares if any.
v.Made and
delivered to the registrar a statutory declaration that the number of shares
not less than the qualification are registered in his name.
After the initial appointment it is usual for an annual retirement of
directors and the filling of vacancies at the annual general meeting. Under Sec
185, a director can be removed by an ordinary means of removal embodied
in the articles. Subject to any modification or exclusion of Table A, article
88 requires that the office of director to be vacated if the director;
a.
Seizes to be a director by virtue of section 183
relating to share qualification or section 186 relating to removal on
attainment of the age of 70 years.
b.
If he becomes bankrupt or makes any arrangement of
composition of his creditors an undischarged banker is not allowed to work as a
director without leave of the court.
c.
Becomes prohibited from being a director by an
order under Sec 189 which empowers the court to restrain the person from
managing the company.
d.
Of an unsound mind.
e.
Resigns from his office by a notice in writing.
f.
Absents himself without permission from directors
meetings for more than 6 months.
The director in a company need not be natural person. A company can be a
director in another company.
Division of powers between the general meeting and the board of
directors.
Until the end of the 19th century, it was generally assumed
that the general meeting was the company and the directors were merely agents
for the company. Although this view else way for a long time it was modified on
the advent of the 20th century. The earliest authority on the
relationship between these two is
Automatic self-cleansing filter syndicate-vs-Cunningham 1906 2CH pg 94
The court of appeal made it clear that the division of powers between
these two in the case of registered companies entirely depends on the articles
of association. Where the powers have been vested on the board by the articles
then the general meeting cannot interfere with the exercise of those powers. In
this case, the companies 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 power 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 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 directive 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
the resolutions of the general meeting on matters of management. They were
therefore entitled to refuse to carry out the sale agreement adapted by an
ordinary resolution of the general meeting.
The division of the powers between the general meeting and the board of
directors in respect to 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 may exercise all such powers of the company as are known by the
Act or these regulations required to be exercised by the company in the general
meeting.”
In Quinn Axtens -vs-Salmon 1909 AC 442
It was established that whether the formula contained in article 80 is
employed as invariably is in practice the general meeting cannot interfere with
the decision of the directors unless they are acting contrary to the provisions
of the Act or the articles. The companies two managing directors who were A and
S held between them the bulk of the companies ordinary shares. One of the
articles provided that the companies business should be managed by the
directors who might exercise all the powers of the company subject to such
regulations as shall not be existent with the provisions of the articles or as
might be prescribed by the company in the general meeting. Another article
provided 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 A or S
descended. The directors resolved to acquire and to let certain properties but
S descended. An extra ordinary general meeting was held at which the
shareholders by a majority passed similar resolutions. Upholding the court of
appeal the House of Lords held that the shareholders resolution were
inconsistent with the articles and granted an injunction to restrain the
company from acting.
Shaw and sons ltd-vs-Shaw 1935 2QB 213
Scott-vs-Scott 1943 1ALER
The general meeting retains the ultimate control but only to amend the
articles thereby taking away the directors power and also through its power to
remove the directors from office and appointing new ones. Unless any of these
actions is taken the directors can if they so wish disregard the wishes and
instructions of the members in all matters not specifically preserved by the
Act or the articles to the general meeting. The old idea that the general
meeting is the company and the directors are merely agents or servants of the
company servient to the general meeting is no longer a law.
Exceptions to the general rule
a.
Litigation
Although the general meeting cannot restrain the directors 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 do so. This situation changes if the directors know that they are the
ones in the wrong. In
Marshalls
Valve Gear Co. Ltd-Vs-Manning waddle and company ltd 1909 1CH 267
Marshalls was the majority shareholder and the managing director of the
plaintiff company which was formed to exploit an invention which he had
patented. On the board he was out voted by the other three directors who were
interested in the defendant company. The latter was infringing on the
plaintiffs patent and Marshalls in spite the opposition of his co-directors
instituted the action to obtain an injunction to restrain the infringement. It
was held that as the majority shareholder he had a right to bring the action.
Grant. Vs. United Kingdom …Railways 1888 Vol 40 CH135
Bamford. Vs. Bamford 1969 2WLR 1107.
- Where
there is a deadlock in the management of the board so that the board
cannot function in any material respect, then the power to do so reverts
back to the general meeting.
Barron. Vs. potter 1914 1CH 895
The company’s articles provided that the number of directors should not
be less than 2 or more than 10 under the quorum for the directors for
transacting business should be 2 years after the company’s’ incorporation, the
company had 2 directors, Mr. Potter as chairman and managing director and
colonel Barron. Colonel Barron refused to attend any board meeting with
Mr. Potter. The companies’ 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 and owing to differences between the
directors no board meeting could be held then the company had the power of
appointing additional directors at the general meeting.
DIVISION OF POWERS BETWEEN THE BOARD OF DIRECTORS AND THE MANANGING
DIRECTOR.
Art 107 of table A allows director 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 fit. The main duty of a managing director is to exercise some or
all of the directors’ powers of management. This is sanctioned by art 109 which
authorises the board to delegate to a MD all their powers. The wording of art
109 suggests that the board of directors may effectively divest itself of its
powers to the managing director.
THE COMPANY SECRETARY
Sec 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 Sec 177, a private company should have at least one
director while a public company must have at least 2 directors. The secretary
is appointed by the board and not by the general meeting. Generally speaking
his duties are managerial or administrative. The traditional view is that he
does not normally have authority to enter contract s on behalf of the company.
In
Barnett
Hoares and Co. vs. London Tramways co ltd 1887 18QP 815
Lord Escher stated, “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 has any authority
to represent anything at all.”
In the past, the secretary has been treated as a subordinate servant
without authority to commit the company over his action except the engagement
of clerical staff. In;
Panorama
investments. Vs. Fidelis furnishing fabrics ltd 1971 2QP 711
It was held that where a company secretary ordered self-driven cars, for
his own purposes but ostensibly for the business purposes of the defendant
company who were his employers, the defendant was liable to the car hire
company.
Lord denning stated, “But times have changed, a company secretary is a
much more important person than he was in 1887. He is an officer of the company
with an extensive duties and responsibilities. This appears not only in the
modern companies act but also by the role which he plays in the day to day
business of a company. He is no longer 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 on behalf of the company.
He is certainly entitled to sign contracts connected with the administrative
side of the companies’ affairs such as employing staff and ordering cars etc.
all such matters now come within the ostensible authority of the company
secretary.”
Salmon LJ described a company secretary as the chief administrative
officer of the company. It is the secretary’s responsibility to ensure that all
the companies’ documentations are in order, that the relevant returns have been
made and the companies’ registers have been properly maintained. The companies
articles also provides that the company 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 recognize the concept of vicarious liability and
instead insists on personal fault as a prelude to liability. For certain
purposes the courts have elected to treat the actions of certain officers in
the company as those of the company itself. This position sprung from the words
of Viscount Haldel in
Lennards
Carrying co ltd. vs. Asiatic Petroleum co. ltd 1915 Ac 705
Under the relevant section of the merchant shipping Act the owners of
any sea going vessel were not liable for any loss which occurred without their
personal fault or privity. Lennard was the MD of the company. He knew that the
ships boilers were faulty and he let the ship out to sea. As a result of a
fault in the boilers the ship was destroyed and the cargo of the Asiatic
Petroleum co ltd was destroyed. Could the company escape liability? It was held
that since Lennard was the MD his knowledge was the company’s and the company
was deemed to have known that the ship was unseaworthy and the company could
not escape liability. The knowledge of the MD must be visited upon the company
which was therefore liable.
Viscount Haldel stated, “my Lords, a corporation is an abstraction, it
has no mind of its own anymore that 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. Lennard was the directing mind of the company
then his actions 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.”
Bolton Engineering Co ltd. vs. Graham and sons 1957 1 QP 159.4
WINDING UP
The rules relating to winding up are specifically set out in the
companies act. Section 212 of the act provides that the winding up may be
either;
a.
Voluntary
b.
By the court
c.
Subject to the supervision of the court.
Voluntary winding up
The circumstances in which a company may be wound up voluntarily are set
out in sec 217 of the companies act. A company may be wound up voluntarily;
- When
the period if any fixed for the duration of the company expires or the
event if any occurs, the occurrence of which the articles provide that the
company is to be wound up and the company in the general meeting passes a
resolution requiring the company to be wound up voluntarily.
- If
the company resolves by a special resolution that the company should be
wound up voluntarily.
Generally companies do not always provide for a period within which they
will be wound up. Those in need of protection are creditors and the minority
shareholders. To protect these groups, sec 276 requires that where it is
proposed to wind up a company voluntarily the directors of the company must
make a declaration to the effect that they have made a full inquiry into the
affairs of the company and having done so have formed the opinion that the
company will be able to pay up its debts in full within such period not
exceeding 12 months from the commencement of the winding up. Where this
declaration is made, there is no need to involve the creditors in the winding
up. The declaration will suffice as a guarantee that the company will pay its
debts. If the directors are unable to make this declaration, then the winding
up will be constituted as creditors winding up. The creditors then appoint a
liquidator and a committee to take care opf their interests.
By the court
Winding up pursuant to a court order to that effect is the common type
of winding up. Sec 218 of the companies act gives the high court jurisdiction
to wind up any company registered in Kenya. The circumstances under which the
company may be wound up are given in sec 219 of the companies act. These are
situations in which;
- The
company has by special; resolution resolved that the company be wound up
by the court.
- Default
is made by the company in delivering to the registrar the statutory report
or in holding the statutory meeting.
- The
company does not commence business within one year from incorporation or
suspends its business for a whole year.
- The
number of members is reduced in the case of a private company below 2 and
in the case of a public company below 7.
- If
the company is unable to pay its debts.
- The
court is of the opinion that it is just an equitable that the company
should be wound up.
- In
the case of a company incorporated outside Kenya, and carrying on business
in Kenya, winding up proceedings have been taken against it in the country
of its incorporation or any other country in which it has established a
place of business.
Who may present a winding up petition?
Under sec 231, an application for the winding up of a company should be
by a petitioner presented either by the company itself or by a contributory. A
creditor will normally present a winding up petition where the company is
unable to pay up its debts. The company’s inability to pay up its debts is
defined in sec 220. The company is deemed to be unable to pay up its debts if;
- A
creditor to whom the company is indebted in a sum exceeding KES 1000 only,
demands payment from the company and three weeks elapse before the company
has paid that sum or secured it to the reasonable satisfaction of the
creditor.
- Execution
is issued on judgement, against the company in favour of the creditor is
returned unsatisfied.
- If
it is proved to the satisfaction of the court by any other method that the
company is unable to pay its debts. Insolvency is inability on the part of
the company to pay its debts as and when they fall due. Winding up may not
be resorted to where the company disputes the debt. In
Re
Ghelani 1957 EA 197
It was
held that it is for the company to show that the debt is disputed on
substantial and bonafide grounds and the onus of establishing this rests with
the company.
See Sec 213, 214, 221, 222
COMMON GROUNDS FOR WINDING UP
There are common grounds for winding up by the courts;
- Where
the company is unable to pay its debts
- Where
the court is of the opinion that it is just and equitable to wind up a
company. The courts have exercised this power under various cases.
a.
Where the substratum of the company has failed; Re
German date coffee company ltd
b.
Where a member has been expelled from office or
excluded form participation in the management of the company.
In Re
Westbourne galleries ltd 1973 AC 390 the profits of the company were paid
to the directors as salaries and the petitioner was expelled from the company
without a dividend. It was held that it was just and equitable that the company
be wound up.
- Minority
protection- a petitioner who can show that he has lost confidence in the
ability or determination of the existing management to conduct the
companies’ affairs, in the proper manner will be entitled to a winding up
order. There must be a continuous disaffection on the part of the
directors or officers in relation to the companies’ business which has
justified the petitioner in lacking confidence in their management.
In Locke
vs John blackwood 1924 AC 783
A
company was registered in Barbados as a public company in order to carry on the
testators business and to divide the profits between member of his family
entitled under his will to share them, the managing director who had the
majority of the voting rights together with the co-director omitted to hold a
general meeting or to submit accounts or recommend payment of dividends. By
failing to do so they laid themselves open to the suspicion that their object
in so failing was to put the petitioner in ignorance of the companies’ position
and affairs and to buy the petitioners shares at another value. It was held
that in the circumstances of the case, regard being heard to the domestic
character of the company, the petitioners were entitled to the winding up order
as it was just and equitable
- Where
there is a deadlock which may arise where the shares are divided equally
between 2 members who have become irreconcilable with the result that the
business of the company can no longer be carried on.
In Re
Yenije tobacco co ltd 1916 2CH 1964
Weinberg
and Rothmann stated separately as tobacconists and cigarette manufacturers. I
1914, they agreed to amalgamate their business and in order to do so formed a
private company in which they were the only shareholders and directors. Under
the companies’ articles they had equal voting powers and one director was to
form a quorum. Any disputes were to be referred to arbitration. In 1915,
differences arose between the parties, where they became so hostile that
neither of them could speak to the other. Information from one to the other was
passed through the company secretary. Weinberg petitioned for the company to
wound up on the ground that it was just and equitable. It was held that this
was a partnership. There was need for dissolution and since there was a
deadlock it was just and equitable that the company be wound up. In the words
of Warring J, “although they are carrying this business by means of machinery
of a limited liability company, in substance they are partners. The litigation
in substance is the dissolution of the partnership and we should not be unduly
bound by matters of form if we treated either the relation between them as
other than that of partners or the litigation other than an action brought by
for the dissolution of the partnership against the other.
Consequences of winding up
The consequences of a winding up order dates back to an earlier date
than when the order was made. The earlier date is called the date of
commencement of winding up which is the date of the presentation of the winding
up petition. Once a court makes a winding up order, a copy of that order must
forthwith be handed over by the company to the registrar of companies. The
consequences of winding up are;
a.
Any disposition of the companies property, transfer
of shares, alteration in the status of the members after the commencement of
winding up is null and void unless the court otherwise orders. See Sec 224 of
the companies act. Once a company goes into liquidation, the whole purpose of
exercise is to collect the companies’ assets, pay its debts and distribute its
assets to the members. The object of sec 224 is to freeze corporate business
from the time the petition is presented so that the companies’ assets may not
be wasted during the period that may lapse before the petition is heard. The
court may sanction the transaction in the ordinary course of business otherwise
the filing of a petition may be ill-founded and cripple the companies’
businesses.
b.
Where the company is wound up by the court, any
attachment, distress or execution put in force against the companies’ assets
after the commencement of the companies winding up is void. Sec 225 of the
companies act. This may be validated by the courts order under section 228
whose purpose is to ensure that where a company goes into liquidation the
assets are administered for the benefit of the creditors. The section provides
that where a winding up order has been made or a provisional liquidator has
been appointed no action can be taken nor proceedings be taken against the
company except by way of leave of the court and subject to such terms as the
court may impose.
c.
On a winding up order being made, section 236
provides that the official receiver by virtue of his office becomes the
provisional liquidator and he continues to act as such until he or another
person is appointed the liquidator.
d.
Upon the appointment of the
liquidator, the powers of the directors seize and they become functus
officio.
e.
On a winding up order being
made, the servants of the company are ipso facto (by virtue of the fact
of winding up) dismissed but the servant who continues to discharge the same
duties and receives the same wages as before may be deemed to have entered into
a contract of service with the liquidator.
END