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COMPANY LAW 1 Class note.
Books:
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Principles of corporate law in Nigeria- Professor JEO Abugu.
The CAMAct.
The Investment and Securities Act 2007.
FORMS OF BUSINESS ASSOCIATION/ORGANIZATIONS.
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Sole Trader/Sole proprietorship.
Partnership.
Registered trustee
Company.
SOLE TRADER, SOLE PROPRIETORSHIP.
A sole trader is a business tied to the personality of the trader. A sole proprietorship revolves
around one person. Do not confuse sole proprietorship with sole trader. If Iya Iyabo owns a
single shop at the front of her house which she runs by herself, Iya Iyabo is a sole trader E.g.
if Mazi Okafor owns five shops at five different spots in lagos and he has five workers
positioned at the respective shops. Okafor IS A SOLE PROPRIETOR. Get the differences
between a sole trader and sole proprietorship. The similarities of sole proprietorship and sole
trade lies in the fact that
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They both run on the trader’s account.
The business is owned by one person.
Loss and profit are borne by one person.
The business is invariably tied to the life of one person.
Note that unlike a sole trader, a sole proprietor has the advantage of multiple participation by
several individuals as we saw in the Mazi Okafor example above.
PARTNERSHIP
A partnership has been defined as an “elevated sole proprietorship ”Precepts of partnership: it
is a distinct feature of the modern market. The advantage of partnership is that there are two
or more persons involved with more potential to raise more capital. The business no longer
revolves around the life of an individual, but is tied to the life of every individual- Each
partner is allowed to participate in the activities of partnership. For example; a dormant
partner can wake from dormancy and become active.
DIFFERNCES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP.
Unlike sole proprietorship where the trader trades for his own account. In partnership, the
partners trade for their own account. Partners in a partnership are accountable to one another.
Under partnership law, the assets are owned by all the partners and they are jointly and
severally liable for the debts and liabilities of the partnership fund. Consequently, profit and
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loss are shared rateably by all the partners. All the partners have an inherent right to
participate in the management of the business.
Part B of CAMA deals with registration of business names. Section 573 of CAMA provides
that if you are carrying on business using your true surname and forenames, you do not need
to compulsorily register it.
REGISTERED TRUSTEES
Part C of CAMA deals with registration of trustees. Borrows from the principles of equity
and trust. This is the first step to the modern type of business although some problems and
intricacies accrue here in relation to the management of other people’s money. Under this
proviso, two or more people pool resources together for the purpose of effecting a particular
course and not just for the purpose of business.
Framework: Dues, contribution, levies… and so on are paid/pooled. They are forming some
sort of brotherhood. They are to apply to the CAC to be registered as an association.
Basically to give the association a name/title as well as a legal title and status.
Section 19 of the CAMA- Any association exceeding 20 has to be registered as a company.
Section 596 CAMA is also important in this regard.
From birth, the law recognizes every person as a legal personae for the purposes of
commerce. Their business name is their true surname and forenames-Section 473-where the
business is not the true name and forename, it must be registred. An association needs six
trustees to get registered..
Unlike sole proprietors and sole traders, Registered trustees are not all involved in the
management of the capitals pulled together. RTs are usually used for charitable and societal
causes. The Registered trustees have the duty/problem of managing other people’s money
since the assets of the trust are legally vested in the trustee but the actual title is vested in the
beneficiaries.
Duties and Liabilities of Registered Trustees.
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They act as fiduciaries (they act in utmost good faith… no secret profit should be
made, disclose all relevant facts, not to let interest conflict with that of the
beneficiary).
They are to act in conformity with the express terms of the trust.
They are not to trade on their account but on behalf of the beneficiaries.
There is a duty to act gratuitously.
Note that these duties stem from the fact that the registered trustees are managing other
people’s money.
THE COMPANY/MODERN COMPANY
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Is a group of persons (2 or more) who have been incorporated to function as a
company.
The purpose of a company is for business and commerce. It is a vehicle of commerce.
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Any 2 or more person may seek to be incorporated as a company- Section 18 of the
CAMA. Any partnership exceeding 20 members must be registered as a companySection 19 of CAMA.
When 2 or more persons are incorporated as a company, the surname and forenames
of the partners are usually not the true name of the company. Where this is the case
(i.e. the names of the partners differ from that of the company) then the name of the
company must be registered.
A company is more advantageous than a partnership because in partnerships, capital
can only be pooled from the partners. This capital is circumscribed and can only be
pooled by a number of 20 people max partners. However, in the case of a company,
there is generally no limitation to the number of ways to pulling resources. Larger
capital can be raised from a wider base/target contributors.
14th January
HISTORY OF COMPANY LAW.
History is the summation of the factors that affects the evolution and growth of the corporate
world. It is the systematic changes in the evolution of companies as well as the issues and
legal regime of company law today… understanding the philosophy of the subject. History
indicates a path of growth. It is procedural and evolutionary. The origin of modern company
is treated in the English regime. I.e. emanated in the continental Europe.
Remember that certain people could not contract due to the fact that they were not recognised
as persons. People like infants and married women. Married women can now contract as
femme sole by virtue of the Married Women Property (protection) Act 1839. The legal
system is comprised of corporation sole and corporation aggregate. The former, being an
individual that occupies an office, whose office is a legal personality by the law and the latter
is an aggregate of the law which bestows legal capacity on the person.
The grant of such “corporate” capacity used to be by the issue of what is called the royal
charter. This was bestowed for the administration of civil societies.
In commercial activities (in its basic form) English law recognised a human’s personality (as
a sole proprietorship)… This status could be elevated to a partnership by joining with some
other people . Note that whilst a sole proprietorship is dependent on the lives of an individual,
a partnership is dependent on the survival of several individuals. Although these individuals
still have their own individual personality. A partnership has no corporate form.
We have noted that the English common law recognised the legal personality of a person.
This recognition could be extended to a corporation. The first benefactors of this recognition
were the church, charities and some other bodies. This concept of conferring personality to a
group of people was adopted following the Norman Conquest. Therefore, residents/two or
more people could approach the crown that they want to be known as a corporate group. This
translated to what is known as the borough System. This means that members of a borough
could transact with that corporate personality (name of the borough). Churches and
monasteries could obtain a royal charter transmitting their body into a corporate body.
Merchants deemed it wiser and expedient to trade as a company rather than as a partner. This
is because the company would be distinct from its partners. The merchants thus sought a
corporate status by appealing to the crown to grant a royal charter.
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English partnership recognizes two forms of partnership
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Commendator?: The commendator provides capital for the commendetarious?? to
carry out business with a view to distributing profit in determined proportions. If
losses are incurred, the commenditor bears the loss.
Societas? : A group of persons pool capital together in the name of the society. The
society has some basic rules as to operations. This form evolved to the extent that the
members agree that capital should be pooled together rather than one member buying
on his own behalf. This would lead us to trusteeship because in such a situation, a
registered trust is created. Remember that under sole p, the owner manages his own…
so there is no trust. In other words company of individuals pooling money together to
be managed by few for the interest/on behalf of members of the societas... This is one
of the first areas that had the features and indication of a trust…. Management of
other people’s money… It was realized that for purposes of raising large amount of
capital, they needed a name.
These were the most rudimentary. The early companies we had in Nigeria include; the Royal
Niger Company, Fast East Indian Company, and so on… These companies were formed by
virtue of the royal charter granted by the crown…
With this new status of corporate personality, the merchants could have a name distinct from
the owners/operators… This was legally expedient fashionable and more preferred.
Within a short while, there was a clamour to have corporation status by way of a royal
charter… everybody wanted to go corporate. Since the grant of a royal charter was within the
discretion of the Crown, not everybody could get. This resulted in an immediate shortfall
between the demand for royal charter and supply of royal charter. The royal charter became
expensive, inaccessible, the procedure became cumbersome and uncertain. Like basic
economics, if any product is scarce, there would be a black market for it. Thus a black market
arose for royal charters… Forgeries began. Charters of moribund companies were tailored to
suit their peculiar needs. In this “bubble”, 419 was evident. Fraudsters would put an
advertisement that they are forming a company with good prospects and misrepresent that
various dignitaries have interest in the company (like lords, Ladies). They then go to a
popular inn in a prominent part of the street in Central London, put a poster that it is the
subscription office They move from one coffee shop to another soliciting for subscribers.
When they have made all the money and collected all they can from the subscribers, they
remove their posters and disappear into thin air… All these types of fraud happened because
there was no formal procedure for obtaining a royal charter to confer royal status, there was
no verified system for evaluating the worth of a scheme, testing the veracity of the claim.
When companies drop names like Lord Eldon, Lady lambert and assert that such dignitaries
are party to the formation of the company when they are not, there was no way/mechanism
for ascertaining the veracity of their claim. There was no tracing system. Investing members
of the business community were swindled by this foul play. The illustration of the South Sea
company would be instructive on this. Read on the South sea company.
The major improvement that came to remedy this defect was the Bubble Act of 1720. This
Act was passed by parliament due to the outcry of the people with respect to the foul-play of
company promoters. It was essentially a prohibitory act. It provided that individuals or
persons without a royal charter should not transact business as if they have a royal charter.
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Penalties, imprisonment and fines were imposed. The Act temporarily stalled the concept of
transacting business as a joint stock company.
In the next lecture you would be taught the process of incorporating a company. You would
be learning the following
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The persons involved must be more than 2.
You must have a registered office. Such registered office must be disclosed (this
solved the mischief of the early swindlers.)
The promoters and prospective shareholders of the company must furnish their names
and particulars… (full names, address, age, nature of business, signatures).
The CAC would ask the incorporating counsel to provide I.Ds like driver’s license,
and other official documents and authentic means of identification.
Those that are going to manage the Joint stock (directors) must have their particulars
(like full names, means of identification and so on) furnished.
All these were done to prevent the creation of “bubble” companies. That can just disappear
into thin air.
The next phase in the evolution was shaped by the courts of equity. Smart lawyers would say
that although a partnership cannot transact as a company (because it does not have a royal
charter…) it can use the name “and co.” Thus, the word “company” was not the exclusive
reserve of a corporation. It can also be used by a partnership. Because the bubble act did not
prohibit a partnership from using the name “and co.”
Another area where lawyers displayed legal genius was by borrowing the principles of equity
and trust. The principles of equity and trust was borrowed to the effect that the law of trust
allows a number of persons to pool their capital together as trustees for the capital to be
managed. This can be done by the execution of a deed of settlement. Thus even though the
company is going to be a partnership, it could still enjoy the benefits of a joint stock through
the execution of a trust. The trust would contain two parts:
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Vesting part: making the director and managers.
Regulation part: The rights, duties and liabilities of members and trustees would be
provided here. When they can share and how the profit is to be shared, when they
should meet and how the trustees shall be controlled. This second part would also be
addressed by the deed of settlement.
The Bubble Act was not repealed until 1885? The law required that
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A memorandum of association must be provided (this copied the first part of the trust
style we noted above).
Articles of association. (This copied the second part of the trust practice). Because
articles of association is like the regulation part of a trust too.
The principles of equity had a great influence. From this influence of the Trust, the Act of
1844 (please get the name of the Act) had its roots. Assignment: read the provisions oof the
1844 act relating to registration and incorporation. Note also the 1834 Companies
Consolidated Act.
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Next, we have the 1855 Limited Liability Act: before the enactment of this Act,
shareholders used to suffer unlimited liability… in other words, if you are a share holder of a
joint stock company registered before 1855, the liability is not limited to the company’s asset.
The shareholders would offset the debts of the company with their private assets. This was
regarded as unlimited liability. The 1855 Act limits the liability to just the asset of the
corporation even where the debt exceeded the asset of the company. This limitation was not
extended to banking and insurance companies until after some years had elapsed.
Next is the English Companies Act 1856. This became a consolidated statute and it retained
those elements of the Incorporation of companies which are still with us today. Like; the use
of a memorandum, registered office, articles of association, identification materials, and so
on. The early provisions of the 1844 act were consolidated. This Statute was incorporated in
Nigeria by virtue of it being a SOGA. It was first extended to Lagos by the 1917 Companies
Ordnance. Later, the English enacted the Companies Act of 1922. Subsequently, the 1948
Companies Act was enacted.
Then, the enactment of the 1968 Act which was largely copied from the 1948 Companies
Act. This (1968) Act held sway until the enactment of the CAMA 1990 January.
From all we have seen, our company law is heavily rooted in English Law.
COMPANIES.
Generally. Two or more persons can come together to form a company. The word “company”
is a generic word like “Bisi and Co”. There are certain distinct features attached to a
company. A company is regarded as a corporate entity… distinct and separate from the
individual members unlike partnership and sole proprietorships.
A company can be brought into existence by the following ways:
1. The use of corporation aggregate (chartered companies): Where a Royal Charter
is granted to confer corporation status on the company. This was usually given to
ecclesiastical bodies. A charter is an act of Royal grace by the King or Queen to give
a corporate status; thus, a charter operated under the monarchical system. Some
chartered corporations include; the Bank of England, the Church of England, the
Chartered institute of Accountants of Whales, the United bank of UK, the Chartered
Institution of Secretaries and Administrators of England and Whales, the Bank of
Ireland.
Up till 1963, Nigeria was still under the crown to charter corporations. The English
king/queen seized to be the Royal head after republicanism in 1963 when the
umbilical cord of Nigeria was severed from England.
2. Companies that emerge by an act of parliament: These are statutory companies:
their corporate status is conferred by statute (maybe federal or state statute) The
parliament is supreme… i.e. the ultimate law making body... Can do and undo. ICAN
as a corporate body is capable of contracting and having a common seal. In the federal
system of government, there is the federal arm and the state arm, making
incorporation possible at both federal and state levels. E.g. PHCN, CBN, NNPC, all
brought into being by an act of parliament. More examples of corporations conferred
with corporate status include, Lagos State Water Corporation, Lagos State
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Development and Property Corporation, etc… they have their own laws establishing
them.
3. Companies that emerge by way of registration: under the 1999 constitution of
Nigeria, Registration of companies is in the Exclusive legislative list of the 1999
Constitution. The CAMA provides the legal framework. We have seen the procedure
for chartered corporations (i.e. by grant of Royal Charter), we have seen statutory
companies(i.e. by creation under statute). Now we shall examine registration.
Registered companies fall into two
 Private Companies (Section 22)
 Public companies. (Section 24)
Section 22-25 of the CAMA is instructive on this… Therefore, it is either a company
is private or public. Public companies have more onerous responsibilities and are
highly regulated. They however enjoy certain benefits…
:: Private Company: A private company is meant to be “private”… a compact group
of shareholders. Once your number goes beyond 50, the company is no longer
private… there is a proviso/exception to this: It excludes “bona-fide employees of the
company who are shareholders… meaning that if 10 out of (let say) 59 shareholder
are employees, it means that the company is still within the provisions of the law…
Thus they can have up to 60 if 10 or more are bonafide employees. They can have
more than 100 provided that the excess above 50 are bona fide employees of the
company. The other meaning of this proviso can be couched thus; is that ordinarily,
those that became shareholders whilst in the employment of the company are
expected to relinquish their shares when their employment terminates. However, by
this provision, if they decide not to sell/relinquish their shares, they would
nevertheless be excluded from the counting…. Thus bona fide employees or former
bona fide employees who were members before their employment and retained their
shares after employment are excluded from the counting. Thus, you can have a private
company with more than 50 shareholders provided the excess fall within the above
discussed. If the shares are acquired after the employment has been terminated, the
employee does not fall under the exclusion… i.e. he/she is not a bona-fide. It would
be technically wrong if in the exam, you say the membership of a private company
must not exceed 50. You should not stop there. You should go ahead and tell us the
exception… the proviso… the qualification… else, you are wrong.
The other thing in Section 22 CAMA is that a private company must by its articles
restrict the transfer of shares. This makes sense… if there is a 50 member constitution,
it makes some sense that there should be some restriction on the transfer of shares. If
one of the member transfers his shares to another, it impliedly means that he is adding
to the number of shareholders. E.g. if Okon, the 50th member (shareholder) of the
company decides to split his shares for his wife and kid, it invariably means that he
has made the number of shareholders 52. Thus, the shares of private companies are
not readily tradable. We shall treat some of these restrictions later. At some point, the
consent of the board would be required... the prohibition may be absolute or
permissive… these shall be discussed later.
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A third element in the definition of private companies is the fact that private
companies cannot make open invitation to the public to ask them to subscribe to their
shares or deposit money with them… they cannot receive money on deposit…
whether or not bearing interest. Private companies cannot ask members of the public
to deposit money with them. This is very germane to the nature of private
companies… Note that such advertisements for subscriptions can only be done by
public companies… This is because in the conception of the law, private companies
are compact and are not meant to be open to the whole world. This is logical
considering the limitation of 50 members. There is one exception: banks that are
configured as private companies. These companies are saved by the provision of
Section 67 of the ISA. They must have been approved and have a banking license
authorising them to crash/break through the limitation.
Between your private and public companies, three other kinds of cos can be formed
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Cos limited by shares. (Public or Private)
Cos limited by guarantee. ‘’
‘’
Unlimited liability company. ‘’
““
These three can be formed either as private or public companies. In other words, so long as
the CAMA in concerned, these are the three forms. And these kinds can either be public or
private. This makes it a total of 6 forms of companies.
21st January, 2016.
CORPORATE PERSONALITY.
LIMITED LIABILITY.
DOCUMENTS OF INCORPORATION
CHOICE OF RESERVATION OF NAME.
The corporate personality/separate legal personality principle and the limited liability
principle are the two pillars of this course. Because almost all we are talking about still boils
down to these. Note however that they are not the same.
Generally speaking, being a human being also means that you are a legal person. Although it
is not every human being that is a legal person… E.g minors, persons of unsound mind and
so on. The distinction is this: being a human being is an issue of nature but being a legal
person/having legal personality is an issue of conferment by law. Once you understand the
distinction, we go to the next stage.
In 1844, even when there was an act passed to confer corporate personality, as at 1844, the
liability of members that form that company was still unlimited. It was not until 1855 and
1866 that the issue of limited liability was recognised. The present consequence being that:
not only can the law confer an artificial person with legal status, the human beings/people
that form that legal entity are separate from the company. In essence, that artificial being
(Sade and Co) is a separate legal person from the human beings that set up that company.
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The second pillar of limited liability is this: you can confer corporate status on an artificial
being… the liability of the human beings who come together to form the artificial being is a
separate issue. Their liability can either be limited or unlimited. The fact that a company runs
into debt and there is a potential of unlimited liability of the members, doesn’t mean that the
company should not pay the debt. It is only where the separate legal personality is unable to
satisfy the debt that the creditors look to the shareholders to satisfy the debt. But if the
liability is limited, you cannot look to hold the shareholders liable for the debt of the
company. If you take up #1500 shares but the company has not asked you to pay for the
shares and the company incurs serious debt. The highest they can take from you is the #1500.
Because your liability is limited to the amount of share you subscribe to.
You would then see that limited liability is essentially a consequence of corporate personality
or what we call separate legal personality. This is why at the end of the name of some
companies you would see “ltd” or “plc”. This immediately tells you that the liability of the
shareholders are limited.
Some companies are however of unlimited liability. Mobil Producing Unlimited is an
example of an unlimited liability company. The good side of unlimited liability is that high
returns are usually made (especially in the petroleum area) but this comes at a cost of having
to pay with your personal assets to offset any debt which the company cannot pay.
The case of Salomon v Salomon is important in discussing corporate and legal personality.
READ THE FULL CASE (in your own interest). Where one Mr Salomon (a cobbler) sold his
sole proprietorship to Salomon and Co which was a registered company consisting of
himself, his wife and 5 children. A creditor of Salomon and Co decided to enforce the debt
personally against Mr Salomon. The court held that Mr Salomon was separate and distinct
from Salomon and Co. Read the Full case.
The company, as distinct from a sole trader is able to raise funding more easily than a sole
proprietor. Funding can be raised through equity (by inviting more people). Through
debenture (which acknowledges that the company is indebted to the debenture holder). A
debenture is higher than an IOU in that it can create a charge/interest over the assets of the
company. This charge can either be:
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A fixed charge: on an identifiable asset of the company. The creditor immediately has
an interest in that property.
Floating debenture: This is the most common. It is essentially a charge that floats over
the assets (mostly movable) of the company. This charge would crystalize (become
fixed) when the company defaults in repaying the loan. The floating debenture does
not restrain the company from smoothly running its affairs.
You can see that the company as a separate entity is an easy medium to perpetuate fraud. This
leads us to the doctrine of “lifting the veil”. In addition to the case of Salomon v Salomon,
read the cases of Lee v Lee’s Air Farming Ltd? 1961 AC at page 12. Macaura v Northern
Assurance Company Ltd 1925 AC 619. Which also talks about the separate legal personality.
You must learn the doctrine of lifting the veil... very important…
LIFTING THE VEIL OF A CORPORATION.
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We have noted that a corporation can be used as an entity for perpetuating fraud, however,
the law seeks to strike a balance between the right to enjoy being a corporate entity and the
duty not to perpetuate fraud. This brings us to the doctrine of “lifting the veil”. You must note
the principles and legal basis upon which Nigerian courts lift the veil of a corporation. The
position is not so certain. Although there are some clear-cut cases where you can immediately
know that the court ought to lift the veil of the corporation. E.g. there is a “gentleman” who
sets up a co and is the majority shareholder, he is also the founding and sole director for life
of the company. Just like the Mr Salomon case. He owns 99 percent of the shares and gives
the other member 1 percent (just to meet the requirement of the law (not less than 2)) in
addition to this, the company then enters into a contract of employment with this same
gentleman. You can see that this gentleman is the majority shareholder, llife director and also
employee. When he was executing the contract of employment, it was for him too as
employee of the company. This man is engaged as an employee (lets say it is a transport
company and he is also employed as the chiefdriver). On official business, along Ibada
express way, he dies in an accident. The issue is this; employees are entitled to some form of
compensation from insurance companies in such circumstances of death while on official
duty. The wife wants to claim the compensation and the insurance company alleges that the
“gentleman” cannot be entitled to the compensation since the company is the same as him.
What would be your position? A similar situation can be found in the Lee v Lee’s farming
case supra.
The other example of Macaura v London Assurance case must be noted. Read the case. The
moral of this decision is that even when you own a company 100 percent, the assets of the
company are not your assets. Thus, the Shareholder does not have insurable interest in the
assets of the company. Even though in the realm of corporate law, you can direct the affairs
of the company in relation to the asset… the asset is still not your own. In practice, you see
people making the mistake of paying their debts with their company’s funds. Making
personal payments with company’s cheque, and so on.
There are times where it is expedient for the law to apply the corporate personality principle.
However when should the law pull back from this principle?... It is when the justice of the
case demands so.
There are at least about 3-5 instances in CAMAct where in appropriate circumstances, the
law would lift the veil. Although the CAMAct does not say “lifting the veil”, common sense
would tell you that it is lifting the veil. You should be looking at Section 290 (fraud) and in
other instances where the CAMAct imposes “personal liability” on the shareholder or
directors/manager. There are also instances in CAMA which talks about the group structure.
Look through CAMAct and those instances of lifting the veil under CAMAct.
In terms of case law, there are certain Key-points to bear in mind from the cases to be read.
1. At some point in time in the history of Company law, there seemed to be a high propensity
to use the corporate form for fraud. Quite a number of English cases were clear cut cases of
fraud/certainly a fraudulent intent to avoid contractual obligation.
2. You would also see cases where no fraud was involved. In the time of War, where a co was
owned by an enemy citizen. The courts would pierce/lift the veil of the corporation and
regard the co as an enemy of the state too. See the case of Dunlop v Continental Tyre.
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3. Those in restraint of trade.
It then became difficult to know the instances in which the courts would lift the veil. “where
the justice of the case demands” meant that the lifting varied just like the judges foot. Lord
Denning made a very novel contribution in this point. He was extremely brilliant and forward
looking. He took this principle of lifting the veil to another level. Lord Denning came up with
the Single Economic Unit Theory noting that where there is a complex/group structure, the
courts should be able to look beyond the structure. E.g. creditors of a subsidiary can jump to
the parent company to enforce the debt. This can be seen in the DHM Foods case? In another
case, the Privy Council refused to accept the Single economic unit theory and held that the
veil can only be lifted in extremely demanding circumstances.
Adams v Cape Industries Ltd, is also an important case. It was essentially about enforcement
of foreign judgment. The issue in this case related to asbestos claims. Asbestos panels caused
lung cancer. In the early 90’s and late 80’s, once it was discovered, there were a lot of claims
against companies that sold and distributed asbestos. Cape industries was an English
Company but they had American subsidiaries. The American plaintiffs sued Cape industries
and their two other American Subsidiaries for damages as a result of the asbestos. Cape
Industries raised the issue of jurisdiction (that they are not resident in the US). After some
deliberations, cape industries agreed to pay and the plaintiffs were compensated. Another
action was instituted by another set of plaintiffs against cape industries in relation to the same
Asbestos claims. This time around, cape industries became adamant and refused to pay the
second set of plaintiffs. They refused to appear for the case. The plaintiffs nevertheless got
“default judgment” in the US. They then came to UK (where cape industries was) to enforce
the judgment. The question then; was Cape Industries present in the US? At the English
Court of Appeal, it was maintained that cape industries was not present in the U.S and that
their subsidiaries were distinct and separate from them.The English Court of Appeal noted
that the subsidiaries in US remained separate and distinct from cape industries thus, cape
industries was not present in the US. On the hand, it was alleged that the subsidiaries should
be regarded as the agents of the Cape Industries. The court refused this and noted that there
was no basis of lifting the veil of a corporation. Thus, English corporate law tends to still
maintain the integrity of corporate personality especially in purely contractual situations.
Except in the cases of fraud or where there is a tort (like serious injury suffered during the
courses of employment in a subsidiary company.) Connelly v RTZ Corporation Plc 1998 AC
at Page 854. The second case is Lubbe v Cape Industries Plc. Read the cases.
What is (are) the basis upon which the Nigerian Courts would lift the veil of a corporation.
Look at the PFF v Jefia? case. Section 290 does not apply to the Jefia’s case.
***read Section 290 CAMAct
PROMOTERS AND PRE-INCORPORATION CONTRACTS.
Read the cases and principles before the class.
28th January, 2016.
As a matter of English company law which is essentially company law, there was a clear
intention not to have a precise definition of promoters. Because of the potential for using the
company as a vehicle of fraud/ the potential that certain people around the company may
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make it an engine of fraud. The Twycot? v. Grant case shows us that most times, you may be
able to identify a person as a promoter. Because if you have a closed definition, it is either
you are in or out… it is either you are a promoter or you are not… this closed definition is not
desirable… Innocent people that are invited to invest in the company can be defrauded or
their participation used to benefit one wrong person.
In 1990 when the old Companies Act of 1968 was amended in Nigeria, we decided that we
were going to have a definition of a promoter. This is what we would find in Section 61 of
the CAMA…
They are those that come together for the purpose of forming a company. How can you
describe promoters?
At common law, people would enter into contract with a non-existing company and after it
has been incorporated, the company would be used as an engine of fraud. The historical
company law position is that promoters are not agents of the company. The reason being that
you cannot be an agent of a non-existent person.
The next question is whether they are trustees. Company law then answered that they are not
trustees. However, because of their close connection, they are in a fiduciary position. You
know the regular duties of a fiduciary… Cool… same duties apply in the case of a promoter.
Laguna's v Laguna's.
Going on to CAMAct, Camact codified the common law description of a promoter but with
some slight differences in Section 61… compare it with the Twycotts case supra. Read the
definition in Section 61 and compare it with that in the Twycotts case.
Note that the ability to be a promoter is not conclusive evidence. This means that if someone
potentially exhibits those characteristics of Section 61 but is able to rebut (by words, conduct
or otherwise) the presumption of him being a promoter… he may not be regarded as a
promoter. E.g. It may happen that someone was actively involved in the incorporation of a
company but was not interested in being a promoter.
Note the proviso in Section 61 …”one acting in a professional capacity” in the formation of a
company…. Meaning that a person exhibiting a “promoter” characteristic may not be
regarded as a promoter if he is doing such in a professional capacity. Does it now mean that if
you act as a solicitor of a company you cannot be a promoter even if you want to be? E.g. Mr
Ade, a legal practitioner decides to start a company with two of his friends. Being a lawyer,
he drafts all the documents and does all that is needed in incorporating the company. Does it
mean that he cannot be regarded as a promoter? Thus, Section 61 must be read in context: if
any person fits the characteristics that are stated in sc 61 of a promoter, it is only “prima
facie” evidence rather than “conclusive evidence”.
Section 61 (2) CAMA simply restates the common law position…that the promoter is in a
fiduciary relationship. Sc 62 just also codifies the common law position in terms of the
remedies tat can be obtained against a promoter… provided that there must be full disclosure
of all material facts known to the promoter. In terms of remedies and ratification, a closer
look would reveal that it is the same wrongdoers that are ratifying their issues (the promoters
usually end up running the company which ratifies their acts).
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The CAMA, in an effort to prevent the above situation brings about some sort of
independence in the issue of ratification… It mandates that such ratification must be done by
-
The company's board of directors independent of the promoters
All members of the company… Read up the Section 62.
Can we identify any flaw in this provision? Take for instance a case where the property is
sold or bought at an under or over value… typically speaking, these promoters would usually
be in control of these entities. And typically, the general rule is that directors are appointed at
the board meeting. Imagine a situation where a majority shareholder (wrongdoer promoter)
has appointed the entire board. How then can we say that the board of directors is
independent of the promoter. He is the one that appointed them... again, on the second
leg/requirement, (“all the members of the company”) it does not say “excluding the
promoter”. This means that the promoter can among the “members of the company” ratifying
the prior acts. Then on the third leg, we can criticise it with the Salomon example. Even if
(for example) Mr Salomon steps aside for impartiality sake, the delebration may nevertheless
end in his favour.
Note the provision of Section 62(4) which removes limitation period in relation to suing the
promoter. Meaning that no limitation period can apply where the company wants to sue the
promoter
PRE INCORPORATION CONTRACTS.
What are pre-incorporation contracts?
Note that at common law, the turning point/determinant was: “how was the contract signed?”
Read the various cases. The cases adumbrated the following:
-
The principle of Privity of contract: The unincorporated company is not a part of the
pre-incorporation contract…
You cannot purport to act on behalf of a non-existing principal.
At common law, even if after the incorporation, the company ratifies, the courts would still
refuse based on the above stated principles.
A company that wishes to scale the common law hurdles could do so by way of “Novation”
alternatively, upon incorporation, it can enter into a new contract with the same terms and
conditions as that entered into before its incorporation.
In the Edokpolo’s case. The counsel argued that it was a shareholder’s agreement while Gani
Fawehinmi was saying that it was a pre-incorporation contract… You should ask yourself
whether the Supreme Court should have decided that case based on pre incorporation contract
principles? We should ask whether the contract has any bearing on pre-incorporation
contracts. You must read the case.
This is the gist of pre-incorporation contract:
-
A promoter purports to enter into a contract with a third party in respect of/on behalf
of a company that has not yet been incorporated.
It should be in relation to and on behalf of the unincorporated entity.
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In essence, it is NOT all contracts entered into before the incorporation of a company that is a
pre-incorporation contract.
There is a difference between a pre-incorporation contract and a contract entered into before
the incorporation of a company.
The scenario in Edokpolo’s case could be seen as an agreement between the shareholders as
to how they would operate. The definition of pre-incorporation contract under Section 72
“transaction purporting to be entered into on behalf of a company prior to its incorporation…
There was no basis for the application of the pre-incorporation contract principle in the
Edokpolo’s case.
Note Section 72 (2) in terms of the legal consequences prior to ratification… the legal
consequence is personal liability and entitlement as well. Meaning that the person (promoter)
would carry the benefit and burden of the contract. Read the following cases: Transbridge Co
Ltd V Survey International, 1986, 4 NWLR Part 37 at Page 576. There is also the case of
Sparks Electrics Nigeria Ltd v Pomile 1986 2 NWLR Part 23 at Page 516. The last case is
Societe Generale v Societe Generale Bank Nig Co. Ltd***
04 February, 2016.
THE CAPACITY OF A COMPANY.
Dr. Abiola Sanni.
(There is a material on this)
There is no “real” personality in a company. Because a company is an artificial entity, there
must be rules and procedures guiding the actions of the human persons in the company and as
to when the company would be liable. The question is; when can an action taken by a human
agent of a company be regarded as that of the company. Issues like; conclusion of contract,
discharge of contract, variation of contract which are to be conducted by the human phase of
the company.
Rules are developed in order to protect the company and ensure that a company fulfils its
objectives. If there are no rules to guide and protect what people are doing on behalf of a
company, the company may be set on a path that is the opposite of its objective. It is possible
that the directors of a company may be moving it in the opposite direction… This is why we
have the law… to guide their steps.
First of all, we need to know the contents, significance and relationship between memo and
articles of association and their legal effects. The bulky memo and article that we used to
know is not what is in practice today. Right now, memorandum and articles are in few pages.
You need to understand the possible legal effect of the changing nature of MEMAT in
Nigeira. You need to determine the extent of the power of a company and distinguish
between the objects and power of a company… you need to know the guiding principles…
when the action of officers and agents of a company would be attributable to the company
and you must understand some of the concepts that have developed around the capacity of a
company.
You must be familiar with the Memorandum and Articles of association (MEMAT) Which
can be likened to the constitutional and administrative framework of a company respectively.
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What is the distinction between constitutional and administrative?
The administrative aspect works out the constitutional aspect- Mr Onifade.
The overriding principle is “constitutional”… You cannot derogate from them… The
administrative aspect is not as fundamental as the constitutional aspect-Mr Chidioke.
Therefore, the Memorandum contains the fundamental information about the nature and
structure of the company. While the articles relate mainly with the day-to-day operations of
the company. The Memo is like the engine of a car.
A problem question would test your ability to distinguish between a memo and article of
association and identify where each matter falls. E.g. if Mr A acts as a solicitor to the
company and wants to be appointed as a solicitor for life… is it a matter that should be in the
memo or the article? We shall discuss these later.
Articles are subordinate and cannot modify the memorandum. It is like making the tail to wag
the dog instead of the other way round. Lawyers who did not understand this have tried to do
the wrong thing. See the case of Guinness v Land Corporations of Ireland? 1983 22 CH.D
349
Section 35(2) Companies and Allied Matters Act obligates promoters to file the
memorandum and articles as part of the incorporation document. Thus, even though there are
other documents, the memo and articles of association are the fundamental documents that
must be prepared and filed.
Let us now focus on the Memorandum.
Anytime you see a bulky constitution, it is an indication that the drafters did not have good
understanding of constitutional law. For example, there are so many irrelevancies in the 1999
Constitution… Matters that are best catered for by statutes. The American constitution is
probably the smallest in the world but at present they are the world power. It was in the
process of making the American constitution that they felt the need to do something relevant
for their existence.
The memorandum should contain the following (Section 27 CAMA):
-
Name.
Address.
Registered office
Objects
Restriction clause
Status clause
Liability clause
Capital clause
Subscription clause
Section 27(1) Everything outside these is dealt in the article…
Name: depending on the type of company, the memo shall be as specified in tables b,c and d
of the first schedule. We shall focus on limited liability companies.
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Some of you may ask: what is in a name? There is a stipulation that the name must end with
either a “Plc” “Ltd” or “?”. There are cases where a company has been sued in a wrong name
and people have capitalized on that to escape liability. What it means is that you cannot hold
that company liable for that judgment where you did not sue it in its correct name. Therefore
you must check their memorandum for the proper name of the company. The registered name
of a company may be different from its brand name. Thus you must check the memorandum
for the proper name of the company. Eg. Chevron, Mobil, MTN, etc are “wrong” names to
sue with. If you sue the company in a name that is not known to law, no liability can attach. It
follows that a “name” is constitutional and fundamental. The next one is:
The Address Clause: It states that the registered address of a company would be situate in
Nigeria often because the promoters are not able to determine the proximate place. Upon
incorporation, a registered company is ascribed a Nigerian personality. This enables it to
operate throughout Nigeria. There is nothing like indigeneship operating in Nigeria. Although
there is what we call registration of business premises for those businesses carrying out
operations in an area. This would specify the area in which they are carrying on business.
Notice of Address of Registered office Clause: is one of the document required to be given
to the commission. See Section 35(2B). Because certain books are required to be kept in a
registered office (like accounting records). A registered office is very important because
certain things are meant to be done and kept at the registered office. It is convenient to think
that the head office is also the registered office. To be sure, check the memo. This
requirement is necessary because at the time the company is being registered, the promoters
may not know the finality or where they would locate it. A company is supposed to
periodically file the necessary papers with the CAC when some of these changes take place.
Like change in the address of the registered office Under Section 407(1), the FHC has
jurisdiction to wind up a company within whose jurisdiction the registered office is located.
In essence, The FHC within the area of the registered office is the court with jurisdiction.
Object Clause: The object of a company is the purpose for which it was formed. We may
conclude that all companies are formed to make money… This is not totally true… but it is
clear that no company is formed for the operation of illegality/illegal purposes. The case of R
v Registrar of Companies ex parte HM A.G 1991 BCLC 476 is instructive on this. Poser:
should a company be formed for a singular purpose/object? Should they just be allowed to do
whatever they want? Since companies are trying to make money, shouldn’t they be allowed
to diversify? The rules inhibit companies and confines them to the field they registered as.
Can first Bank be importing fuel? They may be tempted… but there is legal regulation. There
is what you call “Authorized business”. Most promoters would not want to foreclose ther
possibility of them diversifying into other business endeavours. Therefore, they draft the
object clause in very broad terms. See Section 38(1).
Restriction clause: Section 27(1d) provides for this. E.g. a company has the powers of a
natural person but cannot do whatever it wants in all circumstances. There should be a
restriction clause if a limitation is sought. Wisdom should be applied in crafting such. It is
better to have the power and not use it than for you to restrict your power and find out that
you need the power in the future. Thus you should not restrict your company’s scope because
you may need it in the future.
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Status Clause: It is important to state whether a company is private or public. Because of the
requirements imposed by law. E.g. Public companies should have “Plc” at the end of their
name… a limited liability company should have “ltd” and so on. E.g. “Mobil Unlimited”
shows you that they have unlimited liability. The case of Salomon v Salomon is instructive
on ltd. If the liability of Mr Salomon was unlimited, the creditors would have been able to
pursue him. Poser: What makes a company public and what makes a company private… is it
the number of shareholders?, availability of shares to the public? transferability of shares?…
The major distinction is the way it is stipulated in the memorandum of association. In
essence, you must look at the memo. Forget about all those academic distinctions like
shareholding, transferability, and so on. Look at the name in the memorandum… Being a
private or public company is not about the nature or character of the shareholding structure. A
co owned by the FG can be private or public. E.g. is MTN a private or public company? A
private co would tell you that it is private in the memorandum, so would a public co. The
content of their memo. In other climes, the same number required to register a public co can
register a private co. In some countries, only one person can register a company. Nigeria
would soon follow this position. There are also special procedures on how to convert from
one company to another. In the situation of a co limited by guarantee that wants to convert to
a limited liability company… it cannot. It is better to wind it up. A co that was engaged in
commercial transaction for profit should not be a company limited by guarantee. A co that is
non-profit endeavour may end up being the one making the most profit. Therefore taxation
may be imposed on their profits notwithstanding that they are registered as a non-profit
organization… regulatory bodies monitor the profit of such companies.
Liability Clause: the memo should state whether the liability is to be limited by shares or is
not limited or is limited by guarantee. Member’s liability cannot be increased without his
consent-Section 49 Companies and Allied Matters Act.
Capital clause: should be stated in the memo. If you want to register a company, they would
ask what the share capital is. #10k is the least needed to start a co. 1/3 of this N10,000 must
be subscribed. The question then is: what is the point? When it is as little as 10k. In practice,
nobody registers a company with as little as 10k. The most frequent is 1 million. In the past
questions, issues were raised as regards some young graduates that wanted to register a
company with a billion share capital. The question is: where would they get the money to pay
stamp duties? Since you know that stamp duties can be charged based on the value of the
transaction. In essence, it is not expedient to register a company with a staggering share
capital unless it is mandatory. E.g. If you want to set up a bank, you require 25 billion naira.
The promotion would get the co going. In practice, there a so many companies whose journey
is limited to the certificate of registration. Meaning that they haven’t started working even
after registration.
Subscription clause: Which would state the persons who are shareholders their addresses
and other required details. Subscribers are basically the first members of a company.
Subscription is one of the ways of becoming a member of a company. Their name would
appear in the constitutional and administrative documents… other ways to join a company
include allotment, sale of share and so on. Part of the Incorporation document is the Form
C02 which indicates the structure of shareholding.
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Finally, criticise the above requirement/provisions and tell us what you think. Are
they repetitive, superfluous… and so on. Instead of 8 clauses, can’t you have 7, 6 or 5?
ALTERATION OF A MEMO.
A memo can be altered. You can alter and there are provisions for alteration in the
Companies and Allied Matters Act. Initially, you could not alter your memo. Now you can
unless the memo expressly provides to the contrary. If you want to have a rigid constitution,
the law gives you that power… in essence, a memo can be altered but if you want to make the
memo rigid, you can provide (in the memo) that it cannot be altered. Thus the nature of a
company can change. In real life, there are instructions on how to change the name of a
company. A human person can change his/her name… so can a company change its name.
There are some of the nature of a company that can be changed while there are others that
cannot be changed. Eg. A co ltd by guarantee cannot be changed to another because it goes to
the essence of that company…
8th February, 2016.
ALTERATION OF A MEMO continues…
We shall focus on alteration of 2 clauses: name and object clause.
Section 44(1) provides for:
-
Specific circumstances.
Manner and
Extent
To which a company may alter its memo.
Section 44 requires strict compliance. “a co. cannot alter its memo except in the specific
circumstances, manner and extent…” as provided in this act.
Section 27, 31, 100-111, 46, 49. Have provisions relating to alteration. Specific provisions
are made for the alteration of specific clauses.
-
Name clause-Section 31
Object-Section 46 (which applies to “any other provisions of the memo”)
Capital clause-100-111.
In practice, 2 of the clauses usually feature for alteration vis:
-
Name.
Object.
Alteration of Name: especially in this era of re-branding. A company may feel that it is
reflecting the wrong name/the name doesn’t fit its object… They would thus decide to change
their name. Section 31 provides for change of name of a co. Sub 3 of the Section provides
that the co may by a special resolution change its name with the approval in writing by the
CAC. Thus you need a special resolution and approval from the CAC. A resolution is a
decision of a company… The decision of a company is in form of a resolution. There is
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ordinary resolution and special, the latter is passed by ¾ majority while the former is passed
by simple majority. Also, the notice period differs in both. The approval of cac would not be
required where the only change that the company seeks to make is a substitution of the word
“plc” to “co ltd”. Dr. Sanni believes that this is the most fundamental issue because it
impinges on the status clause… therefore; why is the approval of CAC not required? Because
such name change can change the status of the co from private to public. Thus, if you have
the opportunity to review the law, you should query why this is an exception. The altered
name should be entered by the commission in the register and issue a new certificate of
incorporation issued… Then publish the alteration in a gazette. For evidential purposes, the
publication in the gazette would constitute evidence to the court. The Section says “or” so
you can show the certificate or the publication in the Gazette as evidence.
Alteration of Object Clause: the procedure here is more complex and rigid. Provided under
Section 46.
-
-
-
Notice in writing must be duly given to all members of the company of the intention
to alter its objects. So that such people may change their mind in relation to lending
their support to the company. E.g. a Muslim that invests in a salt making company
and they want to start making beer, the investor can change his mind. The co must
alter by a “special resolution”. 21 days-notice. The 21 days-notice is for policy
reasons. If an application is made to the court for such an alteration to be cancelled,
the alteration would not have effect until it is confirmed by the court. Note that an
application to the court is triggered where there is a dissention.
For the court to entertain the case:
 The application must be at the instance of
 a holder of not less than 15 percent OR
 15 percent of the debenture holders. OR
 15 percent of the members.
 It must not be at the instance of someone that had supported the
alteration. You cannot appropriate and reprobate?
 The application must be made within 21 days of the passing of the
resolution.
 The court may confirm the alteration in part or in whole on such terms
as it may deem fit.
 The court could adjourn the proceeding so that the interest of the
dissenting parties may be bought over. An order to facilitate this may
be made.
The co must file a notice with the CAC by delivering the Certified true copy along
with at printed copy of the altered memo. Alteration of name is cheaper and faster
than setting up a new company.
ARTICLES OF ASSOCIATION
Provides regulation for the internal administration of the co. before the 1960 recent
Companies and Allied Matters Act, it was necessary for a co ltd by shares to register its
articles. Before 1990, it was optional… if u did not file any, you would be deemed to have
adopted the provisions of table A. Section 33 now makes it mandatory for every company to
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file an article and memo. The articles shall be printed, divided into paragraph/number and
subscribed by each subscriber in the presence of at least one witness who shall attest to the
signature. The article shall bear a stamp as though it were contained in a deed.
Table A has 4 specimen
-
For pub co with share capital
Private co with share capital
Cos ltd by guarantee
Unlimited co
Each of these specimens merely provides a guide as Section 34 (1) makes it clear that they
could be used with such additions, modifications or alterations as may be required in
circumstances. This is so because we are talking of indoor management… private matters…
All these have changed due to certain admin practice of the CAC. However, when the
incorporation is that of a closely knit family business, the promoters…. are given almost
complete freedom to modify or vary the contents of the articles…
THE LEGAL EFFECTS OF THE MEMORANDUM AND ARTICLES
:: Articles are subordinate and cannot modify the memo. A tail cannot be wagging the dog.
:: The memo and articles have the effect of a contract under seal. The effect of a contract
under seal is that it is binding and enforceable even where no consideration has been
furnished. Assuming a member/a subscriber to the memo and article wanted to exercise a
right to object to the change of object and the other side raises the issue that although certain
shares have been allotted to him he is yet to pay for it and these shares were subscribed in the
memo and article… what legal effect would this have? He is a member by subscription to the
Memo which is a contract under seal… he does not need to have furnished consideration. The
company may have a lien over it… the fact that he has not paid for it does not disentitle him
from being a member, the law deems that he has paid.
:: The provisions are binding on the company and its members. If the article provides that Dr.
Sanni is a member for life, it is binding. In Wood v Odessa Water works co, a co passed a
resolution to pay dividends by means of debenture… (Dividend is the return on investment)
but the article provided for payment in cash. They were sued. It was held that since the article
was not altered to provide for payment of dividend, they cannot. Obikoya v Ezenwa, the
plaintiff and defendants were permanent directors, the articles provided that a permanent
director cannot vote for the removal of another. The co passed a resolution to alter the
articles, before the special resolution was confirmed, the defendant removed the plaintiff. The
court held that the purported removal was invalid.
:: The provisions are binding between the members inter se: Rayfield v Hands, (Vasley J’s
Judgement). Members must recognize that they enter into contracts on terms which may be
altered. There is nothing that can be in the constitutional and admin doc that may not be
altered provided procedures are followed. In essence, the fact that there are two members at
the inception does not mean that that is the way it would be for life. Administrative matters or
proceedings may change. Meaning that there are dynamics that may take place in the future
that may change certain things. There are situations where there are major buyouts.
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:: the provisions are binding and between the company and its officers: this was not the case
at common law. At present, officers may not be members like secretary, managing director. If
the articles have vested certain rights on the officers, it would be binding.
:: the co must be managed in accordance with the provisions of the memat.
At the moment, CAC has adopted a practice whereby all cos that are being registered must
adopt a standard format. We have noted that initially, the applications were so bulky…
Because CAC would want to scrutinize each of the objects to see that there is nothing
offensive in them. They decided to adopt a format to speed the process. The Articles have
been compressed to less than 2 pages. By saying that you adopt the standard model in table
A. This has far reaching implications. The law gives the co and its members discretion to
modify and alter. The situation we have now is that everybody is now in a straight jacket.
In practice, the way out is to have shareholder’s agreement. Because table A may not contain
everything needed for running the company effectively. Read up shareholders agreement.
Some of these things are better taken in the articles but because of the admin bottleneck,
people are resorting to “shareholders agreement”…. Although Articles of Association is
obviously superior.
11th February, 2016.
CAPACITY OF COMPANIES.
Rules have to be developed to protect the interest of the company and the interest of the third
parties. Some rules resulted in unintended consequences. There is the need to balance the
right of a company against the duty not to defraud others.
Our discussion would be centred on.
-
Constructive notice rule.
The Rule in Royal British Bank v Turquand/The indoor management rule.
ultra vires rules
Note that we are talking about the capacity of the company as stated in the Memo rather than
the power of the officers. Not about the “power” of what a company can do but objects that a
company can pursue. You would see cases where ultra-vires rules have been wrongly applied
in terms of actions of a director.
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Constructive notice rule: Section 68 Companies and Allied Matters Act. Except with
regards to Section 197. Therefore, there is nothing like constructive notice except with
regards to registration of charges (as noted under Section 197). Section 35(1) requires
MEMAT to be registered. Once they have, they constitute public documents which
can be accessed. If you want to know the people behind the affairs of a company you
can go and check the CAC. The constructive notice rule is an old rule which states
that anybody dealing with a company is deemed to have notice of its public
documents. The rationale was stated in the case of Ernest v Nichols. The dictum in
this case can be challenged on the basis that it focuses on the capacity of the Director
rather than the company. They want people dealing with the company to take extra
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care to ensure that the company was registered for that purpose. In the case of Re
John Beaufort (London) ltd, the company whose object was to manufacture dresses
went into making veneers panel. All the claims by creditors except one failed.
Because if they engaged in any transaction without any problem, everything is fine.
But where there is a problem. The company would raise a defence that they were not
setup to carry the act./transaction they concluded. This meant that the rule could be
used against the company and the company could also use it to evade responsibility. It
seems unreal to expect a third party dealing with the Company to check the
documents. The Nigerian Law reform considered this as inconvenient and
impracticable. There is consensus on the criticism of this doctrine. This resulted in
Section 68 CAMA.
The rule in Royal British Bank v Turquand Otherwise called the indoor management
rule. Here it is the article that is relevant rather than the memo. There are certain
things that are regarded as things that everybody should know. This is like the
opposite of constructive notice. E.g. not all decisions of companies are supposed to be
filed with the CAC. Section 68 and 69. Section 69 focuses on the activities/exercise of
power by all the agents of the company.
There is a presumption of regularity in Section 69. The CN rule’s application was
excluded from indoor activities of the company. Some people wanted the constructive
notice to extend to all the documents of the company. The rule in Royal British Bank
Turquand can assume that all matters of internal management has been complied
with. The rule thus operates as estoppel against a company. In the RBB case a co
issued a bond as security for certain withdrawals which they would be doing for their
account series of bonds were issued to the bank. The banks ensured that the bonds
were actually signed by the two directors. Certain resolutions had to be passed before
they can validly sign the bond. Thus in the case, notwithstanding the keen interest of
courts to protect the company. This rule has been applied in various Nigerian
decisions. Metalimpex v AG Leventis and Co. 1976 2 SC 91, 1976 UILR, Trenco
Nigeria Ltd v Africa Real Estate Ltd. 1978, Obaseki v ACB 1966 NMLR 35.
Excpetions to this rule include”
o Where there are suspicious circumstances which should put the third party on
enquiry-Underwood Ltd v Liverpool and Martins.
o Where the third party knows of the internal issues/irregularity-Morris v
Kansen.
o Where the transaction resulted from a forgery.
All these are now codified under Section 68-69.
Look at Underwood Ltd v Bank of Liverpool and Martins case.
THE ULTRA VIRES RULE
This is a combination of two Latin words; ultra-(beyond) and vires (power), basically in the
realm of administrative law. Generally, it is habitually used in three circumstances
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The capacity of a company to act (ultra vires in the strict sense). Applies to
incorporated bodies with distinct legal personality i.e. a company as opposed to an
individual
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The governing body of chartered corporations has acted ultra vires when they go
beyond their statutory limitations.
An activity which the company cannot lawfully undertake.
Section 39 (1)
Why should there be such limitation when the object clause of a can be altered to cover their
new business and it becomes backed by law. Also, such company can set up and register a
subsidiary to carry on the extra business. E.g. banks venture into real estate, brokerage, Micro
finance, insurance, mortgage transactions, pensions, and so on. Also no rights and obligations
would fall on the third party where the transaction is ultra-vires. The shareholders cannot
ratify the ultravires act. What should be done would be to alter the object clause of the
company for future purposes.
This was established in the case of Ashbury Railway carriage and Iron Company v Richie.
The object clause of the co includes to make, sell, lend or hire railway carriages and wagons,
to carry on the business of mechanical engineers, sell coal, timber and other materials... The
co contracted with the plaintiff for financing the construction of a railway line in Belgium.
When the cookies crumbled and they could not pay. It was held that the contract was ultravires since the object clause of the co did not include the financing of railway construction.
Thus it was ultra-vires. In Continental Chemist Ltd v Ifekandu??? Someone was sponsored
by the company on the agreement that the person would serve the company for a specified
time. He retired before the term lapsed. The court held that there was no ultra-vires here.
Read the decision 1966 All NLR Page 1. Although the doctrine was formulated initially to
protect the co and shareholders, third parties were able to use it against the company
frequently.
A strict application of the rule hampers commercial activities and to avoid the harsh effect,
business communities evolved various strategies to avoid the hardship of this rule. Therefore,
instead of having only one object, they would list plenty objects. The courts then refused to
allow this and held that they would limit the companies to their main object which is usually
the fist/listed.
Look at the evolution of the Ultra Vires Rule… There was statutory intervention.
Look at Section 39 ahead of the next class. It hasn’t really abolished the Ultravire rule but
enforces it and contains provisions to prevent the abuse of the doctrine.
15th February, 2015.
THE ULTRA VIRES RULE continues…
To ensure that a registered company does not go beyond what it was set up to do.
Note however that there is a limitation to the intervention of the court. It cannot go beyond
equitable intervention. Otherwise, it would result into what is called legislative judgment.
Look at the evolution of the Ultra Vire rule and you would find that the court is not partial…
it tries to balance the interest of both parties. There are cases where the co enjoyed and other
cases where the third party enjoyed. Although at some point, the rule became unpredictable
and people posited that it had outlived its usefulness
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ATTEMPTS BY LAWYERS TO AVOID THE HARSHNESS OF THE UV RULES.
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Drafting the object clause extensively to include every conceivable object which the
company may want to do in future. The courts pre-acted to this devise by applying
what is called the edjusdemgeneris rule of interpretation or the main object clause
rule. By this rule, the first few objects would be regarded as the main object and the
others listed can be regarded as ancillary. Ancillary means that they are related but
would help you carry out the business. The court may say it would only give effect to
the first two or three listed objects… Dr Sanni believes that the use of the word
“ancillary” makes seem like there is a confusion between the nature of power and
object of a co. Every company has the power of a natural person and would require
human agents to act on its behalf. Therefore, power is different from object. Salmond
J in Anglo Overseas Ltd V Green stated that where a memo expresses the objectives
of a co and the first two or three appear to embody the main object of the co, other
paragraphs are regarded as ancillary. This led smart people to use:
Independent object clause: this involves putting a foot clause stating that each of the
objects are independent and cannot to be limited by other objects. Therefore telling
the courts that they do not want them to read one object in relation to the other… as if
they are appendages. Each object must be regarded separately. This practice was
given effect in Cotman v Brougham, the main object clause was to develop rubber
estates abroad, there was a sub clause which allowed the co to promote cos and deal
in the shares of other cos. The company underwrote shares in another co and failed to
pay. The co when sued contended that the transaction was ultravires of its obj
therefore it was not liable to pay. it was held that it was not ultra-vires and the co was
liable to pay for the shares, the independent clause meant that each object of the
company can be pursued alone. The court in essence noted that notwithstanding that it
was not their main object, since this transaction was noted in the article, they could be
held thereunder.
The drafting of object clause in subjective terms by inserting a subjectively worded
clause: This is another trick/device.
Poser: would it be okay if the co is allowed to do anything that the drivers consider as
fit, proper and profitable? E.g. if an oil company decides to do currency trading and
they do the feasibility study and note that they would make more than what they are
going to make from exploration and prospecting of oil. In principle it is not wrong but
they cannot use the same vehicle to do forex. A manufacturing co can become a
trading co. It is either they amend or create a subsidiary. Therefore, when analysing
ultra vires rule, be critical.
This trick is also referred to as the Bell House Clauses. In Bell House Ltd v City
Walls Properties, they were primarily engaged in property development. There was a
subjectively worded clause which gave the co the power to do all such other things
that are incidental to the above object. In one transaction, the co agreed to introduce
another co a to a financier. When the co sought to obtain its commission, the other
party said the transaction was ultra vires. The court held that this does not matter
provided the transaction was bona fide.
This is good law but it still does not mean that the courts are in favour of bell houses
clauses or independent clauses generally. There is however a limitation: if a co
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abandons or gives up its main object. E.g. if shell turns to a currency dealing co,
rather than an oil exploration co. then the bell houses clause would not avail the co.
Setting up Subsidiaries.
The rule had been statutorily reviewed in Nigeria. Section 39(1) which provides that A
company shall not carry on any business not authorised by its memorandum and shall not
exceed the powers conferred upon it by its memorandum.
This does not stop the company from still listing 20 objects-100 objects. All they need to do
is to say that “no no no this is not ultra vires because it is in clause 35 or it is in clause 70”. It
is better to say that the co should limit its objects. “and shall not exceed the powers in the
memo”: the powers are usually in the Articles not really memo. This shows that the drafters
did not really understand the law. E.g. a co may have the power to borrow but if you want to
register a company on the principle that the company should never borrow, then this power
can be limited in the memo. Other people that are running the company may come and note
that it is a very foolish thing to do. Don’t forget Section 38 which provides that Except to the
extent that the company's memorandum or any enactment otherwise provides, every company
shall, for the furtherance of its authorised business or objects, have all the powers of a natural
person of full capacity.
39(2) provides for those entitled to sue in the event of a breach.
What about cases where the co has already executed the “ultra vires” act. Can you grant
injunction in respect of a completed act? the court may award compensation for any loss or
damages which another party may suffer for setting aside the transaction. The law still does
not want businesses to go beyond what it says it does/its objects.
Universal Banking System. Ultra-vires or not?
Initially, banks were licensed for certain objects. They were classified in relation to the nature
of services they offered. E.g. merchant, agricultural, micro-finance, and so on.
However, there was a policy change which brought us to universal banking. Allowing banks
to carry out the various types of banking activities. This is universal banking.
Later ,banks wanted to diversify further into non-banking related endeavours. Like insurance,
entertainment and so on. This is not universal banking. The question is that when these banks
are doing all these, were they using their banking name and profile? It is like what unilag is
doing like Unilag water, bread, and so on.
Is Union Trustees the Same as Union Bank of Nigeria? Read the case of Salomon v
Salomon, summarise in 3 pages, and then answer the question.
A theoretical Approach.
We have said so much about power… therefore, what is the link between power and
authority? Who can be regarded as acting on behalf of a company. Initially, the acts of a co
were regarded as those that were authenticated by its common seal. Someone had to affix the
seal and if it was affixed without lawful authority, the co may not be bound. While the use of
seal may work in civil matters, it is unworkable with regards to criminal liabilities.
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Subsequently, the resolution of the members at a meeting constituted a decision of seal.
Later, a board of directors was enacted due to business expediency as all members cannot
meet. Subsequently, the power of the board would be delegated to agents, officials, managers
and so on. The power of an agent is different from the organ of the company. There are things
that the VC cannot do on behalf of the school no matter how exalted his office may be. The
law has tried to articulate consistent principles of corporate liability. There must be theories
to explain the liability of a co.
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The organic theory: what are the organs of a persnn? Hands, legs, and so on. The
organic structure of a co consists of the members in general meeting and the board of
directors. It is an attempt to explain the basis of liability of a co. it seeks to identify
the human beings within the co structure whose activities can be attributed to the act
of the co. This theory is also known as the doctrine of the alter ego. Lennard’s
Carrying Co b Asiatic Petroleum Co Ltd the board of directors and general meetings
are not just agents of the co but organs of it. So that the company can be bound by
their acts. Dealing with a co through these organs would give assurance to the third
party. With every theory, there are criticisms. In real life, a wholesale acceptance of
the organic theory would mean that a co can escape liability for the actions of its
officers. In Lennad’s case, Lord Heldane’s dictum is instructive. This approach has
been castigated by the Privy Council through lord Hoffman in Meridian Global
Management Asia Ltd v Security commission where he said that the theory is
misleading…
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