BUSINESS LAW II
NOTES FOR DEGREE CLASS
MAKERERE UNIVERSITY BUSINESS SCHOOL
ACADEMIC YEAR 2010/2011
THE LAW OF BUSINESS ASSOCIATIONS (COMPANY LAW)
Partial Course Outline
1. Definition of a Company.
A company as an artificial legal person.
2. Types of Companies.
i)
Registered company.
ii)
Statutory company.
iii)
Chattered company.
iv)
Corporate sole.
3. Registered Companies.
i)
Private company.
 Limited liability Company/
(Company limited by shares).
 Un limited liability company
 Company limited by guarantee.
ii)
Public company.
4. Distinction between a private and public company.
5. Holding and subsidiary companies.
6. Promotion and formation of a company.
i)
ii)
iii)
iv)
Definition of promoter.
Duties of a promoter.
Remedies for breach of duty by a promoter.
Renumeration of a promoter.
7. Pre incorporation contracts.
8. Novation of contract.
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9. Formation and registration of a company.
i)
ii)
iii)
Steps involved in the registration process.
Consequences of registration of a company.
The role of the registrar.
10. The Memorandum & Articles of Association of a company.
i)
ii)
iii)
iv)
v)
vi)
The Memorandum of association.
Contents of the Memorandum of association.
Alteration of Memorandum of association.
The Articles of Association.
Contents of the Articles of Association.
Alteration of the Articles of Association
11. Interpretation of the Memorandum & Articles of Association.
12. The contractual effect of the Memorandum & Articles of Association.
13. Membership of the company.
14. Consequences of incorporation.
i)
Liability.
ii)
Property.
iii)
Legal proceedings.
iv)
Perpetual succession.
v)
Transfer of shares.
vi)
Borrowing.
vii) Formalities, publicity & expenses involved.
15. Other forms of business organisations.
16. Lifting of the veil of incorporation.
 Statutory lifting of the veil.
 Case law lifting of the veil.
17. Management of a company.
1. Organs responsible for the management.
 The Shareholders through company meetings and
 The Board of Directors
2. The shareholders and Company Meetings.
 types of meetings
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 Procedure, attendance and quorum.
 Officers and members of the company
18. Liability of a company for the acts of its officers.
 Types of authority that a company officer may have.
19. The duties of officers and members.
 Directors.
 The auditors.
 The company secretary.
20. Raising the capital of the company.
 By issue of shares.
 By borrowing/ loan capital.
21. Maintenance of capital of a company.
 Rules/ provisions on maintenance of capital.
22. Enforcement of the member's rights
[Minority Protection & The Rule In Foss V Harbottle]
 Exceptions to the rule.
23. Liquidation /winding up of companies.
 Different modes of winding up.
 Consequences of a winding up order.
 Protection of company property.
 Appointment of a liquidator.
 Duties, powers and liability of the liquidator.
 Priority of settlement of debts.
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Law Applicable to Company Law.
The Companies Act, Cap. 110, Laws of Uganda 2000
Common law and doctrines of equity
Case law
Winding up rules
DEFINITION OF COMPANY:
Definition of a company as an artificial legal person.
The word company originates from a latin word ‘com panis’ meaning people
sharing together. It relates to a group of people associating together and sharing
resources to pursue a common purpose.
The Companies Act Cap 110 definition section states that “company” means a
company formed and registered under the Act or an existing company.
The companies Act does not sufficiently define what a company is but authors
have developed a definition of a company. Professor David Bakibinga in his
book company law in Uganda at page 2 defines a company as an artificial legal
entity separate and distinct from its members or shareholders.
This legal person is distinguishable from natural personality. Natural persons are
born by natural people/persons and their lives end at death, artificial persons
(corporations) are created by law and their existence is ended by the law.
The possession of a legal personality implies that a company is capable of
enjoying rights and being subject to duties, separately from its members. As an
artificial legal person, a company is capable of the following;It has an existence separate from that of the members and as such;It has its own name by which it is recognised.
It can own its own property ie assets like buildings, land, bank accounts. etc
It can sue or be sued in its own name.
Even if a member or all the members die, the company will still remain in
existence, in other words it has perpetual succession.
It can borrow money in its own name and use its assets as security and it
will be responsible for paying back such debts..
It can employ its own employees, including its members or shareholders.
This principle of legal personality was first distinctly articulated in the British
House of Lords Judgment in the case of Salomon Vs. Salmon & Company
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Limited (1897) AC 22. Salomon owned a boot and shoe manufacturing business
as a sole proprietor (single trader); due to pressure from his family (his sons were
demanding for a share in the family business), he formed a limited liability
company known as Salomon & co ltd. The company had a maximum of 7
shareholders consisting of Salomon, the wife and his five children. Salomon
owned 20001 shares of the 20007 shares while the wife and children owned 1
share each. Immediately after incorporation, the company experienced difficulties
and a year later was wound up. After paying all the secured creditors/debenture
holders, he failed to pay the unsecured creditors. These creditors then sued him
personally for the repayment of the company’s debt.
At the court of first instance and appeal court, it was held that he was liable to pay
the debts of the company personally. That there was no company at all but
Salomon , that the company was a mere sham and that he employed the company
as an agent and therefore as a principal behind the company he was liable to pay
its debts.
Some of the reasons given for holding him personally liable were;i) He was the owner of the business before incorporation
ii) After incorporation he was owning a substantial part of the shares
iii) It was him who paid for all the shares even those of his wife and children
iv) He had appointed himself the managing director of the company and he
alone was in charge of the management.
v) Etc
H e appealed further to the House of Lords and the House of Lords departed from
the decision of the lower courts, lord Macnaghten held as follows;i) That Salomon had followed all the formalities required to form a company
and therefore his company was a legal entity recognised by law and
therefore a body corporate capable of its separate existence, capable of
having its own rights and liabilities separate and different from its
members.
ii) That therefore the company was a legal entity capable of a separate
existence and liable to pay its own debts, and Salomon was not
personally liable to pay the debts of the company.
iii) That a company is at law a different person altogether from the subscribers
although it may be that after incorporation, the business is exactly the
same as was before, the same persons are the managers, and the same
hands receive the profits.
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iv) That it does not matter whether all the members are relatives or strangers.
v) That it does not also matter even if one of the members holds a substantial
part of the shares.
vi) That a company being under the full control of one member does not mean
that it is not a company, as long as it is legally registered, it is a legal
person different from its members.
The importance of Salomon’s case is that the highest court in the land recognized
the necessary consequences of the distinction between a company and its members
as separate persons.
The principle has been applied in other cases, for instance in Lee Vs. Lee’s Air
Farming Ltd. (1960) 3 All E.R.420 Lee formed a company that was engaged in
the business of aerial crop spraying in Newzealand. The company had three
thousand shares (3000) in which he held 2999 shares and his wife (the plaintiff)
held one. Lee was sole “governing director” and controlling share holder so he
exercised full and unrestricted control over the affairs of the company. Lee as
managing director appointed himself chief pilot in the company’s business of
aerial crop-spraying. He was killed in a crash while flying for the company. His
wife sued the company for compensation under the workmen’s compensation Act.
Under the Act; one could only be entitled to compensation if they proved that the
deceased was an employee who died in the course of employment.
It was argued by the company that lee had appointed himself and that on him lay
the duty of giving orders and obeying them, that he acted as both employer and
employee and virtually there was no employer employee relationship between
him and the company and that therefore the wife was not entitled to compensation.
In the House of Lords, Lord Morris held that Lee and his company were distinct
legal entities which had entered into contractual relationships under which Lee as
chief pilot became a servant of the company.
Court also held that lee and the company were two separate and distinct persons,
and that in his capacity as managing director he could appoint an employee of the
company, including himself.
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It was further held that the fact that somebody is a managing director of a
company does not mean that he cannot enter into a contractual relationship with
the company to serve it.
In the case of Macaura Vs. Northern Assurance Co. Ltd (1925) A.C.619
Macaura was a landowner who sold the timber on his estate to a company in return
for shares in that company of which he was the sole owner and creditor. Before the
sale to the company, he had insured the timber which lay on his land in his own
name. He did not transfer the insurance policy to the company name. Two weeks
later almost all the timber was destroyed by fire. He claimed for the loss under his
private insurance policy. Under that policy before one could recover
compensation, he had to prove that he had an insurable interest, thus before
Macaura could recover anything from the insurers, he had to prove that he had an
interest it the timber that was destroyed by fire.
The insurers denied liability on the grounds that he personally did not have, as
insurance law required, an insurable interest in the timber.
It was held that Macaura’s claim must fail since it was the company which owned
the timber; Macaura merely owning the shares in the company, the timber was not
effectively covered by his insurance policy.
This case therefore upheld the principal that a company has a distinct legal
existence from that of its shareholders and as such it is capable of owning its own
property and a shareholder has no personal interest in its property, though he may
be the controlling shareholder.
TYPES OF COMPANIES.
1. Registered companies
A registered company is a company that is registered with the registry of
companies. The companies Act provides for the registration of a company.
Therefore for one to have a company that is legally recognised under the
Companies Act, that person must register that company with the registry of
companies, this process is called registration or incorporation /floatation of a
company.
NOTE. In our study of company law, we shall largely be concerned with this
kind of company
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2. Statutory companies
These are formed by Acts of Parliament and do not go through the process of
incorporation laid out under the Companies Act. They are formed by an Act of
Parliament. Examples include NWSCO under the National Water and Sewerage
Corporation Act Cap 317, New Vision formed under the New Vision Printing and
Publishing Corporation Cap 230; others include NWSCO, URA, UWLA, UNRA
etc.
3. Chartered companies
This relates to companies granted a Royal Charter in England by the Crown under
the Royal Prerogative or special powers. The charter normally confers corporate
personality. Examples of these are Colleges of Oxford and Cambridge.
All the types of corporate bodies described above are classified as corporations
aggregate. This distinguishes them from some offices (such as those of traditional
rulers) which exist separately from the individual who for the time being holds the
office. This latter category is called a corporation sole since only one person fills
the office at one time e.g the office of the Kabaka of Buganda, the Omukama of
Toro, the Kyabazinga of Busoga, the Archbishop Etc.
4. Corporate sole
It is one which consists of one human member at a time, being the holder of an
office. They are mostly created by Acts of Parliament but may also be created by
the Constitution or common law. Examples include the office of the Bishop
(Common Law), the President or the Kabaka (Constitution) and the Administrator
or Registrar General (Acts of Parliament)
REGISTERED COMPANIES.
Under the Companies Act, provision is made for two major types of registered
Companies, which can be lawfully formed in Uganda. Principally these can be
further divided into 2 broad categories.
1. Private company.
2. Public company.
PRIVATE COMPANIES
The Companies Act defines a private company as
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 A Company, which by its articles restricts the rights to transfer shares of the
company.
 Secondly, it limits the number of its members to 50 including past and
present employees of the company who are shareholders.
 Thirdly, a private company prohibits any invitations to the public to
subscribe for any shares or debentures of the company (investments in the
company).
 Here the required minimum number of members is 2 people. This position
was laid down in the case of LUTAYA Vs. GANDESHA (1987) HCB 49
in which a man and his wife formed a private company and of the 1500
shares of the company, the wife held only 2 shares. This position was also
stated in the case of Salomon Vs. Salomon & Co (1897) AC 22. The
second person needed may not be an independent person. He could be the
nominee of the first person.
Where a private Company does not comply with these requirements, it loses
exemptions and privileges conferred on a private company. This failure can only
be remedied upon showing court that it was caused by accident or inadvertence or
some other sufficient cause.
PUBLIC COMPANIES
The minimum required number for public companies is 7 and it goes up to infinity
in other words there is no limit as to the maximum number of members a public
company can have. A public company should be a limited liability company. Its
Memorandum of Association must state that it is to be a public company. Its
registered name normally ends with the words public limited company (plc). A
Company, which has obtained registration as a public company, its original
certificate of incorporation or subsequent certificate of registration issued by the
registrar must state that it is a public company.
Distinction between Private and Public Companies
A public company
1. Minimum of 7 members. For such
company to do business there must be a
minimum of at least 7 members. Where the
company continues to do business when
the number of members has fallen below
the legal minimum, then this is a ground
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A private Company
1. Minimum of two members
For such company to do
business there must be a
minimum of at least 2
members. Where the company
continues to do business when
for the winding up of the company.
(Winding up is the process of putting the
company’s existence to an end.)
the number of members has
fallen below the legal
minimum, then this is a
ground for the- winding up of
the company.
2. No maximum limit of members.
2. The maximum number of
members is 50
3. There must be a minimum of two directors
3. Only one director can suffice
4. Cannot commence business until and
unless it obtains a certificate of
trading/certificate of commencement of
business, in addition to a certificate of
incorporation.
4. Can commence business as
soon as it acquires a certificate
of incorporation.
5. Must hold a statutory meeting between l & 5. No statutory meeting is required of
3 months from the date of commencement such companies.
of business. Directors are required under
the law to send a statutory report to every
member within 14 days to the date of the
meeting. Such report must also be sent the
registrar of companies.
The matters discussed in such meeting include:
i) Number of shares that were issued out
ii) Number of shares that were bought
iii) Number of shares that were paid up
iv) Number of shares that were paid an
for a consideration other than cash
v) Names and particulars of directors,
auditors etc
vi) Contracts which require approval of
the meeting
This meeting is held once during the company's
Existence and cannot be held again.
7. Shares are freely transferable. In public 7.
companies, where a person does not wish to be a
shareholder any more, or where he wishes to sell
off his shares, he can do so easily without
necessarily getting the consent of the directors.
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Restricts transfer of shares. The
law restricts the free transfer
of shares in private companies.
Where a person does not wish
to be a shareholder any more,
he cannot freely sell off his
shares but must first seek the
consent of the directors.
8 . Issues a prospectus. This is a requirement of
all public companies and it is one of the
documents that is filed in registering such
company. This document is merely an
advertisement of the company informing the
general public; the nature of the company, a
shares available, the nature of business of the
company, names and particulars of the directors
etc.
8. Does not issue a prospectus since
private companies are not allowed
under the law to invite persons to
come and buy its shares.
Under the Companies Act, Companies in Uganda can also be further divided into:
 Limited by shares
 Limited by guarantee
 Unlimited companies
(a) A company limited by shares.
This is a company where the members enjoy limited liability.
This means that in case of winding up of the company if the company's assets are
unable to meet the company's debts, then the members will only be liable to
contribute to the debts of the company only such amounts as a member may not
have paid for the shares they bought. i,e., a member will only be required to pay
the balance that he did not pay on the shares he bought. Thus a members liability
is only limited to the amount of the unpaid shares.
NOTE:
Liability may arise in case of winding up. When a company is unable
to go on with its business or for some other reasons it is forced to stop operating
business, such a company may go through a process called winding up. Winding
up is the process of ending a company, in this process all its assets are sold, and
the company pays off its debts using the proceeds of its assets i.e. the money it has
got from the sale of its assets. In case that money is not enough to clear all its
liabilities, then the members who have not completed payment for their shares will
be called upon to pay and that money will also be used to clear its debts.
NOTE: A share is a unit of capital in a company. For example if the company
wants to start business it can decide to start up with an initial capital of
10,000,000/=. This capital will then be divided into a number of units let’s say 10
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units. It means that each unit will be equal to 1,000, 0000/=. So since a share is a
unit of capital in a company, each share of that company will be worth
1,000,000/=. So if a share holder buys let’s say 40 shares in that company, he will
pay 40 times 1,000,000(4,000,000/=)
(b) A Company limited by guarantee
This is one where the liability of its members is limited to such amount as the
members may have undertaken to contribute to the company's assets in the event
of its winding up. This guarantee must be expressed in the memorandum of
association. i.e. there must be an express statement/undertaking by the subscribers
/ members that the members guarantee that they will pay a specified amount of
money if in the event of winding up of the company, if the company's assets are
not sufficient to meet its debts.
For example the articles may have a clause saying that in case of winding up of
the company, each member shall be liable to contribute only 500,0000/= in case
the assets of the company are not enough to meet its liabilities. It means that that
members liability will be limited to only that 5000, 000/= and no more.
(c) An unlimited company
This is a company in which there is no limit on the liability of the members. This
means that in the event of winding up, the members are liable to contribute money
sufficient to cover all the company’s debts without any limitations, if the company
for example has debts of millions and millions of shillings, the members have to
be responsible to pay all the debts and the members personal estate/property can
be encroached upon to discharge the liabilities of the company.
Besides the private and public companies, in Uganda we also have the following
companies;
HOLDING AND SUBSIDIARY COMPANIES.
A subsidiary company is one that is controlled by another company called a
holding company or its parent (or the parent company). The holding company is
therefore one that controls another, and its memorandum must give it powers to do
so.
The most common way that control of a subsidiary is achieved, is through the
ownership of majority shares in the subsidiary by the parent. (Note: Voting rights
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will depend on the shares, if you have 80% of the shares in a company, you will be
entitled to 80 votes.) These shares give the parent the necessary votes to determine
the composition of the board of the subsidiary, and so exercise control. This way
the holding company can dictate policy and management decisions.
This gives rise to the common presumption that 50% plus one share ie (more that
50%) is enough to create a subsidiary. Thus if a company owns majority shares in
another company, that other company will be its subsidiary.
A parent company does not have to be the larger or "more powerful" entity; it is
possible for the parent company to be smaller than a subsidiary or the parent may
be larger than some or all of its subsidiaries (if it has more than one). The parent
and the subsidiary do not necessarily have to operate in the same locations, or
operate the same businesses, but it is also possible that they could conceivably be
competitors in the marketplace. Also, because a parent company and a subsidiary
are separate entities, it is entirely possible for one of them to be involved in legal
proceedings while the other is not.
A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries
of their own. Subsidiaries are separate, distinct legal entities for the purposes of
taxation and regulation.
Subsidiaries are a common feature of business life, and most if not all major
businesses organize their operations in this way. Examples include holding
companies such as MTN (Uganda) is a subsidiary of MTN (South Africa), Stanbic
Bank Uganda is a subsidiary of Standard Bank (South Africa).
PROMOTION AND FORMATION OF THE COMPANY
Promotion:
A business cannot come into existence unless someone thinks of the idea and
attempts to translate it into business. The process of conceiving and translating the
business opportunity is what is called promotion.
Promoters Defined:
Before a company is registered or formed, some person or persons must carry out
the preliminary work. This work includes signing contracts, arrangement for
capital and credit facilities, securing premises where the company is to be located,
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machinery and equipment, preparing the necessary documents, etc. All this work
is done by persons called promoters.
Case law has defined who a promoter in the English case of TWYCROSS VS
GRANT (1877) as “any person who undertakes to form a company, or who, with
regard to a proposed newly formed company, undertakes part in raising capital for
it. A person is prima facie a promoter of the company, if he has taken part in
setting a company formed with reference to a given object.”
Duties of a Promoter:
1. A promoter stands in a fiduciary relationship (a relationship of outmost good
faith/trust) to the company and consequently owes it certain fiduciary duties
i.e. duties of disclosure and accounting and this implies that they must not
make any secret profit out of the promotion without disclosing it to the
company. This was illustrated in the case of ERLANGER VS NEW
SOMBERERO CO LTD (1978) 3AC 1218. Members in a syndicate bought
the lease of an island containing a phosphate mine at £55,000. The members of
the syndicate then promoted a company and appointed themselves its directors.
They sold the lease to the company for £110,000. This was unfortunately not
revealed in the prospectus inviting the public to subscribe for its shares but was
subsequently discovered. The company instituted an action to recover profits
from the promoters who in turn argued that they had made a disclosure of their
profits to a board of directors. Nevertheless, the BOD was:i.
ii.
iii.
iv.
v.
Appointed by the promoters themselves,
The first director could not attend meetings because of his state in
life (ill health)
The second director was not present when the profits of the
promoters were approved.
The third director was one of the promoters themselves.
The fourth and fifth directors were ignorant of the subject matter.
The issue was whether there was a disclosure. It was held that the
disclosure to only one director who had appointed the promoters was not a
proper disclosure and that the company was entitled to rescind the contract.
That the promoters must repay the purchase price and the company in turn
must convene the lease to the promoters so as to restore the status quo
(original position)
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Thus a disclosure must be made to the company either by making it to an
entirely independent board or to the existing and potential members as a
whole. A partial or incomplete disclosure will not do, the disclosure must
be full or explicit.
2.
Duty of skill and care: In the process of promotion, a promoter must carry out
his work with great care and skill and due diligence expected of a reasonable
man.
3. Duty to act in the best interests of the company. He should not let his personal
interest conflict with those of the company.
Consequently, a promoter may do anyone or more of the following activities:





Solicit capital
Prepare a prospectus
Solicit directors for the company
Arrange the preparation of the Memorandum and Articles of Association
Obtain premises
Obtain whatever equipment is necessary for the running of the business
Remedied for Breach of duty:
1. A promoter can be made to account for any secret profit made.
2. Damages for misrepresentation where the promoter has made an actual
misrepresentation and cannot prove that he had reasonable ground to
believe and did believe up to the time the contract was made the facts
represented were true.
3. Damages for failure to disclose.
4. Rescission: Since the promoter owes a duty of disclosure to the company,
the primary remedy against him in the event of breach is for the company to
bring proceedings of rescission (termination) of any contract with him.
5. Damages for negligence in allowing the company to purchase property at
an excessive price since they are to act with skill and care.
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Remuneration of a Promoter:
Promoters do not possess an automatic right to receive remuneration from the
company for their services from the company unless there is a valid contract
enabling him to do so between him and the company. Without such a contract, he
is not even entitled to recover his preliminary expenses. This is so because until a
company is formed, it cannot enter into a valid contract and the promoter has to
expend the money without any guarantee that he will be repaid.
However, in practice, the company’s articles may allow directors to pay
preliminary expenses from the company’s funds.
However, if the promoter is a professional, he will not be content merely to
recover his expenses; he will expect to be handsomely remunerated. In the case of
TOUCHE Vs METROPOLITAN RAILWAY WAREHOUSING COMPANY
(1871) LR 6 CH.APP 671 Lord Hatherly said: “the services of a promoter are
very peculiar, great skill, energy and ingenuity may be employed in constructing a
plan and in bringing it out to the best advantages.” Hence, it is perfectly proper for
the promoter to be rewarded provided he fully discloses to the company the
rewards which he obtains. The remuneration must be fully disclosed not only by
the promoter to the company but also by the company in the prospectus.
PRE-INCORPORATION CONTRACTS:
In promoting a company, promoters usually enter into contracts with third parties
and when they do so, they purport to do so on behalf of the company before it is
incorporated ie ( unincorporated company). Such contracts are not binding on the
company because it is not yet in existence and consequently has no capacity to
contract.
A company comes into existence as a legal person after it is registered/
incorporated, so agents cannot make contracts on behalf of a company before that
company is legally registered, if they do, such contracts will be void and of no
effect and the company cannot even ratify them. To ratify a contract means to
adopt or confirm. Such contracts are called pre- incorporation contracts.
In the case of KELNER Vs. BAXTER (1866). The defendants entered into a
contract with the plaintiff to buy goods, “on behalf of the proposed Gravesand
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Royal Alexandra Hotel Company”. The goods were supplied and consumed in the
business. Shortly after incorporation, the company collapsed and the plaintiff sued
the promoters on the contract for the price of the goods. It was held that the
defendant promoters were personally liable on the contract since they had made
the contract on behalf of the company before it was incorporated; it was further
held that the company could not even ratify such a contract.
This same principal that contracts made on behalf of a company before it is
registered are not binding on that company was further illustrated in the case of
Natal Land and Colonization Co. V Pauline and Development Syndicate
(1940) A.C. 120 In December 1897 C, purportedly acting as agent for a company
not yet formed, entered into a contract with N Ltd by which N was to grant a
mining lease to a new company. The new company P was formed in January 1898
but N gave notice that it would not grant the lease. P Ltd claimed that it was
entitled to the lease but the court held that P Ltd’s claim must fail as it could not
adopt or ratify a contract made before it existed.
Similarly in the case of English & Colonial Produce Company Ltd (1906) Ch.
435 where persons who afterwards became directors of the company instructed
solicitors to prepare the memorandum and articles of association so that the
company might be formed but on formation the company failed to pay the
solicitors’ charges and denied that it was liable to do so, it was held that although
the company had taken benefit of the contract, it did not impose on it any liability
to pay since the contract was made before the company was formed and the
persons who had given the solicitors the instructions were personally responsible
for paying them for the work done.
In the Ugandan case of Central Masaka Coffee Co. V. Masaka Farmers and
Producers Ltd (1991) ULSLR 220 it was held that a company lacked the
capacity to conclude an agreement for lease of a coffee processing factory made
five days before its incorporation.
Thus if the contract was entered into by a promoter and signed by him “for and on
behalf of XX Co Ltd” then according to Kelner’s case, the promoter will be
personally liable.
But if the promoter signed the proposed name of the company adding his name to
authenticate it ie if they sign on behalf of the company but do not put the words
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“for and on behalf” to show that they are actually signing on behalf of that
company in the following manner;“MTN UGANDA LTD
MUTEBI GERALD DIRECTOR”
then there is no contract at all. This is because the contract is not signed on behalf
of the company and neither is it in the names of the promoter alone.
This was illustrated in the case of NEWBORN V. SENSOLID (1954) 1 QB 45
the plaintiff was forming a limited liability company to be called Leopold
Newborn London Ltd. The plaintiff entered into a contract with the defendants to
supply them with Ham and the contract was signed as “yours faithfully, Leopold
Newborn London Ltd and underneath the signature was the plaintiffs name.” The
market fell and the defendants refused to take delivery. The plaintiff sued for
breach for contract. The court held that the company was not in existence at the
time of signing the contract hence there was never a contract.
The contract was never signed on behalf of the company nor was it signed by the
plaintiff, and therefore neither the company nor the plaintiff himself could sue on
the contract.
NOVATION
In order a company to be bound by a pre-incorporation contract, a fresh contract
on the same terms as the pre-incorporation contract must be entered into. This
process of entering into a new contract by the company on similar terms as the
those of the pre-incorporation contract is referred to as novation.
Usually an agreement is entered into by the promoter which provides that the
personal liability of the promoter will cease when the company in the process of
formation is incorporated and enters into an agreement in similar terms with the
contractor.
However there must be sufficient evidence that the company has entered into a
new contract. Mere recognition of the pre-incorporation contract by performing it
or accepting benefits under it is not enough.
In Re Northumberland Avenue Hotel Co. Ltd 1886 There was a preincorporation contract for the grant to the company of a building lease. After
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incorporation the company took possession of the land and began to build on it but
there was no new contract entered into between the company and the owners of
the land because the company believed the pre-incorporation contract was binding
on it. It was held that there was no contract between the land owners and the
company as the pre-incorporation contract could not be retrospectively ratified by
the company and the company’s adoption of it did not amount to the making of a
new contract.
In another old English case of Howard B Patent Ivory Manufacturing Co. 1888
where J under a pre-incorporation contract agreed to sell property to a company
but after the company had been formed the terms of the payment were modified
with J accepting part of the purchase price in debentures instead of cash as had
been originally agreed upon, it was held that the renegotiation of the contract
terms of payment were sufficient evidence of a new offer and acceptance by
which a company entered into a new contract after incorporation.
FORMATION/ REGISTRATION PROCESS.
A company is formed by registering it with the Registrar of Companies and
obtaining a certificate of incorporation. The registration process goes through the
following steps;1. RESERVATION OF THE COMPANY NAME.
The promoters must choose a name of their choice and then make an application to
the registrar of companies to reserve the name for their company. The name
should not be identical with that of an existing company or so nearly resemble it as
to be calculated to deceive, it should not also Contains the words “chamber of
commerce” except where the nature of the company’s business so justifies it and
lastly it should not suggests patronage (a connection) from government or be
associated with immorality, crime or scandalous in nature. If the registrar is
satisfied that the name meets the above requirements, he will approve and reserve
the name, the company must then register within 60 days.
Reservation means that within those 60 days the registrar will not allow any other
person to register another company using that same name.
To guard against the possibility of a negative reply from the Registrar, promoters
must have in mind one or more suitable alternatives. Once a company has secured
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registration in a particular name it secures a virtual monopoly of corporate activity
under that name. In case the Registrar inadvertently approves a name which by
law is not adequate, then the new company may change its name within 6 months.
A company may change its name by special resolution and with the written
approval of the Registrar. ‘Where the Registrar refuses to register a name without
good reason, an application for an order of mandamus to compel the registrar to
perform his duty and register the company can be filed in the High Court.
2. PRESENTATION OF THE REQUIRED DOCUMENTS BEFORE THE
REGISTRAR FOR REGISTRATION.
Within 60 days after the reservation of the name, the promoters will then present
the following documents to the registrar to have their company registered.
 Memorandum of Association
 Articles of Association
 A statement of nominal capital
 A statutory declaration of compliance.
 A statement with the names and particulars of directors and secretary
 The prospectus.
 The Memorandum of Association of the company.
The memorandum of association is the most important of all the company
documents because it contains the powers of the company, it describes the
company and the nature of activities that the company is authorized to do or
engage in.
 Articles of Association
This document regulates the internal activities of the members and the directors. It
contains information on, management, who will be the directors of the company,
who will be the managing director, secretary, appointment of the board of
directors, qualifications of directors, the chairman of the board, meetings (how
meetings of the company should be called and conducted), the classes and rights
of shareholders, transfer of shares , borrowing powers of the company, its
properties, control of the company finance, dividends/profits and how they should
be distributed auditing of books, the company seal and how it should be used etc
 Declaration of compliance
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This is a statement declaring that all the necessary requirements of the Companies
Act with regard to the formation of the company have been duly complied with
and that the directors agree to continue complying with them.
 A statement of nominal capital
This is a statement which shows the capital with which the company is starting
with.ie the initial capital of the company.
 List of names and particulars of Directors and Company Secretary
This document contains the details of the names, age, addresses, occupations of
the directors and company secretary of the company.
It should also contain an undertaking by the directors to take and pay for the
qualification shares if any that such persons may be required to acquire.
 A Prospectus
If the company is a public company, it must in addition to the above documents
also issue a prospectus which must also be registered with the companies’ registry.
It is a document setting forth the nature and objects of a company and inviting the
public to subscribe for shares in the company.
It sets out the number of the founders/management, the share qualification of
directors, names, description and addresses of directors, the shares offered to the
public for subscription, property acquired by the company, the auditors, etc.
The purpose of the prospectus is to provide the essential information about the
position of a company when it is launched so that those interested in investing in it
can properly assess the risk of investment.
3. PAYMENT OF STAMP DUTY AND REGISTRATION FEES.
The registrar will then assess how much duty is to be paid on registration of that
company; it is sassed basing on the capital that the company is starting with, the
more the capital the greater the stamp duty. Registration fees are also paid.
4. ISSUANCE OF A CERTIFICATE OF REGISTRATION.
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After all these requirements, a certificate of registration is issued if the Registrar is
satisfied. This is a certification that a company has been recognized as a legal
person and accordingly registered. After it has been issued, a private company can
commence business. However, for a public company, it must in addition obtain a
certificate of commencement of business (certificate of trade).
 This certificate will be granted if the company has issued a prospectus and
filed a copy with the registrar.
 Qualification shares for the directors have been paid for.
 The minimum number of shares which have to be paid for in cash have
been allotted and paid for.
EFFECT OF REGISTRATION AND THE ROLE OF REGISTRAR.
If the Registrar is satisfied that the documents are in order and that stamp duties
and fees have been paid, he enters the name of the company in the register of
companies and issues a certificate of incorporation. The issue of the certificate of
incorporation is conclusive evidence that all registration requirements have been
complied with and that the association is a company authorized to be registered
and is duly registered under the Act.
In the case of Jubilee Cotton Mills Ltd V Lewis (1924) A.C.958 the certificate
was dated 6th January 1920 but it was not signed and issued until 8th January. On
the 6th of January the directors allotted shares and debentures. The allottee later
refused to pay the amount due on the shares arguing that the company did not exist
on the date of issue. It was held that the company was deemed to have come into
existence on the 6th of January 1920. Therefore, the allotment was valid and the
allottee must pay for the securities allotted to him.
The basic role of registrars is to ensure that business entities are formed with
proper documents, ensure compliance with the law in the process of registration
and thereafter. Where the registrar is not satisfied with the documentation, he/she
can decline to register the business/company.
The Registrar may also refuse to register a company whose objects are unlawful.
In the of R. V Registrar of Companies Exparte More (1931) 2 K. B. 197 the
Registrar’s refused register to sell tickets in a lottery because the lottery was
illegal in England.
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However, ‘where he declines without a reasonable excuse, an order of Mandamus
can be obtained from the High Court compelling him/her to perform the duty.
Provision of Copies
Any member of the company may under Sect. 26 (1) of the Act may require the
company to supply him with a copy of the Memorandum of Association and the
articles at a nominal fee. A penalty for failure to comply is spelt out in Sect 26 (2).
Under Sect 27(1), the issued copies of the Memorandum of Association must
contain any alterations if any and under Sect 22(2), penalties for the company and
the defaulting officers are set. Therefore, getting these copies by a member is a
right and it is hereby submitted that these can be enforced as a personal right.
THE MEMORANDUM & ARTICLES OF ASSOCIATION OF A
COMPANY.
The memorandum of Association
The Memorandum of Association of a company, which is required to be registered
for purposes of incorporation, is regarded as the company’s most important
document in the sense that it determines the powers of the company.
Consequently, a company may only engage in activities and exercise powers,
which have been conferred upon it expressly by the memorandum or by
implication there from.
Contents of the Memorandum
The Memorandum of Association of a company limited by shares must state the
following:1.
The name of the company with “Limited” as the last word.
2.
The registered office of the company is situated in Uganda.
3.
The objects of the company.
4.
A statement as to the liability of the members.
5.
A statement to the nature of the company (Whether private or public).
6.
The amount of share capital and division thereof into shares of a fixed
amount. In addition, the memorandum must state the names, address and
descriptions of the subscribers thereof who must be at least two for a private
company and seven for a public company.
1. The name.
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The name of the company should be indicated and if it is a limited
company, it should have the word limited at the end eg Stanbic Bank
Uganda Ltd.
2. Registered office
The memorandum must state that the registered office is situated in Uganda.
However, the actual address must be communicated to the Registrar of Companies
within 14 days of the date of incorporation or from the date it commences business
by registration of a company form called Notice of situation of registered office of
the company, this form will indicate the exact location of the company eg plot 8
industrial area Kampala.
3. The objects clause
This sets out the principle activities the company has been incorporated to pursue.
For example; trading in general merchandise, carrying on business of wholesalers
and retail traders of all airtime cards, mobile phones and all phone accessories,
carrying on the business of mobile money agents etc. The objects must be lawful
and should include all the activities which the company is likely to pursue. The
objects or powers of the company as laid down in the memorandum or implied
there from determine what the company can do.
Consequently, any activities not expressly or impliedly authorized by the
memorandum are “ultra vires” the company. The ultra vires doctrine restricts an
incorporated company under the Companies Act to the purse only the objects
outlined in its registered Memorandum of Association.
The doctrine of ultra vires is illustrated in the case of ASHBURY RAILWAY
CARRIAGE CO. LTD VS. RICH (1875). A company which was not authorized
by its memorandum of association to lend money or finance any activity made an
agreement with the defendant to provide him with finance for the construction of a
railway in Beligium, later on the company repudiated this agreement and did not
actually provide the finances, the defendant sued the company for breach of
contract, the company in its defense argued that financing railway construction
was not one of the activities it was authorized to do, it was held that indeed such
an act was beyond the powers of the company and such an ultra vires contract was
void and un enforceable.
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To evade this restrictive interpretation of the objects clause, draftsmen inserted
words as “and to do all such other acts and things as the company deems
incidental or conducive to the attainment of these objects or any of them. In BELL
HOUSES LTD -VS-CITY WALL PROPERTIES LTD (1966) 2 QB 656, a
company was formed to carry on the business of General Civil Engineering
contracts and in particular to build houses. It had power to carry on any other trade
and to do any other things that incidental to the above company’s objects. The
Court held that the company could lawfully contract for a fee to procure loans to
other concerns, from or business whatsoever which it can in the opinion of the
board of directors be advantageously carried out sources of finance which it had
resorted to in the past. It further held that cementing good relations with the
financiers would be valuable when the company needed finances for its activities.
The Memorandum of Association spells out the main objectives and powers of the
company. However, certain powers may be implied in the Memorandum of
Association. For example, in the case of FERGUSON V WILSON (1866)
2CH.A 277, a power to appoint agents and engage employees was implied in the
Memorandum of Association. This is only sensible because a company as a
fictitious person can only work through agents and employees; and therefore if
such a power was not implied, then the company could not function at all.
Similarly in GENERAL AUCTION ESTATES & MONETARY CO. V.
SMITH (1891) 3CH 432, the court implied powers of borrowing money and
giving security for loans.
Subsequent cases have also adopted this position. In NEWSTEAD
(INSPECTION OF TAXES) V FROST (1978)1 WLR 441 AT PAGE 449, the
court implied powers of entering into partnership or joint venture agreements for
carrying the on the kind of business it may itself carry on i.e. intra vires.
In PRESUMPTION PRICES PATENT CANDLE CO (1976), the court implied
a power of paying gratuities to employees. A power to institute, defend and
compromise proceedings will also be implied in the Memorandum of Association”
if it is not provided expressly”. Courts at times imply powers because the
particular nature of the company’s undertaking demands it. In EVANS, (1921) I
CII. 359. The court observed that a company formed to manufacture chemicals
had powers to make grants to Universities and other scientific institutions to
facilitate scientific research and training scientists although it may not obtain any
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immediate financial benefit from the venture. Therefore before the court implies
powers it seems:
 There must be some reasonable connection between the company’s objects
and the power it seeks to exercise. It is not sufficient for it to merely show
that it will benefit in some way by exercising that power.
 It is important to show that the company will in fact benefit in some way
even though remote in the exercise of the power (see Evans, (above).
However, though the Court may imply these powers in the Memorandum of
Association, its better practice to expressly state them. This is only sensible
because: The company often needs powers which the courts have not ruled that they
can be implied and therefore the company can only obtain them by express
provisions in the Memorandum of Association, (e.g. the power to buy a
share from another company though recognized under the Act has not yet
been implied).
 To avoid uncertainties or expenses of litigation, it is safer to insert them
expressly in the memorandum of association.
4. The liability of members
The memorandum of a company limited by shares or by guarantee should indicate
that the liability of members is limited. With respect to a company limited shares,
the liability of a member is the amount, if any, unpaid on his shares. With regard
to the liability of a member of a company limited by guarantee, this is limited to
the amount he undertook to contribute to the assets of the company in the event of
winding up. A company may also be registered with unlimited liability. In such a
situation, the members liability is unlimited and in cases the company does not
have sufficient credit to pay its creditors, then the shareholders personal property
may be encroached on to pay the company’s debts..
5. Share capital (clause)
The memorandum requires that a company having a share capital must state the
amount of share capital with which the company is to be registered and that such
capital is divisible into shares of a fixed amount. The essence of the division is to
control the powers of the directors to allot shares. The law does not prescribe the
value but they are usually small amounts to encourage people to hold as many
shares as possible. The amount of capital with which a company is to be registered
and the amount into which it is to be divided are matters to be decided upon by the
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promoters and will be determined by the needs of the company and finance
available. For example if a company has its initial share capital/ startup capital of
5,000,000 it can divide this into 100 shares of 50,000 each. So of s member
subscribes for 50 shares, he will contribute 2,500,000/= .
Alteration of the objects.
A company may by special resolution alter the provision in its memorandum (Sec.
12) with respect to the objects of the company to enable it:
 To carry on its business more economically or more efficiently.
 To enlarge or change the local area of its operations.
 To attain any of its objects by new or improved means.
 To carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the
company.
 To restrict or abandon any of the objects specified in the memorandum.
 To sell or dispose off the whole or any part of the undertaking of the
company.
 To amalgamate with any other companies or body of persons as long as the
objects of the other company arc intra vires the objects of the company.
ARTICLES OF ASSOCIATION
The Articles of Association contains regulations for managing the internal affairs
of the company i.e. the business of the company. They are applied and interpreted
subject to the memorandum of association in that they cannot confer wider powers
on the company than those stipulated in the memorandum. Thus, where there is a
conflict or divergence between the memorandum and articles, the provisions of the
memorandum must prevail.
management, who will be the directors of the company, who will be, appointment
of the board of directors, qualifications of directors, the, the classes and rights of
shareholders, transfer of shares , , auditing of books,
Contents of the Articles
 The board of directors (management) and how they will be appointed, their
qualifications, how they can resign or be removed from office.
 The chairman of the board.
 The managing director and how he will be appointed.
 Secretary and his appointment.
meetings (how meetings of the company should be called and conducted
and the required quorum/ number of members that must be present to
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conduct a valid meeting of the company) and the different types of meeting
that the company may hold from time to time voting rights of the members,
the right to receive notice and to attend and vote etc.
 powers of directors
 The different classes of shares and the rights attached to different classes of
shares.
 Borrowing powers of the company.
 its properties, control of the company finance, its bankers,
dividends/profits and how they should be distributed
 appointment of auditors
 the company seal and how it should be used etc
The Articles must be printed in the English language, divided into paragraphs,
numbered consecutively, signed by each subscriber to the memorandum in the
presence of at least one witness who must attest the signature.
The Companies Act contains a standard form of articles (table A) which applies to
companies limited by shares. These regulate the company unless it has its own
special articles which totally or partially exclude table A. The advantages of
statutory model articles are:
 That legal drafting of special articles is reduced to a minimum since even
special articles usually incorporate much of the text of the model.
 There is flexibility since any company can adopt the model selectively or
with modifications and include in its articles special articles adapted to its
needs.
Alteration of the Articles
It is provided that subject to the provisions of the Act and to the conditions
contained in its memorandum, a company may by special resolution alter or add to
its articles. A special resolution is one, which is passed by a majority of not less
than 75% of such members, as being entitled to a vote in person or where proxies
are allowed, by proxy at a general meeting of which not less than twenty-one days
notice specifying the intention to propose the resolution as a special one has been
given.
The alteration will generally be valid unless if:
 It is illegal.
 It conflicts with provisions of the Companies Act.
 It extends or modifies the Memorandum.
 It deprives members of rights conferred on them by the Company Act or
by court.
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 It requires a share holder to take or subscribe for more shares or
increases his liability to contribute to the company.
 It amounts to fraud on the minority.
INTERPRETATION
ASSOCIATION
OF
ARTICLES
AND
MEMORANDUM
OF
1. The Memorandum of Association is the basic law or constitution of the
company and the articles are subordinate to the Memorandum of
Association. It follows therefore that if there is a conflict, the Memorandum
of Association prevails. In other words if there is a contradiction between
the provisions of the memorandum and the provisions of the articles of
association, then the provisions of the memorandum will be followed and
those provisions in the articles which are contradicting the memorandum
will be void and of no effect.
2. If there is no conflict, the Memorandum of Association and articles must be
read together and any ambiguity or uncertainty in either can be removed by
the other e.g. in Re South Durham Brewery Co. Ltd (1885) 3l CD 261,
the Memorandum of Association was silent as to whether the company’s
shares were to be all one class or might be of different classes. It was held
that a power given by articles to issue shares of different classes resolved
the uncertainty and enabled the company to issue shares of different classes
though the memorandum did not expressly state so. Also, in the case of
Rainford Vs-James Kett & Blackman Co. Ltd (1905) 2 CH 147, the
Memorandum of Association of the trading company allowed it to do
things incidental to its objects. It was held that the provisions in the articles
empowering the company to lend money merely exemplified the general
words of the Memorandum of Association and the company was therefore
entitled to lend money to its employees. a trading company has a profit
making motive, and therefore the company lending money to employees at
a profit was incidental or connected to the companies objects/activities of
profit making. In Repyle Works (1891) 1 Ch.173, the Memorandum of
Association empowered the company to borrow on security of its assets or
credit while the articles provided that it might borrow using the security of
uncalled capital. It was held that the articles merely made specific the
general words of the Memorandum of Association and so the company did
have the power to borrow using the security of its uncalled capital since the
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uncalled capital is also part of the company’s assets/credit. (Uncalled
capital is that amount of money that shareholders have not yet paid for their
shares. If a shareholder is allotted shares of 10 million shillings and out of
this he pays only 6 million, the four million that remains is called uncalled
capital, so the company may call upon that shareholder at any moment
requiring him to pay that money.)
3. Though the Memorandum of Association and articles can only be read
together to remove ambiguity or uncertainty, the articles will not be
resorted to, to assist in the interpretation of the Memorandum of
Association or the clause that is required in law to be in the Memorandum
of Association.
4. A contract with non members may be implied. The Articles do not constitute
a contract between the company and third parties. A clause in the Articles
may however form the basis of a contract. Eg, if the Articles set out the terms
as to remuneration to be paid to directors and the director takes office on that
basis, the court will infer that the terms are part of his contract with the
company. Re New British Iron Company; Exparte Beckwith (1898)1 Ch. 3.
THE CONTRACTUAL EFFECT OF THE MEMORANDUM AND
ARTICLES OF ASSOCIATION.
The memorandum and articles form three contracts and these are:
1. The memorandum and articles of association constitute a contract between the
members and the company. A member is any person who has signed the
memorandum and articles of association for purposes of formation of the
company even if he or she later does not pay for any shares in that company.
A member therefore has a right to enforce the provisions in the articles
and memorandum against the company since memorandum and articles
of association constitute a contract between the members and the
company. So if the company is acting contrary to what the memorandum
and articles provide, then that member can sue the company for breach of
those provisions and likewise.
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The articles of association however do not constitute a contract between the
company and a non member. Therefore a non member cannot enforce such
contract.
This was illustrated in the English case of Wood v Oddesa Water Works (1889)
42 CH.D 636, the articles of association of the defendant company empowered the
directors to declare dividends/profit to be paid to the shareholders, the company
passed a resolution not to pay dividends, wood a shareholder was aggrieved by
this resolution which was contrary to what the articles provided, as a member and
shareholder he applied to court for an injunction to stop the company from acting
on that resolution, Stirling J held that the articles of association constitute a
contract between the company and its shareholders and the company was in breach
of that contract by not following what the articles provided.
2. The contract created by the articles binds the company and its members only in
their capacity as members (“qua member’) and not in any other capacity.
Therefore if a shareholder is to sue the company relying on the provisions of the
articles, he should be suing in his/her capacity as a member and not as a creditor or
director or any other capacity.
Note. That for a member to sue in their capacity as members, their claim should be
based on violation of members’ rights provided for by the articles.
In the case of Hickman V Kent (1915) 1 CH 881, Kent the defendant company
had a provision in its articles that any dispute between the association and its
members should be referred to an arbitrator. Hickman brought a claim against the
company before an arbitrator relying on this provision because the company had
refused to register his sheep in its published flock book and threatened to expel
him from membership. Court stayed his suit against the company holding that
Hickman was not suing in his capacity as a member of the company and therefore
he could not rely on the articles since the company had not breached a provision in
its articles. The articles did not provide for rights of members to have their sheep
registered with the company’s published flock book.
In this case, Astbury J stressed the following;a) That the articles of association cannot constitute a contract between the
company and a non member/ third party.
b) That a member who is given a right by the articles in any other capacity
other than that of a member cannot enforce such right against the company
for example if a member is given a right by the articles as a
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lawyer/solicitor, promoter or director and not in his capacity as a member
he cannot enforce such right against the company relying on the articles.
c) That the articles regulate the rights and obligations of members generally
and therefore create rights and obligations amongst
-the members themselves
-and the members and the company
Also in the case of Beattie V E. & Beattie Ltd (1938) Ch 708, a director of a
company was sued in court in his capacity as a director. The articles of the
company provided that any dispute between the company and its members should
be referred to an arbitrator. The director who was sued in court sought to rely on
this provision in the articles to have his matter referred to an arbitrator. Court
refused to grant his application and held that he could not rely on this provision
since it only applied to members and he was not being sued in his capacity as a
member but in his capacity as a director. Court added that provisions in the articles
constitute a contract between the company and its members in their capacity as
members and not in any other capacity.
3. The memorandum and articles also constitute a contract amongst the members
themselves.( between the members “interse”). Thus each member has a duty
to observe the provisions of the memorandum and articles of association and if
they do not, any member can sue them. In Hickman V Kent (1915) 1 CH
881, Astbury J held that That the articles regulate the rights and obligations of
members generally and therefore create rights and obligations amongst the
members themselves.
Also in the case of Obikoya V Ezewa & ors, Ezewa and two others were all
permanent directors in a company, the company’s articles had a provision that a
permanent director shall not vote for the removal of another permanent director
from office. Ezewa and the other directors disregarded this provision, purported to
alter the articles by resolution to enable them remove Ezewa from office, and there
after they stopped him from acting as director. He sued them in their capacity as
members for damages for breach of the provisions of the articles and asked court
for an injunction to stop them from preventing him from acting as director. It was
held that the articles were a contract between the three members not to vote each
other out of office and that the actions of the other of keeping Obikoya out of
office was in breach of the provisions of the articles.
Membership:
Sec.27 of the Companies Act defines a member as a person who has signed the
Memorandum and Articles of Association with the purpose of floating a company.
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Any person who applies and his name is entered on the register of members also
becomes a member. In MAWOGOLA COFFEE FACTORY VS KAYANJA, it
was held that to be a member of a company, there must have been a valid
allotment of shares to the person and his name entered on the register. It was
further observed that a certificate of allotment of shares is the best evidence but in
its absence, the register of members shall suffice. A minor can become a
shareholder but he incurs no liability until he obtains the majority age and fails to
repudiate the contract within a reasonable time.
CONSEQUENCES OF INCORPORATION
The fundamental attribute of corporate personality from which all other
consequences flow is that “the corporation is a legal entity distinct from its
members”.
Hence it’s capable of enjoying rights and being subject to duties which are not the
same as those enjoyed or borne by its members. In other words it has a legal
personality and it is often described as an artificial person in contrast with a human
being-a natural person. (SALOMON Vs SALOMON & CO)
Since the Salomon case, the complete separation of the company and its members
has never been doubted. It is from this fundamental attribute of separate
personality that most of the particular advantages of incorporation spring and these
are:
1.
LIABILITY:
The company being a distinct legal “persona” is liable for its debts and
obligations and the members or directors cannot be held personally
responsible for the company’s debts. It follows that the company’s
creditors can only sue the company and not the shareholders. In in the case
of Salomon V Salomon (1897), creditors of the company sought to have
Solomon a managing director of the company personally liable for the
debts of the company but court held that the company and Solomon were
two different persons and that the company as a legal person is liable for its
own debts and Solomon a managing director could not be held personally
responsible for the debts of the company. In the Ugandan case of Sentamu
v UCB (1983) HCB 59, it was held that individual members of the
company are not liable for the company’s debts.
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The liability of the members or shareholders of the company is limited to
the amount remaining unpaid on the shares. For instance, where a
shareholder has been allotted 50 shares at Shs. 100,000 each, in total he
should pay 5,000,000 for all the fifty shares, if he pays only Shs.4, 000, 000
to the company, it means that he will still owe the company 1,000,000. This
is what is called uncalled capital. The company may call on him to pay it
any time. If that does not happen, then at the time of winding up the
company, he will be required to pay the Shs.1, 000, 000.
In the case of a company limited by guarantee, each member is liable to
contribute a specific amount to the assets of the company and their liability
is limited to the amount they have guaranteed to contribute.
If the company has unlimited liability, the members liability to contribute is
unlimited and their personal property can be looked at to discharge the
company creditors but that is only after utilizing the company’s money and
it is not enough to pay all the debts.
2.
PROPERTY:
An incorporated company is able to own property separately from its
members. Thus, the members cannot claim an interest or interfere with the
company property for their personal gain/benefit. Thus, one of the
advantages of incorporation (corporate personality) is that it enables the
property of the company to be clearly, distinguished from that of the
members. In the case of MACAURA Vs NORTH ASSURANCE CO.
(1925) AC (see page 3 for facts). In that case Lord Buckmaster of the
House in Lords held that no shareholder has a right to any item of the
property of the company, even if he holds all the shares in the company.
In the case of Hindu Dispensary Zanzibar v N.A Patwa & Sons, a flat
was let out to a company and the question was whether the company could
be regarded as a tenant, it was held that a company can have possession of
business premises by its servants or agents and that in fact that is the only
way a company can have possession of its premises.
3.
LEGAL PROCEEDINGS:
As a legal person, a company can take action to enforce its legal rights
or be sued for breach of its duties in the courts of law. If it the company
being sued, then it should be sued in its registered name, if a wrong or
incorrect name is used, the case will be dismissed from court for example in
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the case of Denis Njemanze V Shell B.P Port Harcourt, the plaintiff sued
a company called Shell B.P Port Harcourt which was a non existing
company, counsel for the defendant company objected that there was no
such company and the suit should be dismissed, counsel for the plaintiff
sought courts leave to amend and put the right part but court refused to
grant the leave and dismissed the case.
In the case of Wani V Uganda Timber, 1972 HCB the plaintiff applied for
a warrant of arrest against a managing director of a company instead of
suing the company, chief justice Kiwanoka held that a managing director of
a company is not the company and cannot be sued personally, that if there
is a case against the company then the company is the right party to be sued
not its managing director.
5. PERPETUAL SUCCESSION:
s.15 of the companies Act provides that a company is a legal entity with
perpetual sucession.
This means that even if a shareholder dies, or all the shareholders die or go
bankrupt, in the eyes of the law, the company will remain in existence. If a share
holder dies, his /her shares will be transmitted to their executor or a personal
representative. Also in case a shareholder no longer wants to be a shareholder in a
company, he will simply transfer his shares to someone else and to company will
continue to exist.
The only way a company can come to an end is by winding up, striking it off the
register of companies or through amalgamation and reconstruction as provided by
the Companies Act. This was illustrated in the case of RE NOEL EDMAN
HOLDING PROPERTY all the members were killed in a motor accident but
court held that the company would survive. Thus, this perpetual succession gives
the certainty required in the commercial world even when ownership of shares
changes there is no effect on the performance of the company and no disruption in
the company business.
5.
TRANSFER OF SHARES:
A share constitutes an item of property, which is freely transferable, except in the
case of private companies. When shares are transferred, the person who transfers
ceases to be a shareholder and the person to whom they are transferred becomes
the shareholder. In private companies, there is a restriction on the transfer of
shares for example one may not transfer his shares except to an existing member
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or shareholder, and not to an outsider. This is essential and is in any event
desirable if such a company is to retain its character of an incorporated private
company.
6.
BORROWING:
A company can borrow money and provide security in the form of a floating
charge.
A floating charge is a security created over the assets of the company.
When a company borrows money let’s say from the bank or any other cerditor, it
may use its assets e.g. cars, bank accounts and other assets as security, the
security/ charge will then float over those assets, in case the company defaults on
payment, the charge can settle on one or all of those assets and the bank/creditor of
the company can sell those assets to recover their money.
It is called a floating charge because it floats like a cloud over the whole assets of
the company from time to time, it only settles/crystallizes if the company defaults
on payment. So before the charge settles on the assets, the company is free to deal
with those assets even to dispose them off in the usual course of business.
6. CAPACITY TO CONTRACT.
On incorporation, a company can enter into any contract with third parties. In the
case of Lee V Lee & Air Farming Co. Ltd (1961) A.C 12, it was held that a
company was it is incorporated it has capacity to employ servants, even the
shareholders.
7. FORMALITIES, PUBLICITY AND EXPENSES:
Apart from the advantages mentioned above which arise from incorporation, there
are certain disadvantages of incorporation and these are:
1. Formalities have to be followed which are lengthy and hectic.
2. Loss of privacy because all records are kept at the company registry and
any member of the public who is interested in knowing about the company
can access them of course at a fee.
3. The exercise is too expensive right from the promotion exercise, promoters
have to be paid and if professionals like lawyers are involves, one has to
pay them handsomely, one must also pay stamp duty and registration fees.
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4. The cost of winding up is higher than that of incorporation.
In these respects, a company differs from a Partnership in the sense that no
formalities are required for the formation of a Partnership. A partnership can be
formed orally or by an agreement on a half sheet of paper and can conduct
business without any publicity and can be dissolved cheaply and informally. A
company can only be wound up and cost of winding up is more expensive than
formation. Nevertheless, the policy behind these requirements of formality,
publicity is that incorporation should be accompanied by full disclosure.
THE ULTRA VIRES DOCTRINE.
a) Meaning of ultra vires.
The object clause of the memorandum of association of a company
contains the object for which the company is formed. An act of a
company must not be beyond the object clause otherwise it will be ultra
vires.
The expression ultra vires means beyond powers, therefore an act or
transaction that is beyond the powers of the company as stated in the
objects clause of the memorandum is an ultra vires act or transaction,
such an act that is ultra vires is void and cannot be ratified by the
company.
Sometimes the term ultra vires is also used to describe a situation where
the directors of a company have exceeded the powers delegated to
them, where a company exceeds the powers conferred upon it by its
memorandum of association, it is not bound by it because it lacks the
capacity to incur responsibility for that action, but when the directors of
a company exceed the powers delegated to them, the company in a
general meeting may choose to ratify their act or omission.
b) Distinction from illegality.
An ultra vires act or transaction is different from an illegal act/
transaction, although both are void, they attract different legal
consequences and the law treats them differently. An act of a company
which is beyond its object clause is ultra vires and therefore void even if
it is legal. Similarly an illegal act done by a company will be void even if
it falls squarely within the objects of the company.
c) Importance of the doctrine.
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The doctrine of ultra vires was developed to protect the investors and
creditors of the company. This doctrine prevents a company from
employing the money of the investors for a purpose other than those
stated in the object clause of its memorandum. Thus the investors of the
company are assured that their money will not be employed for
activities which they did not have in contemplation at the time they
invested their money into the company.
This doctrine also protects the creditors of the company by ensuring
that the funds of the company to which they must look to for payment
are not dissipated in unauthorized activities.
d) Establishment of the doctrine.
The doctrine was established firmly in 1875 by the House of Lords in
the case of ASHBURY RAILWAY CARRIAGE CO. LTD VS. RICHE
(1875). A company which was not authorized by its memorandum of
association to lend money or finance any activity made an agreement
with the defendant to provide him with finance for the construction of a
railway in Beligium, the directors made this ultra vires contract on
behalf
the company but subsequently the company ratified this
contract in a meeting. later on the company repudiated this agreement
and did not actually provide the finances, the defendant sued the
company for breach of contract, the company in its defense argued that
financing railway construction was not one of the activities it was
authorized to do.
It was held that indeed such an act was beyond the powers of the
company and such an ultra vires contract was void and could not be
enforced against the company. Court also held that an ultra vires
contract cannot even be ratified by the company and that the
subsequent act of the company purporting to ratify this contract in a
meeting was void, court emphasized that an ultra vires contract is void
and cannot even be ratified by a unanimous decision of all the members
of a company.
In that case, the HOL expressed the view that a company incorporated
under the Companies Act had power to do only those things which are
authorized by its object clause and anything outside that is ultra vires
and cannot be ratified by the company.
Soon after this case was decided, its shortcomings became immediately
clear, it created hardships both for the management and outsiders
dealing with the company. The activities of the management of the
company were subjected to strict restrictions, at every step of
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transacting the business of the company; management was required to
ascertain whether the acts which were sought to be done were covered
by the object clause of its memorandum of association. The business
men thought this unduly restricted the frequency and ease of business,
if the act was not covered by the memorandum, it would mean having to
alter the object clause to add that activity and alteration of the
memorandum required a lengthy procedure.
Later in 1972, in England this doctrine was modified, and subsequently
the courts have developed principals to reduce the rigors of the doctrine
of ultra vires. They include the following.
1. Powers implied by statute. According to this principal, a company
has powers to do an act or exercise a power which has been
conferred on it by the companies Act or any other Act of
Parliament even if such act is not covered by the object clause in
the memorandum of association.
2. The principal of implied and incidental powers. This principal was
established in the case of ATTORNEY GENERAL V GREAT
EASTERN RAILWAY CO (1880) 5 AC 473, in this case the HOL
affirmed the principal laid down in the earlier case of ASHBURY
RAILWAY CARRIAGE CO. LTD VS. RICHE (1875) but made a
slight departure and held that the doctrine of ultra vires ought to
be reasonably and not unreasonably understood and applied.
Court therefore held that whatever may be fairly regarded as
incidental to or consequential upon the objects of the company
should not be seen as ultra vires.
That case therefore led to a clear conclusion that that a company
incorporated under the companies act has power to carry out the
objects set out in its memorandum and also everything that is
reasonably necessary to enable it carry out those objects.
e) Ascertainment of the ultravires doctrine.
An act is therefore intra vires (within the powers) the company if;
 It is stated in the object clause of the memorandum of association
of that company.
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 It is authorized by the Companies Act or by any other Act of
parliament.
 If it is incidental to the main objects of the company or reasonably
necessary to enable it carry out those objects. In the case of
ATTORNEY GENERAL V. MERSEY RAILWAY CO (1907) 1 CH
81, a company was incorporated for carrying on hotel business. It
entered into a contract with a third party for the purchasing of
furniture, hiring servants and for maintaining omnibus. The
purpose or object of the company was only to carry on a hotel
business and it was not expressly mentioned in the objects clause
in the memorandum of the company that they could purchase
furniture or hire servants. The contract was challenged on the
ground that this act of the directors was ultra vires.
The issue before court was whether the transaction was ultra
vires.
Court held that a company incorporated for carrying on a hotel
business can purchase furniture or hire servants and maintain an
omnibus to attend at the railway station to take or receive the
intending guests to the hotel because these objects are reasonably
necessary to effectuate the purpose for which the company has
been incorporated, and consequently such acts are within the
powers of the company, although these may not be expressly
mentioned in the objects clause of the memorandum of
association of that company.
However not every act that is beneficial to the company is intra vires , it
is not enough that the act is beneficial to the company , the act must be
reasonably necessary for the company to carry out the activities
mentioned in the memorandum.
f) Effect of ultra vires transactions.
 Ultra vires contracts. These are void and cannot be enforced by or
against the company. In the Case of RE JON BEAUFORE (LONDON)
LTD (1953) CH 131, it was held that ultra vires contracts made with
the company cannot be enforced against a company. Court also held
that the memorandum of association is constructive notice to the
public and therefore if an act is ultra vires, it will be void and will not
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be binding on the company and the outsider dealing with the
company cannot take a plea that he had no knowledge of the
contents of the memorandum because he is deemed to know them.
In England, the European Communities Act 1972 has lessened the
effect of application of the Ultra vires doctrine in this manner. In
England, third parties dealing with the company in good faith are
protected and can enforce an ultra vires contract against the
company if the third party acted in good faith and the ultra vires
contract has been decided by the directors of the company. However
in Uganda, the ultra vires doctrine has not been modified by statute
or case law and there is therefore no legal provision where third
parties dealing with the company in good faith are protected and can
enforce an ultra vires contract against the company if the third party
acted in good faith
Thus in Uganda the doctrine of ultra vires is applied strictly with the
effect that where the contract entered into by the third party is found
to be ultra vires the company, it will be held void and cannot be
ratified by the company and the company cannot enforce it against
the third party and neither can a third party enforce it against the
company.
 Ultra vires borrowing. In Uganda a borrowing that is ultra vires is
void and cannot be ratified by the company and the lender is not
entitled to sue the company for the return of the loan. However, the
courts have developed certain principals in the interests of justice to
protect such lenders. The reliefs include;
 Injunction. If the money lent to the company has not been
spent, the lender can apply to court for an injunction to
prevent the company from spending the money.
 Tracing. The lender can recover his money as long as it can
still be found in the hands of the company in its original form.
 Property acquired under ultra vires transactions.
Where the funds of the company are applied in purchasing some
property, the company’s right over that property will be protected
even though the expenditure on such purchasing has been ultra vires.
 Judgments from ultra vires transactions.
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Because the law considers ultra vires acts void by their very nature,
the company and third parties cannot even with consent attempt to
validate an ultra vires act. In RE JON BEAUFORE (LONDON) supra,
builders of a factory for purposes which were apparently ultra vires
demanded for their money and by consent it was ordered that the
company should pay, on winding up, the liquidator refused to pay
that debt that was arising out of an ultra vires transaction, the court
held that the liquidator was well entitled to reject the claim as a
company cannot do what is beyond its legal powers by simply going
into court and consenting.
LIABILITY OF DIRECTORS ON ULTRA VIRES TRANSACTIONS .
1. Liability towards the company. It is the duty of the directors to
ensure that the funds of the company are used only for legitimate
purposes of the company. Consequently if the funds of the
company are used for a purpose foreign to its memorandum, the
directors may be held personally liable to restore to the company
the funds used for such purpose. Thus a share holder can sue the
directors to restore to the company funds which they employed in
transactions which the company is not authorized to engage in.
2. Liability towards third parties. The directors of a company are
treated as agents of the company and therefore have a duty not to
go beyond the powers that the company gives them. Where the
director represents to a third party that the contract entered into
by them on behalf of the company is within the powers of the
company while in reality the company does not have such powers
under its memorandum, the directors may be held personally
liable to the third party for the loss on account of breach of
warranty of authority. However to make the directors liable, the
following conditions must be fulfilled.
i)
There must be a representation of authority by the
directors. It should be a representation of fact not law.
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ii)
By such representation, the directors must have induced the
third party to make a contract with the company in respect
of a matter beyond the powers of the company.
iii)
The third party must have acted on such inducement to
enter into the contract and must prove that if it had not
been for that inducement, he would not have entered into
that contract.
iv)
That as a result, the third party suffered loss.
EXCEPTIONS TO THE ULTRA VIRES DOCTRINE.
1. Property acquired /investments made by the company using
money from ultra vires transactions.
2. Activities which are not expressed by the memorandum but are
implied by law.
3. Activities which are not expressed by the memorandum but are
incidental or related to or reasonably necessary for the company
to carry out its express objects.
4. Ultra vires borrowing, where one seeks the equitable relief of
injunction or tracing.
OTHER FORMS OF BUSINESS ORGANIZATIONS
In order to understand the concept of legal personality it is necessary to compare
registered companies with other forms of business organizations particularly the
sole trader, partnerships, clubs and societies, cooperative societies, unit trusts etc.
1.
SOLE TRADER/ sole proprietorship.
A sole trader owns and runs a business, contributes the capital to start the
enterprise, runs it with or without employees, and earns the profit or is fully
responsible for the loss of the venture. The business does not have its own
legal personality. Any one making a legal contract with a sole trader does
so with the trader as an individual.
Advantages of being a sole trader
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 No formal procedure required to set up the business.
 A sole trader is independent and accountable only to himself. He does not
have to consult anybody about business decisions.
 Personal supervision of the business can ensure its effectiveness and close
conduct with customers/clients may enhance commercial flexibility.
 All the profits of the business belong to the sole trader.
Disadvantages
 Unlimited liability means that if the business gets into debt a personal
trader’s personal wealth can be lost.
 Expansion of the business is only possible if the profits are ploughed back
into the business.
 Since the business depends on an individual it means long working hours
and difficulty if the individual is indisposed or incapacitated.
 The death of the proprietor normally results in the death of the business.
 The individual may lack technical skills to effectively manage the business.
 Disadvantages associated with small size, lack of diversification, absence
of economies of scale, problems of raising finance etc.
2.
PARTNERSHIPS
Under section 2(1) of the Partnership Act of 2010, partnership is the
relation which subsists between persons carrying on a business in common
with a view of profit.
Advantages
 Two or more persons can provide more capital than a sole trader.
 Responsibilities are shared between the partners.
 Partners contribute a wider range of skills and experience to the
business.
 The affairs of the business are private and no one except the partners has
any right to inspect the accounts.
Disadvantages
 No separate legal entity.
 Unlimited liability for the debts of the business.
 Change of partners is a termination of the old firm and the beginning of
a new one.
 Partners cannot provide security by a floating charge on goods.
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 There is no distinction between the property of the partners and that of
the partnership.
 Some independence is lost since decisions must be made jointly.
3.
Clubs and Societies
These are unincorporated associations which are subject to no statutory
regulation. Their constitution depends entirely on the ordinary law of
contract with the members expressly or impliedly agreeing to be bound by
the constitution. In the eyes of the law a club has no existence apart from its
members, but since a distinction has to be made between club property and
the separate property of the members, the club property is normally vested
in trustees to be held by them in trust for the club. This form is normally
adopted by organizations involved in religious, educational, literary,
scientific, social or charitable works for instance YMCA, YWCA, churches
etc).
4.
Cooperative Societies
This is any society that has as its object the promotion of the economic
interests of its members in accordance with cooperative principles.
Cooperative societies are registered with or without limited liability. Upon
registration the cooperative society becomes a corporate body with
perpetual succession and a common seal with power to hold movable and
immovable property of every description, to enter into contracts, to institute
and defend suits and other legal proceedings and to do all things necessary
for the purpose of its constitution. To be registered a society must have at
least 30 members.
5.
Unit Trusts
A “unit” means a right or interest whether described as a unit, as a subunit
or otherwise, which may be acquired under a scheme and “a unit trust
scheme” is any arrangement made for the purpose or having the effect of
providing for persons having funds available for investment, facilities for
the participation by them, as beneficiaries under a trust, in profit or income
arising from the acquisition, holding, management or disposal of any
property.
In essence the managers of the trust purchase a block of various
investments and vest them in trustees, to be held on the terms of a trust
deed. This divides the beneficial interest in the trust fund into a large
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number of shares or units. The trustees hold the units on trust for the
managers who then sell them to the public at a price based on their market
value plus a small service charge to cover expenses and a profit for the
managers.
The managers have power from time to time to increase the number of units
by vesting additional securities in the trustees, The managers also provide a
market for unit holders by buying back and reselling units. In practice the
trust deed is for a fixed period at the end of which the underlying
investments are realized and the unit holders repaid unless they elect to
continue the trust.
LIFTING THE VEIL OF INCORPORATION
A company once incorporated becomes a legal personality separate and distinct
from its members and shareholders and capable of having its own rights, duties
and obligation and can sue or be sued in its own name. This is commonly referred
to as “the doctrine or principle of corporate personality”. No case illustrated
the above principles better than the noted House of Lords decision in Salomon v.
Salomon. However, in some circumstances, the courts have intervened to
disregard or ignore the doctrine of corporate personality especially in dealing with
group companies and subsidiaries and where the corporate form is being used as a
vehicle to perpetrate fraud or as a "mere façade concealing the true facts."
Upholding the abiove principal in such cases would result into and perpetuate
injustice.
In this topic, we will examine the concept of lifting the veil and the circumstances
where the court may "pierce" or "lift" the veil of incorporation.
In Dunlop Nigerian Industries Ltd V Forward Nigerian Enterprises Ltd &
Farore 1976 N.CL.R 243, the HC of Lagos stated that in particular circumstances,
e.g where the device of incorporation is used for some illegal or improper purpose,
the court may disregard the principle that a company is an independent legal entity
and lift the veil of corporate identity so that if it is proved that a person used a
company he controls as a cloak for an improper transaction, he may be made
personally liable to a third party.
The legal technique of lifting the veil is recognized under 2 heads:
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1. Statutory lifting of the veil
2. Case law lifting of the veil
Statutory lifting of the veil
1.
Where the number of members is below legal minimum.
Under S. 33 of the Companies Act if a company carries on business for
more than 6 months after its membership has fallen below the statutory
minimum, (2 for private companies and 7 for public companies), every
member during the time the business is carried on after the 6 months and
who knows that the company is carrying on business with less than the
required minimum membership is individually liable for the company’s
debts incurred during that time. In such a case therefore the corporate veil is
lifted in order to hold those members personally liable for the company’s
debts incurred during that time.
2.
Where the- company is not mentioned in the Bill of Exchange.
S.34 of the Companies Act provides that a bill of exchange shall be
deemed to have been signed on behalf of a company if made in the name of
the company, by or on behalf of the company or on account of the company
by any person acting under the company’s authority.
S.109 (4) (b) prohibits any officer of the company from signing or
authorizing to be signed a bill of exchange on behalf of the company in
which the company’s name is not mentioned in legible characters/ clear
letters. Any officer who does this is personally liable on that bill of
exchange for the money or goods for that amount unless it is duly paid by
the company. Therefore in such case the corporate veil is lifted in order to
hold that officer of the company personally liable.
3.
Holding and subsidiary companies.
Where companies are in a relationship of holding and subsidiary
companies, group accounts are usually presented by the holding company
in a general meeting. In this regard, the holding and subsidiary companies
are regarded as one for accounting purposes and the separate nature of the
subsidiary company is ignored. S.147 of the Companies Act requires each
company to keep proper books of accounts with respect to
 Money received by the company and from what source.
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 Money spent and what it was spent on.
 All sales and purchases of goods made by the company.
 The assets and liabilities of the company.
These accounts are meant to give a true and fair view of the state of the
company’s affairs and to explain its transactions.
Directors of the company are required at least once a year to lay before the
company in a general meeting a profit and loss account (or income &
expenditure account for non profit making companies) plus a balance sheet.
Where at the end of each year a company has subsidiaries, then as that
parent company presents its accounts, it should also present a group
account dealing with the affairs of that parent company and its subsidiaries,
the group account consists of a consolidated balance sheet and a
consolidated profit and loss account of both the subsidiary and the parent
company.
4.
Reckless and Fraudulent Trading:
Under sect 327, it is provided that if in the course of winding up, it appears
that any business has been conducted recklessly or fraudulently, those
responsible for such business may be held liable without limitation of
liability for any of the company’s debts or liabilities.
5.
Taxation
Under the income tax Act, the veil of incorporation may be lifted to
ascertain where the control and management of the company is exercised in
order to determine whether it is a Ugandan company for income tax
purposes.
6.
Investigation into related companies
Where an inspector has been appointed by the Registrar to investigate the
affairs of a company, he may if he thinks it fit also investigate into the
affairs of any other related company and also report on the affairs of that
other company so long as he feels that the results of his investigation of
such related company are relevant to the main investigation.
Lifting the Veil under case law
1. Where the company acts as agent of the share holders.
Where the shareholders of the company use the company as an agent, they will be
liable for the debts of the company. Agency is a relationship which exists
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whenever one person authorizes another to act on his or her behalf. The person
acting is called the agent, and the one he is acting for is called the principal. Where
such a relationship exists, the acts of the agent are taken to be the acts of the
principal. Therefore in an agency relationship, the acts of the agent are taken to be
the acts of the principal. In case of liability it is the principal who is held liable and
not the agent. This is because of the dictum that he who acts through another acts
for himself. Thus where share holders employ or use the company as an agent,
then those shareholders will be personally liable for the acts of the company as
principals behind the agent.
2.
Where there has been fraud or improper conduct.
The veil of incorporation may also be lifted where the corporate personality
is used as a mask for fraud or illegality. In Gilford Motor Co V. Horne
[1933] Ch. 935 Home was the former employee of Gilford Motor Co. He
agreed not to solicit its customers when he left employment. He then
formed a company which solicited the customers. Both the company and
Home were held liable for breach of the covenant not to solicit. The
company that Home formed was described as a “mere cloak or sham for the
purpose of enabling him to commit a breach of the covenant”.
In Jones V Lipman [1962]1 W.L.R 832 Lipman in order to avoid the
completion of a sale of his house to Jones formed a company and
transferred the house to the company. Court ordered him and the company
to complete payment, even though the ownership of the house was no
longer in his names but in that of the formed company. The company was
described as a creature of Lipman, a device and a sham, a mask which he
held before his face in an attempt to avoid recognition by the eyes of
equity.
In Re Williams Bros Ltd. (1932) 2ch.71, a company was insolvent but the
Directors continued to carry on its business and purchased its goods on
credit. It was held that if a company continues to carry out business and to
incur debts at a time when there is to the knowledge of the directors no
reasonable prospects of the creditors ever receiving payments of these
debts, it is in general a proper inference that the company is carrying on
business with intent to defraud. R V Graham (1984) QB.675 makes it clear
that a person is guilty of fraudulent trading if he has no reason to believe
that the company will be able to pay is creditors in full by the dates when
the respective debts become due or within a short time thereafter.
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3.
Public interest/policy
Sometimes, courts have disregarded the separate legal personality of the
company and investigated the personal qualities of its shareholders or the
persons in control because there was an overriding public interest to be
served by doing so. In Daimler Co Ltd Vs Continental Tyre And
Rubber Co (1916) A.C 307, a Company incorporated in England whose
shares except one were held by German nationals resident in Germany
brought an action during the First World War. All its directors were also
German nationals resident in Germany, which was an enemy country at the
time. The Court disregarded the fact that the company had a British
nationality by incorporation in England and rather concentrated on the
control of the company’s business and where its assets lay, in determining
the company’s status.
4.
In determining residence of a company for tax purposes.
The court may look behind the veil of the company and its place of
registration so as to determine its residence. The test for determining
residence is normally the place of its central management and control.
Usually, this is the place where the board of directors operate. But it can
also be the place of business of the M.D where he holds a controlling
interest.
MANAGEMENT OF A COMPANY
The control and management of a company is distributed among its principal
officers and these include the auditors, accountants, Board of Directors, Managing
director (if any) and any other officers of a company. There are basically two
organs responsible for the management of a company. These are: 1.
2.
The Shareholders through company meetings and
The Board of Directors.
The shareholders and Company Meetings
The shareholders have an opportunity of influencing the company's management
through the company's meetings. There are 4 types of meetings through which the
shareholders can participate in the affairs of a company.
1. Statutory Meetings: These are provided for under S130 of the Companies Act
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which requires every public ltd company to hold such type of meeting within 30
days from the date of commencement of business. The meeting is held once in
the company's life and never again. The meeting is a must hold for all public
companies, private companies are not required to hold this meeting.
The aim of the meeting is to enable the members to review the progress report
from the directors and the promoters, thus at least 14 days before the meeting
the directors must send a statutory report to every member giving details of
 Shares allotted
 The no of shares which were paid up and those which were not.
 Those shares paid for in cash and those paid up in some other form of
consideration.
 The total amount of money received from the allotment.
 The names and descriptions of the directors, and secretary.
 Contract descriptions of any contract intended to be discussed at the
meeting that will need to be approved at the meeting.
In this meeting members are at liberty to discuss matters arising from the report and
any other matter related to the formation of the company. The directors must also
send this report to the registrar of companies so that it can be registered and put on
the file of that company.
2. Annual General Meeting (S.131). Unlike the Statutory Meeting, an AGM is
required of all types of companies. It must be convened by notice of not less than
21 days. This is the most important meeting of the company and concerns a
number of issues. Although the companies Act doe not exactly indicate the nature
of the business transacted at such a meeting, the business invariably includes
appointment of auditors, fixing their remuneration, declaration of dividends,
consideration of the company’s profit and loss accounts and the balance sheet,
consideration of the reports of the directors, auditors and election of new
directors or auditors if need arises.
The purpose of the annual general meeting is important for the
protection of the members because it is the one occasion when they can
be sure of having an opportunity of meeting the directors and
questioning them on the profit and loss accounts, on their report and on
the company’s position and prospects. It is at this meeting that normally a
proposition of the directors will retire, come up for re-election:- and it is at
this meeting that the members can exercise their only real power over the
board i.e. the power of dismissal by voting them out. Most of these things
could of course be done at the extraordinary meeting but the members who
want to raise these matters may not be able to insist upon the convening of
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such meeting, the annual general meeting is valuable to them because the
directors must hold it whether they like it or not.
If the company fails to convene such a meeting, there are two consequences
that occur:i.
The registrar may himself convene that meeting or order that the
meeting be convened and in extreme cases he may further order that
any one shareholder present in person or by proxy be deemed to
constitute the meeting.
ii.
Every director who is in default of convening that meeting as well as
the company itself are liable to a default fine not exceeding shs 200/=
and every officer of the company who is in default is liable to a default
fine of shs.40/= (1981) HCB 60). Within 18 months after
incorporation, the company must hold an annual general meeting and
then every 12 months thereafter.
3. Extra-Ordinary General Meeting (S 132):
This is usually convened by the directors at their discretion ( art 49 table A) to
deal with urgent matters which cannot wait till the next annual general meeting.
However the directors must hold such meeting irrespective of any contrary
provision in the articles if holders of at least 10% of the company’s paid up
capital or 10% of the members carrying voting rights ask/ requisition for it. They
must state the reason why they want such a meeting. If the directors do not
convene the meeting within 21 days of the requisition, then the requisitionists
may themselves convene the meeting and recover expenses from the company
which may in turn recover the same from the defaulting directors.
4. General meeting convened under court orders (S. 135). It provides that if for
any reason it is impracticable to call a meeting of the company in any manner in
which meetings of the company may be called, the court may on application of
any director or member of the company who would be entitled to attend and vote
at the meeting order a meeting of the company to be called, held and conducted
in any manner that the court thinks fit, and court may for that matter direct that
only one person present at the meeting shall constitute quorum.
In the case of Re Sombrero Ltd (1958) Ch.900, the applicant was a holder of 900
shares in a private company and the 2 respondents who were the only directors
were each holding 50 shares. The respondents did not arrange or call for any
annual general meeting or file a statutory report. They refused to call any meeting
the reason being that the inevitable result of convening any meeting would be
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that they would find when they have ceased to be directors because the applicant
who held majority shares would vote them out of office. When he applied to
court to have a meeting convened, it was held that in the circumstances it was
impracticable for the meeting to be held and this was a case where the court
would intervene and order that the meeting be carried out and one member i.e.
the applicant could carry out the meeting alone.
In Uganda Ey’eDdembe Publications ltd (1975) (Companies Cause No.9 of 1979),
there were 3 shareholders 2 of whom were chased from Uganda in 1972. The third
member became the sole director, signatory and used to constitute all general
meetings and the court later allowed it.
In the case of Re Air Rep.International Ltd (Companies Cause No 3 of 1984), there
were only 2 shareholders and one complained that his co-shareholder had never
stepped into the company's premises for the previous two years. The court asked him
to make an application requesting to be allowed to convene a general meeting, which
he dully did and it was granted.
PROCEDURE, ATTENDANCE AND QUORUM (17.3.05)
1. NOTICE OF MEETINGS.
s.133 provides that any meeting of a company must be called by a notice of a period
not shorter than 21 days and any provision in that articles providing for a shorter
notice is void and of no effect. The notice may be in writing or it can take any other
form like word of mouth, radio or TV announcements, newspapers etc., it must
state the exact date time and place where the meeting will take place and what is
intended to be discussed at that meeting, if the notice does not indicate the above
then it is not a proper notice and if any shareholder is absent from the meeting
because his notice had not fully disclosed the agenda, he can seek a court order to
declare such a meeting null and void.. However a meeting may be called by a
shorter notice than 21 days if all the members entitled to attend and vote at the
meeting agree to such a shorter notice.
2. QUORUM.
This relates to the minimum number of members that must be present at a meeting of
the company for it to be a valid meeting. The company’s articles will normally
provide for the required quorum but where they are silent on this, s.134 (c) of the Act
provides for the requisite quorum as 2 members present in case of a private company
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and in any other case three members personally present. Quorum need not be
maintained throughout the meeting though at the beginning it must be there.
3.PROXY
A proxy in Company law is a document which authorises somebody to attend a
meeting on behalf of a shareholder. S.136 provides that any member of a company
entitled to attend and vote at a meeting of the company is entitled to appoint
another person to attend and vote instead of him of her and any notice calling for a
meeting should indicate that that person is entitled to attend by proxy.
4.VOTING.
S.134 provides that every member shall have one vote in respect of each share he
has and in case of a company having a share capital and in other cases every
member shall have 1 vote.
Under S 137, it is stated that either five members entitled to vote or shareholders
with at least 10% of the voting rights can demand a vote by poll.
OFFICERS AND MEMBERS OF THE COMPANY
1.
Board of Directors
There is no definition of a director whether in the Act or by case law. Nevertheless,
S2 of the Act states that a director includes any person occupying the position of a
director by whatever name called. In most private companies directors are usually
share holders and in public companies , there is a requirement that directors must
take up qualification shares, which is not the case in private companies unless the
articles provide for it. According to S 177, a public company must have at least 2
directors. It’s an offence to have one director. Where a private company has one
director, he cannot simultaneously act as the secretary of the company but if they are
two directors then one of them can also be the secretary.
Under the act, a director is defined as “any person occupying the position of a
director by whatever name called” this definition includes a “de jure director”
meaning one who is duly appointed to act as such and a “defacto director” meaning
one who is not appointed as director but acts as one.
Therefore defect in appointment of one as a director doenot affect the validity of all
the things such a person does while acting as director. In R V. Camps [1962] EA 243
in this case the articles of association of a company required every director to hold at
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least 1 qualification share. Camps as a director did not acquire his qualification share
and the question was whether under the circumstances he was actually a director. It
was held that any person who performs the functions of a director though not duly
appointed as such is occupying the position of a director as a “defucto” director and
so was Camps.
Note: that for a person to be regarded as a “defucto” director, he must be performing
his duties openly.
Qualifications of directors.
1. S 182 requires that before a person can be appointed a director of a company
with share capital, he must have:  Signed and delivered for registration his consent to act as a director.
 Signed a Memorandum of Association of his qualification share and
paid or agreed to pay for those shares. A qualification share is that no
of shares that a director must acquire in a company in order to qualify
as one.
2. According to S 186 a director of a public ltd company or a private company
which is a subsidiary of a public company must be aged between 21-70 years.
3. S 188 disqualifies an un discharged bankrupt. An un discharged bankrupt
does not qualify to become a director or else he is liable to a fine of not
exceeding 10,000/= or imprisonment of 2 years or both.
4. Under S 183, any director who is required to hold qualification shares must
acquire those shares within 2 months of his appointment, otherwise he must
quit.
REMUNERATION OF DIRECTORS.
The companies Act is silent on renumeration of directors but it is the law that a
director has no automatic right to remuneration and as it was emphasized in Re
George Newman & Co. (1895) 1 ch.674 that the directors have no right to be paid
for their services and cannot pay themselves or each other or make presents to
themselves out of the company's assets unless authorised so to do by the articles or
by the shareholders at a properly convened meeting.
PROCEEDINGS OF BOD
The rule is that directors must act collectively and any director who is prevented
from carrying out his duties can seek an injunction from court to restrain his codirectors. However, there is no legal requirement that in the discharge of their duties,
directors must meet formally. However directors can agree to carry out a meeting at
any place or time as long as they agree, thus in the case of Barrow Vs Porter (1914)
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1 ch.895. In this case, the company had only 2 directors who developed personal
differences to the extent that they could no longer meet. One director, staying in
town wanted to carry out a transaction. He waited for the other village director at the
railway station and told him about an incumbent meeting which the other one never
agreed with. The town director met alone and elaborated on many issues and
purported to have resolved together with the director in the village. The Court held
any of those resolutions that the town director purported to pass were invalid
because the directors never agreed on the mode of the meeting.
Conflict Between Directors and Shareholders
As between shareholders and directors, the issue of who has the final say in the
management of the company will depend on the articles of association. Where the
company adopts article 80 of table A, which provides that the business of the
company shall be managed by the directors who may exercise all such powers as are
not required by the Act to be exercised by the company in a general meeting. This
means that the board is left with wide powers to do all those things which the general
meeting is not authorised to do.
LIABILITY OF A COMPANY FOR THE ACTS OF ITS OFFICERS.
This refers to the liability of the company for the acts of its officers.
Upon incorporation, a company becomes a legal person carrying on acts of a
human being, it enjoys rights and benefits of a human being as well, and as
such a company could not enjoy such without obligations or liabilities.
Accordingly in principle, the company is liable for the acts of its officers while
transacting business on its behalf.
It is a necessary component of corporate personality that there should be rules by
which acts are attributed to the company and this is referred to as the rule of
attribution. Under this rule the company is deemed to be a “persona ficta” with
certain powers,, rights and liabilities of a natural person and as such answerable for
the acts of its officers while transacting business on its behalf.
In the case of Meridan Global Funds Management Asia Ltd V. Securities
Commission [1995] 2 AC 500, lord Hoffman observed that the company’s primary
rules of attribution will generally be found in its constitution and that these rules are
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based on the general principals of attribution available to natural persons including
principals of agency.
 The question is under what circumstances / to what extent will a company be
held liable for the acts of its officers done while transacting business on its
behalf.
The company will be held liable for the acts of its officers if that officer was at the
time acting as the “directing mind and will of the company”. Since a company is
an artificial person with no mind and will of its own, officers who act for it have its
directing mind and will. An officer is said to have the directing mind and will of the
company if:1. He has authority to act on behalf of the company given by the share holders in
a meeting.
2. He has authority from the directors of the company.
3. He has been mandated to act on behalf of the company by a provision in the
company’s articles of association.
Therefore if an officer of a company incurs liability in the course of duty under the
above circumstances it is the company that will be held responsible not that officer.
In the case of Lennard Carrying Co V. Asiatic Petroleum [1915] AC 705, the
company owned a ship and Lennard as the company director took the active role of
the management of the company’s ship. In the course of work the ship caught fire
and all the cargo on it was destroyed, the owners of the cargo wanted to recover
from the company as ship owner, under the Shipping Act a ship owner was not
responsible /was not liable for any loss or damage to cargo happening without his
fault, the company relied on this provision and argued that it was not responsible for
the loss because when the cargo got destroyed it was not its fault but that of Lennard,
court held that Lennard’s fault had to be attributed to the company since a company
was an abstruct artificial person and could not act on its own but through its
officers. Court further stated that Lennard acting with the authority of the company
became the directing mind and will of the company and therefore the company was
liable for the acts of its officer while transacting business on its behalf.
TYPES OF AUTHORITY THAT A COMPANY OFFICER MAY HAVE.
1. Express Actual
2. Implied actual
3. Ostensible authority/ apparent authority/authority by estopple.
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1. Express actual authority. This is where a company gives authority to an
officer expressly either in writing or word of mouth to act on its behalf.
2. Implied actual authority. For example if A is placed in a particular position
in a company, there is an implied authority to handle all matters that an
officer in that position normally does. In the case of Panaroma V. Fedelis
[1971] QB 711, it was held that a person in a position of a company secretary
has implied authority to do all administrative work e.g. signing contracts and
employing people on behalf of the company.
3. Ostensible authority/ apparent authority/authority by estopple is that
authority which a person is held out as possessing. If a company or its officer
holds out someone as having authority to act on its behalf and other third
parties rely on this to enter contracts with that person on behalf of the
company, the company is stopped from later on denying that that person did
not have authority to act on its behalf.
LIMITATIONS
 The doctrine of holding out is inapplicable to ultra-vires transactions.
 It’s not applicable unless a competent officer or organ has carried out
the holding out. The officer being held out must be purporting to
occupy a position or an office who according to normal trade usage
that can enter into such a contract. Therefore according to the case of
Freeman & Lockyer Vs Burckhurst, before the doctrine of holding out
can be used against the company, the following tests must be satisfied:
 A representation was made that the officer in question had authority.
 Such a representation was made by a person or organ who/which had actual
authority to manage the company.
 The third party was induced by that representation to enter into the transaction.
 The transaction was intra vires/ within the/powers/ objects of the company. An
act is intravires the company if it is on that is authorised by the company’s
memorandum of association. An outsider dealing with the company only need to
look at the memorandum and see whether the act is intravires the company, once
he has done this, then even if the officer of the company did not observe the
provisions of the articles/internal regulations, then that is not his concern because
articles of association only apply to insiders and do not bind non company
members. Therefore once a transaction is intravires the company an outsider is
entitled to assume that all the internal regulations have been complied with and
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his rights will not be affected if this was not the case. This is known as the rule
in Turquand’s case.
 There were no suspicious circumstances that put the person to notice that that
officer may not be having authority.
Home work. Research about the difference between criminal and civil lability and
the doctrine of quantum meriut
THE DOCTRINE OF CONSTRUCTIVE NOTICE AND THE
INDOOR MANAGEMENT RULE.
THE DOCTRINE OF CONSTRUCTIVE NOTICE.
The doctrine of constructive notice is a legal idea which means that a
person has been notified, notification in this case does not necessarily
mean that the person has been specifically notified, it is enough if
information is available, whether u know it or not.
In company law, the Memorandum of Association of a Company has to
be lodged with the Registrar of Companies. Because this is available for
public inspection, people doing business with the Company are free to
inspect the document to see if there is any limitation of powers or
limitations placed on the nature of the business. Thus outsiders are
deemed to know any limitation placed on the Directors of the Company.
Therefore if later, it was found that there was some irregularity within
the Company in respect of any decisions, outsiders having dealing with
the Company are deemed to be aware of it. This is what is called the
doctrine of constructive notice. In the case of MAHONY V EAST
HOLYFORD MINING CO (1875) LR.7 H.L 869, Lord Hitherley had this
to say
“……but whether he actually reads them or not, it will be presumed that he
has read them. Every joint stock company has its memorandum and
articles of association open to all who are minded to have any dealings
whatsoever with the company and those who so deal with them must be
affected with notice of all that is contained in these two documents.”
THE INDOOR MANAGEMENT RULE.
In order to circumvent the doctrine of constructive notice, courts
developed the doctrine of indoor management. This principal was first
formulated in the case of ROYAL BRITISH BANK V TURQUAND (1856)
ALLER 435. This case law principal protects innocent parties who are
doing business with the company and are not in position to know if
some internal rules or procedures have not been complied with.
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In this case the directors of a company issued a bond to the Royal
British Bank. The articles of association of the company stated that the
directors had powers to do so as long as it was authorized by a
resolution of the company in a general meeting. The company claimed
that there was no resolution passed authorizing the issue of the bond
and that therefore the company was not liable
The Doctrine of Indoor Management lays down that persons dealing with a
company having satisfied themselves that the proposed transaction is not in
its nature inconsistent with the memorandum and articles, are not bound to
inquire into the regularity of any internal proceeding. In other words, while
persons contracting with a company are presumed to know the provisions of
the contents of the memorandum and articles, they are entitled to assume
that the officers of the company have observed the provisions of the articles.
It is no part of duty of any outsider to see that the company carries out its
own internal regulations.
It follows that there is no notice as to how the company’s internal machinery
is handled by its officers. If the contract is consistent with the public
document, (ie the memorandum and articles of association) the person
contracting will not be prejudiced by irregularities that may beset the indoor
work of the company.
The rule in Turquand's case is a presumption of regularity. In other
words, a person dealing with the Company is entitled to presume that
all the internal procedures of the Company have been complied with.
This is a practical approach to solving problems facing outsiders
because an outsider would have difficulty to discover what is going on
in the Company.
It is important to note that the notice of constructive notice can be invoked
by the company and it does not operate against the company. It operates
against the person who has failed to inquire but does not operate in his favor.
But the doctrine of “indoor management” can be invoked by the person
dealing with the company and cannot be invoked by the company.
ORIGINS OF THE DOCTRINE.
The rule had its genesis in the case of ROYAL BRITISH BANK V
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TURQUAND (1856) ALLER 435. In this case the Directors of the
Company were authorized by the articles to borrow on bonds such sums of
money as should from time to time be authorized to be borrowed by a
special resolution of the Company in a general meeting. A bond under the
seal of the company, signed by two directors and the secretary was given by
the Directors to the plaintiff bank to secure the drawings on current account
without the authority of any such resolution. When the company was sued, it
alleged that under its registered deed of settlement (the articles of
association), directors only had power to borrow what had been authorised
by a company resolution. A resolution had been passed but not specifying
how much the directors could borrow.
The Court of Exchequer Chamber overruled all objections and held that the
bond was binding on the company as Turquand was entitled to assume that
the resolution of the Company in general meeting had been passed. The
relevant portion of the judgment of Jervis C. J. reads:
"The deed allows the directors to borrow on bond such sum or sums of
money as shall from time to time, by a resolution passed at a general
meeting of the company, be authorized to be borrowed and the replication
shows a resolution passed at a general meeting, authorizing the directors to
borrow on bond such sums for such periods and at such rates of interest as
they might deem expedient, in accordance with the deed of settlement and
Act of Parliament; but the resolution does not define the amount to be
borrowed. That seems to me enough......We may now take for granted that
the dealings with these companies are not like dealings with other
partnerships, and the parties dealing with them are bound to read the statute
and the deed of settlement. But they are not bound to do more. And the party
here on reading the deed of settlement, would find, not a prohibition from
borrowing but a permission to do so on certain conditions. Finding that the
authority might be made complete by a resolution, he would have a right to
infer the fact of a resolution authorizing that which on the face of the
document appear to be legitimately done." Pollock CB, Alderson B,
Cresswell J, Crowder J and Bramwell B concurred.
The rule in Turquand's case was not accepted as being firmly entrenched in
law until it was endorsed by the House of Lords. In MAHONY V EAST
HOLYFORD MINING CO Lord Hatherly phrased the law thus:
“ When there are persons conducting the affairs of the company in a manner
which appears to be perfectly consonant with the articles of association,
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those so dealing with them externally are not to be affected by irregularities
which may take place in the internal management of the company.’’
So, in Mahoney, where the company's articles provided that cheques should
be signed by any two of the three named directors and by the secretary, the
fact that the directors who had signed the cheques had never been properly
appointed was held to be a matter of internal management, and the third
parties who received those cheques were entitled to presume that the
directors had been properly appointed, and cash the cheques.
EXCEPTIONS TO THE RULE.
The rule of doctrine of indoor management is however subject to certain
exceptions. In other words, relief on the ground of ‘indoor management’
cannot be claimed by an outsider dealing with the company in the following
circumstances:
1. Knowledge of Irregularity: - The first and the most obvious restriction is
that the rule has no application where the party affected by an irregularity
had actual notice of it. Knowledge of an irregularity may arise from the fact
that the person contracting was himself a party to the inside procedure. As in
Devi Ditta Mal v The Standard Bank of India where a transfer of shares was
approved by two directors, one of whom within the knowledge of the
transferor was disqualified by reason of being the transfer himself and the
other was never validly appointed, the transfer was held to be ineffective.
Similarly in Howard v. Patent Ivory Manufacturing Co where the directors
could not defend the issue of debentures to themselves because they should
have known that the extent to which they were lending money to the
company required the assent of the general meeting which they had not
obtained. Likewise, in Morris v Kansseen a director could not defend an
allotment of shares to him as he participated in the meeting, which made the
allotment. His appointment as a director also fell through because none of
the directors appointed him was validly in office.
2. Suspicion of Irregularity: - The protection of the “Turquand Rule” is also
not available where the circumstances surrounding the contract are
suspicious and therefore invite inquiry. Suspicion should arise, for example,
from the fact that an officer is purporting to act in matter, which is
apparently outside the scope of his authority. Where, for example, as in the
case of Anand Bihari Lal v. Dinshaw & co the plaintiff accepted a transfer of
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a company’s property from its accountant, the transfer was held void. The
plaintiff could not have supposed, in absence of a power of attorney, that the
accountant had authority to effect transfer of the company’s property.
Similarly, in the case of Haughton & co v. Nothard, Lowe & Wills Ltd
where a person holding directorship in two companies agreed to apply the
money of one company in payment of the debt to other, the court said that it
was something so unusual “that the plaintiff were put upon inquiry to
ascertain whether the persons making the contract had any authority in fact
to make it.” Any other rule would “place limited companies without any
sufficient reasons for so doing, at the mercy of any servant or agent who
should purport to contract on their behalf.”
3. Forgery: - Forgery may in circumstances exclude the ‘Turquand Rule’.
The only clear illustration is found in the Ruben v Great Fingall
Consolidates here in this case the plaintiff was the transferee of a share
certificate issued under the seal of the defendant’s company. The company’s
secretary, who had affixed the seal of the company and forged the signature
of the two directors, issued the certificate.
The plaintiff contended that whether the signature were genuine or forged
was apart of the internal management, and therefore, the company should be
estopped from denying genuineness of the document. But, it was held, that
the rule has never been extended to cover such a complete forgery.
Lord Loreburn said: “It is quite true that persons dealing with limited
liability companies are not bound to enquire into their indoor management
and will not be affected by irregularities of which they have no notice. But,
this doctrine which is well established, applies to irregularities, which
otherwise might affect a genuine transaction. It cannot apply to Forgery.”
4. Representation through Articles: - The exception deals with the most
controversial and highly confusing aspect of the “Turquand Rule”. Articles
of association generally contain what is called ‘power of delegation’.
Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co explains the meaning
and effect of a “delegation clause”.
Here one G was director of the company. The company had managing
agents of which also G was a director. Articles authorised directors to
borrow money and also empowered them to delegate this power to any or
more of them. G borrowed a sum of money from the plaintiffs. The company
refused to be bound by the loan on the ground that there was no resolution of
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the board delegating the powers to borrow to G. Yet the company was held
bound by the loans. “Even supposing that there was no actual resolution
authorizing G to enter into the transaction the plaintiff could assume that a
power which could have been delegated under the articles must have been
actually conferred. The actual delegation being a matter of internal
management, the plaintiff was not bound to enter into that.”
Thus the effect of a “delegation clause” is “that a person who contracts with
an individual director of a company, knowing that the board has power to
delegate its authority to such an individual, may assume that the power of
delegation has been exercised.”
The question of knowledge of Articles came up in the case of Rama
Corporation v Proved Tin and General Investment Co, here; one T was the
active director of the defendant company. He, purporting to act on behalf of
his company, entered into a contract with the plaintiff company under which
he took a cheque from the plaintiffs. The company’s article contained a
clause providing that “the directors may delegate any of their powers, other
than the power to borrow and make calls to committees, consisting of such
members of their body as they think fit”. The board had not in fact delegated
any of their powers to T and the plaintiffs had not inspected the defendants
articles and, therefore, did not know of the existence of power to delegate.
It was held that the defendant company was not bound by the agreement.
Slade J’, was of the opinion that knowledge of articles was essential. “A
person who at the time of entering into a contract with a company has no
knowledge of the company’s articles of association, cannot rely on those
articles as conferring ostensible or apparent authority on the agent of the
company with whom he dealt.” He could have relied on the power of
delegation only if he knew that it existed and had acted on the belief that it
must have been duly exercised.
Knowledge of articles is considered essential because in the opinion of Slade
J; the rule of ‘indoor management’ is based upon the principle of estoppel.
Articles of association contain a representation that a particular officer can
be invested with certain of the powers of the company. An outsider, with
knowledge of articles, finds that an officer is openly exercising an authority
of that kind. He, therefore, contracts with the officer. The company is
estoppel from alleging that the officer was not in fact authorised.
This view that knowledge of the contents of articles is essential to create an
estopped against the company has been subjected to great criticism. One
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point is that everybody is deemed to have constructive notice of the articles.
But Slade J brushed aside this suggestion stating constructive notice to be a
negative one. It operates against the outsider who has not inquired. It cannot
be used against interests of the company. The principle point of criticism,
however, is that even if the directors had the power to delegate their
authority. They would not yet be able to know whether the director had
actually delegated their authority. Moreover, the company can make a
representation of authority even apart from its articles. The company may
have held out an officer as possessing an authority. A person believes upon
that representation and contract with him. The company shall naturally be
estopped from denying that authority of that officer for dealing on its behalf,
irrespective of what the articles provide. Articles would be relevant only if
they had contained a restriction on the apparent authority of the officer
contained.
5. Acts outside apparent authority: - Lastly, if the act of an officer of a
company is one which would ordinarily be beyond the power of such an
officer, the plaintiff cannot claim the protection of the “Turquand rule”
simply because under the articles power to do the act could have been
delegated to him. In such a case the plaintiff cannot sue the company unless
the power has, in fact, been delegated to the officer with whom he dealt. A
clear illustration is Anand Behari Lal v Dinshaw here the plaintiff accepted a
transfer of a company’s property from its accountant. Since such a
transaction is apparently beyond the scope of an accountant’s authority’ it
was void. Not even a ‘delegation clause’ in the articles could have validated
it, unless he was, in fact, authorized.
THE DUTIES OF OFFICERS AND MEMBERS
DIRECTORS.
As far as directors are concerned, they have two duties to discharge in respect of a
company.
1.
2.
The duty of skill and care
The duty of good faith
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Duty of Skill and Care
There is no criteria for measuring the standard of duty of skill and care expected of a
director and consequently this will depend on the circumstances of each case.
Nevertheless, courts have tried to set some guidelines as to what these duties entail.
In Re City Equitable Fire Insurance Co. Ltd, the directors left the company's
management to the Managing Director and as a result, a number of the company's
assets disappeared and a number of misleading items were entered into the books.
While holding the directors liable for breach of duty of skill and care, the court laid
down two criteria against which the standard of duty of a director must be judged.
 It pointed out that we have to look at the nature of a company's business. Where
such a company is a small concern, the standard of duty expected of a director is
not as high as in a big company.
 The mode in which the company's work is distributed among various officers has
to be determined e.g. directors of operations, finance, etc. Where the company's
operations are divided among many directors duty of skill and care is higher than
otherwise.
A director is not expected to exhibit a greater degree of skill and care beyond that
which is reasonably expected of a person with similar qualifications, knowledge or
skill and experience and he is not bound to give continuous attention provided he
attends the meetings, unless he is a full time director.
The duty of good faith
In determining whether or not a director or any other officer has breached his duty
of good faith to the company, we must always remember that the officer stands in
a fiduciary relationship to his company. Ie duty of outmost good faith. Whenever a
party has an upper hand in any relationship e.g. a Lawyer -client, doctor-patient,
teacher-pupil, trustee-beneficiary, etc in any commercial transaction, we term this
party's position as a fiduciary position and any cheating by this party can be
upheld in courts of law.
The duty of good faith is divided into a number of components.
1. Use of director’s powers. Directors must always put the company's interests first
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and in the exercise of their powers, they must do so for proper purposes
otherwise they are held liable. A director should not also divert or destroy a
particular opportunity being pursued by the company for his personal benefit.
In Cooks v Deeks above three directors of the company obtained a contract in
their own names and diverted it to themselves at the exclusion of the company,
it was held that they were in breach of the duty they owed the company since
as directors they were entrusted with the affairs of the company but instead
used their position to exclude the company from the benefits of a contract
whose interest they were supposed to protect.
2. Dealing with the company's properties. Directors have a duty to protect the
company's properties and not to expend them anyhow or use them for their
personal purposes. If they do so, they are liable to make good the loss. In the case
of Re George Newman , when directors made presents to themselves out of
company assets, they were held liable for misappropriation of company property.
The term company's property is widely defined to include contracts to which the
company is entitled even if the company has lost no funds at all.
In Cooks Vs Deeks (1916) AC 554 the court held that the company's property
belongs to the company both at law and equity, and that the directors cannot
appropriate such property.
3. Making Secret Profits out of the Company. A director being in a fiduciary
position is accountable to the company for any secret profits which he has
made by reason of his position as director. A director is free to trade with the
company but he must ensure that he does not make a secret profit at the
expense of the company. Thus a director should not act in a transaction where
there is a conflict of interest unless he discloses that interest to the company.
S.200 and art 84 allows a director to take part in a contract with a company
in which he has personal interests as long as he discloses this interest to the
company. Where a director has not disclosed his interest the contract is not
void but voidable.
4. Insider trading. This is where a well-positioned officer in the company uses
sensitive and important information about that company to his benefit. This is
more common in deals concerning securities and capital markets. In the case of
Purcival Vs Wright (1902) I Ch. 421. The directors of the company bought shares
from X whose value stood at £ 12 per share on the open market. The directors did
not disclose to him that negotiations were being conducted for the sale of the
company's shares at a higher price than they were paying X. X sued to have the
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sale set aside. It was held that the sale was binding as the directors were under no
obligations to disclose the negotiations to X. That the directors duty of good faith
is owed to the company and rather than individual shareholders and so they
failed.
DISQUALIFIED PERSONS FOR POST OF DIRECTOR
1.
According to S186, a person who has reached the age of 70 cannot be
appointed a director unless the company is private and not a subsidiary of a
public company or the articles otherwise provide, or he is appointed and
approved by a resolution of which special notice stating his age has been
given. A person who is first appointed a director of a company other than a
private company which is not a subsidiary of a public company after he has
reached the age at which the directors retire under the articles must give
notice of his age to the company.
2.
An undischarged bankrupt must not act as a director of or be concerned in the
management of a company without the leave of court with by which he was
adjudged bankrupt. If this is contravened, a penalty of 2 years imprisonment
or a fine of 1000 shillings on application for leave as a director and notice
must be given to the official receiver who can oppose the application if he is
of the opinion that it is against public interest.
3.
A person cannot without leave of court be a director to be concerned with the
management of a company if he has been convicted of an indictable offence
i.e. an offence tried by high court) in connection with the company, or on
winding up it has appeared that he has been guilty of guilty while an officer of
fraud or breach of duty in relation to the company and the court has ordered
that he shall not be a director or be concerned in management for up to 5
years.
 N.B: The period of disqualification must date from conviction, not for instance
from the convicted person's release from prison.
STATUTORY PROVISIONS BEARING ON DIRECTORS
These statutory provisions impose both civil and criminal liability on any officer who
defaults on his duties. There are important sections Vis S 206 and S 405.
Under S206, any provision in the articles or in a contract which exempts any officer
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i.
his negligence
ii.
breach of duty
iii.
breach of trust
is void. There are 2 exceptions to this,
1.
That S.206 does not apply to such provision if it was made before the
commencement of the Companies Act i.e. before 1950. This provision
however is redundant for the act came into force a long time ago. The action
or breach must have been done before the Companies Act. (However, this
provision is of relevance even before 1950 because some companies are as
old as before 1950, when they were governed by the laws of England).
2.
Notwithstanding S.206 a company is free to indemnify any officer vs. liability
incurred in court proceedings, which is successfully defended in any case, he
would have been found not to have breached any of the above. Under S.405,
an officer taken to court for negligence or breach of duty may apply to court
before the proceedings to be excused on the ground that he acted reasonably
and honestly in the circumstances.
In the case of Customs And Excise Vs Alpha Ltd (1991) IQB 549
It was held that section 405 is applicable only where the company is making claims
against the officer and is not applicable if other people are making such
claims.
Other sections are 322 & 329. According to S.322, criminal action can lie against
any office for failure to disclose relevant information during the winding up of the
company. Under S 323, any officer who falsifies companies accounts or books with
an intention to defraud any person is also criminally liable. Under S 324, any officer
who acts in a fraudulent manner in relation to the property of the company being
wound up or fails to account for the loss of the property (S 328) or who is a barrier to
the carrying out of the company's affairs for any fraudulent (S 327) which is also
applicable for lifting of the veil) or who is a party to the non-keeping of proper books
of accounts (S329) is criminally liable.
2.
THE AUDITORS OF A COMPANY
The provisions of the Accountants Statute stipulate that a person is not qualified to
act as an auditor unless he is a member of the institute of registered accountants or
he is registered as an associate accountant. It is therefore important that this be
read together with what is contained hereunder for a proper understanding.
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In public companies, any officer or servant of that company or any person who is a
partner or in employment of an officer or servant of that company or in any body
corporate is not qualified to be appointed as auditors (s.159), to avoid conflict of
interests. The general rule here is that an auditor is appointed by the general
meeting, which is also responsible for fixing remuneration. However, under
certain circumstances, the registrar of companies or the directors can appoint an
auditor and fix the remuneration. Similarly s.160 provides that an auditor can only
be removed by the general meeting and where such resolution has been made a
copy of the resolution is sent to the auditor who has the right to make
representations as redeems fit.
Duties: s 162
Basically, an auditor is to investigate and examine the company's accounts. His
report is to be read at the company's general meeting and an auditor has a right to
attend all such relevant general meetings. The standard of duty has been set by the
court in Re London And General Bank Case. That an auditor must be honest and
must exercise reasonable care and skill in what he certifies.
It was further stated in the case that an auditor is not bound to do more than exercise
reasonable care and skill in making inquiries and investigations even in the case of
suspicion.
It is the duty of an auditor to exercise skill, care and caution a cautions auditor would
use. In the case of Formento (Steeling Area) Vs Selsdon Fountain Pen Co Ltd
(1958)1 ALLER where Lord Denning stated that an auditor is not to be confined to
checking vouchers and adding or subtracting figures but he must take care that errors
are not made and that he should approach his duty suspecting that someone may
have made a mistake and that a check must be taken to ensure that none has been
made. That his vital task is to take care that errors of omission or commission or
down right untruths are not done.
In the case of Roberts Vs Hopwood (1925) AC 578 and in Re Ridsell (1914) CH. 59,
it was stated that where an auditor does not have sufficient legal knowledge to deal
with a matter as accountants do, he is entitled to take legal advice. In the case of
BEVAN VS WEBB (19010) 2 Ch. 59, it was held that "permission to a man to do an
act which he cannot do effectually without the help of an agent carries with it the
right to employ an agent”. According to S.328, an auditor is an officer of the
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company. His duty is to ascertain and state the true financial position of the company
at the time of audit but not to care about declaring dividends. In the case of Re
Kingston, it was stated that he is a watchdog but not a blood-bound but if there is
anything calculated to excite suspicion, he should probe it to the bottom but he does
not guarantee the discovery of all fraud.
Nevertheless, an auditor will not be made liable for not tracking out ingenious and
carefully laid schemes of fraud, when there is nothing to arouse suspicion, and when
those frauds are perpetuated by tried servants of the company who are undetected for
years by the directors.
3.
THE COMPANY SECRETARY
 S.2 defines a company's officer as including the company's secretary. In Uganda,
there are no specific qualifications required. However under sections 178, 179,
180 and 189, provisions and disqualify a person from becoming a company
secretary are contained.
 According to S.178, in a company where there is only one director, he can’t
becomes a company's secretary.
 Under S.179, although a company can be appointed a secretary of another if it is
not ultra vires, the appointment of such a company is invalid if the company
being so appointed has only one director who also happens to be the only director
of the appointing company.
 Under S.180 if a provision in the articles requires that something should be done
or signed by a director and secretary, it should not be done or signed by the same
person acting as both director and secretary. For example in signing the company
returns, the secretary cannot sign them in both capacities as a secretary and a
director. If it is not possible to find another director, the secretary re-delegates
such powers to anybody in accordance with the articles.
 Furthermore according to S.189, a person is disqualified from becoming a
secretary for a period not exceeding 5 years if he has ever been convicted of any
offence relating to the company's affairs from the date he is convicted.ie after
conviction the person should not act as secretary for a period not more than 5
years.
DUTIES AND HIS AUTHORITY
1. There is no clear-cut definition for the secretary's duties but these will depend
on the company in question. Nevertheless, a company's secretary is a very
important person or officer of the company who can legally bind the company
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in its transactions. In the case of Panaroma V. Fedelis [1971] QB 711, it was
held that a person in a position of a company secretary has implied authority
to do all administrative work e.g. signing contracts and employing people on
behalf of the company. In Panorama Development (Guildford Ltd) Vs Fe
Fideli's Furnishings Fabrics Ltd above, the company's secretary ordered self
drive cars using a different companies letterheads and when the cars
arrived, he diverted them to his personal use. When the defendant company
was sued for the price of the cars, it raised a defence that it was not bound
because the secretary who made the order was an insignificant person in a
company (depending on earlier conception of the secretary). The court of
appeal rejected the defence and pointed out that the secretary is an
important company officer with in exhaustive powers, duties and
responsibilities who can make representations on behalf of the company
and can enter into contracts in the day to day running of the company's
business. Consequently, because of his position in the company, the
secretary can be held liable not only to his company but also to the
shareholders in civil suits.
INSTITUTION OF SUITS
Although the Secretary is the officer mainly charged with the duty to institute suits
on behalf of the company and it was the earlier judicial view in the decision in
Bugerere Coffee Growers Ltd. V Zukuberi Kikuya and Another [1970] EA
147. These have been held as no longer good law by the Court of Appeal of
Uganda in the case of M/s Tatu Naiga & Emporium V Uverjee Brothers (U)
Ltd (C.A-U), citing United Assurance Co. Ltd V Attorney General, Civil
Appeal No. 1/1986 which overturned those earlier decisions. Any authorised
director can give the necessary authority to institute a suit in the name of the
company.
Furthermore, a secretary can be held criminally liable under the sections already
discussed in respect of directors.
The Position of Members in a Company
In North West Transport Company Vs Beatty (1887) AC 589
A director of a company in which he was the majority shareholder used his votes
in favour of a contract to buy his own shop. Shareholders sued so that the
resolution could be set aside. The court held that every shareholder has a right to
vote on any question even if he has a personal interest, which is opposed to the
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interests of the company. However, there is a number of instances when the right
of voting can be restricted and this is when the “majority” are said to have
committed a "fraud" on the "minority".
According to the case of Borland Vs Earle (1902) AC 83, fraud does not mean
deceit, rather it means an abuse of power as well as acts of a fraudulent nature e.g.
when the majority are attempting to appropriate themselves money, property or
advantages belonging to the company, the minority shareholders are entitled to
participate. Consequently, the courts have held that where there is:a.
expropriation of the company's properties
b.
release of director's duty of good faith
c.
expropriation of members' property.
Then courts will interfere with a member's right of voting since such voting amounts
to fraud on the minority.
Rights of members/shareholders in a company.
1. Right to attend and vote at company meetings.
2. To share in the dividends once they are declared and authorised to be paid.
3. To transfer their shares except in private companies where such right may be
restricted.
4. Requisition for an extraordinary meeting.
5. Dismiss the board by voting them out
6. Demand a vote by poll or proxy.
Expropriation of the company's property
This can be illustrated by the case of Munier V Hoopers Telegraphic Works
(1874)L.R, 9 Ch.1) APP 350, two company's A ltd and B ltd existed. A ltd was the
majority shareholder in B ltd. B ltd received a contract to construct a telegraphic
line. A ltd appropriated the contract to itself and immediately resolved to wind up B
ltd. Minority shareholders in B ltd sued.
 It was held that the defendant company as a majority shareholder had benefited
from the contract, which was the property of its subsidiary. The minority
shareholders were entitled to participate in the benefits of the contract which the
defendant company had misappropriated. However, winding up had already
taken place and there was no alternative remedy.
Release of directors' duties of good faith
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DEPARTMENT OF BUSINESS LAW
MAKERERE UNIVERSITY BUSINESS SCHOOL, 077-4-110111
 A general meeting cannot authorize directors to breach their duty of good faith
nor can it ratify any such breach. Once it does so, that will amount to a fraud on
the minority and the transaction in issue will be set aside. But the general meeting
can legally release the Director of the duty of skill and care (S 206).
Expropriation of members' property
 Majority shareholders must not use their powers to expropriate the shares of
minority shareholders. If they do so, that will amount to a fraud and the
transaction will be set aside. In Brown Vs British Wheel Co (1979) 1 ch 290, the
majority shareholders wanted to buy the minority shareholders out and the court
held that the action was not bonafide to the company as a whole.
RAISING THE CAPITAL OF THE COMPANY
Companies are time and time again faced with the challenge of raising capital for the
growth of the company. For an existing company, new capital for such a company
can be raised through ploughing back profits without declaring any dividends.
Alternatively, the company may decide to offer its securities to the public, by
floating new shares. Also, the company may decide to borrow from the bank or the
government or insurance companies or finance houses.
RAISING CAPITAL THROUGH ISSUE OF SHARES TO THE PUBLIC
Companies can raise capital by inviting members of the public to subscribe for
shares in the
company. This is done through the issuing of a prospectus.
METHODS OF ISSUE
There are different was of inviting the public to subscribe for shares in a company.
1. Placings (private)
2. Offer by tender.
3. Rights issue
4. Bonus Issue
5. Offers for sale
6. Direct offers e.g. by issuing prospects
Placings
These take place in the issuing house. A company issues securities, placing them in
the issuing house for purposes of the issuing house selling them to its clients. The
issuing house (may purchase securities and place them with clients) or may not place
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DEPARTMENT OF BUSINESS LAW
MAKERERE UNIVERSITY BUSINESS SCHOOL, 077-4-110111
them with the clients. When it purchases the securities, then it ceases to be an agent
of the company.
Offers by Tender
This is a new innovation in the developed world by which the company will make a
tender to the public for the purchase of its shares. All the shares that have been
tendered are sold to the highest bidder.
Rights issue/script issue
The company invites its own shareholders to subscribe for new shares or debentures.
As an incentive, such securities are sold at a lower price than what they would
normally obtain in the new market.
Bonus issue
Like the rights issue, the bonus issue method is an internal affair of the company
concerned. Under this method, instead of the company paying to shareholders a
dividend it may have declared, it holds on to those funds by issuing shares to the
shareholders.
Offer for sale
The company concerned issues its securities in an issuing house and the issuing
house sells them to the public at a higher price. This method has a number of
advantages to this company:
1.
2.
3.
The company is not responsible for unsuccessful issue to the public.
It is the issuing house which bears the responsibility for the prospectus.
Unlike the method of placings, the company does not pay anything since the
issuing house pays itself a commission, the difference of the price at which
the sells and the price which he bought.
Direct issue
The company itself deals with the public without an intervention of the issuing
house. This method is cumbersome for a number of reasons.
1.
The company has to use a prospectus i.e. legal liability are conferred upon a
company.
2.
The company bears a risk of unsuccessful issue.
3.
Although it may protect itself against unsuccessful issue by underwriting such
issue, the underwriters have to be paid a commission for that issue. S. 55
provides that the commission must not exceed 10% of the price at which the
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DEPARTMENT OF BUSINESS LAW
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shares are issued and that there must be authority from the Articles to pay that
commission. This means that a company cannot transact with underwriters
who demand more than 10% of the price. Again according to S. 55, if the
Articles authorise more than 10% the company cannot exceed such figure.
And such payment must be disclosed in the prospectus.
THE PROSPECTUS
According to S.2, a prospectus means any document, prospectus, notice, circular,
advertisement or other invitation or offering to the public for subscription of the
securities of a company.
The definition in S.2 is very vague and consequently the courts have come up with
some guidelines to be employed in determining whether an invitation amounts to a
prospectus or not. Firstly, according to Nash Vs Lynd (1929) AC 158, for a
document to amount to a prospectus, not only must it be delivered but also there
must be some publicity with the aim of inducing subscription e.g. if a thief stole
the document and publicized the issue of shares which the public purport to buy,
the document does not amount to a prospectus.
Secondly according to S. 57, for a document to amount to a prospectus, it must be
issued to the public.
Then what amounts to the Public?
The section seems to indicate that a public means a public whether selected by
members or debenture holders of the company concerned or as clients of the person
issuing the prospectus or in any other manner. In Re Govt Stocks & other Securities
investment Co. Ltd Vs Christopher (1956) 1 WLR 237 a company issued a circular
in which it offered to acquire shares in another company in return for its own shares.
The question was did that circular amount to a prospectus. The court held that where
an offer is acceptable only by the shareholders of a company, such an offer is
deemed not to be to the public unless the shares are to be issued under renounceable
letters or terms. (Renounceable letters are contracts of allotment of shares under
which the allotees can pass those shares to third parties. Where the shares have been
issued at non-renounceable terms, the allottee cannot sell them to a third party.
Secondly, the invitation must be one inviting the public to subscribe or purchase the
securities. The terms subscribe or purchase means taking or agreeing to take
securities for cash.
PREPARED BY NINSIIMA IRENE
DEPARTMENT OF BUSINESS LAW
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Legal aspects of a prospectus
According to S.39, a prospectus must be issued by or on behalf or in relation to a
company or an intended company. It must be dated and must be delivered to the
registrar for registration and if it contains a statement by an expert, that expert’s
written consent must accompany the prospectus (S. 39-43). If these requirements are
contravened, the company and any office responsible for that prospectus are liable to
a fine not exceeding shs 100/= per each day the default continues.
LIABILITY FOR A DEFECTIVE PROSPECTUS
Both civil and criminal liability lie against the company and/or its officers for noncompliance
with the statutory provisions as well as omissions or misstatements in the documents.
Criminal liability
s. 46 provides that where a prospectus issued includes any untrue statement, any
person who authorised its issue is liable on conviction to imprisonment for a term not
exceeding 2 years or to a fine not exceeding 10,000/= or both. The only way such a
person can escape liability is to prove that at the time the statement was issued, they
reasonably believed that the statement was true.
Civil liability.
Civil liability for the defective prospectus exists under both the Act and common
law.
Under the Companies Act, s.45 provides that if a prospectus contains false or untrue
statements, the civil liability will be borne by the persons responsible for its issue to
pay compensation to all those persons who rely on it to subscribe for shares. The
compensation will be for any loss or damages those persons have suffered by reason
of relying on such a false statement. The persons that will be held liable include
 The directors of the company at the time of issue.
 Any other person who authorised himself to be indicated as a director in the
company at the time of issue.
 Promoters of the company.
 Any other person that authorised the issue.
The only way such person can escape liability is to prove that although they had
authorised to be named as directors, they withdrew their consent before the
prospectus was issued or that it was issued without their knowledge or consent or
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DEPARTMENT OF BUSINESS LAW
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that after the issue when they became aware of the defect in it, they withdrew their
consent and gave notice of the false statement to the public.
Civil liability at common law.
5. Damages for misrepresentation.
Under common law, an aggrieved subscriber can institute an action for deceit or
misrepresentation which entitles him to damages for misrepresentation. Damages are
equivalent to the loss suffered and inconveniences. This remedy has got limitations
and therefore before the court can entertain such an action, the plaintiff must show
that; The false statement was a statement of fact not an opinion.
 There was actually a false statement in the prospectus not an omission to
include a statement.
6. Action for rescission of contract. At common law an aggrieved subscriber who
has suffered loss or damage because of the defective prospectus can also institute
an action for rescission of the contract. This way he will seek to put the contract
to an end. This remedy has also got limitations and therefore before the court can
entertain such an action, the plaintiff must show that; He indicated his intention to rescind the contract immediately after
discovering the defects in the prospectus. In this case he must not have
done anything showing that after the discovery of the defect, he was
still willing to continue with the contract and actually did acts that
amounted to affirmation of the contract. For example If he had
applied for shares on the basis of a defective prospectus, he must show
that he immediately returned them on acquisition of this knowledge,
did not attend meeting, sell his shares to a third party or receive
dividends in respect of those shares etc.
 He took steps to bring his action before any winding up proceedings
had commenced in respect to the company.
STATEMENT IN LIEU OF A PROSPECTUS
Where a company doesn’t issue a prospectus and it is a public ltd company or if it
issues one and doesn’t proceed to allotte the shares/debentures, then such a company
must deliver to the registrar of companies a document known as a statement in lieu
of a prospectus. Under S.50 the statement must be signed by directors or proposed by
the directors and must be delivered to the registrar, 3 days before allotment.
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DEPARTMENT OF BUSINESS LAW
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ALLOTMENT OF SHARES
Private Companies. This is the process through which a potential shareholder or
subscriber is given the number of shares which he has successfully applied for.
Private companies under S. 30 restrict the issue of new shares by requiring that: a private company is not entitled to invite the public to subscribe to any of its
securities.
 a private company must in its Articles of Association contain a clause
restricting the right of transferability of its securities as far as its shares are
concerned.
Such clauses are called pre-emptive clauses. Lack of such a pre-emptive clause
automatically makes the company a public ltd company.
Public Companies. Allotment of shares in public companies is the process through
which the company distributes the shares to successful applicants. Generally a
company once it has gone through issuing a prospectus or filing a statement in lieu of
a prospectus, then allotment of shares can proceed. If however a company is making
its first allotment, its not to allot the shares unless the minimum subscription
requirements have been satisfied. A minimum subscription is that minimum amount
which the directors think or deem must be raised by the issue of share capital for
purposes of a number of items as laid in schedule 3 par.4. These include:i.
ii.
iii.
iv.
The purchase price of any property bought if the price of such property is to
be paid out of the issue of securities.
The preliminary expenses payable by the company and any commission
payable by the company to persons who have agreed to subscribe or to induce
subscriptions for the company's securities.
The working capital - there must be enough resources from the minimum
subscriptions for the day to day running of the business on the short run.
S. 49(3) say that at least 5% of the total nominal amount must have been paid
for in respect of each share applied for.
Where the above limitation is contravened after 60 days after the prospectus has been
issued, then the company becomes liable to repay the money to the applicants
without interest. If 75 days elapse before payment of such money, after issue of the
prospectus, then the directors become jointly liable to pay the money with interests at
PREPARED BY NINSIIMA IRENE
DEPARTMENT OF BUSINESS LAW
MAKERERE UNIVERSITY BUSINESS SCHOOL, 077-4-110111
the rate of 5% p.a. Any allotment which may have been made is voidable at the
instance of the applicant.
SHARE CERTIFICATES
This is a document that shows one’s ownership of shares in a company. S. 82 says
that sixty days after the allotment or after the transfer of the shares, the company
must deliver to the owners share certificates. Non-compliance with this:i.
Makes the company and the directors liable to a default fine.
ii.
The aggrieved allottee can serve the company with a note to give him his
certificate. If the company still fails, then he can apply to court for such an
order.
A share certificate with a company seal is prima facie evidence that the owner has
title to the shares. Prima facie evidence is evidence, which can be rebutted i.e. it is
evidence on the face of it, in other words it is not conclusive.
Legal effects of share certificates
1.
It is prima facie evidence that the holder is the owner of the shares.
2.
It estops the company from denying that the person to whom it is granted was
at the date of the issue of the certificate the registered owner of the shares
issued.
3.
It estops the company from denying that the company shares are paid up as
indicated in the certificate. Therefore if a third party detrimentally alters his
position on the basis of that certificate, he cannot be defeated by the
company's denial of the certificate unless it was forged.
SHARE WARRANTS
A company can choose to issue either share certificates or share warrants. S. 85
provides that if the Articles of Association authorise, a company may instead of
issuing a share certificate, issue a share warrant in respect of any fully paid shares.
There are two advantages of a warrant over a share certificate:
1.
A Warrant is a share warranty that the bearer is the owner of shares indicated
while the share certificate is prima facie evidence that the holder is the owner
of shares. Prima facie evidence can be rebutted but a company cannot deny
that the bearer of a warrant is the owner. This thus makes the warrant more
important.
PREPARED BY NINSIIMA IRENE
DEPARTMENT OF BUSINESS LAW
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2.
A purchaser of a share warrant takes the shares concerned free of equities, i.e.
he is a bonafide purchaser and his interest cannot be challanged, while a
purchaser of a certificate must first be registered as shareholder before he can
become a Legal owner of those shares. When a purchaser of a warrant
physically holds the same, he will defeat all warranties.
TYPES OF SHARES/ CLASSES OF SHARES.
A share is a unit of capital of a company. The case of Borland Trustees v Steel
Bros & Co Ltd [1901] 1 CH 279 defined a share as “an interest of a
shareholder in the company measured by the sum of money;- for the purpose
of liability in the first place and of interest in the second”.
1. Ordinary shares. This is the basic category. If all shares in the company are
issued without classification or categorisation or differentiation, then they are
all ordinary shares. If the shares are divided into classes and special rights of
some shares are set out, then the remaining shares without any special rights
are ordinary shares.
2. Preference shares. These shares will usually be entitled to have dividends
paid at a pre determined rate eg at a rate of 10% on their nominal value in
priority to any dividends on ordinary shares.
3. Deferred shares. These are sometimes known as founders shares, they
normally they normally enjoy rights after the preference and ordinary shares,
they have inferior rights.
4. Redeemable shares. These are created on the terms that they shall be bought
back by the company at a future time at the option of the company or the
members.
5. Non voting shares. These may be issued to restrict control of the company to
the holders of the remaining shares. This is quite commonly desired when
family controlled company is involved and looks to outside investors for
additional capital although it may of course find that the investors are not
prepared to put their money on those terms.
6. Shares with limited voting rights or enhanced voting rights.
7. Employee shares. Issued to employees and are ordinary in nature just that
they enjoy tax advantages.
RAISING CAPITAL THROUGH BORROWING/ LOAN CAPITAL
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DEPARTMENT OF BUSINESS LAW
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Companies can decide to raise capital through obtaining loans. The money obtained
is what is called loan capital. The loans obtained are usually secured by company
property, in the form of debentures, debenture stocks, fixed charges and floating
charges.
1. DEBENTURES.
A debenture was defined in the case of Levy V Abercorcis Slate & Slah as a
document which either creates a debt of acknowledges it. Debentures rank according
to the time of issue. The first debenture takes priority over all other debentures on
repayment.
2. DEBENTURE STOCKS.
A private company is not allowed to raise money by borrowing from the public. As
such, instead, the company may decide to create a debenture stock. A debenture
stock is a loan fund which is created by the company and which can be divisible
among various creditors who each hold a debenture stock certificate. For example, a
private company with debenture stock, can obtain money from several banks which
could each hold a debenture stock certificate.
Differences between a debenture and debenture stock.
A) As a general rule, debentures rank according to the time of issue. The first
debenture takes priority over all other debentures on repayment. On the
other hand, since a debenture stock is a fund, each beneficiary ranks in pari
passu/ equal rank with others (no priorities).
B) Easy transferability - The debenture covers a distinct debt which is
indivisible and therefore must be transferred as a whole in case the present
holder wishes to get money from it. On the other hand a debenture
stockholder can always sub-divide his holdings and transfer the same to a
person of his choice.
3. FLOATING CHARGE.
A charge is a security created over the assets of the company. Security is that
asset of a debtor that a creditor is authorised to resort to in case the debtor
fails to pay back their money. A floating charge was defined in the case of
Illingworth V Houldsworth as “a security created over the assets of a
company and by its nature leaves the company at liberty to deal with the
assets charged in the ordinary course of business.’’
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A floating charge floats over all the assets of the company even those
acquired after it was created and the company is at liberty to deal with those
assets in the course of it s business while the charge is still on them, as such
the company can even sell them and replace them with new or different
assets.
A floating charge will settle on the assets of the company if something
happens for example if the company starts to wind up and in that case it
becomes a fixed charge.
4. A FIXED CHARGE.
This one was also defined in the above case of Illingworth V Houldsworth
as a specific charge that fastens / is fixed on an ascertained asset(s) of the
company and as such the company has no liberty to deal with such assets
without the consent of the creditor as long as the charge still exists.
Under S. 96, all charges must be registered in 42 days lest they are deemed void.
SECURED AND UNSECURED CREDITORS
Creditors may be secured or unsecured.
A secured creditor is one where by security has been given by the debtor for
repayment of the loan such that in case the debtor fails to repay, then the creditor can
take over the security to recover the loan.
An un secured creditor is one who has given a loan and no security is given, in case
the debtor fails to pay his only option is to sue in the courts of law for the recovery of
the money.
MAINTENANCE OF CAPITAL
Different types of capital can be identified in a company.
1. Share Capital
Amount contributed by members entitling them to a dividend as a return to the
member.
2. Loan Capital.
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DEPARTMENT OF BUSINESS LAW
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Loan given to a company as capital. It is that returnable portion of capital that
entitles interest to the creditor.
3. Nomial capital.
This is the amount of capital that a company proposes to be registered with which
will be realise d after the shares have been allotted I.E. he maximum amount of share
capital that can be realised. S4 describes nominal capital as the authorized maximum
amount of share capital that can be realized. If the authorized capital is not enough,
the company may alter it by a special resolution if Articles allow.
4. Issued capital.
Nominal value of shares availed for subscription and which has been allotted.
5. Capital at call.
Issued capital that is not yet paid for.
6. Called up capital.
Portion of the issued capital that the company has requested for settlement. It is the
portion of issued capital that the company has requested for settlement from the
holder of shares that have not been fully paid for who is entitled to all benefits as if
the shares were fully paid provided the Articles of association allow.
7. Reserve Capital (S.66)
Reserve capital is a portion of the issued capital which is at call but is not to be
called up except in the event of winding up of the company. It is issued only by a
company limited by shares or by guarantee.
Increase of Issued Capital.
It is lawful for a company to increase its share capital at any time.
s. 63 1 (a) provides for increase of capital, that a company limited by shares or
guarantee and having a share capital may alter the conditions in its memorandum so
as to increase its share capital by new shares of such amount as it thinks fit. The
company must be authorised by its articles to increase share capital. S. 65 provides
that where a company has increased its share capital, it must within 30 days after
passing the resolution to increase its capital give notice of the increase to the
registrar.
MAINTENANCE OF CAPITAL
PREPARED BY NINSIIMA IRENE
DEPARTMENT OF BUSINESS LAW
MAKERERE UNIVERSITY BUSINESS SCHOOL, 077-4-110111
This illustrates the concern of the law to see that the capital of the company is
maintained in the company by ensuring;1. That those who take up shares in the company do in fact contribute their
subscriptions by paying them in money or money’s worth.
2. That this sum of money or its equivalent once received by the company is as
far as possible maintained in the company consistently with regard to all the
risks associated with any business venture.
3. And that in particular that money is not returned to the members themselves
directly or indirectly except through some procedure provided by law.
The question is: why this strictness on maintenance of capital?
The rationale for this strict rule is that to safeguard the interests of the creditors of the
company and other people whose interests would be negatively affected by the
reduction in the company’s capital or assets. The House of Lords explicitly explained
this in the case of Trevor V Whiteworth thus
“one of the main objects contemplated by the legislature in restricting the
power of limited companies to reduce the amount of their capital is to protect the
interests of the outside public who may become its creditors, the effect is to prohibit
every transaction between the company and a shareholder by which money already
paid to the company is returned to him, unless the court has sanctioned the
transaction”
In this case court went on to say
“paid up capital may be diminished or lost in the course of the company’s
trading, that is a result which no legislature can prevent, but persons who deal with
and give credit to the company naturally rely on the fact that the company is trading
with a certain amount of capital already paid; as well as upon the responsibility of its
members for the capital remaining on call and they are entitled to assume that no part
of this capital which has already been paid to the company has been subsequently
paid out except in the legitimate course of business”
In order to ensure strict observance of this the law has come up with rules and
provisions on maintenance of capital. They include the following.
RULES/ PROVISIONS ON MAINTENANCE OF CAPITAL.
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1. It is illegal for a company to acquire/ repurchase its own shares except as
provided by law.
Thus a company cannot use its own capital to buy its own shares as was held in the
case of Trevor V Whiteworth above that it is ultra vires for a company to purchase
its own shares even if the memorandum gives express authority to do so.
2. A company may not issue shares at a discount unless as provided by law.
In Ooregum Gold Mining Co. of India Y Roper (1892) AC 125, the directors
sought to issue shares at a discount. It was held that shares are not to be issued
at a discount and whoever takes shares in return for cash must either pay or
become to pay the full nominal value of those shares. However the companies
Act authorises issue of shares at a discount subject to certain conditions. S. 59
of the Act provides that a company may issue shares at a discount of a class
already issued except that; The issue of the shares at a discount must be authorised by resolution
passed in a general meeting of the company and must be sanctioned by
court.
 The resolution must specify the maximum rate of discount at which
the shares are to be issued.
 The resolution can only be made after the company has already been
in business for more than a year.
 The shares to be issued at a discount must be issued within one month
after the court has sanctioned the issue.
3. A company must not give financial assistance for the acquisition of its
own shares.
A company is prohibited from giving financial assistance for the acquisition
of its shares to a person whether directly or indirectly. S. 56 provides that it
shall not be lawful for a company to give whether directly of indirectly any
financial assistance for the purpose of or in connection with a purchase or
subscription made or to be made by any person of any share sin the company
or its subsidiary or holding company. Examples of such instances include the
following; A company lending money to A so that to put A in funds so that he
can buy shares from the existing members.
 A company lending to C money so that C can repay a loan provided
earlier by C’s bank which C has already used to buy shares in the
company.
 A company buys a piece of land from D knowing that D will use that
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same purchase price he receives to pay for shares in the company that
he already agreed to buy.
Exceptions to this rule/ instances where the company may give financial
assistance.
 Where the lending of the money is part of the ordinary business of the
company.
 Where the company gives loans to persons with in the employment of the
company other than the directors with a view to enabling those persons to
subscribe for fully paid up share in the company for their beneficial interest.
4. If a company is to pay dividends then they can only be paid out of the
company’s profits but not out of its working capital.
Dividends are any return paid/given to a shareholder on his
investment/shareholding in a company. Unless the Articles state otherwise, a
shareholder receives dividends on his shares. A share holder is not entitled to
payment unless the directors have declared the dividends and authorised payment
of the same to the shareholders. In Makidayo Oneka Vs Wines And Spirits (U)
Ltd And Another (1974) HB.2, the principle was laid that unless the articles and
terms of the issue of shares confer a right upon a shareholder to compel a company
to pay a dividend; it is the discretion of the directors to recommend to a general
meeting that a dividend be declared.
If the company adopted table A, Article 116 provides that a company shall only
pay dividends out of profits. Furthermore, where a company has an article
equivalent to article 114 of table A, if the directors have recommended a certain
sum for dividend, the general meeting has no discretion to increase that sum.
However, a shareholder or a debenture holder can seek a court injunction to
restrain a company from declaring a dividend.
5. A company may not pay interest out of its capital except as authorised by
law.
s. 67 of the Act provides that a company may pay interest out of its capital in certain
cases in particular where shares were issued so that the company can raise money to
cover expenses of construction of any works or buildings. The shareholders who paid
for the shares may be given interest on the money they paid and this interest may be
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DEPARTMENT OF BUSINESS LAW
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paid out of the company’s capital. However the payment is subject to the following
conditions.
 The payment must have been authorised by the articles or by a special
resolution.
 The payment must have also been sanctioned/ authorised by the registrar of
companies.
 The registrar may first make an inquiry into the circumstances surrounding
the entire transaction before he authorises the payment and he can charge the
cost of the inquiry on the company.
 The payments must be made within the period fixed by the registrar.
 The rate of interest must not exceed 5% per year.
6. A company may not reduce its capital except as provided by law.
s. 68 provides for the reduction of capital. A company may by special
resolution or if its articles provide so reduce its capital but this reduction must
first be confirmed by court.
ENFORCEMENT OF THE MEMBER'S RIGHTS
[MINORITY PROTECTION & THE RULE IN FOSS V HARBOTTLE].
We are here concerned with the avenues through which members can enforce their
rights e.g. payment of declared dividends, removal of incompetent directors, etc.
This can be done under statute law or under common law.
1.
a.
COMMON LAW
PERSONAL ACTION: at common law a member who is aggrieved by the
acts of the directors can bring his personal action against those directors on
behalf of himself and on behalf of the company. However there is a
limitation on members liberty to institute such actions. Whether or not an
aggrieved shareholder can have his complaint entertained at common law,
will depend on the rule in Foss V Harbottle. In this case a plaintiff instituted a
suit a against the directors of a company who had sold their land to the
company at an overpriced value, it was held that court will not ordinarily
intervene in a matter which is competent for the company to solve itself and
that where it is alleged that a wrong has been done to the company, prima
facie, the only proper plaintiff to sue is the company itself. As we saw ealier,
officers of the company like a secretary or the directors are the ones with
authority to sue on behalf of the company.
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The rational for this rule is to avoid a multiplicity of suits where any
member may sue when a wrong is done to a company and when an
action of one member fails another one sues and on and on.
However, there may be instances where by an injustice has been done to the
company and the officers are the ones in the wrong yet they are the ones who
can authorise the institution of the suit on behalf of the company, they will
definitely never sue themselves on behalf of the company. For that matter, if
the rule in Foss v Harbottle was to be strictly followed then it would
perpetuate injustice, as such a number of exceptions have been recognized
by courts whereby an individual shareholder can go to court notwithstanding
the fact that the wrong was committed against the company.
THE ABOVE EXCEPTIONS INCLUDE THE FOLLOWING.
i.
Infringement of the personal rights of the member: if the wrong being
complained of amounts to an infringement of the personal rights of a
shareholder, he can petition under a personal action notwithstanding that the
company had been wronged. In Misango Vs Musigire (1966) E.A. 390, a
general meeting purported to alter Articles of Association to the detriment of
the plaintiff. It was also stated that some 9 shareholders had attended that
meeting and voted in favour of the resolution.
Sir Udo Udoma C.J, held
that the action could be entertained in so far as what was complained of
infringed on the rights of the plaintiff.
ii.
Illegal/Ultra vires transactions: where the act being complained of is illegal
or an ultra vires transaction, any aggrieved shareholder can proceed to court
notwithstanding the rule in Foss. Vs Harbottle e.g. in the case of Hurton V
Westcork (1883) 23 Ch.D.654 court held that since the company was
involved in an ultra vires transaction, the plaintiff a member of the company
could bring an action against the directors.
iii.
Fraud on the minority. E.g.
 Expropriation of company's property.
 Expropriation of members property
 Breach of directors, duty of good faith.
All these wrongs must be perpetuated by the officers of the company.
Therefore whenever it is established that a transaction which amounts to the
fraud on the minority has been done by the officers of the company, then any
aggrieved shareholder is free to go to court not withstanding that the company
itself has been wronged. The rationale is that if the minority are denied that
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right to sue, their grievance could never reach court because the wrong doers
themselves being in control would never allow the company to sue. In the
case of Edwards V Halliwell, it was held that for one to sue on the ground of
fraud on the minority,
a) The fraudulent act must be being carried out in the company.
b) The people in control must be the wrong doers.
iv.
Breach of Articles of Association –
Where the articles require a special majority or procedure and this is not
observed then an aggrieved shareholder can institute an action to challenge a
decision which was made in disregard to the above requirement despite the
rule in Foss V Harbottle (S23). In Edwards Vs Halliwell, the plaintiffs were
members of a trade union, who sued the union and the members of the
executive committee. The articles required that in order to alter the union
dues, there had to be a resolution passed by 2/3 of the members( majority
vote), the committee disregarded this and altered the union dues by a minority
vote, it was held that in such a case, the members could sue as an exception to
the rule in F&H.
v.
Interest of Justice: Courts are ready to entertain any action of a shareholder
which falls outside the above 4 exceptions if it is in the interests of justice
 There must be negligence or breach of duty by the directors.
 That breach or negligence must have resulted into a benefit to those
directors at the expense of the company.
In Daniel's V Daniels, a shareholder complained that the majority shareholders who
were also directors negligently sold a company's plot of land to one of the directors
at a cheap and undervalued price which he later disposed off at a very high price, the
issue before the court was whether this suit should be maintained in light of the rule
in Force Vs Harbottle since there was no allegation of fraud. Templeman J held that
the minority shareholders action was maintainable where “the directors use their
power intentionally or unintentionally, fraudulently or negligently, in a manner
which benefits them at the expenses of the company”. Also in the case of Alexander
V Automatic Telephone Co, the directors issued shares and required some people
who took up the shares to make payments for those shares but did not themselves
pay for the shares they took, aa minority shareholders action was instituted against
the directors and it was held that the action was maintainable since the directors were
guilty of breach of duty in procuring those contracts and then taking advantage of
them so as to benefit themselves at the expense of the company.
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b.
DERIVATIVE ACTION:
This is a relatively recently developed action where a shareholder who cannot
proceed under common law because of the rule in Foss Vs Harbottle or under Statute
can take a complaint to court for the wrongs committed in his company.
A derivative action differs from a personal action in the sense that although a
shareholder is allowed to sue, he is not suing on his own behalf but on behalf of the
company because the company itself is unable to sue for that wrong. The rational
behind the principle is that when the people who have committed the wrong are the
same people who are supposed to sue, they may not do it. However, the courts have
insisted that a derivative action should not be utilized as a means of side stepping the
rule in Foss. V Harbottle. Therefore the following conditions must be satisfied.
i.
ii.
iii.
iv.
v.
The action must allege fraud on the minority.
The company is being controlled by those who have committed the wrong
and therefore are unable to sue for it.
The plaintiff is not suing on his own behalf or on behalf of the others but
rather on behalf of the company.
The plaintiff must have "clean hands" i.e. not to have connived with company
members who are in the wrong.
It must be proved impracticable for the company to sue by itself.
In the case of Wallersteiner V Moir [1974] ALL ER 217, lord Denning
summarised the essence of a derivative action where he said;“ the rule in Foss V Harbottle is easier to apply when it is an outsider defrauding the
company, but where it is the insiders in control who are defrauding the company,
who are the ones to sue on behalf of the company, they will not authorise bringing an
action against themselves in a shareholders meeting or board of directors meeting,
in this way the law would fail its purpose and injustice would go unaddressed hence
the justification for a derivative action brought by an individual member on behalf
of a company. It is called derivative because the individual suing on behalf of the
company purports to derive his authority to do so from the company where the
company can’t sue by itself because those in control are the wrong doers and cant
authorise the action against themselves.”
c.
Representative Action
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This is a hybrid of the two actions above. In all the above actions, the plaintiff
must have clean hands.
2.
STATUTORY LAW
1. Winding up the company under the just and equitable Clause (S222):
This is where a member or shareholder petitions court asking it to give an order for
the winding up of the company on ground that it is difficult to continue as a member
and that the situation cannot be rectified and that in the circumstances it is only just
and equitable to wind up the company. Any wrong can be dealt with under the
section. However, the following have been accepted as major grounds for winding
up the company under the section.
I.
Deadlock between directors who are also the only shareholders: In Reyenidje
Tobacco Co Ltd (1916) 2 Ch.426; two directors who were also the only
shareholders only communicated through a secretary. The directors hated
each other and it was held that in the circumstances winding up was the best
option and court agreed.
II.
Expulsion from office due to the bad intentions of those carrying out the
expulsion: If A is a director per se and he is kicked out of office, he cannot
apply S222(F) unless he is a shareholder.
III.
Loss of substraturn of the company (i.e. object for which the company was
formed): Where a company was formed for an illegal or fraudulent purpose, it
can be wound up under the just and equitable laws. The above is just a sample
of wrongs that are entertained under S222(f).
In the case of RE Ibrahim West Bond Gaurages (1973) AC 360, it was held that a
petitioner may rely on circumstances of justice and equity affecting the relationship
with the company.
Before the shareholder can have the matter entertained under this section, he must
satisfy the following conditions:
i.
ii.
The petitioner must be a contributory i.e. that shareholder who is liable to
contribute to the assets of the company during its winding up.
He must satisfy the court that although there is another remedy open to him,
he is not acting unreasonably in not seeking that other remedy instead of
winding up the company. In the case of Re East African Tobbaco (1951-52)
TLR 2, it was held that a petitioner must satisfy court that although he has
other alternatives, winding up would not be unreasonable in the
circumstances.
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iii.
The petitioner must satisfy the court that after the winding up, there will still
be something tangible for sharing among shareholders - if the company is
heavily indebted (insolvent) then S222 cannot be invoked.
2. Alternative remedy to winding up under s. 211 of the Companies Act. ie
The oppression section
S.211 provides that where a member of the company complains that the affairs of
the company are being conducted in a manner oppressive to some part of the
members including himself, such a person may apply to court to settle the matter
instead of asking for the company to wind up. That in the circumstances it would
be a case for winding up but that to wind up the company will unfairly prejudice
the minority members interests. In such a case if court is of the same opinion, it
may make any order necessary to regulate the conduct of the affairs of that
company in future. In RE Nakivubo Chemists (U) Ltd [1977] HCB 312, it was
held that the oppression complained of must be to a person in his capacity as a
shareholder/ member and not in any other capacity.
3.
Inspections and Investigations: These can be initiated either by the registrar
or the members themselves.
a.
Members: there are 2 instances:
i.
Under S165, either 200 members or members holding at least 10% of
the shares in a company with share capital or at least 20% of the
members in a company without share capital may make an application
to court for the appointment of competent inspectors for the
investigations. However, the applicants may be required to pay a
deposit of shs 10,000/= before the investigations commence. They
must also prove that they are not malicious and must indicate the
reason why they want the investigation.
NB. The shareholder involved is referred to as an applicant and not a plaintiff or a
petitioner. The application will not be entertained if there are other remedies
available. See the case of Re Elyeza Bwambale Co. Ltd (1969) E.A 243
ii.
b.
A special resolution may be passed that a court appoints competent
inspectors to investigate the affairs of the company (S166).
S164 - The registrar-where the registrar:
i.
believes that the C.A provisions are not complied with.
ii.
believes that the books and documents of the company
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supposed to be filed do not reasonably disclose what they ought
to disclose; he may direct through a written order for the
company to produce all relevant books and documents for
investigation and inspection and if he feels dissatisfied he can
make a report to court.
Under S 166 (b), the court may order for the appointment of inspectors to look into
the affairs of the company if from the registrar's report either:
i.
The company's business is conducted in a fraudulent or unlawful or
oppressive manner or members have not given all the information they
are entitled to.
ii.
Promoters or management are guilty of misfeasance that it is desirable.
4.
MISFEASANCE PROCEEDINGS S 328
If in the course of winding up of the company it appears that any person who has
taken part in the formation or promotion of the company or any past or present
director or manager or liquidator or any officer of the company misapplied or
retained money or property of the company or is guilty of misfeasance or breach
of trust in relation to the company, the court may on application of a contributory
examine such conduct and compel such a person to repay and restore whatever
was misappropriated.
LIQUIDATION/ WINDING UP OF COMPANIES.
The law on winding up of companies is governed by the companies
Act and winding up rules. Winding up basically means liquidation of
a company. Its a process by which the company’s life is brought an
end and its property managed for the benefit of its creditors and members. It
involves an operation of putting to an end the transactions of
the company, realizing the assets
and discharging its liabilities.There
are two types of winding up.
1. Voluntary winding up
2. Compulsory winding up
Voluntary winding up occurs when the company decides by itself to wind up
its affairs and therefore passes a resolution to that effect. A company may be
wound up voluntarily under the following circumstances.
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(i) When the period fixed by the articles for the duration of the company or if the
company was set up for a specific activity and that activity has been accomplished.
In such cases the company may pass an ordinary resolution to windup.
(ii) A company on its own
wind up voluntary.
motion and volition can by special resolution
(iii) If the company feels that it can not continue operating by reason
that its liabilities are continuously exceeding the assets, it can by
ordinary resolution wind up its business . Voluntary winding up in its
nature also takes two forms .It can be members voluntary winding up
or creditors voluntary winding up.
1. Members voluntary winding up s. 282 -289.
 After the company has passed a resolution to voluntarily wind up,
the directors are required to make a sworn statement (declaration of
solvency) to the effect that they have made a full inquiry into the
affairs of the company and that having done so have formed an
opinion that that the company is solvent and will be able to pay up
its debts within 12 months of the commencement of winding
up. This statement must lay out the assets and liabilities of the
company.
 The members will then appoint a liquidator to help in the winding
up of the company. The liquidator appointed in this case is
not an officer of court but of the company where
remuneration is fixed by the general meeting. The effect of
appointing the liquidator is that all the powers of directors
cease except where they are allowed to continue with his
permission.
 Once a liquidator is appointed notice of appointment should
be gazetted within fourteen days of appointment and served
on the Registrar of Companies.(S. 303 Companies Act)
 If in the course of winding up the liquidator finds that the company
will not be able to pay its debts with in the 12 months, he must call a
meeting of creditors and inform them by giving them a statement of
the assets and liabilities of the company.
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 If the winding up continues for more than a year, the liquidator must
call a general meeting of the company at the end of each year and
give an account of the work he has so far done.
 As soon as the liquidator has finished his work and fully wound up
the affairs of the company, then he must make a full account of his
work to the company in a general meeting showing how he
conducted it, how he disposed of the company’s assets and send a
copy of this report to the registrar.
 Three months after the liquidators final report is filed, the company
will be deemed finally dissolved/woundup.
2. Creditors Voluntary Winding up. S. 290-298
 The company will first call a meeting of creditors by advertising in the
gazette or local newspaper informing them that the meeting intends to pass
a resolution for winding up.
 At the meeting the directors shall give a full statement of the position of the
company’s affairs and a list of the creditors of the company and their
respective claims.
 The company directors will then nominate a person to act as liquidator. If
they choose a different person, then the person chosen by the creditors will
be the one to act as liquidator.
 If the winding up continues for more than a year, the liquidator must call a
general meeting of the company at the end of each year and give an account
of the work he has so far done.
 As soon as the liquidator has finished his work and fully wound up the
affairs of the company, then he must make a full account of his work to the
creditors in a meeting showing how he conducted it, how he disposed of the
company’s assets and send a copy of this report to the registrar.
 Three months after the liquidators final report is filed, the company will be
deemed finally dissolved/woundup.
COMPULSORY WINDING UP/ WINDING UP BY COURT ORDER.
Winding up by court is also known a compulsory winding up. Under s. 218 of the
Companies Act, the High Court of Uganda is the one that has jurisdiction to wind
up a company registered in Uganda though after giving the winding up order, the
High Court may direct that the rest of the proceedings be handled by a Chief
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Magistrates Court or a Magistrate Grade 1 Court. Compulsory winding
can be effected under the following circumstances.
1. If the company has passed a special resolution that it should
be wound up by court.
2. In case of public companies where the company has failed to hold a
statutory meeting
or delivery a statutory report to the registrar.
However, court has the powers to direct that such meeting be held
or such report be filed on an alternative remedy to winding up
order.
3. If the company does not commence business within a year from the date of
incorporation or suspends its business for a whole year.
4. Where the number of members has reduced below the legal minimum i.e.
2 in case of private companies and 7 in case of public companies.
5. Where the company is unable to pay its debts. A company will be said to be
unable to pay its debts if;- the company has failed to pay a creditor, the creditor has demanded for
payment and the company has failed to pay for a period of three weeks and
above.
-an order of court has been made for the company to pay a given debt and it
has been returned to court unsatisfied.
6. Where it is just and equitable to do so under the just and equitable clause.
Situations which fall under this clause are, when there is a deadlock in
management, where there is justifiable lack of confidence in the
management of the company, where there has been loss of substratum i.e.
failure of the whole purpose for which the company was set and lastly
where the company is carrying out business in an unlawful manner or for
fraudulent purposes.
7. In case of as company incorporated outside Uganda but doing business in
Uganda, if winding up proceedings are commenced on that company in the
country where it was incorporated, then that can be a ground for
compulsory winding up of that company in Uganda.
WHO CAN PETITION FOR WINDING UP UNDER COURT ORDER.
 creditors. These are the ones owed money by the company.
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 Contributory. These are the persons who are liable to contribute to the
company’s liability in the case of winding up.
Procedure for winding up under court order.









The creditors petition court for a winding up order.
The petition is advertised in the gazette or news paper.
The petition is heard
A winding up order is made if court is satisfied that the order should be
made
The order is forwarded to the registrar for registration
The co then prepares a statement of its affairs and submits the same to the
official receiver.
The official receiver makes a report to court basing on the statement
Court may then appoint a liquidator who does the actual winding up.
The creditors in order to make sure that the liquidator does his work
diligently may appoint a committee of inspection. To act with the
liquidator. After the liquidator has accomplished his work he calls a final
meeting of the creditors and lays before them a report of his work and files
the same and the company is finally dissolved.
WINDING UP UNDER THE SUPERVISION OF COURT.S. 308-212
When a company has passed a resolution for voluntary winding up, the court may
make an order that the voluntary winding up shall continue but subject to courts
supervison.
CONSEQUENCES OF WINDING UP ORDER.
After the issue of winding up order the following consequences arise.
-No legal proceedings can be instituted against the company without the leave
(permission) of court
-Any disposition/ sale of the company’s property or transfer of shares is void
unless the court has directed otherwise.
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-Any attachment, distress or execution lodged against the assets of the
company is void. However, with leave of court an execution or other
proceedings against the company can be granted.
-The directors’ powers of management cease upon the appointment of a
liquidator although they retain the regional authority to engage practitioners to
pursue legal issues in court.
-The directors of the company employees are dismissed although they may be
re-employed by the liquidator
Protection of the company property at the commencement and course of
winding
up.
At the commencement of winding up proceedings the officer of the company may
interfere with the company`s property. Consequently the law has been put in
place to cater for such situations.
(a) Fraudulent trading. If in the course of winding up, it appears that any of the
company’s business has been carried on with the intention to defraud creditors or
for any fraudulent purpose, a court may on application order that any person who
has the knowledge be made personally liable for the debts of the company without
limitation of liability.
b) Fraudulent preferences. Rules on fraudulent preferences are applied, these rules
are to the effect that any payment on disposition of property made to the creditor
after the commencement of the winding up proceedings will be invalid if it is
proved that the dominant intention of the debtor in making it was to prefer the
creditor over the other creditors.
The effect of preference is that it enables a creditor to get more than what he
would be entitled if he had not been paid until the winding up.
c)Misfeasance summons. If in the course of winding up it appears that any person
has misappropriated or retained any money or property of the company or has
been guilty of breach of trust, court may upon application examine such persons
conduct and order him to repay with interest or otherwise as court may deem fit.
d)Creation of floating charge. Any floating charge created within 12 months of
the commencement of winding up on the company`s property is invalid except
where it is proved that was solvent immediately after the creation [S 318].
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APPOINTMENT OF A LIQUIDATOR
A liquidator is a person appointed after the commencement of winding up to
control the company’s property in the process winding up.
Any person other than a body corporate may be appointed a liquidator. Ordinarily
a liquidator should be an accountant of not less than five years experience.
A liquidator once appointed is empowered bring or defend any action or any
other legal proceedings in the name of the company and to carry on business of
the company as far as may be necessary for the beneficial winding up thereof .
He is mandated to appoint a legal practitioner to assist him in the performance of
his duties.
The liquidator is also empowered to sell the real or personal property of the
company by public auction or private treaty with the power to transfer the same
to any person or company.
He can execute all deeds, receipt and other documents and as such to use them
when necessary. He can appoint an agent to do all the work he cannot do himself
or to do any other such thing as may be necessary for winding up the affairs of the
company and distributing its assets. These powers are controlled by court and any
creditor or contributory can apply to court for redress in case of abuse of the
powers.
DUTIES OF THE LIQUIDATOR
A liquidator is appointed for purposes of conducting the proceedings in winding
up of a company and performing such duties in connection thereto as court may
impose.
Accordingly, the liquidator’s duties include taking into the custody or control the
company’s property. He has an obligation of identifying the contributories,
collecting the company’s assets , paying of debts and distributing the surplus
assets among the members according to their rights.
The liquidator is also obliged to summon a meeting of creditors and contributories
when directed by their resolution and may also summon a meeting at his own
motion to ascertain the wishes of the creditors.
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The liquidator must keep proper accounts which subject to courts control may be
open to inspection by any creditor or contributory received by him in the
companies liquidation account.
POWERS OF A LIQUIDATOR.
1. The liquidator can bring or defend any action or other legal proceedings in
the name of the company.
2. The liquidator has power to carryon business of the company as far as may
be necessary for the benefit of winding up. Ordinarily once winding up
commences the company is required to stop operating business, however
the liquidator has powers to continue operating the business of the company
if in his opinion it is beneficial to the winding up process. He is deemed to
be an agent of the company and can conclude all transactions on its behalf
for the purposes of effective winding up.
3. The liquidator has powers to appoint legal practitioner or any other
professional to assist him in the performance of his duties.
4. The liquidator has the powers effect payment to the creditors in the
different classes i.e. in priority. He can also make any compromise or
arrangement with creditors or persons claiming to be creditors.
5. The liquidator can deal with all question relating to liabilities and make
calls on unpaid shares, i.e. if there is any share holder who did not pay up
his shares, the liquidator can call upon him to pay.
6. A liquidator is also empowered to dispose of the real and personal property
of the company in a public auction or private contract with power to
transfer to any person or company and execute all deals or documents of
ownership endorsing bills of exchange or promissory notes in the name of
the company.
7. The liquidator has powers to apply and get letters of administration in
respect of the estate of any deceased contributory and to do in his official
name any other act necessary for obtaining payment of any money to
the company.
8. He can appoint agents to do any business which liquidator is unable to do
himself.
9. A liquidator has the power with special leave of court to rectify the register
of
members.
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LIABILITY OF THE LIQUIDATOR.
The liquidator must exercise high degree of care and diligence in his dealings if he
is to escape liability. If he fails to seek the necessary legal advice and negligently
causes loss to the company and creditors he will be held liable in damages.
The liquidator must act in good faith. He should be honest and avoid making a
secret profit and conflict of interest. Where he fails to act bonafide, he can be
made to account for any unfair benefit obtained from the liquidation
PRIORITY OF SETTLEMENT OF DEBTS
According to S. 315 of the companies Act, the companies Assets on winding up
should be distributed in the following order of priority in settling the claims.
1. In the first place the assets should be applied to meet the costs, charges and
expenses of winding up including the liquidator’s disbursement and
remuneration. However, remuneration of the liquidator should be
reasonable and where it is proved excessive and unjustifiable court
can interview and require him to submit his bill for taxation during taxation
some of the money claimed is reduced.
2. The second priority is given to preferred creditors. The priority with
regard to the preferential creditors is determined as follows:
 Local rates, charges and government taxes due with one year of the
date of winding up.
 Wages and salaries of any clerk or servant for services rendered for
the previous four months.
 All accrued holiday remuneration of the servants.
 All outstanding payments to N.S.S Fund in respect of a worker.
3. The third priority is given to the ordinary creditors starting with
 the secured creditors.
 Deferred creditors.
 And lastly the unsecured creditors.
Where the winding up of the company is not concluded within a
year, the liquidator must furnish the registrar with the details of
liquidation.
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When the affairs of the company have been wound up, court must on
application of the liquidator make an order dissolving the company.
Subsequently the liquidator is required within 14 days of the issue of dissolution
order to send a copy thereof to the registrar who enters the notice of dissolution in
his register. Alternatively, the liquidator may apply to the registrar to dissolve the
company by striking its name off the register of companies.
READING MATERIALS.
1. David Bakibinga, Company Law in Uganda
2. Gower L.C. B., The Principles of Modern Company Law, Stevens and Sons,
third Edition (1969)
3. Musisi James, Company Law in East Africa
4. Seally L.S; Cases and Materials in Company Law, C.U.P (1971)
5. The Companies Act Cap 110 Laws of Uganda.
6. Notes prepared for class.
PREPARED BY NINSIIMA IRENE
DEPARTMENT OF BUSINESS LAW
MAKERERE UNIVERSITY BUSINESS SCHOOL, 077-4-110111