Wallock
Company Law
Lecturer:
Date:
Ms. Lesley Walcott
September 16th, 2003.
BUSINESS ENTERPRISES
Sole
Proprietorship
Partnership
Un-incorporated
Associations
Limited
Partnership
Private Companies
One Man Company
De facto
Companies
Public Companies
Listed
Unlisted
De jure
Types of Business Enterprises include:  The Sole Proprietorship
 The Partnership
 The Un-incorporated Association
 The Company
The Sole Proprietorship
This is the oldest and simplest form of business. There is a single owner who has the prerogative
and responsibility of making all the ultimate decisions concerning the business. Servants or
agents may assist the Sole Proprietor, if he functions without the aid of others, his obligations are
in Contract and his liabilities for wrongdoing are primarily by Tort.
1
Wallock
Advantages of the Sole Proprietorship
1. Businesses commenced and dissolved with ease.
2. There are modest expenses involved in starting up the business.
3. Businesses subject to minimum regulation by law.
Disadvantages of the Sole Proprietorship
1. Un-incorporated owner is fully liable for all the debts and other obligations incurred by
his business, for in law his business has no separate legal personality.
2. The courts adopt a hostile attitude when the sole proprietor attempts to segregate his
property alienating his interest in the property by passing personal assets into the name of
a spouse or other family members.
3. Absence of continuity; therefore death or prolonged illness may interrupt the business
and ultimately destroy it.
Partnership
The partnership of the 21st century is virtually the same as it was at the start of the 19th century
when it was defined by the 1891 UK partnership act as:
“The relation which subsists between persons carrying on a business in common with a
view to profit.”
The “persons” may be companies or individuals or any combination of the two. All partners
have the right to participate in the management of the business and all partners are jointly and
severally liable for the debts and obligations of the partnership. To satisfy commercial interests,
separate legal personalities have been bestowed in the United States and some Commonwealth
Caribbean jurisdictions with the advent of the Limited Liability Partnership Act, for example, St.
Lucia. But, by and large the United Kingdom Partnership Act of the 19th century continues to
represent the foundation of partnership law in the Commonwealth Caribbean. The
attractiveness lies in the informality of formation. They are not required to register and
there are no filing requirements. It operates as a sole proprietorship as there is a collection
of sole traders who co-operate for the sake of the business. The advantage lies in the
flexibility and ease of operation. See the Jamaican decision in the case of Joseph v. MCKenzie
(1993) 30 JLR 305 which is instructive of the essential characteristics of a partnership. The facts
involved a breakdown in the relationship between the defendant (MCKenzie) and the plaintiff
(Joseph) in relation to a restaurant. This business relationship started with an oral agreement
relating to profit sharing. Justice Smith found the oral agreement was binding. He noted that it
is a settled principle that a partnership can be formed as a result of an agreement between the
parties to carry out a business in common with a view to sharing profit or loss.
“There must be a community of profit or loss and to ascertain whether or not a
partnership exists the agreement must be construed as a whole. The mere fact that the
parties to it claim that they are partners is not conclusive.”
Co-operatives
1. A co-operative differs from other forms of businesses in that its structure reflects its aims,
which are generally stated as to service its members and to benefit the society at large.
This is reflected in the course of its business as well as the use of profits.
2. An essential feature of the co-operative is democratic control i.e. one member one vote.
Persons elected, or appointed, in a manner agreed upon by the members conduct their
2
Wallock
affairs. The elected or appointed persons are also accountable to the members. The
policy of a co-operative is laid down in the general meeting and is reflected in the bylaws
of the co-operative. In contrast in a corporation control is vested in shareholders,
primarily those with the largest financial interest.
3. Open membership: Membership in a co-operative society should be voluntary and
available without artificial restriction and without any social, political, racial or religious
discrimination to all persons who can make use of its services and are willing to accept
the responsibilities of membership.
4. Surplus distribution: A co-operative society belongs to the members. The economical
result therefore is that any surplus must be distributed evenly so as to avoid one member
gaining at the expense of other members. When a surplus is distributed it is allocated
between members on the basis of the transactions with the co-operative.
5. All co-operatives should make provision for the education of the employees, members,
officers and the general public.
Liability
A co-operative is an un-incorporated association so that historically a person seeking an action
against a common fund would in effect have to prove the liability of all the members personally,
since the fund is thought to be owned by all the members for the time being. This created
problems because of fluctuations in membership and the procedural burden of getting judgement
against all the members personally. Legislation now permits that an association can be sued in
its own name. Taff Vale Ry v. A.S.R.S. [1901] AC 426 is authority for the proposition that an unincorporated association can be liable in Tort through a class action. Boyce v. Committee of
Management Enterprise Co-operative Credit Union Ltd. The court found for the credit union as
the dispute related only to the committee as the body responsible for the management of the
society.
Companies
Lecturer:
Date:
Ms. Lesley Walcott
September 18th, 2003.
Companies
Private Companies
Public Companies
Statutory Companies
One Man
De facto
Closed Controlled
Listed
De jure
3
Not Listed
Wallock
As far as corporate legislation is concerned, it has many functions:
1. It is enabling; i.e. it empowers people to attain what they could not otherwise achieve,
creating a body with a distinct corporate personality.
2. It is regulatory;legislation prescribes conditions, which have to be complied with to
obtain incorporation. The rules of the Companies Act must be observed to protect the
shareholders, creditors and the general public. The Companies Act classifies companies
in terms of their size and their method of raising capital.
Public Companies
The Barbados Companies Act S.2 defines a public company as a company whose shares or
debentures1 are issued to the public. This type of company dominates important segments of our
economy and it represents perhaps the biggest centre of non-governmental power. Typically the
share-holding body is vast and diffuse. The company is managed by a board of directors who
delegate their powers to executive directors. S.59 of the Barbados Companies Act states that a
public company must have no fewer than three directors at least two of who are not officers or
employees of the company or any of it’s affiliates. If public companies are going to be listed on
the stock exchange they must have a minimum capital requirement. No such requirement for
private companies of minimum capital.
Listed Companies
Some companies are listed on the stock exchange. Stock exchanges were incorporated in the
region in the mid 1980’s. These were created to fill a void in the financial system. It comprises
designated and non-designated members who make up the board. Designated members include
the Minister of Trade, Governor of the Central Bank and Minister of Finance. Companies listed
on the exchange fall under the purview of Securities Legislation. Such as:
Barbados Securities Act of 2002
Jamaica Securities Act of 1993
Trinidad and Tobago Securities Act of 19952.
The listed company must enter into a listing agreement, which imposes a number of obligations
on issuing companies. They enter into obligations relating to the conduct of trading prohibiting
manipulative and fraudulent practices. In order to secure a listing a company must have a
trading record or history and a certain number of shares must be held by members of the public
who are not associated with the directors or major shareholders.
Private Companies
Generally these are small family type companies3. According to statute in “new law4”
jurisdictions, there must be at least one director. It is a closely-knit unit with family members
BLACK’S LAW DICTIONARY:
1. A debt secured only by the debtor’s earning power, not by a lien on any
specific asset. 2. An instrument acknowledging such a debt. 3. A bond that is backed only by the general credit and
financial reputation of the corporate issuer, not by lien on corporate assets. 4. English Law. A company’s security
for a monetary loan  The security usually creates a charge on company stock or property.
2
These Securities Acts are the first of their kind in the Commonwealth Caribbean.
3
Ms. Walcott did however point out in class that this is not always the case.
1
4
Wallock
often comprising the share holding body. Because of the nature of this type of company, many
of the formal requirements stipulated in the Companies Act are abandoned i.e. requirements for
taking minutes, the holding of meetings. This is because often Directors do not bother to hold
general meetings concentrating rather on running the business. Another characteristic of Private
Companies is they normally have in their constitution a pre-emptive rights clause. It is used to
ensure shareholders remain “friendly”. It is a clause, which states that no shareholder can sell
shares without the approval of the board.
Holding and Subsidiary Companies
This is where one company is in a position of control over another by owning more than 50% of
the shares in that company. This is covered by the Companies Acts:
Barbados
S442
Jamaica
S149
Trinidad and Tobago S5.
Control is an essential ingredient. The parent or holding company has the ability to control or
influence the policies of the other company and they can appoint executives.
Limited and Unlimited Companies
Not all companies are limited by shares, if they are limited, the letters Ltd. or the word “limited”
must be affixed after the corporate name. If it is a public limited company the letters PLC or the
words “Public Limited Company” must also be affixed after the corporate name.
Method of Incorporation
In Jamaica, Belize5 and the Bahamas6, incorporation is achieved by filing the
memorandum of association and the articles of association. The memorandum of association
is the company’s principal constitutional document and it governs the relationship between the
company and the outside world. The memo sets out the details of the company’s existence. For
example the company name, domicile, capital structure, whether it is a private or public
company and the company’s objects.
The articles of association regulate the company’s internal day to day affairs. For example
when meetings have to be held, the number and rights of shareholders as well as directors
powers. The first subscribers for shares sign both the memorandum and the articles of
association, see for example Jamaica Companies Act Arts. 3 & 6. The signatures must be
witnessed and each subscriber must take at least one share. The number of shares taken will be
entered alongside the name in the memorandum. In new law jurisdictions there are pre-printed
forms which are filled out. There are actually five standard forms, these are:
Notice of Directors form
4
New Law Jurisdictions with more modern Companies Acts are: Barbados 1982, Guyana 1991, Trinidad & Tobago
1995 and Dominica, Grenada & St. Lucia who got their companies Acts between 1995-1996, they are all also based
on the Barbados statute.
5
Jamaica and Belize are considered to b old law jurisdictions.
6
The Bahamas is considered to be a hybrid jurisdiction in terms of its Companies Act. In this regard, it remains
with the old law jurisdictions.
5
Wallock
Request for Name Search form
Registered Head Office form
Certificate of Incorporation and an
Affidavit
The affidavit stems from articles such as S.4 of the Barbados Companies Act, which provides
that you must be over 18, you must not be bankrupt, and you must be of sound mind. These
things are sworn by an attorney in an affidavit.
Lecturer:
Date:
Ms. Lesley Walcott
September 23rd, 2003.
Advantages of Incorporation
1.
2.
3.
4.
5.
6.
7.
8.
A company has perpetual succession. Unlike partnerships and sole traders, the
“business” continues despite the death (or serious illness7) or shareholders and
directors.
Its assets are owned and its debts owed by the company and not its members, this is
so even with one-man companies, which are permissible in some territories8.
Generally a shareholder can freely transfer his share holdings unlike a partnership
where the consent of the other partners must be obtained.
The liability of a shareholder is limited by his shares. In Barbados all shares must be
fully paid whereas in Jamaica shares might be partially paid9.
Shareholders are not bound by a fiduciary duty either to themselves or the company.
There are fiscal advantages of incorporation as opposed to being a sole trader, there is
scope for tax avoidance (which is legal as opposed to tax evasion which is illegal.)
Where there are high profits, it is advantageous to incorporate10.
It is arguably easier for a company to raise additional finance from banks and other
financial institutions through shares and debentures.
As a separate legal person, the company can sue or be sued in its own name.
Disadvantages of Incorporation
1.
2.
3.
National Insurance contributions are payable by both employer and employee.
There has been an increase in the corporate tax rate, which makes incorporation to
reduce tax liability less attractive.11
There is reduced flexibility, one has to maintain minutes, records of meeting and
comply with the various statutory requirements. These are quite significant with
regard to public listed companies. There are additional accounting and audit
7
My addition from prior notes.
New Law Jurisdictions such as: Barbados 1982, Guyana 1991, Trinidad & Tobago 1995 and Dominica, Grenada &
St. Lucia who got their companies Acts between 1995-1996.
9
In Jamaica and Belize, being the two old law jurisdictions, partially paid shares exist.
10
This is because as explained by Ms. Walcott, corporations are usually charged at a fixed rate of tax, which may be
lower than that which would be paid for an un-incorporated company with the same earnings.
11
Barbados for instance recently raised their corporate tax rate to 40%.
8
6
Wallock
requirements imposed on companies and considerable financial information should be
given to the shareholders by the board of directors.
Corporate Persona
A company is defined by S.2 of the Companies Act of Barbados as “A body corporate that is
incorporated or continued under this act.” Section 2 of the Jamaica Companies Act defined a
company as “A company formed or incorporated under this act or an existing company.”
In the eyes of the law, the company is regarded as a separate distinct person apart from its
shareholders. For example, see the case of A.G. v. Antigua Times Ltd.12 where the court stated
that “the term person includes the body corporate.” See also the Interpretation Acts. Section 17
in the Barbados Companies Act provides that: “A company has the capacity and subject to this act, the rights, powers and privileges of
an individual.”
The decision cited as establishing the legal personality of the company is the House of Lords
decision in the case of Salomon v. Salomon & Co. Ltd.13 In this case Salomon carried on
business as a manufacturer of leather goods, he was a sole trader. Due to an increase in
profitability he was advised to incorporate, he then created a limited liability company, which
purchased the business. The company thereafter started to experience financial difficulties.
Salomon gave the company a loan, which was secured with company assets. The company was
forced into liquidation and Salomon claimed the assets of the company, which had been used to
secure his loan, the liquidator and the other creditors objected to this. The House of lords
unanimously reversed the decision of Vaughn Williams LJ and held that Salomon was under no
liability to the company and its creditors that his debentures were validly issued, and his security
over the company’s assets were effective against the company and its other creditors. Lord
MCNaghten stated in summing up a company’s personality: “The company is at law a different person all together from the subscribers to the
memorandum, and though it may be that after incorporation, the business is precisely the
same as it was before and the same persons are the managers and the same hands
receive profits, the company is not in law the agent of the subscribers or a trustee for
them. Nor are the subscribers as members liable in anyway shape or form except to the
extent and in the manner provided by the act.”
The House of Lords held that no matter how large a proportion of the share capital is held by a
shareholder, the company’s assets, liabilities and rights were not those of it’s controlling
shareholders.
Application of the Doctrine
The principle of the company’s separate legal personality has been consistently applied since
Salomon v. Salomon & Co. Ltd.14 See for example the case of Macaura v. Northern Assoc. Co.
12
[1976] AC 16
[1897] AC 22
14
[1897] AC 22
13
7
Wallock
Ltd.15 where the House of Lords held that the assets of the corporation were not those of the
shareholders. See particularly the judgments of Wrenbury and Lord Buckmaster. This case is
also authority for the proposition that the shareholders do not have an insurable interest in the in
the property of the corporation because they do not have a legal or equitable interest in the
property.
Determine the validity of the arguments used in the case of Constitution Ins. Co. of
Canada v. Kosmopolous [1987] 34 DLR (4th) 208.
Since a company is a legal person, separate from its shareholders, the following applies: 1.
A contract of employment can be entered into by a company and its sole director and
controlling shareholder. See the case of Lee v. Lee Air Farming [1961] AC 12.16
2.
Regardless of whether the person holds all the shares in the company, the company’s
business is not necessarily that persons business in the eye of the law. However,
where an individual controls a number of companies whereby their existence
represents a sham, the court will treat these companies as his creatures whereby the
individual will be personally liable.
Piercing the Corporate Veil
There are instances where the courts will pierce the corporate veil and disregard its separate
existence. Within traditional legal scholarship, there is no principled distinction between the two
limbs i.e. instances where the principle is applied and instances where it is ignored. The courts
seem unwilling to define clear guidelines, preferring rather to describe instances where the
corporate veil is used as a sham or a cloak. It is difficult to rationalise the cases except under
broad and rather questionable headings. These headings are: 1.
Agency
2.
Fraud
3.
Trusts
4.
Enemy &
5.
Statute17
See also the United States Patriot Acts and the Helms Burton legislation.
Lecturer:
Date:
Ms. Lesley Walcott
September 25th, 2003.
Fraud
Equity will not allow an individual to use a company as a shield for improper conduct or fraud.
In a group relationship, the claimant must attack the artificiality of the Parent subsidiary
relationship. The onus lies on the claimant and a high burden of proof must be discharged.
He/she must establish that the company is a sham, cloak and buffer. See Gilford Motor Co. v.
Horne18where the court of appeal held that the plaintiff was entitled to an injunction against both
the defendant and the company which, the defendant, in contravention of a contract, formed a
15
[1928] AC 619
Privy Council decision.
17
This is usually or especially for tax statutes.
18
[1933] Ch. 935
16
8
Wallock
company and solicited his former employers clients. See also the case of Jones v. Lipman19
where a vendor of land sought to avoid specific performance by transferring the land in breach of
he contract to a company he had formed for that specific purpose. The court treated the company
as a sham and granted an order for specific performance. See also the case of BG Preco Pacific
Coast Ltd. [1989] DLR 30. Please note however that an unsuccessful claim of fraud renders the
claimant liable for costs.
Agency
An examination of the cases indicates that agency is often used in conjunction with other heads,
for example fraud. One should consider whether agency precedes the lifting of the veil by virtue
of the courts imputing an agency relationship-using agency as a means of lifting the veil
resulting in implied or constructive agency. See the decision of Smith Stone & Knight Ltd. v.
Birmingham Corp.20 and note that there are two types of agency, agency as a result of capitalist
control, and agency as a result of functional control. Functional control is a question of fact.
The factors to be considered are:
1.
Does the shareholder treat as their own the profits of the company?
2.
Who appoints the persons conducting the business?
3.
Who is the head and brain of the trading venture?
4.
Who decides what and how much capital should be injected into the various
ventures?
5.
By whose skill and direction are profits made?
6.
In a group subsidiary relationship who closely and directly controls the subsidiary?
Group Enterprises
Regional company statutes contain definitions of the holding, subsidiary and affiliated
companies. These are: Jamaica
S. 149
Bahamas
S. 2
Barbados
Ss.440 – 443
Trinidad & Tobago S. 5
On the financial implications of the holding and subsidiary relationship see the case of Acatos &
Hutchinson Plc Watson [1995] 1BCLC 218, which involved an arrangement whereby the
company acquired another company which held shares in it. See also the decision in Ord v.
Bellhave Pubs Ltd.21
Advantages of the Holding Company
1.
2.
3.
It is suitable as a medium for controlling modern large-scale business enterprises.
There is simplicity in formation, by simply acquiring a majority of the shares that
carry voting powers. This does not disturb creditors or preference shareholders or
any minority of ordinary shareholders and it does not interfere with the good will and
reputation of an existing business.
The holding company may be used for the purpose of financing the operations of its
subsidiaries.
19
[1962] 1 WLR 832
[1939] 4 All ER 116
21
[1998] 2 BCLC 447
20
9
Wallock
4.
5.
Tax advantages may be obtained for example where a company with accumulated
losses acquires a subsidiary with substantive gains, the losses may be carried forward
for income tax purposes and deducted from future profits.
Subsidiary companies insulate each individual company from the creditors of other
subsidiary companies. In this way the risk of loss to the holding company is limited
to the amount of capital subscribed in the subsidiary. The mere fact of ownership of
shares or capitalist control does not impose a responsibility on the holding company.
Disadvantage and Abuse of the Holding Company
Some of the advantages mentioned may prove to be disadvantages: 1.
Holding companies tend to create monopolies and concentrate the control of big
business in the hands of a few 22.
2.
Share Pyramiding; control can be acquired by investing a relatively small amount of
capital in a number of subsidiary companies. Control is achieved over the whole
chain by holding a majority of shares in the first company.
3.
Manipulation of accounts; inter-corporate transfer and transactions may be hidden.23
Financial statements may be obscure and cover up essential information
Generally the doctrine of Salomon v. Salomon & Co. Ltd.24 can be easily abused and the
corporate personality used as a veil behind which to shield conduct prejudicial to the
corporations creditors. An insolvent subsidiary is generally treated, as a separate legal entity so
that it’s parent company will rarely if ever be liable for it’s debts. The application of this
principle to group companies has caused hardship to the unsecured creditors of the insolvent
subsidiary. See the case of Multinational Gas v. Multinational Gas & Petrochemical Services
Ltd.25 where the court held that there was no agency relationship between the plaintiff and
defendant company. The court further found that when the parent company sent instructions to
the subsidiary company and it was carried out, the subsidiary company ratified the instructions.
In the case of DHN Ltd. v. Towel Hamlet,26 the parent company requested that the courts pierce
the veil because the subsidiary company had been compulsorily acquired. It was in this case that
Lord Denning devised the “Single Economic Unit” theory. He felt the courts should pierce the
veil in the “interest of justice.”
In Adams v. Cape Industry Pic [1990] 2 WLR 657. The subsidiary company was mining
asbestos; the court however found that there was no agency relationship between the parent and
subsidiary companies. The court in this case also expounded the view that there was no such
thing as “in the interest of justice.” In the case of Polly Peck International plc.27 the court of
appeal affirmed the principles arising from Adams v. Cape Industry Pic28.
In the United Kingdom, there continues to be a marked unwillingness on the part of the courts to
acknowledge he economic reality of groups and pierce the corporate veil. In Europe, the “single
economic unit” theory receives a far more favourable response.
22
This may create problems in term of Fair Trading. Jamaica for instance has extensive Fair Trading legislation,
which is strictly enforced. (1993)**********
23
See the article “Storm in a Teacup; The Crisis In Jamaica” *********
24
[1897] AC 22
25
[1938] Ch. 258
26
[1976] 1 WLR 852
27
[1996] 2 All ER
28
[1990] 2 WLR 657
10
Wallock
See the Barbadian case of Debdor Co. Ltd. v. Wilkinson29. In this case the owner of Bresnie
transferred all of Bresnie’s assets to Debdor Co. Ltd. and only maintained the employees’
contracts with Bresnie. Miss. Wilkinson was terminated and sued for wrongful dismissal. She
was successful but there were no company assets to settle the debt. The owner of Debdor then
provided a Debdor cheque to settle the debt. He then argued in court that he had no authority to
use Debdor assets to settle a Bresnie debt. The court of appeal held that although Bresnie had
employed the former employee, it was no more than a shell. William’s J expressed the view of
the court when he said: “The court strongly disapproves of the use of the corporate concept as a device for
treating employees unjustly…It is nothing more than a shell, an entity used as a tool to
hold contractual arrangements made with those who are employed in the business. When
successful claims are made by employees, there is no substance to satisfy them and the
employees are left with feelings of injustice and frustration.”
Lecturer:
Date:
Ms. Lesley Walcott
October 9th, 2003.
COMPANY TUTORIAL
Tutor: Ms. C. Babb
Barbados Companies Act S. 442
“a.
A body corporate is the holding body corporate of another, if that other body
corporate is its subsidiary.
b.
A body corporate is a subsidiary of another body corporate if it is controlled by
that other body corporate.”
In the case of The Albazeera [1977] AC 774 Roskill LJ stated: “E
Lecturer:
Date:
Ms. Lesley Walcott
September 30th, 2003.
Promoter
There is a lack of judicial definition of the word promoter in the Jamaica Companies Act see S43
& 44 in Barbados the Companies Act refers to an incorporator. In jurisdictions such as Jamaica
and Belize there is a promoter, but in the new law jurisdictions reference is made to an
Incorporator. The term incorporator and Promoter are not synonymous. Promoters are persons
who conceive the idea of forming a company, they undertake its incorporation, and they provide
shares and loan capital. See for example the case of Emma Silver Mining Co. v. Lewis & Son30
where Lindley LJ stated that: “as used in connection with companies the term promoter involves the idea of exertion
for the purpose of getting and starting a company, or what is known as floating it.”
29
30
(1995) 49 WIR 49
[1879] 4 CP D
11
Wallock
The nearest attempt at a definition can be found in Twycross v. Grant31 in the 19th Century where
Cobourne CJ states that a promoter is: “one who undertakes to form a company with reference to a given project and to see it
going and who takes the necessary steps to accomplish that purpose.”
The Need For a Definition
A definition is often of the utmost practical importance so as to impose liability upon a
defendant/promoter. See for example Vice Chancellor Bacon’s comments in Bagnall v.
Carlton.32 The grant of a particular relief or remedy may depend solely on this issue. In Jamaica
see S. 40 of the Companies Act and the third schedule to the legislation. How therefore can a
company and the persons who have authorised the issue of the prospectus fulfil this duty without
knowing who is he promoter?
Reasons For The Lack of Definition.
1.
2.
3.
4.
Where a promoters conduct falls to be considered by the courts the judges simply
resort to equitable remedies. Relying on the principle that secret profits are
inequitable, and anyone who has made them is a promoter.
One school of thought insists that the term promoter is best left as a business term
rather than a legal one. See for example the case of Twycross v. Grant.33
The courts have intentionally failed to set down a definition in a formal sense,
because if a definition were laid down it might be possible for persons concerned
in the promotion of companies to avoid its application, taking advantage of their
fiduciary position without incurring the liability of promoters.
A comprehensive definition is impossible due to the wide range of companies
promoted, from small one-man companies to the large public corporations, and
given the varied activities of the person engaged in promoting the company.
Suggested Test
The animus factum test see the case of Bagnall v. Carlton34 when the defendants were held to be
promoters “because it was their intention and conviction to sell the prospect of the company”.
There we witness the element of intention and the fulfilment of this intention as the criteria. See
the case of Re Leeds & Hanley Theaters of Varieties Ltd.35 where the element of intention was
also stressed by Vaughn William's LJ he stated: “If you trace all the proceedings of the finance company as detailed in their own minutes,
it seems clear that they were acting and intended to act as promoters of the company.”
Similarly see the decision of Twycross v. Grant36 where it was stated that: “The defendants acts were done with a view to the promotion of the company.”
The inference from these is that a promoter is not under a liability merely because he agreed to
promote the company. To be liable the person had to act. See the case of Whaley Bridge Calico
31
[1877] 2 CP.D
[1877] 6 Ch. D 371
33
[1877] 2 CP.D
34
[1877] 6 Ch. D 371
35
[1902] 2 Ch. 809
36
[1877] 2 CP.D
32
12
Wallock
Printing v. Green & Smith37 as to what constitutes an active step. There is an active step of
promotion only where the vendor has negotiated the promotion with other institutions. Please
note that this has not been followed by later House of Lords decisions such as Gluckstein v.
Barnes38 and Erlanger v. New Sombrero Phosphates & Co.39.
Termination of Promotion
In the decision of Twycross v. Grant40 Cobourne LJ stated that: “So long as the work of formation continues, those who carry on that work must retain
the title of promoter.”
There is no statutory limitation of promoters, the courts have developed a test of intention and
the promotion period covers all activities designed to start the company. As a reality;
1.
The term promoter is not a term of art.
2.
The obligations of the promoter have been built up piecemeal by the courts. See the use
of agency and trust principles, buttressed at times by legislation.
3.
Where attempts have been made at judicial definitions, the definitions have not been
exhaustive.
4.
The matter of whether or not someone is a promoter is a question of fact.
5.
The promoter is not an agent of the company as there is no principal (This is because the
principal or company is not yet formed).
Duties and Obligations
The promoters stand in a fiduciary relationship to the company. See the case of Erlanger v. New
Sombrero Phosphates & Co.41which was the first decision to recognise the existence of a
fiduciary relationship Lord Blackburn commented on the extensive, almost unlimited powers
which promoters have. Lord Blackburn indicated that such powers must be checked by an
objective test of reasonable use.
1.
A promoter must not make any secret profit out of the promotion of the company
without the company’s consent.
2.
A promoter is under a duty to disclose any interest in which he may have in a venture
in which he has entered into.
3.
A contract entered into between the promoter of the company is voidable at the
instance of the company unless all material facts have been disclosed to a full and
independent board.
“Independent”, is a question of fact. If a company is a private company then the general meeting
is the proper forum for disclosure. At this meeting, the promoter due to his vested interest must
abstain from the vote. If the company is a public company then full disclosure in the prospectus
is sufficient. See the House of Lords decision in the case of Erlanger v. New Sombrero
37
[1880] 5 QBD 109
[1900] AC 240
39
[1878] 3 App.Cas 1218
40
[1877] 2 CP.D
41
[1878] 3 AC 1218
38
13
Wallock
Phosphates & Co.42 as well as Gluckstein v. Barnes43 where a syndicate purchased property and
resold it to the company. The syndicate only disclosed a portion of the profits. The House of
Lords decided they were accountable for the remainder. See the case of Whaley Bridge Calico
Printing v. Green & Smith44 where a promoter was held accountable where he negotiated a sale
of a business from a third party to the company and obtained a share of the profits.
Remedies
1.
2.
3.
Lecturer:
Date:
The company may bring proceedings in its own name for restitution of a benefit,
which the promoter has received either in equity on the basis of constructive trust, or
through an action for money had and received. See the case of Gluckstein v.
Barnes45.
The company may have a remedy in damages against the promoters for breach of
their fiduciary duty. See Re Leeds & Hanley Theatres of Varieties Ltd.46
The promoter and his accomplices may be sued in an action of deceit. A promoter
may be personally liable to compensate persons who subscribed for shares or
securities on the faith of his prospectus. Where a promoter has been promised but has
not received a profit, bribe or other benefit, the company may itself enforce his claim
against the promisor on the basis that he held the claim as trustee for it.
a. restitution
b. damages
c. recission
d. compensation
Ms. Lesley Walcott
October 2nd, 2003.
Remuneration
A promoter is not entitled to recover any remuneration for his services form the company unless
there is a valid contract between him and the company. See the cases of Re: English & Colonial
Produce Co.47 and also Re: National Motor Mail Co.48. In the absence of a valid contract
therefore, a promoter will be unable to recover his preliminary expenses and any registration fees
or duties paid. The promoter is at the mercy of the directors of the company. In practice this
does not present a significant problem because a provision is usually inserted in the articles or
byelaws of he company authorising the directors to pay the promoter. Furthermore, more often
than not, the promoter himself becomes a director.
Pre-Incorporation Contracts
The fact that Anglo-West Indian law does not recognise the existence of a corporation until a
certificate of incorporation has been issued and other prescribed conditions met creates
significant legal and practical difficulties. Where a promoter purports to conclude a contract on
42
[1878] 3 AC 1218
[1900] AC 240
44
[1880] 5 QBD 109
45
[1900] AC 240
46
[1902] 2 Ch 809
47
[1906] 2 Ch435
48
[1908] 2 Ch 515
43
14
Wallock
behalf of a prospective corporation. Pre-incorporation contracts are an essential part of
commercial life. The promoter may feel that it is important to nail down the other party to the
contract before he has had an opportunity to change his mind. The other party may insist on the
contract being concluded by a given date, or the existence of the contract may be a pre-condition
of the promoter being able to attract other investors to the corporation. Frequently the promoter
is also under the mistaken impression that the corporation has already been incorporated or that
compliance with the statutory incorporation requirement is only a minor inconsequential
formality.
Common Law Position
Determining the enforceability of pre-incorporation contracts has led to a volume of case law.
The common law can be regarded as unsatisfactory, arbitrary, unrealistic and fraught with fine
distinctions. The structure and application of the common law is evident in the case of Kelner v.
Baxter49 and Newbourne v. Sensolid (Great Britain Ltd.)50. In the case of Kelner v. Baxter51 the
court stated that a promoter who purports to make a contract on behalf of an unformed company
will be personally liable despite signing as agent of the unformed company. This is provided
that on the face of the instrument it is evident that he was a party to the contract. The rationale
for this is: 1.
Prior to the incorporation a company lacks the capacity to enter into contracts and is
not bound by contracts made by the agents purporting to act on its behalf prior to
incorporation.
2.
A company is prevented from ratifying pre-incorporation contracts because when the
company comes into existence, it is a totally new creature. Rights and liabilities
begin on the date of incorporation and not before. Thus when the company in Kelner
v. Baxter purported to ratify the promoters contract, it was held that in the absence of
a principal who could be originally bound, they themselves were liable.
3.
An agent for a non-existing principal must be considered as personally incurring
liability. In the case of Kelner v. Baxter Earle CJ applied the parol evidence rule.
Where an instrument is clear and unambiguous on its face, oral evidence is
inadmissible to contradict the written instrument. In the case of Kelner v. Baxter, all
the parties were aware that the company was not in existence.
In the case of Newbourne v. Sensolid (Great Britain Ltd.)52 a written contract was made for the
supply of goods by the appellant to the respondent, as in Kelner v. Baxter53the appellant was
acting for an un-incorporated company, the respondent refused to accept delivery, and the
appellant sought specific performance relying on the principle in Kelner’s case. The appellant
claimed the contract was binding and enforceable by him as the company’s agent. The Court of
Appeal rejected his arguments and held that the company and not the promoter was the
contracting party and since the vendor was non-existent; there was no contract at all. As a result
of the decision, the courts became pre-occupied with the form of the pre-incorporation contract
as opposed to its substance. The court of appeal placed specific emphasis on the, manner in
49
(1860) LR 2 CP 174
[1954] 1 QB 45; [1953] 2 WLR 596
51
(1860) LR 2 CP 174
52
[1954] 1 QB 45; [1953] 2 WLR 596
53
(1860) LR 2 CP 174
50
15
Wallock
which the contract was signed. The position is that if as in Kelner v. Baxter54 a promoter signs
for and on behalf of a non-existent company, he will be considered as personally incurring
liability. If the promoter signs as per director of an unformed company, there is no company and
no one is liable. The issue came up for consideration in the case of Black v. Smallwood55 , here
the attestation clause in the contract for the sale of land contained the name of the company as
purchaser followed by the signatures of two persons as directors. The signatories believed the
company had been incorporated and they were the directors of the company. The vendor sued
for the specific performance of the contract citing the case of Kelner v. Baxter56 and it was also
claimed that the signatories were personally liable. The court held that the ‘directors’ were not
liable. Kelner v. Baxter57 was distinguished on two grounds: 1.
In Kelner, both sides were aware o f un-incorporation
2.
That the court in Kelner had concluded that the documents disclosed an intention that
the directors should be personally bound.
The court in Black v. Smallwood58introduced intention as a guideline as to whether an agent will
be personally liable. See Phonogram v. Lane59 which is a case concerned with S.9 ss. 2 of the
United Kingdom European Community Act of 1972. Lord Denning criticised the fine common
law distinction between a contract signed for another and a contract signed as agent for another.
The real question in every case was the true intention of the parties. The liability of the signer
did not turn on the distinction drawn in the Newbourne v. Sensolid (Great Britain Ltd.)60 case.
The common law applies in Jamaica and Belize, the common law does not apply in the Bahamas,
Barbados, Guyana, Trinidad & Tobago, Dominica, Grenada and St. Lucia, this problem with the
common law has been corrected by statute. In old law jurisdictions, reliance must also be placed
on the common law and the cases of Newbourne v. Sensolid (Great Britain Ltd.)61and Kelner v.
Baxter62apply. Reliance must also be placed on the common law doctrine of novation i.e. the
person making the contract will be released from liability if the company after incorporation
enters into a second contract with the contractor incorporating some of the same terms as the preincorporation contract. Cogent evidence is required to prove the existence of a second, fresh
contract. See the case of Bagnot Pneumatic Tyre Co. v. Clipper Pneumatic Tyre Co.63 where it is
demonstrated that a mere mistaken belief is not sufficient., see also Re Northumberland Avenue
Hotel Co.64 If a company takes possession of property transferred to it under a preincorporation contract the court may be able to infer a new contract see the case of Re Patent
Ivory Manufacturing Co.65 Consider the Jamaican decision of Hadlinston Construction co.
54
(1860) LR 2 CP 174
[1966] ALR 744
56
(1860) LR 2 CP 174
57
(1860) LR 2 CP 174
58
[1966] ALR 744
59
[1981] 3 All ER 182
60
[1954] 1 QB 45; [1953] 2 WLR 596
61
[1954] 1 QB 45; [1953] 2 WLR 596
62
(1860) LR 2 CP 174
63
[1902] 1 Ch
64
(1886) 33 Ch D 16
65
(1888) 38 Ch D 156
55
16
Wallock
Ltd66A Court of Appeal decision which illustrates the traditional common law approach. This
case involved a series of building contracts with allegations of negligence: 1.
The issue of pre-incorporation contracts arose as a preliminary issue reaffirmed the
salient principle in the common law that a company cannot enter into contracts before
incorporation because it does not yet exist as a legal person. Nor for the same reason
is it found by contracts made by agents purporting to act on its behalf before
incorporation.
2.
In response to arguments that there was no enforceable contract, the court of appeal
held that a company cannot ratify or adopt a pre-incorporation contract. However, a
new contract may be inferred and in this case, there was cogent evidence to support
such an agreement between the appellant and the respondent.
3.
The Court of Appeal found there was an entirely new contract following the case of
National Land v. Colonisation [1904] AC 120. and therefore that novation operated
to save the agreement. This doctrine operates wholly apart from the common law
position against ratification.
See the case of Canwest International v. Atlantic (1994) 48 WIR 40.
Lecturer:
Date:
Ms. Lesley Walcott
October 7th, 2003.
Dealings With The Company and Liability for Torts and Crimes
The rule in Foss v. Harbottle67: - If a wrong is done to the company, only the company can
rectify the wrong. There are exceptions to this rule. The exceptions include: _
1.
ultra vires
2.
Personal Action; the personal rights as an ordinary shareholder are infringed.
3.
Special Majority; the special majority requirements for decisions breached.
4.
Fraud;
this is referred to as fraud on the minority (it has been argued by some,
that this is the only true exception).
The four exceptions have either been replaced or supplemented by Statutory Derivative Act.
In the Barbadian decision of Canwest International v. Atlantic (1994) 48 WIR 40. In this
case William's CJ enabled or empowered a third party who acquired rights under a preincorporation contract to bring an action against the company. A complainant may bring an
action and is defined as a shareholder or former shareholder, director or former director, and
the Director of Companies and any other person who is a fit and proper person to bring the
action. Williams CJ interpreted the phrase “any other person who is fit and proper…” to
include third parties who acquire rights under a pre-incorporation contract. In the Jamaican
case of Chinatown Restaurant Ltd. et al v. Wong68, the case was thrown out because the
shareholder did not live in Jamaica, Jamaica therefore follows the rule in Foss v. Harbottle.
The Doctrine of Ultra Vires
66
Hadlinston Construction co. Ltd Casilla Development Ltd. & Harold Massop v. Casilla Development Ltd.
Goldson Barrett Jo9hnson (a firm) & Earl A. Arichards (1985) 22 JLR 495
67
(1843) 2 Hare 461
68
Jamaica Court of Appeal Civil Appeal No. 25 of 1988 (Rowe, Pres. Wright and Forte JJ.A March, 1989.
17
Wallock
The Memorandum of Association
This is the company’s principal constitutional document, it governs the relationship between
the company and the outside world. The memorandum sets out the essential details of he
company’s existence. For instance the company name, domicile, capital structure and
whether it is a private or public company.
The Objects Clause
This is the most important clause in the memorandum of association. This clause defines the
capacity of the company. It sets out the main business activity of the company. Its purpose
is to protect investors, shareholders and others dealing with the company. A company has
natural limitations in accordance with Suttons Hospital***, a company cannot commit
treason, it cannot marry and it cannot be excommunicated. The law has introduced an
artificial limitation in the form of the doctrine of ultra vires. This doctrine is based on the
fact that companies were formed historically to fulfil a specific limited purpose as stated in
the companies constitution.
See the case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche69, which settled the
uncertainty as to whether, the doctrine applied to companies. In this case the company’s
memorandum gave he company power to make and sell railway carriages. The directors
entered into a contract to purchase a concession. The issue was whether the contract was
valid, and if it was not, could the shareholders ratify the contract. The House of Lords held
the contract was of a nature not provided for in the memorandum and was therefore null and
void and incapable of ratification. Lord Cairns expressed the view that: “The memorandum is the area beyond which the action of the company cannot go.”
In the subsequent House of lords decision in the case of A.G. v. Great Western Rly. Co.70 the
court sought to relax the harsh application of the ultra vires doctrine by introducing the
“reasonably incidental” test stating that the court will accept those acts which are reasonably
incidental to the expressed objects unless they are expressly prohibited. Lord Selbourne
stated that: “The doctrine of ultra vires ought to be reasonable and not unreasonably understood and
applied.”
Certain powers are implied in the case of trading companies unless expressly prohibited for
example the power to appoint and act through agents, the power to borrow money, to give
security on property, to employ labour, to have a bank account. It is evident that the doctrine
of ultra vires operates as a fetter on commercial enterprise, because the doctrine of ultra vires
by confining the activities of a company to its stated objects has the effect of restricting the
companies actions and may prejudice bona fide creditors. Draftsmen have devised numerous
schemes in an attempt to ensure the company’s capacity remains unfettered: 1. The Subjective Clause; provides that the “company can carry on any other trade or
business whatsoever which, can in the opinion of the board of directors be
advantageously carried on by the company in connection with or ancillary to the general
business of the company.” This type of clause vests the company and its directors with
69
70
(1875) LR HL 653
(1880) 20 Ch.D. 169 (CA)
18
Wallock
the power to define its commercial activities enabling the company to extend its area of
operations.
See the case of Bellhouse Ltd. v. City Wall Properties Ltd71 where the court of appeal
reluctantly upheld such a clause. This decision attempts to throw doubt on Re Crown
Bank******** which stated that “an objects clause must be capable of ascertainment, it
must contain a definite purpose.”
2. Lengthy and Comprehensive Memorandum; Corporate draftsmen developed the
technique of specifying in the objects clause, not only the main objects which the
company was to pursue, but also a seemingly endless list of other activities covering
every conceivable business venture. Lord Wrenbury in the case of Cotman v.
Brougham72 in response to this the courts attempt to restrict this development by
developing the main objects rule of construction. See the case of Re Haven Goldmining
Company (1882) 20 Ch. 151 and the application of the ejusdem generis rule. Where the
main objects specified in the first few paragraphs of the memorandum of association are
followed by wide powers expressed in general words, the latter should be construed
subject to the main objects.
3. Separate and Independent Objects Clause; in order to circumvent the ejusdem generis
rule draftsmen inserted a separate and independent objects clause at the end of the objects
clauses. These clauses provided that each paragraph is to constitute a separate and
independent clause not limited by or to other paragraphs. See the case of Cotman v.
Brougham73where the House of Lords reluctantly upheld such a clause, contrast this with
the case of Re Introductions Ltd. v. National Provincial Bank Ltd.74 where a company
was incorporated with the object of hosting foreign students, later it became involved in
pig breeding. Two debentures over the company’s assets were created to secure a large
overdraft. The objects clause stated that the company could borrow by debentures, and
there was also a clause which provided that each of the preceding sub-clauses should be
construed independently and should in no way be limited in any way to any other sub,
sub-clause. The Court of Appeal held that the ability to borrow money was a power and
not an object, and the power to borrow money could not be elevated into an object by an
independent objects clause. We witness the distinction between objects and facilitative
powers with powers being considered as facilitating an object.
Lecturer:
Date:
Ms. Lesley Walcott
October 9th, 2003.
The Doctrine of Ultra Vires
Rolled Steel Products Ltd75 (H of L) & Russell v. Northern Bank Dev. Corporation Ltd.76
In the case of Rolled Steel Products (Holdings) Ltd v. British Steel Corporation77, which is based
on complex facts, and has to do with the maintenance of capital in accordance with S. 151 of the
71
[1966] 1 QB 207
[1918] AC 514 HL
73
[1918] AC 514 HL
74
[1968] 2 All ER 1221
75
Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1982] Ch. 478
76
[1992] 1 WLR 588
77
[1982] Ch. 478, [1982] 3 All ER 1057
72
19
Wallock
UK Companies Act 1985. The memorandum gave the plaintiff company power to lend and
advance money, to give guaranties and give securities. The controller of the plaintiff company
established a service company which ran up a debt with a third company which was
subsequently acquired by the defendant company. The controller of the plaintiff company gave a
guarantee on the companies indebtedness and subsequently guaranteed the balance of the debts
and issued a debenture to secure the debt. On the subsequent liquidation of the plaintiff
company, the plaintiff instituted proceedings against the defendant for money paid under the
debenture. They also sought a declaration as to the validity of the guarantee and the debenture
granted. Justice Vinn Lott in the lower court stated that the power to lend and advance money in
the plaintiffs memorandum was not a separate independent object, but merely an ancillary power
which had to be exercised in pursuance to the main objects and purpose of the company. Since
the defendant knew that the granting of the debentures and guarantee was under the ancillary
power, and was not to further the companies main purpose and objects, the guarantee and
debenture were ultra vires, and being ultra vires, the shareholders even if acting unanimously
could not ratify them. The Court of Appeal reversed this decision finding instead that “an act
which comes within the scope of a power conferred expressly or impliedly by the company’s
memorandum is not made ultra vires by reason of the fact that the director entered into it for
some improper purpose.” The court of appeal decision can be regarded as blurring the
distinction, or eradicating the distinction between an object and a power.
Lord Justice Slade in the Court of Appeal put forward six propositions: 1. It is a question of construction of the memorandum of association whether a particular
transaction is within or outside a company’s capacity.
2. The state of mind or knowledge of persons dealing with it is irrelevant when considering
corporate capacity.
3. While due regard must be paid to any express conditions attached to the company’s
memorandum, for example a power to borrow only up to a specified amount. The court
will not ordinarily construe a statement in the memorandum as a condition limiting the
company’s corporate capacity, but rather as a limitation on the authority of the directors.
4. In the absence of unanimous consent of all shareholders, the directors of a company will
not have actual authority from the company to exercise any expressed or implied powers
other than for the purpose of the company as set out in its memorandum of association.
5. A company holds its directors as having ostensible authority to bind the company to any
transaction which falls within the powers expressly or impliedly conferred on it by the
memorandum of association. Unless he is put on notice to the contrary, a person dealing
in good faith with a company that is carrying on an intra vires business is entitled to
assume that its director are properly exercising such powers for the purpose of the
company as set out in the memorandum of association.
6. If a person dealing with the company is put on notice he cannot rely on the ostensible
authority of the directors.
Note the following: 1. It is questionable whether the decision of Rolled Steel Products (Holdings) Ltd v. British
Steel Corporation78 is applicable when there has been a total abandonment of the
78
[1982] Ch. 478, [1982] 3 All ER 1057
20
Wallock
companies original business as in the case of Re Introductions Ltd. v. National Provincial
Bank Ltd.79.
2. Brady v. Brady80 seems to indicate that the distinction between an object and a power has
not been wholly eradicated.
Gratuitous Dispositions
Gratuitous dispositions include employee benefit schemes and dispositions for non-business
purposes. The classical approach is that an activity not bona fide designed to enhance the
profitability of the company is ultra vires. See the case of Hutton v. West Cork Railway81 where
it was stated that: “Charity cannot sit at the board room table, and there are no cakes and ale except for the
benefit of the company.”
See the case of** Re Lee Behrens; in this case a director of a company awarded a widow of one
of the company’s former directors an annuity, the court upheld the liquidators claim which was
that the payment was mere gratuity and therefore ultra vires the company. Eve J laid own the test
for determining the validity of such gratuitous grants: 1.
Is the transaction incidental to the carrying on of the companies business?
2.
Is it a bona fide transaction?
3.
Is it done for the benefit of and to promote the prosperity of the company?
See the case of Re W&M Roith Ltd.82 where a service agreement with a director provided for a
pension to his widow was held to be ultra vires the company on the grounds that tests one and
three of Eve J’s tests were not satisfied.
Where there is an express provision in the memorandum, which identifies a substantive object of
the company as charitable works, it should be immaterial whether the transaction benefits and
promotes the prosperity of the company. See the case of Re Horsley & Weight Ltd.83 where the
court of appeal held that the grant of a pension was not ultra vires bearing in mind the separate
and expressed provision in the memorandum.
See the case of Charterbridge Corporation v. Lloyds Bank Ltd.84 where it was held that the act
was ultra vires regardless of whether or not it was intended for the benefit of the company
because it was in pursuance of an express purpose.
Failure of Substratum
If the objects for which the company has been formed cannot be achieved, the company is liable
to be wound up on the just and equitable ground of failure of substratum. See the case of Re
German Date Coffee Co.85 where the memorandum of association of a company stated that it
was formed for working a German patent which had been or would be granted. This German
patent was never granted, and it was held that the shareholders were entitled to apply for the
winding up of the company.
79
[1968] 2 All ER 1221
[1987] 3 BCC 535, [1988] BCLL 21
81
[1883] 23 Ch. D. 654
82
[1967] 1 All ER 427
83
[1982] Ch. 442
84
[1970] Ch. 62
85
(1882) 20 |Ch. D. 169 C.A.
80
21
Wallock
Remedies
1. A member can sue under a derivative action on behalf of a company to set aside the
effect of an ultra vires transaction.
2. Shareholders are entitled to apply for an order of winding up. See the Jamaica
Companies Act S. 203.
3. Members have the power to apply for an injunction to restrain the company from entering
into an ultra vires transaction.
4. The company has the right to recover from its officers compensation for loss suffered as a
result of an ultra vires transaction which they have caused it to enter.
Articles of Association
Every company is required to have articles of association (Jamaica, Bahamas, Belize and St.
Kitts). This defines the companies corporate authority indicating contractual limitations placed
upon the company by the shareholders. The articles of association determine how the objects of
the company are to be achieved and how the powers are to be exercised. Articles of Association
generally contain the following provisions: 1.
Appointment of the board of directors.
2.
Specifications as to the powers which a director may exercise in a company’s name.
3.
The calling and holding of shareholders meetings.
4.
The determination of voting rights.
5.
Determination of rights of different classes of shareholders.
6.
provisions dealing with the financial management of the company, for example: a. Share capital and variation of rights clause.
b. Calls on shares  this applies to partially paid up shares in Jamaica and Belize.
c. Transfer of shares.
d. Alteration of capital
e. Annual accounts, profits and dividends.
f. Winding up of the company.
Lecturer:
Date:
Ms. Lesley Walcott
October 14th, 2003.
Articles of Association…
Interpretation
Articles of association are subordinate to the memorandum of association, hence if there is any
inconsistency between the memorandum and the articles of association, the memorandum will
prevail and articles are void to the extent of their inconsistency. The authority for this comes
from the case of Guinness v. Land Corp. of Ireland (1885) 30 Ch. 376.
The articles of association may be examined to clarify Ambiguities in the memorandum. Please
note that in determining the question of corporate authority the purposes of the corporation are
material. The purposes are to be gathered from the ordinary natural meaning of the words.
22
Wallock
The Contractual Effect of the Articles of Association
This has been the centre of debate for over a century. The controversy stems from a drafting
oversight in S. 20 of the 1948 UK Companies Act which is reflected in S. 14 of the 1985 UK
Companies Act. This oversight has been carried through and adopted in the English speaking
Caribbean. see for example S.22 of the Jamaica Companies Act as well as S. 14 of the 1981
Companies Act of Belize.
Section 20 of the UK Companies Act provided that: “Subject to the provisions of this act the memorandum and articles, when registered bind
the company and its members to the same extent as if they respectively had been signed
and sealed by each member, and contained covenants on the part of each member to
observe all the provisions of the memorandum and of the articles.”
St. Kitts in 1996 remedied this lacuna with S. 10 of the Companies Act and now expressly
mentions covenants on the part of each member and the company86.
The deed of settlement failed to take into account the fact that the corporation is a separate legal
entity. The courts as a result of this loophole became preoccupied with the following questions:
a. Who are the parties to the statutory contract, the members of the company and the
company, or just the members?
b. Are the members deemed to have covenanted with each other, or the company or
both?
c. Could members sue another directly on the contract or must he enforce his
statutory right only through the company?
Some of the questions have been resolved: 1. See the case of Wood v. Odessa Waterworks Co. where the articles empowered a director
with the sanction of a general meeting to declare dividends to be paid to shareholders.
The company passed an ordinary resolution proposing to pay no dividends, but to
give shareholders debenture bonds redeemable over thirty years. An injunction was
granted to the shareholder to prevent the company from acting on the resolution. A
shareholder therefore has the right to enforce the terms of the articles by virtue of the
statutory contract of S. 20.
2. The articles bind the shareholders only ion their capacity as members of the company.
They as shareholders cannot make the company abide by the articles by virtue of any
special or personal right for example qua director, as solicitor or as managing
director. These rights are not shared by all. This principle was illustrated in the case
of Hickman v. Kent or Romney Marshall Sheep Breeders Association87 and Beattie v.
Beattie.
In the case of Hickman v. Kent, the plaintiff was a member of the defendant company. The
articles of the company contained an arbitration clause for the settling of disputes. The plaintiff
brought an action complaining of irregularities in the affairs of the association. Astbury J
examined the earlier decision case of Pritchard v. Melhado & Porto Allegro as well as the
decision in Browne v. La Trinidad (1887) 37 Ch. D 1. He stated that these decisions relied on
by the plaintiff purported to give specific contractual rights to persons in some capacity other
than that of shareholders, and in none of these cases did the members possess rights in common
with other members.
86
87
Section 18 in the St. Kitts Companies Act abolishes the doctrine of ultra vires.
[1915] 1 Ch. 881
23
Wallock
He laid down the following principles upon which most of the law as to the legal effect of a
companies articles of association now rest: 1. No article can constitute a contract between the company and a third party.
2. No right merely purporting to be given by an article to a person in a capacity other than
that of a member, for example, solicitor, promoter o director can be enforced against the
company.
3. That the articles generally create rights and obligations between the members inter se and
the company respectively.
See the case of Rayfield v. Hans where Vaisey J upheld an action against a member by another
member without joining the company in the action. The articles required every member who
intended to transfer his shares to notify the directors who are entitled to take the shares at fair
value. The court held that the obligation to acquire the shares was imposed on the directors as
members and they were obligated to honour the clause.
See the case of Eley v. The Positive Government Security Life Assurance Co. Ltd. [1876] 11
Ex.D. 88.the articles of association provided that the plaintiff acts as solicitor and transacts all
legal business on behalf of the company, he was to be paid all usual fees and charges. The
articles provided that he not be removed and used for breach of contract. The court in upholding
Astbury J’s second proposition held that the plaintiff was not a party to the contact and that was a
matter between the directors and shareholders. The court did not address the fact that Eley
subsequently acquired shares in the company.
New law jurisdictions have bylaws, they are regulatory only and are not contractual. Section 20
only applies in Jamaica Belize and St. Kitts and does not give rise to contractual obligations. See
the case of Rands Hiram v. Walker where the court purported to give contractual effect to
bylaws, it was subsequently discredited by the Supreme Court of Canada. ****
Rights conferred by the articles of association are: 1. The right to vote  Pender v. Lushington
2. The right to protect preferential rights and class interest  Green Halgh v. Arderne
3. The right to be registered and the right to enforce delivery of share certificates in
accordance with the articles.
4. The right to enforce a declared dividend as a legal debt, and if no dividends are declared
then a right to prevent dividend from being distributed otherwise than in accordance with
the articles of association  Wood v. Odessa Waterworks
5. A member has a personal right to prevent alterations in the articles which would
constitute a fraud on the minority.
Alteration of Articles
The Jamaica Companies Act S.7, 9 and 12: - Directors have the power to alter the contract and S.
22 of the legislation provides the procedure to be followed. This constitutes a substantial
corporate change a three-quarters majority is required, for that special resolution, and that
resolution must be forwarded to the Registrar of Corporate Affair. Section 9 of the Jamaica
Companies act provides that subject to the conditions contained in it memorandum a company
may by special resolution alter its article. It follows that shareholders rights although dependent
24
Wallock
upon the articles of incorporation are not enduring and indefeasible, but are liable to
modification or destruction. A shareholder is not entitled to assume that the articles would
always remain in a particular form.
Lecturer:
Date:
Ms. Lesley Walcott
October 16th, 2003.
The Rules of Agency
AUTHORITY
ACTUAL
AUTHORITY
Express Authority
APPARENT/OSTENSIBLE
AUTHORITY
Implied or Usual
Authority
Course of
Conduct
WRITTEN
ORAL
Actual Authority
Actual authority may be express or implied. Express actual authority is derived from the
memorandum of association, articles of association or bylaws depending on the jurisdiction
whereby specific authority may be conferred on an agent orally or in writing in the form of a
resolution.
Implied Actual Authority
This is where actual authority is not defined and therefore needs to be implied or inferred from
the surrounding circumstances. It will be implied from the fact of appointment that the person
has the usual authority which holders of such position usually have. Actual authority whether
express or implied is binding between company and agent as well as the company and others.
See the case of Hely Hutchinson v. Brayhead.88 The common law doctrine of implied actual
authority is supported in the statutory assumption in S 21.(d.) in the Barbados Companies Act
which provides that : - A person held out by a company as a director, an officer or an agent of the
88
[1968] 1 QB 549
25
Wallock
company who has not been duly appointed has authority to exercise the powers and perform the
duties that are customary in the business of the company or usual for such a director, officer or
agent. –
Ostensible/Apparent Authority
This is the authority of an agent as it appears to others. It is often wider than actual authority,
and is the legal relationship between the principal, (the company), and the contractor, (the third
party), created by a representation made by the principal and acted upon by the contractor that
the agent had the authority to enter into a contract of the kind entered into. The principal (the
company) is liable to perform any obligations imposed by such contracts.
Note the following: 1. The agent is a stranger and need not be aware of the existence of the representation.
2. The representation when acted upon by the contractor operates as estoppel, preventing
the principal from asserting that he is not bound by the contract.
3. It is irrelevant whether the agent had actual authority to enter into the contract.
4. The representation may take a number of forms, the most common being conduct,
usually by allowing the agent to act in some way  Acquiescence.
5. The key to apparent or ostensible authority is that the company has created the situation.
See the case of Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. 89 where
Diplock LJ identified four criteria which must be satisfied before apparent authority will
be created: a. A representation made to the outsider that the agent had the authority to enter into
a contract of he kind in dispute on behalf of the company
b. This representation was made by a person who had actual authority to mange the
business of the company either, generally, or with respect to the matters which the
contract relates.
c. The outsider was induced by such representation to enter into the contract
d. The company had the capacity either to enter into a contract of the kind sought to
be enforced or to delegate such authority to an agent to enter into a contract of
that kind.
Constructive Notice
Constructive notice is another obstacle confronting outsiders, whereby outsiders are deemed to
have knowledge of the corporations constitution and related documents which are filed in the
registry. Consequently if those documents impose restrictions on an agent’s authority, the
outsider will be bound by virtue of the operation of the doctrine. An outsider will not be allowed
to plead ignorance. See the House of Lords decision in the case of Ernest v. Nichols90 where the
court stated that the corporate constitution is strict and obligatory on those who deal with the
company.
The Rule in Turquands Case a.ka. The Indoor Management Rule
This is an important qualification introduced to redress the imbalance. This rule states that: 89
90
[1964] 2 QB 480
[1857] 6 H.L. Case 401
26
Wallock
“where persons conduct the affairs of the company in a manner which appears to be in
accordance with the company’s constitution then persons dealing with these agents are
not affected by any irregularities in the internal management of the company.”
For an application of this rule, see the case of Mahoney v. East Holyford Mining co.91 In this
case a bank was held to be entitled to accept cheques drawn and signed by directors in a manner
authorised by the articles and were not obliged to query whether the individual signing the
cheque were validly appointed by the company.
Note the following: 1. The rule does not protect a third party who in fact had notice or knowledge of the
defective authorisation. The onus lies on he who alleges that the third party had the
required notice or knowledge as shown by the case of B. Liggett (Liverpool) Ltd. v.
British Steel Corp.92 where a bank contrary to instructions paid out cheques signed by
one director only. The court held the bank should have made enquiries to satisfy itself
and could not rely on the indoor management rule.
2. The doctrine does not apply if the document the outsider sought to rely on is forged. See
for example the case of Ruben v. Great Fingal Consolidated93. The forged document is
considered a pure nullity and the indoor management rule only applies to irregularities
which would otherwise constitute a genuine transaction. This forgeries ruke has been
abolished by the Barbados Companies Act. S.21 (3)
3. An outsider is precluded from relying on the rule. See the cases of Morris v. Kansen94
and Howard v. Patent Ivory Manufacturing Co.95
Reform
The Barbados Companies Act S.20 abolished the doctrine of constructive notice. See also S. 81,
which provides that: “An act of a director or officer is valid not withstanding any irregularity in his election or
appointment.”
Section 21 is a reflection of the indoor management rule. It is broader in ambit, expressly
overruling the rule with respect to forgeries.
Criminal and Civil Liability
A Company has no soul to be damned and no body to be kicked. In recent times we have had
several highly publicised disasters caused by human error. There are however, several
conceptual difficulties in applying criminal law to corporations: a. The criminal law process is a personal one, evident in the rules relating to
diminished responsibility and the requirement of mens rea, whereas corporate law
is impersonal.
b. Ones notion of punishment is never satisfied with respect to corporations
c. The inappropriateness of certain punishment for example life imprisonment,
hanging, cat-o-nine tails.
91
[1875] LR 7 HL 869
[1986] Ch. 246
93
[1906] AC 439
94
[1946] 1 All ER 586
95
[1888] 38 Ch. D. 156
92
27
Wallock
d. There are some crimes which can only be committed by someone performing
some physical act.
Corporations, like human beings may be made to pay punitive damages. They may be subjected
to administrative sanctions and may even be criminally convicted.
Weaknesses
1. The punitive system is weak, paltry fines are evident in many regional statutes, which do
not correlate to the wrong committed. See for example S.125 (5) in the Jamaica
Companies Act, which imposes a fine of $100.00 on directors.
Lecturer:
Date:
Ms. Lesley Walcott
October 21st, 2003.
2. Another weakness is a personalised sanction satisfying some of a more visceral notion
which demand personal damnation, shame, hurt and humbling contriteness. There is a
difficulty in attaining these goals when the corporation rather than the owner is punished.
In an attempt to circumvent these difficulties, corporate law has devised several themes or
principles of corporate blameworthiness: a.
the identification doctrine or alter ego
b.
agency principles
c.
the imposition of strict liability requiring no mental element or mens rea.
However if the offence is one that requires a mental element such as intention or recklessness
then the identification principle applies. See the Bahamian case of Rabin v. Sunshine
Development: - in this case the villain of the piece was stated to be the alter ego of the company.
The legal distinction between a company incorporated under the companies articles and the
individual human person(s) as the alter ego was highlighted. The court employed the doctrine of
the rule in Turquands case, and the issue was whether Mr. Reid had the power to bind the
company. As stated by Moore J: “he was a character who had a pattern of getting into ladies pants and then into their
pocketbook.”
The court stated that a person who deals in good faith with a representative body of a company,
which is in fact exercising powers of management, is not prejudiced by defects in procedure
which should have been fulfilled before the transaction is effected. Therefore the plaintiff as an
outsider is entitled to rely on the assurances of the defendant???Director.*** Moore J
commented on the fact that the doctrine of separate legal personality has been historically
exploited in the Bahamas so much that an industry of sorts is created and a large measure of legal
factors has to do with companies whose practical as distinct from legal existence hardly extends
beyond the covers of a document folder.
Common Law Test
a.
Identifying mind and will theory. A company as a separate artificial person cannot
commit certain acts which require a human thought or action. See the case of Lennards
Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705 where Viscount Collins stated
that: -
28
Wallock
“a company is an abstraction, it has no mind of it’s own, more than it has a body of its
own. Its active and directive will must consequently, be sought in the person of
somebody who for some purposes may be called an agent but who is really the directing
mind and will of the corporation, the very ego and centre of the corporation.”
In this case the company unsuccessfully claimed protection under S. 502 of the Merchant
Shipping Act of 1894 which provided that a ship owner is liable for damage by fire in the
absence of “actual fault or guilt.” The evidence shows that Mr. Leonard a director of the ship
owning company was aware that the ship was un-seaworthy; his fault was imputed to the
company and as the company failed to discharge the burden of proof that his fault was not the
fault of the company. See the subsequent House of Lords Decision in the case of H.L Bolton
Engineering Co. Ltd. v. T.J. Graham & Sons Ltd [1957] 1 QB 159 wher Lord Denning stated: “a company may in many ways be likened to a human body, it has a brain and nerve
centre which controls what it does. It also has hands which holds the tools and act in
accordance with directions from the centre. Some people in the company are mere
servants and agents who are nothing more than the hands to do the work and cannot be
said to represent the mind or will. Others are directors and managers who represent the
directing mind and will of the company and control what it does. The state of mind of
these managers is the state of mind of the company and is treated by the law as such.”
In the subsequent House of lords case of Tesco Supermarkets v. Nattrass [1971] 2 All ER 127
Lord Reid stated that: “a living person has a mind which can have knowledge or intention or be negligent and
he has hands to carry out his intention. A corporation has none of these, it must act
through living persons though not always one and the same person. Then the person who
acts is not speaking or acting for the company, he is acting as the company and his mind,
which directs his acts, is the mind of the company. He is an embodiment of the company
or one can say he hears and speaks through the persona of the company.”
Note the following: 1. Who will be identified with the company? See the case of Meridian Global Funds
Management Asia Ltd. v. Securities Commission [1995] 2 AC 500 which involved an
alleged breach of securities legislation, the defence turned on whether the company had
knowledge of the activities of the investment managers. Pay attention to Lord Hoffman’s
judgement which addressed the problem of the attribution of knowledge or mens rea to a
company. He also suggests that the directing mind and will theory will not always be
appropriate. Examine his primary and secondary rules of attribution and determine
whether or not he provides a solution.
2. On the issue of corporate theft, see your respective larceny or theft legislation. In
Barbados, theft is: “the appropriation of property of another with the purpose of permanently depriving
another of that property.”
See the cases of Perlberg & Obrien [1982] Crim. LR 829, AG’s Ref. # 2 of 1982 [1984]
QB 624 and R v. Philipou (1989) 89 Cr. App. R. 290 which deal with the question of
whether one can steal from oneself. See Virgo’s article “Stealing From The Small
Family Business” [1991] CLJ 464. See the case of Rv. Rozeik [1996] 1 WLR 159 where
Mr. Rozeik received two cheques from two companies and was convicted of obtaining
29
Wallock
them dishonestly by defrauding the company. The issue was whether his guilty mind
could be imputed to the company by virtue of his office. Please note Legatt LJ stated: “in cases where the company is the victim the person(s) who stand for its state of
mind may differ from those who do so in cases where he company is charged with
the commission of the criminal offence.”
3. Corporate Manslaughter: See AG’s Reference # 2 of 1999 [2003] WLR 195. Please note
that the broader mention rule was rejected in this corporate manslaughter case.
4. See the case of R v. IRC Haulage [1944] KB 551 where the court of criminal appeal held
that the liability of a company for a criminal act of an individual identified with the
company depends on the nature of the charge.
Directors
The companies acts empower the directors to manage the business and affairs of the company96,
subject to a unanimous agreement of the shareholders97 . The companies acts provide the
statutory power which reflects the common law, and the common law position obtains in
Jamaica and Belize.
Barbados and other new law jurisdictions (like Bahamas and Trinidad and Tobago) gives a twofold duty to directors. S.95(1)(a) under a duty to act honestly and in good faith with a view to
the best interests of the company. S.95(1)(b) places directors under a duty of care duty and skill
that a reasonable prudent person would exercise in comparable circumstances. S.95(2) provides
that where the director exercises his fiduciary duty to the company he is to have regard to the
“interest of the employees in general and to the shareholders.”
DIRECTORS
Barbados
Bahamas
Lecturer:
Date:
STATUTE
Barbados
Trinidad & Tobago
Bahamas
S. 58
S. 60
S.85
S. 95 (1)
S. 99
S. 86
Ms. Lesley Walcott
October 23rd, 2003.
Nature of Fiduciary Duties
The director’s power to mange is not unfettered. Limitations are imposed on the exercise of his
duty in the form of statute and the common-law. In new law jurisdictions, directors are under a
statutory obligation to act honestly and in good faith with view to the best interest of the
company. See for example S. 95 of the Barbados, S. 99 Trinidad & Tobago, S. 86 Bahamas
Companies Acts. The statutory requirement that directors act honestly and in good faith with a
view to the best interests of the company summarises the notion that directors are fiduciaries
enabling their conduct over the company property to be tested against equitable standards. The
strengths and weaknesses of the standard (the ex statutory standards) to act in good faith lie in its
96
97
Barbados S 58 OECS S. 58
Trinidad and Tobago S 15, Bahamas S 85-6, Barbados S. 95, Trinidad and Tobago S. 99
30
Wallock
generality. It is a broad statement about what is expected from directors and officers. In new law
jurisdictions such as Trinidad & Tobago, Barbados and the Bahamas which refer to “directors
and officers” statute began this: - Officers defined in S. 2 as CEO, Corporate Secretary,
Treasurer. St. Kitts has a curious definition of an officer as a director or liquidator of the
corporation. It’s weakness arises from the difficulty of what constitutes prudent behaviour, good
faith and the best interest of the corporation.
Rule 1: - (Belize and Jamaica) Directors when exercising their directorial power must act bona
fide in what they consider, not what the court considers is in the best interest of the company.
See the case of Mills v. Mills [1958] 60 CLR 150 where as a result of tension between the
managing director of the company who was also a large ordinary shareholder and his nephew
who was a director and the holder of a large number of preference shares. The managing
Director utilised his votes and those of family members and resolved that certain accumulated
profits be capitalised and distributed to ordinary shareholders in the form of bonus shares. This
was designed to ensure that the managing director continued to control the company. Latham CJ
noted the difficulty of applying the test of “acting in the interest of the company” where there are
different classes of shares, for the character of the act must necessarily adversely affect the
interest of one class of shareholders while benefiting the other. In such circumstances he states,
the question becomes what is fair between the different classes of shareholders i.e. what is the
moving**** cause. He held that the exercise of the power was proper.
Rule 2: - directors must not act for any collateral purpose, the duty to exercise powers for a
proper purpose requires that those powers must be exercised for the purpose for which those
powers were granted. If Directors issue shares of the company for the purpose of conserving
their own power, the resolution concerning the shares would be set aside or an injunction would
be granted. Before the court will intervene it must be established that the director acted from an
improper motive or arbitrarily and capriciously. See the case of Hogg v. Cramphorn Ltd. [1969]
1 All ER 977 where directors attached special voting rights to preference shares so as to thwart a
hostile take-over bid. The director believed that the acquisition of control by a prospective takeover bidder would not be in the best interest of the company or its staff. Nevertheless the court
held it was improper use of the directors power and while accepting that the board acted in good
faith, they noted that the primary purpose of the scheme was to ensure control of the company.
Rule 3: - this relates to contracts between a director and the company. A contract made by a
company with one of its directors or with a company or firm in which he has an interest is
voidable at the instance of the company. See the case of Aberdeen Rly. Co. v. Blaikie
Bros.[1854] 4 MAC 461, where an arrangement to manufacture iron chains was set aside on the
ground that the chairman of its board of directors was the managing partner of that company.
The rationale for this was that in the discharge of duties one must not place oneself in a situation
where your interests and duty conflict, and in accordance with equity, a director is prohibited
from dealings unless he can point to full disclosure. Trinidad & Tobago S.93 and Barbados S. 86
& 90.
A director or officer of a company who is a party to a material contract or proposed material
contract with the company must disclose in writing or request to have entered into the minutes
the nature and extent of his interests.
Note the following: -
31
Wallock
1.
2.
The onus is on the director to point to full disclosure, failure to satisfy this
requirement may lead to a loss of office, avoidance of the contract, or loss of profits.
It is possible under S. 94 of the Trinidad & Tobago and S. 90 of the Barbados
Companies Act for a director to give general notice.
Bribes
See the case of Mahesan v. Malaysian Housing Society [1978] 2 WLR 444
Remedies: 1.
rescission of contract
2.
an action for money had and received (The company can sue him as a constructive
trustee of the bribe money.)
3.
damages
4.
the official is liable to instant dismissal and will forfeit any claim he may have to
commission or bonus relating to the transaction concerned
Rule 4: - directors are precluded from making any secret profit and from misusing corporate
information and opportunity. Corporate fiduciaries and officers normally consider a range of
commercial opportunities as a function of their office. Where directors acquire for themselves
property rights which they are regarded as holding in equity on behalf of the company, they will
be held to be in breach of their strict fiduciary obligation. One must determine the point at which
such an opportunity may be said to belong to the company. If an executive resigns from the
corporation, at what point does that implicit contract with respect to obligations between the
company and the executive terminate? At what point is former employee free to capitalise on
information gleaned while in the services of the corporation? The implicit contract will in
general extend beyond the termination of the employment. See the case of Regal (Hastings) Ltd.
v. Gulliver 98[1942] 1 All ER 378 where Viscount Salkey*** laid down the conflict test. The
general rule of equity is that: “no one who has duties of a fiduciary nature to perform is allowed to enter into
agreements in which he has or can have personal interest conflicting with the interest of
those he is bound to protect.”
See the case of Peso~ Silver Mines Ltd. v. Cropper [1966] DLR (2nd ed.) 1 where the strict rule
was relaxed because there was a bona fide vote of the board of directors, thus the court held that
the directors did not violate the conflict rule. Therefore, a director is free to make an investment
on his own account after the company has considered the proposition and bona fide decided
against it. It is important to note that the principle is dependent upon informed consent. See
Canadian Aero Services Ltd. v. O’Malley [1973] 40 DLR (3rd) 371 where Laskin J identified the
relevant factors required in determining standards of honesty, loyalty and good faith: 1.
the position held
2.
the nature of the corporate opportunity “its rightness or specificity” and the directors
or officers relationship to it.
3.
the amount of knowledge possessed
4.
the circumstances in which the knowledge was obtained
5.
was the knowledge special and private?
98
[1967] 2 AC 134 (see work sheet 5)
32
Wallock
6.
the circumstances under which the relationship was terminated, for example,
retirement, resignation, sick-leave.
It is clear that a criterion for business opportunity is property rights. Economic theory suggests
that if an executive appropriates an investment opportunity for private account which was
anticipated by the participants in the capital market that gain belongs to the firm. In the case of
Industrial Development Consultants Ltd. v. Cooley [1972] 2 All ER 162, Cooley was the
managing director of the company and as a representative of the company he took part in
negotiations with the gas board which said expressly that they did not want to do business with
the company. They wanted to do business with Cooley in his private capacity. Cooley resigned
and Roskill J held that he was accountable to the company for the whole of his benefit under the
contract.
Lecturer:
Date:
Ms. Lesley Walcott
October 28th, 2003.
Duty Of Care Diligence and Skill
In the case of Re City Equitable Fire Ins. [1925] Ch. 407 Justice Romer outlines the duty as
follows: 1. A director need not exhibit a greater degree of skill than that usually associated with
persons in that position.
2. A director need not give continuous attention to the affairs of the company, his duties are
of an intermittent nature to be performed at periodical board meetings.
3. A director is justified in the absence of suspicion to delegate or trust some other official.
See also the case of Re Brazilian Rubber Plantations & Estates Ltd. [1911] 1 Ch. 425 where it is
noted that if the director has special knowledge he must give the company the benefit of it.
In the case of Re Cardiff Savings Bank, Marquis of Bute [1892] 2 Ch. 100 where the director
attended one board meeting in 38 years, the court found that he was not in breach of his duty of
care diligence and skill.
The case of Re Pavlides v. Jensen [1956] Ch. 565 demonstrates that mere negligence is
insufficient to constitute a breach of care diligence and skill. The sale of an asset at under value
will not without more be a breach of care diligence and skill. There must be mala fides on the
part of the director. He must have benefited from the sale at under value to establish a breach.
Dovey v. Cory [1901] AC 477 examined the third prong of Justice Romer’s directors duties. The
court found the director was entitled ton rely on statements made by the chairman.
The directors can also protect themselves through indemnity insurance, or they can insert a
clause in the bylaws or articles to protect themselves from liability. Barbados Companies Act S.
101. In the case of Re Brazilian Rubber Plantations & Estates Ltd. [1911] 1 Ch. 425 there was
an indemnity clause in the articles of association that was given effect to.
33
Wallock
Corporate Finance
Equity Financing
The term equity is applied to the shares of a corporation. Justice Falwell in the case of Re
Borlands Trustees gave the definition of a share, he stated: “A share is the interest of a shareholder in the company measured by a sum of money for
the purpose of liability in the first place and of interests in the second, but also consisting
of a series of mutual covenants entered into by all the shareholders inter se in accordance
with S.14 of the Companies Act of 1985.”
The Jamaica Companies Act S. 2 defines a share as “A share in the share capital of a company.”
See also S. 73 which provides that “The share or other interest of a member in a company shall
be personal estate transferable in the manner provided by the articles of a company and shall not
be in the nature of a real estate.”
Barbados S. 26 section has similar provisions and provides that shares in a company are personal
estate and are not in the nature of a real estate.
Share Certificates
A share certificate is an instrument under seal of the company that the person therein named is
entitled to a certain number of shares. It is not a negotiable instrument. In Jamaica a share
warrant to bearer is permissible, this is a certificate under the seal of the company stating that the
bearer of the warrant is entitled to a certain number of paid up shares. A share warrant to bearer
is a negotiable instrument. See the Jamaica Companies Act S. 82.
Classes of Shares
The shares of a corporation may be sub-divided into various classes and the relative rights of the
holders of these various classes of shares are usually prescribed in the articles of association.
Preference Shares
1. These rank first in priority
2. They have attached to them certain preferences or rights over the holders of other classes
of shares.
3. Holders of this type of security are usually entitled to dividend paid at a fixed predetermined rate; usually expressed as a percentage of the nominal value of the share.
This nominal value99 has been abolished in new law jurisdictions such as Barbados,
Trinidad & Tobago, St. Lucia. The value of shares is determined by the market value.
There is also a book value – this is what the a/c ********says the value is. The nominal
percentage is fixed and cannot be increased no matter how large the companies profit
may be unless, the shares are accompanied by an express right to participate in the
surplus profits.
4. Preference shareholders rank equally with ordinary shareholders with respect to the
repayment of capital on winding up unless expressly governed by the bylaws or articles
of association.
99
S. 26(2)
34
Wallock
5. Preferred dividends may be and usually are cumulative, in other words, if they are not
paid in a particular year, they accumulate and are payable in subsequent income years.
The arrears of preferred dividends are not a debt of the company, but represents a priority
with respect to future dividend distribution.
6. Where the preferred dividend is non-cumulative, it is payable only out of the profit of
that particular year. There is no allowance for the carrying forward of arrears.
Shareholders Rights
1. The right to vote
2. The right to dividends
3. The right to a return of their capital on winding up.
Income tax legislation in the region recognises the existence of preference shareholders. When a
company pays dividends to preference shareholders, they are entitled to deduct it from their
profits in the computation of its accessible income. The preference shareholder may be seen as a
hybridic investor, he lies somewhere between a creditor and an ordinary shareholder. See S. 10
of the Barbados Income Tax Act.
Lecturer:
Date:
Ms. Lesley Walcott
October 30th, 2003.
Common or Ordinary Shares
This is the residual category, payment of capital and dividends is postponed. If the company
prospers, the increase in value will accrue to the ordinary shareholders since the preferred shares
are normally fixed in value. Similarly if the company suffers, on liquidation the common
shareholders will bear the brunt of the losses since the preferred shareholders will normally have
returned to them the full issue price of the preferred shares and any arrears in dividends before
the ordinary shareholders receive anything.
Note: 1. This category normally carries the majority of voting rights at general meetings
2. If the issued capital does not differentiate then the issued shares are ordinary shares
ranking equally. See S. 27 of the Barbados Companies Act.
3. Ordinary shareholders are entitled to dividends if and when declared.
4. They are entitled to share in the surplus assets of the company if and when wound up.
Other Types of Shares
1. Watered Shares: - These are where shares are issued for labour, services or property
which is less than the par value of the share, or were less than the value attributed by the
director to the labour services or property. (This applies in old law jurisdictions like
Jamaica and Belize.)
2. Redeemable Shares: - If these are authorised by the article or bylaws, a company
may issue redeemable shares. The shares may be redeemed or bought back out of the
profits of the company. If there are more liabilities than assets, then the company is
prohibited from purchasing or redeeming the shares. See S.40 Barbados and S. 57 of
Jamaica Companies Acts.
3. Bonus Shares: - These are shares given as extra consideration for what is received by
the corporation.
35
Wallock
4. Discount Shares: - These are where shares are issued for a sum of money that is less
than normally obtained by such shares as indicated by their par value. See for example S.
58 of the Jamaica Companies Act. The Barbados statute prohibits the issuing of shares at
a discount.
5. The Golden Share: - this share is associated with state ownership where in the
process of privatisation the government retains a percentage of the share capital.
Rules of Constitution
1. There is no implied condition that all shares rank equally.
2. A presumption of equality arises in the absence of express provision to the contrary.
Barbados S. 27. See the House of Lords decision of Birch v. Cropper [1889] 14 A.C.
525 where the articles of the company provided for only one class of shares i.e. ordinary
shares. Preference shares were subsequently created and the articles amended to provide
that preference shares are entitled to a dividend of 5% taking preference over the
ordinary shares. On winding up the issue was what method should be used to distribute
corporate assets between the two groups. The House of Lords held that in distributing
the surplus assets, preference shareholders were entitled were to participate rateably with
the ordinary shareholders, in proportion to the nominal amount of shares held. Therefore
where the share issue does not differentiate between the rights of the classes of shares
with regard to: a. dividends and
b. return of capital and participation in surplus capital and
c. voting
then shareholders are entitled to participate rateably in proportion to shares owned.
3. If shares are expressly divided into classes, it is a question of construction in each case as
to what the rights of each class of shareholders are. See the case of Scottish Insurance
Corp. v. Wilson & Clyde Coal Co. [1949] AC 512
4. Where a preference is bestowed in respect of dividends, the return of capital or voting,
then this preference does not extend beyond that particular right. The preference is
exhaustive and the presumption of equality remains in respect of the remaining residual
rights. See．．
the
case
．
．
．
． of Re Bridgewater Navigation Co. [1891] 2 Ch. 317 as well as Will
v. United Lankat Plantations [1914] AC 11 where Falwell LJ stated that: “The attribute of a preference share are limited and defined on its birth, it has a
preference and such a preference as is given to it by resolution.”
Both the Court of Appeal and the House of Lords rejected the argument that the
preference shareholders are entitled to participate in dividends equally with the ordinary
shareholders after they receive their cumulative 10%. See the case of Re William
Metcalf
．．．
．
．
．
& Sons Ltd. [1933] Ch. 132 which ruled that the principle in Will v. United Lankat
Plantations100only applied to dividend rights and had no application to capital rights. So
preference shareholders may be seen as non-participating with dividends but participating
with capital, this decision removed by Scottish Insurance Corp. v. Wilson & Clyde Coal
Co.101 as well as Prudential Assurance Co. Ltd. v. Chatterly Whitfield Colliers [1949] AC
512. These decisions arguably make preferred shares a less secure form of investment.
100
101
[1914] AC 11
[1949] AC 512
36
Wallock
5. A company may be empowered to give preference shareholders a share in the profits of
the company in addition to preference dividends, this is dependent upon the bylaws and
articles of association.
6. Where shares are entitled to participate in surplus capital on a winding up, prima facie,
they participate in all surplus assets. See the case of Dimbula Valley (Ceylon) Tea Co.
Ltd. v. Laurie [1961] Ch. 353 where Buckley LJ rejected the contention that the
companies undistributed profits were automatically the sole and exclusive property of the
ordinary shareholders. He construed the preference shareholders rights provisions as
extending to these funds except in so far as they formed part of the subject matter of the
appropriate dividend resolution passed at the commencement of liquidation.
7. If preference dividends are provided for, it is presumed to be cumulative. See the case of
Webb v. Earle [1875] LR 20 Eq. 556. This presumption is rebuttable.
8. There is a presumption that preferential dividends are payable only if declared.
The Rules on Capital Maintenance
The fundamental principle is that a company must maintain its stated or nominal capital, the
share capital fund must be preserved and should not be diminished, otherwise than by
expenditure specified in the companies memorandum. The law therefore has laid down certain
rules to ensure the preservation of this fund.
1.
Issuing share at a discount: - See the Jamaica Companies Act S. 58
a. The issue of shares at a discount must be authorised by a resolution passed in a
general meeting of the company and must be sanctioned by the court
b. The maximum rate of discount must be specified in the resolution.
c. The company must have been in business for at least a year.
d. The discounted share must be issued within one month after the date on which the
issue is sanctioned by the court or within the extended time allowed by the court.
See the case of Oregum Gold Mining v. Roper [1892] AC 1125, this is a House of
Lords decision which concerned the issue of preference shares so that the preference
shareholders were to be relieved of liability to pay up shares in full. The House of
lords found that this was beyond the companies power. Lord MCNaghten stated that:
“The rationale for this rule is that the requirement is based on limited liability
and the investor purchases his interest on this understanding. It operates
therefore as a condition precedent which cannot be dispensed with.”
Discounted shares are not allowed in new law jurisdictions see for example Barbados
Companies Act S. 26. This rule therefore applies in old law jurisdictions such as Jamaica
and Belize.
Maintenance of Capital and Rights of Shareholders:  Examinable
On the subject of what is examinable, Work Sheets 2 and 4 seem to be very examinable as well.
Lecturer:
Date:
Ms. Lesley Walcott
November 4th, 2003.
37
Wallock
Consideration Other Than Cash
The question is whether this represents a means of evading the rule against issuing shares at a
discount. The decision of Re Wragg [1897] 1 Ch. 796 states that the value of the consideration
cannot be enquired into unless impeached on the ground of fraud. See Spargo’s Case [1873]
LR8 Ch.App. 407 where a lease was sold to a company incorporated to purchase the lease, and
the company credited the purchase price against the vendors liability as a payment against the
shares for which he had subscribed. The court held that this operated as a payment for cash.
See the case of Re White Starline [1938] Ch. 458, which states that the consideration given by
way of payment must bona fide, be regarded as representing the sum which the payment is to
discharge. It is evident therefore that the issuing of shares for consideration other than cash can
be a means to avoid the stringent rules on the maintenance of capital.
Shares Issued at a Premium
There is no prohibition against the issuing of shares at a premium, in other words, in excess of its
nominal or par value. Statute ensures the premium is treated as capital and not as income or
profit by stipulating the amount to be credited must be in a separate section on the companies
account headed “Share Premium Account”. See the Jamaica Companies Act S. 56 ss.(1) & ss
(2).
Note the following: 1.
By virtue of the capitalisation of the company, a rigidity is placed in the corporate
structure.
2.
It represents a special statutory reserve as distinct from profits and revenue reserves.
3.
Payments out of this account are analogous to a reduction of capital.
4.
A return of the companies share capital in the form of dividends is prohibited.
See the cases of Henry Head & Co. Ltd. v. Roper Holdings Ltd. [1952] Ch. 124 and Shearer
(Insp. of Taxes) v. Bercain Ltd. [1980] 3 All ER 295. The case of Shearer (Insp. of Taxes) v.
Bercain Ltd.102 involved an amalgamation whereby the share capital in one company was
exchanged for the issue of shares in another company at a lower value. The issue was whether
the excess had to be capitalised. The Inland Revenue claimed the excess was subject to tax
because it was distributable. The court found the company was under an obligation to capitalise
by setting up a share premium account and the “profit” as such was not subject to tax. This
decision illustrates that share premium accounts may operate to reduce ones tax liability.
Pre-emptive Rights
This is a first option restriction and it operates so as to maintain the balance of power between
respective shareholders. It is a right given to shareholders to subscribe for any new shares that
the company issue in proportion to their existing share holding. See the Barbados Companies
Act S. 34 which commences “If the articles so provide.” Work Sheet 6 p.2-3 lists the reasons for
Restrictive Provisions or (Pre-emptive rights), these are: -“
1. To prevent intrusion of undesirable business associates
2. To preserve the relative interests of the owners
3. To resolve deadlock (or as a control device)
102
[1980] 3 All ER 295
38
Wallock
4. To comply with the definition of “private company” in legislation
5. To ensure continuity of the business
6. To provide a market at an acceptable price, for shares”
See the case of Tett v. Phoenix Property Investment Co. Ltd. [1984] BCLC 599 where article 5 of
the company’s articles permitted a member to transfer his shares without prior authorisation from
existing members. However, a shareholder could not transfer his shares to an outsider if any
member, or the wife, husband or parent of a member was willing to purchase the shares. The
shares were transferred to the plaintiff without considering the interest of the members. Justice
Vinn Lott found that though the transfer was in breach of the articles, it was wholly complete as
between the parties so as to confer a beneficial interest in the plaintiff.
Shareholders rights are dependent upon the articles of association in old law jurisdictions.
Equity Financing
Share Holders Rights
Shareholders rights are protected by: 1. Common law
2. Statute
3. Contract
Contract: Variation of Rights Clause
This is a protective provision inserted in the articles of a company or bylaws prescribing the
conditions, which must be, fulfilled in order to later the rights attached to a particular class of
shares. It is an internal restriction. Note however, that an insertion of such a clause may in itself
amount to an alteration of substantive rights, where there was no previous provision. The
effectiveness of a variation of rights clause is dependent upon whether a company is bound to
adhere to the conditions stipulated in the variation of rights clause. One must examine two
conflicting decisions in the cases of Fischer v. Easthaven Ltd. [1964] NSWR 261 and Crumpton
v. Morrine Hall Pty. Ltd. [1965] NSWR 240. In the case of Fischer v. Easthaven Ltd.103the
company failed to comply with a variation of rights clause contained in the company’s articles.
The company attempted to hold a general meeting to alter the rights including one right, which
affected the plaintiff. The court held that the variation of rights clause was not binding on the
company. However, in Crumpton v. Morrine Hall Pty. Ltd.104 the variation of rights clause was
upheld as binding on the company on the ground that the action of the company operated as a
fraud on the minority.
In the decision of Cumbrian Newspapers Group Ltd. v. Cumberland & Westmoreland Herald
Newspaper & Printing Co. Ltd. [1986] 2 All ER 816105 Scott J commented on the variation of
rights clause and he contends that it provides only a limited protection to the shareholders. See
the decision of Greenhalgh v. Arderne Cinemas [1951] Ch. 286106 where Vaisey J stated that: “The word class is not a technical word, but the rights of persons in the same class must
be capable of being ascertained by a common system of valuation.”
103
[1964] NSWR 261
[1965] NSWR 240
105
[1987] Ch. 1, [1986] 3 WLR26, [1986] BCLC 286
106
[1950] 2 All ER 1120
104
39
Wallock
In Cumbrian Newspapers Group Ltd. v. Cumberland & Westmoreland Herald Newspaper &
Printing Co. Ltd. [1986] 2 All ER 816107 Scott J had to determine whether there had been a
variation of rights clause attached to a class of shares. He stated that the: “Rights or benefits which may be contained in articles may be divided into three different
categories.
1. First, there are rights or benefits which are annexed to particular shares.
Classic examples of rights of this character are dividend rights and rights to
participate in surplus assets on a winding up. And the right to vote…
2. A second category of rights which may be contained in the articles (although it
may be that neither ‘rights’ nor ‘benefits’ is an apt description), would cover
rights or benefits conferred on individuals not in the capacity of members or
shareholders of the company but, for ulterior reasons, connected with the
administration of the company’s affairs or the conduct of its business. For
example the tenure of directors. Eley v. Positive Government Security Life
Assurance Co Ltd108 was a case where the articles of the defendant company had
included a provision that the plaintiff should be the company solicitor. The
plaintiff sought to enforce that provision as a contract between himself and the
company. He failed. The reasons why he failed are not here relevant, and I cite
the case only to draw attention to an article which, on its terms conferred a
benefit on an individual but not in the capacity as a member or shareholder of
the company.
3. This category would cover rights or benefits that, although not attached to any
particular shares, were nonetheless conferred on the beneficiary in the capacity
of member or shareholder of the company.
The rights of the plaintiff under the articles 5, 7,9 & 12 fall, in my judgment, into this
category. (“This category” being category three.)”
It is contended that this decision represents a widening of the definition of class rights.
What Amounts To a Variation or Abrogation of Class Rights
The courts unwillingness to interfere in the internal management of the company is evident in the
restrictive interpretation of variation. See the case of Adelaide Electrical Co. v. Prudential
[1933] All ER 82 where the place of the payment of a fixed preferential dividend was changed
from England to Australia, the Australian £ was less than the English £ causing a decrease in the
value of dividends paid to preference shareholders. The court found no abrogation of preference
shareholders rights.
In the case of Greenhalgh v. Arderne Cinemas [1951] Ch. 286109 a subdivision of one class of
shares was held not to amount to a variation of rights, despite the fact that the variations altered
to company’s voting equilibrium.
In the case of White v. Bristol Aeroplane Co. Ltd. [1953] Ch. 65110 the Court of Appeal held the
proposed issue of new capital did not affect the rights and privileges of existing preference
107
[1987] Ch. 1, [1986] 3 WLR26, [1986] BCLC 286
(1876) 1 EX D 88
109
[1950] 2 All ER 1120
110
[1953] 1 All ER 40, [1953] 2 WLR 144
108
40
Wallock
shareholders. The courts have drawn a distinction between the rights and the value or the
enjoyment of those rights. See the cases of White v. Bristol Aeroplane Co. Ltd. [1953] Ch. 65111
and Greenhalgh v. Arderne Cinemas [1951] Ch. 286112. Evershed MR said in the case of White
v. Bristol Aeroplane Co. Ltd. that: “There is to my mind a distinction, a sensible distinction between an affecting of the
rights and an affecting of the enjoyment of the right.”
Note that there is no need to comply with a variation of rights clause where there has been a
mere alteration of the enjoyment of the right.
See the House of Lords decision in the case of Re House of Fraser plc [1987] BCLC 293 where
the company at an extraordinary general meeting passed a special resolution reducing the capital
of the company and paid off and cancelled its cumulative preference shares. No class meeting of
the preference shareholders had been held, and the preference shareholders argued (held) that
this failure contravene the articles of the company. The House of lords held there had been no
variation of rights.
****Mention was made that Work Sheets 5, 6, & 7 are in fact linked****
Lecturer:
Date:
Ms. Lesley Walcott
November 5th, 2003.
Alteration of The Articles of Association…
Forms of Corporate Action
There are three forms of corporate action: 1.
Personal
2.
Representative
3.
Derivative
Personal Action
This is brought by an individual shareholder who has been wronged, and wishes to recover on
his own behalf. Such an action may be undertaken by a shareholder so as to restrain a company
from performing an ultra vires act. It is also appropriate for the vindication of contractual rights
conferred on a shareholder by the Jamaica Companies Act S. 22 or S14 ***. Authority for this is
the case of Pender v. Lushington (1877) 6 Ch.D 70 where the shareholders right to vote was
abrogated, the shareholder was held to be entitled to have his vote counted and to compel the
observance of the articles of association.
Representative Action
This is an appropriate action where a shareholder brings an action on behalf of himself and
remaining shareholders to enforce collective personal rights. The relief sought is beneficial to all
the shareholder and any judgment obtained binds all the shareholders represented. This prevents
duplicity of action  (See the Rules of the Supreme Court Ord 15 Rule 12)
111
112
[1953] 1 All ER 40, [1953] 2 WLR 144
[1950] 2 All ER 1120
41
Wallock
Derivative Action
Where a company has been injured by some wrongdoing, a shareholder has also arguably been
injured throughout the diminution in the value of their shares. This is traceable to the corporate
injury. The courts followed by statute have developed a derivative action whereby a shareholder
is permitted to bring an action to rectify a wrong committed against a company for which
management did not seek redress, perhaps because management or one of their members were
the alleged wrongdoers. Under a derivative action, a shareholder on behalf of a corporation
brings an action which is derived from the companies cause of action. This is an indirect action
in contrast to a personal action which is direct.
Note the following: 1.
A derivative action cannot be brought by a shareholder who participated in the
wrongdoing.
2.
Judgment is given in favour of the company. The individual plaintiff or applicant
does not directly benefit.
3.
The company must be joined in the action and must indemnify the shareholder who
acted on its behalf if the action is successful, or if it was reasonable and prudent in the
circumstances.
4.
If the company asks the court to strike out a derivative action prior to the
commencement of proceedings, the action will be allowed to continue only if
allegations in the statement of claim justify a derivative action and a prima facie case
is proved the authority for this is Prudential Assurance Co. Ltd. v. Newman Industries
Ltd.(No. 2) [1981] Ch. 257113.
Exceptions to The Rule In Foss v. Harbottle
1.
2.
3.
4.
Ultra vires: - In cases where the act complained of is ultra vires the company, the Foss
v. Harbottle114 rule has no application because there is no question of the transaction
being confirmed by any majority 115. See the case on point Russell v. Wakefield
Waterworks Co. (1875) LR 20 Eq. 474.
Individual or Personal Rights: - The rule has no application where the personal or
individual rights of members have been infringed, if the wrong done is not to the
company but to the member. The problem with this exception is that the line between a
personal action and a derivative action is not clear or settled. And, the shareholder who
brings his suit believing he has a personal right of action may be confronted with the
ruling that the wrong is not a wrong to him but to the company.
Special Majority or Special Resolution: - Where the activity undertaken must be
sanctioned by a special resolution, a shareholder is entitled to apply to the court to
restrain the breach of the article. The shareholder can sue by way of representative
action. Note that if the breach was actually committed, he can sue in his personal
capacity on the basis of his contractual rights.
Fraud on the Minority: - Where the activity amounts to fraud on the minority and the
wrongdoers are in control of the company, the rule in Foss v. Harbottle116in favour of the
aggrieved minority who are entitled to bring a minority shareholders action on behalf of
113
[1980] 2 All ER 841, [1980] 3 WLR 543, [1982]Ch. 204
(1843) 2 Hare 461
115
See Work Sheet 7 p. 5
116
(1843) 2 Hare 461
114
42
Wallock
themselves and others. This is the most popular exception, and most commentators
argue, the only true exception. Note, the procedure is derivative and in order for the
plaintiff or applicant to succeed he must first furnish prima facie proof that: 1.
There was fraud on the minority, and
2.
The perpetrators were in a position of control of the company.
Categories of Fraud
1.
2.
3.
Appropriation of Corporate Property:  Cook v. Deeks [1916] 1 AC 554117 and
contrast with the decision of Regal (Hastings) Ltd. v. Gulliver (1942)[1967] 2 AC 134118.
The case of Cook v. Deeks [1916] 1 AC 554119 involved an un-ratifiable misappropriation
of corporate assets, while Regal (Hastings) Ltd. v. Gulliver (1942)[1967] 2 AC 134120
involved ratifiable profit making. Note that where majority shareholders compromise
litigation commenced by the company, this will amount to an appropriation of corporate
property. Menier v Hooper’s Telegraph Works (1874) 9 Ch. App. 350121.
Negligence: 
Mere negligence is insufficient, see for example the case of
Pavlides v. Jensen [1956] Ch. 565122 which involved a gross undervalue of a corporate
asset by some £800, 000.oo, nevertheless, the action was held to be ratifiable. However,
if the negligence is self-serving, the action is not ratifiable as shown by the case of
Daniels v. Daniels [1978] Ch. 406123.
Abuse of Power:  Where directors act for an improper purpose, that is in mala fides
that cannot be ratified, Cook v. Deeks. Note however, that a bona fide exercise of power
for a collateral purpose is ratifiable as shown by Hogg v. Cramphorn Ltd. [1969] 1 All
ER 977.
At common law there were problems of procedure as it was often unclear whether it was a
personal, derivative or representative action. If the party gets past this hurdle, the claimant then
has to determine whether the action is brought under: 1. ultra vires
2. Infringement of personal rights
3. Special majority or
4. Fraud on the minority.
The matter could still be thrown out at this stage, but if the claimant succeeds what was available
was an equitable action for winding up. A claimant whose rights were infringed, may not want
the company wound up, he could simply want the infraction rectified. The Jamaica Companies
Act S. 196 relaxed the rule which required a just and equitable winding up, however, S. 196 was
read along with S.203 and as a result there was very little flexibility in applying S. 196.
117
[1916-17] All ER Rep.285
[1942] 1 All ER 378
119
[1916-17] All ER Rep.285
120
[1942] 1 All ER 378
121
[1874-80] All ER Rep Ext 2032
122
[1956] 2 All ER 518, [1956] 3 WLR 224
123
[1978] 2 All ER 89, [1978] 2 WLR 73
118
43
Wallock
Procedural Problems Which Arose Under the Common
Law
STAGE I
STAGE II
1. Personal
STAGE III
1. Ultra Vires
1.
Just
and
equitable winding
up
2. Personal Action
2. Derivative


2. Oppression had
to be shown
3. Special Majority
3. Representative
4. Fraud on the Minority
(If the action is
improperly
brought
under any of the
actions at Stage 1 then
the courts throw it out
at this stage.)
(If the action is improperly
classified under any of the actions
at Stage 2 then the courts could
throw it out at this stage.)


Thrown Out
Thrown Out
(Altered by statute Jam.
S. 196)
See the case of Scottish Co-operative Wholesale Society Ltd v. Meyer [1959] AC 324124 where
the court said to prove oppression, the conduct had to be harsh, burdensome and wrongful.
The difficulty in showing oppression is shown by the case of Windoors v. Bryan where a director
bought a house, an apartment and a racehorse with corporate funds, and held no meetings with
shareholders. The court found that there was no oppression.
New law jurisdiction for instance in Barbados, the Companies Act S. 225- 228 removed the
restrictive requirement of “shareholders”, and replaced it with “complainant”, and created a wide
range of actions see S. 228. Oppression was relaxed and anything that is 1. “unfairly prejudicial”
or 2. “unfairly disregards your interest” and 3. oppression is still included.
The Companies Acts also indemnify the shareholder as to the cost of bringing the proceedings.
Barbados S. 230 and Trinidad and Tobago S. 242. (Trinidad and Tobago S.240 ???)
124
[1958] 3 All ER 66, [1958] 3 WLR 404.
44