DEFINITION OF COMPANY:
The Companies Act Cap 110 definition section states that “company” means a company
formed and registered under the Act or an existing company.
The companies Act does not sufficiently define what a company is but authors have developed a
definition of a company. Professor David Bakibinga in his book company law in Uganda at
page 2 defines a company as an artificial legal entity separate and distinct from its members or
shareholders.
This legal person is distinguishable from natural personality. Natural persons are born by natural
people/persons and their lives end at death, artificial persons (corporations) are created by law
and their existence is ended by the law.
The possession of a legal personality implies that a company is capable of enjoying rights and
being subject to duties, separately from its members. As an artificial legal person, a company is
capable of the following; It has an existence separate from that of the members and as such; It has its own name by which it is recognised.
 It can own its own property ie assets like buildings, land, bank accounts. etc
 It can sue or be sued in its own name.
 Even if a member or all the members die, the company will still remain in
existence, in other words it has perpetual succession.
 It can borrow money in its own name and use its assets as security and it will be
responsible for paying back such debts..
 It can employ its own employees, including its members or shareholders.
i)
This principle of legal personality was first distinctly articulated in the British House
of Lords Judgment in the case of Salomon Vs. Salmon & Company Limited (1897)
AC 22 At the court of first instance and appeal court, it was held That therefore the
company was a legal entity capable of a separate existence and liable to pay its own
debts, and Salomon was not personally liable to pay the debts of the company.
ii)
That a company is at law a different person altogether from the subscribers although
it may be that after incorporation, the business is exactly the same as was before, the
same persons are the managers, and the same hands receive the profits.
TYPES OF COMPANIES.
Under the Companies Act, provision is made for two major types of registered Companies,
which can be lawfully formed in Uganda. Principally these can be further divided into 2 broad
categories.
1. Private company.
2. Public company.
PRIVATE COMPANIES
The Companies Act defines a private company as
 A Company, which by its articles restricts the rights to transfer shares of the company.
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 Secondly, it limits the number of its members to 50 including past and present employees
of the company who are shareholders.
 Thirdly, a private company prohibits any invitations to the public to subscribe for any
shares or debentures of the company (investments in the company).
 Here the required minimum number of members is 2 people. This position was laid down
in the case of LUTAYA Vs. GANDESHA (1987) HCB 49 in which a man and his wife
formed a private company and of the 1500 shares of the company, the wife held only 2
shares. This position was also stated in the case of Salomon Vs. Salomon & Co (1897)
AC 22. The second person needed may not be an independent person. He could be the
nominee of the first person.
Where a private Company does not comply with these requirements, it loses exemptions and
privileges conferred on a private company. This failure can only be remedied upon showing
court that it was caused by accident or inadvertence or some other sufficient cause.
Under the Companies Act, Companies in Uganda can also be further divided into:



Limited by shares
Limited by guarantee
Unlimited companies
(a) A company limited by shares.
This is a company where the members enjoy limited liability.
This means that in case of winding up of the company if the company's assets are unable to meet
the company's debts, then the members will only be liable to contribute to the debts of the
company only such amounts as a member may not have paid for the shares they bought. i,e., a
member will only be required to pay the balance that he did not pay on the shares he bought.
Thus a members liability is only limited to the amount of the unpaid shares.
(a) A Company limited by guarantee
This is one where the liability of its members is limited to such amount as the members may
have undertaken to contribute to the company's assets in the event of its winding up. This
guarantee must be expressed in the memorandum of association. i.e. there must be an express
statement/undertaking by the subscribers / members that the members guarantee that they will
pay a specified amount of money if in the event of winding up of the company, if the company's
assets are not sufficient to meet its debts.
(b) An unlimited company
This is a company in which there is no limit on the liability of the members. This means that in
the event of winding up, the members are liable to contribute money sufficient to cover all the
company’s debts without any limitations, if the company for example has debts of millions and
millions of shillings, the members have to be responsible to pay all the debts and the members
personal estate/property can be encroached upon to discharge the liabilities of the company.
PUBLIC COMPANIES
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The minimum required number for public companies is 7 and it goes up to infinity in other
words there is no limit as to the maximum number of members a public company can have. A
public company should be a limited liability company. Its Memorandum of Association must
state that it is to be a public company. Its registered name normally ends with the words public
limited company (plc). A Company, which has obtained registration as a public company, its
original certificate of incorporation or subsequent certificate of registration issued by the
registrar must state that it is a public company.
Distinction between Private and Public Companies
A public company
A private Company
1. Minimum of 7 members. For such company
to do business there must be a minimum of at
least 7 members. Where the company
continues to do business when the number of
members has fallen below the legal
minimum, then this is a ground for the
winding up of the company.
(Winding up is the process of putting the
company’s existence to an end.)
1. Minimum of two members For
such company to do business
there must be a minimum of at
least 2 members. Where the
company continues to do
business when the number of
members has fallen below the
legal minimum, then this is a
ground for the- winding up of
the company.
2. The maximum
members is 50
2. No maximum limit of members.
number
of
3. Only one director can suffice
3. There must be a minimum of two directors
4. Cannot commence business until and unless it
obtains a certificate of trading/certificate of
commencement of business, in addition to a
certificate of incorporation.
4. Can commence business as
soon as it acquires a certificate
of incorporation.
5. Must hold a statutory meeting between l & 3 5. No statutory meeting is required of
months from the date of commencement of such companies.
business. Directors are required under the law
to send a statutory report to every member
within 14 days to the date of the meeting.
Such report must also be sent the registrar of
companies.
HOLDING AND SUBSIDIARY COMPANIES.
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A subsidiary company is one that is controlled by another company called a holding company
or its parent (or the parent company). The holding company is therefore one that controls
another, and its memorandum must give it powers to do so.
The most common way that control of a subsidiary is achieved, is through the ownership of
majority shares in the subsidiary by the parent
Examples include holding companies such as MTN (Uganda) is a subsidiary of MTN (South
Africa), Stanbic Bank Uganda is a subsidiary of Standard Bank (South Africa FORMATION/
REGISTRATION PROCESS.
A company is formed by registering it with the Registrar of Companies and obtaining a
certificate of incorporation. The registration process goes through the following steps;1. RESERVATION OF THE COMPANY NAME.
The promoters must choose a name of their choice and then make an application to the registrar
of companies to reserve the name for their company. The name should not be identical with that
of an existing company or so nearly resemble it as to be calculated to deceive, it should not also
Contains the words “chamber of commerce” except where the nature of the company’s business
so justifies it and lastly it should not suggests patronage (a connection) from government or be
associated with immorality, crime or scandalous in nature. If the registrar is satisfied that the
name meets the above requirements, he will approve and reserve the name, the company must
then register within 60 days.
Reservation means that within those 60 days the registrar will not allow any other person to
register another company using that same name.
To guard against the possibility of a negative reply from the Registrar, promoters must have in
mind one or more suitable alternatives. Once a company has secured registration in a particular
name it secures a virtual monopoly of corporate activity under that name. In case the Registrar
inadvertently approves a name which by law is not adequate, then the new company may change
its name within 6 months. A company may change its name by special resolution and with the
written approval of the Registrar. ‘Where the Registrar refuses to register a name without good
reason, an application for an order of mandamus to compel the registrar to perform his duty and
register the company can be filed in the High Court.
2. PRESENTATION OF THE REQUIRED DOCUMENTS BEFORE THE REGISTRAR FOR
REGISTRATION.
Within 60 days after the reservation of the name, the promoters will then present the following
documents to the registrar to have their company registered.
 Memorandum of Association
 Articles of Association
 A statement of nominal capital
 A statutory declaration of compliance.
 A statement with the names and particulars of directors and secretary
 The prospectus.
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 The Memorandum of Association of the company.
The memorandum of association is the most important of all the company documents because it
contains the powers of the company, it describes the company and the nature of activities that the
company is authorized to do or engage in.
 Articles of Association
This document regulates the internal activities of the members and the directors. It contains
information on, management, who will be the directors of the company, who will be the
managing director, secretary, appointment of the board of directors, qualifications of directors,
the chairman of the board, meetings (how meetings of the company should be called and
conducted), the classes and rights of shareholders, transfer of shares , borrowing powers of the
company, its properties, control of the company finance, dividends/profits and how they should
be distributed auditing of books, the company seal and how it should be used etc
 Declaration of compliance
This is a statement declaring that all the necessary requirements of the Companies Act with
regard to the formation of the company have been duly complied with and that the directors
agree to continue complying with them.
 A statement of nominal capital
This is a statement which shows the capital with which the company is starting with.ie the initial
capital of the company.
 List of names and particulars of Directors and Company Secretary
This document contains the details of the names, age, addresses, occupations of the directors and
company secretary of the company.
It should also contain an undertaking by the directors to take and pay for the qualification shares
if any that such persons may be required to acquire.
 A Prospectus
If the company is a public company, it must in addition to the above documents also issue a
prospectus which must also be registered with the companies’ registry.
It is a document setting forth the nature and objects of a company and inviting the public to
subscribe for shares in the company.
It sets out the number of the founders/management, the share qualification of directors, names,
description and addresses of directors, the shares offered to the public for subscription, property
acquired by the company, the auditors, etc.
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The purpose of the prospectus is to provide the essential information about the position of a
company when it is launched so that those interested in investing in it can properly assess the
risk of investment.
3. PAYMENT OF STAMP DUTY AND REGISTRATION FEES.
The registrar will then assess how much duty is to be paid on registration of that company; it is
sassed basing on the capital that the company is starting with, the more the capital the greater the
stamp duty. Registration fees are also paid.
4. ISSUANCE OF A CERTIFICATE OF INCORPORATION.
After all these requirements, a certificate of registration is issued if the Registrar is satisfied.
THE MEMORANDUM & ARTICLES OF ASSOCIATION OF A COMPANY.
The memorandum of Association
The Memorandum of Association of a company, which is required to be registered for purposes
of incorporation, is regarded as the company’s most important document in the sense that it
determines the powers of the company. Consequently, a company may only engage in activities
and exercise powers, which have been conferred upon it expressly by the memorandum or by
implication there from.
Contents of the Memorandum
The Memorandum of Association of a company limited by shares must state the following:1.
The name of the company with “Limited” as the last word.
2.
The registered office of the company is situated in Uganda.
3.
The objects of the company.
4.
A statement as to the liability of the members.
5.
A statement to the nature of the company (Whether private or public).
6.
The amount of share capital and division thereof into shares of a fixed amount. In
addition, the memorandum must state the names, address and descriptions of the subscribers
thereof who must be at least two for a private company and seven for a public company.
1. The name.
The name of the company should be indicated and if it is a limited company, it should
have the word limited at the end eg Stanbic Bank Uganda Ltd.
2. Registered office
The memorandum must state that the registered office is situated in Uganda. However, the actual
address must be communicated to the Registrar of Companies within 14 days of the date of
incorporation or from the date it commences business by registration of a company form called
Notice of situation of registered office of the company, this form will indicate the exact location
of the company eg plot 8 industrial area Kampala.
3. The objects clause
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This sets out the principle activities the company has been incorporated to pursue. For example;
trading in general merchandise, carrying on business of wholesalers and retail traders of all
airtime cards, mobile phones and all phone accessories, carrying on the business of mobile
money agents etc. The objects must be lawful and should include all the activities which the
company is likely to pursue. The objects or powers of the company as laid down in the
memorandum or implied there from determine what the company can do.
Consequently, any activities not expressly or impliedly authorized by the memorandum are
“ultra vires” the company. The ultra vires doctrine restricts an incorporated company under the
Companies Act to the purse only the objects outlined in its registered Memorandum of
Association.
The doctrine of ultra vires is illustrated in the case of ASHBURY RAILWAY CARRIAGE
CO. LTD VS. RICH (1875). A company which was not authorized by its memorandum of
association to lend money or finance any activity made an agreement with the defendant to
provide him with finance for the construction of a railway in Beligium, later on the company
repudiated this agreement and did not actually provide the finances, the defendant sued the
company for breach of contract, the company in its defense argued that financing railway
construction was not one of the activities it was authorized to do, it was held that indeed such an
act was beyond the powers of the company and such an ultra vires contract was void and un
enforceable.
To evade this restrictive interpretation of the objects clause, draftsmen inserted words as “and to
do all such other acts and things as the company deems incidental or conducive to the attainment
of these objects or any of them. In BELL HOUSES LTD -VS-CITY WALL PROPERTIES
LTD (1966) 2 QB 656, a company was formed to carry on the business of General Civil
Engineering contracts and in particular to build houses. It had power to carry on any other trade
and to do any other things that incidental to the above company’s objects. The Court held that the
company could lawfully contract for a fee to procure loans to other concerns, from or business
whatsoever which it can in the opinion of the board of directors be advantageously carried out
sources of finance which it had resorted to in the past. It further held that cementing good
relations with the financiers would be valuable when the company needed finances for its
activities.
The Memorandum of Association spells out the main objectives and powers of the company.
However, certain powers may be implied in the Memorandum of Association. For example, in
the case of FERGUSON V WILSON (1866) 2CH.A 277, a power to appoint agents and engage
employees was implied in the Memorandum of Association. This is only sensible because a
company as a fictitious person can only work through agents and employees; and therefore if
such a power was not implied, then the company could not function at all.
Similarly in GENERAL AUCTION ESTATES & MONETARY CO. V. SMITH (1891) 3CH
432, the court implied powers of borrowing money and giving security for loans.
Subsequent cases have also adopted this position. In NEWSTEAD (INSPECTION OF
TAXES) V FROST (1978)1 WLR 441 AT PAGE 449, the court implied powers of entering
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into partnership or joint venture agreements for carrying the on the kind of business it may itself
carry on i.e. intra vires.
In PRESUMPTION PRICES PATENT CANDLE CO (1976), the court implied a power of
paying gratuities to employees. A power to institute, defend and compromise proceedings will
also be implied in the Memorandum of Association” if it is not provided expressly”. Courts at
times imply powers because the particular nature of the company’s undertaking demands it. In
EVANS, (1921) I CII. 359. The court observed that a company formed to manufacture
chemicals had powers to make grants to Universities and other scientific institutions to facilitate
scientific research and training scientists although it may not obtain any immediate financial
benefit from the venture. Therefore before the court implies powers it seems:
 There must be some reasonable connection between the company’s objects and the power
it seeks to exercise. It is not sufficient for it to merely show that it will benefit in some
way by exercising that power.
 It is important to show that the company will in fact benefit in some way even though
remote in the exercise of the power (see Evans, (above).
However, though the Court may imply these powers in the Memorandum of Association, its
better practice to expressly state them. This is only sensible because: The company often needs powers which the courts have not ruled that they can be
implied and therefore the company can only obtain them by express provisions in the
Memorandum of Association, (e.g. the power to buy a share from another company
though recognized under the Act has not yet been implied).
 To avoid uncertainties or expenses of litigation, it is safer to insert them expressly in the
memorandum of association.
4. The liability of members
The memorandum of a company limited by shares or by guarantee should indicate that the
liability of members is limited. With respect to a company limited shares, the liability of a
member is the amount, if any, unpaid on his shares. With regard to the liability of a member of a
company limited by guarantee, this is limited to the amount he undertook to contribute to the
assets of the company in the event of winding up. A company may also be registered with
unlimited liability. In such a situation, the members liability is unlimited and in cases the
company does not have sufficient credit to pay its creditors, then the shareholders personal
property may be encroached on to pay the company’s debts..
5. Share capital (clause)
The memorandum requires that a company having a share capital must state the amount of share
capital with which the company is to be registered and that such capital is divisible into shares of
a fixed amount. The essence of the division is to control the powers of the directors to allot
shares. The law does not prescribe the value but they are usually small amounts to encourage
people to hold as many shares as possible. The amount of capital with which a company is to be
registered and the amount into which it is to be divided are matters to be decided upon by the
promoters and will be determined by the needs of the company and finance available. For
example if a company has its initial share capital/ startup capital of 5,000,000 it can divide this
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into 100 shares of 50,000 each. So of s member subscribes for 50 shares, he will contribute
2,500,000/= .
ARTICLES OF ASSOCIATION
The Articles of Association contains regulations for managing the internal affairs of the company
i.e. the business of the company. They are applied and interpreted subject to the memorandum of
association in that they cannot confer wider powers on the company than those stipulated in the
memorandum. Thus, where there is a conflict or divergence between the memorandum and
articles, the provisions of the memorandum must prevail.
management, who will be the directors of the company, who will be, appointment of the board of
directors, qualifications of directors, the, the classes and rights of shareholders, transfer of shares
, , auditing of books,
Contents of the Articles
 The board of directors (management) and how they will be appointed, their
qualifications, how they can resign or be removed from office.
 The chairman of the board.
 The managing director and how he will be appointed.
 Secretary and his appointment.
meetings (how meetings of the company should be called and conducted and the required
quorum/ number of members that must be present to conduct a valid meeting of the
company) and the different types of meeting that the company may hold from time to
time voting rights of the members, the right to receive notice and to attend and vote etc.
 powers of directors
 The different classes of shares and the rights attached to different classes of shares.
 Borrowing powers of the company.
 its properties, control of the company finance, its bankers, dividends/profits and how
they should be distributed
 appointment of auditors
 the company seal and how it should be used etc
The Articles must be printed in the English language, divided into paragraphs, numbered
consecutively, signed by each subscriber to the memorandum in the presence of at least one
witness who must attest the signature.
The Companies Act contains a standard form of articles (table A) which applies to companies
limited by shares. These regulate the company unless it has its own special articles which totally
or partially exclude table A. The advantages of statutory model articles are:
 That legal drafting of special articles is reduced to a minimum since even special articles
usually incorporate much of the text of the model.
 There is flexibility since any company can adopt the model selectively or with
modifications and include in its articles special articles adapted to its needs.
INTERPRETATION OF ARTICLES AND MEMORANDUM OF ASSOCIATION
The Memorandum of Association is the basic law or constitution of the company and the articles
are subordinate to the Memorandum of Association. It follows therefore that if there is a conflict,
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the Memorandum of Association prevails. In other words if there is a contradiction between the
provisions of the memorandum and the provisions of the articles of association, then the
provisions of the memorandum will be followed and those provisions in the articles which are
contradicting the memorandum will be void and of no effect.
If there is no conflict, the Memorandum of Association and articles must be read together and
any ambiguity or uncertainty in either can be removed by the other
CONSEQUENCES OF INCORPORATION
The fundamental attribute of corporate personality from which all other consequences flow is
that “the corporation is a legal entity distinct from its members”.
Hence it’s capable of enjoying rights and being subject to duties which are not the same as those
enjoyed or borne by its members. In other words it has a legal personality and it is often
described as an artificial person in contrast with a human being-a natural person. (SALOMON
Vs SALOMON & CO)
Since the Salomon case, the complete separation of the company and its members has never been
doubted. It is from this fundamental attribute of separate personality that most of the particular
advantages of incorporation spring and these are:
1.
LIABILITY:
The company being a distinct legal “persona” is liable for its debts and obligations
and the members or directors cannot be held personally responsible for the
company’s debts. It follows that the company’s creditors can only sue the company and
not the shareholders. In in the case of Salomon V Salomon (1897), creditors of the
company sought to have Solomon a managing director of the company personally liable
for the debts of the company but court held that the company and Solomon were two
different persons and that the company as a legal person is liable for its own debts and
Solomon a managing director could not be held personally responsible for the debts of
the company. In the Ugandan case of Sentamu v UCB (1983) HCB 59, it was held that
individual members of the company are not liable for the company’s debts.
The liability of the members or shareholders of the company is limited to the amount
remaining unpaid on the shares. For instance, where a shareholder has been allotted 50
shares at Shs. 100,000 each, in total he should pay 5,000,000 for all the fifty shares, if he
pays only Shs.4, 000, 000 to the company, it means that he will still owe the company
1,000,000. This is what is called uncalled capital. The company may call on him to pay it
any time. If that does not happen, then at the time of winding up the company, he will be
required to pay the Shs.1, 000, 000.
In the case of a company limited by guarantee, each member is liable to contribute a
specific amount to the assets of the company and their liability is limited to the amount
they have guaranteed to contribute.
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If the company has unlimited liability, the members liability to contribute is unlimited
and their personal property can be looked at to discharge the company creditors but that
is only after utilizing the company’s money and it is not enough to pay all the debts.
2.
PROPERTY:
An incorporated company is able to own property separately from its members.
Thus, the members cannot claim an interest or interfere with the company property for
their personal gain/benefit. Thus, one of the advantages of incorporation (corporate
personality) is that it enables the property of the company to be clearly, distinguished
from that of the members. In the case of MACAURA Vs NORTH ASSURANCE CO.
(1925) AC (see page 3 for facts). In that case Lord Buckmaster of the House in Lords
held that no shareholder has a right to any item of the property of the company, even if he
holds all the shares in the company.
In the case of Hindu Dispensary Zanzibar v N.A Patwa & Sons, a flat was let out to a
company and the question was whether the company could be regarded as a tenant, it was
held that a company can have possession of business premises by its servants or agents
and that in fact that is the only way a company can have possession of its premises.
3.
LEGAL PROCEEDINGS:
As a legal person, a company can take action to enforce its legal rights or be sued for
breach of its duties in the courts of law. If it the company being sued, then it should be
sued in its registered name, if a wrong or incorrect name is used, the case will be
dismissed from court for example in the case of Denis Njemanze V Shell B.P Port
Harcourt, the plaintiff sued a company called Shell B.P Port Harcourt which was a non
existing company, counsel for the defendant company objected that there was no such
company and the suit should be dismissed, counsel for the plaintiff sought courts leave to
amend and put the right part but court refused to grant the leave and dismissed the case.
In the case of Wani V Uganda Timber, 1972 HCB the plaintiff applied for a warrant of
arrest against a managing director of a company instead of suing the company, chief
justice Kiwanoka held that a managing director of a company is not the company and
cannot be sued personally, that if there is a case against the company then the company is
the right party to be sued not its managing director.
5. PERPETUAL SUCCESSION:
s.15 of the companies Act provides that a company is a legal entity with perpetual
sucession.
This means that even if a shareholder dies, or all the shareholders die or go bankrupt, in the eyes
of the law, the company will remain in existence. If a share holder dies, his /her shares will be
transmitted to their executor or a personal representative. Also in case a shareholder no longer
wants to be a shareholder in a company, he will simply transfer his shares to someone else and to
company will continue to exist.
The only way a company can come to an end is by winding up, striking it off the register of
companies or through amalgamation and reconstruction as provided by the Companies Act. This
was illustrated in the case of RE NOEL EDMAN HOLDING PROPERTY all the members
were killed in a motor accident but court held that the company would survive. Thus, this
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perpetual succession gives the certainty required in the commercial world even when ownership
of shares changes there is no effect on the performance of the company and no disruption in the
company business.
5.
TRANSFER OF SHARES:
A share constitutes an item of property, which is freely transferable, except in the case of private
companies. When shares are transferred, the person who transfers ceases to be a shareholder and
the person to whom they are transferred becomes the shareholder. In private companies, there is
a restriction on the transfer of shares for example one may not transfer his shares except to an
existing member or shareholder, and not to an outsider. This is essential and is in any event
desirable if such a company is to retain its character of an incorporated private company.
6.
BORROWING:
A company can borrow money and provide security in the form of a floating charge.
A floating charge is a security created over the assets of the company.
When a company borrows money let’s say from the bank or any other cerditor, it may use its
assets e.g. cars, bank accounts and other assets as security, the security/ charge will then float
over those assets, in case the company defaults on payment, the charge can settle on one or all of
those assets and the bank/creditor of the company can sell those assets to recover their money.
It is called a floating charge because it floats like a cloud over the whole assets of the company
from time to time, it only settles/crystallizes if the company defaults on payment. So before the
charge settles on the assets, the company is free to deal with those assets even to dispose them
off in the usual course of business.
6. CAPACITY TO CONTRACT.
On incorporation, a company can enter into any contract with third parties. In the case of Lee V
Lee & Air Farming Co. Ltd (1961) A.C 12, it was held that a company was it is incorporated
it has capacity to employ servants, even the shareholders.
THE ULTRA VIRES DOCTRINE.
a) Meaning of ultra vires.
The object clause of the memorandum of association of a company contains the object for which
the company is formed. An act of a company must not be beyond the object clause otherwise it
will be ultra vires.
The expression ultra vires means beyond powers, therefore an act or transaction that is beyond
the powers of the company as stated in the objects clause of the memorandum is an ultra vires
act or transaction, such an act that is ultra vires is void and cannot be ratified by the company.
Sometimes the term ultra vires is also used to describe a situation where the directors of a
company have exceeded the powers delegated to them, where a company exceeds the powers
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conferred upon it by its memorandum of association, it is not bound by it because it lacks the
capacity to incur responsibility for that action, but when the directors of a company exceed the
powers delegated to them, the company in a general meeting may choose to ratify their act or
omission.
b) Distinction from illegality.
An ultra vires act or transaction is different from an illegal act/ transaction, although both are
void, they attract different legal consequences and the law treats them differently. An act of a
company which is beyond its object clause is ultra vires and therefore void even if it is legal.
Similarly an illegal act done by a company will be void even if it falls squarely within the objects
of the company.
c) Importance of the doctrine.
The doctrine of ultra vires was developed to protect the investors and creditors of the company.
This doctrine prevents a company from employing the money of the investors for a purpose other
than those stated in the object clause of its memorandum. Thus the investors of the company are
assured that their money will not be employed for activities which they did not have in
contemplation at the time they invested their money into the company.
This doctrine also protects the creditors of the company by ensuring that the funds of the
company to which they must look to for payment are not dissipated in unauthorized activities.
d) Establishment of the doctrine.
The doctrine was established firmly in 1875 by the House of Lords in the case of ASHBURY
RAILWAY CARRIAGE CO. LTD VS. RICHE (1875). A company which was not
authorized by its memorandum of association to lend money or finance any activity made an
agreement with the defendant to provide him with finance for the construction of a railway in
Beligium, the directors made this ultra vires contract on behalf the company but subsequently
the company ratified this contract in a meeting. later on the company repudiated this agreement
and did not actually provide the finances, the defendant sued the company for breach of contract,
the company in its defense argued that financing railway construction was not one of the
activities it was authorized to do.
It was held that indeed such an act was beyond the powers of the company and such an ultra
vires contract was void and could not be enforced against the company. Court also held that an
ultra vires contract cannot even be ratified by the company and that the subsequent act of the
company purporting to ratify this contract in a meeting was void, court emphasized that an ultra
vires contract is void and cannot even be ratified by a unanimous decision of all the members of
a company.
In that case, the HOL expressed the view that a company incorporated under the Companies Act
had power to do only those things which are authorized by its object clause and anything outside
that is ultra vires and cannot be ratified by the company.
Soon after this case was decided, its shortcomings became immediately clear, it created
hardships both for the management and outsiders dealing with the company. The activities of the
management of the company were subjected to strict restrictions, at every step of transacting the
business of the company; management was required to ascertain whether the acts which were
13
sought to be done were covered by the object clause of its memorandum of association. The
business men thought this unduly restricted the frequency and ease of business, if the act was not
covered by the memorandum, it would mean having to alter the object clause to add that activity
and alteration of the memorandum required a lengthy procedure.
Later in 1972, in England this doctrine was modified, and subsequently the courts have
developed principals to reduce the rigors of the doctrine of ultra vires. They include the
following.
1. Powers implied by statute. According to this principal, a company has powers to do an
act or exercise a power which has been conferred on it by the companies Act or any other
Act of Parliament even if such act is not covered by the object clause in the memorandum
of association.
2. The principal of implied and incidental powers. This principal was established in the case
of ATTORNEY GENERAL V GREAT EASTERN RAILWAY CO (1880) 5 AC
473, in this case the HOL affirmed the principal laid down in the earlier case of
ASHBURY RAILWAY CARRIAGE CO. LTD VS. RICHE (1875) but made a slight
departure and held that the doctrine of ultra vires ought to be reasonably and not
unreasonably understood and applied. Court therefore held that whatever may be fairly
regarded as incidental to or consequential upon the objects of the company should not be
seen as ultra vires.
That case therefore led to a clear conclusion that that a company incorporated under the
companies act has power to carry out the objects set out in its memorandum and also everything
that is reasonably necessary to enable it carry out those objects.
e) Ascertainment of the ultravires doctrine.
An act is therefore intra vires (within the powers) the company if;
 It is stated in the object clause of the memorandum of association of that company.
 It is authorized by the Companies Act or by any other Act of parliament.
 If it is incidental to the main objects of the company or reasonably necessary to enable it
carry out those objects. In the case of ATTORNEY GENERAL V. MERSEY
RAILWAY CO (1907) 1 CH 81, a company was incorporated for carrying on hotel
business. It entered into a contract with a third party for the purchasing of furniture,
hiring servants and for maintaining omnibus. The purpose or object of the company was
only to carry on a hotel business and it was not expressly mentioned in the objects clause
in the memorandum of the company that they could purchase furniture or hire servants.
The contract was challenged on the ground that this act of the directors was ultra vires.
The issue before court was whether the transaction was ultra vires.
Court held that a company incorporated for carrying on a hotel business can purchase
furniture or hire servants and maintain an omnibus to attend at the railway station to take
or receive the intending guests to the hotel because these objects are reasonably necessary
to effectuate the purpose for which the company has been incorporated, and consequently
14
such acts are within the powers of the company, although these may not be expressly
mentioned in the objects clause of the memorandum of association of that company.
However not every act that is beneficial to the company is intra vires , it is not enough that the
act is beneficial to the company , the act must be reasonably necessary for the company to carry
out the activities mentioned in the memorandum.
f) Effect of ultra vires transactions.
 Ultra vires contracts. These are void and cannot be enforced by or against the company. In
the Case of RE JON BEAUFORE (LONDON) LTD (1953) CH 131, it was held that ultra
vires contracts made with the company cannot be enforced against a company. Court also
held that the memorandum of association is constructive notice to the public and therefore if
an act is ultra vires, it will be void and will not be binding on the company and the outsider
dealing with the company cannot take a plea that he had no knowledge of the contents of the
memorandum because he is deemed to know them.
In England, the European Communities Act 1972 has lessened the effect of application of the
Ultra vires doctrine in this manner. In England, third parties dealing with the company in
good faith are protected and can enforce an ultra vires contract against the company if the
third party acted in good faith and the ultra vires contract has been decided by the directors
of the company. However in Uganda, the ultra vires doctrine has not been modified by
statute or case law and there is therefore no legal provision where third parties dealing with
the company in good faith are protected and can enforce an ultra vires contract against the
company if the third party acted in good faith
Thus in Uganda the doctrine of ultra vires is applied strictly with the effect that where the
contract entered into by the third party is found to be ultra vires the company, it will be held
void and cannot be ratified by the company and the company cannot enforce it against the
third party and neither can a third party enforce it against the company.
 Ultra vires borrowing. In Uganda a borrowing that is ultra vires is void and cannot be
ratified by the company and the lender is not entitled to sue the company for the return of the
loan. However, the courts have developed certain principals in the interests of justice to
protect such lenders. The reliefs include;

Injunction. If the money lent to the company has not been spent, the lender can apply
to court for an injunction to prevent the company from spending the money.

Tracing. The lender can recover his money as long as it can still be found in the
hands of the company in its original form.
 Property acquired under ultra vires transactions.
Where the funds of the company are applied in purchasing some property, the company’s
right over that property will be protected even though the expenditure on such purchasing has
been ultra vires.
 Judgments from ultra vires transactions.
Because the law considers ultra vires acts void by their very nature, the company and third
parties cannot even with consent attempt to validate an ultra vires act. In RE JON
15
BEAUFORE (LONDON) supra, builders of a factory for purposes which were apparently
ultra vires demanded for their money and by consent it was ordered that the company should
pay, on winding up, the liquidator refused to pay that debt that was arising out of an ultra
vires transaction, the court held that the liquidator was well entitled to reject the claim as a
company cannot do what is beyond its legal powers by simply going into court and
consenting.
LIABILITY OF DIRECTORS ON ULTRA VIRES TRANSACTIONS .
1. Liability towards the company. It is the duty of the directors to ensure that the funds of
the company are used only for legitimate purposes of the company. Consequently if the
funds of the company are used for a purpose foreign to its memorandum, the directors
may be held personally liable to restore to the company the funds used for such purpose.
Thus a share holder can sue the directors to restore to the company funds which they
employed in transactions which the company is not authorized to engage in.
2. Liability towards third parties. The directors of a company are treated as agents of the
company and therefore have a duty not to go beyond the powers that the company gives
them. Where the director represents to a third party that the contract entered into by them
on behalf of the company is within the powers of the company while in reality the
company does not have such powers under its memorandum, the directors may be held
personally liable to the third party for the loss on account of breach of warranty of
authority. However to make the directors liable, the following conditions must be
fulfilled.
i)
There must be a representation of authority by the directors. It should be a
representation of fact not law.
ii)
By such representation, the directors must have induced the third party to make a
contract with the company in respect of a matter beyond the powers of the
company.
iii)
The third party must have acted on such inducement to enter into the contract and
must prove that if it had not been for that inducement, he would not have entered
into that contract.
iv)
That as a result, the third party suffered loss.
EXCEPTIONS TO THE ULTRA VIRES DOCTRINE.
1. Property acquired /investments made by the company using money from ultra vires
transactions.
2. Activities which are not expressed by the memorandum but are implied by law.
3. Activities which are not expressed by the memorandum but are incidental or related to or
reasonably necessary for the company to carry out its express objects.
4. Ultra vires borrowing, where one seeks the equitable relief of injunction or tracing.
16
LIFTING THE VEIL OF INCORPORATION
A company once incorporated becomes a legal personality separate and distinct from its
members and shareholders and capable of having its own rights, duties and obligation and can
sue or be sued in its own name. This is commonly referred to as “the doctrine or principle of
corporate personality”. No case illustrated the above principles better than the noted House of
Lords decision in Salomon v. Salomon. However, in some circumstances, the courts have
intervened to disregard or ignore the doctrine of corporate personality especially in dealing with
group companies and subsidiaries and where the corporate form is being used as a vehicle to
perpetrate fraud or as a "mere façade concealing the true facts." Upholding the abiove principal
in such cases would result into and perpetuate injustice.
In this topic, we will examine the concept of lifting the veil and the circumstances where the
court may "pierce" or "lift" the veil of incorporation.
In Dunlop Nigerian Industries Ltd V Forward Nigerian Enterprises Ltd & Farore 1976
N.CL.R 243, the HC of Lagos stated that in particular circumstances, e.g where the device of
incorporation is used for some illegal or improper purpose, the court may disregard the principle
that a company is an independent legal entity and lift the veil of corporate identity so that if it is
proved that a person used a company he controls as a cloak for an improper transaction, he may
be made personally liable to a third party.
The legal technique of lifting the veil is recognized under 2 heads:
1. Statutory lifting of the veil
2. Case law lifting of the veil
Statutory lifting of the veil
1.
Where the number of members is below legal minimum.
Under S. 33 of the Companies Act if a company carries on business for more than 6
months after its membership has fallen below the statutory minimum, (2 for private
companies and 7 for public companies), every member during the time the business is
carried on after the 6 months and who knows that the company is carrying on business
with less than the required minimum membership is individually liable for the company’s
debts incurred during that time. In such a case therefore the corporate veil is lifted in
order to hold those members personally liable for the company’s debts incurred during
that time.
2.
Where the- company is not mentioned in the Bill of Exchange.
S.34 of the Companies Act provides that a bill of exchange shall be deemed to have been
signed on behalf of a company if made in the name of the company, by or on behalf of
the company or on account of the company by any person acting under the company’s
authority.
S.109 (4) (b) prohibits any officer of the company from signing or authorizing to be
signed a bill of exchange on behalf of the company in which the company’s name is not
mentioned in legible characters/ clear letters. Any officer who does this is personally
17
liable on that bill of exchange for the money or goods for that amount unless it is duly
paid by the company. Therefore in such case the corporate veil is lifted in order to hold
that officer of the company personally liable.
3.
Holding and subsidiary companies.
Where companies are in a relationship of holding and subsidiary companies, group
accounts are usually presented by the holding company in a general meeting. In this
regard, the holding and subsidiary companies are regarded as one for accounting
purposes and the separate nature of the subsidiary company is ignored. S.147 of the
Companies Act requires each company to keep proper books of accounts with respect to
 Money received by the company and from what source.
 Money spent and what it was spent on.
 All sales and purchases of goods made by the company.
 The assets and liabilities of the company.
These accounts are meant to give a true and fair view of the state of the company’s affairs
and to explain its transactions.
Directors of the company are required at least once a year to lay before the company in a
general meeting a profit and loss account (or income & expenditure account for non
profit making companies) plus a balance sheet.
Where at the end of each year a company has subsidiaries, then as that parent company
presents its accounts, it should also present a group account dealing with the affairs of
that parent company and its subsidiaries, the group account consists of a consolidated
balance sheet and a consolidated profit and loss account of both the subsidiary and the
parent company.
4.
Reckless and Fraudulent Trading:
Under sect 327, it is provided that if in the course of winding up, it appears that any
business has been conducted recklessly or fraudulently, those responsible for such
business may be held liable without limitation of liability for any of the company’s debts
or liabilities.
5.
Taxation
Under the income tax Act, the veil of incorporation may be lifted to ascertain where the
control and management of the company is exercised in order to determine whether it is a
Ugandan company for income tax purposes.
6.
Investigation into related companies
Where an inspector has been appointed by the Registrar to investigate the affairs of a
company, he may if he thinks it fit also investigate into the affairs of any other related
company and also report on the affairs of that other company so long as he feels that the
results of his investigation of such related company are relevant to the main investigation.
Lifting the Veil under case law
1. Where the company acts as agent of the share holders.
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Where the shareholders of the company use the company as an agent, they will be liable for the
debts of the company. Agency is a relationship which exists whenever one person authorizes
another to act on his or her behalf. The person acting is called the agent, and the one he is acting
for is called the principal. Where such a relationship exists, the acts of the agent are taken to be
the acts of the principal. Therefore in an agency relationship, the acts of the agent are taken to be
the acts of the principal. In case of liability it is the principal who is held liable and not the agent.
This is because of the dictum that he who acts through another acts for himself. Thus where
share holders employ or use the company as an agent, then those shareholders will be personally
liable for the acts of the company as principals behind the agent.
2.
Where there has been fraud or improper conduct.
The veil of incorporation may also be lifted where the corporate personality is used as a
mask for fraud or illegality. In Gilford Motor Co V. Horne [1933] Ch. 935 Home was
the former employee of Gilford Motor Co. He agreed not to solicit its customers when he
left employment. He then formed a company which solicited the customers. Both the
company and Home were held liable for breach of the covenant not to solicit. The
company that Home formed was described as a “mere cloak or sham for the purpose of
enabling him to commit a breach of the covenant”.
In Jones V Lipman [1962]1 W.L.R 832 Lipman in order to avoid the completion of a
sale of his house to Jones formed a company and transferred the house to the company.
Court ordered him and the company to complete payment, even though the ownership of
the house was no longer in his names but in that of the formed company. The company
was described as a creature of Lipman, a device and a sham, a mask which he held before
his face in an attempt to avoid recognition by the eyes of equity.
In Re Williams Bros Ltd. (1932) 2ch.71, a company was insolvent but the Directors
continued to carry on its business and purchased its goods on credit. It was held that if a
company continues to carry out business and to incur debts at a time when there is to the
knowledge of the directors no reasonable prospects of the creditors ever receiving
payments of these debts, it is in general a proper inference that the company is carrying
on business with intent to defraud. R V Graham (1984) QB.675 makes it clear that a
person is guilty of fraudulent trading if he has no reason to believe that the company will
be able to pay is creditors in full by the dates when the respective debts become due or
within a short time thereafter.
3.
Public interest/policy
Sometimes, courts have disregarded the separate legal personality of the company and
investigated the personal qualities of its shareholders or the persons in control because
there was an overriding public interest to be served by doing so. In Daimler Co Ltd Vs
Continental Tyre And Rubber Co (1916) A.C 307, a Company incorporated in
England whose shares except one were held by German nationals resident in Germany
brought an action during the First World War. All its directors were also German
nationals resident in Germany, which was an enemy country at the time. The Court
disregarded the fact that the company had a British nationality by incorporation in
19
England and rather concentrated on the control of the company’s business and where its
assets lay, in determining the company’s status.
4.
In determining residence of a company for tax purposes.
The court may look behind the veil of the company and its place of registration so as to
determine its residence. The test for determining residence is normally the place of its
central management and control. Usually, this is the place where the board of directors
operate. But it can also be the place of business of the M.D where he holds a controlling
interest.
MANAGEMENT OF A COMPANY
The control and management of a company is distributed among its principal officers and these
include the auditors, accountants, Board of Directors, Managing director (if any) and any other
officers of a company. There are basically two organs responsible for the management of a
company. These are: 1.
2.
The Shareholders through company meetings and
The Board of Directors.
The shareholders and Company Meetings
The shareholders have an opportunity of influencing the company's management through the
company's meetings. There are 4 types of meetings through which the shareholders can participate
in the affairs of a company.
1. Statutory Meetings: These are provided for under S130 of the Companies Act which requires
every public ltd company to hold such type of meeting within 30 days from the date of
commencement of business. The meeting is held once in the company's life and never again.
The meeting is a must hold for all public companies, private companies are not required to hold
this meeting.
2. Annual General Meeting (S.131). Unlike the Statutory Meeting, an AGM is required of all
types of companies. It must be convened by notice of not less than 21 days. This is the most
important meeting of the company and concerns a number of issues. Although the companies
Act does not exactly indicate the nature of the business transacted at such a meeting, the
business invariably includes appointment of auditors, fixing their remuneration, declaration of
dividends, consideration of the company’s profit and loss accounts and the balance sheet,
consideration of the reports of the directors, auditors and election of new directors or auditors if
need arises.
The purpose of the annual general meeting is important for the protection of the
members because it is the one occasion when they can be sure of having an
opportunity of meeting the directors and questioning them on the profit and loss
accounts, on their report and on the company’s position and prospects. It is at this
meeting that normally a proposition of the directors will retire, come up for re-election:- and
it is at this meeting that the members can exercise their only real power over the board i.e.
the power of dismissal by voting them out. Most of these things could of course be done at
the extraordinary meeting but the members who want to raise these matters may not be able
20
to insist upon the convening of such meeting, the annual general meeting is valuable to them
because the directors must hold it whether they like it or not.
If the company fails to convene such a meeting, there are two consequences that occur:i.
The registrar may himself convene that meeting or order that the meeting be
convened and in extreme cases he may further order that any one shareholder
present in person or by proxy be deemed to constitute the meeting.
ii.
Every director who is in default of convening that meeting as well as the company
itself are liable to a default fine not exceeding shs 200/= and every officer of the
company who is in default is liable to a default fine of shs.40/= (1981) HCB 60).
Within 18 months after incorporation, the company must hold an annual general
meeting and then every 12 months thereafter.
3. Extra-Ordinary General Meeting (S 132):
This is usually convened by the directors at their discretion ( art 49 table A) to deal with urgent
matters which cannot wait till the next annual general meeting. However the directors must hold
such meeting irrespective of any contrary provision in the articles if holders of at least 10% of
the company’s paid up capital or 10% of the members carrying voting rights ask/ requisition for
it. They must state the reason why they want such a meeting. If the directors do not convene the
meeting within 21 days of the requisition, then the requisitionists may themselves convene the
meeting and recover expenses from the company which may in turn recover the same from the
defaulting directors.
4. General meeting convened under court orders (S. 135). It provides that if for any reason it is
impracticable to call a meeting of the company in any manner in which meetings of the
company may be called, the court may on application of any director or member of the company
who would be entitled to attend and vote at the meeting order a meeting of the company to be
called, held and conducted in any manner that the court thinks fit, and court may for that matter
direct that only one person present at the meeting shall constitute quorum.
PROCEDURE, ATTENDANCE AND QUORUM (17.3.05)
1. NOTICE OF MEETINGS.
s.133 provides that any meeting of a company must be called by a notice of a period not shorter than
21 days and any provision in that articles providing for a shorter notice is void and of no effect. The
notice may be in writing or it can take any other form like word of mouth, radio or TV
announcements, newspapers etc., it must state the exact date time and place where the meeting will
take place and what is intended to be discussed at that meeting, if the notice does not indicate the
above then it is not a proper notice and if any shareholder is absent from the meeting because his
notice had not fully disclosed the agenda, he can seek a court order to declare such a meeting
null and void.. However a meeting may be called by a shorter notice than 21 days if all the
members entitled to attend and vote at the meeting agree to such a shorter notice.
2. QUORUM.
21
This relates to the minimum number of members that must be present at a meeting of the company
for it to be a valid meeting. The company’s articles will normally provide for the required quorum
but where they are silent on this, s.134 (c) of the Act provides for the requisite quorum as 2
members present in case of a private company and in any other case three members personally
present. Quorum need not be maintained throughout the meeting though at the beginning it must be
there.
3.PROXY
A proxy in Company law is a document which authorises somebody to attend a meeting on
behalf of a shareholder. S.136 provides that any member of a company entitled to attend and vote
at a meeting of the company is entitled to appoint another person to attend and vote instead of
him of her and any notice calling for a meeting should indicate that that person is entitled to
attend by proxy.
4.VOTING.
S.134 provides that every member shall have one vote in respect of each share he has and in
case of a company having a share capital and in other cases every member shall have 1 vote.
Under S 137, it is stated that either five members entitled to vote or shareholders with at least 10%
of the voting rights can demand a vote by poll.
OFFICERS AND MEMBERS OF THE COMPANY
1.
Board of Directors
There is no definition of a director whether in the Act or by case law. Nevertheless, S2 of the Act
states that a director includes any person occupying the position of a director by whatever name
called. In most private companies directors are usually share holders and in public companies , there
is a requirement that directors must take up qualification shares, which is not the case in private
companies unless the articles provide for it. According to S 177, a public company must have at
least 2 directors. It’s an offence to have one director. Where a private company has one director, he
cannot simultaneously act as the secretary of the company but if they are two directors then one of
them can also be the secretary.
Under the act, a director is defined as “any person occupying the position of a director by whatever
name called” this definition includes a “de jure director” meaning one who is duly appointed to
act as such and a “defacto director” meaning one who is not appointed as director but acts as one.
Therefore defect in appointment of one as a director doenot affect the validity of all the things such
a person does while acting as director. In R V. Camps [1962] EA 243 in this case the articles of
association of a company required every director to hold at least 1 qualification share. Camps as a
director did not acquire his qualification share and the question was whether under the
circumstances he was actually a director. It was held that any person who performs the functions of
a director though not duly appointed as such is occupying the position of a director as a “defucto”
director and so was Camps.
Note: that for a person to be regarded as a “defucto” director, he must be performing his duties
openly.
22
Qualifications of directors.
1. S 182 requires that before a person can be appointed a director of a company with share
capital, he must have:  Signed and delivered for registration his consent to act as a director.
 Signed a Memorandum of Association of his qualification share and paid or agreed
to pay for those shares. A qualification share is that no of shares that a director must
acquire in a company in order to qualify as one.
2. According to S 186 a director of a public ltd company or a private company which is a
subsidiary of a public company must be aged between 21-70 years.
3. S 188 disqualifies an un discharged bankrupt. An un discharged bankrupt does not qualify to
become a director or else he is liable to a fine of not exceeding 10,000/= or imprisonment of
2 years or both.
4. Under S 183, any director who is required to hold qualification shares must acquire those
shares within 2 months of his appointment, otherwise he must quit.
REMUNERATION OF DIRECTORS.
The companies Act is silent on renumeration of directors but it is the law that a director has no
automatic right to remuneration and as it was emphasized in Re George Newman & Co. (1895) 1
ch.674 that the directors have no right to be paid for their services and cannot pay themselves or
each other or make presents to themselves out of the company's assets unless authorised so to do by
the articles or by the shareholders at a properly convened meeting.
PROCEEDINGS OF BOD
The rule is that directors must act collectively and any director who is prevented from carrying out
his duties can seek an injunction from court to restrain his co-directors. However, there is no legal
requirement that in the discharge of their duties, directors must meet formally. However directors
can agree to carry out a meeting at any place or time as long as they agree, thus in the case of
Barrow Vs Porter (1914) 1 ch.895. In this case, the company had only 2 directors who developed
personal differences to the extent that they could no longer meet. One director, staying in town
wanted to carry out a transaction. He waited for the other village director at the railway station and
told him about an incumbent meeting which the other one never agreed with. The town director met
alone and elaborated on many issues and purported to have resolved together with the director in the
village. The Court held any of those resolutions that the town director purported to pass were
invalid because the directors never agreed on the mode of the meeting.
Conflict Between Directors and Shareholders
As between shareholders and directors, the issue of who has the final say in the management of the
company will depend on the articles of association. Where the company adopts article 80 of table A,
which provides that the business of the company shall be managed by the directors who may
exercise all such powers as are not required by the Act to be exercised by the company in a general
meeting. This means that the board is left with wide powers to do all those things which the general
meeting is not authorised to do.
23
LIABILITY OF A COMPANY FOR THE ACTS OF ITS OFFICERS.
This refers to the liability of the company for the acts of its officers.
Upon incorporation, a company becomes a legal person carrying on acts of a human being,
it enjoys rights and benefits of a human being as well, and as such a company could not
enjoy such without obligations or liabilities. Accordingly in principle, the company is liable
for the acts of its officers while transacting business on its behalf.
It is a necessary component of corporate personality that there should be rules by which acts are
attributed to the company and this is referred to as the rule of attribution. Under this rule the
company is deemed to be a “persona ficta” with certain powers,, rights and liabilities of a natural
person and as such answerable for the acts of its officers while transacting business on its behalf.
In the case of Meridan Global Funds Management Asia Ltd V. Securities Commission [1995] 2
AC 500, lord Hoffman observed that the company’s primary rules of attribution will generally be
found in its constitution and that these rules are based on the general principals of attribution
available to natural persons including principals of agency.
 The question is under what circumstances / to what extent will a company be held liable for
the acts of its officers done while transacting business on its behalf.
The company will be held liable for the acts of its officers if that officer was at the time acting as the
“directing mind and will of the company”. Since a company is an artificial person with no mind
and will of its own, officers who act for it have its directing mind and will. An officer is said to have
the directing mind and will of the company if:1. He has authority to act on behalf of the company given by the share holders in a meeting.
2. He has authority from the directors of the company.
3. He has been mandated to act on behalf of the company by a provision in the company’s
articles of association.
Therefore if an officer of a company incurs liability in the course of duty under the above
circumstances it is the company that will be held responsible not that officer. In the case of
Lennard Carrying Co V. Asiatic Petroleum [1915] AC 705, the company owned a ship and
Lennard as the company director took the active role of the management of the company’s ship. In
the course of work the ship caught fire and all the cargo on it was destroyed, the owners of the
cargo wanted to recover from the company as ship owner, under the Shipping Act a ship owner was
not responsible /was not liable for any loss or damage to cargo happening without his fault, the
company relied on this provision and argued that it was not responsible for the loss because when
the cargo got destroyed it was not its fault but that of Lennard, court held that Lennard’s fault had
to be attributed to the company since a company was an abstruct artificial person and could not act
on its own but through its officers. Court further stated that Lennard acting with the authority of the
company became the directing mind and will of the company and therefore the company was liable
for the acts of its officer while transacting business on its behalf.
TYPES OF AUTHORITY THAT A COMPANY OFFICER MAY HAVE.
24
1. Express Actual
2. Implied actual
3. Ostensible authority/ apparent authority/authority by estopple.
1. Express actual authority. This is where a company gives authority to an officer expressly
either in writing or word of mouth to act on its behalf.
2. Implied actual authority. For example if A is placed in a particular position in a company,
there is an implied authority to handle all matters that an officer in that position normally
does. In the case of Panaroma V. Fedelis [1971] QB 711, it was held that a person in a
position of a company secretary has implied authority to do all administrative work e.g.
signing contracts and employing people on behalf of the company.
3. Ostensible authority/ apparent authority/authority by estopple is that authority which a
person is held out as possessing. If a company or its officer holds out someone as having
authority to act on its behalf and other third parties rely on this to enter contracts with that
person on behalf of the company, the company is stopped from later on denying that that
person did not have authority to act on its behalf.
LIMITATIONS
 The doctrine of holding out is inapplicable to ultra-vires transactions.
 It’s not applicable unless a competent officer or organ has carried out the holding
out. The officer being held out must be purporting to occupy a position or an office
who according to normal trade usage that can enter into such a contract. Therefore
according to the case of Freeman & Lockyer Vs Burckhurst, before the doctrine of
holding out can be used against the company, the following tests must be satisfied:
 A representation was made that the officer in question had authority.
 Such a representation was made by a person or organ who/which had actual authority to manage
the company.
 The third party was induced by that representation to enter into the transaction.
 The transaction was intra vires/ within the/powers/ objects of the company. An act is intravires
the company if it is on that is authorised by the company’s memorandum of association. An
outsider dealing with the company only need to look at the memorandum and see whether the
act is intravires the company, once he has done this, then even if the officer of the company did
not observe the provisions of the articles/internal regulations, then that is not his concern
because articles of association only apply to insiders and do not bind non company members.
Therefore once a transaction is intravires the company an outsider is entitled to assume that all
the internal regulations have been complied with and his rights will not be affected if this was
not the case. This is known as the rule in Turquand’s case.
 There were no suspicious circumstances that put the person to notice that that officer may not be
having authority.
Home work. Research about the difference between criminal and civil lability and the doctrine of
quantum meriut
THE DOCTRINE OF CONSTRUCTIVE NOTICE AND THE INDOOR
MANAGEMENT RULE.
25
THE DOCTRINE OF CONSTRUCTIVE NOTICE.
The doctrine of constructive notice is a legal idea which means that a person has been
notified, notification in this case does not necessarily mean that the person has been
specifically notified, it is enough if information is available, whether u know it or not.
In company law, the Memorandum of Association of a Company has to be lodged with the
Registrar of Companies. Because this is available for public inspection, people doing
business with the Company are free to inspect the document to see if there is any limitation
of powers or limitations placed on the nature of the business. Thus outsiders are deemed to
know any limitation placed on the Directors of the Company. Therefore if later, it was
found that there was some irregularity within the Company in respect of any decisions,
outsiders having dealing with the Company are deemed to be aware of it. This is what is
called the doctrine of constructive notice. In the case of MAHONY V EAST HOLYFORD
MINING CO (1875) LR.7 H.L 869, Lord Hitherley had this to say
“……but whether he actually reads them or not, it will be presumed that he has read them.
Every joint stock company has its memorandum and articles of association open to all who
are minded to have any dealings whatsoever with the company and those who so deal with
them must be affected with notice of all that is contained in these two documents.”
THE INDOOR MANAGEMENT RULE.
In order to circumvent the doctrine of constructive notice, courts developed the doctrine of
indoor management. This principal was first formulated in the case of ROYAL BRITISH
BANK V TURQUAND (1856) ALLER 435. This case law principal protects innocent parties
who are doing business with the company and are not in position to know if some internal
rules or procedures have not been complied with.
In this case the directors of a company issued a bond to the Royal British Bank. The articles
of association of the company stated that the directors had powers to do so as long as it
was authorized by a resolution of the company in a general meeting. The company claimed
that there was no resolution passed authorizing the issue of the bond and that therefore
the company was not liable
The Doctrine of Indoor Management lays down that persons dealing with a company having
satisfied themselves that the proposed transaction is not in its nature inconsistent with the
memorandum and articles, are not bound to inquire into the regularity of any internal proceeding.
In other words, while persons contracting with a company are presumed to know the provisions
of the contents of the memorandum and articles, they are entitled to assume that the officers of
the company have observed the provisions of the articles. It is no part of duty of any outsider to
see that the company carries out its own internal regulations.
It follows that there is no notice as to how the company’s internal machinery is handled by its
officers. If the contract is consistent with the public document, (ie the memorandum and articles
of association) the person contracting will not be prejudiced by irregularities that may beset the
indoor work of the company.
The rule in Turquand's case is a presumption of regularity. In other words, a person dealing
with the Company is entitled to presume that all the internal procedures of the Company
26
have been complied with. This is a practical approach to solving problems facing outsiders
because an outsider would have difficulty to discover what is going on in the Company.
It is important to note that the notice of constructive notice can be invoked by the company and it
does not operate against the company. It operates against the person who has failed to inquire but
does not operate in his favor. But the doctrine of “indoor management” can be invoked by the
person dealing with the company and cannot be invoked by the company.
ORIGINS OF THE DOCTRINE.
The rule had its genesis in the case of ROYAL BRITISH BANK V TURQUAND (1856) ALLER
435. In this case the Directors of the Company were authorized by the articles to borrow on
bonds such sums of money as should from time to time be authorized to be borrowed by a
special resolution of the Company in a general meeting. A bond under the seal of the company,
signed by two directors and the secretary was given by the Directors to the plaintiff bank to
secure the drawings on current account without the authority of any such resolution. When the
company was sued, it alleged that under its registered deed of settlement (the articles of
association), directors only had power to borrow what had been authorised by a company
resolution. A resolution had been passed but not specifying how much the directors could
borrow.
The Court of Exchequer Chamber overruled all objections and held that the bond was binding on
the company as Turquand was entitled to assume that the resolution of the Company in general
meeting had been passed. The relevant portion of the judgment of Jervis C. J. reads:
"The deed allows the directors to borrow on bond such sum or sums of money as shall from time
to time, by a resolution passed at a general meeting of the company, be authorized to be
borrowed and the replication shows a resolution passed at a general meeting, authorizing the
directors to borrow on bond such sums for such periods and at such rates of interest as they
might deem expedient, in accordance with the deed of settlement and Act of Parliament; but the
resolution does not define the amount to be borrowed. That seems to me enough......We may now
take for granted that the dealings with these companies are not like dealings with other
partnerships, and the parties dealing with them are bound to read the statute and the deed of
settlement. But they are not bound to do more. And the party here on reading the deed of
settlement, would find, not a prohibition from borrowing but a permission to do so on certain
conditions. Finding that the authority might be made complete by a resolution, he would have a
right to infer the fact of a resolution authorizing that which on the face of the document appear
to be legitimately done." Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B
concurred.
The rule in Turquand's case was not accepted as being firmly entrenched in law until it was
endorsed by the House of Lords. In MAHONY V EAST HOLYFORD MINING CO Lord
Hatherly phrased the law thus:
27
“ When there are persons conducting the affairs of the company in a manner which appears
to be perfectly consonant with the articles of association, those so dealing with them
externally are not to be affected by irregularities which may take place in the internal
management of the company.’’
So, in Mahoney, where the company's articles provided that cheques should be signed by any
two of the three named directors and by the secretary, the fact that the directors who had signed
the cheques had never been properly appointed was held to be a matter of internal management,
and the third parties who received those cheques were entitled to presume that the directors had
been properly appointed, and cash the cheques.
EXCEPTIONS TO THE RULE.
The rule of doctrine of indoor management is however subject to certain exceptions. In other
words, relief on the ground of ‘indoor management’ cannot be claimed by an outsider dealing
with
the
company
in
the
following
circumstances:
1. Knowledge of Irregularity: - The first and the most obvious restriction is that the rule has no
application where the party affected by an irregularity had actual notice of it. Knowledge of an
irregularity may arise from the fact that the person contracting was himself a party to the inside
procedure. As in Devi Ditta Mal v The Standard Bank of India where a transfer of shares was
approved by two directors, one of whom within the knowledge of the transferor was disqualified
by reason of being the transfer himself and the other was never validly appointed, the transfer
was held to be ineffective.
Similarly in Howard v. Patent Ivory Manufacturing Co where the directors could not defend the
issue of debentures to themselves because they should have known that the extent to which they
were lending money to the company required the assent of the general meeting which they had
not obtained. Likewise, in Morris v Kansseen a director could not defend an allotment of shares
to him as he participated in the meeting, which made the allotment. His appointment as a director
also fell through because none of the directors appointed him was validly in office.
2. Suspicion of Irregularity: - The protection of the “Turquand Rule” is also not available where
the circumstances surrounding the contract are suspicious and therefore invite inquiry. Suspicion
should arise, for example, from the fact that an officer is purporting to act in matter, which is
apparently outside the scope of his authority. Where, for example, as in the case of Anand Bihari
Lal v. Dinshaw & co the plaintiff accepted a transfer of a company’s property from its
accountant, the transfer was held void. The plaintiff could not have supposed, in absence of a
power of attorney, that the accountant had authority to effect transfer of the company’s property.
Similarly, in the case of Haughton & co v. Nothard, Lowe & Wills Ltd where a person holding
directorship in two companies agreed to apply the money of one company in payment of the debt
to other, the court said that it was something so unusual “that the plaintiff were put upon inquiry
to ascertain whether the persons making the contract had any authority in fact to make it.” Any
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other rule would “place limited companies without any sufficient reasons for so doing, at the
mercy of any servant or agent who should purport to contract on their behalf.”
3. Forgery: - Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear
illustration is found in the Ruben v Great Fingall Consolidates here in this case the plaintiff was
the transferee of a share certificate issued under the seal of the defendant’s company. The
company’s secretary, who had affixed the seal of the company and forged the signature of the
two directors, issued the certificate.
The plaintiff contended that whether the signature were genuine or forged was apart of the
internal management, and therefore, the company should be estopped from denying genuineness
of the document. But, it was held, that the rule has never been extended to cover such a complete
forgery.
Lord Loreburn said: “It is quite true that persons dealing with limited liability companies are not
bound to enquire into their indoor management and will not be affected by irregularities of which
they have no notice. But, this doctrine which is well established, applies to irregularities, which
otherwise might affect a genuine transaction. It cannot apply to Forgery.”
4. Representation through Articles: - The exception deals with the most controversial and highly
confusing aspect of the “Turquand Rule”. Articles of association generally contain what is called
‘power of delegation’. Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co explains the
meaning and effect of a “delegation clause”.
Here one G was director of the company. The company had managing agents of which also G
was a director. Articles authorised directors to borrow money and also empowered them to
delegate this power to any or more of them. G borrowed a sum of money from the plaintiffs. The
company refused to be bound by the loan on the ground that there was no resolution of the board
delegating the powers to borrow to G. Yet the company was held bound by the loans. “Even
supposing that there was no actual resolution authorizing G to enter into the transaction the
plaintiff could assume that a power which could have been delegated under the articles must
have been actually conferred. The actual delegation being a matter of internal management, the
plaintiff was not bound to enter into that.”
Thus the effect of a “delegation clause” is “that a person who contracts with an individual
director of a company, knowing that the board has power to delegate its authority to such an
individual, may assume that the power of delegation has been exercised.”
The question of knowledge of Articles came up in the case of Rama Corporation v Proved Tin
and General Investment Co, here; one T was the active director of the defendant company. He,
purporting to act on behalf of his company, entered into a contract with the plaintiff company
under which he took a cheque from the plaintiffs. The company’s article contained a clause
providing that “the directors may delegate any of their powers, other than the power to borrow
and make calls to committees, consisting of such members of their body as they think fit”. The
board had not in fact delegated any of their powers to T and the plaintiffs had not inspected the
defendants articles and, therefore, did not know of the existence of power to delegate.
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It was held that the defendant company was not bound by the agreement. Slade J’, was of the
opinion that knowledge of articles was essential. “A person who at the time of entering into a
contract with a company has no knowledge of the company’s articles of association, cannot rely
on those articles as conferring ostensible or apparent authority on the agent of the company with
whom he dealt.” He could have relied on the power of delegation only if he knew that it existed
and had acted on the belief that it must have been duly exercised.
Knowledge of articles is considered essential because in the opinion of Slade J; the rule of
‘indoor management’ is based upon the principle of estoppel. Articles of association contain a
representation that a particular officer can be invested with certain of the powers of the company.
An outsider, with knowledge of articles, finds that an officer is openly exercising an authority of
that kind. He, therefore, contracts with the officer. The company is estoppel from alleging that
the officer was not in fact authorised.
This view that knowledge of the contents of articles is essential to create an estopped against the
company has been subjected to great criticism. One point is that everybody is deemed to have
constructive notice of the articles. But Slade J brushed aside this suggestion stating constructive
notice to be a negative one. It operates against the outsider who has not inquired. It cannot be
used against interests of the company. The principle point of criticism, however, is that even if
the directors had the power to delegate their authority. They would not yet be able to know
whether the director had actually delegated their authority. Moreover, the company can make a
representation of authority even apart from its articles. The company may have held out an
officer as possessing an authority. A person believes upon that representation and contract with
him. The company shall naturally be estopped from denying that authority of that officer for
dealing on its behalf, irrespective of what the articles provide. Articles would be relevant only if
they had contained a restriction on the apparent authority of the officer contained.
5. Acts outside apparent authority: - Lastly, if the act of an officer of a company is one which
would ordinarily be beyond the power of such an officer, the plaintiff cannot claim the protection
of the “Turquand rule” simply because under the articles power to do the act could have been
delegated to him. In such a case the plaintiff cannot sue the company unless the power has, in
fact, been delegated to the officer with whom he dealt. A clear illustration is Anand Behari Lal v
Dinshaw here the plaintiff accepted a transfer of a company’s property from its accountant. Since
such a transaction is apparently beyond the scope of an accountant’s authority’ it was void. Not
even a ‘delegation clause’ in the articles could have validated it, unless he was, in fact,
authorized.
30
THE DUTIES OF OFFICERS AND MEMBERS
DIRECTORS.
As far as directors are concerned, they have two duties to discharge in respect of a company.
1.
2.
The duty of skill and care
The duty of good faith
Duty of Skill and Care
There is no criteria for measuring the standard of duty of skill and care expected of a director and
consequently this will depend on the circumstances of each case. Nevertheless, courts have tried to
set some guidelines as to what these duties entail. In Re City Equitable Fire Insurance Co. Ltd, the
directors left the company's management to the Managing Director and as a result, a number of the
company's assets disappeared and a number of misleading items were entered into the books.
While holding the directors liable for breach of duty of skill and care, the court laid down two
criteria against which the standard of duty of a director must be judged.
 It pointed out that we have to look at the nature of a company's business. Where such a
company is a small concern, the standard of duty expected of a director is not as high as in a
big company.
 The mode in which the company's work is distributed among various officers has to be
determined e.g. directors of operations, finance, etc. Where the company's operations are
divided among many directors duty of skill and care is higher than otherwise.
A director is not expected to exhibit a greater degree of skill and care beyond that which is
reasonably expected of a person with similar qualifications, knowledge or skill and experience and
he is not bound to give continuous attention provided he attends the meetings, unless he is a full
time director.
The duty of good faith
In determining whether or not a director or any other officer has breached his duty of good faith
to the company, we must always remember that the officer stands in a fiduciary relationship to
his company. Ie duty of outmost good faith. Whenever a party has an upper hand in any
relationship e.g. a Lawyer -client, doctor-patient, teacher-pupil, trustee-beneficiary, etc in any
commercial transaction, we term this party's position as a fiduciary position and any cheating by
this party can be upheld in courts of law.
The duty of good faith is divided into a number of components.
1. Use of director’s powers. Directors must always put the company's interests first and in the
exercise of their powers, they must do so for proper purposes otherwise they are held liable. A
director should not also divert or destroy a particular opportunity being pursued by the
company for his personal benefit. In Cooks v Deeks above three directors of the company
31
obtained a contract in their own names and diverted it to themselves at the exclusion of the
company, it was held that they were in breach of the duty they owed the company since as
directors they were entrusted with the affairs of the company but instead used their position
to exclude the company from the benefits of a contract whose interest they were supposed to
protect.
2. Dealing with the company's properties. Directors have a duty to protect the company's
properties and not to expend them anyhow or use them for their personal purposes. If they do so,
they are liable to make good the loss. In the case of Re George Newman , when directors made
presents to themselves out of company assets, they were held liable for misappropriation of
company property. The term company's property is widely defined to include contracts to which
the company is entitled even if the company has lost no funds at all.
In Cooks Vs Deeks (1916) AC 554 the court held that the company's property belongs to the
company both at law and equity, and that the directors cannot appropriate such property.
3. Making Secret Profits out of the Company. A director being in a fiduciary position is
accountable to the company for any secret profits which he has made by reason of his
position as director. A director is free to trade with the company but he must ensure that he
does not make a secret profit at the expense of the company. Thus a director should not act in
a transaction where there is a conflict of interest unless he discloses that interest to the
company. S.200 and art 84 allows a director to take part in a contract with a company in which
he has personal interests as long as he discloses this interest to the company. Where a director
has not disclosed his interest the contract is not void but voidable.
4. Insider trading. This is where a well-positioned officer in the company uses sensitive and
important information about that company to his benefit. This is more common in deals
concerning securities and capital markets. In the case of Purcival Vs Wright (1902) I Ch. 421.
The directors of the company bought shares from X whose value stood at £ 12 per share on the
open market. The directors did not disclose to him that negotiations were being conducted for
the sale of the company's shares at a higher price than they were paying X. X sued to have the
sale set aside. It was held that the sale was binding as the directors were under no obligations to
disclose the negotiations to X. That the directors duty of good faith is owed to the company and
rather than individual shareholders and so they failed.
DISQUALIFIED PERSONS FOR POST OF DIRECTOR
1.
According to S186, a person who has reached the age of 70 cannot be appointed a director
unless the company is private and not a subsidiary of a public company or the articles
otherwise provide, or he is appointed and approved by a resolution of which special notice
stating his age has been given. A person who is first appointed a director of a company other
than a private company which is not a subsidiary of a public company after he has reached
the age at which the directors retire under the articles must give notice of his age to the
company.
2.
An undischarged bankrupt must not act as a director of or be concerned in the management
of a company without the leave of court with by which he was adjudged bankrupt. If this is
contravened, a penalty of 2 years imprisonment or a fine of 1000 shillings on application for
32
leave as a director and notice must be given to the official receiver who can oppose the
application if he is of the opinion that it is against public interest.
3.
A person cannot without leave of court be a director to be concerned with the management
of a company if he has been convicted of an indictable offence i.e. an offence tried by high
court) in connection with the company, or on winding up it has appeared that he has been
guilty of guilty while an officer of fraud or breach of duty in relation to the company and the
court has ordered that he shall not be a director or be concerned in management for up to 5
years.
 N.B: The period of disqualification must date from conviction, not for instance from the
convicted person's release from prison.
STATUTORY PROVISIONS BEARING ON DIRECTORS
These statutory provisions impose both civil and criminal liability on any officer who defaults on
his duties. There are important sections Vis S 206 and S 405.
Under S206, any provision in the articles or in a contract which exempts any officer from liability or
indemnifies him due to:i.
his negligence
ii.
breach of duty
iii.
breach of trust
is void. There are 2 exceptions to this,
1. That S.206 does not apply to such provision if it was made before the commencement of
the Companies Act i.e. before 1950. This provision however is redundant for the act came
into force a long time ago. The action or breach must have been done before the Companies
Act. (However, this provision is of relevance even before 1950 because some companies are
as old as before 1950, when they were governed by the laws of England).
2.
Notwithstanding S.206 a company is free to indemnify any officer vs. liability incurred in
court proceedings, which is successfully defended in any case, he would have been found
not to have breached any of the above. Under S.405, an officer taken to court for negligence
or breach of duty may apply to court before the proceedings to be excused on the ground
that he acted reasonably and honestly in the circumstances.
In the case of Customs And Excise Vs Alpha Ltd (1991) IQB 549
It was held that section 405 is applicable only where the company is making claims against
the officer and is not applicable if other people are making such claims.
Other sections are 322 & 329. According to S.322, criminal action can lie against any office for
failure to disclose relevant information during the winding up of the company. Under S 323, any
officer who falsifies companies accounts or books with an intention to defraud any person is also
criminally liable. Under S 324, any officer who acts in a fraudulent manner in relation to the
property of the company being wound up or fails to account for the loss of the property (S 328) or
who is a barrier to the carrying out of the company's affairs for any fraudulent (S 327) which is also
33
applicable for lifting of the veil) or who is a party to the non-keeping of proper books of accounts
(S329) is criminally liable.
2.
THE AUDITORS OF A COMPANY
The provisions of the Accountants Statute stipulate that a person is not qualified to act as an
auditor unless he is a member of the institute of registered accountants or he is registered as an
associate accountant. It is therefore important that this be read together with what is contained
hereunder for a proper understanding.
In public companies, any officer or servant of that company or any person who is a partner or in
employment of an officer or servant of that company or in any body corporate is not qualified to
be appointed as auditors (s.159), to avoid conflict of interests. The general rule here is that an
auditor is appointed by the general meeting, which is also responsible for fixing remuneration.
However, under certain circumstances, the registrar of companies or the directors can appoint an
auditor and fix the remuneration. Similarly s.160 provides that an auditor can only be removed
by the general meeting and where such resolution has been made a copy of the resolution is sent
to the auditor who has the right to make representations as redeems fit.
Duties: s 162
Basically, an auditor is to investigate and examine the company's accounts. His report is to be read
at the company's general meeting and an auditor has a right to attend all such relevant general
meetings. The standard of duty has been set by the court in Re London And General Bank Case.
That an auditor must be honest and must exercise reasonable care and skill in what he certifies.
It was further stated in the case that an auditor is not bound to do more than exercise reasonable care
and skill in making inquiries and investigations even in the case of suspicion.
It is the duty of an auditor to exercise skill, care and caution a cautions auditor would use. In the
case of Formento (Steeling Area) Vs Selsdon Fountain Pen Co Ltd (1958)1 ALLER where Lord
Denning stated that an auditor is not to be confined to checking vouchers and adding or subtracting
figures but he must take care that errors are not made and that he should approach his duty
suspecting that someone may have made a mistake and that a check must be taken to ensure that
none has been made. That his vital task is to take care that errors of omission or commission or
down right untruths are not done.
In the case of Roberts Vs Hopwood (1925) AC 578 and in Re Ridsell (1914) CH. 59, it was stated
that where an auditor does not have sufficient legal knowledge to deal with a matter as accountants
do, he is entitled to take legal advice. In the case of BEVAN VS WEBB (19010) 2 Ch. 59, it was
held that "permission to a man to do an act which he cannot do effectually without the help of an
agent carries with it the right to employ an agent”. According to S.328, an auditor is an officer of
the company. His duty is to ascertain and state the true financial position of the company at the time
of audit but not to care about declaring dividends. In the case of Re Kingston, it was stated that he is
a watchdog but not a blood-bound but if there is anything calculated to excite suspicion, he should
probe it to the bottom but he does not guarantee the discovery of all fraud.
34
Nevertheless, an auditor will not be made liable for not tracking out ingenious and carefully laid
schemes of fraud, when there is nothing to arouse suspicion, and when those frauds are perpetuated
by tried servants of the company who are undetected for years by the directors.
3.
THE COMPANY SECRETARY
 S.2 defines a company's officer as including the company's secretary. In Uganda, there are no
specific qualifications required. However under sections 178, 179, 180 and 189, provisions and
disqualify a person from becoming a company secretary are contained.
 According to S.178, in a company where there is only one director, he can’t becomes a
company's secretary.
 Under S.179, although a company can be appointed a secretary of another if it is not ultra vires,
the appointment of such a company is invalid if the company being so appointed has only one
director who also happens to be the only director of the appointing company.
 Under S.180 if a provision in the articles requires that something should be done or signed by a
director and secretary, it should not be done or signed by the same person acting as both director
and secretary. For example in signing the company returns, the secretary cannot sign them in
both capacities as a secretary and a director. If it is not possible to find another director, the
secretary re-delegates such powers to anybody in accordance with the articles.
 Furthermore according to S.189, a person is disqualified from becoming a secretary for a period
not exceeding 5 years if he has ever been convicted of any offence relating to the company's
affairs from the date he is convicted.ie after conviction the person should not act as secretary for
a period not more than 5 years.
DUTIES AND HIS AUTHORITY
1. There is no clear-cut definition for the secretary's duties but these will depend on the
company in question. Nevertheless, a company's secretary is a very important person or
officer of the company who can legally bind the company in its transactions. In the case of
Panaroma V. Fedelis [1971] QB 711, it was held that a person in a position of a company
secretary has implied authority to do all administrative work e.g. signing contracts and
employing people on behalf of the company. In Panorama Development (Guildford Ltd)
Vs Fe Fideli's Furnishings Fabrics Ltd above, the company's secretary ordered self drive
cars using a different companies letterheads and when the cars arrived, he diverted them
to his personal use. When the defendant company was sued for the price of the cars, it
raised a defence that it was not bound because the secretary who made the order was an
insignificant person in a company (depending on earlier conception of the secretary).
The court of appeal rejected the defence and pointed out that the secretary is an important
company officer with in exhaustive powers, duties and responsibilities who can make
representations on behalf of the company and can enter into contracts in the day to day
running of the company's business. Consequently, because of his position in the
company, the secretary can be held liable not only to his company but also to the
shareholders in civil suits.
35
INSTITUTION OF SUITS
Although the Secretary is the officer mainly charged with the duty to institute suits on behalf of
the company and it was the earlier judicial view in the decision in Bugerere Coffee Growers
Ltd. V Zukuberi Kikuya and Another [1970] EA 147. These have been held as no longer good
law by the Court of Appeal of Uganda in the case of M/s Tatu Naiga & Emporium V Uverjee
Brothers (U) Ltd (C.A-U), citing United Assurance Co. Ltd V Attorney General, Civil
Appeal No. 1/1986 which overturned those earlier decisions. Any authorised director can give
the necessary authority to institute a suit in the name of the company.
Furthermore, a secretary can be held criminally liable under the sections already discussed in
respect of directors.
The Position of Members in a Company
In North West Transport Company Vs Beatty (1887) AC 589
A director of a company in which he was the majority shareholder used his votes in favour of a
contract to buy his own shop. Shareholders sued so that the resolution could be set aside. The
court held that every shareholder has a right to vote on any question even if he has a personal
interest, which is opposed to the interests of the company. However, there is a number of
instances when the right of voting can be restricted and this is when the “majority” are said to
have committed a "fraud" on the "minority".
According to the case of Borland Vs Earle (1902) AC 83, fraud does not mean deceit, rather it
means an abuse of power as well as acts of a fraudulent nature e.g. when the majority are attempting
to appropriate themselves money, property or advantages belonging to the company, the minority
shareholders are entitled to participate. Consequently, the courts have held that where there is:a.
expropriation of the company's properties
b.
release of director's duty of good faith
c.
expropriation of members' property.
Then courts will interfere with a member's right of voting since such voting amounts to fraud on the
minority.
Rights of members/shareholders in a company.
1. Right to attend and vote at company meetings.
2. To share in the dividends once they are declared and authorised to be paid.
3. To transfer their shares except in private companies where such right may be restricted.
4. Requisition for an extraordinary meeting.
5. Dismiss the board by voting them out
6. Demand a vote by poll or proxy.
Expropriation of the company's property
This can be illustrated by the case of Munier V Hoopers Telegraphic Works (1874)L.R, 9 Ch.1)
APP 350, two company's A ltd and B ltd existed. A ltd was the majority shareholder in B ltd. B ltd
received a contract to construct a telegraphic line. A ltd appropriated the contract to itself and
immediately resolved to wind up B ltd. Minority shareholders in B ltd sued.
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 It was held that the defendant company as a majority shareholder had benefited from the
contract, which was the property of its subsidiary. The minority shareholders were entitled to
participate in the benefits of the contract which the defendant company had misappropriated.
However, winding up had already taken place and there was no alternative remedy.
Release of directors' duties of good faith
 A general meeting cannot authorize directors to breach their duty of good faith nor can it ratify
any such breach. Once it does so, that will amount to a fraud on the minority and the transaction
in issue will be set aside. But the general meeting can legally release the Director of the duty of
skill and care (S 206).
Expropriation of members' property
 Majority shareholders must not use their powers to expropriate the shares of minority
shareholders. If they do so, that will amount to a fraud and the transaction will be set aside. In
Brown Vs British Wheel Co (1979) 1 ch 290, the majority shareholders wanted to buy the
minority shareholders out and the court held that the action was not bonafide to the company as
a whole.
RAISING THE CAPITAL OF THE COMPANY
Companies are time and time again faced with the challenge of raising capital for the growth of the
company. For an existing company, new capital for such a company can be raised through
ploughing back profits without declaring any dividends. Alternatively, the company may decide to
offer its securities to the public, by floating new shares. Also, the company may decide to borrow
from the bank or the government or insurance companies or finance houses.
RAISING CAPITAL THROUGH ISSUE OF SHARES TO THE PUBLIC
Companies can raise capital by inviting members of the public to subscribe for shares in the
company. This is done through the issuing of a prospectus.
METHODS OF ISSUE
There are different was of inviting the public to subscribe for shares in a company.
1. Placings (private)
2. Offer by tender.
3. Rights issue
4. Bonus Issue
5. Offers for sale
6. Direct offers e.g. by issuing prospects
Placings
These take place in the issuing house. A company issues securities, placing them in the issuing
house for purposes of the issuing house selling them to its clients. The issuing house (may purchase
securities and place them with clients) or may not place them with the clients. When it purchases
the securities, then it ceases to be an agent of the company.
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Offers by Tender
This is a new innovation in the developed world by which the company will make a tender to the
public for the purchase of its shares. All the shares that have been tendered are sold to the highest
bidder.
Rights issue/script issue
The company invites its own shareholders to subscribe for new shares or debentures. As an
incentive, such securities are sold at a lower price than what they would normally obtain in the new
market.
Bonus issue
Like the rights issue, the bonus issue method is an internal affair of the company concerned. Under
this method, instead of the company paying to shareholders a dividend it may have declared, it
holds on to those funds by issuing shares to the shareholders.
Offer for sale
The company concerned issues its securities in an issuing house and the issuing house sells them to
the public at a higher price. This method has a number of advantages to this company:
1.
2.
3.
The company is not responsible for unsuccessful issue to the public.
It is the issuing house which bears the responsibility for the prospectus.
Unlike the method of placings, the company does not pay anything since the issuing house
pays itself a commission, the difference of the price at which the sells and the price which
he bought.
Direct issue
The company itself deals with the public without an intervention of the issuing house. This method
is cumbersome for a number of reasons.
1.
The company has to use a prospectus i.e. legal liability are conferred upon a company.
2.
The company bears a risk of unsuccessful issue.
Although it may protect itself against unsuccessful issue by underwriting such issue, the
underwriters have to be paid a commission for that issue. S. 55 provides that the commission must
not exceed 10% of the price at which the shares are issued and that there must be authority from the
Articles to pay that commission. This means that a company cannot transact with underwriters who
demand more than 10% of the price. Again according to S. 55, if the Articles authorise more than
10% the company cannot exceed such figure. And such payment must be disclosed in the
prospectus
TYPES OF SHARES/ CLASSES OF SHARES.
A share is a unit of capital of a company. The case of Borland Trustees v Steel Bros & Co Ltd
[1901] 1 CH 279 defined a share as “an interest of a shareholder in the company measured
by the sum of money;- for the purpose of liability in the first place and of interest in the
second”.
1. Ordinary shares. This is the basic category. If all shares in the company are issued without
classification or categorisation or differentiation, then they are all ordinary shares. If the
38
2.
3.
4.
5.
6.
7.
shares are divided into classes and special rights of some shares are set out, then the
remaining shares without any special rights are ordinary shares.
Preference shares. These shares will usually be entitled to have dividends paid at a pre
determined rate eg at a rate of 10% on their nominal value in priority to any dividends on
ordinary shares.
Deferred shares. These are sometimes known as founders shares, they normally they
normally enjoy rights after the preference and ordinary shares, they have inferior rights.
Redeemable shares. These are created on the terms that they shall be bought back by the
company at a future time at the option of the company or the members.
Non voting shares. These may be issued to restrict control of the company to the holders of
the remaining shares. This is quite commonly desired when family controlled company is
involved and looks to outside investors for additional capital although it may of course find
that the investors are not prepared to put their money on those terms.
Shares with limited voting rights or enhanced voting rights.
Employee shares. Issued to employees and are ordinary in nature just that they enjoy tax
advantages.
RAISING CAPITAL THROUGH BORROWING/ LOAN CAPITAL
Companies can decide to raise capital through obtaining loans. The money obtained is what is
called loan capital. The loans obtained are usually secured by company property, in the form of
debentures, debenture stocks, fixed charges and floating charges.
1. DEBENTURES.
A debenture was defined in the case of Levy V Abercorcis Slate & Slah as a document which
either creates a debt of acknowledges it. Debentures rank according to the time of issue. The first
debenture takes priority over all other debentures on repayment.
2. DEBENTURE STOCKS.
A private company is not allowed to raise money by borrowing from the public. As such, instead,
the company may decide to create a debenture stock. A debenture stock is a loan fund which is
created by the company and which can be divisible among various creditors who each hold a
debenture stock certificate. For example, a private company with debenture stock, can obtain money
from several banks which could each hold a debenture stock certificate.
Differences between a debenture and debenture stock.
A) As a general rule, debentures rank according to the time of issue. The first debenture
takes priority over all other debentures on repayment. On the other hand, since a
debenture stock is a fund, each beneficiary ranks in pari passu/ equal rank with others
(no priorities).
B) Easy transferability - The debenture covers a distinct debt which is indivisible and
therefore must be transferred as a whole in case the present holder wishes to get money
from it. On the other hand a debenture stockholder can always sub-divide his holdings
and transfer the same to a person of his choice.
39
3. FLOATING CHARGE.
A charge is a security created over the assets of the company. Security is that asset of a
debtor that a creditor is authorised to resort to in case the debtor fails to pay back their
money. A floating charge was defined in the case of Illingworth V Houldsworth as “a
security created over the assets of a company and by its nature leaves the company at
liberty to deal with the assets charged in the ordinary course of business.’’
A floating charge floats over all the assets of the company even those acquired after it was
created and the company is at liberty to deal with those assets in the course of it s business
while the charge is still on them, as such the company can even sell them and replace them
with new or different assets.
A floating charge will settle on the assets of the company if something happens for example
if the company starts to wind up and in that case it becomes a fixed charge.
4. A FIXED CHARGE.
This one was also defined in the above case of Illingworth V Houldsworth as a specific
charge that fastens / is fixed on an ascertained asset(s) of the company and as such the
company has no liberty to deal with such assets without the consent of the creditor as long
as the charge still exists.
Under S. 96, all charges must be registered in 42 days lest they are deemed void.
SECURED AND UNSECURED CREDITORS
Creditors may be secured or unsecured.
A secured creditor is one where by security has been given by the debtor for repayment of the loan
such that in case the debtor fails to repay, then the creditor can take over the security to recover the
loan.
An un secured creditor is one who has given a loan and no security is given, in case the debtor fails
to pay his only option is to sue in the courts of law for the recovery of the money.
MAINTENANCE OF CAPITAL
Different types of capital can be identified in a company.
1. Share Capital
Amount contributed by members entitling them to a dividend as a return to the member.
2. Loan Capital.
Loan given to a company as capital. It is that returnable portion of capital that entitles interest to the
creditor.
3. Nomial capital.
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This is the amount of capital that a company proposes to be registered with which will be realise d
after the shares have been allotted I.E. he maximum amount of share capital that can be realised. S4
describes nominal capital as the authorized maximum amount of share capital that can be realized.
If the authorized capital is not enough, the company may alter it by a special resolution if Articles
allow.
4. Issued capital.
Nominal value of shares availed for subscription and which has been allotted.
5. Capital at call.
Issued capital that is not yet paid for.
6. Called up capital.
Portion of the issued capital that the company has requested for settlement. It is the portion of
issued capital that the company has requested for settlement from the holder of shares that have not
been fully paid for who is entitled to all benefits as if the shares were fully paid provided the
Articles of association allow.
7. Reserve Capital (S.66)
Reserve capital is a portion of the issued capital which is at call but is not to be called up except
in the event of winding up of the company. It is issued only by a company limited by shares or
by guarantee.
Increase of Issued Capital.
It is lawful for a company to increase its share capital at any time.
s. 63 1 (a) provides for increase of capital, that a company limited by shares or guarantee and having
a share capital may alter the conditions in its memorandum so as to increase its share capital by
new shares of such amount as it thinks fit. The company must be authorised by its articles to
increase share capital. S. 65 provides that where a company has increased its share capital, it must
within 30 days after passing the resolution to increase its capital give notice of the increase to the
registrar.
MAINTENANCE OF CAPITAL
This illustrates the concern of the law to see that the capital of the company is maintained in the
company by ensuring;1. That those who take up shares in the company do in fact contribute their subscriptions by
paying them in money or money’s worth.
2. That this sum of money or its equivalent once received by the company is as far as possible
maintained in the company consistently with regard to all the risks associated with any
business venture.
3. And that in particular that money is not returned to the members themselves directly or
indirectly except through some procedure provided by law.
The question is: why this strictness on maintenance of capital?
41
The rationale for this strict rule is that to safeguard the interests of the creditors of the company and
other people whose interests would be negatively affected by the reduction in the company’s capital
or assets. The House of Lords explicitly explained this in the case of Trevor V Whiteworth thus
“one of the main objects contemplated by the legislature in restricting the power of limited
companies to reduce the amount of their capital is to protect the interests of the outside public who
may become its creditors, the effect is to prohibit every transaction between the company and a
shareholder by which money already paid to the company is returned to him, unless the court has
sanctioned the transaction”
In this case court went on to say
“paid up capital may be diminished or lost in the course of the company’s trading, that is a
result which no legislature can prevent, but persons who deal with and give credit to the company
naturally rely on the fact that the company is trading with a certain amount of capital already paid;
as well as upon the responsibility of its members for the capital remaining on call and they are
entitled to assume that no part of this capital which has already been paid to the company has been
subsequently paid out except in the legitimate course of business”
In order to ensure strict observance of this the law has come up with rules and provisions on
maintenance of capital. They include the following.
RULES/ PROVISIONS ON MAINTENANCE OF CAPITAL.
1. It is illegal for a company to acquire/ repurchase its own shares except as provided by
law.
Thus a company cannot use its own capital to buy its own shares as was held in the case of Trevor
V Whiteworth above that it is ultra vires for a company to purchase its own shares even if the
memorandum gives express authority to do so.
2. A company may not issue shares at a discount unless as provided by law.
In Ooregum Gold Mining Co. of India Y Roper (1892) AC 125, the directors sought to
issue shares at a discount. It was held that shares are not to be issued at a discount and
whoever takes shares in return for cash must either pay or become to pay the full nominal
value of those shares. However the companies Act authorises issue of shares at a discount
subject to certain conditions. S. 59 of the Act provides that a company may issue shares at a
discount of a class already issued except that; The issue of the shares at a discount must be authorised by resolution passed in a
general meeting of the company and must be sanctioned by court.
 The resolution must specify the maximum rate of discount at which the shares are to
be issued.
 The resolution can only be made after the company has already been in business for
more than a year.
 The shares to be issued at a discount must be issued within one month after the court
has sanctioned the issue.
3. A company must not give financial assistance for the acquisition of its own shares.
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A company is prohibited from giving financial assistance for the acquisition of its shares to a
person whether directly or indirectly. S. 56 provides that it shall not be lawful for a
company to give whether directly of indirectly any financial assistance for the purpose of or
in connection with a purchase or subscription made or to be made by any person of any
share sin the company or its subsidiary or holding company. Examples of such instances
include the following; A company lending money to A so that to put A in funds so that he can buy shares
from the existing members.
 A company lending to C money so that C can repay a loan provided earlier by C’s
bank which C has already used to buy shares in the company.
 A company buys a piece of land from D knowing that D will use that same purchase
price he receives to pay for shares in the company that he already agreed to buy.
Exceptions to this rule/ instances where the company may give financial assistance.
 Where the lending of the money is part of the ordinary business of the company.
 Where the company gives loans to persons with in the employment of the company other
than the directors with a view to enabling those persons to subscribe for fully paid up share
in the company for their beneficial interest.
4. If a company is to pay dividends then they can only be paid out of the company’s
profits but not out of its working capital.
Dividends are any return paid/given to a shareholder on his investment/shareholding in a
company. Unless the Articles state otherwise, a shareholder receives dividends on his shares. A
share holder is not entitled to payment unless the directors have declared the dividends and
authorised payment of the same to the shareholders. In Makidayo Oneka Vs Wines And Spirits
(U) Ltd And Another (1974) HB.2, the principle was laid that unless the articles and terms of the
issue of shares confer a right upon a shareholder to compel a company to pay a dividend; it is the
discretion of the directors to recommend to a general meeting that a dividend be declared.
If the company adopted table A, Article 116 provides that a company shall only pay dividends
out of profits. Furthermore, where a company has an article equivalent to article 114 of table A,
if the directors have recommended a certain sum for dividend, the general meeting has no
discretion to increase that sum. However, a shareholder or a debenture holder can seek a court
injunction to restrain a company from declaring a dividend.
5. A company may not pay interest out of its capital except as authorised by law.
s. 67 of the Act provides that a company may pay interest out of its capital in certain cases in
particular where shares were issued so that the company can raise money to cover expenses of
construction of any works or buildings. The shareholders who paid for the shares may be given
interest on the money they paid and this interest may be paid out of the company’s capital. However
the payment is subject to the following conditions.
 The payment must have been authorised by the articles or by a special resolution.
 The payment must have also been sanctioned/ authorised by the registrar of companies.
 The registrar may first make an inquiry into the circumstances surrounding the entire
transaction before he authorises the payment and he can charge the cost of the inquiry on the
43
company.
 The payments must be made within the period fixed by the registrar.
 The rate of interest must not exceed 5% per year.
6. A company may not reduce its capital except as provided by law.
s. 68 provides for the reduction of capital. A company may by special resolution or if its
articles provide so reduce its capital but this reduction must first be confirmed by court.
LIQUIDATION/ WINDING UP OF COMPANIES.
The law on winding up of companies is governed by the companies Act
and winding up rules. Winding up basically means liquidation of a company. Its a process
by which the company’s life is brought an end and its property managed for the
benefit of its creditors and members. It involves an operation of putting to an
end the transactions of the company, realizing the assets
and discharging its
liabilities.There are two types of winding up.
1. Voluntary winding up
2. Compulsory winding up
Voluntary winding up occurs when the company decides by itself to wind up its affairs and
therefore passes a resolution to that effect. A company may be wound up voluntarily under
the following circumstances.
(i) When the period fixed by the articles for the duration of the company or if the company was
set up for a specific activity and that activity has been accomplished. In such cases the company
may pass an ordinary resolution to windup.
(ii) A company
voluntary.
on its own
motion and volition can by special resolution wind up
(iii) If the company feels that it can not continue operating by reason that its
liabilities are continuously exceeding the assets, it can by ordinary resolution wind
up its business . Voluntary winding up in its nature also takes two forms .It can be
members voluntary winding up or creditors voluntary winding up.
1. Members voluntary winding up s. 282 -289.
 After the company has passed a resolution to voluntarily wind up, the directors
are required to make a sworn statement (declaration of solvency) to the effect that
they have made a full inquiry into the affairs of the company and that having done
so have formed an opinion that that the company is solvent and will be able to pay
up its debts within 12 months of the commencement of winding up. This
statement must lay out the assets and liabilities of the company.
44
 The members will then appoint a liquidator to help in the winding up of the
company. The liquidator appointed in this case is not an officer of
court but of the company where remuneration is fixed by the general
meeting. The effect of appointing the liquidator is that all the powers of
directors cease except where they are allowed to continue with his
permission.
 Once a liquidator is appointed notice of appointment should be gazetted
within fourteen days of appointment and served on the Registrar of
Companies.(S. 303 Companies Act)
 If in the course of winding up the liquidator finds that the company will not be
able to pay its debts with in the 12 months, he must call a meeting of creditors and
inform them by giving them a statement of the assets and liabilities of the
company.
 If the winding up continues for more than a year, the liquidator must call a
general meeting of the company at the end of each year and give an account of the
work he has so far done.
 As soon as the liquidator has finished his work and fully wound up the affairs of
the company, then he must make a full account of his work to the company in a
general meeting showing how he conducted it, how he disposed of the company’s
assets and send a copy of this report to the registrar.
 Three months after the liquidators final report is filed, the company will be
deemed finally dissolved/woundup.
2. Creditors Voluntary Winding up. S. 290-298
 The company will first call a meeting of creditors by advertising in the gazette or local
newspaper informing them that the meeting intends to pass a resolution for winding up.
 At the meeting the directors shall give a full statement of the position of the company’s
affairs and a list of the creditors of the company and their respective claims.
 The company directors will then nominate a person to act as liquidator. If they choose a
different person, then the person chosen by the creditors will be the one to act as
liquidator.
 If the winding up continues for more than a year, the liquidator must call a general
meeting of the company at the end of each year and give an account of the work he has so
far done.
 As soon as the liquidator has finished his work and fully wound up the affairs of the
company, then he must make a full account of his work to the creditors in a meeting
showing how he conducted it, how he disposed of the company’s assets and send a copy
of this report to the registrar.
 Three months after the liquidators final report is filed, the company will be deemed
finally dissolved/woundup.
COMPULSORY WINDING UP/ WINDING UP BY COURT ORDER.
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Winding up by court is also known a compulsory winding up. Under s. 218 of the Companies
Act, the High Court of Uganda is the one that has jurisdiction to wind up a company registered in
Uganda though after giving the winding up order, the High Court may direct that the rest of the
proceedings be handled by a Chief Magistrates Court or a Magistrate Grade 1 Court.
Compulsory winding can be effected under the following circumstances.
1. If the company has passed a special resolution that it should be wound up by
court.
2. In case of public companies where the company has failed to hold a statutory
meeting or delivery a statutory report to the registrar. However, court has the
powers to direct that such meeting be held or such report be filed on an
alternative remedy to winding up order.
3. If the company does not commence business within a year from the date of incorporation
or suspends its business for a whole year.
4. Where the number of members has reduced below the legal minimum i.e. 2 in case of
private companies and 7 in case of public companies.
5. Where the company is unable to pay its debts. A company will be said to be unable to
pay its debts if;- the company has failed to pay a creditor, the creditor has demanded for payment and the
company has failed to pay for a period of three weeks and above.
-an order of court has been made for the company to pay a given debt and it has been
returned to court unsatisfied.
6. Where it is just and equitable to do so under the just and equitable clause. Situations
which fall under this clause are, when there is a deadlock in management, where there is
justifiable lack of confidence in the management of the company, where there has been
loss of substratum i.e. failure of the whole purpose for which the company was set and
lastly where the company is carrying out business in an unlawful manner or for
fraudulent purposes.
7. In case of as company incorporated outside Uganda but doing business in Uganda, if
winding up proceedings are commenced on that company in the country where it was
incorporated, then that can be a ground for compulsory winding up of that company in
Uganda.
WHO CAN PETITION FOR WINDING UP UNDER COURT ORDER.
 creditors. These are the ones owed money by the company.
 Contributory. These are the persons who are liable to contribute to the company’s
liability in the case of winding up.
Procedure for winding up under court order.
 The creditors petition court for a winding up order.
 The petition is advertised in the gazette or news paper.
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



The petition is heard
A winding up order is made if court is satisfied that the order should be made
The order is forwarded to the registrar for registration
The co then prepares a statement of its affairs and submits the same to the official
receiver.
 The official receiver makes a report to court basing on the statement
 Court may then appoint a liquidator who does the actual winding up.
 The creditors in order to make sure that the liquidator does his work diligently may
appoint a committee of inspection. To act with the liquidator. After the liquidator has
accomplished his work he calls a final meeting of the creditors and lays before them a
report of his work and files the same and the company is finally dissolved.
WINDING UP UNDER THE SUPERVISION OF COURT.S. 308-212
When a company has passed a resolution for voluntary winding up, the court may make an order
that the voluntary winding up shall continue but subject to courts supervison.
CONSEQUENCES OF WINDING UP ORDER.
After the issue of winding up order the following consequences arise.
-No legal proceedings can be instituted against the company without the leave (permission)
of court
-Any disposition/ sale of the company’s property or transfer of shares is void unless the court
has directed otherwise.
-Any attachment, distress or execution lodged against the assets of the company is void.
However, with leave of court an execution or other proceedings against the company can be
granted.
-The directors’ powers of management cease upon the appointment of a liquidator although
they retain the regional authority to engage practitioners to pursue legal issues in court.
-The directors of the company employees are dismissed although they may be re-employed
by the liquidator
Protection of the company property at the commencement and course of winding up.
At the commencement of winding up proceedings the officer of the company may interfere with
the company`s property. Consequently the law has been put in place to cater for such
situations.
(a) Fraudulent trading. If in the course of winding up, it appears that any of the company’s
business has been carried on with the intention to defraud creditors or for any fraudulent purpose,
47
a court may on application order that any person who has the knowledge be made personally
liable for the debts of the company without limitation of liability.
b) Fraudulent preferences. Rules on fraudulent preferences are applied, these rules are to the
effect that any payment on disposition of property made to the creditor after the commencement
of the winding up proceedings will be invalid if it is proved that the dominant intention of the
debtor in making it was to prefer the creditor over the other creditors.
The effect of preference is that it enables a creditor to get more than what he would be entitled if
he had not been paid until the winding up.
c)Misfeasance summons. If in the course of winding up it appears that any person has
misappropriated or retained any money or property of the company or has been guilty of breach
of trust, court may upon application examine such persons conduct and order him to repay with
interest or otherwise as court may deem fit.
d)Creation of floating charge. Any floating charge created within 12 months of the
commencement of winding up on the company`s property is invalid except where it is proved
that was solvent immediately after the creation [S 318].
APPOINTMENT OF A LIQUIDATOR
A liquidator is a person appointed after the commencement of winding up to control the
company’s
property
in
the
process
winding
up.
Any person other than a body corporate may be appointed a liquidator. Ordinarily a
liquidator should be an accountant of not less than five years experience.
A liquidator once appointed is empowered bring or defend any action or any other legal
proceedings in the name of the company and to carry on business of the company as far as may
be necessary for the beneficial winding up thereof . He is mandated to appoint a legal
practitioner to assist him in the performance of his duties.
The liquidator is also empowered to sell the real or personal property of the company by public
auction or private treaty with the power to transfer the same to any person or company.
He can execute all deeds, receipt and other documents and as such to use them when necessary.
He can appoint an agent to do all the work he cannot do himself or to do any other such thing as
may be necessary for winding up the affairs of the company and distributing its assets. These
powers are controlled by court and any creditor or contributory can apply to court for redress in
case of abuse of the powers.
DUTIES OF THE LIQUIDATOR
A liquidator is appointed for purposes of conducting the proceedings in winding up of a
company and performing such duties in connection thereto as court may impose.
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Accordingly, the liquidator’s duties include taking into the custody or control the company’s
property. He has an obligation of identifying the contributories, collecting the company’s
assets , paying of debts and distributing the surplus assets among the members according to
their rights.
The liquidator is also obliged to summon a meeting of creditors and contributories when directed
by their resolution and may also summon a meeting at his own motion to ascertain the wishes
of the creditors.
The liquidator must keep proper accounts which subject to courts control may be open to
inspection by any creditor or contributory received by him in the companies liquidation account.
POWERS OF A LIQUIDATOR.
1. The liquidator can bring or defend any action or other legal proceedings in the name of
the company.
2. The liquidator has power to carryon business of the company as far as may be
necessary for the benefit of winding up. Ordinarily once winding up commences the
company is required to stop operating business, however the liquidator has powers to
continue operating the business of the company if in his opinion it is beneficial to the
winding up process. He is deemed to be an agent of the company and can conclude all
transactions on its behalf for the purposes of effective winding up.
3. The liquidator has powers to appoint legal practitioner or any other professional to assist
him in the performance of his duties.
4. The liquidator has the powers effect payment to the creditors in the different classes i.e.
in priority. He can also make any compromise or arrangement with creditors or persons
claiming to be creditors.
5. The liquidator can deal with all question relating to liabilities and make calls on unpaid
shares, i.e. if there is any share holder who did not pay up his shares, the liquidator can
call upon him to pay.
6. A liquidator is also empowered to dispose of the real and personal property of the
company in a public auction or private contract with power to transfer to any person or
company and execute all deals or documents of ownership endorsing bills of exchange
or promissory notes in the name of the company.
7. The liquidator has powers to apply and get letters of administration in respect of the
estate of any deceased contributory and to do in his official name any other act necessary
for obtaining payment of any money to the company.
8. He can appoint agents to do any business which liquidator is unable to do himself.
9. A liquidator has the power with special leave of court to rectify the register of members.
LIABILITY OF THE LIQUIDATOR.
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The liquidator must exercise high degree of care and diligence in his dealings if he is to escape
liability. If he fails to seek the necessary legal advice and negligently causes loss to the company
and creditors he will be held liable in damages. The liquidator must act in good faith. He should
be honest and avoid making a secret profit and conflict of interest. Where he fails to act
bonafide, he can be made to account for any unfair benefit obtained from the liquidation
PRIORITY OF SETTLEMENT OF DEBTS
According to S. 315 of the companies Act, the companies Assets on winding up should be
distributed in the following order of priority in settling the claims.
1. In the first place the assets should be applied to meet the costs, charges and expenses of
winding up including the liquidator’s disbursement and remuneration. However,
remuneration of the liquidator should be reasonable and where it is proved excessive and
unjustifiable court can interview and require him to submit his bill for taxation during
taxation some of the money claimed is reduced.
2. The second priority is given to preferred creditors. The priority with regard to the
preferential creditors is determined as follows:
 Local rates, charges and government taxes due with one year of the date
of winding up.
 Wages and salaries of any clerk or servant for services rendered for the previous
four months.
 All accrued holiday remuneration of the servants.
 All outstanding payments to N.S.S Fund in respect of a worker.
3. The third priority is given to the ordinary creditors starting with
 the secured creditors.
 Deferred creditors.
 And lastly the unsecured creditors.
Where the winding up of the company is not concluded within a year, the
liquidator must furnish the registrar with the details of liquidation.
When the affairs of the company have been wound up, court must on application
of the liquidator make an order dissolving the company.
Subsequently the liquidator is required within 14 days of the issue of dissolution order to send a
copy thereof to the registrar who enters the notice of dissolution in his register. Alternatively, the
liquidator may apply to the registrar to dissolve the company by striking its name off the register
of companies.
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