GENERAL PRINCIPLES OF

COMPANY LAW

MUSHAGARA AGGREY MPORA.

…Africa-law teacher series…
2014©
GENERAL PRINCIPLES OF
COMPANY LAW
2nd EDITION

BY

MUSHAGARA AGGREY MPORA

LLB (Hons); P.G. Dip Legal Practice (LDC);

LLM (Commercial Law) R.S.A

Advocate of the High Court of Uganda,

Lecturer of Commercial Law at

Kampala International University Dar es Salaam College

Tanzania.

First Published in 2012 by

Africa law teacher Publishers Ltd,

P.o.box 9790,

Dar es Salaam-Tanzania

East Africa.

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 Copyright.
All rights reserved. No part of this publication may be reproduced or transmitted, in any form or
by means, or stored in a retrieval system of any nature, without prior written permission, except
for permitted fair dealing under the law or in accordance with terms of a license issued by
Copyright Licensing Agency in respect of photocopying and or reprographic reproduction.
Application for permission for other use of copyright material shall be made to the publishers.
Full acknowledgement of the author, publisher source must be given.
Africa law teacher series is the Trademark for this publication.

Africa law teacher series ©

2014.

iii
PREFACE
This publication is a comprehensive and clear introduction to the principles and practices of
company law. The book is well respected for its accuracy and clarity, and is up to date with case
law and legislative developments. The level of detail and topics covered avoid excessive technical
detail and are appropriate for law students, Advocates and law lecturers. Essential Cases are
highlighted so that key decisions are brought to light.

Finally, I would like to thank those members of staff at Africa-law teacher publishing who have
helped produce this book, particularly Louise Matoya, Acquisitions Editor- Commercial Law.

My thanks also go to those who designed, set, printed and bound this book.

In this book, I have also had the invaluable assistance of my beloved better half in terms of the
collection of sources of material that should be considered and in terms of my library. No lawyer
can operate without this kind of backup.

Any errors and omissions at the level at which the text is aimed are down to me.

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 TABLE OF CONTENTS
PREFACE ...................................................................................................................................... iv
TABLE OF CONTENTS ................................................................................................................. 1

CHAPTER ONE ............................................................................................................................ 6

DEFINITION OF COMPANY ........................................................................................................ 6

CHAPTER TWO ........................................................................................................................... 9

TYPES OF COMPANIES ............................................................................................................... 9

CHAPTER THREE ..................................................................................................................... 10

REGISTERED COMPANIES........................................................................................................ 10
Private companies .......................................................................................................................... 10
Public companies ........................................................................................................................... 10
HOLDING AND SUBSIDIARY COMPANIES S.154................................................................... 14

CHAPTER FOUR ....................................................................................................................... 15

PROMOTION AND FORMATION OF THE COMPANY ............................................................ 15
Promotion ...................................................................................................................................... 15
Promoters Defined ......................................................................................................................... 15

CHAPTER FIVE ......................................................................................................................... 19

PRE-INCORPORATION CONTRACTS ....................................................................................... 19
NOVATION .................................................................................................................................. 20

CHAPTER SIX ............................................................................................................................ 22

FORMATION /REGISTRATION PROCESS ................................................................................ 22
EFFECT OF REGISTRATION ..................................................................................................... 24
THE ROLE OF THE REGISTRAR ............................................................................................... 25

CHAPTER SEVEN...................................................................................................................... 26
THE MEMORANDUM & ARTICLES OF ASSOCIATION OF A COMPANY ............................ 26

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The memorandum of Association ................................................................................................... 26
ARTICLES OF ASSOCIATION (S 8-12of the Companies Act) .................................................... 29
INTERPRETATION OF ARTICLES AND MEMORANDUM OF ASSOCIATION ..................... 31
THE CONTRACTUAL EFFECT OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION
...................................................................................................................................................... 32
CONSEQUENCES OF INCORPORATION .................................................................................. 34
LIABILITY ................................................................................................................................... 34
PROPERTY .................................................................................................................................. 35
LEGAL PROCEEDINGS .............................................................................................................. 35
PERPETUAL SUCCESSION ......................................................................................................... 36
TRANSFER OF SHARES ............................................................................................................. 36
BORROWING .............................................................................................................................. 36
FORMALITIES, PUBLICITY AND EXPENSES .......................................................................... 37
CAPACITY TO CONTRACT ....................................................................................................... 37

CHAPTER EIGHT ...................................................................................................................... 38

THE ULTRA VIRES DOCTRINE................................................................................................. 38
LIABILITY OF DIRECTORS ON ULTRA VIRES TRANSACTIONS ......................................... 41
EXCEPTIONS TO THE ULTRA VIRES DOCTRINE .................................................................. 42

CHAPTER NINE ......................................................................................................................... 43

LIFTING THE VEIL OF INCORPORATION ............................................................................... 43

CHAPTER TEN .......................................................................................................................... 47

OTHER FORMS OF BUSINESS ORGANIZATIONS .................................................................. 47
SOLE TRADER/ SOLE PROPRIETORSHIP ................................................................................ 47
PARTNERSHIPS .......................................................................................................................... 48
CLUBS AND SOCIETIES ............................................................................................................ 48
COOPERATIVE SOCIETIES ....................................................................................................... 48
UNIT TRUSTS.............................................................................................................................. 49

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CHAPTER ELEVEN................................................................................................................... 50
THE DOCTRINE OF CONSTRUCTIVE NOTICE AND THE INDOOR MANAGEMENT RULE
...................................................................................................................................................... 50
THE DOCTRINE CONSTRUCTIVE NOTICE ............................................................................. 50
THE INDOOR MANAGEMENT RULE ....................................................................................... 50
ORIGINS OF THE DOCTRINE ..................................................................................................... 51
EXCEPTIONS TO THE RULE ..................................................................................................... 52
CHAPTER ELEVEN ..................................................................................................................... 56
THE OFFICERS OF THE COMPANY ......................................................................................... 56
Disqualification to act as director ................................................................................................... 56
Duties of directors ......................................................................................................................... 57
EXERCISE OF DIRECTORS DUTIES ......................................................................................... 72

CHAPTER TWELVE ................................................................................................................. 81

MEETINGS OF THE COMPANY ................................................................................................ 81

CHAPTER THIRTEEN .............................................................................................................. 88

RAISING CAPITAL OF THE COMPANY ................................................................................... 88
Limitations to damages for misrepresentation................................................................................. 93
Limitations for rescissions ............................................................................................................. 93
Statement lieu of a prospectus ........................................................................................................ 94

CHAPTER FOURTEEN ............................................................................................................. 95

ALLOTMENT OF SHARES ......................................................................................................... 95
ALLOTMENT PROPER ............................................................................................................... 95
SHARE CERTIFICATES .............................................................................................................. 96
LEGAL EFFECTS OF SHARE CERTIFICATES. ......................................................................... 96
TYPES OF SHARES ..................................................................................................................... 98
LOAN CAPITAL .......................................................................................................................... 98

CHAPTER FIFTEEN ................................................................................................................ 101

MAINTENANCE OF CAPITAL ................................................................................................. 101

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OTHER EXCEPTIONS TO THE MAINTENANCE OF CAPITAL RULE. ................................. 116

CHAPTER SIXTEEN ............................................................................................................... 118

WINDING UP OF COMPANIES ................................................................................................ 118
Winding up or striking off the register? ........................................................................................ 118

CHAPTER SEVENTEEN ......................................................................................................... 129

RECEIVERSH1P ........................................................................................................................ 129
Formalities of appointment .......................................................................................................... 129
Notice of appointment.................................................................................................................. 130
The receiver’s position ................................................................................................................. 130

CHAPTER EIGHTEEN ............................................................................................................ 131

ENFORCEMENT OF MEMBER’S RIGHTS .............................................................................. 131
ii) The minority shareholder’s action based on the exceptions to the rule in FOSS Vs HARBOTTLE
.................................................................................................................................................... 131
COMMON LAW PROTECTION AND THE RULE IN FOSS Vs HARBOTTLE ....................... 131

CHAPTER NINTEEN ............................................................................................................... 140

THE LAW OF PARTNERSHIPS ................................................................................................ 140
FORMATION OF A PARTNERSHIP ......................................................................................... 142
NAME OF THE PARTNERSHIP AND MANDATORY REGISTRATION ................................ 143
NUMBER OF PARTNERS ......................................................................................................... 143
PARTNERSHIP PROPERTY ...................................................................................................... 144
RETIRING PARTNER ................................................................................................................ 144
RELATIONS OF THE PARTNERS/POWERS OF PARTNERS TO BIND EACH OTHER ........ 145
AUTHORITY OF AN AGENT ................................................................................................... 145
EXPRESS/ ACTUAL AUTHORITY ........................................................................................... 145
IMPLIED AUTHORITY / USUAL AUTHORITY ...................................................................... 145
APPARRENT AUTHORITY / OSTENSIBLE AUTHORITY/ AUTHORITY BY ESTOPPEL ............ 146
EXTENT OF PARTNERS AUTHORITY & LIABILITY ................................................................. 147
VARIATION BY CONSENT OF THE TERMS OF A PARTNERSHIP. ..................................... 149

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DUTIES/OBLIGATIONS OF PARTNERS ................................................................................. 149
MANAGEMENT AND CONTROL OF THE PARTNERSHIP ................................................... 150
DISTINCTION BETWEEN A COMPANY AND A PARTNERSHIP ......................................... 151
REFERENCES ............................................................................................................................ 153

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 CHAPTER ONE
DEFINITION OF COMPANY
Definition of a Company as an artificial legal person

The word company originates from a Latin word ‘com panis’ meaning people sharing together.
It relates to a group of people associating together and sharing resources to pursue a common
purpose.

S.2 of The Companies Act Cap 2012, defines a company as any company formed and registered
under the Act or an existing Company or a re-registered company under this Act.

The definition given by the Companies Act is not helpful, as it 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 while artificial persons (Corporations) are created by
law/statute 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 recognized.

 It can own its own property i.e. 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 remain in existence, in other words
it has perpetual succession.
 It can be a creditor i.e. borrow money in its own name and use its assets as security and it will
be responsible for paying back ‘such debts.
 It can employ its own employees, including its members or shareholders.

This principle of legal personality was first distinctly articulated in the British House of Lords
Judgment in the case of SALOMON Vs SALOMON & CO. LTD (1897) AC 22. Salomon owned
a boot and shoe manufacturing business as a sole proprietor (single trader); due to pressure from
his family (his sons were demanding for a share in the family business), he formed a limited
liability company known as Salomon & co ltd. The company had a maximum of 7 shareholders
consisting of Salomon, the wife and his five children. Salomon owned 20001 shares of the 20007
shares while the wife and children owned I share each. Immediately after incorporation, the

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company experienced difficulties and a year later was wound up. After paying all the secured
creditors/debenture holders, he failed to pay the unsecured creditors. These creditors then sued
him personally for the repayment of the company’s debt.

At the court of first instance and appeal court, it was held that he was liable to pay the debts of the
company personally. That there was no company at all but Salomon, that the company was a mere
sham and that he employed the company as an agent and therefore as a principal behind the
company he was liable to pay its debts.

Some of the reasons given for holding him personally liable were;

 He was the owner of the business before incorporation.

 After incorporation he was owning a substantial part of the shares.
 It was him who paid for all the shares even those of his wife and children.
 He had appointed himself the managing director of the company and he alone was in charge
of the management.

He appealed further to the House of Lords and the House of Lords departed from the decision of
the lower court, lord McNaughton held as follows;-.

i) That Salomon had followed all the formalities required to form a company and therefore his
company was a legal entity recognized by law and therefore a body corporate capable of its own
rights and liabilities separate and different from its members.

ii) That therefore the company was a legal entity capable of a separate existence and liable to
pay its own debts, and Salomon was not personally liable to pay the debts of the company.

iii) That a company is at law a different person altogether from the subscribers although it may
be that after incorporation, the business is exactly the same as was before, the same persons are
the managers, and the same hands receive the profits.

iv) That it does not matter whether all the members are relatives or strangers.

v) That it does not also matter, even if one of the members holds a substantial part of the shares.

vi) That a company being under the full control of one member does not mean that it is not a
company, as long as it is legally registered, it is a legal person different from its members.

The importance of Salomon’s case is that the highest court in the land recognized the necessary
consequences of the distinction between a company and its members as separate persons.

The principle has been applied in other cases, for instance in LEE Vs LEE’S AIR FARMING
LTD. (1960) 3 ALL E.R 420 Lee formed a company that was engaged in the business of aerial
crop spraying in Newzealand. The company had three thousand shares (3000) in which he held
2999 shares and his wife (the plaintiff) held one. Lee was sole “governing director” and

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controlling shareholder so he exercised full and unrestricted control over the affairs of the
company. Lee as a managing director appointed himself chief pilot in the company’s business of
aerial crop spraying. He was killed in a crash while flying for the company. His wife sued the
company for compensation under the workmen’s compensation Act. Under the Act; one could only
be entitled to compensation if they proved that the deceased was an employee who died in the
course of employment.

It was argued by the company that on him lay the duty of giving orders and obeying them, that he
acted as both employer and employee and virtually there was no employer-employee relationship
between him and the company and that therefore the wife was not entitled to compensation.

In the House of Lords, Lord Morris held that Lee and his company were distinct legal entities,
which had entered into contractual relationships under which Lee as chief pilot became a servant
of the company.

Court also held that lee and the company were two ‘separate and distinct persons, and that in his
capacity as managing director he could appoint an employee of the company, including himself.

It was further held that the fact that somebody is a managing director of a company does not mean
that he cannot enter into a contractual relationship with the company to serve it.

In the case of MACAURA Vs NORTHERN ASSURANCE CO. LTD (1925) A.C.619; Macaura
was a landowner who sold the timber on his estate to a company in return for shares in that
company of which he was the sole owner and creditor. Before the sale to the company, he had
insured the timber, which lay, on his land in his own name. He did not transfer the insurance policy
to the company name. Two weeks later almost all the timber was destroyed by fire. He claimed for
the loss under his private insurance policy. Under that policy, before one could recover
compensation, he had to prove that he had an insurable interest, thus before Macaura could
recover anything from the insurers, he had to prove that he had an interest in the timber that was
destroyed by fire.

The insurers denied liability on the grounds that he personally did not have, as insurance law
required, an insurable interest in the timber.

It was held that Macaura’s claim must fail since it was the company, which owned the timber;
Macaura merely owning the shares in the company, the timber was not effectively covered by his
insurance policy.

This case therefore upheld the principal that a company has a distinct legal existence from that of
its shareholders and as such it is capable of owning its own property and a shareholder has no
personal interest in its property, though he’ may be the controlling shareholder.

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 CHAPTER TWO
TYPES OF COMPANIES
1. Registered companies

A registered company is a company that is registered with the registry of companies. The
Companies Act provides for the registration of a company. Therefore, for one to have a company
that is legally recognized under the Companies Act, that person must register that company with
the registry of companies, this process is called registration or incorporation /floatation of a
company.

2. Statutory companies

These are formed by Acts of Parliament and do not go through the process of incorporation laid
out under the Companies Act. They are formed by an Act of Parliament, Examples include NWSCO
under the National Water and Sewerage Corporation Act Cap 317, New Vision formed under the
New Vision Printing and Publishing Corporation Cap 230; others include NWSCO, URA, UWLA,
UNRA etc.

3. Chartered companies

This relates to companies granted a Royal Charter in England by the Crown under the Royal
Prerogative or special powers. The charter normally confers corporate personality. Examples of
these are Colleges of Oxford and Cambridge.

All the types of corporate bodies described above are classified as corporations aggregate. This
distinguishes them from some offices (such as those of traditional rulers) ‘which exist separately
from the individual who for the time being holds the office. This latter category is called a
corporation sole since only one person fills the office at one time e.g. the office of the Kabaka of
Buganda, the Omukama of Toro, the Kyabazinga of Busoga, and the Archbishop Etc.

4. Corporate sole

It is one, which consists of one human member at a time, being the holder of an office. They are
mostly created by Acts of Parliament but may also be created by the Constitution or common law.
Examples include the office of the Bishop (Common Law), the President or the Kabaka
(Constitution) and the Administrator Registrar General (Acts of Parliament)

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 CHAPTER THREE
REGISTERED COMPANIES
Under the Companies Act, provision is made for two major types of registered Companies, which
can be lawfully formed in Uganda. Principally these are;

1. Private companies.

2. Public companies.

Private companies
S.4 of the Companies Act defines a private company as a Company, which by its articles

 Restricts the rights to transfer shares of the company.

 Limits the number of its members to 50, not including past, present employees of the company.
 Prohibits any invitations to the public to subscribe for any shares or debentures of the company
(investments in the company).

Under s. 4(1), the required minimum number of members is 1 person. 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 as per S.30 of the
Companies Act.

Public companies
Under S.3 (1), the required minimum 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.

Liability of members where the number of members is below legal minimum

10
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.

Distinction between Private and Public Companies

A public Company A private Company

1. Minimum of 7 members. For such a company 1. Minimum of two members for
to do business there must be a minimum of at such company to do business
least 7 members. Where the company there must be a minimum of at
continues to do business when the number of least 2 members. Where the
members has fallen below the legal company continues to do
minimum, then this is a ground for the business when the number of
winding up of the company. (Winding up is members has fallen below the
the process of putting the company’s legal minimum, then this is a
existence to an end.) s.6 of the Companies ground for the winding up of the
Act company. S.4 (1) of the
Companies Act

2. No maximum limit of members.

2. The maximum number of
members is 100. S.4 of the
3. There must be directors. Companies Act
3. Only one director can suffice. S 4
of the Companies Act
4. Cannot commerce business until and unless
it obtains a certificate of trading /certificate
of commencement of business, in addition to 4. Can commence business as soon
a certificate of incorporation. as it acquires a certificate of
incorporation s.22.
5. Must hold a statutory meeting between 1 &
3 months from the date of commencement of
business. Directors are required under the 5. No statutory meeting is required
law to send a statutory report to every of such companies s.137(11).
member within 14 days to the date of the
meeting. Such report must also be sent the

11
 registrar of companies. S 137 and 138 of the
Companies Act
The matters discussed in such meeting include:
i) Number of shares that were issued out
ii) Number of shares that were bought
iii) Number of shares that were paid up
iv) Number of shares that were paid an for a
consideration other than cash
v) Names and particulars of directors,
- auditors etc
vi) Contracts which require approval of the meeting
This meeting is held once during the company’s
existence and cannot be held again.

6. Shares are freely transferable. In public 6. Restricts transfer of shares. The

companies, where a person does not wish to be a law restricts the free transfer of
shareholder any more, or where he wishes to sell off shares in private companies.
his shares, he can do so easily without necessarily Where a person does not wish to
getting the consent of the directors. be a shareholder any more, he
cannot freely sell off his shares
but must first seek the consent of
the directors. S.5

7. Does not issue a prospectus since

7. Issues a prospectus. This is a requirement of all
private companies are not
public companies and it is one of the documents that
is filed while registering such company. This allowed under the law to invite
persons to come and buy its
document is merely an advertisement of the
shares.
company informing the general public; the nature of
the company, shares available, the nature of
business of the company, names and particulars of
the directors etc. s. 2 and 60 of the Companies Act

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Under the Companies Act, registered Companies may be limited liability companies or unlimited
liability companies: as provided under S.4 of the Companies Act. Limited liability companies
may be:-

 Liability limited by shares

 Liability limited by guarantee

(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 member’s liability is only limited
to the amount of the unpaid shares. S.2, S.4 (2) (a) of the Companies Act.

NOTE: Liabi1ity may arise in case of winding up. When a company is unable to go on with its
business or for some other reasons it is forced to stop operating business such a company may go
through a process called winding up. Winding up is the process of ending a company, in this
process, all its assets are sold, and the company pays off its debts using the proceeds of its assets
i.e. the money it has got from the sale of its assets. In case that money is not enough to clear all its
liabilities, then the members who have not completed payment for their shares will be called upon
to pay and that money will also be used to clear its debts.

NOTE: A share is a unit of capital in a company. For example, if the company wants to start
business, it can decide to start up with an initial capital of 10,000, 000/=. This capital will then be
divided into a number of units, let us say 10 units. It means that each unit will be equal to 1,000,
0000/. Therefore, since a share is a unit of capital in a company, each share of that company will
be worth 1,000, 000/=. So (a shareholder buys let us say 40 shares in that company, he will pay
40 times 1,000,000(40,000,000).

(b) A Company limited by guarantee

This is one where the liability of its members is limited to such amount, as the members may have
undertaken to contribute to the company’s assets in the event of its winding up. This guarantee
must be expressed in the memorandum of association. i.e. there must be an express
statement/undertaking by the subscribers / members that the members guarantee that they will pay
a specified amount of money in the event of winding up of the company, if the company’s assets
are not sufficient to meet its debts S 2), S.4(2) (b) of the Companies Act.

For example, the articles may have a clause saying that in case of winding up of the company,
each member shall be liable to contribute only 500,0000/= in case the assets of the company are

13
not enough to meet its liabilities. It means that the members liability will be limited to only that
5000, 000/= and no more.

(c) An unlimited company

This is a company in which there is no limit to 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 the company has debts of
millions and millions of shillings, the members have to be responsible to pay all the debts and the
member’s personal estate/property can be encroached upon to discharge the liabilities of the
company. S.4 (2) (d) and 2 of the Companies Act.

HOLDING AND SUBSIDIARY COMPANIES S.161

A subsidiary company is one that is controlled by another company called a holding company or
its parent (or the parent company). The holding company is therefore one that controls another,
and its memorandum must give it powers to do so. The most common way that control of a
subsidiary is achieved, is through the ownership of majority shares in the subsidiary by the parent.
(Note: voting rights unless otherwise agreed in the articles, will depend on the shares, if you have
80% of the shares in a company, you will be entitled to 80 votes). These shares give the parent the
necessary votes to determine the composition of the board of the subsidiary, and so exercise
control. This way the holding company can dictate policy and management decisions. This gives
rise to the common presumption that 50% plus one share i.e. (more that 50%) is enough to create
a subsidiary. Thus if a company owns majority shares in another company, that other company
will be its subsidiary.

A parent company does not have to be the larger or “more powerful” entity; it is possible for the
parent company to be smaller than a subsidiary or the parent may be larger, than some or all of
its subsidiaries (if it has more than one). The parent and the subsidiary do not necessarily have to
operate in the same locations, or operate the same businesses, but it is also possible that they could
conceivably be competitors in the marketplace. In addition, because a parent company and a
subsidiary are separate entities, it is entirely possible for one of them to be involved in legal
proceedings while the other is not.

A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation.

Subsidiaries are a common feature of business life, and most if not all major businesses organize
their operations in this way. Examples include holding companies such as MTN (Uganda) is a
subsidiary of MTN (South Africa), Stanbic Bank Uganda is a subsidiary of Standard Bank (South
Africa) etc.

14
 CHAPTER FOUR
PROMOTION AND FORMATION OF THE COMPANY

Promotion
A business cannot come into existence unless someone thinks of the idea and attempts to translate
it into business. The process of conceiving and translating the business opportunity is what is called
promotion.

Promoters Defined
Before a company is registered or formed, a person or persons must carry out the preliminary work.
This work includes signing contracts, arrangement for capital and credit facilities, securing
premises where the company is to be located, machinery and equipment, preparing the necessary
documents, etc. All this work is done by persons called promoters.

A promoter has been defined judicially by Cockburn C J in the English case of; TWYCROSS VS
GRANT (1877) as-

“One who undertakes to form a company with reference to a given project and to set it going, and
who takes the necessary steps to accomplish that purpose”.

A person is prima facie a promoter of the company, if he has taken part in setting a company
formed with reference to a given object.”

A company may have, many promoters and in the case of; RE LEADS & HANLEY THEATRES
[1902] 2 CH 809, it was held that one existing company may promote another new company.

An employee of a promoter is not a promoter for example a lawyer or advocate or solicitor who
merely does the legal work necessary to the formation of a company is not as such a promoter. RE
GREAT WHEAL POLGOOTH LTD (1883) CR 42

A promoter may do anyone or more of the following activities: -

• Solicit capital

• Prepare a prospectus

. Solicit directors for the company

• Arrange the preparation of the Memorandum and Articles of Association

• Obtain premises

• Obtain whatever equipment is necessary for the running of the business

• Negotiate contracts.

15
Duties of a Promoter:

A promoter is not an agent of the company which he is forming because a company cannot have
an agent before it comes into existence (KELNER Vs BAXTER (1866) and is not usually treated
as a trustee for the future company (OMINIUM ELECTRIC PALACES LTD Vs BAINES [1914]
1 CH 332). However, from the moment he acts for the company in mind, he owes duties to the
company and they include the following;

1. Duty of good faith. A promoter stands in a fiduciary relationship (a relationship of utmost good
faith/trust) to the company and consequently owes it certain fiduciary duties i.e. duties of
disclosure and accounting and this implies that they must not make any secret profits out of the
promotion without disclosing it to the company. A promoter must disclose a profit which he is
making out of the promotion to either an independent board of directors or the existing and
intending shareholders for example by disclosure in the prospectus.

This was illustrated in the case of; ERLANGER Vs NEW SOMBERERO Co LTD (1978) 3AC
1218. Members in a syndicate bought the lease of an island containing a phosphate mine at
£55,000. The members of the syndicate then promoted a company and appointed themselves its
directors. They sold the lease to the company for £110,000. This was unfortunately not revealed
in the prospectus inviting the public to subscribe for its shares but was subsequently discovered.
The company instituted an action to recover profits from the promoters who in turn argued that
they had made a disclosure of their profits to a board of directors. Nevertheless, the BOD was:

i. Appointed by the promoters themselves.

ii. The first director could not attend meetings because of his state in life (ill health).

iii. The second director was not present when the profits of the promoters were approved.

iv. The third director was one of the promoters themselves.

v. The fourth and fifth directors were ignorant of the subject matter.

The issue was whether there was a disclosure. It was held that the disclosure to only one director
who had appointed the promoters was not a proper disclosure and that the company was entitled
to rescind the contract. That the promoters must repay the purchase price and the company in turn
must re-convey the lease to the promoters so as to restore the status quo (original position). Thus,
a disclosure must be made to the company either by making it to an entirely independent board or
to the existing and potential members as a whole. A partial or incomplete disclosure will not do,
the disclosure must be full or explicit. CHARLESWORTH IN HIS BOOK;
CHARLESWORTH’S COMPANY LAW 18TH EDITION 2010 has criticized this requirement of
disclosure before an independent board because in most cases this requirement is one that cannot
be complied with, as all the promoters or some of them are usually the first directors of the

16
company. In the formation of private companies, the promoter usually sells his business to a
company, of which he is the managing director and in which he is the largest shareholder.

2. Duty of skill and care: In the process of promotion, a promoter must carry out his work with
great care and skill and due diligence expected of a reasonable man. He should take care not to
make false representation/ misstatements for example in the prospectus.

3. Duty to act in the best interests of the company. He should not let his personal interest conflict
with those of the company for example he should not sell his own properties to the company at an
overpriced value. He should also take care not to under negotiate contracts for example buying
properties from third parties at overpriced values.

Remedied for Breach of duty

1. A promoter can be compelled to account for any secret profit made. In GLUECKSTEIN Vs
BARNES (1900) A.C 240; promoters of a company operating under a syndicate bought property
intending to sell it to a company and sold it to the company at a higher price and made a profit on
it but did not disclose this profit to the company in the prospectus, it was held that they were liable
to account for the above profits to the company.

Where promoters sell their own property to the company, the company cannot affirm the contract
and at the same time ask for an account of the profits or for damages, as this would amount to
asking Court to vary the contract of sale and order the defendant promoters to sell their assets at
a lower price.

2 Rescission: where the promoter has for example sold his own properties to the company at an
overpriced value, the company may rescind the contract and recover the purchase price paid.
(ERLANGER Vs NEW SOMBERERO).

The right to rescission may be lost in a number of ways. For example; -

 It will be lost if the parties cannot be restored to their original positions, as where the
property has been worked so that its character has been altered. LAGUNAS NITRATE
CO Vs LAGUNAS SYNDICATE [1899] 2 CH 392. However, even if restitution is not
strictly possible, the right to rescind will be allowed if restitution is substantially possible.
 It will also be lost if third parties have acquired rights for value by mortgage or otherwise
under a contract. RE LEADS & HANLEY THEATRES [1902] 2 CH 809; where the
mortgagee of the property had sold it.

3. Damages for misrepresentation where the promoter has made an actual misrepresentation and
cannot prove that he had reasonable ground to believe and did believe up to the time the contract
was made the facts represented were true.

4. Damages for failure to disclose.

17
5. Damages for negligence in allowing the company to purchase property at an excessive price
since they are to act with skill and care.

Remuneration of a Promoter

Promoters do not possess an automatic right to receive remuneration from the company for their
services from the company unless there is a valid contract enabling him to do so between him and
the company. Without such a contract, he is not even entitled to recover his preliminary expenses.
This is so because until a company is formed, it cannot enter into a valid contract and the promoter
has to expend the money without any guarantee that he will be repaid.

However, in practice, the company’s articles may allow directors to pay preliminary expenses from
the company’s funds.

However, if the promoter is a professional, he will not be content merely to recover his expenses;
he will expect to be handsomely remunerated. In the case of TOUCHE Vs METROPOLITAN
RAILWAY WAREHOUSING COMPANY (1871) LR 6 CH.APP 671 Lord Hatherly said: “the
services of a promoter are very peculiar, great skill, energy and ingenuity may be employed in
constructing a plan and in bringing it out to the best advantages.” Hence, it is perfectly proper for
the promoter to be rewarded provided he fully discloses to the company the rewards, which he
obtains. The remuneration must be fully disclosed not only by the promoter to the company but
also by the company in the prospectus.

18
 CHAPTER FIVE
PRE-INCORPORATION CONTRACTS S. 54 Companies Act 2012
In promoting a company, promoters usually enter into contracts with third parties and when they
do so, they purport to do so on behalf of the company before it is incorporated i.e. (unincorporated
company). Such contracts are not binding on the company because it is not yet in existence; and
consequently has no capacity to contract. Herman J in the case of; ROVER INTERNATIONAL
LIMITED Vs CANNON FILMS SALES LTD F1987)1 WLR 1597 AT 1599; Observed that

“If somebody does not exist, they cannot contract”. A company comes into existence as a legal
person after it is registered/ incorporated, so agents cannot make contracts on behalf of a company
before that company is legally registered, if they do; such contracts will be void and of no effect
as against the company and the company cannot even ratify them. To ratify a contract means to
adopt or confirm. Such contracts are called pre- incorporation contracts. This position has been
changed by section 54 of the companies Act. Section 54(1) These contracts have effect as those
made with the person purporting to act for the company, S.54(2 Company may adopt a pre-
incorporation contracts with its formation and registration made on its behalf without a need for
norvation. Where a company adopts a pre-incorporation contract the liability of the promoter
ceases.

In the case of; KELNER Vs BAXTER (1866). The Gravesend Royal Alexandra Hotel Company
ltd was being formed to buy a hotel from K. At a time when all the concerned knew that the
company had not been formed, a written contract was made “on behalf of’ the proposed company
by A, B & C for the purchase of wine worth 900 pounds from K. The company was subsequently
formed and the wine handed over to it and consumed. Before payment was made, the company
went into liquidation; It was held that A, B & C were personally liable on the contract, and no
ratification could release them from their liability.

In that case, Ere J at page 183 stated thus; “where a contract is signed by one who professes to
be signing as an agent’ but who has no principal existing at the time, and the contract would be
altogether inoperative unless binding on the person who signed it, he is bound thereby, and a
stranger cannot by a subsequent ratification relieve him from that responsibility”

Similarly in the case of ENGLISH & COLONIAL PRODUCE COMPANY LTD (1906) CH.
435 where persons who afterwards became directors of the company instructed solicitors to
prepare the memorandum and articles of association so that the company might be formed but on
formation the company failed to pay the solicitors’ charges and denied that it was liable to do so,
it was held that although the company had taken benefit of the contract, it did not impose on it any
liability to pay since the contract was made before the company was formed and the persons who
had given the solicitors the instructions were personally responsible for paying them for the work
done.

19
In the Ugandan case of CENTRAL MASAKA COFFEE CO. Vs MASAKA FARMERS AND
PRODUCERS LTD (1991), ULSLR 220, it was held that a company lacked the capacity to
conclude an agreement for lease of a coffee processing factory made five days before its
incorporation. Thus if the contract was entered into by a promoter and signed by him “for and on
behalf of XX Co Ltd” then according to KELNER’S CASE, the promoter will be personally liable.

But if the promoter signed the proposed name of the company without adding his name to
authenticate it, if they sign on behalf of the company but do not put the words “for and on behalf’
to show that they are actually signing on behalf of that company in the following manner;

“AMUREY LTD

AGGREY MPORA DIRECTOR”

-then there is no contract at all. This is because the contract is not signed on behalf of the company
and neither is it in the names of the promoter alone.

This was illustrated in the case of NEWBORN Vs SENSOLID (1954) QB 45; the plaintiff was
forming a limited liability company to be called Leopold Newborn London Ltd. The plaintiff
entered into a contract with the defendants to supply them with ham and the contract was signed
as “yours faithfully, Leopold Newborn London Ltd and underneath the signature was the plaintiffs
name” The market fell and the defendants refused to take delivery. The plaintiff sued for breach
of contract. The court held that the company was not in existence at the time of signing the contract
hence there was never a contract. The contract was never signed on behalf of the company nor
was it signed by the plaintiff, and therefore neither the company nor the plaintiff himself could sue
on the contract

If a pre-incorporation contract cannot be enforced against the company, can the company
enforce such a contract?

A company cannot after incorporation enforce a contract made in its name before incorporation or
sue for damages for breach of such contract. The rationale is that the company was not a party to
that contract in the first place and secondly because it had no capacity to contract. Thus in NATAL
LAND AND COLONIZATION CO. Vs PAULINE AND DEVELOPMENT SYNDICATE
(1940) A.C. 120; N Co Ltd agreed with a person acting on behalf of a future company P Co Ltd
that N Co Ltd would grant a mining lease to P Co Ltd. Coal was discovered in the land and N Co
Ltd refused to grant P Co Ltd the lease. P Co Ltd sued for breach of contract asking for specific
performance. It was held that P Co Ltd could not compel N Co Ltd to grant the lease and that that
P Ltd’s claim must fail as it could not adopt or ratify a contract made before it existed.

NOVATION
In order a company to be bound by a pre-incorporation contact, a fresh contract on the same terms
as the pre-incorporation contract must be entered into. This process of entering into a new contract

20
by the company on similar terms as those of the pre-incorporation contract is referred to as
novation.

Usually, an agreement is entered into by the promoter, which provides that the personal liability
of the promoter will cease when the company in the process of formation is incorporated and enters
into an agreement in similar terms with the contractor.

However, there must be sufficient evidence that the company has entered into a new contract; Mere
recognition of the pre-incorporation contract by performing it or accepting benefits under it is not
enough. In RE NORTHUMBERLAND AVENUE HOTEL CO. LTD 1886, there was a pre
incorporation contract for the grant to the company of a building lease. After incorporation, the
company took possession of the land and began to build on it but there was no new contract entered
into between the company and the owners of the land because the company believed the pre-
incorporation contract was binding on it. It was held that there was no contract between the
landowners and the company as the pre-incorporation contract could not be retrospectively
ratified by the company and the company’s adoption of it did not amount to the making of a new
contract.

In another old English case of; HOWARD B PATENT IVORY MANUFACTURING CO. 1888
where J under a pre-incorporation contract agreed to sell property to a company but after the
company had been formed the terms of the payment were modified with J accepting part of the
purchase price in debentures instead of cash as had been originally agreed upon, it was held that
the renegotiation of the contract terms of payment were sufficient evidence of a new offer and
acceptance by which a company entered into a new contract after incorporation.

21
 CHAPTER SIX
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

S.4-54 and Table A of the Companies Act has provisions in regard to names of companies. 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
Contain the words “chamber of commerce” except where the nature of the company’s business so
justifies it and lastly it should not suggest 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 a 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

22
  The prospectus if a public company.

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 per sections 2,7,8,9,15,16,17,19,21,43,4244,45,46,47,
51 & Table B

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, 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 per S.2,11,12,15,16,17,19 ,21,42,43,44,45.

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 comp1ied 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 i.e. the initial
capital of the company per section 118.

List of names and particulars of Directors and Company Secretary per Table B

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 provided for under section 60.

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.

23
It sets out the number of the founders/management, the share qualification of directors, names,
description and addresses of directors, the shares offered to the public for subscription, property
acquired by the company, the auditors, etc.

The purpose of the prospectus is to provide the essential information about the position of a
company when it is launched so that those interested in investing in it can proer1y 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
assessed basing on the capital that the company is starting with, the more the capital the greater
the stamp duty. Registration fees are also paid. S.22 and Regulation 6 of the Companies General
Regulations.

4. ISSUANCE OF A CERERTIFICATE OF REGISTRATION

After all these requirements, a certificate of registration is issued if the Registrar is satisfied. This
is a certification that a company has been recognized as a legal person and accordingly registered.
After it has been issued, a private company cans commerce business. However, for a public
company, it must in addition obtain a certificate of commencement of business (certificate of
trade).

 (This certificate will be granted if the company has issued a prospectus and filed a copy
with the registrar.
 Qualification shares for the directors have been paid for.
 The minimum number of shares which have to be paid for in cash have been allotted and
paid for.

EFFECT OF REGISTRATION
If the Registrar is satisfied, that the documents are in order and that stamp duties and fees have
been paid, he enters the name of the company in the register of companies, issues a certificate of
incorporation. The issue of the certificate of incorporation is conclusive evidence that all
registration requirements have been complied with and that the association is a company
authorized to be registered and is duly registered under the Act per section 22 and regulation 6.

In the case of JUBILEE COTTON MILLS LTD Vs LEWIS (1924) AC.958; the certificate was
dated 6th January 1920 but it was not signed and issued until 8th January. On the 6th of January,
the directors allotted shares and debentures. The allottee later refused to pay the amount due on
the shares arguing that the company did not exist on the date of issue. It was held that the company
was deemed to have come into existence on the 6th of January 1920. Therefore, the allotment was
valid and the allottee must pay for the securities allotted to him.

24
Principally the effect of registration is that from the date mentioned in the certificate of
incorporation, the subscribers to the memorandum, together with such other persons that from
time to time become members of the company become a body corporate by the name contained in
the memorandum, capable of exercising all the functions of an incorporated company, with power
to hold land and having perpetual succession and a common seal, but with such liability on the
part of members to contribute to the assets of the company in the event of it being wound up.

THE ROLE OF THE REGISTRAR

The basic role of registrars is to ensure that business entities are formed with proper documents,
ensure compliance with the law in the process of registration and thereafter. Where the registrar
is not satisfied with the documentation, he/she can decline to register the business/company. Per
sections 22, 262, 289 and Regulation 6 of the company General Regulations of 2016.

The Registrar may also refuse to register a company whose objects are unlawful. In the case of R.
Vs REGISTRAR OF COMPANIES EXPARTE MORE (1931) 2 K. B. 197 the Registrar refused
to register the sell of tickets in a lottery because the lottery was illegal in England.

However, where he declines without a reasonable excuse, an order of Mandamus can be obtained
from the High Court compelling him/her to perform the duty.

Provision of Copies

Any member of the company may under Sect. 45 of the Act may require the company to supply
him with a copy of the Memorandum of Association and the articles at a nominal fee. A penalty
for failure to comply is spelt out in Sect 45 (2 of the Companies Act). Under Section 40 of the
Companies Act, the issued copies of the Memorandum of Association must contain any alterations
if any and under Sect 22(2 of the Companies Act), penalties for the company and the defaulting
officers are set. Therefore, getting these copies by a member is a right and it is hereby submitted
that these can be enforced as a personal right. See also sections 43 and 44.

25
 CHAPTER SEVEN
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 (S.7 of the Companies Act)

The memorandum of Association of a company limited by shares must state the fol1owing: -

1. The name of the company with “Limited” as the last word in case the company is a limited
liability company.

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 and their shareholding.

1. The name section 7(1)(a)

The name of the company should be indicated and if it is a limited company, it should have the
word limited at the end e.g. Amurey International Uganda Ltd.

2. Registered office section 7(1)(b)

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

26
Notice of situation of registered office of the company, this form will indicate the exact location
of the company e.g. plot 45 Nakasero Road, Kampala.

3 The objects clause section 7(1) (c)

This sets 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 pursue 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 RICHIE (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 Belgium. 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 PROPERIES LTD
(1962) 2 Q.B 656; in that case, both companies to the dispute carried on business as property
developers, the plaintiff company agreed to introduce the defendant company to a financier who
could provide a loan and the defendants promised to pay a fee to the plaintiff. When the defendants
were sued for that fee, they pleaded that a mortgage broking transaction such as that was ultra
vires by the plaintiffs and that it was not expressly covered in the plaintiff’s company memorandum
of association. The plaintiffs on the other hand argued that the transaction was not ultra vires;
they relied on a provision in their memorandum, which provided that the company was authorized;

“to carry on any other trade or business whatsoever which can, in the opinion of the board
of directors be advantageously carried on by the company in connection with or ancillary to the
general business of the company”

Salmon J of the Court of appeal held that that provision gave the company the necessary
power. In his remark, which has been criticized as destroying the whole doctrine of ultra vires he
stated thus;

27
“an object of the company is to carry on any other business which the directors believe can be
advantageously carried out in connection with or ancillary to the general business of the company.
It may be that directors take the wrong view and in fact, the business in question cannot be carried
on as directors believe. But it matters not how mistaken the directors may be provided they form
their view honestly and the business is within the company’s objects and powers.”

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 Vs 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 Vs 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 (INSPECTJON OF TAXES)
Vs FROST (1978) 1 WLR 441 at page 449, the Court implied powers of entering into partnership
or joint venture agreements for carrying 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 to 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.

However, though the Court may imply these powers in the Memorandum of Association, it is 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 only 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 section 7(2)

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 by 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 vent of winding up. A company may also be registered with un-limited liability,

28
in such a situation, the members liability is unlimited and in case 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) section 7(4)

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 decided upon by the promoters will be determined by the
needs of the company and finance available. For example, if a company has its initial share
capital/startup capital of 5,000,000 it can divide this into 100 shares of 50,000 each. So if a
member subscribes for 50 shares, he will contribute 2,500,000/=.

Alteration of the objects section 9

A company may by special resolution alter the provision in its memorandum (Sec.7 of the
Companies Act) with respect to the objects of the company to enable it:

 To carry on its business more economically or more efficiently.

 To enlarge or change the local area of its operations.
 To attain any of its objects by new or improved means.
 To carry on some business, which under existing circumstances may conveniently or
advantageously be combined with the business of the company.
 To restrict or abandon any of the objects specified in the memorandum.
 To sell or dispose off the whole or any part of the undertaking of the company.
 To amalgamate with any other companies or body of persons as long as the objects of the
other company arc intra vires the objects of the company

ARTICLES OF ASSOCIATION (S 11-21of the Companies Act)

Articles of Association contain 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 classes and rights of shareholders, transfer of shares,
auditing of books are all contained in the Articles of Association.

29
Contents of the Articles Table A

 The board of directors (management) and how they will be, appointment, 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 rights attached to different classes of shares.
 Borrowing powers of the company.
 It’s 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 of the Companies Act) which
applies to companies limited by shares (S 13 of the Companies Act). These regulate the company
unless it has its own special articles, which totally or partially exclude table A. The advantages of
statutory model articles are:

• That legal drafting of special articles is reduced to a minimum since even special articles usually
incorporate much of the text of the model.

• There is flexibility since any company can adopt the model selectively or with modifications and
include in its articles special articles adapted to its needs.

Alteration of the Articles S.16 of the Companies Act

It is provided that subject to the provisions of the Act and to the conditions contained in its
memorandum, a company may by special resolution alter or add to its articles. A special resolution
is one, which, is passed by a majority of not less than 75% of such members, as being entitled to
a vote in person or where proxies are allowed, by proxy at a general meeting of which not less than
twenty-One days’ notice specifying that the intention to propose the resolution as a special one has
been given.

30
The alteration will generally be valid unless if:

• It is illegal.

• It conflicts with provisions of the Companies Act.

• It extends or modifies the Memorandum.

• It deprives members of rights conferred on them by the Company 2t or by court.

• It requires a shareholder to take or subscribe for more shares or increases his liability to
contribute to the company,

• It amounts to fraud on the minority.

INTERPRETATION OF ARTICLES AND MEMORANDUM OF ASSOCIATION

1. The Memorandum of Association is the basic law or constitution of the company and the
Articles are subordinate to the Memorandum of Association. It follows therefore that if there is a
conflict, the Memorandum of Association prevails. In other words, if there is a contradiction
between the provisions of the memorandum and the provisions of the articles of association, then
the provisions of the memorandum will be followed and those provisions in the articles which are
contradicting the memorandum will be void and of no effect.

2. If there is no conflict, the Memorandum of Association and articles must be read together and
any ambiguity or uncertainty in either can be removed by the other e.g. in RE SOUTH DURHAM
BREWERY CO. LTD (T885) 31 CD 261, the Memorandum of Association was silent as to
whether the company’s shares were to be all one class or might be of different classes. It was held
that the power given by articles to issue shares of different classes resolved the uncertainty and
enabled the company to issue shares of different classes though the memorandum did not expressly
state so. Also, in the case of RAINFORD Vs JAMES KETT & BLACKMAN CO. LTD (1905) 2
CII 147, the memorandum of Association of the trading company allowed it to do things incidental
to its objects. It was held that the provisions in the articles empowering the company to lend money
merely exemplified the general words of the Memorandum of Association and the company was
therefore entitled to lend money to its employees, a trading company has a profit making motive,
and therefore the company lending money to employees at a profit was incidental or connected to
the company’s objects/activities of profit making. In REPYLE WORKS (1891) 1 CH 173, the
Memorandum of Association empowered the company to borrow on security of its assets or credit
while the articles provided that it might borrow using the security of uncalled capital. It was held
that the articles merely made specific the general words of the Memorandum of Association and
so the company did have the power to borrow using the security of its uncalled capital since the
uncalled capital is also part of the company’s assets/credit. (Uncalled capital is that amount of
money that shareholders have not yet paid for their shares. If a shareholder is allocated shares

31
of 10 million shillings and out of this he pays only 6 million, the four million that remains is called
uncalled capital so, the company may call upon that shareholder at any moment requiring him to
pay that money.)

3. Though the Memorandum of Association and articles can only be read together to remove
ambiguity or uncertainty, the articles will not be resorted to, to assist in the interpretation of the
Memorandum of Association or the clause that is required in law to be in the Memorandum of
Association or the clause that is required in law to be in the memorandum of Association.

THE CONTRACTUAL EFFECT OF THE MEMORANDUM AND ARTICLES OF

ASSOCIATION
S. 21 of the Companies Act provides that the memorandum and articles of association shall when
registered, bind the company and the members as if they had been signed and sealed by each
member and contained covenants on the part of each member to observe all the provisions. Thus
they have a contractual effect. The memorandum and articles form three contracts and these are:

1. The memorandum and articles of association constitute a contract between the company and a
non-member. A member is any person who has signed the memorandum and articles of association
for purposes of formation of the company even if he or she later does not pay for any shares in
that company. A member therefore has a right to enforce the provisions in the articles and
memorandum against the company since memorandum and articles of association constitute a
contract between the members and the company. So if the company is acting contrary to what the
memorandum and articles provide, then that member can sue the company for breach of those
provisions and likewise.

The articles of association however do not constitute a contract between the company and a non-
member. Therefore, a nonmember cannot enforce such contract. This was illustrated in the English
ease of WOOD Vs ODDESA WATER WORKS (1889) 42 CH.D 636, the articles of association
of that defendant company empowered the directors to declare dividends/profits to be paid to the
shareholders, the company passed a resolution not to pay dividends, Wood a shareholder was
aggrieved by this resolution which was contrary to what the articles provided, as a member and
shareholder he applied to Court for an injunction to stop the company from acting on that
resolution, Stirling J held that the articles of association constitute a contract between the
company and its shareholders and the company was in breach of that contract by not following
what the articles provided.

2. The contract created by the articles binds the company and its members only in their capacity
as members (“qua member’) and not in any other capacity.

Therefore, if a shareholder is to sue the company relying on the provisions of the articles, he
should be suing in his/her capacity as a member and not as a creditor or director or any other
capacity.

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Note. That for a member to sue in their capacity as members, their claim should be based on
violation of members’ rights provided for by the articles.

In the case of HICKMAN Vs KENT (1915) 1 CH 881, Kent the defendant company had a
provision in its articles that any dispute between the association and its members should be
referred to an arbitrator. Hickman brought a claim against the company before an arbitrator
relying on this provision because the company had refused to register his sheep in its published
flock -book and threatened to expel him from membership. Court stayed his suit against the
company holding that Hickman was not suing in his capacity as a member of the company and
therefore he could not rely on the articles since the company had not breached a provision in its
articles. The articles did not provide for rights of members to have their sheep registered with the
company’s published flock book.

In this case, Asbury stressed the following;

a) That the articles of association cannot constitute a contract between the company and a
non-member / third party.
b) That a member who is given a right by the articles in any other capacity other than that of
a member cannot enforce such right against the company for example if a member is given
a right by the articles as a lawyer / solicitor, promoter or director and not in his capacity
as a member he cannot enforce such right against the company relying on the articles.
c) That the articles regulate the rights and obligations of members generally and therefore
create rights and obligations amongst; the members themselves and the members and the
company.

Also in the case of BEATTIE V.E & BEATTIE LTD (1938) CH 708, a director of a company
was sued in Court in his capacity as a director. The articles of the company provided that any
dispute between the company and its members should be referred to an arbitrator. The director
who was sued in Court sought to rely on this provision in the articles to have his matter referred
to an arbitrator. Court refused to grant his application and held that he could not rely on this
provision since it only applied to members and he was not being sued in his capacity as a member
but in his capacity as a director. Court added that provisions in the articles constitute a contract
between the company and its members in their capacity as members and not in any other capacity.

3. The memorandum and articles also constitute a contract amongst the members themselves
(between the members “interse”). Thus, each member has a duty to observe the provisions of the
memorandum and articles of association and if they do not, any member can sue them. In
HICKMAN Vs KENT (1915) 1 CH 881, Ashbury J held that the articles regulate the rights and
obligations of members generally and therefore create rights and obligations amongst the
members themselves.

Also in the case of OBIKOYA Vs EZEWA & ORS, EZEWA and two others were all permanent
directors in a company, the company’s articles had a provision that permanent director shall not

33
vote for the removal of another permanent director from office. Ezewa and the other directors
disregarded this provision, purported to alter the articles by resolution to enable them remove
Ezewa from office, and there after they stopped him from acting as director. He sued them in their
capacity as members for damages for breach of the provisions of the articles and asked Court for
an injunction to stop them from preventing him from acting as director. It was held that the articles
were a contract between the three members not to vote each other out of office and that the actions
of the other of keeping Obikoya out of office was in breach of the provisions of the articles.

Membership :( the process of becoming a member)

Sec.47-49 of the Companies Act defines a member as a person who has signed the Memorandum
and Articles of Association with the purpose of floating a company. Any person who applies and
his name is entered on the register of members also becomes a member. In MAWOGOLA
COFFEE FACTORY Vs KAYANJA, it was held that to be a member of a company, there must
have been a valid allotment of shares to the person and his name entered on the register. It was
further observed that a certificate of allotment of shares is the best evidence but in its absence, the
register of members shall suffice. A minor can become a shareholder but he incurs no liability
until he obtains the majority age and fails to repudiate the contract within a reasonable time.

CONSEQUENCES OF INCORPORATION
The fundamental attribute of corporate personality from which all other consequences flow is that
“the corporation is a legal entity distinct from its members”. -

Hence, it’s capable of enjoying rights and being subject to duties which are not the same as those
enjoyed or borne by its members. In other words, it has a legal personality and it is often described
as an artificial person in contrast with a human being a natural person. (SALOMON Vs
SALOMON & CO)

Since the Salomon case, the complete separation of the company and its members has never been
doubted. It is from this fundamental attribute of separate personality that most of the particular
advantages of incorporation spring and these are:

LIABILITY per section 49

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 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

34
for its own debts and Solomon a managing director could not be held personally responsible for
tie debts of the company. In the Ugandan case of SENTAMU Vs UCB (1923) 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 shou1d pay Sh.5,000,000 for all the fifty shares, if he pays only Shs.
4,000,000 to the company, it means that he still owes the company Sh.1,000,000. This is what is
called uncalled capital. The company may call on him to pay it any time. If that does not happen,
then at the time of winding up the company he will be required to pay the Shs.1, 000,000.

In the case of a company limited by guarantee, each member is liable to contribute a specific
amount to the assets of the company and their liability is limited to the amount they have
guaranteed to contribute.

If the company has unlimited liability, the members’ liability to contribute is unlimited and their
personal property can be looked at to discharge the company creditors but that is only after
utilizing the company’s money and it is not enough to pay all the debts.

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 Lord Buckmaster of the House of Lords
held that no shareholder has a right to an item of the property of the company, even if he holds all
the shares in the company.

In the case of HINDU DISPENSARY ZANZIBAR Vs 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.

LEGAL PROCEEDINGS see sections 284-298.

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 is 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 Vs SHELL B.P PORT HARCOURT, the plaintiff
sued a company called Shell B.P Port Harcourt which was now a non-existing company, counsel
for the defendant company objected that there was no such company and the suit should be

35
dismissed, counsel for the plaintiff sought Court’s leave to amend and put the right part but Court
refused to grant the leave and dismissed the case.

In the case of WANI Vs 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
Kiwanuka 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.

PERPETUAL SUCCESSION
S.15 of the companies Act provides that a company is a legal entity with perpetual succession.

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 shareholder 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
the 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 the Court held that the company
would survive. Thus, this perpetual succession gives the certainty required in the commercial
world that even when ownership of shares changes, there is no effect on the performance of the
company and no disruption in the company business.

TRANSFER OF SHARES
A share constitutes an item of property, which is freely transferable, except in 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. See
sections 83-97

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 creditor, it may use its assets e.g. cars, bank accounts and ether
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

36
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 see sections 104-111.

FORMALITIES, PUBLICITY AND EXPENSES

Apart from the advantages mentioned above which arise from incorporation, there are certain
disadvantages of incorporation and these are:

1. Formalities have to be followed which are lengthy and hectic.

2. Loss of privacy because all records are kept at the company registry and any member of the
public who is interested in knowing about the company can access them, of course at a fee.

3. The exercise is expensive right from the promotion exercise, promoters have to be paid and if
professionals like lawyers are involved, one has to pay them handsomely, one must also pay stamp
duty and registration fees.

4. The cost of winding up is higher than that of incorporation.

In these respects, a company differs from a Partnership in the sense that no formalities are
required for the formation of a Partnership. A partnership can be formed orally or by an
agreement on a half sheet of paper and one can conduct business without any publicity and can
be dissolved cheaply and informally. A company can only be wound up and cost of winding up is
more expensive than formation. Nevertheless, the policy binds these requirements of formality,
publicity is that incorporation should be accompanied by full disclosure.

CAPACITY TO CONTRACT
On incorporation, a company can enter into any contract with third parties. In the case of; LEE
VS LEE & AIR CO. LTD (1961) A.C 12, it was Held that once a company is incorporated, it has
capacity to employ servants, even the shareholders. See section 54.

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 CHAPTER EIGHT
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. See sections 21 and 51.

The expression ultra vires means beyond powers, therefore an act or transaction that is beyond
the powers of the company as stated in the objects clause of the memorandum is an ultra vires act
or transaction, such an act that is ultra vires is void and cannot be ratified by the company.
Sometimes the term ultra vires is also used to describe a situation where the directors of a company
have exceeded the powers delegated to them. Where a company exceeds the powers conferred
upon it by its memorandum of association, it is not bound by it because it lacks the capacity to
incur responsibility for that action, but when the directors of a company exceed the powers
delegated to them, the company in a general meeting may choose to ratify their act or omission.

b) Distinction from illegality

An ultra vires act or transaction is different from an illegal act/ transaction. Although both are
void, they attract different legal consequences and the law treats them differently. An act of a
company which is beyond its object clause is ultra vires and therefore void even if it is legal.
Similarly, an illegal act done by a company will be void even if it falls squarely within the objects
of the company.

c) Importance of the doctrine

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 Belgium, the directors

38
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 House of Lords 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
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
principles to reduce the rigors of the doctrine of ultra vires. They include the following.

1. Powers implied by statute. According to this principle, 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 principle of implied and incidental powers. This principle was established in the case of
ATTORNEY GENERAL Vs GREAT EASTERN RAILWAY CO (1880) 5 AC 473, in this case
the House of Lords affirmed the principal laid down in the earlier case of ASHBURY RAILWAY
CARRIAGE CO. LTD Vs RICHIE (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.

39
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 in its memorandum and also everything that
is reasonably necessary to enable it carry out those objects.

e) Ascertainment of the ultra vires 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 Vs MERSEY RAILWAY
CO (1907) 1 CR 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 caring on a hotel business can ‘purchase furniture or hire
servants and maintain an omnibus to attend at the railway station to take or receive the
intending guests to the hotel because these objects are reasonably necessary to effectuate
the purpose for which the company has been incorporated and consequently such acts are
within the powers of the company although these may not be expressly mentioned in the
objects clause of the memorandum of association of that company.

However not every act that is beneficial to the company is intra vires, it is not enough that the act
is beneficial to the company, the act must be, reasonably necessary for the company to carry out
the activities mentioned in the memorandum.

f) Effect of ultra vires transactions

 Ultra vires contracts. These are void and cannot be enforced by or against the company.
In the Case of RE JON BEAUFORE (LONDON) LTD (1953) CH 131, it was held that
ultra vires contracts made with the company cannot be enforced against a company. Court
also held that the memorandum of association is constructive notice to the public and
therefore if an act is ultra vires, it will be void and will not 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 Eng1and, 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

40
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 to 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 principles in the interest 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 BEAUFORE
(LONDON) supra, builders of a factory for purposes which were apparently ultra vires demanded
for theft 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,

41
 a shareholder 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 to 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

I. 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.

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 CHAPTER NINE
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 “the doctrine or principle of corporate
personality” see section 20. No case illustrated the above principles better than 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
perpetuate fraud or as a “mere façade concealing the true facts.’ Upholding the above principle
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 Vs FORWARD NIGERIAN ENTERPRISES

LTD & FARORE 1976 N.CL.1 243, 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 entity and lift the veil of corporation
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.

2. Where the company is not mentioned in a 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.

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S. 109 (4) (b) of the Companies Act prohibits any officer of the company from signing or
authorizing to be signed a bill of exchange on behalf of the company in which the company’s name
is not mentioned in legible characters / clear letters. Any officer who does this is personally liable
on that bill of exchange for the money or goods for that amount unless it is duly paid by the
company. Therefore, in such a case the corporate veil is lifted in order to hold that officer of the
company personally liable.

3. Holding anti 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
company and subsidiary companies are regarded as one for accounting purposes and the separate
nature of the subsidiary company is ignored. S.161 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 nonprofit 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 of the Companies Act, 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.

44
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 an agent of the shareholders

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
shareholders 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 Vs HOME [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 Vs LIPMAN (19621.1 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 Vs
GRAHAM (1984) QB.675 makes it clear that a person is guilty of fraudulent trading if he has no

45
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.

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 national’s resident in Germany. All its
directors were also German national’s resident in Germany, which was an enemy country at the
time. An action was brought and the Court disregarded the fact that the company had a British
nationality by incorporation in England and rather concentrated on the control of the company’s
business and where its assets lay, in determining the company’s status.

4. In determining residence of a company for tax purposes

The Court may look behind the veil of the company and its place of registration so as to determine
its residence. The test for determining residence is normally the place of its central management
and control. Usually, this is the place where the board of directors operates. But it can also be the
place of business of the managing director where he holds a controlling interest.

46
 CHAPTER TEN
OTHER FORMS OF BUSINESS ORGANIZATIONS
In order to understand the concept of legal personality it is necessary to compare registered
companies with other forms of business organizations particularly the sole trader, partnerships,
clubs and societies, cooperative societies, unit trusts etc.

SOLE TRADER/ SOLE PROPRIETORSHIP

A sole trader owns and runs a business, contributes the capital to start the enterprise, runs it with
or without employees, and earns the profit or is fully responsible for the loss of the venture. The
business does not have its own legal personality. Any one making a legal contract with a sole trader
does so with the trader as an individual.

Advantages of being a sole trader

• No formal procedure required to set up the business.

• A sole trader is independent and accountable only to himself. He does not have to consult
anybody about business decisions.

• Personal supervision of the business can ensure its effectiveness and close conduct with
customers/clients may enhance commercial flexibility.

• All the profits of the business belong to the sole trader.

Disadvantages

• Unlimited liability means that if the business gets into debt a personal trader’s personal wealth
can be lost.

• Expansion of the business is only possible if the profits are ploughed back into the business.

• Since the business depends on an individual it means long working hours and difficulty if the
individual is indisposed or incapacitated.

• The death of the proprietor normally results in the death of the business.

• The individual may lack technical skills to effectively manage the business.

• Disadvantages associated with small size, lack of diversification, absence of economies of scale,
problems of raising finance etc

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PARTNERSHIPS
Under section 2(1) of the Partnership Act of 2010, partnership is the relation which subsists
between persons carrying on a business in common with a view of profit.

Advantages

• Two or more persons can provide more capital than a sole trader

• Responsibilities are shared between the partners.

 Partners contribute a wider range of skills and experience to the business.

• The affairs of the business are private and no one except the partners has any right to inspect the
accounts.

Disadvantages

 No separate legal entity.

 Unlimited liability for the debts of the business.
 Change of partners is a termination of the old firm and the beginning of a new one.
 Partners cannot provide security by a floating charge on goods.
 There is no distinction between the property of the partners and that of the partnership.
 Some independence is lost since decisions must be made jointly.

CLUBS AND SOCIETIES

These unincorporated associations are subject to no statutory regulation. Their constitution
depends entirely on the ordinary law of contract with the members expressly or impliedly agreeing
to be bound by the constitution. In the eyes of the law a club has no existence apart from its
members, but since a distinction has to be made between club property and the separate property
of the members, the club property is normally vested in trustees to be held by them in trust for the
club. This form is normally adopted by organizations involved in religious, educational, literary,
scientific, social or charitable works instance YMCA, YWCA, churches etc.).

COOPERATIVE SOCIETIES
This is any society that has as its object the promotion of the economic interests of its members in
accordance with cooperative principles. Cooperative societies are registered with or without
limited liability. Upon registration, the cooperative society becomes a corporate body with
perpetual succession and a common seal with power to hold movable and immovable property of
every description, to enter into contracts, to institute and defend suits and other legal proceedings
and to do all thing necessary for the purpose of its constitution. To be registered, a society must
have at least 30 members.

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UNIT TRUSTS
A “unit” means a right or interest whether described as a unit, as a subunit or otherwise, which
may be acquired under a scheme and “a unit trust scheme” is any arrangement made for the purpose
or having the effect of providing for persons having funds available for investment; facilities for
the participation by them, as beneficiaries under a trust, in profit or in income arising from the
acquisition, holding, management or disposal of any property.

In essence the managers of the trust purchase a block of various investments and vest them in
trustees, to be held on the terms of a trust deed. This divides the beneficial interest in the trust fund
into a large number of shares or units. The trustees hold the units on trust of the managers who
then sell them to the public at a price based on the market value plus a small service charge to
cover expenses and a profit for the managers.

The managers have power from time to time to increase the number of units by vesting additional
securities in the trustees. The managers also provide a market for unit holders by buying back and
reselling units. In practice, the trust deed is for a fixed period at the end of which the underlying
investments are realized and the unit holders repaid unless they elect to continue the trust.

49
 CHAPTER ELEVEN
THE DOCTRINE OF CONSTRUCTIVE NOTICE AND THE INDOOR MANAGEMENT
RULE

THE DOCTRINE 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 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 aware of it. This is what is called the doctrine of constructive notice In the
case of MAHONY Vs EAST HOLYFORD) MINING CO (1875) LR 7 H.L 869, Lord Hitherley
had this to say “……………. 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 principle was first formulated in the case of ROYAL BRITISH BANK Vs
TURQUANID (1856) ALLER 435. This case law principle 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 the 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

50
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, (i.e. the memorandum and articles
of association) the person contracting will not be prejudiced by irregularities that may beset the
indoor work of the company.

The rule in Turquand’s case is a presumption of regularity. In other words, a person dealing with
the Company is entitled to presume that all the internal procedures of the Company have been
complied with. This is a practical approach to solving problems facing outsiders because an
outsider would have difficulty to discover what is going on in the Company.

It is important to note that the notice of constructive notice can be invoked by the company and it
does not operate against the company. It operates against the person who has failed to inquire but
does not operate in his favor. But the doctrine of “indoor management” can be invoked by the
person dealing with the company and cannot be invoked by the company.

ORIGINS OF THE DOCTRINE

The rule had its genesis in the case of ROYAL BRITISH BANK Vs 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 authorized 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 the 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

51
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 nut accepted as being firmly entrenched in law until it was
endorsed by the House of Lords. In MAHONY Vs EAST HOLYFORD MINING CO., Lord
Hatherly phrased the law thus

“When there are persons conducting the affairs of the company in a manner which appears to be
perfectly consonant with the articles of association, 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 Mahony 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 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 Vs 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 Vs 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 Vs 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 who 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 content are suspicious and therefore invite inquiry. Suspicion
should arise, for example, from the fact that an officer is purporting to act in a matter, which is
apparently outside the scope of his authority. Where, for example, as in the case of ANAND

52
BIHARI LAL Vs 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 Vs NOTHARD, LOWE & WILLS LTD where a
person holding directorship in two companies agreed to apply for the money of one company in
payment of the debt to other, the Court said that it was something so unusual “that the plaintiff
were put upon inquiry to ascertain whether the persons making the contract had any authority in
fact to make it” Any other rule would “ place limited companies without any sufficient reasons for
so doing, at the mercy of any servant or agent who should purport to contract on their behalf.”

3. Forgery: - Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear
illustration is found in the RUBEN Vs GREAT FINGALL CONSOLIDATES 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 signatures were genuine or forged was part 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 Lore burn 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’. LALKSHMI RATAN LAL COTTON MILLS Vs 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 authorized 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.”

53
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 o 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 Vs

PROVED TIN AND GENERAL INVESTMENT CO; here, one T was the active director of the
defendant company. He, purporting to act on behalf of his company, entered into a contract with
the plaintiff company under which he took a cheque from the plaintiffs. The company’s article
contained a clause providing that “the directors may delegate any of their powers, other than the
power to borrow and make calls to committees, consisting of such members of their body as they
think fit”. The’, board had not in fact delegated any of their powers to T and the plaintiffs had not
inspected the defendants articles and, therefore, did not know of the existence of power to
delegate.

It was held that the defendant company was not bound by the agreement. Slade J was of the opinion
that knowledge of articles was essential “A person who at the time of entering into a contract with
a company has no knowledge of the company’s articles of association, cannot rely on those articles
as conferring ostensible or apparent authority on the agent of the company with whom he dealt.”
He could have relied on the power of delegation only if he knew that it existed and had acted on
the belief that it must have been duly exercised.

Knowledge of articles is considered essential because in the opinion of Slade J; the rule of ‘indoor
management’ is based upon the principle of estoppels. Articles of association contain a
representation that a particular officer can be invested with certain 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 estopped from alleging that the
officer was not in fact authorized.

This view that knowledge of the contents of articles is essential to create an estoppel 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 contracts 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. Artc1es would be relevant only if they had contained a
restriction on the apparent authority of the officer contained.

54
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 Vs 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.

55
 CHAPTER ELEVEN
THE OFFICERS OF THE COMPANY
Under this sub topic, we shall be reviewing appointment, disqualification and nature of the duties
of directors, auditors and the company secretary.

1) DIRECTORS

A company being an artificial person cannot manage its own affairs, it is therefore the practice that
since the law gives it human attributes, there must be someone to perform those duties that it is
incapable of doing. In company law, this delegation and management function is performed by
directors. A director is defined by Section 2 Companies Act 2012 to include “any person occupying
the position of director by whatever name called”. This definition therefore looks at the duties
being performed by the person as opposed to the title with which he is being referred to.

Management of a company’s affairs is usually done by the directors of the company. Every private
company must have at least 1 director and every public company must have at least 2 directors
under Sections 185-194 of the Companies Act.

Appointment of directors

The appointment of directors is ordinarily governed by the company’s articles and memorandum
of association see sections 185-194. The first directors are usually appointed by being named in
the articles of association. If this is not done, Article 80-109 Table A deems the signatories to the
memorandum as the first directors.

The subsequent directors are usually appointed by the shareholders in a general meeting or in the
manner stipulated in the articles and memorandum of association.

Table A). The directors are ordinarily supposed to be appointed at a general meeting at which they
are voted on individually. Modern articles of association also make provision for directors to
appoint alternate directors to act in their absence or incapacity to execute their duties. An alternate
director is clothed with the same powers and rights that the appointing director has and it is obvious
that the alternate director is also subjected to the duties of directors discussed more particularly
below during the time he acts as an alternate director.

Disqualification to act as director

1. According to S.195-199 and Regulation 88 of the Companies Act, a person who has reached
the age of 70 cannot be appointed a director unless (a) the company is a private limited company
(ii) the company is not a subsidiary of a public company (iii) the articles otherwise provide, or (iv)
he is appointed and approved by a resolution of which special notice stating his age has been given.

56
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 undercharged 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, there is a penalty of 2 years imprisonment or a fine of 10,000 shillings.

3. A person cannot without leave of Court be a director or be concerned with the management of
a company if he has been convicted of an indictable offence in connection with the promotion,
formation or management of the company, or on winding up it has appeared that he has been guilty
while an officer of the company of fraud or fraudulent trading or breach of duty in relation to the
company. In that case, the Court may order that he shall not be a director or be concerned in
management for a period of up to 5 years. The period of disqualification must date from conviction,
not for instance from the convicted person’s release from prison.

NB: Students should carry out research on termination of the office of a director.

Duties of directors see section 198.

Directors are charged with managing the affairs of the: company. This power has large been seen
as deriving its force from Article 80 Table A which provides that;

“the business of the company shall be managed by the directors who may pay all expenses incurred
in promoting and registering the company, any exercise all such powers of the company as are not
by the Act or by these regulations required to be exercised by the company in general meeting,
subject nevertheless, to any of these regulations, to the provisions of the act and to such
regulations, being not inconsistent with the aforesaid regulations or provisions as may be
prescribed by the company in general meeting, but no regulation made by the company in general
meeting shall invalidate any prior act of the directors which would have seen valid if that
regulation had not been made”.

Although this provision seems to be still the subject of considerable debate, there is no doubt that
there is general consensus that i.e. forms the bedrock of director’s managerial functions has been
seen by many as at times even conferring more powers to the board as an organ than the
shareholders. The sovereignty of the directors within the powers conferred onto them by the
articles was stated by GREER L) IN JOHN SHAW & SONS (SALFORD) LTD Vs SHAW
(1935)2 KB 113 THUS;

“a company is an entity distinct alike from its shareholders and its directors. Some of its powers
may according to its articles be exercised by directors; certain other powers may be reserved for
the shareholders in a general meeting. If powers of management are vested in the directors, they
and they alone can exercise these powers. The only way in which the general body of the
shareholders can control the exercise of the powers vested by the articles in the directors is by

57
altering the articles, or if the opportunity arises under the articles by refusing to re-elect the
directors of whose actions they disapprove. They cannot themselves usurp the powers which by
this articles are vested in the directors any more than the directors can usurp the powers vested
by the articles in the general body of shareholders.

Directors have two broad duties to discharge in respect of a company.

1. The duty of skill and care and

2. The duty of good faith.

The director’s duty of skill and care

That directors most satisfy a duty of care is a long-standing principle of the common law, although
the duty of care has been reinforced by statute in other Jurisdictions (other than Uganda) to become
more demanding.

Among the earliest English cases establishing the duty of care were DOVEY Vs CORY [1901) A.C
477 (H.L), In RE BRAZILIAN RUBBER PLANTATIONS AND ESTATES, LTD., (1911)1 CH.
425, and in RE CITY EQUITABLE FIRE INSURANCE CO, [1925) I CH. 407 (C.A.). In
substance, all these cases held that the standard of care for directors was a reasonably relaxed,
subjective standard.

The common law generally required directors to avoid being grossly negligent with respect to the
affairs of the company and judged them according to their own personal skills, knowledge, abilities
and capacities. Given the history of the case law in this area, and the prevailing standards of
competence displayed in commerce generally are quite clear that directors were not and are not
(at least in Uganda) expected at common law to have any particular business skill or judgment.

There is no criterion 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 (1925) CH 407, 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 in determining this duty; one has to look at the nature of a company’s business
generally. 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 and vice versa.

58
• 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.

The following are the 3 rules, which were laid down by Romer J in the RE CITY EQUITABLE
FIRE INSURANCE CO. LTD CASE to inform Court as to whether or not a director has breached
or complied with this duty:

i) A director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience

Thus, rules prescribes a duty which is partly objective (the standard of the reasonable man) and
partly subjective (the reasonable man is deemed to have the knowledge and experience of that
particular director) liability under this rule is exemplified by the case of; DORCHESTER
FINANCE CO. LTD Vs STEBBING (1977). IN this case, two part time directors (who were
accountants by profession) of the plaintiff company signed blank cheques at the request of the full
time director of the company. The cheques were used by the full time director to make loans which
became irrecoverable because they were not properly and adequately secured. The company
successfully sued all the 3 directors for negligence. It was held that the part time directors had
failed to exercise the skill and care which was reasonable to expect from them as professional
accountants.

ii) A director is not bound to give continuous attention to the affairs of his company

His duties are to be performed at periodical board meetings and at meetings of any board
committee which he happens to be placed. He is not however bound to attend all such meetings
though he ought to attend whenever in the circumstances he is reasonably able to do so. Thus in
RE MARQUIS OF BUTE (1892) 2 CH. 100 , a director who had attended only one board meeting
in 38 years was exonerated from liability for alleged negligence on the ground that neglect or
omission to attend meetings was not the same thing as neglect or omission of a duty which ought
to be performed at such meetings.

The status of non-executive Directors

Due to the part-time status of non-executive directors, reliance is particularly important for them
in practice. A non-executive director should be able to fulfill his or her duties to the company by
relying on credible information and advice provided by his subordinates. However, a non-
executive director cannot simply be passive and rely only on what he or she is told. He must
demonstrate that he took the initiative to inform himself about the actual dynamics of the operation
of the company. (See DANIELS Vs ANDERSON (1995) 16 AUST. CO. SEC. REP. 607).

Indeed recent judicial thought has indicated that inactivity by a director may itself be a breach of
their duties as such. In LEXI HOLDINGS PLC (IN ADMINISTRATION) Vs LUQMAN AND

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OTHERS [2009) BWCA. CIV. 117, the Court of Appeal ruled that, where a director commits
fraud, his or her fellow directors are in breach of their own duties to the company in allowing the
fraud to happen, and cannot defend themselves on the grounds that the fraudster would have
deceived them if they had tried to prevent the fraud. The case reiterates an earlier judgment where
it was said that it is in itself a breach of duty by the remaining directors to allow themselves to be
dominated or bamboozled by one of their number.

The key point is “that any individual who undertakes the statutory and fiduciary duties of being a
company director should realize that these are inescapable personal responsibilities”.

The decision emphasizes that a Court is highly unlikely to accept as a defence to a claim for breach
of duty that the individual director concerned played no active part in the company’s management.
Lexi correctly asserted that had M and Z each fulfilled their fiduciary duties and common law
duties as directors of Lexi the losses arising from S’s breaches of duty and misappropriations
would have been prevented or not occurred. Those accepting a position as directors must ensure
that they familiarize themselves with, and participate in, the business, particularly the decision-
making processes. Directors must exercise independent business judgment and be prepared to
challenge others on the board whoever they are. If they disagree with a board decision, they should
ensure this is evidenced in the company’s minutes. In the final analysis they may have to resign.

(iii) In respect of all duties, having regard to the exigencies of business and the articles of
association, some duties may properly be left to some other officials. A director is in the absence
of grounds for suspicion justified in trusting that official to diligently and honestly and perform
such duties.

Reliance: A director who has properly left the performance of tasks to some other official is, in
the absence of grounds for suspicion, justified in trusting that official to perform such duties
honestly (RE CITY EQUITABLE [1925] CH. 407; NORMAN Vs THEODORE GODDARD
[1991] BCLC 1028)

Limits on reliance: Directors retain overall responsibility for delegated functions and cannot
blindly follow the lead of others. This is in accord with the general principle of delegation that
delegators only delegate duties but not responsibility for the duties so delegated. (See RE D’JAN
OF LONDON LTD. (1994) 1 BCLC 561: BISHOPSGATE INVESTMENT MANAGEMENT
LTD. IS MAXWELL (NO. 2) [1994] 1 ALL ER 261; RE BARINGS PLC: (NO. 5) [2000] 1
BCLC 523)

If a director is to be made liable, it can only be on the basis of his personal negligence and it is
not negligence to delegate some responsibilities to officials or employees of the company whose
previous conduct has given no grounds for distrust or suspicion. In DOVEY Vs CORY, a director
was held not liable for negligence merely because he had failed to verify false information
regarding the company’s accounts which he had been given by the company’s manager and
managing director. The Court stated that “business cannot be carried on upon principles of

60
distrust. Men in responsible positions must be trusted by those above them as well as by those
below them, until there is reason to distrust them”.

This conclusion is of course otherwise if the conduct of a certain employee has in the past been
questionable or if the employee is obviously incompetent to execute the tasks sought to be
delegated to him or her.

As seen above, the common law standards of diligence and care were traditionally undemanding
(RE CITY EQUITABLE [1925] CH. 407), Pre-2006 however, the standards were evolving (See
BISHOPSGATE L’S VESTMENT MANAGEMENT LTD. Vs MAXWELL (NO. 2) [1994] 1
ALL ER 261, 264), meaning a director had to inform himself or herself about the company’s
affairs and to join in supervising and controlling them (See RE WESTMID PACKING
SERVICES [1998] 2 ALL ER 124, 130; RE RAVINGS PLC (NO.5) [2000] 1 BCLC 523,535-
36) Directors were not expected, however, to attend personally to every detail concerning a
company’s operations, particularly in larger companies (RE CITY EQUITABLE 11925] CH.
407 DANIELS Vs ANDERSON (1995) I6AUST. CO. SEC. REP. 607, 664)

The director’s duty of good faith

The director’s duty of good faith underpins the fiduciary nature of director’s duties which require
directors and officers to act honestly and in good faith vis a vis the company. They must respect
the trust and confidence that have been reposed in them to manage the assets of the company in
pursuit of the realization of the objects of the company. They must avoid conflicts of interest with
the company. They must avoid abusing their position to gain personal benefits. They must
maintain the confidentiality of information they acquire by virtue of their position. Directors and
officers must serve the company selflessly, honestly and loyally.

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. 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;

(i) Use of directors powers for-proper purposes

Directors must exercise their powers for the proper purposes for which they have been conferred
and they must not do so for proper purposes otherwise they will be held liable. If directors use
their powers for some purposes other than those for which they were conferred, they are in breach
of their duty and will be liable to account to the company. This is the basic principle and is
illustrated in the case of; HOGG Vs CRAMPTON LTD (1962) CH. 64 in which the directors
honestly feared that the plaintiff who was the majority shareholder, would take over the company

61
and that this was not in the best interests of the company. The directors created a share fund in
favor of the workers but only the directors could vote in respect of those shares. Using that voting
power they defeated a takeover bid by the majority shareholder i.e. plaintiff. It was held that the
directors were liable for having utilized their powers for an improper purpose, which according
to the Court was the fact that they wanted to defeat the majority shareholder. The decision was
left for the general meeting, which re endorsed the director’s results, and so Hogg never achieved
his objectives.

What then is a proper purpose? A proper purpose is one where the action taken by the directors
has been primarily motivated by desire to protect or further the company’s interests even though
it may result in some incidental benefit accruing to the directors personally. An improper purpose
is where the directors are primarily motivated by their desire to further their own personal
interests or those of the third party, (PIERCY Vs MILLS & CO. LTD (1920) 1 CH.77).

This duty therefore requires that directors must exercise powers for the purposes for which they
are conferred. Common law authority on the collateral purpose doctrine indicates that analysis of
compliance with this duty will be a two-stage process: (See HOWARD SMITH V. AMPOL
PETROLEUM [1974] AII ER 1126, 1134).

First, it will be necessary to determine the purposes for which directors can use the relevant
powers. On proper purposes for the power to issue shares, (see also PUNT Vs SYMONS & CO.
LTD. [1903] 2 CH. 506; HOGG Vs CRAMPHORN [1967] CH. 254; HOWARD SMITH LTD.
Vs AMPOL PETROLEUM LTD [1974] 1 ALL ER 1126; HARLOWE’S & NOMINEES THY.
PTY. Vs WOODSIDE (LAKES ENTRANCE) OIL NL (1968) 133 COMMONWEALTH LR 483;
TECK CORP. Vs MILLAR (1972) 33 DOMINION LR (3D) 288)

Second, it will be necessary to ascertain the purpose(s) that motivated a company’s directors to
act to see if what was done was permissible. (See HOWARD SMITH V AMPOLS PETROLEUM
[19741 1 ALL ER 1126, 1134)

In cases involving breaches of the collateral purpose doctrine, the relief commonly sought and
granted was an order declaring resolutions passed by the board to be invalid and unenforceable
(e.g. HOWARD SMITH Vs AMPOL PETROLEUM [1974] 1 ALL ER 1126).

ii) Duty to exercise powers bonafide in the best interests of the company

This forms the basis of the fiduciary duties imposed on directors. Directors owe their primary (and
perhaps only) duty to the company for which they are appointed to serve. It is however never clear
what amounts to the best interests of the company”.

The clearer test to date is that in considering what the best interests of the company are the duty is
a subjective one and the test is what the directors (and not what the Courts) honestly consider to

62
be in the best interests of the company and that Courts should be slow in substituting their own
judgments with the benefit of hindsight for that of the directors.

This position is well summarized in Lord Greene’s statement in RE SMITH & FAWCETT LTD
(1942) 1 ALL ER 542. In that case, the directors pursuant to authorization in the articles of
association refused to register a transferee of shares as a member in a company. The relevant
article provided that “the directors may at any time in their absolute and uncontrolled discretion
refuse to register any transfer of shares”. The appellant as executor of his father claimed to be
registered in respect of 4,001 shares. The directors refused to register the transfer unless he was
willing to sell 2,000 of the shares to a named director at a certain price in which case they would
register a transfer of the remainder. Action was brought against them. It was held that having
regard to the clear wording of the articles, the only limitation on the director’s discretion was that
it should be exercised bonafide in the best interests of the company. There was no ground for
saying that the director’s refusal to register the transfer was not due to a bonafide consideration
of the interests of the company as seen by them. His Lordship emphasized that the viewpoint must
be “a bonafide consideration of the interests of the company as the directors see them”.

It is important to note however that this duty is owed by the directors to the company and not to
individual shareholders in their capacity as such. Thus in the case of PERCIVAL Vs WRIGHT
(1902) 1 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 director’s duty of good faith is owed to the
company and rather than individual shareholders and so they failed. Court emphasized that
directors are not trustees for the individual shareholders and may purchase their shares without
disclosing pending negotiations for the sale of the company. A contrary view would mean that they
could not buy or sell shares without disclosing negotiations, a premature disclosure of which might
well be against the best interests of the company. There was therefore no unfair dealing since the
shareholder in fact approached the directors and named his own price.

The duties of directors generally have also been stated and reaffirmed more recently in other
common law jurisdictions not to extend to the creditors of the company. On October 29, 2004, the
Supreme Court of Canada released its much-anticipated decision in PEOPLES DEPARTMENT
STORES INC. (TRUSTEE OF) Vs WISE. The Court unanimously ruled that directors and
officers of the company owe their fiduciary duties to the company at all times, even when the
corporation is in the “vicinity of insolvency,” declining to adopt the approach favoured in some
other jurisdictions where fiduciary duties are owed to creditors when a corporation is in financial
difficulty.

In that case, Wise Stores Inc. purchased Peoples Department Stores Inc; in 1992, Lionel, Ralph
and Harold Wise were majority shareholders, officers and directors of Wise and after the

63
purchase, the only directors of the Peoples subsidiary. Almost immediately, problems arose with
the joint operation bf Wise arid Peoples. In search of a solution, the Wise brothers consulted the
vice-president of finance of Wise who suggested merging the inventory systems of the two
companies. An inevitable result of the joint inventory procedure was that Peoples would be
extending a significant trade credit td Wise. The new policy was implemented in February 1994
and, before the end of that year, both Peoples and Wise were bankrupt Peoples’ trusted in
bankruptcy subsequently brought an action against the Wise brothers, in their capacity as
directors of Peoples, claiming that they had breached both their fiduciary duty (i.e. their duty of
loyalty) and their duty of care (i.e. their duty of due consideration and skill) to the creditor of
Peoples.

The trial judge of the Quebec Court determined that the Wise brothers had failed to fulfill both
duties when they adopted the new inventory policy. In reaching that determination, the judge stated
that Canadian law should evolve in the direction adopted by the Courts in Great Britain, Australia
and New Zealand, which have held that directors owe a fiduciary duty to the creditors of a
corporation when the corporation is near insolvency. The Quebec Court of Appeal set aside the
trial judge’s decision, finding that the conduct of the Wise brothers was ‘reasonable in the
circumstances. The Court of Appeal further held that the trial judge had erred in applying case
law from other jurisdictions that established that a director owes a fiduciary duty to creditors
when a corporation is near insolvency.

The Supreme Court o Canada affirmed the decision of the Quebec Court of Appeal and held that
the wise brothers did not breach their fiduciary duty or duty of care as directors of peoples. On
the question of fiduciary duties, the Court held that those duties are at all times owed to the
corporation, even when the corporation is insolvent or in the “vicinity of insolvency”.

The Court held that the phrase the “best interests of the corporation” should not be read simply
as the “best interests of the shareholder”. From an economic perspective, the “best interests of
the corporation” means the maximization of value of the corporation. This is not to say that it is
not legitimate, in certain circumstances, for the directors to consider the interests of stakeholders,
including employees, suppliers, and creditors when assessing the best interests of the corporation
however, the duty of the directors’ remains to act honestly and in good faith with a view to creating
a “better” corporation, not furthering the interests of any particular group of stakeholders.

The Court considered it unnecessary to read the interest of creditors into fiduciary duty since
creditors have the oppression remedy available to them (if directors act in a manner that is
oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, any creditor) and
also an action based on the duty of care. The Court held that directors owe a duty of care to
creditors and other stakeholders, which provides that directors must exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable circumstances.

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The “business judgment rule”, which was explicitly adopted by the Court, will help directors
satisfy this duty. The Court held that directors will not be held to be in breach of their duty of care
if they act prudently and on a reasonably informed basis. The Court emphasized, “Perfection is
not demanded”. Courts are ill suited and should be reluctant to second-guess the application of
business expertise to the considerations that are involved in corporate decision-making. In
exploring the duty of care, the Court rejected the “objective subjective” test previously outlined
by the Federal Court of Appeal in SOPER Vs CANADA; that approach involves an objective
assessment based on the specific skills and experience of each individual director.

The Court indicated that the appropriate standard is an objective standard that takes into account
the context in which a particular decision was made, but holds all directors to the same standard
of care.

The decision of the Supreme Court of Canada should provide directors with comfort that where a
board of directors has made a business decision honestly and in good faith, and has acted
prudently and on a reasonably informed basis, a Court should not (and will not) second-guess the
judgment of the directors. This decision is however far from protecting directors who are unable
to demonstrate proper business, judgment in their decisions.

The decision in PEOPLES DEPT. STORES INC Vs WISE reaffirmed the long standing business
judgment rule in company law with regard to director’s duties under which the directors of a
corporation are clothed with the presumption (unless otherwise proven), which the law accords to
them, of being motivated in their conduct by a bona fide regard for the interests of the corporation
whose affairs the shareholders: have committed to their charge and whereby a court will refuse to
review the actions of a company’s Board of directors in managing the company unless there is
some allegation of conduct that the directors violated their duty of care to manage the company
to the best of their ability.

Given the obvious fact that directors are not insurers of corporate success, the business judgment
rule specifies that the Court will not review the business decisions of directors who performed
their duties:

1. in good faith;
2. with the care that an ordinarily prudent person in a like position would exercise under
similar circumstances; and
3. in a manner, the directors reasonably believe to be in the best interests of the company.

The business judgment rule is very difficult to overcome and Courts will not interfere with directors
unless it is very clear from the facts of a particular case that they are guilty of fraud or
misappropriation of the corporate funds.

In effect, the business judgment rule creates a strong presumption in favour of the Board of
Directors of a company, freeing its members from possible liability for decisions that result into

65
harm to the company. The presumption is that in making business decisions not involving direct
self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the
honest belief that their actions are in the corporation’s best interest.

In MAPLE LEAF FOODS INC. Vs SCHNEIDER CORP (1998), 42 OR. (3D) L77, Weiler J.A
stated, at p. 192: “the Court must be satisfied that the directors have acted reasonably and fairly,
the Court looks to see that the directors made a decision not a perfect decision, provided the
decision taken is within a range of reasonableness, the Court ought not to substitute its opinion
for that of the board even though subsequent events may have cast doubt on the board’s
determination. As long as the directors have selected one of the several reasonable alternatives,
deference is accorded to the board’s decision. This formulation of deference to the decision of the
Board is known as the “business judgment rule”. The fact that alternative transactions were
rejected by the directors is irrelevant unless it can be shown that a particular alternative was
definitely available and clearly more beneficial to the company than the chosen transaction”.

In order for a plaintiff to succeed in challenging a business decision made by the directors, he or
she has to establish that the directors acted:

i. in breach of the duty of care and

ii. in a way that caused injury to the plaintiff.

It follows that directors and officers will not be held to be in breach of the duty of care if they act
prudently and on a reasonably informed basis. However, for them to get this protection of the rule,
the decisions they make must be reasonable business decisions in light of all the circumstances
about which the directors or officers knew or ought to have known.

In determining whether directors have acted in a manner that breached the duty of care, it is worth
repeating that perfection is not demanded. Courts have several times indicated that they are ill
suited and should be reluctant to second guess the application of business expertise to the
considerations that are involved in corporate decision making, but they are capable, on ‘the facts
of any case, of determining whether an appropriate degree of prudence and diligence was brought
to bear in reaching what is claimed to be a reasonable business decision at the time it was made.

In short, the rule therefore exists so that a board will not suffer legal action simply from a bad
decision, It has always been the rule that a Court will nor substitute its own notions of what is or
is not sound business judgment if the directors of a company acted on an informed basis in good
faith and in the honest belief that the action taken was in the best interests of the company.

It appears to be relatively well settled as well that the directors of a company owe no duty to that
company’s holding or subsidiary company. It could be that in an appropriate case he has breached
his duty to his company. It will only be his company and not the parent or subsidiary as the case
may be to bring an action. In BELL Vs LEVER BROS LTD (1932) AC 161, a holding company
L held than 99% of the share capital of its subsidiary N. Two directors of N who had service

66
agreements with L engaged in secret speculation in cocoa, a commodity in which N company dealt
in. This was essentially conducted which would have justified their dismissal as directors by N
company and termination of their service agreement with L. With regard to the question of whether
they were in breach of duty to the holding company, the House of Lords held that they were not.
Lord Atkins noted that, Bell was not a director of L and with respect it was difficult to conclude
that he was in a similar fiduciary relationship to the shareholders or the particular shareholder
(L) which held 99% of the shares.

In PERGAMON PRESS LTD Vs MAXWELL (1970) 1 WLR 1167, the plaintiff holding company
held 70% shares In its subsidiary located in New York of which the defendant director was
president. On the prayer that the Court should interfere with the discretionary powers of the
defendant to vote in a way adverse to the interests of the plaintiff company, it was held that the
Court would not at the instance of some only of the members of an incorporated company make a
mandatory order upon the defendant directing him to exercise his discretion in a certain manner.

Directors and the financially distressed company

From a functional perspective, shareholders are a company’s “residual claimants” but when a
company is on the verge of insolvency, the company is effectively trading with the creditors’
money, which would ordinarily imply that directors’ duties should adjust accordingly.

Common law

In England however, Courts appear to have endorsed the view that if a company was on the verge
of insolvency, the directors had to have regard for the creditors’ interests as part of the
overarching duty to act in the best interests of the company (See RE HORSLEY & WEIGHT
LTD. [1982) 3 AU ER 1045, 1055; WEST MERCIA SAFETY WEAR Vs DODD [L988] BCLC
250, 252’53; RE PANTONE 485 LTD. [2002) 1 BCLC 266, 285).

This position has been doubted in other jurisdictions as the Wise decision showed and there are
sufficient public policy reasons for this doubt on the basis that directors are appointed by the
shareholders to manage the company as a result of which it would be both undesirable and onerous
for them to owe duties to those to whom they have no direct obligations to.

Shareholder ratification and prejudice to creditors

Shareholders likely cannot ratify breaches of duty once the process for liquidating a company has
been commenced (See PRECISION DRIPPINGS LTD. Vs PRECISION DRIPPINGS
MARKETING LTD [1986] CH, 447, 457), Ratification also cannot occur when the result would
be a fraud on the company’s creditors (See ROLLED STEEL PRODUCT Vs BRITISH STEEL
CORP. [1986] CH. 246, 296, AVELING BARFORD LTD Vs PERION LTD [1989] BCLC 627)

iii) Dealing with the company’s property

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Directors have a duty to protect the company’s properties and not to expend them improperly. If
they do so, they are liable to make good the loss so occasioned. In the case of RE GEORGE
NEWMAN, (Supra) the term company’s property is widely defined to include contacts to which
the company is entitled even if the company has lost no funds at all.

In COOKS Vs DEEK (1916) AC 554. The defendants 3 of the 4 directors of the Toronto
Construction Company resolved to break their business relations with the director, the plaintiff
called Cook. The company had built up considerable good will with the Canadian pacific Ply Co.
as a result of a successful performance in several contracts each of which had been negotiated
with the railway company’s representative by one of the directors. The last of these contracts, the
Shore Line contract was negotiated in the same way but when the arrangements were completed,
the defendants rook it in the name of a company they had formed for that purpose. Cook claimed
that the company was entitled to the benefit of the contract and that a shareholders’ resolution
which the defendants had carried by their own votes purporting to confirm that the company
claimed no interest in the contract was ineffective. It was held that Deeks had breached the duty
of good faith and he was compelled to pay the proceeds to the company i.e. the profits. Lord
Buckmaster noted that whereas there was an inevitable importance not to overburden those who
assume the role of director in a company on the other had men who assume the complete control
of a company’s business must remember that they are not at liberty to sacrifice the interests which
they are bound to protect and while ostensibly acting for the company divert in their own favour
business which should properly belong to the company they represent. The defendants could
therefore not retain the benefit of such contract for themselves.

The misapplication of company property by directors renders them liable to account to the
company in equity on the same basis as governs a misapplication of trust finds by trustees although
directors are strictly speaking not trustees (RE LANDS ALLOTMENT CO. (1894) 1 CH 616,
BISHOPSGATE INVESTMENT MANAGEMENT LTD (IN LIQ) Vs MAXWELL (NO. 2)
(1994) ALL ER 261)

(iv) Making Secret Profits out of the Company and avoiding conflict of interests.

Like all trustees or agents a director must never use his position to make profits at the expense of
the company and if he so does, he is under a fiduciary duty to account the same to the company.
The rule in the case of; ABERDEEN RAIL CO Vs BLAIKE BROS (L843) ALL ER 249 ; is that
since a director is in a fiduciary relationship, he is not allowed to enter into any transaction in
which he has a personal interest if to do so will result into a conflict with the interest of the
company. In this case, the respondents, Blaike Bros. had agreed to manufacture iron chairs for
the railway company at CBP 8.50 per ton and sued to enforce the contract. The railway company
pleaded that it was riot bound by the contract because at the time when it was made, the chairman
of its board of directors was also managing partner of the respondents. This plea was upheld by
the House of Lords. The Court held that he was bound to make the best bargains for the company

68
and his position as managing partner in his own firm would lead him in an entirely opposite
direction.

Lord Crainworth LC noted that “a corporate bosh can only act by agents and it is of course the
duty of those agents so to act as best to promote the interests of the corporation to those affairs
they are conducting. Such agents have duties to discharge of a fiduciary nature towards their
principal. And it is a rule of universal application that no one having such duties to discharge
shall be allowed to enter into engagements in which he has or can have a- berson.al interest
conflicting with the interests of those whom he is bound to protect. So strictly is this principle
adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract
so entered into...”

At common law there was however, no general rule forbidding a director from serving on the
board of directors of another company, even if the other company was a competitor. (LONDON
AND MASHONALAND EXPLORATION CO. Vs NEW MASHONALAND EXPLORATION
CS. [1891] WN 165; BELL LEVER BROS, LTD. [1932] AC 161, 195; IN PLUS GROUP Vs
PYKE [2002] 2 BCLC 201).

At common law a director could not take up an additional directorship if this breached an express
restrictive agreement (See PLUS GROUP Vs PYKE [2002] 2 ECLO 201). Even absent explicit
restrictions, if the companies involved have competing interests a director taking up an additional
directorship should obtain advance consent from the companies to preclude running afoul of the
“double employment rule” (ULTRA FRAME (UK) LTD. Vs FIELDING [200S3 EWHC 1638
[1301-17].

The above rule has been slightly modified since it was never regarded fair. S 200 and Article, 84
of table A modify the role, to allow a director to make profit out of the transaction provided he has
disclosed his interest to the Board, in the case of; HELLY HUTCHINSON Vs BRAYHEAD (197)
3 ALL ER 98, it was said that where the director has not disclosed his interest in the contract,
makes the contract not void but merely voidable under the ordinary principles of equity. The court
rejected the position that there on that there is no valid contract unless disclosure is made by the
director regarding his interest.

However as noted above, Section 200 of the Companies Act (Cap 110) makes provision for
directors interests in contracts. Section 200(1) requires a director who either directly or indirectly
is interested in a contractor proposed contract with the company to declare the nature of his
interest at a meeting of the directors of the company. Under Section 200(2), where the contrast is
just being proposed to be entered into, the director is required to make such disclosure at the
meeting of the director at which the question of entering into the contract is first considered or if
he was not at such meeting interested in the contract then at the next meeting after his interest
arose and in case he becomes interested in it after it has hen made; he must declare his interest at
the first meeting held after he became interested.

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Under Section 200 (4), it is an offence for a director not to make such disclosure and it is
punishable by neither a fine not exceeding 200/=.

Moreover the Section requires the disclosure to be made “at a meeting of the directors” which
appear to mean the whole board of directors: Thus in GUINNESS PIE Vs SAUNDERS & ANOR
(1988) 2 ALL ER 940, a director who had declared the nature of his interest to a committee of
the board which consisted of himself and 2 other directors was not held not have complied with
the necessary statutory provisions which require the declaration to be made at a “meeting of
the directors of the company.” The director was therefore liable to the company as a constructive
trustee of the 5.2 Million pounds that the company had paid to him under a contract he had entered
into during a take-over bid. Fox LJ stated that “assuming it were true that all the members of the
board knew about the payment, that does not alter the fact that the requirement of the statute that
there be a disclosure to ‘a meeting of the directors of the company’ (which is a wholly different
thing from knowledge by individuals and involves the opportunity for Positive consideration of the
matter by the board as a body) was not complied with. I conclude therefore that the statute required
disclosure to a duly convened meeting of the board of Guinness”.

However, it is not required that directors and officers in all cases avoid personal gain as a direct
or indirect result of their honest and good faith supervision or management of the company. In
many cases, the interests of directors and officers will innocently and genuinely coincide with
those of the company. If directors and officers are also shareholders, as is often the case, their lot
will automatically improve as the company’s financial condition improves. Another example is the
compensation that directors and officers usually draw from the companies they serve. This benefit,
though paid by the company, does not, if reasonable, ordinarily place them in breach of their
fiduciary duty. Therefore, all the circumstances may be scrutinized to determine whether the
directors and officers have acted honestly and in good faith with a view to the best interests of the
company.

There is also authority to support the view that where a board of directors considers a business
venture or Investment which is offered or proposed to be offered to the company and bonafide
come to the Conclusion that the company should not to take it, any director is free to make such
an investment on his own account and he will not be deemed as having done so in breach of his
duties. (See PESO SILVER MINES LTD Vs CROPPER (1966)58 DLR (2D) 1 SUPREME
COURT OF CANADA

(iv) Insider trading; This is where a well positioned officer in the company uses sensitive and
important information about that company to his benefit and it usually overlaps with the duty not
to make secret profits. This is more common in deals concerning securities and capital markets.
This involves situations where directors come into possession of an opportunity or information
which should be used for the company’s benefit but which they instead use for their own benefit
and make a profit as a result.

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The law is very stringent on this duty and it does not in fact matter that the company was not in a
position to take up the opportunity itself. In INDUSTRIAL DEVELOPMENT CONSULTANTS
LTD Vs COOLEY [1972] 2 ALLER 162, in which the director became personally interested in a
contract he had been assigned to negotiate for the company, the Court ordered him to account to
the company and it noted that it was immaterial that it had in fact suffered no loss and that in
could not have appropriated the contract for itself. Roskill J noted that “upon general rules of
equity, a person holding a fiduciary position as a director cannot obtain for himself a benefit
derived from the employment of the company’s funds unless the company knows and assents. No
director can in the absence of a stipulation to the contrary partake in any benefit from a contract
which requires the sanction of a board of which he is a member. He stands in a fiduciary position
towards the company and if he makes any profit when he is acting for the company, he must
account to the company. it makes no difference that the profit is one which the company itself
could not have obtained, the question being not whether the company would have acquired it
but whether the director acquired while working for the company”

Remedies for breach of the duty

At common law when a director violated the secret profits rule, the company could at its option
elect to claim for equitable compensation based on damages for the loss of the profitable
opportunity or require the director to account for actual profits obtained (CMS DOLPHIN LTD.
VS SIMONET [2001 BCLC 704), REGAL (HASTINGS) LTD. Vs GULLIVER [1942] 1 ALL
ER 378, HEFTY HUTCHINSON VS BRAYHEAD LTD)

What if the company that ultimately exploits the opportunity ends up insolvent?

There can still be profits that must be accounted for. (See CMS DOLPHIN LTD. Vs SIMONET

[2001] BOLC 704, 733-34, 746)

Making allowances for the efforts of the errant director

The duty to account for profits should not be applied in a manner, which makes it vehicle for unjust
enrichment of the plaintiff. (See WARMAN INTERNATIONAL LTD. Vs DWYER (1994 95)182
CLR 544).

Knowing receipt

A company can seek relief against a third party in the context of a breach of duty by a director if
there has been “knowing receipt” of company property. Dishonesty on the part of the third party
is, not required but there will need to be knowledge that the assets were traceable to a breach of
fiduciary duty. (ULTRA FRAME (UK) LTD. Vs FIELDING [2005] EWHC 1638 [1478-79]).
Though a corporate opportunity does not tend to resemble “property”, in some cases corporate
opportunities have been treated as such (COOK Vs DEEKS [1916] 1 AC 554).

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Accessory liability

A company can also seek relief against a third party in the context of a breach of duty by a director
on the basis of accessory liability”. No company property need be involved, but there must be
dishonesty, in the sense that a reasonable person knowing what the defendant knew, would have
regarded the transaction or arrangement as dishonest: (See BARLOW CLOWES Vs
EUROTRUST INTERNATIONAL [2006] I WLR 1476, 1479)

Rescission

At common law, interested contracts were voidable by the company at its instance (HELY
HUTCHINSON V. BRAYHEAD LTD. [1968) 1 QB 549). A company’s right to rescind could be
lost by affirmation of the contract, inability to make restitution or intervention of rights of an
innocent third parry as to when the connection between the director with the conflict of interest
and a third party company will be-substantial enough to preserve the option to rescind, (see CMS
DOLPHIN LTD. Vs SIMONET [2001) 2 B.C.L.C. 704, 735-36, ULTRA FRAME (UK) LTD. Vs
FIELDING [20051 EWHC 1638 [1561-76]. A contract which is voidable because of a director’s
interest may be ratified by the company in a general meeting and the director is not debarred from
voting on it as a shareholder in such a meeting. (See NORTHWEST TRANSPORTATION CO.
LTD Vs BEATTY (1887) 12 APP. CAS 589)

Equitable compensation

If the option to rescind an interested contract is unavailable inter alia for the reasons pointed out
above, a company may still be able to claim equitable compensation from the director to reverse
any loss of wealth it has suffered. Courts have been prepared to grant the remedy in related contexts
(SEE MCKENZIE Vs MCDONALD [1927] VLR 134; MAHONEY PURNELL [1996) 3 ALL
ER 61) but it is not entirely clear the remedy is available if the director involved has not been
dishonest (GWEMBE VALLEY DEVELOPMENT CO. Vs KOSHY [2004) I BCLC 131, 173).

EXERCISE OF DIRECTORS DUTIES

Board meetings

Directors act and exercise their functions through board meetings. Table A implies that this
management power is given to the board and not individual directors. (See sections 137-153 and
Articles 98 & 99.

Table A). To exercise these powers therefore a board meeting must be held.

Notice of board meetings

Every director of the company is required to be given notice for board meetings. However, Article
98 Table A provides in part that it shall not be necessary to give notice of a meeting of directors
to any director for the time being, absent from Uganda. The United Kingdom Companies Act on

72
the contrary requires such notice to be given where the director’s whereabouts are unknown. It
appears however in Uganda that the mere absence of a director in Uganda would disentitle him
from notice.

Failure to give notice of a board meeting to any director renders the meeting a nullity. IN RE
PORTUGUESE CONSOLIDATED COPPER MINES LTD (1890) 45 CH D 16, an allotment of
shares which had been made by the directors at a meeting of the directors was held to be irregular
on grounds that notice of the meeting had not been given to all the directors and that on that basis,
the meeting was irregular. The case also forms basis for the proposition that an earlier meeting
where no notice has been given to all directors will not regularize an adjourned meeting
subsequently called after in. (See also RE HOMER DISTRICT & CONSOLIDATED GOLD--
MINES LTD EXP. SMITH (1888) 39CH 0 546).

It is also relatively well settled that a director may bring a personal action against his fellow
directors to restrain them from wrongfully excluding him from attending board meetings. Every
director has a right by the articles of the company to take part in the management of its affairs, to
be present and to vote at the meetings of the board of directors and he has a perfect right to know
what goes on at director’s meetings as this may affect his liability as a director. (See PULBROOK
Vs RICHMOND CONSOLIDATED MINING CO. (1S78) 9 CH 0610)

Length of notice for meetings see section 140

Whereas there has not been consensus on what time is sufficient for notice to a director for a board
meeting, from the decisions it appears that - for notice to be valid, it must be reasonable having
regard to all the circumstances of the case. - it has been for example held that 3 hours notice to
directors who had other businesses to attend to was insufficient even though left at their places of
business and the place where the board meeting was to be held. (See RE HOMER DISTRICT
CONSOLIDATED GOLD MINES LTD EXP. SMITH (1888)39 CH 0546) yet on the other hand,
5 minutes notice to a director was held sufficient when neither distance nor other engagements
prevented a director from attending. (See BROWNE Vs LA TRINIDAD (1887) 37 CH D 1).

Notice bf a board meeting need not state the business to be transacted at the meeting provided it
states when and where the meeting is to be held. (See COMPAIGNE DE MAYVILLE Vs
WHITLEY (1896) 1 OH 788). The rationale behind this rule is that directors may from time to
time consider at their meetings several matters. It would be inconvenient for a rule to prohibit
them from considering any other matters. It would be inconvenient for a rule to prohibit them from
considering any other matters than those set out in the notice.

However if all the directors agree informally on a certain matter without a board meeting being
held, their unanimity is equivalent to a resolution passed at a board meeting and is binding on the
company. (See RE BONELLI’S TELEGRAPH CO. COLLIE’S CLAIM (1871) LR 12 EQ 246
AND TCB LTD Vs GRAY (1986) 1 ALL ER 587).

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The above rule notwithstanding, a board meeting may be held informally but cannot be constituted
on a merely casual encounter between the directors if one or more of the directors object to its
being held, In BARTON Vs POTTER (1914) 1 CH 895, court held that no meeting had been
validly held where a director met another at a railway platform and against the wishes of the other
director proposed to hold a meeting as they were walking along to allow additional directors join
the Board. When the ocher director objected, the director using his casting vote as Chairman of
the meeting declared a resolution as having been passed for their election. Court held that whereas
directors are free to hold their meeting in any circumstances, one or more of them cannot however
convert a casual or social meeting or gathering into a board meeting. Court also reached the
conclusion that the notice that no notice had heed given to the other director of the meeting.

Board meetings cannot be validly held unless there is sufficient quorum for such meetings. Article
99 Table provides that the quorum necessary for the transaction of the business of the directors
may be fixed by the directors and unless so fixed shall be two.

If the number of directors has fallen to less than a quorum, the articles will usually permit the,
remaining directors to fill the vacancies so as to ‘make up a quorum but if there are no is deadlock
between the directors, there is authority to suggest that the members may exercise their powers
until a board is properly constituted. In BARTON Vs POTTER (1914) 1 CH 895, FOSTER Vs
FOSTER (1916) 1 OH 532, 2 directors were not on speaking terms so that effective board
meetings could not be held; The Plaintiff had requisitioned a shareholder’s meeting at which
additional directors had Purportedly been appointed but the defendant objected that the power to
make such appointments was vested by the company’s article in the directors, it was held that in
view of the deadlock between the directors, the power in question reverted to the general meeting
an appointment of the additional directors that had been made were accordingly valid.

Similarly, in FOSTER Vs FOSTER (1916) 1 OH 523, there was a dispute over which of 2
directors should be appointed Managing Director, there being 3 directors in all. Although the
power to appoint was conferred by the company’s articles on the directors, another article forbade
a director from Voting in respect of any contract in which he was interested. It was therefore
impossible to carry any motion in view of the disqualification of one director and the opposition
of another. It was held that this was a proper case for the board powers to revert to the general
meeting.

Other 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 i.e. S 206 and S 405of the Companies Act.

Under S206 of the Companies Act, any provision in whether in the articles of the company or in
a contract between the company and the officer, which exempts any officer of the company from
liability or indemnifies him due to his negligence, default, breach of duty or breach of trust is void.

74
There are 2 exceptions to this

1) That S.206 of the Companies Act 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 of the Companies Act a company is free to indemnify any officer
against 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 of the Companies Act, an officer taken to court for negligence breach of trust, default
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 such that he ought to be fairly excused.

In the case of CUSTOMS AND EXCISE VS ALPHA LTD (1991) IQB 549 it was held that
Section 405 of the Companies Act is applicable only where the company is making claims against
the officer and is not applicable if other people are making such claims.

Under Section 405 of the Companies Act, a director (or other officer) of the company against
whom proceedings for negligence, default, breath of duty or breach of trust may be excused from
liability by court if he proves to it and It is convinced that he has acted. Honestly and reasonably
and that having regard to all the circumstances of the case he ought fairly to be excused for such
breach. This defence however is not an easy one to rely on by a defaulting director because of the
high standard of honesty and reasonableness that it sets as a prerequisite. It was held for example
in RE DUOMATIC LTD (1969) 2 CH. 365, that the court is unlikely to make such order granting
relief from liability if the director did not obtain any legal or other professional advice in order
to determine whether the proposed action would occasion a breach of his fiduciary or other duties
to the company.

The test for relief under the Section is whether the director has acted honestly and reasonably and
he may be held to have so acted even if he was in fact negligent on that particular occasion or
transaction. Thus in RE D’JAN OF LONDON LTD (1993), a director of the company had dined
an insurance proposal form without reading it. The form was filled in by the director’s broker. An
answer given to one of the questions on the form was incorrect. The Insurance Company
repudiated the contract as a result of which the company failed to get any compensation for loss
of stock whose value was estimated at over 174,000 pounds The company was put into liquidation
and the liquidator sued the director for negligence. It was held that although in failing to read the
proposal from the director had been negligent, he had acted honestly and reasonably and ought
therefore to be partly relieved from liability.

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Other important sections are s 322 & 329 of the Companies Act. According to S.322 of the
Companies Act, criminal action can lie against any office for failure to disclose relevant
information during the winding up of the company among other things. Under S 323 of the
Companies Act, any officer who falsifies company’s 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 of the Companies Act) or who is a barrier to the carrying out of the company’s
affairs for any fraudulent (S 327of the Companies Act) which is also applicable for lifting of the
veil) or who is a party, to the non keeping of proper books of accounts (S329 of the Companies
Act) is criminally liable.

2. AUDITORS OFA COMPANY

The provisions of the Accountants Act 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. See sections 154-171 and Article 65-67

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 neither is nor
qualified to be appointed as auditors to avoid conflict of interest. The general rule here is that an
auditor is appointed by the general meeting, which is also responsible for circumstances, the
registrar of companies or the directors can appoint an auditor ‘and fix the remuneration.
Similarly, 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 eight to make
representations as redeems fit.

Duties Section 166 of the Companies Act.

Basically, an auditor’s duty is to investigate and examine the company’s accounts. He has a duty
under that Section to make a report to the members on the accounts examined by them and on
every balance sheet, every profit and loss account and all group accounts laid before the company
in the general meeting during their tenure of office. His report is to be read at the company’s
general meeting.

Under Section 162(4) of the Companies Act, an auditor has a right to attend all-such relevant
general meetings and to receive all notices of communications relating to any general meeting
which any member of die company is entitled to receive and he also has a right to be heard at any
general meeting which they attend on any part of the business discussed which concerns them as
auditor-.

Under Section 162(3) of the Companies Act, an auditor has the right to require any officer of the
company to give him any information that he may require in the proper execution of his duties.

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The standard of duty of auditors of the company has been set by the court in RE LONDON &
GENERAL BANK (1S5) 2 CH 673 to the effect that a’ auditor must be honest and must exercise
reasonable care and skill in what he certifies. It was noted that “it is the duty of an auditor to
bring to bear on the work he has to perform that skill, care and caution which a reasonably
competent careful and cautious auditor would use...An auditor is not bound to do more ‘than
exercise a skill in making enquiries.. He is not an insurer, he does hot guarantee that the books
do correctly show the inst position of the company’s affairs”.

The case has therefore traditionally supported the rule that an auditor is not bound to do more
than exercise reasonable care and skill in making inquires and investigations even in the case of
suspicion and that it is the duty of in auditor to bring to bear on the work he has to perform that
skill, care and caution a cautious auditor would in those circumstances use.-

Lindley LJ in the above case added that “such I take to be the duty of the auditor: he must be
honest i.e. he must not certify what he does not believe to be nice and he must take reasonable care
and skill before he believes what he certifies to, is true. What is reasonable care in any particular
case must depend upon the circumstances of that case. Where there is nothing to excite suspicion
is aroused, more care is obviously necessary but the auditor is not bound to exercise more than
reasonable care and skill even in a case of suspicion and he is perfectly justified in acting on the
opinion of an expert where special knowledge is required.

This proposition was later reaffirmed by Lopes LJ in RE KINGSTON COTTON MILL CO.(NO.
2) wherein he stated that “ an auditor is not a detective or as was said to approach his work
with suspicion or with a foregone conclusion that there is something wrong. He is a watchdog
and not a bloodhound. He is justified in believing tried servants of the company in who confidence
is placed by the company. He is entitled to assume that they are honest and rely upon their
representations provided he takes reasonable care. If there is anything calculated to excite
suspicion , he should probe it to the bottom but in the absence of anything of that kind, he is
only bound to be reasonably cautious and careful.

This duty however seems to have been widened by later authority. In the case of FORMENTO
(STEELING AREA) Vs SELSDON FOUNTAIN PEN CO LTD (195S) 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 he is not to be written off as a professional “added-up
subtractor”. That his vital task is to take care that error of omission or commission or downright
untruths are not done. Although he affirms that the auditor is not required to come to the books
with suspicions of dishonesty, he must come with an inquiring mind.

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Although Lord Denning was not very explicit in his statement, it is clear that the indirect effect of
his proposition was that an auditor could not in light of his duties and modem times afford to be
simply a watchdog.

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 is matter
as accountants do, he is entitled to take legal advice. In the case of BEVAN Vs WEBB (1910)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 of the Companies Act, an auditor is an officer of the company. His duty is to
ascertain and state he true financial position of the company at the time of audit but not to care
about declaring dividends.

Nevertheless, an auditor will not be made liable for not tacking-out ingenious and carefully laid
schemes of fraud, when here 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. In the case of
THOMAS GERALD & SONS LTD (1968), CH.455 has expressly presented the current provision
in contemporary company structures. It appears to have indirectly endorsed the view that
circumstances had changed since Re Kingston and that the auditor is now a bloodhound, and not
merely a watchdog. That auditor of the company owe a statutory duty to make the members a
report containing certain statements.

It must be emphasized that auditors owe their duties to the company and the shareholders and not
any third party who may have read the accounts unless of course the Medley Byrne principle of
assumption of liability apply. In CAPARO PLC Vs DICKMAN & ORS (1990) 1 ALL ER 568, the
auditors of a company negligently audited its account with the result that the amount showed a
GBP 1.2 Million profit rather than areal loss of GBP 400,000. In reliance on these accounts, the
respondents made a takeover bid for the company, which was ultimately unsuccessful.
Subsequently, the respondents brought proceedings against the auditors for breach of duty of skill
and care; it was held by the House of Lords that there was to liability since the auditor owed no
duty of care to a member of the public who relied on the accounts to buy shares in the company.
To hold otherwise would give rise to unlimited liability on the part of the auditor. The auditors
duty is therefore owed to the company and its shareholders as a body and not to outsiders.

However, even where there is an assumption of liability, it is relatively settled since the case of
HEDLEY BYRNE & CO LTD Vs HELLEN PARTNERS LTD (1964) AC 465, that an auditor
will not be liable to a third party if he has made an appropriate disclaimer to his work.

It appears however that such a disclaimer does not apply as against the company and shareholders
because Section 206 of the Companies Act provides that any provision whether contained in the
articles of a company or in a contract with a company or otherwise which exempts any officer of
the company or any person whether an officer of the company or not employed by the company

78
as an auditor from liability or indemnifies him due to his negligence, default, breach of duty or
breach of trust in which he may be guilty in relation to the company to the is void. Therefore as
against the claims by the company against a shareholder, he does not get any protection from a
disclaimer in the contract between him and the company. In case of third parties, the disclaimer
would apply on the Hedley Byrne principles.

3. THE COMPANY SECRETARY

S.2 of the Companies Act defines a company’s officer as including the company’s secretary, In
Uganda, there are no specific qualifications required. However under sections 187,188,189,190
of the Companies Act and Articles 57-59., provisions and disqualify a person from becoming a
company secretary are contained.

In a company where there is only one director, such a director cannot become the company
secretary of that company. 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 at the same time also happens to be the only director of the appointing
company.

Under S.180 of the Companies Act, where anything is required to e done by or to a director or a
secretary, or an act is legally done by or to the same person acting as a director and as a secretary,
it shall not be satisfied by its being done by or to the same person acting both as director and as
or in place of the 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 of the Companies Act, 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.

Duties and authority of a company secretary

There is no clear-cur exhaustive definition for the secretary’s duties but these wilt depend on the
company in question. In’ practice, his duties include calling meetings, taking custody of sensitive
documents, keeping the company seal and issuing share certificates. This notwithstanding, a
company’s secretary is a very important person or officer of the company who can legally bind
the company in its transactions.

It is settled that a company secretary in modern company law has the usual authority to bind the
company in matters concerned with administration. In PANORAMA DEVELOPMENT
(GUILDFORD LTD) Vs FIDELIS FURNISHINGS FABRICS LTD (1971) 3WLR 12, 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

79
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.

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 CHAPTER TWELVE
MEETINGS OF THE COMPANY
Article 80 of Table A of the Companies Act and case law generally empower the directors - to
manage the affairs of the company save for those matters which the Act and the Articles of
Association of that company may reserve for the shareholders in the general meeting. This
notwithstanding, the ultimate control of the affairs of the company lies with the general meeting.
There are 4 kinds of meetings of members which may be held by a company and they include the
following;

a) The Statutory meeting

b) Annual General Meeting

c) Extraordinary Meeting

d) Class Meeting

a) The Statutory Meeting

Under Section 137 of the Companies Act, every public company must hold a statutory meeting
between at least one month and not more than 3 months from the date of its entitlement to
commence business.

Under Section 137 (2) of the Companies Act provides that at least 14 days before the meeting,
the directors must send a statutory report to every member giving details of shares Issued whether
they are paid up or not, cash received by the company, the nature of consideration for the issue of
the shares, abstracts of the-receipts of the company and of the payments made there out and other
matters, The aim of this meeting is to enable members review the progress report from the directors
and promoters and any matters arising from incorporation or indeed from the statutory report.

The statutory report is required to be certified by at least 2 directors while the shares issued, cash
received in respect of shares and receipts and payments of the company on capital account must
be certified by be auditors. (S 137 (4) & (5) of the Companies Act.

A copy of the statutory report must be sent to the Registrar in addition to those sent to the members.

As we shall see later, failure to hold this meeting is one of the grounds that can lead to winding up
of a public company.

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b) The Annual General Meeting (AGM)

Every company is required under Section 138 (1) of the Companies Act in each year (and not
more than 15 months from the date of the last annual general meeting) to hold an annual general
meeting specifying it as such in the relevant notices calling it. The AGM is usually called by the
directors.

Professor Gower has noted that this is a critical meeting for the members as it is in this meeting
that they require the directors of the company to be accountable to them in their running of the
affairs of the company. Indeed it is also at this meeting that the shareholder may choose to retire
or terminate a director whom they feel is not performing according to their expectations.

However if the directors do not call one then the Registrar may under Section 138 (4) of the
Companies Act on the application of a member direct the convening of such meeting and he may
also give directions as to its conduct including a directive that one person may form a sufficient
quorum or make any necessary modifications relating to its calling, holding or conducting. (See
RE EL SOMBRERO (1958) CH. 900).

The AGM usually considers such business as declaration of dividends, appointment of auditors,
appointment of new directors etc.

Defaulting in holding the AGM is an offence which attract criminal sanctions under Section 138(8)
of the Companies Act

c) Extraordinary Meeting (EGM) -

The extra ordinary meeting (EGM) is any general meeting other than the Annual General Meeting
(AGM) and is usually convened by the directors at their discretion to deal with matters of urgency,
which may not be put on halt until the next AGM.

The directors notwithstanding anything in its article of association must convene a meeting. If
holders of at least 10% of the paid up capital carrying voting rights requisition for one, for a
company without a share capital at least one tenth of the members with voting rights must have
requisitioned for the meeting. The requisition must state the objects of the meeting and must be
signed by those requisitioning and deposited at the company’s registered office.

Under Section 132 (3) of the Companies Act if the directors do not within 21 days after the deposit
of the requisition convene such meeting, those requisitioning may themselves convene it.

d) Class meetings -

These are not provided for under the Act. They are usually held pursuant to the company’s articles
of association by different holders of shares of different classes.

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Case law has stressed that a meeting cannot be attended by one person. In SHARP Vs DAWES
(1876) 2 QBD 26, a meeting was attended by one member and the company secretary who was
not a member at which a call on shares was made. One of the other shareholders who did not
attend the meeting refused to pay up on the call. It was held that the meeting was a nullity and the
call was invalid. Court noted that “ it is clear but according to the ordinary use of English
language, a meeting could no more be constituted by one person that a meeting could have been
constituted if no share at all had attended.” It was further noted, “the word ‘meeting’ prima
facie means coming together of more than one person.

This common law interpretation must be understood subject to Section 135 of the Companies Act
below where court may call meeting where it has become impractical to call it and make any
orders as necessary to hold it. Such orders may include the holding of such a meeting by one
member.

Under Section 135(2) of the Companies Act, such a meeting if convened under order of court is
deemed in law to have been validly called and held.

Further, the entire context must be looked at. In EAST Vs BENNETT BROS (1911) 1 CH 163
for example, I member holding all shares of a class was held to constitute a class meeting which
could only be attended by holders of shares in such a class

General matters relating to meetings.

i) Length of notice

The notice of even’ general meeting must be sent to all members of the company except where
there is a provision to the contrary in the articles. Under Section 133 (1) of the Companies Act a
meeting of the company may be called by 21 day’s notice writing and by virtue of Section 133 (1)
of the Companies Act, any provision in the company’s articles of association permitting the
calling of a meeting with a shorter notice is be void.

However, under Section 133 (4) of the Companies Act notwithstanding the above, a meeting shall
be deemed properly called notwithstanding that, it has been called by a shorter notice if:

(i) in the case of an AGM it is so agreed by all the members entitled to attend and vote; and

(ii) in the case of any other meeting, if majority of the members having a right to attend and vote
at a meeting and holding together not less than 95%

iii) Service of notices for meeting.

Table A is instructive on the procedure to be followed unless of course, Table A is not adopted by
the company or it excludes those particular articles. The relevant articles are Articles 131 -134 of
the Companies Act.

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Under Article 131 of the Companies Act service of such notice is effected either personally or
through the post to the address of a member. Under Article 133 of the Companies Act service may
be effected upon the legal representative of a deceased member or trustee in bankruptcy of a
bankrupt member at their addresses. Where there are joint shareholders, notice by virtue of Article
132 of the Companies Act may be given to the one whose name first appears in the register of
members.

Failure to give notice to any person legally entitled to receive it renders any business deliberated
at such meeting inconsequential unless the articles provide to the contrary. By way of example
Article 51 of Table A of the Companies Act provides that the accidental omission of giving notice
to a person entitled to it does not invalidate the proceedings at a meeting.

iii) The nature and content of the notice

Section 141 of the Companies Act requires notice of meetings of the company to be in writing. By
using “shall’, it appears that the wording is mandatory and that the calling of a meeting with an
oral notice may well not suffice for purposes of the Act.

Under article 50 of Table A of the Companies Act, the notice is required to state the place, day
and hour of the meeting and in the case of any special business the general nature of such business.
In addition, notice of the special business must indicate the resolution to be passed. In BAILLIE
Vs ORIENTAL TELEPHONE ELECTRIC CO. LTD (1915) 1 CH. 503, special resolutions were
passed altering articles of association in order to sanction the retention by directors of payments
previously received in breach of trust. The notice convening the meeting at which the resolutions
were passed did not give particulars of the amount of remuneration relieved by the directors. The
plaintiff, a shareholder in the company brought an action for a declaration that the resolutions
were not binding on the ground of insufficient notice of the meeting at which they were passed.
Court held that the resolutions were not binding, as they had not made a full disclosure of the facts
for which the vote was required. Similarly, in KAYE Vs CROYDON TRAMWAYS (1896), the
court invalidated a resolution because the notice convening the meeting contained the text of the
resolution to approve the sale of the company’s business but did not mention that the directors
‘were to be paid a sum as compensation for loss of office.

INDEED IT WAS HELD IN TIESSEN Vs HENDERSON (1899) 1 CH. 861, that a notice for
an extraordinary general meeting must disclose all facts necessary to enable the shareholder
receiving it make up his mind whether or not it is in his or her best interest to attend the meeting.

iv) Court’s inherent power to call a meeting

Under Section 142 of the Companies Act, if for any reason it is impracticable to call a meeting of
a company in the usual manner or in that stipulated in its articles, the Court may either of its own
initiative or on the application of any director or member of the company who would be entitled
to vote at such meeting order a meeting to be called, held and conducted in such manner as it

84
thinks fit and it may also give such ancillary or consequential directions as it thinks expedient
including a direction that a single member shall form sufficient quorum.

This provision will usually be helpful where those who ate supposed to convene the meeting are
frustrating the calling of such a meeting.

The powers of the court under this Section were illustrated in the case of RE FT SOMBRERO
(1958) CH. 900. In that case, the applicant held 900 of the 1,000 shares in the company while the
remaining shares were held as to 50 each by the 2 respondents who were its only directors, The
applicant had twice requisitioned a meeting of the company for the purpose of exercising the power
to remove directors by ordinary resolution but on each of these occasions the respondents had
absented themselves in order to ensure that the quorum of 2 members as fixed by the articles was
not present. The applicant sought an order under S. 135 and a direction that one person should be
deemed to constitute a quorum at such meeting. The court made the order accordingly.

With regards to the meaning of the word impracticable’ in Section 135 of the Companies Act
Wynn-Parry noted that the word impracticable is not synonymous with impossible and that the
word impracticable simply means that the court must examine the circumstances of the particular
case and answer the question whether as a practical matter the desired meeting of the company
can be conducted there being no doubt that it can be convened and held.

The wording of the Section however only permits those members entitled to attend and vote at such
a meeting to apply to court. It appears on this basis that preference shareholders are not entitled
to make this application as preference shares are essentially non-voting shares by their very
nature:

(v) Right to nominate proxies

Under Section 136(1) of the Companies Act, any member of the company entitled to attend and
vote, at a meeting of the company is entitled to appoint another person (whether a member or not)
as his proxy to attend and vote instead of him and a proxy appointed by a member of a private
company shall have the same right as the member appointing him to speak at the meeting except
that unless the articles otherwise provide:

(a) the subsection shall not apply to a company not having a share capital;

(b) a member of a private company shall not be entitled to appoint more than one proxy to attend
on the same occasion and

c) a proxy shall not be entitled to vote except on a poll

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(vi) Representation of companies.

Under Section 139 of the Companies Act, a company which is a member in another company
attends meetings by its directors passing a resolution authorizing any particular person to act as
its representative at any meeting of the company. Under Section 139(2) of the Companies Act,
the person so appointed has the same rights and powers in such a meeting as the corporation
could exercise if it was an individual shares.

(vii) Voting by Poll

Except as the articles may otherwise provide, in a company having a share capital, every
shareholder is entitled to one vote for each share held by them (See Section 134 (e), Article 62
‘Table A of the Companies Act) and proxies are not entitled to vote except by way of poll
S.(136(1(c) of the Companies Act.

However, a poll maybe demanded before or on the declaration of a show of hands (Article 58
Table A of the Companies Act)

(viii) Informal meeting by assent

Decisions may be made informally without a meeting where all the members entitled to attend and
vote at such meetings consent to such a decision. This in company law terms is called a meeting
by circulation. (See RE DUOMATIC LTD (1969) 2 CH 265).

It has been emphasized that the validity of such decisions critically depends on whether the consent
is unanimous, In EBM CO. LTD Vs DOMINION BANK (1937) 3 ALL ER 555, 3 principal
shareholders held between them over US $726,000 of issued capital and were accustomed to
running the company’s affairs as if it were a 3 man partnership. In fact the wives of 2 of them held
one share each. It was held that it was fatal to the validity of a security given to the Respondent
Bank that the consent of the 3 principal shareholders only had been given notwithstanding that
the shareholding of the wives was insignificant.

This rule as to the holding of meetings has at times worked to produce adverse results. In RE
EXPRESS ENGINEERING WORKS LTD (1920)1 CH 466, 5 persons who were the only
directors and shareholders of a company resolved at a director’s meeting to purchase certain
property from a syndicate in which they were themselves interested. The company’s articles
disqualified a director from voting as a director in relation to any contract in which he was
interested. The liquidator attempted to have this meeting set aside but the court held that the
unanimous though informal agreement of the 5 as members at that meeting bound the company.
The court was convinced because in this case all the 5 shareholders did meet and did agree on the
issue. Court noted that although the minutes in fact showed that this was a Board meeting but
there was nothing that could have stopped the directors from reconstituting themselves into a
general meeting.

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(ix) Voting agreements

A shareholder’s vote (unlike that of a director) is a property right which prima facie maybe
exercised by a shareholder or his proxy in his own interests (even if they are selfish ha nature) and
as he thinks fit, A shareholder voting as such is under no fiduciary duty to the company. This
position holds for a director/shareholder who is voting in a particular instance not as a director
but as a shareholder. (See NORTHERN COUNTIES SECURITIES LTD Vs JACKSON &
STEEPLE LTD (1974) 1 WLR 1133). In that case, Walton Li noted, “a director is an agent who
casts his vote to decide in what manner his principal (the company) shall act through the collective
agency of the board of directors, a-shareholder who casts his vote in general meeting is not casting
it as an agent of the company in any shape or form. His act therefore in voting as he pleases can
not in any way be regarded as an act of the company”.

It is also settled that a contract by a shareholder to vote in a particular way or as directed by

another person is binding and may be enforced by an injunction. In PUDDEPHATT Vs LEITH
(1916) 1 CH 200, the Plaintiff had mortgaged shares in the company to the defendant and
transferred them into his name. By a contemporaneous letter, the defendant had undertaken to
vote on the shares as directed by the Plaintiff. The court upheld that right and issued a mandatory
injunction to stop the defendant from voting otherwise than as agreed.

Whereas this case concerned only one shareholder, it is settled that a contract between several
shareholders agreeing to coordinate their votes or delegating to one the power to cast votes for
all in particular manner commonly known as voting trusts are lawful.

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 CHAPTER THIRTEEN
RAISING CAPITAL OF THE COMPANY
In this section, we look at how Companies (particularly Public Companies) raise their capital.
Focus is placed on public companies since as we saw earlier on; a private company can only raise
bands through private initiatives as the Companies Act prohibits it from offering its shares to the
public or even inviting the public to subscribe to its shares.

Public companies may raise capital by way of selling shares of debentures. The following are the
methods of raising capital in this regard:

1. Methods of issue

I. Rights issue: The members are also termed public.

2. Placings (private)

3. Offers for sale

4. Direct offers e.g. by issuing prospects

5. Offer by tender.

6. Bonus issue

a) A Direct offer to the public usually called an offer for subscription or offer by prospectus. In
this mode, 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 with all the attendant legal liabilities in the event of
inaccurate disclosures.

2. The company bears a risk of unsuccessful issue.

3. Although it may protect itself against unsuccessful issue by underwriting such issue, the
underwriters have to be paid a commission for that issue.

S. 55 of the Companies Act 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.

Further, S55 of the Companies Act, if the articles authorize more than 10% the company exceed
such figure. And finally such payment must be disclosed the prospectus.

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b) An Offer for sale is where an issuing house subscribes for the whole of the new issue and then
itself invites the public to buy from it either at a fixed price or by tender.

This method has a number of advantages to this company:

I. The company is not responsible for unsuccessful issue to the public.

2. It is the issuing house, which bears the responsibility for the prospectus.

3. Unlike the method of placing the company does not pay anything since the issuing house pays
itself a commission the difference of the price at which he sells and the price which he bought.

c) Placing: This is where an issuing house undertakes to place the securities issued with or without
buying them itself. The issuing house in that case will try to persuade potential buyers to buy the
securities. 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.

d) A Rights issue: This is where the Company invites the company’s existing members to subscribe
for additional shares in proportion to their current shareholding. As an incentive, such securities
ate sold at a lower price than what they would normally obtain in the new market,

e) Offer by Tender is a new innovation in the developed world by which the company will make
tender to the public for the purchase of its shares. All the shares that have been tendered are sold
to the highest bidder.

f) A Bonus issue is another mode of raising capital. 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 shareholder a dividend it may have declared, it holds on to those funds by issuing shares to the
shareholders.

Alternatively, the company may decide to offer its securities to the public. It will float new shares
and debentures. This may equally be done by offering shares to the public on the Uganda Securities
Exchange.

The company may also decide to borrow from the bank or the government or insurance companies
or finance houses, We do not consider this mode in this chapter as it is governed not by company
law but by fairly settled rules of the law of contract,

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2. Allotment of shares

This is the process through which a potential shareholders or subscriber is given the number of
shares which he has successfully applied for and which the company has decided to offer to him.
Private companies under S. 5 of the Companies Act restrict the offering of their shares to the
public and their articles must provide that:’

 a private company is not entitled to Invite the public to subscribe to any of its securities,
 a private company must in its Articles of Association contain a clause restricting the right
of transferability of its securities as far as its shares are concerned.

Such clauses are called pre-emptive clauses. Lack of such a pre-emptive clause automatically
makes the company a public limited company and if the membership is less than the statutory
minimum requirement, S.32 of the Companies Act operates to make the shareholders who remain
members knowingly when such number remains so reduced are liable for any debts of the company
incurred during such period. This is also a ground for winding up of a private company.

An allotment of shares is an acceptance by the company of his or her offer to take shares. It
completes a binding and enforceable contract between them but he does not thereby become a
member until his name is actually entered on the register of members. The only effect of shares
being allotted to a person is that he becomes a shareholder. He does not become a member of
the company until his name is entered on the register of members of the company as required by
Section 47 of the Companies Act. (See also LUTAAYA Vs GHANDESHA (1986) HCB 46).

In NICOL’S CASE (1S85)29 CH D 421, Wilkinson had applied for a certain number of shares in
a company and had been sent a letter of allotment. He was however never put on, the share register
and the allotment money was never paid by him to the company. The allotment was purportedly
cancelled by the company 3 years later after which the shares representing all the nominal capital
were issued to others. In the liquidation of the company, Wilkinson was held not to be liable as a
contributory. The court held that he had not become a member simply by signing the list of
subscribers and the company sending him a letter of allotment. Re still had to be entered on the
register of members in order for him to become a member.

In a rights issue, the letter of rights addressed to a holder of existing securities is an offer by the
company, which is capable of acceptance by the shareholders. On the other hand, in an open offer
of shares, the letter contains merely an invitation to treat. The member’s letter of reply is the offer.
(See JACKSON Vs TURQUAND (1869) LR 4 HL 305).

It is fairly well settled that an application to take shares will unless otherwise agreed lapse if no
allotment is made within a reasonable time. (RAMSGATE VICTORIA HOTEL. LTD Vs
MOATEFIORE (1566) LR I ETC. 109)

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A company moat make a Return of Allotment and register it with the Registrar of Companies within
60 days of making the allotment under Section 54 The return must have details the details of the
allottees, shares taken and amount payable on each share.

3. The prospectus

According to S2 of the Companies Act, a prospectus means any document, prospectus notice,
circular, advertisement or other Invitation offering to the public for subscription to the securities
of a company. The definition in S1 is very vague and consequently the courts have come up with
some guidelines to be employed in determining whether an invitation amounts to a prospectus or
not. There must be voluntary delivery.

Firstly according to NASH Vs LYND (1929) AC 158 , for a document to amount to a prospectus,
not only must it be delivered but also there must be some publicity with the aim of inducing
subscription e. g if a thief stole the document and publicized the issue of shares which the public
purport to buy , the document does not amount to a prospectus.

Secondly, according to S.60 of the Companies Act, for a document to amount to a prospectus, it
must be issued to the public.

What amounts to the Public?

The section seems to indicate that a public means a public whether selected by members or
debenture holders of the company concerned or as clients of the person issuing the prospectus or
in any other manner. In RE GOVT STOCKS & OTHER SECURITIES INVESTMENT CO. LTD
Vs CHRISTOPHER (1956) 1 WLR 237 a company issued a circular in which it offered to acquire
shares in another company in return for its own shares. The question was did that circular amount
to a prospectus. The court held that where an offer is acceptable only by the shareholders of a
company, such an offer is deemed not to be to the public unless the shares are to be issued under
renounceable letters or terms.

 Renounceable letters are contracts of allotment of shares under which the allottees can
pass those shares to third parties. Where the shares have been issued at terms, the allottee
cannot sell them to a third party.
 Secondly, the invitation must be ‘one inviting the public to subscribe or purchase the
securities. The terms subscribe or purchase means taking or agreeing to take securities for
cash.

According to S.60 of the Companies Act, a prospectus issued by or on behalf or in relation to a

company or an intended company must be dated and must be delivered to the Register for
registration and if intended company must be dated and must be delivered to the Registrar for
registration and if it contains a statement by an expert, under Section 41, that experts written

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consent must accompany the prospectus. If these requirements are contravened, the company and
any officer responsible for that prospectus are liable to a fine not exceeding Shs 10,000/= each
day the default continues. An ‘expert’ under Section 41(4) of the Companies Act includes an
engineer, valuer, accountant and any other person whose profession gives authority to a statement
made by him or her.

Liability for detective prospectus

Both civil and criminal liability lie against the company and/or its officers for non-compliance
with the statutory provisions as well as omissions as a misstatements in the documents.

Criminal liability (S 46 of the Companies Act)

Under S 46 of the Companies Act provides that where a prospectus is issued with an untrue
statement anybody who authorized the issue of the prospectus is liable on conviction to
imprisonment for a term not exceeding 2 years or to a fine not exceeding shs.l0,000/.

Civil liability (S 45 of the Companies Act)

Liability for the defective prospectus exists under both the Act and common law. S 45 imposes civil
liability for a prospectus containing any untrue statements. This liability is upon:

 any person who was a director at the time of the issue

 a person who has authorized his name to appear in the prospectus as a director or as
having agreed to become a director thereafter
 a promoter of the company
 any person authorizing the issue of that prospectus but the section raises a number of
defenses however.

The section raises a number of defenses however,

i. If the defendant can prove that although he consented his name to be used as a promoter
or director, he withdrew his consent before that issue or that the issue was without his
authority.
ii. That after the issue but before allotment under it, he on becoming aware of any untrue
statement in it, he withdrew his consent and gave reasonable public notice of his
withdrawal and of the reason of the withdrawal. When he is held liable, he is bound to pay
compensation to anybody who has subscribed to securities on the failure of that prospectus
for any loss or damage he may have suffered.
iii. That the prospectus was issued without his knowledge or consent and that on becoming
aware of its issue he immediately gave reasonable public notice that it was issued without
his knowledge or consent.

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 iv. That in regard to that statement (provided it is no made by an expert as described above),
he had reasonable ground to believe and did believe up to the time of the allotment of the
shares that the statement was true.

Under common law, an aggrieved subscriber can institute an action for deceit or
misrepresentation which entitles him to damages or rescission of a contract of allotment. However,
there are a number of limitations to these remedies.

Limitations to damages for misrepresentation

The court may deny the action or dismiss it as disclosing no cause of action unless:’

i. The plaintiffs complaints must be against a misrepresentation of fact and not of merely n opinion
e.g. if we say, I hope to become an accountant’ as opposed to “as I am going to become an
accountant.

ii. That misstatement or misrepresentation must be true if a prospectus omits stating what it should
have mentioned, then a company cannot be sued e.g. we are going to import maize from Uganda
without mentioning the part of Uganda and bearing in mind that some parts of Uganda are
insecure. However, if a statement mentions articulately the area, then it can be sued.

Limitations for rescissions

1. The plaint must indicate his intention of rescinding the contact i.e. immediately i.e. he must
not do anything, which amounts to an affirmation of the contracts. If he applies for shares
on the basis of a defective prospectus, he must immediately return them on acquisition of
this knowledge e.g. attending meeting, selling the shares to third party receiving dividends
on such shares etc.
2. He must take steps to rescind the contract of allotment before winding up proceedings have
commenced. The rationale is to safeguard the interests of creditors since such a
shareholder would avoid his liability or even fall among the directors to that company.
3. It has been held that rescission will not be availed if the commission of the false statement
is of un-relatively unimportant matters e.g. the prospectus ma’ mention the auditors as Y
and company ltd instead of X & Co ltd with different addresses, then, rescission is not
available but there must not exist that firm referred to in the prospectus. (SEE RE SOUTH
OF ENGLAND NATURAL & PETROLEUM CO. LTD (1911) 1 CH. 573)
4. Restitution integrum must still be possible. The principal means that it must be possible to
restore the order party to the same position they were in before the contract since
rescission is an equitable remedy.
5. This remedy is only open to the original allottee. In case the shares were purchased from
an issuing house, the allottee can still rescind the contract.

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Statement lieu of a prospectus
Where a company does not issue a prospectus and it is a public ltd company or flit issues one and
does not proceed to allot the shares/debentures, then such a company must deliver to the registrar
of companies a document known as a statement in lieu of a prospectus.

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 CHAPTER FOURTEEN
ALLOTMENT OF SHARES
This is the process through which the company distributes the shares to successful applicants,
generally, once a company has gone through issuing a prospectus or filing a statement in lieu of a
prospectus, then allotment of shares can proceed but there are normally some limitations. S 49(1)
of the Companies Act is to the effect that if a company is making its first allotment, it is not allowed
to allot the shares unless the minimum subscription requirements have been satisfied. A minimum
subscription is that minimum amount which the directors think must be raised by issue of share
capital for purpose of the number of items as laid in schedule 3 part 4 of the Companies Act.
These include:

i. The purchase price of any property bought if the price of such property is to be paid out
of the issue of securities.
ii. The preliminary expenses payable by the company and any commission payable by the
company to persons who have agreed to subscribe or to induce subscriptions for the
company’s securities.
iii. The working capital there must be enough resources from the minimum subscriptions for
the day-to-day run running of the business on the short run.
iv. S.49 (4) of the Companies Act is to the effect that at least 5% of the total nominal amount
must have been paid for in respect of each share applied for, Under Section 49 (5 of the
Companies Act), where the two limitations are contravened after 60 days after the
prospectus has been issued, then the company becomes liable to repay the money to the
applicants without interest. If 75 days elapse before payment of such money, after issue of
the prospectus, then the directors become jointly liable to pay the money with interests at
the rate of 5% p.a. Any allotment which may have been made is voidable at the instance
of the applicant.

If a prospectus mentions that an application was made for permission of the shares to be dealt in
on any stock exchange, any allotment on such a prospectus is void if permission was not applied
for before the third issue of a prospectus. If the permission was applied for but, it was refused,
then, the company must pay the subscribers their money immediately and if such payment is not
made within 8 days after refusal of the permission, then the company and the directors must repay
back the money with an interest of 5% p.a.

ALLOTMENT PROPER
 As a general rule the responsibility for allotment of shares lies within the Board of
Directors. In the discharge of this responsibility, the directors must act bonafide and in the
interests of the company, otherwise they will be in breach of their duty of good faith, A
return of allotment must be filled with the registrar within 60 days after the allotment, it
must include the number and nominal amount of shares comprised in the allotment, the

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 names, addresses and descriptions, of the allottees and amount if any paid or due and
payable on each share. According to S 54 (1) (b) of the Companies Act, if the securities
were allotted as fully or paid up for in a consideration other than cash, such a contract in
writing must also be delivered to the Registrar. It must constitute the title of the allottee
and the extent to which they are to be treated as paid up and the consideration for which
they have been allotted.

SHARE CERTIFICATES
 S82 of the Companies Act is to the effect that every company shall within sixty days after
the allotment or after the transfer of the shares deliver to the owners share certificates.

Non-compliance with this:

i. Makes the company and the directors liable to a default fine.

ii. The aggrieved allottee can serve the company within a note to give him his certificate. If
the company still fails then he can apply to court for such an order.

A share certificate with a company seal is prima facie evidence that the owner has title to the
shares. Prima lack evidence is evidence, which -can be rebutted. In the case of KULUBYA Vs
UTC (1988), the Judge held that absence of the company’s seal in the share certificate in itself
does not negate ownership of the shares.

LEGAL EFFECTS OF SHARE CERTIFICATES.

1. It is prima facie evidence that the holder is the owner of the shares. (S. 83 of the
Companies Act).
2. It estopps the company from denying that the person to whom it is granted was at the date
of the issue of the certificate the registered owner of the shares issued. In RE BAHIA &.
SAN FRANCISCO RLY .CO a share certificate was described as “ a declaration by the
company to all the world that the person in whose name the certificate is made out and
whom it is given by the company with the intention that it shall be so used by the person
to whom it is given and acted in the sale and transfer shares”
3. It estopps the company from denying that the company shares are paid as indicated in the
certificate. (BURKINSHAW Vs NICHOLS), therefore if a third party detrimentally alters
his position on the basis of that certificate, he cannot be defeated by the company’s denial
of the certificate unless it was forged.
4. Since the share certificate is only prima-facie evidence, once the company gets to know
about any untrue statement in a share certificate before the shareholder sells the shares, it
would in law be entitled to recall the certificate for cancellation so that it can issue another
one.

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Forged certificates.

The principle of a share certificate acting as an estoppel against the company does not apply when
the certificate relied upon was issued fraudulently and without the authority of the Board of
Directors. This may even be so where the company secretary wrongly affixed the company’s seal
and forged the signature attesting it. ln RUBEN Vs GREAT FINGALL Consolidated, the
plaintiffs, stockbrokers procured a loan for the secretary of the defendant company on the security
of a share certificate for 5000 shares in the company to which unknown to them, the secretary had
affixed his own signature and the company seal after forging the signatures of 2 directors. The
plaintiffs paid off the loan and then sued the company for damages for failure to register them as
owners of the shares. It was held that the company was not bound or estopped by the certificate.

S 85 of the Companies Act provides that if the Articles of Association authorize, a company may
instead of issuing a share certificate, issue a share warrant in respect of any frilly paid shares. A
share warrant states that the bearer of the warrant is entitled to the shares specified in it and it
may provide for the payment of the future dividends on the shares included in the warrant. If the
person issued with the warrant was already on the company’s register of members, his name must
be stuck off, as if he has ceased to be a member (S 144(1) of the Companies Act. Under S 114(2)
of the Companies Act, the bearer of a share warrant shall on surrendering it for cancellation be
entitled to have his name entered as a member in the registrar of members.

There are two advantages of a warrant over share certificate:

1. A Share Warrant is a ‘warrant’ that the bearer is the owner of shares indicated while the
share certificate is only prima facie evidence that the holder is the owner of shares. A
company cannot deny that the bearer of a warrant is the owner of the shares shown on its
face, which makes it more important.
2. A purchaser of a share warrant takes the shares concerned free of equities, if he is a
bonafide purchaser while for a purchaser of a certificate must first he registered as
shareholder before he can become a Legal owner of those shares. When a purchaser of a
warrant physically holds the same, he will defeat all warranties and he is nor affected by
any defect in the tide of the transferor,
3. A share warrant is a negotiable instrument, which is transferable by simple delivery.

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TYPES OF SHARES
Article 2 of Table A of the Companies Act gives the company the right to issue shares of any type
with any rights or Liabilities it may wish.

1. ORDINARY SHARES: These have full voting rights but with no fixed or guaranteed dividend
or entitled to residuary dividend. These are also called equity shares.

2. DEFERRED SHARES: These are normally reserved for founder members. They rank below
ordinary shares in the issue of dividends. They usually confer special voting rights and rights to
share in surplus on winding up.

3. PREFERENCE SHARES: As the term suggests, these have preference over other shares.
Holders of these shares:

 Receive a fixed dividend

 Are paid in priority to ordinary shares as far as dividends are concerned.
 Have dividends which are normally cumulative.
 Are referred to as non-participating shareholders. Since their dividend is fixed, they are
not entitled to reminder of the profits after issue of the dividends.

4. REDEEMABLE PREFERENCE SHARES (S.60 of the Companies Act), before these can
be issued, there must be authority from the articles of association. Unless the articles so authorize,
the company cannot issue them. The company may at its option buy out those shares but before
that, 2 conditions must be satisfied:

 They must be fully paid for.

 The funds used by the company to buy such shares must be either from profits or a fresh
issue of shares made for that purpose.

LOAN CAPITAL
These are debentures, debenture stock, floating charges and fixed charges. Legally speaking, a
debenture is a paper or a document indicating an indebtedness of some kind of permanence by the
company. The debenture is an acknowledgement of a distinct debt. Consequently, a company may
raise money by way of borrowing from the public and in return issue debentures. Incidentally, a
private company is not by its very definition under S 29 of the Companies Act, allowed to raise
money by borrowing from the public through inviting them to subscribe for its debentures. Instead
of a company raising capital by borrowing and issuing a debenture, the company may decide to
create a debenture stock.

A debenture stock may be a defined as a loan fund which is created by the company and its
divisible among various creditors who each holds a debenture stock certificate

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Differences

1. 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 merely a fund, each beneficiary ranks in pari passu with others and there are no priorities.
2. 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 subdivide his holdings and transfer the
same to a person of his choice.
 Creditors may be secured or unsecured; such collateral assets attached to secure creditors
are sometimes referred to as charges.
 A secured creditor may have his security or charge in form of a fixed charge or a floating
charge. A fixed charge is attributed to a creditor entitled to a particular asset as security
while a floating charge relates to a creditor who is entitled to any of the company’s assets,
which are usually but not necessarily of a floating nature and which have no fixed charge
attaching to them.
1. A floating charge is that form of charge or security which covers assets (current assets) of
the same generic name but which assets are, indeterminable at any given time since the
borrower has the right to use them in the ordinary, course of his business during his day to
day business to the extent that he may even if he wishes exercise the power of disposing
them and replacing them with others.
2. The difference between a fixed charge and a floating charge is that a fixed charge
immediately attaches to some identifiable property and prohibits any dealings with those
properties unless the consent of the charge is first sought On the other hand, a floating
charge simply ‘floats, over the company’s assets which are usually of a circulating nature
e.g. stock in trade. It does not attach to those assets until the charge crystallizes usually
after some event which is usually default. In the meantime before ‘the charge crystallizes,
the company has a right to use the charged assets in the ordinary course of employment.
 S 318 of the Companies Act any floating charge created within one year of the
commencement of winding up proceedings is void. However,
i. That charge will be valid if cash was given in return for its creation at the time of
or subsequently to its creation and the company was solvent immediately after its
creation.
ii. It is the charge and not the credit or money advanced, which is void: Accordingly,
the effect of invalidating this charge is that the creditor becomes an ordinary
unsecured creditor who must line up with everybody else’ in liquidation but he is
still contractually entitled to his money.
 Under S96 of the Companies Act, all charges must be registered in 42 days after the date
of creation and if not so registered they are deemed void. Once they are not registered
however, the money secured by them becomes immediately payable. Under section 97of
the Companies Act, it is primarily the duty of the company to register the charge and if it

99
does not so register it, every officer of the company is liable to pay 1,000 Shs as fine. This
section however allows any interested person e.g. a creditor to make an application for
registration of the same. Under Section 102 of the Companies Act, the time within which
to register a charge i.e. The 42 days may be extended upon application to court. However,
the applicant must prove that the omission to register the charge was purely accidental,
inadvertent or due to any sufficient cause and that it will not prejudice creditors or
shareholders of the company and that it is just and equitable to grant the extension.

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 CHAPTER FIFTEEN
MAINTENANCE OF CAPITAL
All companies limited by shares are incorporated with a nominal or authorized capital which must
be stated in the Articles and Memorandum of Association.

Share capital is contributed by members. It is important to note that share capital of the company
does not include loans by the members to the company. Share capital is the amount represented by
the entire shares held in a company and this is what entitles a particular shareholder to a dividend
as a return to that member.

S 4 of the Companies Act 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 its articles allow. Issued capital (or in the case of the first shareholders of the
company, the Subscribed capital) is the sum equivalent to the nominal value of all the shares that
have been issued.

Paid up capital is so much of the issued capital as is represented by money, which the
shareholders have in fact paid. There is in most cases an unpaid balance on the shares which in
ordinary circumstances is not due until the company makes a call on such shares or unless the
company goes into liquidation.

Capital at call is issued capital not yet paid for. As a consequence of corporate personality, the
only liability of the members is the value of any unpaid capital. Called up capital is the portion of
issued capital that the company has requested for settlement from the holder of shares that have
not been hilly paid for who is entitled to all benefits as if the shares-were fully paid provided the
articles of association allow.

Reserve Capital under S 70 of the Companies Act 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 that company. It is issued only by
a company limited by shares or by guarantee.

The rules relating to maintenance of capital are intended to ensure that those who take up shares
in a company do in fact pay up for those shares in money or money’s worth and that this sum or
its equivalent is as far as possible maintained in the hands of the company and that it is not
returned to the shareholders whether directly or indirectly except as authorized by the Companies
Act (Cap 110) through the modes recognized there under for example reduction of share capital
or redemption or repurchase of shares,

The rationale for the maintenance of capital rules has largely been accepted to be well condensed
by Lord Watson in TREVOR Vs WHITWORTH (1887) 12 APP CAS 409, thus “one of the main
objects contemplated by the legislature in restricting the power of limited companies to reduce the
amount of their capita! as set forth in the memorandum is to protect the interests of the outside

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public who may become their creditors. In my opinion the effect of these statutory restrictions is
to prohibit every transaction between a company and a shareholder by means of which the money
already paid to the company in respect of his shares is returned to him unless the court has
sanctioned the company is trading with a certain amount of capital already paid up as well as
upon the responsibility of its members for the capital remaining at call and they are entitled to
assume that no part of the capital which has been paid into the coffers of the company has been
subsequently paid out except in the legitimate course of its business.

There is of course only so much protection that the law can give to protect this capital of the
company. Indeed in a case seen by many as one which strongly advocates for this principle
TREVOR Vs WHITWORTH (1887) 12 APP CAS 409, Lord Watson conceded that “paid up
capital may be diminished or lost in the course of the company’s trading that is a result which no
legislation can prevent….”

The rationale for the maintenance of capital rules has largely been accepted to be well condensed
by Lord Watson in TREVOR Vs WHITWORTH(1887) 12 APP CAS 409, thus “ one of the main
objects contemplated by the legislature the power of limited companies to reduce the amount
of their capital as set forth in the memorandum is to protect the interest of the outside public who
may become their creditors. In my opinion the effect of these statutory restrictions is to prohibit
every transaction between a company and a shareholder by means of which the money already
paid to the company in respect to his shares is returned to him unless the court has sanctioned
the transaction. Persons who deal with and give credit to a limited company naturally rely
upon the responsibility of its members for the capital remaining at call and they are entitled
to assume that no part of the capital which has been paid into the coffers of the company has
been subsequently paid out except in the legitimate course of its business”.

The rules regarding maintenance of capital are mainly 4 namely:

i. A Company is precluded from purchasing its own shares.

ii. A company is prohibited from issuing its shares at a discount
iii. A company is forbidden from providing financial assistance to purchase its own shares
iv. Dividends can only be paid out of the profits of the company

i) A Company is prohibited from purchasing or acquiring its own shares or using its assets to do
so.

A company is precluded from buying its own shares except as provided under the Companies Act
(Cap 110). In the case of TREVOR Vs WHITWORTH (1887) 12 AC 409, during the winding up
of the company, a shareholder claimed the balance of the principal/premium for filly paid up
shares which he had sold to the company before winding up. It was held that it is ultra vires for a
company to purchase its own shares even if the memorandum gives express authority to do so. It
was emphasized by court that the intention of this law is for the protection of investors and
creditors of the company, Lord Watson noted that “when a share is fortified or surrendered, the

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amount which has been paid up remains with the company, the shareholder being relieved of
liability for future calls whilst the share itself reverts to the company, bears no dividend and may
be reissued. When the shares are repurchased at par and transferred to the company, the result is
very different. The amount pad up on the shares is returned to the shareholder and in the event of
the company continuing to hold the shares (as in the present case) is permanently withdrawn from
its trading capital. It is consistent with the essential nature of a company that it should become a
member of itself. It cannot be registered as a shareholder to the effect of becoming debtor to itself
for calls or of being placed on the list of contributories in its own liquidation.

Apart from the foregoing holding (ultra vires aspect) the transaction is objectionable on the
following ground.

i. If the company paid is more than the actual par value of the shares, the value of the remaining
shares may be curtailed or diluted a result which may cause dire economic consequences.

ii. Allowing the company to buy its shares amounts to a return of capital to the shareholders which
may mislead the public as to how much trading capital the company has,

This rule has attracted sever criticism from several scholars. The main criticism is that the rule
presupposes (wrongly) perhaps that whenever a company buys its shares, it does so by using its
paid up capital. ‘What this rule does not address in act is whether there would be an infringement
if a company borrowed money from a bank to purchase its shares in which case the paid up capital
find remains very intact. It has also been said that such a sale would at times be most beneficial
to the company say where the existing shareholders have started selling their shares to third
parties due to an unfounded rumour about the financial health of the company. The company could
avert this undesirable consequence by buying the shares itself.

(ii) A company may not issue its shares at a discount (The Rule in Ooregum’s Case).

In OOREGUM GOLD MINING CO. OF INDIA LTD Vs ROPER (1892) AC 125, a holder of
ordinary shares brought the action to test the validity of an issue of preference shares which had
been made by the directors in accordance with resolutions duly passed by the members on the
basis that each new share of GBP 1 nominal value should be credited with 75p paid, leaving a
liability of only 25p per share. The transaction was bonafide thought to be the best way of raising
further capital for the company particularly because the ordinary shares stood at a great discount.
The House of Lords held that it was beyond the powers of the company to issue shares at a discount
and that in consequences the holders were liable for the full nominal amount of the shares.

In explaining the logic in this rule Lord Halsbury LC noted that “confining myself for the moment
to the Act of 1862, it makes one of the conditions of the limitation of liability that the memorandum
of association shall contain the amount of capital with which the company proposes to be
registered divided into ei.ors of a certain fixed amount It seems to me that the system thus created
by which the shareholders liability is to be limited by the amount unpaid upon his shares, renders

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it impossible for the company to depart from that requirement and by any expedient to arrange
with their shareholders that they shall not be liable for the amount unpaid upon the shares, renders
it impossible for the company to depart from that requirement and by any expedient to arrange
with their shareholders that they shall be reliable for the amount unpaid on the shares although
the amount of those shares has been, in accordance with the Act of Parliament, fixed at a certain
sum of money. It is manifest that if the company could do so, the provision would operate nothing”.

The learned justice noted that the real essence of acquiring a share in a company is that a
shareholder becomes liable to pay the company the amount for which the share has been created.
That agreement, he said, is one which the company itself has no authority to alter or qualify. He
further noted that the rationale of the prohibition is that every creditor is entitled to look to the
fixed share capital for his protection in the event of insolvency and that accordingly, if the
prohibition was not to exist, the result would be to permit the company to mislead and deceive
those persons who are either about to become its shareholders or about to give it credit He was
satisfied that aside from the Ac this prohibition existed by virtue of the ultra vires laid down in the
ASHBURY Vs RICHE CASE.

Section 7(2) of the Companies Act requires every memorandum of a company having a share
capital to state amount of share capital with which it proposes to be registered and the division
of the share capital into shares of a fixed amount.

However there are a number of ways in which one can side step the prohibition created by this
rule. Section 59 of the Companies Act allows (subject to that Section) a company to issue at a:
discount shares in the company of a class already issued. The following restrictions are however
placed on such an issue:

 The issue at a discount must be authorized by a resolution passed in a general meeting of

the company and must be sanctioned by an order of court and
 The resolution must specify the maximum rate of discount which the shares are to be issued
for.
 Not less than year must at the date of the issue have lapsed since the date on which the
company was entitled to commence business and
 The shares to be issued at a discount must be issued within 1 month after the date on which
the issue is sanctioned by the court or within such extended time as the court may allow.

It is a requirement for every prospectus relating to issues of shares to contain the particulars of
the discount allowed on the issue of the shares or so much of that discount as has not been written
off at the date of the issue of the prospectus.

The protection that this rule allegedly offers has been seen as being watered down by the fact that
currently (at least in Uganda), there is no required minimum share capital for setting up a
company in which case the creditors may not get any meaningful protection. A company may well

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be incorporated with an authorized capital of Ug. Shs, 100,000/. It has been said however what
this in easily translates into is that those creditors and other persons having read its articles and
seeing such a low amount are put on notice and only continue to deal with such a company at their
own peril.

Shares issued to a premium. See section 66(1)

There is however no prohibition (or shares to be issued at a premium although the companies Act
attaches particular restriction to the premium sums. As seen above, the rule that shares may not
be issued at a discount means -that a company which allots a share of nominal value Ug. Shs
1,000/ must in turn get Ug. Shs. 1,000/” and nothing less for that share- There is (understandably
so as there is no rule infringed or. deception involved) however no corresponding rule which states
that the company in the above example may not acquire an amount beyond Ug. Shs. 1000/= for
the share.

Accordingly if a shareholder wishes to pay Ug. Shs. 1,500/= for a share worth Ug. Shs. l,000/=
there is no apparent prohibition and the company is absolutely free to receive that sum- The only
effect is that its use will be restricted by rules similar to those which restrict dealings with the
capital arising from the par value of the shares. The Ug. Shs. 500/” in excess received in that case
is what is called a premium.

It is also settled that shares may be issued at a premium within the meaning of Section 58 even if
they have not been issued for a cash consideration. In HENRY HEAD & CO. LTD Vs ROPNER
HOLDINGS LTD (1951) 2 ALL BR 994, the defendant company was formed to acquire by way
of amalgamation the shares of 2 shipping companies and did so by exchanging the shares in these
companies for shares in itself of equivalent nominal value. In this way, it acquired assets worth
some CBP 7 Million in exchange for shares of a nominal value of GBP’ 1,175,000. The court held
that the difference of just over GBP 5 Million had rightly been shown in the company’s balance
sheet as carried to a share premium account. The court held that the opening words of our Section
58 namely “where a company issues shares at a premium whether for cash or otherwise,” could
only mean that the words “or otherwise” sensibly meant ‘other than cash namely goods or assets
of some physical sort”.

There is no rule that the shares of the company may be issued only for cash consideration. Indeed,
it is very common for the issue of shares to be done in consideration for the transfer to the company
of property such as a business previously owned by the allottee. This is what happened in the
celebrated case of Salomon. The new shares may even be exchanged in another company. In
SPARGO’S CASE (1873) LR S CH APP 407, X sold a lease to a company, which had been formed
for the purpose o adopting the lease. The company then credited the purchase price of the lease
against X’s liability on the shares for which he had subscribed. It was held that this amounted to
payment for the shares.

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Section 61 of the Companies Act requires that payments for shares otherwise than in cash must
be registered with the Registry of Companies. The Section provides that whenever a company
limited by shares makes any allotment of its shares, the com1Sany shall within 60 days thereafter
deliver to the Registrar for registration in the case of shares allotted as Sally or partly paid up
otherwise than in cash, a contract in writing constituting the title of the allottee to the allotment
together with any contract of sale or for services or other consideration in respect of which that
allotment was made, such contracts being duly stamped and a return stating the number and
nominal amount of shares so allotted, the extent to which they are to be treated as paid up and the
consideration for which they have been allotted.

Where the contract is not written, the company is required within 60 days after the allotment to
deliver for registration to the Registrar-the prescribed particulars of the contract stamped with
the same stamp duty as would have been payable if the contract had been reduced in writing.

Default in complying with the above requirements makes every officer of the company who is in
default to a fine not exceeding 100/= for every day during which the default continues.

Where payment for shares is made for a non – cash consideration, courts are hesitant to inquire
into the adequacy of the consideration given in exchange for the shares unless it is quite obvious
that there was no consideration at all given or the consideration purportedly given was illusory
or fraudulent. It has therefore been settled that a company may buy property at any price it thinks
fit and pay for it in fully paid shares, unless the transaction itself is impeached for example o
grounds of fraud, the actual value of the company for its shares cannot be inquired into by the
court.

The rule is now commonly referred to as the rule in RE WRAGG LTD’S CASE (1897) 1 CH 796,
In that case, wragg and Martin had sold to the company on its incorporation their omnibus and
livery-stable business for GEP 46,300 which was paid partly in cash and debentures and partly
by the allotment to them of the whole of the company’s original capital of GBP 20,000 in fully paid
up shares, The liquidator of the company later sought to show that the value of the business had
been overstated by some GEP 18,000 and he claimed either to be entitled to treat the shares
representing this amount as being unpaid or alternatively to charge Martin and Wragg as
directors with misfeasance in connection with the purchase. Both claims failed. In arriving at this
conclusion Lindley LJ noted that “that shares cannot be issued at a discount was settled in the
case of the Ooregum Gold Mining Co. of India V Roper….It has however never yet lasso decided
that a limited company cannot buy property or pay for services at any price it thinks proper and
pay for them in fully paid up shares. Provided a limited company does so honestly and not
colourably, and provided that it has not been so imposed upon as to be entitled to be relieved
from its bargain, it appears to be settled by Fell’s case (1869)5 Ch App 11) and the others that
agreements by limited companies to pay for property or services in paid up shares are valid arid
binding on the companies and their creditors. The value paid to the company is measured by the

106
price at which the company agrees to buy what it thinks is worth its while to acquire. Whilst the
transaction is unimpeached, this is the only to be considered.”

This rule is also reaffirmed by the decision reached by the House of Lords in Salomon’s case.

The House of Lord’s rejected the assertion that the company was entitled to rescind the sale by
Salomon of his business to the company he formed allegedly because he had overvalued it and
thereby committed a fraud against it and its creditors. The court in rejecting this assertion noted
that there was no fraud at all since the shareholders were fully conversant with what was being
done.

In this regard, past consideration for the company’s shares is not considered to be good
consideration. (See RE EDDY STONE MARINE (1893)3 CH D9).

In Europe, the Second EC Directive now requires that in case shares are allotted for a non-cash
consideration, there must be valuation by independent experts of the non-cash consideration
offered both at formation of the company and for any subsequent allotment made by the company.
The experts are required to certify whether the value of the non- cash consideration amounts to
the aggregate nominal value of the shares issued.

In Uganda, the only requirement in such a case still appears to be the registration of the details
of the noncash consideration. There is no requirement for valuation and it appears in this regard
the common law rule in RE WRAGG’S case to the effect that courts will in the absence of fraud
or similar factors inquire in toss the adequacy of the non-consideration given still applies.
Therefore, the position in Uganda is still that faced with this scenario, a Uganda court would no
doubt take the traditional contractual stance and refrain from second guessing the non
consideration which has been given in exchange for shares.

In Europe, the Second EC Directive has further prohibited certain types of non- cash consideration
being given in return for allotment of shares e.g. an undertaking to do work for the company in
the future and an undertaking of a long term nature (other than a promise to pay cash) which may
take 5 years or more to perform.

Secondly, if on the other hand the property is worth less than the nominal value of the shares then
in practical terms the shares will, have been issued at a discount contrary to law. It is possible in
this event that the requirements laid down in Section 59 would not have been followed yet the
requirements are supposed to be complied with before the issue of shares at a discount and cannot
be purportedly satisfied after the fact.

The premium is treated by the Companies Act (Cap 110) not as a profit or income of the company
but in fact, as if it were capital to which the maintenance of capital rules apply. Section 58(1) of
the Companies Act provides that where a company issues shares at a premium, whether for cash
or otherwise a sum equal to the aggregate amount or value of the premium on those shares shall

107
be transferred to an account to be called “the share premium account” and the provisions of the
Act relating to the reduction of the share capital of a company (i.e. maintenance of capital rules)
shall, except as provided in the section apply ‘if the share premium account were paid up share
capital of the company’.

It is not clear where the money to be credited on the share premium account is expected to come
from where the shares are allotted for a non-cash consideration as in fact in that case no cash is
given by the allottee to the company.

Under Section 66(2) of the Companies Act however withstanding the above Section, the share
premium account may be applied by the company in paying up unissued shares of the company to
be issued o members of the company as frilly paid up shares in writing off:

a) the preliminary expenses of the company or

b) the expenses of or the commission paid or discount allowed on any issue of shares or
debentures of the company or in providing for the premium payable on redemption of any
redeemable preference shares or of any debentures of the company.

There are however well known exceptions to the rule that a company may not acquire its own
shares. These have considerable formalities and procedures all of which are intended to safe guard
the interest of creditors.

The exceptions to the rule include the following:

(a) where a member of the company feels that the affairs of the company are being run in an
oppressive manner, he may petition court which may make such orders as it deems fit including
ordering the members or the company to purchase that member’s shares and in the case of a
purchase by the company, for the reduction accordingly of the company’s capital. In this case, the
aggrieved shareholder is bought our of the company,

(b) As earlier seen, under Section 60, the company has power subject to the conditions contained
in the Section to buy its redeemable preference shares,

(c) The principle is not violated where the shares in the company are held on trust for the company
as a result of a gift or bequest in which case the legal title to the shares is held by the trustee(s). it
has been emphasized that in such a case the bequest will only not be a violation of the rule if the
shares which are the subject of the bequest are fully paid up. This will not fall foul of the rule since
the previous shareholder will already have fully paid up the full nominal value of such shares and
nothing is paid back to him or paid out to anyone else. This exception was recognized at common
law in the case of RE CASTIGLIONE’S WILL TRUSTS (1958) 1 ALL ER 480 in which a legacy
of shares to be held by a nominee on behalf of the company itself was held not to violate the rule
in TREVOR Vs WHITWORTH.

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(d) Where the company makes a call on shares to be paid up and they are not paid up by the
shareholders, they are forfeited and may subsequently be reacquired by the company.

(iii) A company is prohibited from giving financial assistance for the purchase of its shares.

As we saw in rule 1 above, a company is generally prohibited from purchasing or acquiring its
own shares. Instead of the company directly buying its own shares, it could (in the absence of this
rule) provide finance for a person to buy its own shares. This is tantamount to a company buying
its own shares and was often ‘used as a means by which speculators could buy a substantial
amount of a company’s shares and arrange matters so that the purchase money was provided by
the company whose shares they had acquired. If there are no sufficient safeguards to avoid this
result, then the gap exists through which the capital of the economy may well be lost.

Section 63 of the Companies Act provides that it “subject as provided in this section, it shall be
unlawful for a company to give, whether directly or indirectly, and whether by means of a loan,
guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in
connection with a purchase or subscription or to be made by any person of or for any shares in
the company or where the company is a subsidiary company in its holding company”.

Examples of practices, which are caught by this prohibition, include:

 Company X lends money to A to put A in finds so that he can buy shares from an existing
member in the company
 Company X guarantees A’s bank loan and on the security of this guarantee, A’s bank
advances money to A so that he can buy shares in Company X
 Company X lends money to A so that he can repay a loan provided earlier by A’s bank
which A has already used to buy shares in Company X
 Company X buys a piece of land from A knowing that A in fact intends to use the money so
obtained to pay for shares in Company X which he has agreed to buy.

In the first 3 scenarios, A as purchaser of the shares repays the money he has borrowed, then no
real harm is done but the risk is that the loan may never be repaid to indeed that the bank may
enforce the guarantee so given against Company X after A himself has defaulted. In this case
Company X will have lost money which was part of its capital and so to speak the maintenance of
capital rules would have been infringed.

The same result ensues in scenario 4 above if the land is not worth what the company has paid A
for it.

It is not therefore surprising that Section 63 exists in the Companies Act of 2012. The courts have
it appears taken a rather strict approach to financial assistance. It appears this notwithstanding
that there are challenges in setting the limits of the definition of the term. In CHARTERHOUSE
INVESTMENT TRUST LTD Vs TEMPEST DIESELS LTD (1986) BCLC 1, Hoffman j (as he

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then was) noted that “there is no definition of giving financial assistance. In the section although
sons examples are given. The worth have no technical meaning and their frame of reference is in
my judgment the language of ordinary commerce, One must examine the commercial realities of
the transaction and decide whether it can properly be described as the giving of financial
assistance by the company bearing in mind that the section is a penal one and should not 6e
strained to cover transactions which are not fairly within it”.

Latter authority has been a little stricter. It appears to be now accepted that an arrangement will
constitute financial assistance if its real purpose is to smoothen the path to acquisition of a
company’s shares. For this purpose, all inducements, incentives and concurrent benefits leading
to the attainment of this objective are caught by Section 56.

In CHASTON Vs SWP GROUP PLC (2003) BOC 140, SWP was negotiating to purchase
DRCH’s shares. SWP wished to obtain an accountant’s due diligence report detailing the state of
the target’s finances. Chaston was a director of DRC, a subsidiary of DRCH. He procured DRC
to pay the accountant’s fees. The claim against Chaston was that he breached his fiduciary duties
to DRC (the subsidiary) by procuring in the giving of financial assistance for purposes of acquiring
its parent’s shares. At first instance, it was held that the payment was not in breach since the due
diligence was for the benefit of both DRC and DRCH and that the liability was incurred bonafide
in what the directors of DRC believed was in the best interests of DRC and that it was not for the
purpose of acquiring whether directly or indirectly the shares of DRC.

On appeal, Arden LJ noted that from the way the Section is worded, (the equivalent of our Section
56) it covers many forms of financial assistance in many forms apart from loans. The general
mischief however remains the same ‘namely that the resources of the company should not be used
directly or indirectly to assist the purchaser finally to make the acquisition as this would prejudice
the interests of the creditors of the company and the shareholders who do not accept the offer to
acquire their shares or to whom the offer is not made.

In throwing more light on what ‘financial assistance” means, Arden Li after conceding that the
phrase is incapable of exact definition noted that “for it to amount to financial assistance, the
transaction must assist the acquisition whether directly or indirectly. ‘The payments alleged to be
financial assistance were in respect of work done on account of the DRC Group but as a matter of
commercial reality, the fees in question smoothed the path to the acquisition of shares. ‘The term
financial assistance is a commercial concept. Accordingly, the question whether financial
assistance exists in any given case may be fact sensitive and not one, which can be answered simply
by applying a legal definition. The question is whether from a commercial point of view the
transaction impugned amounts to financial assistance. Here, as a commercial matter, assistance
was clearly given. D & T (the accountant who did the valuation) received payment for their
services and both, the purchaser (SWP) and the vendors (DRCH) were relieved of any obligations
to pay for this service themselves. There is no reason why assistance which is paid to a subsidiary

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or associated company or other person nominated by one of the parties to the transaction should
not be assistance contrary to the Section”.

Court noted that it was ordinarily SWP which was supposed to pay for the services of the
Accountant, The assistance rendered to it by paying for the services of the Accountant was “for
the purpose of the acquisition of shares in DRCH within the meaning of Section 63 of the
Companies Act 2012 because it was given to further the acquisition of shares.

The Chaston case also had the following holdings, which are important for the concept of financial
assistance:

(a) For a transaction to amount to financial assistance there is no need to prove that
Prohibited by Section 63 even if it appears that it is in fact beneficial to the company in the
short or long run. By way of example, even if the company gives the potential purchaser
financial assistance by the way of a loan given highly attractive terms to the company, this will
be no defence.

(b) Section 63 prohibits financial assistance given directly or indirectly. These words are wide
enough to capture pre-transactional financial assistance i.e. assistance given before the
transaction.

(c) Notwithstanding this strict interpretation of the phrase, It still remains fairly agreed that
Section 63 requires that there should be assistance or help given to the potential purchaser for
the purpose of acquiring shares in the company and the assistance has to be financial in nature
otherwise it is wrong to assume that every remote help given in a share purchase transaction
will be caught by Section 56. in the New Zealand case of BURTON Vs PALMER (1980) 2
NSWLR 878, the Supreme Court of New South Wales noted in this regard that “the fact that
a company undertakes obligations absolute or contingent in connection with, the proposal for
rise transfer of its shares does not of itself constitute the giving of financial assistance, The
fact that a company facilitates a proposal for such transfer will not involve it necessarily in a
contravention of Section 67 (our Section 63). ‘Thus, a company may answer requests for
information relevant to the proposed transfer knowing that it does so in circumstances such
that it will be liable for damages if for lack of care, the information is incorrect. But by
answering such requests, the company does not thereby give financial assistance; there must
be more than the incurring in connection with the transfer of shares of on obligation which
may involve the company in the payment of money. The obligation must be such that it is
properly to be categorized as financial assistance. An obligation of a different kind e.g. an
obligation to permit inspection of its books and records will not constitute the giving of
financial assistance. ”

(See also BARCLAYS BANK PLC Vs BRITISH & COMMONWEALTH HOLDINGS PLC
(1996) 1 WLR 1)

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 The prohibition on giving financial assistance is not applicable under the following exceptions
under Section 63:- .

(a) Under Section 63, in cases where the lending of money is part of the ordinary business of
the company, the lending of money by the company in the ordinary course of its business
e.g. a bank lending a prospective purchaser of shares money which he then uses to buy
shares in it. In STEEN (1964) AC 287. It was held that for this exception to be available
to a company which has given such a loan, money lending must be part of the ordinary
business of that company. A loan made by a company which does not lend money as part
of its ordinary course of business falls foul of Section 63 if it is intended to purchase its
shares. Bank.” The Privy Council was persuaded to reach this conclusion because in its
view, a company which lends money, as part of its ordinary course of business many times
has no control over what the borrower uses it for and it would in fact be unfair to expect
it to monitor the borrower to this extent.

This exception does not therefore validate a loan given for the express purpose of enabling a
person to purchase the shares of the lending company. This is because no company can be formed
for the sole purpose of lending money to people to enable them purchase its shares. Accordingly,
for this provision to apply the loan must have been given for one of the purposes for which the
company ordinarily or usually lends money but it was instead diverted to facilitate the purchase
of a company’s shares.

(b) Under Section 63 where the financial assistance is given by the company under its scheme of
helping its employees including a salaried director to subscribe for frilly shares in that company
or in its holding company by way of trustees holding such shares for the benefit of the employees
of the company. It can in such a case provide money for such purpose and this will not be in
violation of the rule.

c) Under Section 63, where the company makes loans to persons (other than directors)
bonafide in the employment of the company with a view of enabling those persons to
purchase or subscribe for frilly paid shares in the company or its holding company to be
held by themselves by way of beneficial ownership.

The difference between section 63) above appears to be that in (b), the shares must necessarily
be held on behalf of employees by trustees whereas in Cc) the shares are held by the employees
themselves beneficially.

Contravention of Section 63

Penal sanctions

Under Section 63 of the Companies Act, if Section 63 is contravened, the company and any officer
responsible are liable to a fine not exceeding 20,000/”.

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Civil sanctions

A transaction which infringes Section 56 is equally illegal and unenforceable, In HEALD Vs

O’CONNOR (1971) 2 ALL ER 1105, the Plaintiffs agreed to sell to the defendant all the shares
in a company for GBP 35,000 and simultaneously they agreed to make a secured loan guaranteed
by the defendant of GBP 25,000 to the company. ‘When the company afterwards defaulted in
paying installments due in repayment of the loan, the plaintiffs sued to enforce the defendant’s
guarantee and claimed to be entitled to have summary judgment against him. The defendant
however alleged that the loan had been made not to the company but to him personally so that he
could pay for the shares and he thereby contended that the giving of security by the company was
in breach of the equivalent of our Section 56. The court held that if the defendant’s allegations
were true, the security would be illegal and void. He accordingly gave leave to appear and defend.

Furthermore, a company which has been a party to a transaction which infringes Section 56 may
bring an action against its directors and other persons implicated for recovery of its property
misapplied on the grounds of breach of trust or constructive trust. In SELANGOR UNITED
RUBBER ESTATES LTD Vs CRADOCK (NO.3) (1968) 1 WLR. 155. Cradock bid for and
obtained a controlling interest in the shareholding of Selangor, the plaintiff company which he
paid for improperly by the use of the company’s own funds in the following way. His nominees,
Barlow Lawson and Jacob were appointed directors to the Selangor Board, At Cradock’s
direction; they advanced CBP 232,500 of money belonging to Selangor to a company called
Woodstock. Woodstock lent the same sum to Cradock and GEE 195000 that sum was then paid to
the former shareholders in Selangor as purchase price for shares that Cradock sought to buy.
Soon afterwards, Selangor was wound up and Cradock left England. The Board of Trade brought
proceedings in the company’s name to recover the sum improperly paid away against inter alia
the 2 director nominees of Cradock. The 2 were held liable for the misapplication of Selangor’s
assets after the court fixed them with knowledge of Cradock’s improper purpose.

NB. Because the transaction is illegal and unlawful, any security a company may mortgage for a
loan to finance certain persons to purchase the company’s shares is not recoverable at all. The
lenders of the money cannot sue for the loan; it is irrelevant that the lenders did not know the
purposes for which the loan held.

(iv) Dividends are only payable out of a company’s profits

It is not sufficient merely to ensure that the nominal amount of the capital shown as a liability is
not reduced. This may prevent the authorized capital which some have referred to as the ‘creditor’s
guarantee fund” from being dissipated by a payment to shareholders expressly made as a return
of capital. However, this will of itself not prevent that fund from being reduced by payments
masquerading as payments of dividends to shareholders.

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This possibility the courts have attempted to avoid by requiring that dividends must not be paid
out of capital or put in an alternative way that dividends must only be paid out of profits (See
BOND Vs BARROW HEMATITE STEEL CO. (1902) 1 CH 353). Article 116 Table A provides
that “no dividend shall be paid otherwise than out of profits”.

Dividends are any return paid/given to a shareholder on his investment /shareholding in that
company. Unless the articles state otherwise, a shareholder receives dividends on his shares, In
MAKIDAYO ONEKA Vs WINES AND SPIRITS the principle was laid that unless the articles
and terms of the issue of shares confer a right upon the share holder to compel a company to pay
a dividend, it is a discretion of the directors to recommend to a general’ meeting that a dividend
be declared for payment.

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
froth declaring a dividend.

The Companies Act is not helpful as to when dividends should be declared and it appears the
discretion. The nearest is article 116 of table A, which requires that dividends are to be paid out
of profits. Article 115 of Table A ‘also provides that the directors may from time to time pay to the
members such interim dividends as appear the directors to be justified by the profits of the
company.

The directors must have sufficient considerations of their duties to the company in declaring
dividends, At common law, dividends could not be paid from capital and directors who pay
dividends improperly in the absence of distributable profits are liable to Compensate the company
personally for the money so paid away to the shareholders. In FLITCROFT’S CASE (1882) 21
CH.D. 519, the Court of Appeal held that directors who had allowed bad debts which they knew
to be bad, to be credited in the company’s accounts showing it as an asset thereby creating
imaginary and fictitious profits with the knowledge that debts were bad were liable to refund the
dividends paid on their recommendation since these amounts amounted to an unauthorized
reduction of capital.

This conclusion was clearly arrived at because there had in actual fact been no profits from which
to declare profits.

In articulating the real basis of the maintenance of capital concept Jessel MR stated that ‘he
creditor no other debtor but that impalpable thing the corporation which has no property excepts
the assets of the business. The creditor therefore, i may say gives credit to that capital, gives credit
to the company on the faith of the implied representation that the capital shall be applied only for

114
the purposes of the business and he has therefore a tight to say that the corporation shall keep its
capital and not return it to the shareholders”.

Similarly, in BAIRSTOW Vs QUEENS MOAT HOUSES PLC (20010 1 BCLC 549, the
defendant directors were ordered to pay sums which with interests totaled almost GBP 42 Million
because they were party to authorizing the payment of unlawful dividends, It was concluded that
directors could in such a case be liable to reimburse the company the monies so wrongly paid out
at least if they had knowledge or ought to have had knowledge of the facts making the payment
unlawful.

It is also settled that a share holder who receives a payment of a dividend which had been
improperly paid and who has knowledge of the facts is liable to repay the amount as a
constructive trustee( see PRECISION DRIPPINGS LTD Vs PRECISION DRIPPINGS
MARKETING LTD(1986)CH 447.

Then, the question is what are the “profits’ from which dividends may be declared and paid? It
appears that the courts themselves have not been prepared to enter into the accounting issues
surrounding when or when not a profit may have been made and some judges have been willingly
prepared to abandon this practice to accountants.

In the case of LEE Vs NEUCHATTEL, ASPHALT CO (1889) 41 CH.D a company had been
formed for the purposes of acquiring and working out a concession in a mine. The company
proposed to pay a dividend out of the profits shown on the reserve account, A shareholder
challenged this on the ground that the company’s assets were not equal to its share capital and
that since the mining concession was a wasting asset, dividing annual proceeds amounted to
dividing the company’s capital assets. The shareholders contention was rejected and the court
noted that there was no indication at all the Act about how dividends are to be paid nor how profits
are to be recommended. Lindey LJ noted that regard that all that is left and very judiciously and
properly left to the commercial world and not courts. It’s not a subject of parliament to say how
accounts, what to be put into capital accounts and what to be left to the men of business.

Rules relating to payment of dividends

Although the cases and courts have been largely divided on the issue of dividends and whereas the
companies Act (Cap 110) does not itself surmount this problem, the following rules appear to come
out of the authorities with regard to dividends:

1. Dividends cannot be paid if this would result in the company’s being unable to pay its debts as
they fall due. This appears to be the overriding rule and consideration in declaration and payment
of dividends.

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2. Losses of fed assets need not be made good before treating a revenue profit as being available
for the company to declare a dividend and it is not legally essential to make any provision for
depreciation.

3. However, losses on floating or circulating capital or assets in the current accounting period
must be made good before a dividend is paid otherwise there is no profit from which a dividend
may be declared. Thus, in BOND Vs BARROW HEMATITE STEEL CO (1902) CH. 353, the
court held that while as a general where a company may declare a dividend without paying regard
to the loss of fixed capital, if such a step is challenged, the company has a burden of justifying
such action. Moreover in AMMONIA SODA CO. Vs CHAMBERLIN (1918)1 CH 266, it was
held that a company may declare a dividend without having made good the loss of the previous
years. In the case, a declaration of a dividend was challenged on the ground that for about 3 years,
the company had made losses so that the profits made in the 4th year could not be considered
profits for a declaration of a dividend without making good the loss of the previous years.

However, the court pointed out that in declaring a dividend in such circumstances, directors must
act honestly and reasonably taking into account the previous years.

4. As a general rule and according to DIMBULA VALLEY (CEYLON) TEA CO, LTD Vs
LAWRIE (1961) CH. 353, a realized profit on the sale of a company’s assets can be treated as a
profit available for a dividend provided the company’s liabilities are less than the value of its fixed
assets and circulating assets. Moreover, if the articles of association allow it, an unrealized
increase in value of the company’s assets made on revaluation and in good faith by competent
valuers and where such revaluation is not likely to fluctuate in the short run, may be distributed
as a company dividend or be used to pay a bonus issue.

5. Profits of previous years can be brought forward and distributed even if there is a revenue loss
in the current trading year. (RE HOARE & CO. LTD).

NB. Once a dividend has been declared, it becomes a shareholders property (it is a debt from the
company) and he can consequently sue for it.

OTHER EXCEPTIONS TO THE MAINTENANCE OF CAPITAL RULE.

i. Company resolution to reduce its capital (S 76)

According to S 76 of the Companies Act, any company limited by shares- or guarantee and with
share capital and authorized by its articles may pass a special resolution to reduce its capital.
However, according to S 76 and 77 of the Companies Act, the following conditions must be
satisfied:

a) The special resolution must be confirmed by court through a petition to court.

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b) If the proposed reduction of capital involves a reduction in the amount of unpaid share capital
or if it is designed to pay out of the paid up capital to any shareholder, every aggrieved creditor
who lodges a claim is admissible and he may petition challenging the reduction. If the company
were to be wound up, he is entitled to object whereupon the court may compile a list of such
creditors and their claims and hear their objections. In RE MOORGATE MERCANTILE
HOLDINGS LTD (1980), ALL ER.40, there was a proposal by the company to reduce its capital
on the ground that the paid up capital had been lost. It was held that in exercising its jurisdiction
to confirm a reduction of capital on such ground, the court should require evidence of laws and
provisions for safeguarding creditors especially where the loss is less than the amount to be
reduced. Moreover, under Section 70, such a company may be required to add to its name the
words “and reduced” to show that its capital has been reduced.

Under Section 70 (1 of the Companies Act), if such objections are made by the creditors, the court
may proceed to make the order reducing the capital of the company provided that it is satisfied
that either:

 The consent of such creditor has been sought first by the company before the reduction.
 His debt has been discharged or
 His debt has been fully secured.

c) The articles of association must specifically authorize the reduction

d) A special resolution must be passed

Companies limited by guarantee

It is surprising that whereas companies limited by guarantee are required - in their memorandum
to stipulate the amount undertaken by each member as being guaranteed by him to be payable in
the liquidation of the company, the guarantee (which is clearly similar to the authorized share
capital in the sense that it is only this that a creditor must look up to) is not subject to the same
maintenance of capital rules.

Although just like with share capital, a member in a company limited by guarantee has no
obligation to pay until the company meets financial difficulties most probably in liquidation, the
question may well be asked what happens if a member retires as most such articles allow. It is
quite anomalous that the courts have never seen it fitting to extend to companies limited by
guarantee the maintenance of capital rules. The real result may be that creditors who deal with
these companies are in far worse position than those who deal with companies limited by shares
for at least for these there is some fair degree of statutory and judicial protection.

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 CHAPTER SIXTEEN
WINDING UP OF COMPANIES
Winding up or liquidation of a company is a way by which the life of a company is terminated.
Winding up of a company is therefore generally known as the process where the company gives
up its business, sells of its assets, pays of its debts or if it is as the case usually is, insolvent to the
extent that the funds allow and distributes whatever surplus that may remain (usually none) to its
shareholders o otherwise as its memorandum and articles of association may provide.

The conduct of winding up is generally speaking placed in the hands of a person called a liquidator
and on his appointment the director’s power to manage the business of the company lapses.

The company still continues in existence throughout the process of winding up in the sense that it
is still a recognized body corporate. All that changes is that it can now only act through the
liquidator (acting in its name an on its behalf) with regard to all corporate acts that it could
originally execute in Its own name. The company only ceases to legally exist by the formal act of
dissolution after the winding up procedure has been finally completed.

There are generally two broad types of winding up. Compulsory winding up i.e. by order of court.
In this case, a liquidator is appointed by the court and is in law regarded as an officer of the court
acting under its direction and control. On the other hand, in a Voluntary winding up, the process
is initiated as a consequence of an extraordinary resolution passed by the shareholders to wind up
the company. In this case, the liquidator is appointed by the shareholders if the directors are able
to issue a statutory declaration of solvency that the company will be able to meet its debts in full
for the next following 12 months (which is called a member’s voluntary winding up) or if they are
unable to so declare, the company’s creditor then take over the liquidation and they have the power
of appointment and exercise general control over the conduct of the liquidation (which is called a
creditor’s voluntary up).

Winding up or striking off the register?

Winding up should however be distinguished from cases where the Registrar of Companies strikes
off a defunct or no operational company from the register of companies. The insolvency Act
provides that where the Registrar has reasonable cause to believe that a company is not carrying
on business or in operation, he may send to the company by post a letter inquiring whether the
company is carrying on business or in operation. A director or company secretary of a company
may himself request the Registrar to strike off a company from the register l notifying him that it
has ceased carrying on business under Insolvency Act 2011. This will save the company the
expense of a formal liquidation.

Under Section 343(2) of the Companies Act, if he does not within 30 days from sending the letter
receive any response, he is required within 14 days after the expiry of the 30 days to send rd the
company by registered post a letter referring to the first stating that no answer to the first letter

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has been received and that if he does not receive a response to the second letter within 30 days, a
notice will be published in the Gazette with a view to strike off its name off the register.

Under Insolvency Act 2011, if he does not get response to his second letter within 30 days, he must
publish a notice, in the Gazette that at the expiration of 3 months from the date of the notice, the
name of the company unless cause is shown to the contrary shall be struck off the register and the
company dissolved.

Under Insolvency Act 2011, at the expiry of this 3 months period, unless caused the contrary is
shown, the Registrar is entitled to strike off the company from the register and to publish a notice
of the striking off in the Gazette. As a means of protecting any creditors of the company that may
exist, the Section provides that notwithstanding such striking off, the liability if any of any director,
officer and member of the company shall continue and maybe enforced as if the company had not
been dissolved and that the court retains the power to wind up a company the name of which has
been struck off the register.

Under the Insolvency Act 2011if the company, any member or creditor feels aggrieved by the
striking off, he may apply to court before the expiration of 10 years from the publication of the
notice of Gazette of striking off by the Registrar and may prove that the company was carrying on
business or was in operation and the court may if it deems fit restore such company to the register.
The company in that case shall be deemed to have continued in existence as if its name had not
been struck off the register.

Under Section 212 of the Companies Act, winding up may take any of the 3 forms namely:

(a) Winding up by the Court

(b) Voluntary winding up

(c) Winding up subject to supervision of Court

(A) Winding up by Court

Who is entitled to petition?

The Insolvency Act 2011 provides that an application to the court for the winding up of the
company shall be presented subject to that section either by:

• The company

• Any creditor or creditors (including any contingent or prospective creditor or prospective creditor
or creditors)

• Contributory or contributories or

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The Insolvency Act 2011 section 2 defines a ‘contributory” as “every person liable to contribute
to the assets of a company in the event of its being wound up and for the purposes of all proceedings
for determining, and all proceedings prior to the final determination of, the persons who are
deemed contributories includes any person alleged to be a contributory”.

Insolvency Act 2011 provides that the liability of a contributory creates a debt accruing du-e from
him at the time when his liability commenced but payable at the times when calls are made for
enforcing the liability.

If a contributory dies or becomes bankrupt before he is placed on the list of contributories, his
personal representative or trustee in bankruptcy respectively replace him as contributories.

. In RE PEVERIL GOLD MINES LTD (1898) 1 CH 122, the company’s articles provided that
no member should petition for the winding up of the company unless 2 directors had consented in
writing, a general meeting had resolved so of unless the petitioner held at least 20% of the issued
share capital. A shareholder presented a petition without satisfying any of the above conditions.
It was held that the articles were ineffective to prevent him from presenting the petition. The court
noted that it is entitled to ignore any provisions in company articles, which restrict the right of a
shareholder to petition the court for winding up of the company where the grounds stated in the
Act . The court is equally entitled to ignore provisions which restrict application for winding up
by the persons whom the Act expressly states may apply to petition for winding up in such
circumstances. .

The grounds

a) Where the company has by special resolution resolved that the company be wound up
by the court.
b) Where default is made in delivering the statutory report to the registrar or in holding
the statutory meeting. This only applies to public companies. However, under the
court has discretion to direct that a meeting be held or that the necessary report should
be delivered instead of issuing a winding up order.
c) The company does not commence its business within a year from its incorporation or
suspends its business for a whole year. Under this ground winding up will only be
ordered if there is no clear intention for the company to do business. In RE
MIDDLEBOROUGH ASSEMBLY ROOMS C0. (1880) 14 CH. 104, it was held that
no order will be made if the company has not commenced business due to
circumstances beyond its own control e.g. by a legislative act if it has all intentions of
carrying on business following the removal of these obstacles.
d) The number of members is reduced in the case of a private company below two (2) and
in the case of any other company below seven (7)
e) The company is unable to pay its debts. For this ground under a company is deemed
unable to pay its debts when

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  A creditor to whom the company is indebted in a sum exceeding 1,000/ which I due has
served on the company a demand notice and the company has failed to pay such sum for 3
weeks thereafter
 If a judgment creditor’s decree or order directing payment is not satisfied by the company
 If it is proved to the satisfaction of the court that the company is unable to pay its debt. In
determining whether a company is unable to pay its debts, the court takes into account
both its contingent and prospective liabilities.

Under this head, a demand for payment is crucial and a prerequisite for determining liability. The
demand must be made in the mode required by law. Thus in RE W. BINEY &CO. (NIG) LTD.
The demand was sent to the company by post. This was held not to be an effective demand since
the Nigerian Act required Act such demand to be served on the debtor company by hand at its
registered office.

Where however, the company genuinely and bonafide disputes the debt, the winding up will not be
ordered by court under this head. In RE LONDON & PARIS BANKING CORPN (1874) LR 19
EQ 444, the petitioner, Zuccani had charged the company GBP 267 for furniture which he had
supplied but the directors considered this an excessive price and instead offered GBP 155 and
later after having received the report of 2 valuers, GBP 197.An action had been commenced to
resolve the dispute but Zuccani who had earlier served a statutory demand presented a winding
up petition. The court refused to make an order on the grounds that the debtor in this case bonafide
disputed the debt.

Once the company admits an amount exceeding 1,000/ then the winding up will be ordered
notwithstanding that there is a dispute of that there is a dispute of that account provided it is
beyond 1,000/=. In TANDY Vs HARMONY HOUSE FURNITURE CO. LTD, the sum of 20,000
naira was lent to a company which it failed to pay. The creditors petitioned for winding up. The
company while admitting its indebtedness indicated that there was a dispute as to the actual
amount and that according to it only owed 18,000 naira. The most up to date balance sheet of the
company showed current liabilities of about 38,000/ naira and current assets of 62,000 naira. It
was held that although the company may own assets which if liquidated would be sufficient to
discharge its debts. If it has no adequate assets to meet its current liabilities as this case, then it is
commercially insolvent and liable to be wound up. Court also noted that once court is satisfied
that the company is insolvent, it would grant a winding up to a petitioner/creditor who is owed
money and would not refuse to do so simply because there was a dispute as to the exact amount
owed by the company.

f) Where the court is of the opinion that it is just and equitable that the company should
be wound up.

This ground is usually relied on where there is a breakdown of relations between members.
Broadly speaking, the following ate the grounds under which this ground has been relied on.

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i) Where one of the members has been excluded from participation in the management of the
company where there is an understanding implied or express that he shall so participate. In
EBRAHIMI Vs WESTBOURNE GALLERIES (1972) 2 ALL ER 492, E and N were carrying
out business under a partnership with N providing most of the capital. There was no written
agreement between them and N thought of the agreement as one where he was merely employing
E in his business. Consequently, a company was formed to rake over the business. N’s son was
made a director and some shares were transferred to him with the result that both N and his son
became majority shareholders. After there arose misunderstandings between E and N, N and his
son used this majority shareholding to pass a resolution removing E from the Board of Directors.
E petitioned for winding up under the just and equitable ground. The House of Lords in granting
the winding up order noted that this ground is intended to enable court to subject the exercise of
legal rights to equitable considerations. Lord Wilberforce noted that whereas it was impossible to
formulate an exhaustive list when it would be equitable, generally speaking the following were the
considerations,

(a) Where there was an association formed or continued on the basis of a personal relationship
involving mutual confidence. This would more readily be implied where a pre’ existing partnership
has been converted into a company as was the case here,

(b) An agreement or understanding that all or some of the shareholders shall participate in the
conduct of the business

c) Restriction upon the transfer of the member’s interest in the company so that if confidence
is lost or one of the members is removed from management , he can take out his stake.

The order was granted because of exclusion of B from participation in the management of the
company’s business and court was of the view that it was just and equitable in the circumstances
to make the order. Lord Wilberforce noted that the worth ‘just and equitable’...are a recognition
of this fact that a limited company is more than a mere legal entity with a personality in law of its
own; that there is room in company law for recognition of the fact that behind it, amongst it, there
are individuals with rights, expectations and obligations inter Se which are not necessarily
submerged in the company structure.”

ii) Where the petitioner has justifiably lost confidence in the ability of the existing company
management to run its affairs in a proper way. The loss of confidence must be based on the conduct
of the directors affecting the company’s business and should contain an element of impropriety.
In LOCH V JOHN BLACKWOOD LOCH I924) AC 783, the engineering business of John
Blackwood had following his death been transferred into a company and run by one of his trustees
called McLaren for the benefit of the beneficiaries of his estate, Although the business was
profitable, it was conducted in a way which was Oppressive to the beneficiaries. 2 of the
beneficiaries petitioned for winding up on the just and equitable ground. They contended that the
balance sheets and profit and loss accounts were never submitted to the company and that the

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statutory conditions for holding general meetings were not observed. The Court granted the
petition.

iii) ‘Where the substratum/purpose of the company has wholly failed

In RE GERMAN DATE COFFEE CO. (1882) 20 CH 0 169, the company was formed to work a
German patent for making from dates a substitute for coffee. It failed to get the patent. Upon
petition by some of the members that it should be wound up on the just and equitable ground, the
court granted the petition for winding up.

iv) Where there is a deadlock between the members

This will be the case where the members have had irreconcilable differences among themselves
such that the management of a company is made impossible,

v) ‘Where a company is formed for a fraudulent purpose, it may be wound up under the Just and
equitable ground. In RE THOMAS EDWARD BRINSMEAD & SONS (1897)1 CH 406, men
named Brinsmead former employees of John Brinsmead & Sons, the well known piano makers
formed the present company to make pianos which were to be passed off as the product of the
older-established firm. An injunction had been obtained restraining the company from this action
but meantime shares in the company worth many thousands of pounds had been subscribed for by
the public in a promotion fraud instigated by the Consolidated Contract Corporation. On this
evidence, it was held to be just and equitable to grant a winding up order. The court was satisfied
that the facts fell within the just and equitable rule.

The effect of granting a winding up order under this ground is the same as with all other grounds.
It appears however that the petitioner must be able to demonstrate that the company is in a position
to pay off its debts.

g) In the case of a company incorporated outside Uganda and carrying an business in Uganda,
where winding up proceedings have been commenced in respect of it in the country of its
incorporation or in any other country in which it has established a place of business.

B) Voluntary Winding Up

According to S 268-272 of the Companies Act, a company may be wound up voluntarily in the
following circumstances namely:

i) ‘When the period if any fixed for the duration of the company in its articles has expired or where
the event if any provided for the dissolution has occurred and the company passes an ordinary
resolution requiring the company to be wound up voluntarily.

ii) If the company resolves by special resolution that it should be wound up voluntarily

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iii) If the company resolves by extra-ordinary resolution that it cannot by reason of its liabilities
continue its business and that it is advisable to wind up.

In this case, the passing of a resolution for winding up the company voluntarily is deemed to
commence the winding up. The effect is chat the company must cease to carry on business except
where it is necessary for its winding up.

Voluntary winding up is categorized into:

a) Member’s voluntary winding up and

b) Creditor’s voluntary winding up.

a) Member’s voluntary winding up

The main feature of this mode is that the members pass a resolution that the company be wound
up voluntarily, they then appoint a liquidator of their choice and must as well file a statutory
declaration of solvency declared by the directors that it will be able to pay its debts within the next
12 months from the commencement of the winding up. It is an offence for a director to make this
declaration well knowing that the company is in fact in no position to meet its debts within the next
12 months. Accordingly, this mode can only be used where the company is in a position to meet its
financial obligations at the rime and for the next 12 months.

The company is required within 14 days after passing of this resolution to give notice of the
resolution in the Gazette and in a newspaper of national circulation.

In a member’s voluntary winding up, the following process would have to be undertaken:

(i) The directors of the company issuing a statutory declaration of solvency as required
by Section 271 of the Companies Act and having it, registered with the Registrar of
Companies: 30 days before passing a resolution for voluntary winding up of the
company. Section 270 of the Companies Act also requires the statutory declaration to
contain a statement of the company’s assets and liabilities as at the latest practicable
date before the making of the declaration.
(ii) The members passing a special resolution for the voluntary winding up of the company
as required by Section 270 of the Companies Act;
(iii) The members in a general meeting appointing a liquidator pursuant to Companies Act
to wind up the company and distribute its assets, The liquidator would be required to
publish in the Gazette his appointment within 14 days from the date of his appointment
and also to deliver to the registrar for registration a notice of his appointment as
required by of the Companies Act;
(iv) The company within 14 days after the passing of the resolution, giving notice of the
resolution for voluntary winding up by advertisement in the Gazette and advertising
the winding up in a newspaper circulating in Uganda;

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 (v) Distribution of the remaining assets of the company to the members and settling any
liabilities that may exist;
(vi) The liquidator calling a general meeting to lay before it an account of the winding up.
This meeting is required by of the Companies Act 2012 to be called by at least thirty
(30) days notice in the gazette and in a - newspaper circulating in Uganda.
(vii) The liquidator making an account of the winding up to the members in a general
meeting of the company under Section of the Companies Act and sending a copy- of
such account and a return of the holding of such general meeting to the registrar.
(viii) After the expiry of 3 months from the date of the registrar receiving the account and
the return and registering the same, the company is deemed to be dissolved.

b) Creditor’s voluntary winding up:

A creditor’s voluntary winding up is a hybrid of a member’s voluntary winding up and in fact

begins as such. Under the Member’s voluntary winding, if a Liquidator is appointed and he forms
the view that the company will not be able to pay its debts in full within the required time, he must
summon a creditor’s meeting and lay before it a statement of the assets and liabilities of the
company. From this point on, the winding up cease to be referred to as a member’s voluntary
winding up and is instead called a creditor’s voluntary winding up because the creditor’s now
take over the process once it becomes evident that the company is unable to meet its obligations.

In this case, the meeting of creditors must be called and the notice calling it must be advertised in
the Gazette and in a newspaper of national circulation. The creditors in their meeting are supposed
to appoint a liquidator.

The consequences of voluntary winding up are that the company ceases to carry on business except
in so far as is necessary for its winding up and from that date, its official documents must have an
annotation that it is in liquidation. In the-same way, the powers of directors cease except where
they are expressly allowed to continue.

C) Winding up subject to supervision of court

This mode usually arises from voluntary winding up. In this case, any person interested may
petition court to order that such voluntary winding up shall continue but subject to supervision of
court, such that the creditors of the company can now apply to court for such orders as they may
deem fit. This winding up is deemed to proceed as a winding up by court and all procedures apply
to it with the necessary modifications. The court has power to appoint an additional liquidator.

Priority of debts

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In the event of winding up of the company, the following debts must be paid out in priority to all
unsecured debts, and in certain cases (mentioned below): must be paid out in priority to secured
debts:

(a) Any claims of employees or those claiming on their behalf for wages which have accrued in
respect of the twenty-six (26) weeks immediately preceding the date on which the declaration of
winding up is made.

(b) All Government taxes and local rates due at the relevant date and having become due and
payable within twelve months next before that date not exceeding in the whole one year’s
assessment;

(c) All rents payable to Uganda Land Commission or a district land board not more than one year
in arrears;

(d) Amounts- due by way of workmen’s compensation accrued before the relevant date;

(e) Amounts due in respect of contributions payable during the period of twelve months
immediately preceding the relevant date under the National Social Security Fund Act.

Preferential debt (a) was introduced by Section 48 of the Employment Act (Act 6 of 2006) which
affected the priority that had been hitherto accorded to wages under the Companies Act (Cap 110).
Preferential debts (b)(c) and the conditions applicable to them are specified in Section 315 of the
Companies Act (Cap. 110) which also defines the ‘relevant dare”. Essentially this is the date on
which winding-up is commenced, a receiver is appointed or possession is taken (as the case may
be). The costs and expenses of the liquidator, receiver or person taking possession also rank as a
prior claim over the general creditors; Assets comprised in floating charges must be used to satisfy
preferential debts in priority to the creditors secured by the floating charge if other funds are not
available. Assets comprised in fixed charges including the charge over immoveable property of
the borrower are not available to pay preferential debts until the creditors secured by those
charges have been paid in full.

Priority of payment of debts of financial institutions is different and is affected by the Financial
Institutions Act, 2004. Section 105 of that Act expressly states that Section 315 of the Companies
Act with regard to priority of debts in the winding up of an ordinary company does not apply to
financial institutions.

Ordinary unsecured creditors

If there is any money left after discharging the costs and expenses of the winding up and payment
of preferred creditors, the remainder of the assets if any must be used to pay the ordinary unsecured
creditors who will rank equally and whose debts therefore abate proportionately, if there is
insufficient assets to pay them in full.

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So strictly is this rule adhered to in practice that almost no deviation is permitted. This rule is
referred to commonly as the rule in EXP MACKAY (1873)8 CH APP 634 In that case, it was laid
down that any contractual provision or arrangement designed to prefer one unsecured creditor
ahead of the others is void as being a fraud on the bankruptcy laws, Provided however that the
provision was not designed to prefer one creditor, it did not matter that it had the undesired effect
of preferring one creditor to the others.

This attitude was, later discarded by the HOUSE OF LORDS IN BRITISH EAGLE
INTERNATIONAL AIRLINES LTD Vs CIE NATIONALE AIR FRANCE (1975) 2 ALL ER
390 where the court stated that provided the effect is to prefer one creditor to another, it does not
matter that that was not the intention of the parties in arranging their affairs as they did.

Assets available for distribution

In a company’s winding up only its assets go into the pool of assets that fall to be distributed
amongst the creditors. The following are usual types of assets which fall outside this pool:

a) Assets charged by secured creditors

The rights of secured creditors are not usually affected by winding up as the documents usually
provide insolvency as an act of default. The secured assets are therefore unless the secured creditor
chooses to place them in the pool not available for distribution.

b) Trust property

Property which the company holds on trust is not available for distribution as it is not its property.
It is only property to which the company is beneficially entitled that is available to its creditors,

c) Retention of title clauses

Goods in which the title has been retained until say payment or fulfillment of some other condition
are generally not available fee distribution as part of the assets of the company because it has no
property in such goods.

Avoidance of transactions in winding up

The intention of winding up is to collect as many assets as may be available to meet the creditors
of the company. It is not surprising that the Companies Act therefore has ways of clawing back b
transactions which could otherwise hive been used to deprive the company of its assets on the eve
of its winding up. The transactions that are vulnerable include:

Late Floating Charges

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The insolvency Act 2011 provides that where a company is being wound up, any floating charge
on the undertaking or property of the company created within one year of the commencement of
winding up proceedings is void unless it is proved that the company immediately after the creation
of the charge was solvent. However, that charge will be valid to the extent of any amount of cash
that was paid to the company at the time of or subsequently to the creation of and in consideration
for the charge together with interest on that amount at the rate of 6% per year or such other rate
as may from time to time be prescribed.

It is important to note that it is the charge and not the credit or money advanced, which is- void.
Accordingly, the effect of invalidating this charge under the Section is that the creditor becomes
an ordinary unsecured creditor who must line up with everybody else in liquidation but he is still
contractually entitled to his money.

Fraudulent preference

Under Insolvency Act 2011, any transfer, conveyance, mortgage, charge, delivery of goods,
payment, execution or other act relating to property made or done by or against a company within
6 months before the commencement of id winding up which is a fraudulent preference against its
creditors shall be invalid, The insolvency Act further invalidates and makes void any transfer,
conveyance or assignment by a company of all its property to trustees for the benefit of all Its
creditors.

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 CHAPTER SEVENTEEN
RECEIVERSH1P
A receiver is a person who is appointed with his primary task being to repay the money d to the
charge holder from the proceeds of sale and income otherwise arising from those assets covered
by the charges. He must also make such necessary and reasonable changes the business to make it
more profitable, discharge the indebtedness of the company a then return the company to the
control of the directors. It is important to note that mere appointment of a receiver does not prevent
the company being placed into liquidation and it is indeed the usual first step towards liquidation
of most companies.

The Insolvency Act 2011 makes provision for the appointment of receiver on behalf of the
debenture holders or other creditors of the company which being wound up by court. However,
usually the right to appoint a receiver will only arise the circumstance specified in the agreement
or the charge or debenture document Circumstances which usually justify appointment of a
receiver include the following:

• A request to that effect made by the directors of that company

• The security being in jeopardy

• A default in payment

• Judgment having been obtained by a creditor against the company

• The presentation of a winding up petition against the company.

The Companies Act does not provide any restrictions as to who may act as a receiver of company.
However, under Section 349, a body corporate cannot be appointed a receiver and it is an offence
for any company to so act. Similar, under Section 350, an undischarged bankrupt is not allowed
to be appointed and to act as a receiver of a company. It important to ensure that the above persons
are not appointed as receivers of the company.

Formalities of appointment
The right to appoint a receiver must of course have arisen before an appointment is root
(GENERAL PARTS LTD Vs NPART SCCA NO. 5 OF 1999). The method by which a receiver
appointed is normally specified in the security document. This mode should strictly be followed
otherwise the appointment will be declared ineffectual. It has been held that the appointment must
be in writing (GRINDLAYS BANK (U) LTD Vs BOAR SCCA NO 23 OF 1999). If joint receivers
are appointed, the instrument of appointment must state whether they are acting jointly or
severally. This will enable one of them to act without the consent of the others at all times.

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Notice of appointment
The appointor of a receiver is obliged to give notice of the appointment to the Registrar of
Companies within 7 days. The receiver is then responsible for the other statutory notices. Every
document on or in which the name of the company appears must then contain a statement that a
receiver or manager has been appointed.

The receiver’s position

A receiver is personally liable on any contract entered into by him except in so far as the contract
provides otherwise, though he retains a right of indemnity out of the assets of the company. The
security document will however usually provide that the receiver will be deemed an agent of’ the
company in receivership. (STEPHEN LUBEGA Vs BARCLAYS BANK (UGANDA) LTD SCCA
NO, 2 OF 1992; G.M. COMBINED (U) LTD Vs AK DETERGENTS (U) LTD & ORS HCCS
No 348 OF 1994).

The receiver has full powers to administer the assets over which he has been appointed including
the company’s business. In addition, a receiver appointed under any instrument may apply to court
to empower him to do certain acts or to give directions in relation to any particular matter relating
to the performance of his functions,

On the appointment of a receiver, the company’s directors remain in office but are unable to
exercise any of their powers relating to the assets under the receiver’s control, they are still able
to do such things as calling company meetings and presenting winding up petitions and they may
also deal with those assets over which the receiver has not been appointed or which he is not
interested in pursuing.

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 CHAPTER EIGHTEEN
ENFORCEMENT OF MEMBER’S RIGHTS
We are here concerned with the avenues through which members can enforce their rights e.g.
payment of declared dividends, removal of incompetent directors, etc. He can do this under statute
law or under common law, depending on whether it is personal or derivative actions, however
because of the notorious majority rule in the management of the affairs of the company, emphasis
is placed on how minority shareholders may enforce their rights both under the Companies Act
2012 and common law.

Whereas it is never easy to define accurately who a minority shareholder is, a useful working
definition is a shareholder who is unable either alone or with his associates from preventing others
from controlling the board of directors of the company and the management of its business. In the
absence of any special rights or restrictions attached to shares, control of the board is in the hands
of a simple majority of the issued shares of the company.

The law takes the general view that in the management of the affairs of the company; the majority
rule is desirable in order to obviate the many practical and administrative difficulties that would
arise.’

The following are among the principal protections provided by law:

i) The ability to prevent the passing of certain resolutions

ii) The minority shareholder’s action based on the exceptions to the rule in FOSS Vs
HARBOTTLE
iii) Ability to wind up the company on the just and equitable ground

iv) Ability to petition court on the oppressive member’s action

v) Ability to restrict alteration of class rights

vi) Ability to apply for appointment of inspectors to examine the affairs of the company

COMMON LAW PROTECTION AND THE RULE IN FOSS Vs HARBOTTLE

a. Personal Action:

In a personal action, the shareholder complains in his own name and on his own behalf of a wrong
done to him as a shareholder either by the other shareholders or by the company itself based on
the statutory contract established by the signing of the articles and memorandum of association.

Whether or not an aggrieved shareholder can have his complaint entertained at common law, will
depend on the rule in FOSS Vs HARBOTTLE. In the case, the shareholders complained that the
directors had sold their own land to the company at a grossly overvalued price and had kept the

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proceeds of the sale for themselves. The issue was whether the members had a right of suing the
directors. It was held that the courts could not entertain such a suit, because the wrong had been
done to the company.

 Therefore the rule in FOSS Vs HARBOTTLE has 2 limbs to it namely:

a) In a case where a wrong has been committed to the company, the proper plaintiff to sue for the
wrong is the company and not an individual shareholder; and

b) ‘Where the substance of the minority shareholder’s complaint is that some act has been done
wrongly which would nevertheless be lawful if there was an ordinary resolution in a general
meeting to authorize it, then the court will not interfere at the instance of the minority shareholder.

The rationale behind the rule in FOSS Vs HARBOTTLE is that control by the majority must
prevail as control by unanimous consent of the shareholders would be impractical and minority
control unfair. The rule is a simple way of stating that a minority shareholder who does not like a
particular course of action by the majority has as his only option the right to sell his shares and
exit the company. The rule makes sense because it would be futile for the minority to bring an
action in such circumstances if the effect of the court order could be overturned by a subsequent
resolution of the majority in the general meeting. Further, where a wrong is done to the company,
the proper claimant being the company itself, if the majority have the power to ratify the matter in
question, it is they who should decide whether the matter should be taken before the courts:
Matters ratifiable by the majority include acts done by improperly appointed directors or by
directors in breach of their authority under the articles and a breach by a director of a fiduciary
duty which he owes to the company.

Some commentators have concluded that the rule is broadly speaking in whatever terms it may be
crafted, intended to prevent multiplicity of suits since it does not make sense for the court to
entertain litigation at the instance of the minority if the majority do not wish it and can in fact fight
it, (MACDOUGALL Vs GARDINER (1875) 1 CH. D 13).

However if this rule stood alone without exceptions, there would be injustice whereby the majority
could act with impunity in ignoring breaches of obligations and duties owed to the company, to
the detriment of the minority. The question is assuming the majority was the wrong doers and only
they could sanction the institution of a suit, how would they possibly sue themselves? For that
matter, a number of exceptions have been recognized whereby an individual shareholder can go
to court in his own name and right notwithstanding the fact that the wrong was committed against
the company. These include the following

i. Infringement oldie personal rights of the member:

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If the wrong being complained of amounts to an infringement of the personal rights of a
shareholder, he can petition under a personal action notwithstanding that the company had been
wronged. This action may be brought by him in his own name to restrain an act, which infringes
his personal rights. This is strictly speaking not a true exception to the rule because the petitioner
is seeking to enforce a personal right for his own benefit and not a right of action for the benefit
of the company. It is only an exception to the extent that it enables the minority to sue the company
to enforce personal rights.

The ‘rights, which are capable of protection in such a case, include

a) The right to vote (PONDER Vs LUSHINGTON (1877) 6 CH D 70)

b) The right to receive notice of general meetings

c) The rights conferred by a pre-emption clause (RAYFIELD Vs HANDS (1960) CH 1) and

d) The rights conferred on individual shareholders by the Act.

In MISANGO Vs MUSIGIRE (1966) L.A. 390, a general meeting purported to alter Articles of
Association to the detriment of the plaintiff. It was also stated that some 9 shareholders had
attended that meeting and voted in favour of the resolution, Sir Udo’ Udoma C.J held that the
action could be determined in so far as what was complained of infringed on the rights of the
plaintiff.

However, procedural irregularities or breaches of the articles, which do not involve a breach of
individual rights, are covered by the rule as being ratifiable by the majority. Thus in
MACDOUGALL Vs GARDINER (1875) 1 CH D 13, it was held that where a Chairman of a
general meeting refused to take a poll on a motion to adjourn a meeting, only the company had a
right of action as the matter concerned only the internal affairs of the company.

ii) Illegal / ultra vires transactions

Where the act being complained of is illegal or ultra vires the company (as opposed to merely
being in excess or an abuse of the powers of directors), a minority shareholder will be able to
bring proceedings in the name of the company to prevent the company from so acting. Thus for
example if the company proposes to make a gratuitous disposal may take out proceedings against
such course. .

iii) Fraud on the minority and the wrongdoer who are in control of the company.

If the conduct complained of is fraudulent conduct on the part of the majority, the minority may
sue notwithstanding the rule in FOSS Vs HARBOTTLE if the wrong doers in control of the
company.

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Traditionally the fraud in such instances has been said to be wider than the fraud in ordinary
cases. It has been defined to include:

 Expropriation of company’s property by the majority or their appointees (COOKS Vs

DEEKS (1916) 1 AC 554)
 Expropriation of an individual member’s property
 Release of directors from their duty of good faith

Whenever it is established that there has been concluded a transaction which amounts to a fraud
on the minority, then any aggrieved shareholder is free to go to court not withstanding that the
company itself has been wronged.

The traditional approach has meant that fraud does not include negligence however gross. Thus
in PAVLIDES Vs JENSON (1956) CH 565, the sale by the directors of one of the company’s
assets at an undervalue was ratifiable by the majority because although their conduct was
negligent, it was rot fraudulent. However the concept of fraudulent conduct has gradually been
liberalized, in DANIELS Vs DANIELS (1978) CH 406, the court permitted a minority action
alleging that the directors had been negligent in selling assets of the company at an undervalue
but only because the directors had benefitted themselves at the expense of the company. The tenor
of the judgment appeared to have been that the court will intervene in circumstances where the
directors benefit themselves even if their conduct was only negligent or even unintentional.

A minority shareholder’s derivative action under this head must show that because the wrong
doers are in control of the company, the proper claimant (namely the company) cannot sue. The
question of control of the company must therefore necessarily be determined before the minority
shareholder’s action will be allowed to proceed under this head.

iv. Breach of Articles of Association

If a breach of the articles of association of the company takes place, any aggrieved shareholder
can proceed to court notwithstanding that the company itself may have been prejudiced. In
EDWARDS Vs HALLIWELL, the trade union and its executive committee members were sued
for having used union dues by a resolution of a simple majority. It was held that a breach of the
articles by a company or any other shareholder can be challenged by any member without the
restrictive effect of the rule in FOSS Vs HARBOTTLE.
v. Interest of Justice

Courts are ready to entertain any action of a shareholder which falls outside the above 4
exceptions if in the circumstances of the case, it is in the interests of justice e.g. in Daniel’s case,
a shareholder complained that the majority shareholders who were also directors negligently sold
a company’s plot of land to one of the directors at a price of £ 120,000. The issue before the court
was whether this suit should be maintained in light of the rule in FOSS Vs HARBOTTLE since
there was no allegation of fraud. It was held that the shareholders could maintain the suit. The

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judge said that it is one thing to put up foolish directors but it is another thing to put up directors
who are so foolish to enter such a transaction.

The utility of this exception is still doubted as recent authority has cast great doubt on it and its
real extent.

b. Derivative action:

This is a relatively recently developed action in which a shareholder who cannot proceed under
common law because of the rule in FOSS Vs HARBOTTLE or under Statute can take a complaint
to court for the wrongs committed in his company. Under this type of action, the shareholder is
not seeking to enforce a personal right but instead complains on behalf of the company of a wrong
done to the company itself. Where a wrong is done to the company itself, a minority shareholder
may either persuade the directors to take action or if they do not proceed with a derivative action
under one at the exceptions to the rule In FOSS Vs HARBOTTLE. As the action is being brought
on behalf of the company, it is the company, which will receive any award of damages and not the
claimant shareholder(s).

The plaintiff is seen to be suing not on his behalf but on behalf and lot the company. However,
courts are not very ready to implement such and consequently, a number of limitations have been
put up as explained below.

A derivative action differs from a personal action in the sense that although a shareholder is
allowed to sue, he is not suing on his own behalf and for his own benefit but on behalf of the
company because the company itself is unable to sue for that wrong. The rationale behind the
principle is that when the people who have committed the wrong are the same people who are
supposed to sue, they may not do it because they may not pass a resolution authorizing such action
to be taken.

The derivative action must be brought in a representative form. The claimant however is not suing
in his own name but on behalf of himself and all of the shareholders other than the shareholders
who are in default. The company should not itself be joined as a claimant but it must be joined as
a nominal defendant in order to be bound by the result of the action.

However, the courts have insisted that a derivative action should not be utilized as a means of side
stepping the rule in FOSS Vs HARBOTTLE.

In such cases, it must be shown that

a) What was taken belonged to the company;

b) It passed to those against whom the claim is made;

c) It must be impossible or impractical for the company to sue because those who appropriated
the company’s property are the very people hi control of the company
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d) The action must allege fraud on the minority resulting into the expropriation of the property of
the company or the minority shareholders, a breach of the director’s duties of good faith

e) The company must be joined to the action as a defendant

f) The plaintiff shareholder should sue in a representative capacity on behalf of himself and the
other members

g) The plaintiff must have ‘clean hands” i.e. not to have connived with company members

In COOK Vs DEEKS (1916), the directors (who were also controlling shareholders) negotiated
a contract in the name of the company, took the contract for themselves and passed a resolution
that the company had no interest in the contract. A minority shareholder successfully sued the
directors since the contract belonged to the company not the directors.

c. Representative Action

This is a hybrid of the two actions above which is brought under the Civil Procedure Rules
provisions governing representative suits. The claimant in this action sues on behalf of himself
and all or some of the other shareholders who have suffered the same infringement of a personal
right against the other shareholders of the company or the company itself. The named claimant
will have conduct of the proceedings on behalf of the other shareholders. The claimant shareholder
will normally have agreed with the other claimant shareholders as to how the costs of the action
are to be borne between them before the representative action is commenced.

2. STATUTORY LAW

I. Winding up the company udder the just and equitable Clause (S.222 of the Companies Act):

11 The oppression section

i) The court is moved by a petition. The petitioner is complaining about oppression not
only to himself but also to other shareholders.
ii) The petitioner must satisfy the court that although the facts justify the winding up of
the company under S.222 of the Companies Act, such winding up if conducted would
be unfair to him. If it not possible to get a remedy under S.222 then S.221 of the
Companies Act cannot be applied.
iii) Where the court is satisfied with the petition, it may make an order directing how the
company’s affairs are to be conducted in future or an order that the petitioner can be
bought ma of the company either by the company itself or by the other shareholders.
The order is f& the petitioner only to be bought out but not other oppressed members,
iv) He must prove that the act being complained of is not an isolated event but a continuing
process.

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 v) He must satisfy the court that the oppression is not only limited to himself but also the
affairs of the company are being conducted in an oppressive manner, In the case of
ELDER Vs ELDER &WATSON (1952) S.C 491, the court defined oppression as a
visible departure from the standards of fair dealing and the violation of the conditions
of fair play on which every shareholder is entitled to rely. IN JERMYN TURKISH
BATHS LTD (1971) 1 WLR 1042, the court admitted that there is no exhaustive
definition of oppression and pointed out that ‘oppression must impute that something
which unfair deal to the overbearing character of the oppressor is being done.

In RE U.K HAMMER LTD (1959) IWLR 62, a father who gave gifts of shares to Sons continued
to run the company as his own and to disregard wishes of other shareholders and company
directors and even resolutions of the Board of Directors, It was held, relying on S.211 of the
Companies Act that oppression amounts to a conduct the majority which is harsh, burdensome
and wrongful. In the matter of ALLIED FOOD PRODUCTS LTD HCB 294. It was held that “a
failure by company directors to notify a shareholder who is also a director of a general meeting
where he was removed as a director amounted to oppression. This Ugandan case succeeded under
S 211of the Companies Act.

III) Inspections and Investigations: These can be initiated either by the registrar or the members
themselves.see sections 172-184.

a. For Members, there are 2 instances:

i. Under S.165 of the Companies Act, on the application of either 200 members or members
holding at least one tenth of the issued shares in a company with share capital or members holding
not less than one tenth of the shares issued or in case of a company without share capital, where
the application is made by not less than one fifth of the members, the court may appoint competent
inspectors for the investigations. However, the applicants may be required to pay a deposit of Shs
10,000 before the investigations commence as security for payment of costs of the investigation.

NB. The shareholder involved is referred to as an applicant and not a plaintiff or petitioner. The
application will not be entertained if there are other remedies available. See the case of RE
ELYEZA BWAMBALE CO. LTD (1969) E.A 243

A special resolution may also be passed that a court appoints competent inspectors to investigate
the affairs of the company S.166 (a) of the Companies Act.

b. S. 164 of the Companies Act provides that the registrar can initiate an inspection where he:

i. Believes that Companies Act provisions are not being complied with
ii. Believes that the books and documents of the company supposed to be filed do not
reasonably disclose what they ought to disclose; he may direct through a written order for

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 the company to produce all relevant books and documents for investigation and inspection
and if he feels dissatisfied, he can make a report to court.

Under S.166 (b) of the Companies Act the court may order for the appointment of inspectors to
look into the affairs of the company if it appears from the registrars report that either:

(i) The company’s business is being conducted with intent to defraud its creditors or the
creditors of any other person or otherwise for- a fraudulent or unlawful purpose or in an
oppressive manner to any part of its members or that it was formed for any fraudulent or
unlawful purpose.
(ii) Promoters or persons concerned with management of its affairs are guilty of fraud,
misfeasance or other conduct cowards its members;
(iii)That its members have not been given all the information with respect to its affairs which
they might reasonably expect or
(iv) that iris desirable to do so, -

IV. MISFEASANCE PROCEEDINGS S 328 of the Companies Act

This is another remedy open to a shareholder who wants to enforce a company’s tights.

He, in this case, is not enforcing his own right. Under S 328 of the Companies Act, a shareholder,
contributory, liquidator or creditor can apply to court for an order to examine the conduct of:

a) Promoters-past or present:
b) Director-past or present
c) Managers
d) Liquidators and/or any company’s officer or a member who has been guilty of misfeasance
or breach f trust to the company

There are 3 important limitations

a) The proceedings are only invoked during the winding up of the company.
b) Receivers are not caught by S 328 of the Companies Act but liquidators and any other
&facto officer is caught.
c) The section deals with only the wrongs involving misappropriation of funds or property
(pecuniary claims).

‘Where the proceedings are success, the delinquent officer may ‘be ordered to pay / replace the
funds/ property or to contribute such sums of money as the company deems fir to the’ assets of the
company. Such officer may also be- liable, to criminal proceedings However the officer concerned
may take any remedy of the process of Sect ion 405 which stipulates that an officer may be excused

138
of breach of duty or negligence if’ he pleads of having acted reasonably and honestly in the
circumstances.

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 CHAPTER NINTEEN
THE LAW OF PARTNERSHIPS
The law applicable to partnerships includes; The Partnership Act of 2010, General Law of
contract, Case law, Common law and doctrines of equity.

A Partnership is defined under S2 of the Partnership Act as a relation, which subsists/exists

between 2 or more persons, not exceeding twenty, carrying on a business in common with a view
of making profit. Under S.2 of the Partnership Act, where a partnership is formed for purposes of
carrying on a profession, the number of professionals who constitute a partnership should not
exceed fifty.

In order to prove the existence of a partnership, the following factors must be established;

1. There must be a business

2. The business must be carried out in common

3. There must be a profit making motive

The Act defines a business to include every trade, occupation or profession. There must be a
commercial or professional enterprise where goods are sold or services are rendered. Mere joint
ownership of property is not enough to constitute the owners into partners and its immaterial
whether or not they share profits.

For an act to amount to a business the said business must have commenced /started operating. In
the case of EMORUT Vs OSAKOT 1984, the plaintiff and his colleague the defendant and yet
another unnamed person decided to form a partnership. They duly registered the business name
and obtained a bank account in the names of the firm. The plaintiff did not pay his contribution
and because of this and other reasons, the business did not take off. In the mean time, the defendant
operated a carpentry business. The plaintiff brought this action lease to court claiming an account
and a share of the defendant’s carpentry business. This action/case failed on the ground that there
was no partnership in law.

The Court further held that the act of opening a bank account was an act preparatory/in
preparation for the commencement of the business & does not create a partnership. For there to
be a partnership, the business must have commenced.

In the case of HENSNHAQ Vs ROBERT {I367} 1 ALRT it was held that its basically the carrying
out of business which determines the existence of a partnership and that an agreement to carryout
business in the future for a future plan was just an agreement to carry out business in the future
hilt not an establishment of a partnership. Court held that in such circumstances the fact that the
parties believed they were in partnership was irrelevant.

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In the case of RE KEITF SPICER LTD [1971) KLR 333 it was held that the preparatory steps
for formation of a partnership in future cannot constitute a subsisting partnership even if the
parties show a document, it’s just to show their intention.

It should further be noted that in a partnership, the business must be one that involves a repetition
of actions and does not include the acts of an association formed for doing one particular act,
which is never to be repeated.

Carrying on business in common means that the business must be carried on by or on behalf of
all those involved in the undertaking/venture/business, thus the mere sharing of gross returns
(profits) does not in itself constitute/make the persons sharing profits into partnership Although
the sharing of profits is evidence for the existence of a partnership, something more than this must
be proved in order to prove the existence of a partnership This is because person receiving
payment out of the profits of the business whether as a gift or in return for a service rendered e g
interest on a loan cannot be said to be a partier The existence of a partnership can only be
effectively ascertained determined from the intention of the parties.

With a view, of a profit. The persons must carry on this business with the ultimate major objective
of making profit and must at the end of the day each share in profits. In the case of DAVIS Vs
DAVIS (1894)1 ‘CH 391 court explained the apparent contradiction in s3 and held that one must
look at the evidence of sharing profit but this does not raise the presumption of existence of a
partnership. Court emphasized that if there is profit sharing and no other evidence at all to
construe the existence of a partnership, then you cannot claim that there is existence of a
partnership; one must look at all the ingredients without undue weight to any one of them.

In the case of PENSTONE Vs JOHNSTONE [1945] 23 TC 29 Penstone wanted to purchase. and

develop a piece of land but he lacked the money so he approached a friend who advanced to him
the money and the later described in writing the relationship which was to follow between him and
the former in this piece of business and it was set out in a letter which Penstone assented to in
writing. The adventure was successful and profits were realized, on the issue of whether the
venture constituted a partnership because profits were shared, it was held that persons involved
in any trade or business or adventure upon terms of sharing a profit an4 making good the ‘loss
arising there from are to some extent partners, however it is not enough that profits are being
shared, if there other circumstances which show that there was no intention to form a partnership,
a partnership will not be presumed to exist simply because two people are doing business and
sharing a profit.

In this court looked at the letter that described the relationship of the parties and found that from
the contents of the letter, there was no intention to form a partnership. Court went on to say that
in determining whether there is partnership or not, it is not enough to just establish the existence
of a business, the business must be in common and with a vie w of a profit all the three ingredients
must exist.

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The Act stipulates rules for determining the existence of a partnership.s.3 provides for the
following rules.

-Joint tenancy, tenancy in common, common property or part ownership does not itself create a
partnership. In the case of SMITH Vs ANDERSON (1880) 15 CH.D 247, court held that co
ownership does not imply a business or a partnership. In the case of OGIN V OGIN, it was held
that co ownership does not create a partnership whether or not the profits made are shared

However sharing of losses may in certain circumstances create a partnership In the case of
NORTHERN SALES Vs MINISTRY OF NORTHERN REVENUE(1973)37 DLR 612, there
was sharing of both profits and losses of the firm and the court found such circumstances to be
conclusive for the existence of a partnership sharing of gross returns does not itself create a
partnership whether the persons sharing those returns have or do not have a joint or common
right or interest in any property from which or from the use of which, the returns are derived.

In the case of COX Vs COLSON (1916) 2 KB 177 Mr. Colson was a theatre manager who agreed
with Mr. Mills to avail the theatre for some of Mr. Mills’s productions. Mr. Mills was to provide
the company and the scenery whereas Colson was to pay for lighting, posters etc. under the
agreement; Colson was to receive 60% of the gross earning and the 40% for Mills. The plaintiff
was shot by one of the actors during the performance and sought to make Colson liable since he
was Mills partner; Court held that sharing gross returns in itself does not create a partnership.

The receipt of a person of a share of the profits of a business is prima facie evidence of existence
of a partnership but where the payment is contingent upon the profits of the firm, it does not mean
that that person is a partner.

FORMATION OF A PARTNERSHIP
A partnership may be formed by oral or written agreement or the existence of a partnership may
be inferred or implied from the conduct of the parties.

Where the partnership contract is put in writing, it is contained in a document called a partnership
deed and that is what is called a partnership agreement. The deed will then regulate the conduct of
the parties. A partnership relationship is essentially a contractual relationship so the general
principals of contract apply with equal force to the partnership. A partnership deed must be drafted
with care and be signed by all the partners; It must include the following clauses:

(a) Name of the firm

(b) Names and addresses alike partners and their occupations

(c) Nature of the business and the place where it will be carried on.

(d) Date of commencement of business, the partnership and the duration of the partnership if any.

(e) The amount of capital to be contributed by each partner

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(f) How the flow of profits and losses are to be shared

(g) Interest on partners capital, partner’s loans

(h) Salaries, commissions payable to partners

(i) Powers and obligations of the partners

(j) Procedures to be followed in case of death, retirement and admission of partner among others.

Where there is no express or oral agreement creating a partnership, the court will look at the
conduct of the partners to determine whether they constitute a partnership,

NAME OF THE PARTNERSHIP AND MANDATORY REGISTRATION

The Partnership Act provides that the persons who form a partnership are called a firm (partners)
and the name under which they conduct their business is called the Firm name. A firm has a right
to conduct its business under any name but the name should not be similar to the name of another
firm, which is already in existence.

S.4 of the Partnership Act 2010 provides for mandatory registration of the firm name, it provides
that every firm carrying on a business under a business name which does not consist of surnames
of all the partners must be registered under the Business Names registration act within 14 days
of commenced business.

For the registration of the firm name, the following details must be submitted to the Registrar.

1. The business name

2. The general nature of the business carried on by the firm

3. The principal place of business of the firm

4. The present Christian name and surname of each partner

5. The nationality and residential address of each partner

6. Any other business or occupation of each partner

The registrar of business names issues a certificate indicating the firm name registered. This
certificate must be displayed at the Firm’s principal place of business.

NUMBER OF PARTNERS
A partnership cannot consist of more than 20: persons except where they are professionals. In the
case-of banking business, the number of partners is limited to 10. If the number of partners exceeds
these limits, then the partnership becomes an illegal association. In the case of

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FRONTHALL BAKERY SUPPLY CO. Vs FREDRLCK MUGHAIL WARGOE (1959) E.A 474,
the plaintiff was an association consisting of 145 persons trading in partnership for gain but the
firm was not registered under the Registration of Business Names Ordinance. The issue was
whether the firm had a legal existence and court held that once a partnership exceeds 20 persons,
it can no longer be regarded as a partnership.

PARTNERSHIP PROPERTY
Partnership property is defined by the Act under S.22 of the Partnership Act as all property and
rights or an interest in property originally brought into the partnership stock or acquired whether
by purchase or otherwise on account of the firm or for the purposes, and in the course of the
partnership business.

Partnership property must be held and applied by the partners exclusively r the purposes of the
partnership and in accordance with the partnership agreement.

Some property may be used for the purposes of the firm’s business and yet may not be part of the
partnership property e.g. office furniture or equipment may be used by the firm and yet remain the
property of one of the partners. It is always necessary to distinguish between partnership
properties from the property belonging to the partners.

S.23 of the Partnership Act provides that property bought with the money belonging to the firm is
deemed/will be said to have been bought on behalf of the firm. It follows from this therefore that
property bought using the firm’s money is deemed partnership property.

In case of execution of a decree of court, S. 25 of the Partnership Act provides that execution of
a decree shall not issue against any partnership property except on a judgment against the firm.
If a partner is a judgment debtor, then a creditor can -apply to court to the share of that partner’s
interest in the partnership property and profits charged with payment of the amount of the
judgment debt.

RETIRING PARTNER
A partner has the liberty to retire from the partnership at any stage before the partnership expires
by giving notice to the other partners of his intention to dissolve the partnership by obtaining the
consent of the other partners regarding the dissolution. Where the partners decline to give their
consent to the dissolution, that partner has the option of returning from the partnership as
provided under S 28 of the Partnership Act.

Where a person retires from a partnership, he ceases to be a partner (stops being a partner) However
where a partner has retired, the other partners should not still represent / hold out to third parties
as a partner. Where this happens, the retired partner will continue to be liable for the debts of the
firm even those which are incurred after his retirement

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Therefore, to avoid all this, a partner on retiring must take steps and give notice to the creditors
and the public that he is no longer a partner in the firm so that in case the firm incurs debts after
he retires then he will not be liable.

RELATIONS OF THE PARTNERS/POWERS OF PARTNERS TO BIND EACH OTHER

Every partner is an agent of the firm and his or her other partners for the purpose of the business
of the partnership. S.5 of the Partnership Act.

The act of any partner done in the ordinary course of business of the firm binds the firm and the
partners unless the partner so acting does not have authority to act for the firm in that particular
transaction and the person with whom the partner is dea1in knows that the partner has no
authority or does not know or believe him to be a partner.

Thus, a partner has authority to bind other partners. The partner is seen as an agent of the other
partners. There are different types of authority that a partner as an agent of the other partners
may have.

AUTHORITY OF AN AGENT
Authority of an agent means his capacity to enter into a given contract on behalf of his principal
and bind that principal by such contract. The agent can only bind the principal only where he acts
with the authority of the principal. In order for the agent to act with authority, he must do that act
which the principal gave him powers to do i.e. must act within the scopecfhiaautharityan4not to
go outside that scope. if he acts beyond these powers he will be exceeding his authority and those
acts where he has exceeded authority will not bind the principal and the agent will be personally
liable for them.

Authority of an agent may be divided into the following types/categories.

EXPRESS/ ACTUAL AUTHORITY

This is where the authority of an agent is clearly spelt out orally or in writing. Sometimes the law
requires that authority of an agent be put in writing in a particular form for example agency to buy
or sell land on behalf of another rust be in form of a special document called a power of attorney.

IMPLIED AUTHORITY / USUAL AUTHORITY

This refers to an agent’s authority to do all, acts necessary for the performance of those acts where
he has given express authority. Therefore, where an agent is given express authority to do a certain
act, he will have implied authority to do all other things that are necessary to perform such an act.
For example if x appoints y to buy him land. Y will have express authority to buy the land, he will
also have implied authority to; look for the land, ascertain the real owner of the land, ascertain its
value , sign the sale agreement and pay for that land and transfer into the name of X.

Implied ‘authority of an agent may also arise from custom. A principal who appoints an agent to
act for him in a particular market also gives him implied authority to follow the customs of that

145
market. Thus if there is a custom in that market, lie principal will be bound by it even if he did not
know about it.

However, where the custom is inconsistent with the express instructions of the principal, then the
principal will not be bound by that custom.

Implied or usual authority may also mean that authority which a particular type of agent usually
has. In the case of PANAROMA DEVELOPMENTS LTD! Vs FEDELIS FURNISHINGS
(1971)2 QB711 it was held that a company secretary had usual authority to hire cars on behalf of
the company and the company would be liable for the hire charges even if she had not been
authorized or actually used the car for her own purposes.

This is because a company secretary has usual authority to hire cars on behalf of the company
and anyone dealing with her in that capacity would assume she had that authority.

A managing director of a company has usual authority to make commercial arrangements binding
the company.

APPARRENT AUTHORITY / OSTENSIBLE AUTHORITY/ AUTHORITY BY ESTOPPEL

This refers to that authority which the agent appears to have but does in fact have.

It arises out of estoppels. Where the principal by his words or conduct has led others to believe
that an agent had authority and others have acted on this, then he will not be allowed to turn
around and say that the agent did not have authority to act on his behalf.

In the case of RAMA CORPORATION Vs PROVED TIN AND GENERAL INVESTMENTS

LTD (1952) ALL ER it was stated that for one to say that an agent has authority by estoppel, the
following conditions must be fulfilled

The principal must have made a representation that the agent has authority to act on his behalf

A representation may be by word or conduct .e.g. where a principal makes an agent appear like
he has authority.

The person to whom the representation was made must have relied on that representation thinking
that it was actually true.

And that person must have acted on it to .his or her detriment In the case of; EDMUND
SCHULTER & CO (U) LTD Vs PATEL (1969) E A 259, A principal authorized his agent to sell
his land to a buyer The principal gave his title to the agent The buyer paid the deposit of the
purchase price to the agent and the balance was later paid directly to the principal. The agent
however disappeared with the deposit and the principal sought to recover the money from the
buyer arguing that the agent was not authorized to receive the money and therefore the buyer
should not have given him the deposit. Court held that though the agent had no express authority
to receive the money, the fact that the principal had given him the certificate of title to the land
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presented him as having authority to act on behalf of the principal and therefore the principal was
estopped from denying the agents authority.

Apparent authority can only arise from a representation made by the principal and not one made
by the agent, in the case of ATTORNEY GENERAL Vs SILVA (1951) AC, a crown agent falsely
represented that he had authority to sell steel plates which were crown property, it was held that
the crown was not liable since the representation was made by the agent and not the principal
(crown).

EXTENT OF PARTNERS AUTHORITY & LIABILITY

The extent to which a partner may bind the firm was described in the case of RE
AGRICULTURALIST CATTLE INSURANCE CO [The Baird’s case [1870) LRS or CH or
AC.725 where the court observed that as between partners and the outside world each partner is
unlimited agent of every other in every matter connected with the partnership business or which
he represents as a partnership business and not being in. its nature beyond the scope of the.
partnership. Court went on to say that a- poor partner may bind the partnership -for contracts of
any amount and may give the partnership -acceptance for any amount and may involve his
innocent partners in unlimited amounts for frauds which he has in unlimited amounts for frauds
which has craftly concealed.

In the case of HAMLYIN Vs HOUSTON [1903J1 KB 81, H an active partner in a firm consisting
of himself and S bribed a clerk of a rival firm to disclose confidential information concerning the
contracts and tenders of his employment. It was found that the obtaining of information lay within
the firm’s business and that the means employed were sufficiently related to that end to make the
firm liable.

The partners act may thus be willful or negligent tortuous or criminal’ Collin MR went on say that
“it is too well established by the authorities to be now disputed that a principal may be liable for
the fraud or other illegal act committed by his agent within the general scope of the authority given
to him and even the fact that the act of an agent is criminal does not necessarily take it out of the
scope of his authority.”

The act does not have to be for the principal’s benefit according to the House of Lords judgment
in the ease of; LLOYD Vs GRACE SMITH &CO (1912) AC where Lord McNaughton said that
“the principal must be liable for fraud of his agent committed in the course of his employment and
not beyond the scope of his authority, whether the breach was committed for the principals benefit
or not.

Whether an act was committed in the course of business depends on the facts of each case”

However, where the partner pledges the credit of the firm for a purpose apparently not connected
with the firms ordinary course of business, the firm is not bound, unless that partner is infact
specially authorized by the partners.

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Where it has been agreed between or among the partners that the restriction shall be placed .on
the power of any one or more of them to bind the firm, an act done in contravention of the
agreement is not binding on the firm with respect to persons having notice of that agreement.

Partners have unlimited liability. The liability of each partner is unlimited such that if the firm
defaults, creditors will have a personal claim against the partners. This means that in case the
firm incurs debts and the partnership- property Es not enough to meet the debts of the firm, then
the partners will be personally liable. I.e. the partner’s personal property can be sold to meet the
firm’s debts.

Although a minor can be a partner in a firm and enjoy benefits of the partnership but he is not
personally liable for the debts of the partnership.

In the case of LOVELL Vs BEAUCHAMP [1894] AC 607 court observed data it is clear that
there is nothing to prevent an infant from becoming a partner but that infant contract debts by
such trading, although the goods may be ordered for the firm, he does not become a debtor in
respect of them. Court further observed that however this does not mean that the adult members
will not be liable on such contract, court went on to say that if the adult members of a partnership
could avoid liability because one of the partners is a minor,, minors would then be found 6 every
partnership.

However, the share of that minor in the property of the firm is liable for any obligations of the firm
s. 10.

But attaining majority age, the minor, now adult, will be made liable for all the obligations of the
partnership from the date of his or her admission unless he or she gives public notice within a
reasonable time of his or her repudiation of the partnership. S. 11.

A new partner is not liable for the debts of the firm, which were incurred before he became a
partner. For him to be liable for such debts, he must have agreed in writing at the time of joining
the firm that he will pay the debts of the firm which were incurred before he became a partner.
S.19 of the Partnership Act.

A partner who retires from the firm does not cease to be liable for the liabilities incurred while
still a partner S.19 of the Partnership Act. However, he may be discharged from his liabilities by
agreement.

Since partners have unlimited liability, where a partner dies, his estate will be liable to meet the
debts of the firm. S.19 of the Partnership Act and KENDALL Vs HAMILTON.

Where by a wrongful act or omission of any partner acting in the ordinary course of business of
the firm or with the authority of his or her co partners, loss or injury is caused to any person not
being a partner, the firm is liable S.12 of the Partnership Act.

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S.14 of the Partnership Act provides that where a partner acting within the scope of his or her
apparent authority receives the money or property of a third person and misapplies that money or
property, the firm is liable. Also where a firm in the course of its business; receives money ‘or
property of a third person and the money or property so received is misapplied by one or more of
the partners while it is in the custody of the firm, the firm is liable. -

Howeve4 if a partner misapplies trust property held by him as trustee in the business or on account
of the firm, the partners are not liable. In the case of EXPARTE HEATON, liability of the partners
where a partner employs trust property partnership business was discussed, in this case father and
sons who were trustees of a will applied trust money for partnership purposes and on bankruptcy,
it was held that the amount so applied could not be proved against the joint estate partners could
only be made liable after proof that they were implicated in the breach of the trust.

VARIATION BY CONSENT OF THE TERMS OF A PARTNERSHIP.

S.21 of the Partnership Act provides that the mutual rights and duties of partners, whether
ascertained by agreement or defined by the act, may be varied by the consent of all the partners,
and that consent may be either express or inferred from the course of dealing.

DUTIES/OBLIGATIONS OF PARTNERS
1. Duty of outmost good faith. This principal is not outlined in the Partnership Act but it is a
recognized principal that all provisions in the PA rotate around it. Under this duty of outmost
good faith, partners are expected to be honest and fully disclose to each other matters and issues
involving the firm. Each partner is expected to deal with his fellow partners honestly and to
disclose any relevant facts fully and must act transparently. This was illustrated in the. Case of V
LAW [1905) CH 140 where it was held that every partner- owes a duty of disclosure of information
regarding the partnership business. in this cast court held that it is clear law that in a transaction
between two co-partners for the sale by one to the other of a share of the business. In the case
court held that information that is within his knowledge about that transaction and where he does
not do that, then sale is voidable and may be set aside.

2. Duty to render true accounts, every partner has a duty to render true accounts and give all
information about all aspects and matters of the partnership business S.30 of the Partnership Act.

3. Duty not to make secret profits, A partner is under a duty not to make secret profits He must
not secretly benefit from the firm’s property, firm’s name, or business connections. S.31 of the
Partnership Act. He must not use the firm’s name or his position as a partner or his business
connections as a partner to make secret profits. Where he makes such profits, he will be called
upon to refund to the firm any benefits or profits that may have been made. In BENTLEY Vs
CRADEN [1853], BEFD 75, the plaintiff and defendant were in a business of sugar refining. The
defendant was the purchasing officer for the firm: He bought sugar at a low price and kept it and
waited for the price to rise and he resold it to the firm at the prevailing market price which was
higher than the price at which he bought it Court held that the defendant was accountable to the

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firm for the profits made Also in the case of PATHIRANA Vs PATHIRANA [1967] 1 ac 233, the
two partners dissolved the partnership but one of them continued to use the partnership assets and
the other partners share capital and made profits, it was held that that partner was liable to
account to the other partner for the profits made out the partnership assets and capital after
dissolution and that the plaintiff partner was entitled to a share of the profits.

4. Duty not to compete with the firm; A partner must not set up a business which is similar to
that of the firm unless with the consent of the partners. Where he does this he will be accountable
to the firm for all the profits he makes out of that business. S.32 of the Partnership Act. He must
not in any way compete with the firm. In AAS Vs BENHAM [1891] 2CH 244; a partner in a firm
of ship brokers whose business was to charter ships used information which he obtained in the
business to set up a ship building company for which he also received remuneration and also
became a director. His fellow partners brought an action for an order him to account for the
remuneration and salary in this second Company. Court held that this type of activity was outside
the scope of the partnership business and was therefore not in competition with it. That the partner
was therefore under no duty to account for the remuneration he received as a director.

This principal was also illustrated in the case of; TRIMBLE Vs GOLDBERG [1906] AC 494.

5. Duty with regard the partnership property; every partner has a duty to hold and apply
partnership property exclusively / only for the purposes of the partnership business.

6. Since partners have unlimited liability, every partner has a duty to share the debts of the firm.

MANAGEMENT AND CONTROL OF THE PARTNERSHIP

Every partner has the right to take part in the management of the firm. S.26 of the Partnership Act
the partners may however decide that one of them should be in charge of the management of the
firm unless the parties agree in tills manner, where a. partner is excluded from taking part in the
management of the firm, this can be a ground for the dissolution of the firm. In the case of DAUDE
Vs HOUSEN 17 EACA, it was held that forceful rejection and refusal of one partner to take part
in the management of the partnership business could be a cause to dissolve the partnership on just
and equitable ground.

No partner shall be entitled to remuneration for acting in the partnership business.

And no person may be introduced as a partner without the consent of all the existing partners

Any difference arising as to ordinary matters connected with the partnership business may be
decided by a majority of the partners but no change shall be made.

Where the business of the partnership is being carried out a loss, i.e., where a partnership is merely
making losses then any of the partner or any other third party may apply to court the partnership
to be dissolved.

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Where a partner becomes permanently incapable of continuing to perform the activities of the firm
E.g. when he becomes permanently disabled, any of the partners can apply to court for the
partnership to be dissolved.

If a partner continuously breaches the partnership agreement, then any of the partners can apply
to court for the partnership to be dissolved.

Court may also grant an application for dissolution of a partnership on an’ other just and
equitable ground.

DISTINCTION BETWEEN A COMPANY AND A PARTNERSHIP

Formation. Formation of a partnership is easy i.e. a partnership may be formed by agreement,
orally or the law may imply its existence from the conduct of business by the parties. It therefore
has fewer formalities for purposes of formation where as a company requires formalities such as
registration, securing of a company name, filing of documents etc. The company is therefore fairy
expensive to form as there are a number of formalities which must be complied with and a number
of documents which must be filed with the registrar of companies.

Legal Status. A partnership has no separate legal status that is separate from the partner
therefore; it cannot as of right sue or be sued in the partnership flame. However, in practice where
somebody wants to sue a partnership he may sue in the firm name. If one wants to sue the firm, he
must sue all partners. A company On the other hand has a legal existence which is separate from
its members. See the case of Salomon Vs Salomon the consequences of incorporation of the
company.

Liability: Partners have unlimited liability where as share holders in a company enjoy limited
liability. Creditors therefore of a partnership can proceed against the personal property of the
partners where the partnership property is not enough to satisfy those debts.

Size: A partnership has a minimum of partners is 2 and the maximum in 50.

Ultra Vires doctrine: This does not apply to a partnership especially where the existence of such
partnership is implied from the conduct of the parties and it is difficult to toll the scope of their
objects/activities the partnership was set out to do. More so, most partnerships are oral
agreements.

Authority to build the enterprise: Shareholders have no authority to build the company but only
the directors can. In a partnership, every partner is an agent of the others and the acts of one
partner while acting in the course of the partnership business are the acts of the other partners
and therefore all the partners are liable.

Management of the Enterprise. The day-to-day management of the company is entrusted with
the board of directors of a company by the shareholders of the company where as in a partnership;
every member has a right to take part in the management of the firm. The structure of a partnership

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easily allows for each of the partners to take part in any activity of the firm’s business according
to their mutual understanding. In other words, there are no formalities or demarcation of roles as
in a company where you find shareholders on the one hand and the directors and management on
the other hand.

Continuity:

A company enjoys perpetual succession. This means that a company can continue to exist even
where all the shareholders die or leave the company. The existence of a company can only be
brought to an end by a legal process called winding rip. On the other hand, a partnership may be
dissolved by death, bankruptcy or insanity of a member.

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 COMPANY LAW SAMPLE REVISION QUESTIONS

1. In relation to company law explain the differences between a private company and a public
company.
2. In relation to company law:
(a) explain and distinguish between an annual general meeting and a general meeting;

(b) explain the procedure for calling a general meeting.

3. In relation to company law explain:

(a) the rules relating to the appointment of a director.
(b) the rules relating to the removal of a director.

4. “Courts should be more prepared to lift the veil of incorporation than they have been in
the past. Their reluctance to do so only encourages artificiality in commercial life.”
Discuss.
5. “Corporate governance policies have tended to show that directors still have the effective
power within companies and that it is only by non-legal means that their power can be
controlled.” Discuss
6. “The development of an understanding of corporate social responsibility is essential to the
development of a feasible and just modern form of company law.” Discuss.

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7. MegaCorp plc was the holding company in a group of trading companies: one subsidiary
(Shop Ltd) operated small, city-centre supermarkets; another subsidiary (Snack Ltd)
manufactured pre-packaged sandwiches sold at petrol garages; and the other subsidiary
(Zip Ltd) manufactured zips used in clothing. Due to his own negligence, one of the buyers
for Zip Ltd, Billy, acquired a consignment of metal for use in the manufacture of zips which
caused nasty skin rashes when worn next to the skin. Billy reported directly to a director
of Zip Ltd, but that director did not sit on the board of directors of Zip Ltd. MegaCorp Ltd
has been sued for damages in negligence by a woman who suffered such a skin rash. The
board of directors of MegaCorp plc had decided to sell Snack Ltd to a competitor, Chubby
Ltd. None of Snack Ltd‟s directors would remain on the board of directors after the
business and all of its plant and premises were sold to Chubby Ltd. MegaCorp plc did not
disclose that a multi-million pound writ for damages for negligence had been served on
Snack Ltd as the result of a consignment of prawn sandwiches which caused mild dioxin
poisoning. The leases over Shop Ltd‟s supermarkets all expire on 30th May 2003. Shop
Ltd is to be wound up on 25th May 2003. MegaCorp plc wishes to renew all the leases in
its own name. MegaCorp, by the service contracts of the directors, has agreed to indemnify
the directors personally against any liability occasioned during the course of their
directorships. Advise MegaCorp plc on its various rights and liabilities.

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8. Wire plc is intending to issue shares to the public at large by admission of those shares to
trading on the Main Market of the London Stock Exchange. Wire plc is in the business of
manufacturing covert surveillance equipment for use by police and security services. Wire
plc has developed a new genre of surveillance devices known as “The Super Bugs” which
have a common design feature which makes them particularly robust. The Super Bug has
no patent yet. Director of Research and Development, Herc, believes that the patent will
not be awarded because it is very similar to a process used by another company; although
Carver, Director of Scientific Processes, believes that there are enough differences between
the two designs to constitute a separately patentable process. Greggs has commissioned a
report from expert accountants, the Barksdale Group, which suggests that if the Super Bug
design receive a patent and has successful field tests, then it should acquire about 50% of
the market for “bugs”, and so should generate annual profits of £40 million. If the patent
application or the field tests are unsuccessful, then it is suggested that Wire plc will not
establish such a large market share and consequently that its annual profits are likely to be
less than £5 million. The report mentions the name of Stringer, a senior partner of the
Barksdale Group, although he did not approve the final version of the report despite being
involved in much of its preparation. The board of directors of Wire plc is hopeful that Bunk
will join the company as its chief research officer. Bunk is very well known in the law
enforcement community in Europe and the USA, and so would grant Wire plc an enormous
amount of goodwill and investor confidence, even though the company is new. Bunk is
still haggling over his salary and so he has not yet signed a contract of employment with
Wire plc; he has told the board of directors that he is considering alternative offers.
McNulty, the solicitor advising the company, prepared language for the prospectus which
read: “The board of directors of Wire plc are confident that the pending patented process
for the Super Bug will establish the company as one of the leading surveillance equipment
companies in Europe. The level agreement reached with Mr Bunk to act as to the way in
which he will become involved with the future of Wire‟s business plan demonstrates the
standing of this company in the international surveillance equipment marketplace. Mr
Stringer of the Barksdale Group has therefore been able to predict profits of at least £50
million per annum.” McNulty overstated the predicted profits as a result of a negligent

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typographical error. Wire plc did not acquire its patent. Its profits are only £10 million.
Advise Bernard who acquired shares in Wire plc in the after-market.

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9. Consider the following: Carcetti, Chief Executive of the Italian company “Baltimori”, an
electronics giant in Europe and competitor of Wire plc, met with Daniels, Chief Executive
of Wire plc, in Milan on 1 November 2008 to discuss the possibility of a takeover of Wire
by Baltimori. This meeting was held in secret at the house of a mutual friend of both parties.
Carcetti bought himself 100,000 shares in Wire plc on 2 November after the meeting
seemed promising. Daniels encouraged his brother-in-law, Joe, to buy shares in Wire plc
over lunch on 3 November – by which time the price had risen only to 130 pence – because
Joe was in danger of going bankrupt. Joe did not buy the shares because he thought Daniels
was an idiot. Greggs learned of the success of Daniels‟ meeting with Carcetti by telephone
on 2 November and so bought a “call option” from Monster Bank in the name of a company
which she controlled, which entitled her company to buy 200,000 shares in Wire plc from
Monster Bank for 140 pence at any time she should choose. Greggs exercised her right on
4 November and made £30,000 profit.

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10. Dibble was a minority shareholder in Bright Lights Ltd, holding one-sixth of the shares in
that company. The company sold package tours to American tourists wanting to visit
London. The four directors (Pugh, Pugh, Barney and McGrew) held one-sixth each of the
total shareholding in the company. The other shareholder holding one-sixth of the shares
was Cuthbert. Cuthbert was Barney‟s brother-in-law but not a director of the company.
Dibble had no personal connection to any of the other shareholders. With the dip in the
American tourist market from 2002 onwards, the company‟s directors decided to diversify
and to take over another company, Fishy Ltd, which ran a chain of fish restaurants on the
South coast of England. The takeover was conducted in January 2003. At the time of the
takeover Fishy Ltd had a market capitalisation of £10 million, whereas Bright Lights had
a market capitalisation of £40 million. The articles of association provided that “no
acquisition shall be made of the shares in any company which has a market capitalisation
more than one-fifth of the market capitalisation of Bright Lights Ltd without the prior
agreement of three-quarters of all of the shareholders.” No vote of the shareholders was
taken before the purchase. In February 2003, the directors decided at a meeting of the board
not to pay a dividend to the shareholders but rather to distribute the company‟s profits
entirely to the four directors personally by way of bonuses “to recompense them for their
hard work during this difficult time”. At a meeting of the shareholders, Pugh, Pugh, Barney,
McGrew and Cuthbert all agreed to ratify both of the directors‟ decisions. Dibble objected
that none of the directors knew anything about the restaurant business, that Cuthbert had a
large shareholding in Fishy Ltd which he was seeking to support with Bright Lights Ltd‟s
money, that Cuthbert and Barney were conspiring together because Barney owed Cuthbert
a lot of money, and that Dibble was being forced out of the company by the other
shareholders. Advise Dibble. OR (B) „The concepts of “unfair prejudice” and of
“legitimate expectations” have proved inadequate in bolstering the needs of the minority
shareholders, and the changes contained in the Companies Act 2006 are unlikely to have
any material impact on the needs of shareholders.‟ Discuss.
11. Peter was the managing director of Reality TV Ltd, a private company. He became
extremely well-known personally as the public face of the company which specialised in
providing technological and logistical support for fashionable reality television
programmes. Peter held no shares in the company. In 2005, while working for the

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 company, Peter attended a weekend conference at the country home of a senior television
executive, Reg, who revealed to Peter and his other guests that his TV channel was
developing a programme which was to have been called Footballers’ Lives. For this
programme, Reg was negotiating contracts to film Premiership footballers 24 hours a day.
He needed Reality TV Ltd‟s support in the technology involved. Reg and Peter talked
about this idea frequently thereafter. As a result of their growing relationship, Reg
commissioned a large amount of work through Peter from Reality TV Ltd on various other
programmes shown on his channel. Footballers’ Lives itself was never made. In February
2008, Reg approached Peter with a new idea for a programme which had been developed
from the Footballers’ Lives project. Combining popular interest in cookery programmes
and football, Reg intended to produce a programme called Footballers’ Knives in which
celebrity footballers would be filmed secretly while cooking. Reg told Peter that if Peter
could provide technological support he would “guarantee a hefty fee in advance”. Peter
presented this idea to his fellow directors at a Reality TV Ltd board meeting as “something
which may or may not show a profit and which would probably only pay a fee in proportion
to its ratings success after work was completed”. This was the usual way in which the
company was paid. The unanimous view of the board of directors was that cookery
programmes and football would not be as popular in future and therefore that the company
should not be involved in the programme at all. In March 2008, Peter resigned from his
position as managing director and sought to develop the idea for himself. He has been paid
£250,000 so far. Advise the remaining directors of Reality TV Ltd. OR (B) „The “corporate
opportunity” doctrine has effectively operated as a defence to liability for directors‟ duties
in relation to conflicts of interest. The new code of directors‟ duties in the Companies Act
2006 will do nothing to increase the liabilities borne by directors, but instead have tended
to offer directors ways of reducing their liabilities.‟ Discuss.
12. Define the term of “Promoter”
13. (b) What is a pre-incorporation contract? To what extent can a promoter be held liable on
a pre incorporation contract?

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14. Eric, Kevin and David want to set up a company to be known as Super Nice Sdn Bhd. You
are their close friend and since you are working in a financial institution, they seek your
advice on the following matters :
(a) The effect of incorporation of a company;

(b) The types of companies and their nature (characteristics)

15. Top Studio Sdn Bhd, a company in the entertainment industry, was offered a series of short
films made by Michael. Alan, a director of Top Studio Sdn Bhd, has recommended the
board of directors to reject the offer on the grounds that the films would not be profitable
to Top Studio Sdn Bhd. After the board had rejected Michael’s offer, Michael approached
Alan personally and persuaded Alan to buy films on his account. Alan did so and shortly
afterwards sold the films at a substantial profit to an American television company. The
other directors of Top Studio Sdn Bhd are proposing to claim the profits which Alan made
from the films. Alan has evidence to show that Michael would not have sold his films to
Top Studio Sdn Bhd in any event because Michael has discovered that Top Studio Sdn Bhd
was dealing in obscene films. Advise Alan whether Top Studio Sdn Bhd will be able to
claim the profit from him.

16. Mary, a director of XYZ Sdn Bhd has altered the Article of Association so that Ahmad, a
minority shareholder could purchase the share of the company. Mary has also altered the
object of the company so that the company can enter contracts with a foreign company.
Vellu, a majority shareholder objects to the alteration and says that the alteration was
invalid. Advise Mary in the above situation.

17. Vivian, a preference shareholder of ABC Sdn Bhd, is entitled to a dividend of 10% of the
company. The company has been suffering losses and the company has passed a resolution
in a general meeting to reduce the dividend from 10% to 5%. Vivian wants your advice on
the following matters:
(a) What are the rights of a preference shareholder?
(b) Can the company vary the dividend to be given to her in the above situation?

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18. What are the duties of a director of a company?

19. Please explain the Indoor Management Rule.

20. What are the circumstances under which corporate entity will be disregarded or exceptions
to the doctrine / rule of veil of incorporation?

21. Discuss the Procedure for conversion of a Public Company into a Private Company?

22. Write about certificate of commencement of Business?

23. Write about doctrine of Indoor Management? (or) Turquand Rule?

24. What is meant by irregular allotment and its effect?

25. How far can a minor become a member?

26. State the sources of funds that can be utilized by the company for purchasing own shares
& the requirements to be complied with by the company?

27. With the aid of decided cases and or statutory provisions, discuss and explain the principle
of corporate personality and the process of incorporating a company.

28. With the aid of decided cases and or statutory provisions, discuss the legal effect of
incorporation of company.

29. With the aid of decided cases and or statutory provisions discuss all the Duties of the
following officers of a company
(a) Directors
(b) Company secretaries

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(c) Auditors

30. With the aid of decided case and or illustrations where applicable, discuss and explain the
doctrine of corporate lifting the veil and the exceptions thereto.

31. With the aid of decided cases and or illustrations where applicable, discuss and explain the
modes and processes of raising capital of a company

32. With the aid of decided cases and or illustrations where applicable, discuss the principles
embedded in the case of Foss vs Habbottle.

33. With the aid of divided cases and or statutory provisions discuss how a partnership is
created and terminal

34. With the aid of divided cases cord or illustrations. Discuss and explain the doctor of indoor
management/constructive notice

…...END…..

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 REFERENCES
Ashton Cross, Liability of Corporations for the Torts of their Servants (1950) 10 Cambridge. L.J
419

Bakibinga, Company Law in Uganda

Baxt R, Pre-Incorporation Contracts and Liability of Promoters (1975) vol.49 No.11, Aug L.J. 635

Cartoon, Compensatory Payments to Directors for Loss of Office, “The Golden Handshake",
(1978) 94 L.Q.R 497

Companies Act Cap 110, Vol III Laws of Uganda

Davies, Alteration of the Objects Clause and the Ultra Vires Doctrine (1974) 99 LQR 79.

Good Hart, Corporate Liability in Tort and Doctrine of Ultra Vires (1925) Cambridge L.J 350

Gower L.C. B., The Principles of Modern Company Law, Stevens and Sons, third Edition (1969)

Gross J.H., Pre-Incorporation Contracts (1971) 87 LQR 367

Haden T, Company Law and Capitalism, Winfield and Nicolson (1972).

Katende J.W., “Company Law in East Africa, Present and Future”, (1969) 2 EALR 135

Katende, The Law of Business Associations in East and Central Africa, EALB, (1976)

Keeler; Contractual Action against Unincorporated Bodies,(1971) 34 MLR 615.

Lenin V. I, Imperialism, The Highest Stage of Capitalism, Peking (1975) also in

Lenin,SelectedWorks, Progress Publishers, Moscow (1975) vol.1, also in Lenin; Collected Works,
Vol. 22.

Mackenzie; The Legal Status of the Unborn Company (1973) 5 N.2.V.L.R. 211

Musisi James, Company Law in East Africa

Prentince, A Director’s Access to Corporate Books of Accounts (1978) 94 L.Q.R 184

Radin, “The Endless Problem of Corporate Personality” (1932) 32 Col. R. Rev. 643.

Samuels, Lifting the Veil (1964) J.B.L 107.

Schimittoff, Is a Minority Right? (1974) J.B.L 53

Schimittoff, The Wholly Owned and Controlled Subsidiary (1978) J.B.L. 218

Seally L.S; Cases and Materials in Company Law, C.U.P (1971)

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Shannon H.A., The Coming of General Limited Liability, in E.M.

Carus-Wilson Essays in Economic History, London (1954) p.358

Sullivian, The Relationship Between the Board of Directors and the General Meeting in Limited
Companies, (1977) 1977) 93 L.Q.R 569.

Warren, Torts by Corporations in Ultra vires Undertakings (1925) 2 Cambridge. L.J 180,

Wedderburn K., Corporate Personality and Social Responsibility: The Problem of Quasi
Corporations, (1965) 28 MLR 62.

Welsh, The Liability of Corporations 62 L.Q.R 345

Winn; The Criminal Responsibility of Corporations (1929) 3 Cambridge. L.J. 398

Wolff, On the Nature of Legal Persons (1938) 54 LQR. 494

164
 PROFILE

The Author is a Practicing Advocate and a Corporate Lawyer at AMUREY & Co.
ADVOCATES which is also a member of AMUREY AFRICA GROUP Located at 22 Bree
Street, Cape Town, South Africa.

Aggrey Mushagara is a lecturer at the school of law of both Kampala International University Dar
es Salaam Constituent College and Main campus in Uganda where he teaches Business Law,
Company Law, Mergers and Acquisitions and Oil and Gas Law studies. He began his career as a
Corporate Law Lawyer in Uganda, and is currently a visiting lecturer at Aregoon State University.
He writes in the areas of Corporate Law, Commercial Law, Oil and Gas Law, Telecommunications
and Cyber Law and Policy, Civil Procedure, Criminal Law, Business Law and Investments Law.
His law review articles have appeared in journals such as Aregoon State University Law School's
Journal of Commercial Law. His articles on Corporate Law have also been cited in amicus briefs
arguing for clear systems of curbing down Corporate Fraud, Money Laundering, Tax evasion and
Corruption in Africa. His most recent article is on the intersection of law and the international
capital markets. (Aregoon School of Law Journal of Corporate Law, 2013).

This book, “General Principles of Company Law” is a comprehensive and clear introduction to
the principles and practices of company law. It is well respected for its accuracy and clarity, and
is up to date with case law and legislative developments. The level of detail and topics covered
avoid excessive technical detail and are appropriate for law students, Advocates and law lecturers.
Essential Cases are highlighted so that key decisions are brought to light. The reader will certainly
find it useful.

Printed and Typeset by Emma Enterprises Ltd

Published by Africa Law Teacher series 2012©

[email protected]

ISBN No. 16 78 2300 98 12 330

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