COMPANY LAW NOTES -Kenya (pursuant to the 2015 Act)

INTRODUCTION

This course is primarily concerned with companies as defined in the companies Act, Cap. 2015 of the
Laws of Kenya. These are companies which are formed and registered under that Act. There are
companies incorporated otherwise than under the companies Act. Some Companies are formed under
specific Acts of Parliament. The Parastatal bodies were created under statutes as bodies corporate. Most
companies derive their existence via the process of registration under the companies Act, 2015.

EARLY FORMS OF BUSINESS ORGANISATIONS

Early forms business organisation owing their existence to Royal Charter were primarily Ecclesiastical
bodies or public bodies such as boroughs. Trading on Joint Account was accomplished through forms of
partnerships known as the commenda and the societa and later, through the company. The commenda
was a partnership in which one of the partners supplied the capital in money or goods without
personally taking part in the management of the venture. The financier advanced a sum of money to the
active trader upon the understanding that he should share in the profits of the enterprise, but with no
liability beyond the capital advanced.

The societies was a form of Association which developed into the present day partnership, each partner
being an agent of the others and liable to the full extent of his private fortune and partnership debts
charters of incorporation were sought in order to give members a monopoly over the trading and to give
the Government authority to regulate and control foreign trade and colonisation. In this form of
organisation, the proprietors pooled their stock and traded on the basis of the joint stock. This is
developed. It received its charter in 1600, granting it monopoly of trade with the East Indies. This kind of
Company represented state interests, formed primarily for the government of a particular trade and the
more modern type of company, designed to trade for the profit of its members. On the other hand,
charters of incorporation conferred certain advantages. A corporation was capable of existing in
perpetuity, it could sue outsiders and its own members, and the possession of a common seal facilitated
the distinction between the acts of the company and those of its members.

COMPANY: A DEFINITION

The companies Act, 2015 Section 3 defines a company to mean "a company formed and registered
under this Act or an existing company". This definition is vague. In legal theory the word company
demands an association of a member of persons who come together for some common object or
objects. A company is an artificial legal person created by complying with the provisions of the
companies Act, 2015 of the Laws of Kenya.
FUNDAMENTAL CONCEPTS

IN COMPANY LAW

There are two fundamental concepts on the operational aspects of company law. These are the concept
of

Legal personality: A company must be treated as a person in its own right. This separates and creates a
distinction between the personalities which constitutes the created entity. This concept also
incorporates other aspects such as life and death. A legal person is any person, human or otherwise
which has rights and duties. The Non human persons are called corporations. The word corporation
derives from the latin word, ‘corpus' meaning body. These are legal persons brought into being by
artificial process of the law

Limited liability: Liability means the extent to which a person can be called upon to account for
something. A person can be called upon to pay the amount of the debt or to account for a debt upto a
certain amount. In the context of company Law, liability can be limited by shares or guarantee. A share
is an interest which an investor has in a particular company. Under Section 6 of the companies Act, Cap.
2015 a limited liability company is one in which the liability of its members is limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them. This is a company
limited by shares. A share is the interest which someone has in a company measured in monetary terms.
The members in a company may sometimes enter an agreement where they may agree to contribute
towards the company's assets while they are still members to enable the company to discharge its
debts. They cannot be called upon to pay more than they undertook to pay. Such a company is limited
by guarantee. Under section 7 of the companies Act, Cap. 2015, a company limited by guarantee is a
company having the liability if its members limited by the memorandum to such amount as the
members may respectively thereby undertake to contribute to the assets of the company in the event of
its being wound up.

In the event that a company does not have this guarantee or liability then it is an unlimited company.
Thus section 8 of the companies Act, 2015 defines an unlimited company as "a company not having any
limit on the liability of its members."

Nearly all principles in company law are meant for:

(a) Protection of creditors

(b) Protection of investors.

These are the only groups of people protected by the Act. However, when a company is formed its
activities may affect the public or its employees. Whether or not companies should have the interest of
the community put into account is still a matter of debate.

FORMS OF BUSINESS ORGANISATIONS

There are various legal forms that a business may take VIZ:

(a) Sole Trader

(b) Partnerships with 2 or more people

(c) Limited liability company

SOLE TRADER:

The sole trader is the single owner of the business. He may be on his own or may be assisted by other
people mainly members of his family. He procures the necessary capital on his own, makes all the
decisions necessary in running the business. He gets the profits alone and equally shoulders any houses.
Since a sole trader has no Association in law, he is not in any way regulated by any special rule of law.

PARTNERSHIPS

A Partnership is a relationship that subsists in an association of between two and twenty members in a
trading partnership, two or more professional business persons with a view to showing profits. Firms of
professional persons like dentists, lawyers, Accomutants and surveyors have no limitation of
membership. The partnership Act, Cap. 29 defines a partnership as the relation that subsists between
two or more persons carrying on business in common with a view to profit. Under Section 389 of the
companies Act, Cap. 486, "No company, association or partnership consisting of more than twenty
persons shall be formed for the purpose of carrying on any business that has for its object the
acquisition of gain by the company, association or partnership, or by the individual members thereof,
unless it is registered as a company under [the] Act. The effect of this section is to prohibit the formation
of a partnership of more that 20 people. In case of Forth Hall Bakery Ltd v. Wangoe the Plaintiffs brought
an action to recover certain sums of money from the Defendant. During the hearing, evidence disclosed
that the Plaintiffs were an association consisting of more than 45 people trading in partnership for gain
and that the firm was not registered under the registration of Business Names Ordinance. The counsel
for the Defendant thereupon submitted that the action was not properly before the court; that the
association was illegal as the companies ordinance prohibited an association or partnership consisting of
more than twenty persons formed for the purpose of business that has for its object the acquisition of
gain unless it is registered as a company under the ordinance and that the court had no power to grant
relief held;

i) The Plaintiffs could not be recognised as having any legal existence; were incapable of maintaining the
action and therefore, the court would not allow the action to proceed.

ii) Since a non existent Plaintiff can neither pay not receive costs, there could be not order as the costs.
Suit was struck out.

Why should the partnership number be limited at all? The number should be limited for public policy
reasons. Lord Justice James in Smith v. Anderson (1880) 15 ch. 247 at P. 273 explained this public policy
as hereunder:

"The Act was intended to prevent the mischief arising from large trading undertakings being carried on
by large fluctuating bodies so that persons dealing with them did not know with them did not know with
whom they were contracting and may be put to great difficulty and expense"

This was a public mischief to be redressed. However an unregistered foreign company sue or grounds of
public policy. In Paul Gardette v. Republic (1960) EA 728, the appellant was convicted by the supreme
court of Seychelles on two counts of stealing by agent and on three counts of fraudulent false
accounting while employed as an Accountant by cable and wireless Ltd., and was sentenced to 2 years
imprisonment. An appeal against conviction and sentence one of the principal grounds of appeal was
that since cable and wireless Ltd had not been authorised by the Government to do business it had no
legal existence and could not own property in Seychelles. It was held that an unauthorised foreign
company has not legal existence and can enforce no rights in Seychelles but since as a matter of public
policy a citizen can never the less enforce rights against such a company, it would also be contrary to
public policy to allow it assets which would otherwise be available to satisfy legitimate claims to be
embezzled or stolen with impurity.

Partnerships are fowarded or mutual trust and confidence. The rights of the partners are regulated by
an agreement and if this agreement is in writing it is referred to as the Articles of Partnership or the
partnership Deed. The provisions of the partnerships Act govern whatever the partners may have left
out in the partnership Deed. A Partnership need not be formed formally. It need not even be in writing.
It can be formed orally or may be referred from the conduct of the parties. In Mohammed v. Hussein
[1950] 17 EACA1, there was a verbal partnership between the parties and it did not contain any term as
to how the partnership could be dissolved. One party owned the premises or which the business was
carried on but the terms of occupation by the partnership were not clear. The defendant forcibly ejected
the plaintiff from the premises and refused him to take part in the management of the business. Every
partner is entitled by law to take part in the management of the business. In holding that this action
terminated the partnership Sir Paul Grayham said, "A partnership…is determinable at any moment by
one partner by notice to the other. The notice need to be in any particular form or in writing as long as it
amounts to an unambiguous intimation of a final intention to dissolve the partnership. Forcible ejection
and refusal to allow one partner to take part in the management of a business is a definite intimation of
such intention"

Under Section 11 of the partnership Act, every partner in a firm is liable jointly with other partners for all
the obligations and debts of the firm incurred while he is a partner. This is in contract to companies.
Companies are thus better organ for doing business.
Where an action is brought against a partnership, it is one against all the partners. For this reason,
where a sole trader carries or business in a name other than his own name he cannot commence action
in that name in V.A. Patel v. National contractors (1954) 21 EAACA 39, National contractors took
objection proceedings by originating summons in the name of national contractors as plaintiffs in
respect of certain properties seized in execution by the appellant in respect of a decree against one
Devrah Ramji, on the ground that National contractors was a partnership between Devraj Ramji and one
J.P. Patel, at the time of execution that the goods were partnership property and that they were not
subject to attachment for the separate debt of Devraj Ramji. There was evidence that J.P. Patel had
retired from the partnership and that Devrj Ramji had notice of the retirement. It was held that an
individual had no right to institute legal proceedings in his business name.

LIMITED LIABILITY COMPANIES:

If promoters wish to carry on business through the medium of limited liability companies they must
choose which one of the various types of company they wish to form. The first choice is for the
promoters to consider between limited and unlimited companies. If a company is limited it could be by
shares or guarantee, if not limited it would be an unlimited company. Section 8 of the companies Act
provides that for purposes of the Act, a company is an unlimited company if:

a) There is no limit on the liability of its members.

b) Its certificate of incorporation states that the liability of its members is unlimited.
c) Its certificate of incorporation states that it is a private company.

"Any seven or more persons or where the company to be formed will be a private company, any two or
more persons associated for any lawful purpose may by subscribing their names to a memorandum of
Association and otherwise complying with the requirements of this Act in respect of registration from an
incorporated company with or without limited liability."

If the company is a profit making concern then it is wise to have a company limited by shared if not the
company limited by guarantee is more suitable.

The promoters must also decide whether the company is to be private or public. Section 9 of the
companies Act, defines a private company to mean a company which by its Articles

(i) Restricts the right to transfer its shares.

(ii) Limits the number of its members to filling not including persons who are the company and persons
who having been formally in the employment of the company were while in that employment, and have
continued after the determination of that employment to be members of the company.

(iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

(iv) Is not a company limited by gurantee.

Any company which does not fall in this definition is a public company. In order to form a public
company, there must be at least seven persons to sign the memorandum of Association.

REGISTRATION OF THE COMPANY

Under section 11 of the companies Act, In order to secure registration of a company, one or more
persons must prepare subscribe their wrong to a
(a) Memorandum of Association in which they express interalia their desire to be formed into a
company with a specific name and objects. They declare their intention to be formed into a company.

And a copy up the propsed

(b) Articles of Association

These documents must be signed by at least seven or two persons where it is a public or private
company as the case may be.

The signatures must be attested by a witness.

A person so signing the memorandum is referred to as a subscriber. If the company has a share capital
each subscriber must state opposite his name the member of shares he takes and must not take less
than one share. Section 5 (4) (b) of the companies Act states that no subscriber to the memorandum
shall take less than one share.

STATEMENT OF NOMINAL CAPITAL - required only in the case of a company with share capital. This is
used to compute the stamp duty as per sections 13(4) (a) and 14 of the Companies Act.

DECLARATION OF COMPLIANCE. This is a statutory declaration made either by the Advocate engaged in
the or by a person named in the Articles as a director or secretary to the effect that all the requirements
of the companies Act have been complied with in the case of public companies only the other document
is a list of persons who have agreed to become the directors and also the written consent of the
directors to act. These are the only documents which are to be lodged with the registrar of companies
so as to have the company registered. There are other documents which the law requires to be filed on
incorporation these include:

Notice of the situation of the Registered office. Under S. 108 (1)

"Notice of the situation of the registered office and the registered postal address, and of any change
therein, shall be given within 14 days after the date of incorporation of the company or of the change as
the case may be, to the registrar, for registration".
The statement of proposed officers as per section 16 of the Act

"The company shall within a period of 14 days from the date of the appointment of the first directors,
deliver to the registrar for registration a return in the prescribed, form containing the particulars
specified in the register and a notification in the prescribed form of any change among its directors or in
its secretary or in any of the particulars contained in the register specifying the date of the change".

These documents are lodged with the Registrar of companies who sensitizes them and on finding then in
order he registers then and issues a certificate of incorporation and the company is thereby formed as
per section 17 of the Companies Act.

Under section 17 from the date of incorporation mentioned in the certificate the subscribers to the
memorandum together with such other persons as may from time to time become members of the
company shall be a body corporate by the name contained in the memorandum, capable of exercising
all the form actions of an incorporated company with power to own land and having perpetual
succession and a common seal under section 19. A certificate of incorporation given by the registrar in
respect of any association shall be conclusive merits of this Act, in respect of the registration and of
matters precedent and incidental thereto have been complied with and that the association is a
company authorised to be registered and duly registered under this Act. This is intended to clear any
doubts that may arise thereafter. Together with registered companies, we also have statutory
corporations. The difference between the two is that a statutory corporation is created by an Act of
Parliament. The companies Act does not create a company as such but merely lays down the process by
which two or more persons may create such a corporation by complying with the rules set by the Act.
CONSEQUENCES AND ADVANTAGES OF INCORPORATION

LEGAL PERSONALITY: The most fundamental attribute of incorporation from which all the other
consequences and advantages flow is that a company is regarded in law as having its own legal
personality distinct and separate from its members. It is therefore capable of enjoying rights and being
subject to duties. The company is a legal entity in its own right. The full implications of legal personality
were never understood fully not even by the courts until the case of Solomon v. Salomon & Co. (1897)
A.C. 22 Salomon was a leather merchant an both manufacturer. He sold his business to a company,
Solomon & Co. Ltd which he had formed for {300,000. The company had a membership of seven being
Salomon, his wife, daughter and four sons. The shares were allortted as hereunder:

Salomon took 20,000 ordinary shares of { 1 each plus a debenture worth {10,000 against the assets of
the company.

The rest owned one share of {1 each. Later, there were industrial strikes which pushed the company into
in solemnly and was finally wound up. The company's assets proved inadequate to pay the {10,000
worth debentures owed to unsecured creditors. Solomon took {10,000 before paying the creditors. The
unsecured creditors sought legal action entitled to the assets of the company before Solomon, the
debentures holder could be paid. They said Solomon & Co. Ltd were really the same person with
Solomon, and argued that Solomon could not owe money to himself. In the HighcourtUpjohn J. Stated;

"Really, I find no difference between Salomon and

Salomon & Co. Ltd." He decided that the

Unsecured creditors be paid first. Salomon appealed to the court of Appeal which upheld the decision of
the High Court stating that the company was a were agent for Salomon and that he must pay the {7000
to unsecured creditors. Salomon appealed again to the House of Lords which overruled the decision of
the Lower Courts and held:

(i) Salomon & Co. Ltd is a separate and distinct entity from Salomon and any other member.

(ii) Salomon as a debenture holder/secured creditor) has a priority claim over the assets of Salomon &
Co. Ltd before any unsecured creditors.

Lord MCNanghten put it this:

In order to form a company limited by shares the companies Act requires that a memorandum of
Association should be signed by seven persons who are each to take one share at least. If those
conditions are complied with, what can it matter whether the signatures are relatives or strangers?.
There is nothing in the Act requiring that the subscribers to the memorandum should be independent or
unconnected or that they or any one of them should take a substantial interest in the undertaking or
that they should have a mind of their own or that there should be anything like a balance of power in
the constitution of the company when the memorandum is duly signed and registered, through there
may be only 7 shares taken, the subscribes are a body corporate capable forthwith of exercising all the
functions of an incorporated company. These are strong words. The company attains maturity at its
birth. There is no period of minority no interval of incapacity. A body corporate thus made capable by
statute cannot loose its individuality by issuing the bank of its capital to one person, whether he be a
subscriber or not.

The company is at law a different person altogether from the subscribers,

though it may be that after in corporation, the business is precisely the same

as it was before and the same persons are managers and the same hands

receiver the profit the company is not in law an agent or trustee for them.

Nor are the subscribers as member liable in any shape or from except to the
extend and the manner provide by the Act".

As is illustrated by the following case, the assets of the company belong to it and not to the members.
Shareholders do not have an insurable interest in other assets nor do creditors unless they have a
security.

Macaura v. Northern assurance co. Lts [1925] a.c 619. Macaura owned a timber estate in Britain. He
formed an Estate company and sold the timber by obtaining 42000 fully paid up shares of {1 each. The
total was issued to Macaura and his nominees. He was also an unsecurred creditor for {19000.

He took out an insurance policy bearing his own name to secure the company. Later, most of the timber
was gutted by fire and Macaura went to the insurance company and claimed compensation or against
the fire in his own name. It was held that Macaura as a person had no insurable interest in the estate
either as a creditor or as a shareholder.

In Ratate v. Nyakatukura (1956) 7 YLR 47, the Respondent sued the petitioner for the recovery of
Uganda shillings 2,255/= alleged to belong to the Angole African Commercial Society Ltd. It was alleged
that while he was a director and Deputy Chairman of the company the petitioner had collected various
sums of money from debtors of the company and failed to pay them over to the company or to account
for them. The action was filed in the Native court. The relevant stature, the jurisdiction of the Native
courts Act was limited to those cases in which all the parties were natives. In suing the petitioner the
respondent admitted quite frankly that he was acting on behalf of Angole African Society Ltd as an
agent. The problem was Angole African commercial society Ltd was or was not a native. It was held that
a limited liability company is a corporation and as such has an existence distinct from the shareholders
who own it. The distinct legal entity is not capable of having racial attributes and was not therefore a
native, even if all the shareholders were natives. Another case explaining the concept of corporate
personality is Lee v. Lee's Air farming Ltd. Lee formed the (1961) (A.C) 12 respondent company for the
purpose of carrying on the business of aerial top dressing method of farming of praying crops from the
air the nominal capital of the company was {3000 divided into 3000 shares of {1 each. Lee owned 2999
of the shares and the remaining shares was held by a solicitor in trust for him. Lee was therefore the
beneficial owner of all the shares. Lee was appointed the company's director and employed at a salary
as the chief pilot. Ac was killed in an aircraft while working for the company. His widow claimed
compensation under the workmens compensation Act. The issue was whether Lee was entitled to any
compensation and whether he was a worker. A worker was defined as a person who had entered into a
contract of service with an employer as per the stature. Had Lee entered into a contract with the
company or the company was another face of Lee? It was held that it was a logical consequences of the
decision of Salomon v. Salomon & Co. Ltd., that a company is separate from its members and that Lee
and the company were two different persons capable of establishing contractual relationships between
them. The deceased was a workman and his widow qualified for compensation.

LIMITED LIABILITY: Since a company is a corporation it has a separate legal personality and the members
are not liable for the company's debts. In the case of a company limited by shares a member will be
liable only for the amount payable on his shares if the company is limited by guarantee, then the liability
is limited to the amount quarantined to be paid. Section 213 of the companies Act provides;

Under Section 5 of the Companies Act 2015, a company is a company limited by shares if the
liability of its members is limited by the Company's Articles to any amount unpaid on the

shares held by the members.

(c) in the case of a company unlimited by shares no contribution shall be required from any member
exceeding the amount if any unpaid on the shares in zrespect of which he is liable as a present or past
member.

(d) In the case of a company limited by guarantee, no contribution shall be required from any member
exceeding the amount, if any unpaid on the shares in respect of which he is liable as a present or past
member.

(e) In the case of a company limited by guarantee no contribution shall be required from any member
exceeding the amount undertaken to be contributed by him to the assets of the company on its being
wound up. How does this compare with unincorporated Associations?
In the case of clubs and society's, there will be an implied term that the members are not personally
liable for obligations on behalf of the clubs. In Bradley Egg farm Ltd. v. Clifford & others (1943) 2 LLER
378 the Plaintiffs wanted their poultry to be tested for bacillary white Diarrhea. They contracted with a
society was not incorporated. The society official who carried out the test was negligent and as a result
some of the poultry died and the Plaintiff sought to recover damages from the society. The issue was
that since the society did not have a separate legal existence from the members who was liable for the
negligence of the official was it the society or the executive committee? It was held that to make all the
members liable will amount to giving the society the status of separate legal entity which they did not
have. The society therefore was not liable only the Executive Committee was liable where such a
committee of an unincorporated association is found liable it will be entitled to be indemnified from the
funds of the Association.

3. HOLDING OF PROPERTY

Corporation personality enables the company to hold property in its own name distinct from that of its
members.

4. SUING AND BEING SUED

The company being a separate legal personality may sue to enforce its rights and it may also be sued for
breaching its own legal duties. Unincorporated associations can sue under a representative capacity,
where one party represents the rest in a representative capacity. At commonlaw, a company is not
allowed to appear otherwise than by an Advocate, and not by an official such as a manager. In East
African Roofing Co. Ltd. v. Dandit (1954)27 JKR 86, the Plaintiff company filed an action for the recovery
of money from the Defendant. The Defendant entered appearance and filed a defence admitting
liability, but praying to be allowed to pay the money by instalments. The Company secretary thereby
took a hearing date exparte. On the hearing date no appearance was made by either party and the court
dismissed the action. The company opted to set aside the exparte dismissal. At the hearing the company
was represented by an Advocate. The only ground for setting aside was that the company had hoped to
be represented by their manager who had gone to court but was in the wrong court room at the first
hearing. It was the first hearing. It was held that a corporation such as a limited liability company can
only be represented by a Lawyer. This was the commonlaw position. To remove this commonlaw rule
Order 3 Rule 4 of the civil procedure rules provides that appearance in respect of a corporation may be
made by an officer of the corporation duly authorised under the corporate seal. There must be a written
message under seal, otherwise representation should be by Advocates.

5. PERPETUAL SUCCESSION

Since a company is a corporation and an artificial person it has no body, mind or soul but it rests only on
the intendment and consideration of the law. It can not die like a human person since it is born by a
process of law it can only be destroyed by the same process. Unless and until that process is brought
into play, it cannot be brought to an end hence a company has perpetual succession and hives
indefinitely.

6. TRANSFER OF SHARES
Section 326 of the company's Act , provides:

"The shares and any other interest of a member in a company are transferable in accordance with the
company's Articles".

This however, is subject to section 30 of the companies Act shares in a company are freely transferable
and the transferee steps into the shoes of the transferor as a member. Section 30 provides that private
companies should restrict the right to the transfer of shares. One must comply with conditions under
the Articles in case of private companies. In a partnership one partner cannot assign his interest except
with the consent of all the other parties. Even then, the outgoing partner continues to be liable for all
the debts and obligations of the firm incurred while he was a partner. The only way he can escape
liability for such debts is by entering a tripartite agreement between himself, the remaining partners and
the creditors whereby he will be released from liability for the debts of the firm. This agreement is
referred to as a oration.

7. BORROWING FACILITIES

A company can borrow money much more easily than sole traders and partnerships. This is facilitated by
the device of a floating charge. A floating charge is "a charge which floats like a cloud over all the assets
of the company from time to time falling within a generic description but without preventing company
from disposing of those assets in the ordinary course of business until something causes it to crystallise
and fasten on the assets". A floating charge is an equitable security. It does not attach on any property
at all as opposed to the legal charge which is attached to a particular property of the company.
The company is not limited from disposing such a charge. Sole traders and partnerships are not allowed
to do so. Anything in the possession of the bankrupt can be attached but this provisions does not apply
to companies.

DISADVANTAGES OF INCORPORATION:

The disadvantages of incorporation are:

(i) Formality

(ii) Expense

iii) Publicity
In order to form a company the promoters must prepare and register certain documents. Throughout its
life a company is required to file certain documents like annual returns balance sheets and profit and
loss Accounts. These are public Documents and may be examined by any member of the public on
paying of an examination fee. Their preparation requires the payment of money. The company's affairs
are therefore publicised and there is no more privacy, as there is a lot of interference in the company's
affairs.

Even in liquidation, a company must follow a particular procedure this is a legal formality under the Act.

Companies are also subject to the partnership doctrine to which partnership and sole proprietorships
are not subject.

LIFTING THE VEIL - IGNORING THE CORPORATE ENTITY

Although Salomon's case finally established that a company is a separate and distinct legal person, there
are situations in which this fundamental principle of corporate personality is ignored. In such situations,
the law ignores the corporate entity of the company and instead pays regarded to the surrounding
economical realities.
These situations must be referred to as exceptions to the instances under which the corporate
personality is ignored are provided for under statue and by commonlaw.

Under section 129 of the companies Act 2015 a company is required to have at least one director who is
a natural person. This is complied with if the office of director is held by a natural person as cooperation
sole.

1. NEGLIGENCE

Under section 194 (2) a provision in the company's constitution, contract or scheme of management
that purports to exempt a director from any liability that would otherwise attach to the director in
connection with any of text on relation to the company is void.

2. INDEMNITY
Under section 194 (3) provision by which a company provides directly or indirectly for an indemnity for a
director of the company or an associated company against a liability attaching to the director in
connection with any negligence, default or breach of duty or trust in relation to the company is void.
However under section 194 (4) the company may purchase insurance against any such liability.

3. ACCOUNTS

Under section 630 of the companies Act, every company shall keep its accounting records at its
registered office and ensure that the records are open to inspection by the officers of the company for a
period of not less than seven years. Under section 631, of the company does not comply, then the
company and each officer of the company who is in default commits an offence and is liable, in the case
of the corporate body to a tune of Kshs.2,000,000. In the case of a natural person to a tune not
exceeding Kshs.1000,000/= or to imprisonment for a term not exceeding 2 year or to both.

2. FRAUDULENT TRADING

Under sectiuob323 (I) (a)

"If in the course of the winding up of a company it is shows that proper works of account were not kept
by the company at any time during the period of two years immediately proceedings the
commencement of winding up, whichever is the shorter every offices of the company who is in default
shall unless he shows that he acted honestly in which the business of the default is excusable is liable on
connection to imprisonment for a term not exceeding three years".

It is shown that any person has been carrying on business with intend defraud creditors or for any
fraudulent purpose, the courts in the application of the official receiver or liquidator or creditor may
declare that any person who were knowingly parties to the fraud shall be personally responsible for the
debts or any others liabilities of the company incurred fraud however, us a difficult allegation to prove.

In Re William Leibech Brothers Ltd (1932)2.,ch.71, The company wads incorporated in 1926 to quire
williams business as a perambulator and furniture manufacture. The directors of the company william
and this brother appointed william as the managing director with a salary of {1000 p.a. Within he first six
months, the company was debited with the whole of that salary which was more than he should have
got. During that period the company made a loss of {2200. During that year when the company was still
in financial problems the directors paid themselves {250 dividends. Towards the end of 1929 to March
1930 the company was in serious financial troubles that it could not pay its dents as they dell due.
Inspite of this William ordered goods worth {6000 which became the substance of a charge contained in
a debenture held by him. Around the same time William continued to repay himself a loan of {600 which
he had lent to the company. By mid 1930, the company with the knowledge of William Owed about
{5600 for goods supplied. Dividends, by law are not declared when the company is making losses.
William continued doing this and ordered goods making the company to incur debts. The liquidator
applied for William to be held liable under section 323 in that he knew that the company could not pay
debts, he was doing so fraudulently and should be personaally liable.

It was held that for the company to carry on business yet William knew, was fraudulently and William
was personally liable to the credidors. In the words of Justice Mongham:
"If a company continues to carry on business and incurs debts at a time when

there is, to the knowledge of the directors, no reasonable prospects of the

creditors receiving payments of the debt, it can generally be inferred that

the company is carrying on business with intention to defraud."

In Re Patrick and Lyon LTD(1933) CH. 786, A Company had financial problems and incurred debts. The
same judge ruled;

"The word fraud and fraudulent purpose where they appear in the section are words which
connote actual dishonesty involving, according to the correct notions of fair trading

among commercial men real moral blame. No Judge has even been willing to define fraud

and I am attempting no definition."

In Re Cyona Distributors, Ltd [1967] Ch. 889 an application to court was made by a creditor and it was
held that the creditor was to be paid his money for the discharge of his debt. Because the creditor made
the application he was entitled to payment. Loard Denning held that where the application is made by
the official receiver or liquidator, then the money will from part of the general assets liable for
distribution to the creditors.

3. HOLDING AND SUBSIDIARY COMPANIES

Officers have been held liable for the omission of the word Ltd. The importance of the word limited is
that it is a red flag warning that members enjoying limitation of liability. The idea of this provision is to
secure positive identification of the company in a transaction. In F. Goldsmith (Secklesmere) Ltd v.
Baxter engaged in the business of bus and coach contractor. Locally it was venom as Goldsmith &
coaches and this was the name printed at its premises. It purchased some property which was
registered in the name Goldsmith's coaches (Sicklesmere) Ltd. It then entered into a contract for the sale
of that property to the defendant. When the defendant realised that there was no company under that
name he refused to finalise the contract. Meanwhile a supplementary conveyance was made in favour
of the Plaintiff in its proper name. The Plaintiff sued for specific performance. Held, applying the rule
that a contract is to be construed on reference to the surrounding circumstances as in the light of known
facts it was clear that holdsmith coaches (sicklesmere) Ltd was an inaccurate description of the Plaintiff
company.

A limited company like a natural person has characteristics other than its name. Such as a business place
shareholders and Directors by which it could be identified. It is not essential to the validity of a contract
made on behalf of a limited company that the company should be described with precision. The Plaintiff
company was entitled to an order of specific performance.

4. HOLDING AND SUBSIDIARY COMPANIES

A subsidiary company is defined under section 154 of the companies Act to be a subsidiary of another if
that other either:
(i) is a member of it and controls the composition of its Board of Directors.

(ii) Holds more than half in nominal value of its equity share capital or

(iii) The first mentioned company is a subsidiary of any company which is that other's subsidiary.

The Accounts of the holding company may not give the proper picture of the economic situation of the
entire group. Thus, section 150 provides:

"150(1) where at the end of its financial year, a company has subsidiaries, accounts or

statements (in this Act, referred to as group Accounts) dealing as hereinafter mentioned with the

state of affairs and profit or loss of the company and the subsidiaries shall .. be laid before the
company in general meeting when the company's own balance sheet and the profit and loss

account are so laid".

Under Section 151, the group Accounts should consist of:

(a) a consolidated balance sheet dealing with the state of affairs of the company and all the subsidiaries
to be dealt with in group accounts.

(b) A consolidated profit and loss Account dealing with the profit or loss of the company and those
subsidiaries.

SITUATION IN WHICH THE CORPORATE ENTITY IS IGNORED AT COMMONLAW

1. AGENCY RELATIONSHIPS

Logically, there is no reason why a company may not act as an agent of another. Where there is an
agency relationship, the courts will ignore the separate entity of each company and instead give effect
to the economic reality behind the legal theory. The best example of agency relationship is where one
company is a subsidiary of another. In Smithstone & Knight Ltd. v. Birtningham corporation [1939] 4
ALIER 116, the Plaintiffs were paper manufacturers in Birningham. In the same city there was a
partnership called Birningharm Waste Co. which did business as merchants and dealers in waster paper.
The Plaintiffs bought out the partnership as a going concern and caused it to be registered as a
company. The share capital of the newly formed company was {502 divided into 502 shares of {1 each.
The Plaintiffs beneficially owned all the shares. The newly formed company carried on business which
previously belonged to the Plaintiffs. It occupied business premises as tenants of the Plaintiff but never
paid any rent. It employed no separate staff, kept no books of accounts: such books being kept by the
Plaintiffs. All the profits made by the company was credited to the Plaintiffs. Birningharm corporation
purported to acquire compulsorily the previous which the subsidiary carried on business. Thereupon,
the Plaintiffs claimed compensation for removal and disturbances. The issue was who would be entitled
to the compensation. Under the legislation giving the corporation the power to make a compulsory
purchase order an occupier could not claim for compensation unless it enjoyed a tenancy for a period
longer than one year. The subsidiary's tenancy was a one year. The Plaintiff, the parent company argued
that it was really the person in occupation. It was held that while the subsidiary was a separate legal
entity it might be acting as the agent of its shareholders in this case the Plaintiff company. Further more
the occupation of the premises by the subsidiary was technical only and solely for the purposes of the
parent company. The Plaintiff could therefore maintain a claim for compensation.

SITUATIONS WHERE THE COMPANY FORMED FOR DRADULENT PURPOSES

Re F.G. Films Ltd [1953]I Alier 615; [1953] Iwlr 483 The company was incorporated in England. Its capital
was {100 in {1 shares; 90 of which were held by the President of an American company and 10 were
held by another director a British Subject. The company contended that it was the maker of a film which
should therefore be registered as a British film. The court refused to agree that the film was made by the
British company whose participation in it was so small as to be practically negligible; the company was
merely the nominee or agent of the United States company which had provided {80000 for the making
of the film and which had brought the British company into existence for the sole purpose of enabling
the film. The modest capital of the British company and its shareholding were treated by the court as
evidence that the British company had been formed with the view to evading the legislation in issue.

Another case which explains this point is RE BUGLE PRESS LTD [1961) Ch. 270. A, B and C were the only
shareholders in a company. A held 45% of the shares, B held 45% of the shares. The remaining 10% were
held by C.

A & B persuaded C to sell his shares to them but he refused to do so. A and B thereupon formed another
company, AB Ltd. which made an offer to the shareholders of ABC Ltd. The offer was accepted by A & B.
They then incurred section 200 of the companies Act, which provides that if one company makes an
offer to take the shares of one company and if the offer is accepted and it gets 90% of the shares by
buying out the shareholders, then it can buy up the remaining 10%. Upon inworking section 210, they
took all the shares. It was held that this was a far fetched attempt to evade the fundamental rule of
company law which for bade the majority shareholders from expropriating the minority. The courts will
not recognise the corporate entity in such a case. Similarly, the separate legal entity principle was
ignored in GILFORD MOTOR CO. LTD v. HERWE [1935] ch. 935 where the company was formed to avoid
the burden of a covenant restricting the businesses which could be carried on by the company's former
Managing Director in in competition with it.
In ones v. Lipman. [1962] IWLR 832 the Defendant entered into a contract to sell property to the
Plaintiffs. He later refused to convey the property to the Plaintiffs but formed a company for the
purpose of acquiring that property and he transferred the property to the company. The Plaintiff sued
for specific performance. In ordering specific performance, Mr. Justice Russell described the defendant
company as

"a creative of the Defendant, a device and a sham, a mark which he holds before his face in an

attempt to avoid recognition by the eye of equity."

GROUP ENTERPRISE

There is a general tendency by the

courts to ignore the legal entity of various companies within a group and

instead at the economic reality of the entire group. In doing so, the courts are following the

interpretation of the legislature under s. 150 – 154 where group Accounts are

needed in respect of associated companies.

In Holdsmith & Co. v. Caddies [1955 IWLR 352, the Plaintiff was
appointed Managing Director of the Defendant company for a period of 5 years. At that time the
defendant company controlled

three subsidiary in terms that he should

perform his duties and exercise his powers in relation to the company and its

existing subsidiaries which from time to time may be assigned to him by the

Board of Directors. One year later, the

Board of Directors of the Defendant company resolved that the Plaintiff should

confine his attention to only one of the company’s subsidiaries. The Plaintiff regarded this as a breach
and

sued for damages. It was held that in

essence, the subsidiary company and the Plaintiff were one economic entity and

there was no breach of contract.

RESIDENCE

The issue of the residence of a

company is important for taxation purposes.

In De Beers Consolidated mines Ltd. v. Howe [1906] A.C. 455, the

appellant company was registered in South Africa. Its general meetings were always held

there. Some of the directors lived in

Smith Africa. Its meetings were hold in

Kinmberley and in London. However, a majority of the directors lived in

London and most

of the director’s meetings were held there.

Most of the Chief operations of the company were controlled from London. It was held that the
company was resident in

the Unlimited Kingdom for purposes of taxation. Lord Loveburn L.C. stated:

“A

company cannot eat or steep; but it can keep house and do business. We ought

therefore to see

where it

kept house and did business. A

company’s real business is carried on

where the control

management

and control actually resides.”

THE MEMORANDUM OF ASSOCIATION

Under Section 13 (2) (a) of the

Companies Act requires an application for registration of company should be in

the English language printed and should state:

1.

The name of the company with limited as the last word

of the name in case of a

company limited by shares or by

guarantee. The name clause is the first

clause in the

memorandum. Ltd is an accepted

abbreviation. In Stacey & Co. v. Wallis [1912]

106 LT 554 Lord Justice Sconteon decided

that Ltd. was an accepted abbreviation

for limited. However, where it is proved that an

Association about to be formed as a

limited company is to promote commerce,

Arts, Peligium, Charity, science or any

other useful object and intends to

apply its profits in the promotion of those objects

 and prohibit the payment of those

dividends to its members, then under section 21 of

the companies Act, the minister may

direct that the Association may be registered

as a company with limited liability

without adding the word limited in its name.

This is an exception. Even so, the company still remains with

limited liability but

this is not reflected in its name. The name is chosen by the promoters who write

to

the registrar to reserve such name for

a period of 30 days pending registration or

such longer period not exceeding 60

days as the registrar may decide. During

that

period, no company may be registered

with that name by anybody else. Under S.

20, the company may change its name by

special resolution and with the approval of

the registrar signified in

writing. The registrar should be

notified within 14 days and

he will issue a certificate of change

of name and enter the new name in the register

in place of the old. The company will be notified by notice in the

Kenya Gazette.

Within 6 months of the registration of a

company the registrar may compel a

company to change its name if it is too

similar to that of an existing company.

In

default of doing so, every member of

the company is liable to a fine of Kshs. 100/=

 for every day dinning which the

default continues. However any change of

the

name of the company does not affect

the existing liabilities obligations and existing

rights of the company.

2.

The second clause shall state that the Registered

office of the company shall be

situate in the Republic of Kenya. The Registrar shall be notified of the actual

place

after incorporation pursuant to the

requirements of S. 108 of the companies

Act.

This will enable the office of the

Registrar of the Registrar to know where notices

and legal process may be notified to

the company. It will enable members and

other

authorised persons to know the location

of the various registers required to be kept

there which must be available for

inspection at spevified times. The

statutory books

which must be kept at the Registered

office are:

a)

The register of charges

b)

Minute books of general meetings

c)

Register of directors and secretaries.

Other books

which may be kept there are:

a)

The Register of members

b)

The register of directors interests in shares or

debentures of the company and associated companies.

c)

Register of debenture holders.

d)

The books of Account

3.

The third and perhaps the most important clause is the

objects clause. It states the objects

for which the company is incorporated. A

company is not allowed to do any activity beyond its objects or else any such

activity will be deemed to be null and void.

It will be ultra vires the

company.

The purpose

of the doctrine of ultravires is two told.

(i)

It is intended to protect the investors by ensuring

that they know the objects to which their money is to be applied.

(ii)

It is for the protection of creditors by ensuring that

the company’s assets to which they look for the repayment of their debts are

not wasted in unpaying ventures. In

ashbury Railway carriage Co. Ltd v. Riche (1875)LR 7 HL 653, the memorandum of

Association gave the company power to:

(i)

Make and sell, or lend on hire railway carriage or

wagons.

(ii)

To carry on the business of mechanical Engineers and

general contractors.

(iii)

To purchase, lease, work and sell mines, minerals land

and buildings.

The directors entered into a

contract to purchase a concession for the construction of a railway in Belgium. The issue was whether it
this contract was
valid and if not, whether it could be ratified as the shareholders had

already met to do so. Held that since the memorandum did not

contain any provision for the purchase of concession or the construction of a

railway, the purchase was ultra vires so that even the subsequent asset of the

whole body of the shareholders could not ratify it. Although mechanical Engineers and general

contractors, they could not do so. Loard Cains stated:

“The words general contractors referred

to the words which went

immediately before and denoded such

contracts which mechanical

engineers make for the purpose of

carrying on business.

This contract was not in the

memorandum of Association. If so it

was placed beyond the powers of the

company to make the contract

…..it is not a question whether the

contract ever was ratified or was not.

 If the contract was void at the

beginning it was void because the company

could not make the contract.”

Today this doctrine is not as rigid

as it used to before. It has been

eroded. The first in road was made in Attorney

General v. Eastern Railway Co. (1880) 5 A.C. 473. The company was incorporated to acquire the

undertaking of two existing railway companies and construct and non certain

other railways. The company entered into

a contract with another company to supply that other company with tonomotive

power. For five years and wagon carriage

for 2 years. Was this ultra vires? It was held that the activities in question

were within the express powers of the company selborne LJ.

“The doctrine of ultra vires, as

was explained in Ashbury’s case should be

maintained but this doctrine ought

to be reasonably and not unreasonably be

understood and applied and

whatever may be regarded as incidental to or

 consequential upon those things

that the legislature authorised ought not unless

expressly held to be ultra vires.”

The company can therefore undertake acts

reasonably incidental to express

stipulations.

The original intention of parliament

was that the company’s objects be stated in one short paragraph but with the

practice of including in the objects clause not only the immediate business but

also further businesses and all ancillary powers, the memoranda of practically

every company do not share the

simplicity intended by parliament, with this practise of incorporating many

objects clause does this objects the greater the security of the creditors

because the chances as that every transactions is covered by the objects clause

and is ultra vires and the creditor cannot lose. The untra vires doctrine has been eroded by

judicial acceptance of subsequently worded objects clause.

In Bell Houses Ltd. v. City Wall

properties Ltd [1966] 2 QB 656; [1966] 2 ALLER 674 the main business of the

Plaintiff company was the development of housing estates. The chairman of the Board of Directors to

whom the Board had delegated the management of the company acquired knowledge

of an skill in securing finance for the company’s operations. A contract was

made between the Plaintiff and defendant companies for the payment of a fee for

arranging finance for one of the defendant company’s schemes of

development. When the Plaintiff company

brought action for its fee, the defendant alleged that the making of the agreement

was ultra vires the plaintiff company.

Mortgage brooking was not a stated object of the company’s

memorandum. Clause 3 (c) thereof however

authorised the company to carry on any trade or business whatever which could

in the opinion of the director’s be advantageously carried on by the company in connection with or

ancillary to any of the businesses specified in the object clause. The court of Appeal held that the
memorandum,

once registered, is deemed to have complied with the provisions of the companies

Act that the question was one of construction, and that the bonafide opinion of

the Board expressed through the chairman to whom management had been delegated

determined whether the activity was intravires.

The Plaintiff company thus succeeded in its action.

Salomon L.J. stated:

“ As a matter of pure construction the meaning

of these words seems to me to be abvious:

An object of the Plaintiff’s company is to carry on any business which

the directors genuinely believe can be carried on advantageously in connection

with or ancillary to the general business of the company. It may be that the directors their own view

and infact the businesses in question cannot be carried on as the directors

believe but it matters not how mistaken the directors may be provided they from their view honestly.
The object is within the company’s objects

and power. This is the natural and

ordinary language of subclause ‘C’ that

I would refuse to construe it differently unless compelled to do so by

the clearest authority and there is no such authority indeed, the authorities

put that the obvious meaning which I have referred is in law, the true meaning

of the words.”

As long as the directors form their opinion honestly it is

the director’s judgement that matters.

In Re Crown Bank (1890) 44 ch. 634 Mr. Justice North expressed the view

that a clause which states that the business of the company is to carry on any

business which the directors consider beneficial to the company is not a

statement of the company’s objects as required by the Act. As per section 17 of the companies Act the

Registrar’s certificate of incorporation is conclusive evidence that the

company has stated its objects clearly.

If the objects clause were to state for example, “that the company will

do anything beneficial to the company”, then it need not be registered The

registrar need not register as this may

lead to ultravires trains action. This is subjective clause and the company can

do anything that is ultravires.The doctrine of ultravires is thus long over due

for amendments

The counts have made sure that companies do not evade this

need. The counts use several methods to control misuse of the rule. These rules
are:

(a) The

Ejusdem geneis rule or the main objects rule of construction

(b) The

loss of substation rule.

EJUSDEM GENERIS OR MAIN OBJECTS RULE

This is where the memorandum of association expresses the

objects of the company in a series of paragraphs and one paragraphs or the

first, second and third paragraphs appear embody the main objects of the

company or the other paragraphs will be treated as merely ancillary to these

main objects and as limited or

controlled thereby. However not withstanding these rules the business community

has invented the independent objects. This is a situation where the promoters

state at the bottom of the memorandum that each of the objects is independent

and each of the subclauses should be created as equally important. The leading

interpretation is cotman v brongham

(1918)A C 514, The company was formed to acquire certain members and tabacco

estates.The objects clauses clause contained clause 8 giving the power to

promote and form companies and deal in the stock and shares of such companies

clause is giving a general power to deal in stocks and shares and clause 30

which provided:

(a) That

the objects specified in any clause were not to be restrictively construed by

reference to the contents of any other subclause and

(b) That

no object should be construed as

subsidiary or ancillary to any other entry in the objects clause. The company underwrote shares in
another

company dealing in oil into liquidation and was placed on the list of

contributions- It applied to be struck off that list on the ground that the

entire transaction was ultravires. The

house of Lords concluded however that the underwriting transactions were

authorised by clauses 8 and 12 which by clause 30 had to be given primary

effect as separate and independent objects.

As per Lord Parker, the result was the:

“..modern memorandum of Association with its multi farious list of

objects

and powers specified as objects and its clauses designed to prevent any
specified object being read as ancillary to any other object.”

However, the independent objects clause cannot turn powers

into objects. Thus, a power of borrowing

cannot be an object. Inreintroductions

ltd. v. National Provincial Bank Ltd [1969] 2 WLR 791 the company was created

with objects enabling it to provide services and accommodation to overseas

visitors. Some years later, after a

change in management it begun pig farming.

The objects did not include the power to carry on pig farming but they

did enable the company to borrow money contained a subjective ancillary clause

enabling the company to carry on any trade or business which in the opinion of

the directors could be advantageously carried on in connection with or as

ancillary to the business of the company and provided that all the items in the

objects clause were to be construed as separate and independent objects. The bank knowing that the
company was

engaging in pig farming, and knowing of the objects clause, advanced money to

the company on the security of a debenture was resisted by the liquidator. It was held that not
withstanding the

ancillary clause and the clause requiring each itemto be read as an independent

object, the entry relating to borrowing was a power rather than an object that

borrowing for any purpose not warranted by the objects clause was utravires and

that the bank could not rely on the debenture.

THE SUBSTRATION RULE

Under this rule if the main object of the company fails

then the rest of the objects also fail.

Such an object is the substratum meaning the main object of the

company. If the main object fails, then

the company subject to winding up. In Re

German Date Coffee Co. Ltd (1882) 20 ch. D. 169 The major object of the company

was to acquire a German patent to manufacture coffee from dates. The German patent was not granted
but the

company obtained a Dutch patent for the same purpose. Two shareholders petitioned the court for a

winding up order on the grounds that the company’s object had failed. It was held that the substration
had failed

as it was not possible to carry out the objects for which the company was

formed and therefore it was just and equitable for the company to be wound

up. See S. 219 of the companies

Act. Kay J. stated that where the

company was formed for a primary purpose:

“…then,

although the memorandum may contain other general words, which include

the doing of
the other objects, those general words must be read as being ancillary to

that which

the memorandum shows to be the main purpose and if the main purpose

fails

altogether then…the substration of the association fails.

However, the substration of the association may fail but

the court will not make an order until members of the company petition for a

winding up order if members denied not to petition them then the company

continues in business. The ultra vires

doctrine is to protect members and creditors.

The creditors unless they are secured cannot sue on ultra vires

transactions perse. The doctrine, under

current business practices has been prejudicial to creditors. This is illustrated by Re jon Beanforte

London Ltd. [1953] ch. 131 [1953] I ALLER 634 the company was empowered to

carry on business as manufacturers of womens clothing. Later it begun to

manufacturer veneer plywood panelling. The

company later went into liquidation. A

supplier of coal later claimed inter alier on the ground that the fuel supplied

by him could have been used for an intravires purpose and that he ought

therefore to recover. Unfortunately, the

company’s letterhead disclosed that the

company was carrying on the business of plywood manufacturers. It was held that the supplier was
fixed with
knowledge of the memorandum which did not empower the company to carry the

plywood business and had actual knowledge that the company was carrying on

business that was ultra vires. Although

the supplier could have recovered had he had no notice of the purpose for which

the coal was being used, he could not having such knowledge from the letter

head prove for the debt which was incurred on an ultravires contract.

There are areas where the doctrine is vigorously

enforced. This is mainly in the field of

gratuitous payments. A company cannot

effectively make gratuitous payments rules these are made for the benefit of

the company. In Huthon C. Wstcork the

company (1883) 23 ch. D. 654 the company had disposed of the whole of its

undertakings and it was no longer a going concern as trading body.

It existed only for purposes of winding up. In its general meeting it resolved to expend

part of the purchase money on gratuitous payments to directors and other

officials. It was held that since the

company was no longer a going concern the resolution was invalid.

L.J. Bowen stated:

“The law
does not say that there are to be no cakes and ale…except such as are

required for the benefit of the company. Charity has no business to sit with the

Board of

Directors”

Suppose there was an express provision in the company’s

memorandum providing for this, would this be ultra vires? This was decided in RE LEE BEHRENS [1832]2
CH. 36. The objects clause contained an express power

to provide for the welfare of the employees ex employees, widows, children and

other dependents by granting money or pensions.

Three years before the company was wound up, the Board of Directors

decided that the company should enter into a contract for the payment of

pension to the widow of a former managing Director. The liquidator rejected the pension on

grounds that it was ultravires it was held that the transaction was not for the

benefit of the company or reasonably incidental to the carrying on of the

company’s business and was ultravires, null and void. The question of whether this was going to be

beneficial to the company in any way never presented itself in any way. The payment was therefore
outlawed.

Eve J. stated:

“But

whether it be made under an express or implied power all such grants

involve an expenditure of the company’s money and that money can only be

spent

for purposes reasonably incidental to the carrying on of the company’s

business and the validity to such grants is to be tested by the answers

to three

pertinent questions:

(a)

is the transaction reasonably incidental to the

carrying on of the company’s business?

(b)

Is it a bonafide transaction?

(c)
Is it done for the benefit and to promote the

prosperity of the company”

Should the courts interfere and

direct the activities of companies? In

charterbridge corporation v. Lloyds bank [1970] ch. 62, the case is one in

which directors have abused the powers entrusted to then, but have acted within

the ambits of powers possessed by the company.

In this case castleford, a company in group of companies executed first

and second mortgages on its freehold property in order to guarantee the

indebtedness of other companies in the group of which it was a member. A second mortgage was
executed in favour of

the bank. Castleford had express power

to mortgage its properties to secure the obligations of any other person or company

with whom it had dealings or in whose business it was concerned. Ultimately castleford sold the
mortgaged

property to the Plaintiff company but failed to pay off the mortgage to the

bank. The bank threatened to realize its

security and the Plaintiff company thereupon brought action for a declaration

that the mortgage in favour of the bank was ultravires. The ground upon which the Plaintiff company

relied was that the directors of castleford in granting the mortgage acted

ultravires in not considering whether the granting of the mortgage was for the

benefit of the castleford company alone.

The action was dismissed.

Pennyanick J. held that:

1. the

directors in considering the transaction could have regard not only to the

affairs of the company considered in isolation but also to its affairs as a

member of the group.

2. Where

the directors act under an express power, the disposition cannot be ultravires

but it may be voidable where in so acting the directors bade themselves upon

considerations which they are not entitled to take into account when

determining whether the transaction is for the benefit of the company. In Parke v. Daily News Ltd
(1962) ch. 927 A

shareholder sued to restrain the company from distributing among its former

employees a sum in excess of {1,000,000 which was to be received from the sale

of Newspapers owned by it. The payments

were to be in addition to payments made to employees in lieu of notice in

respect of pension money and in respect of holiday money. The company ws under no obligation to
make

such payments. It was held that proposed

payment was ultrvires and that the proposed payment accordingly could not be

ratified by a majority of the shareholders.

Mr. Justice Phoman said:

“The defendants were prompted by motives

which however londable and however enlightened from the point of view of
indutrial relations were such as the law would not recognise as a sufficient

justification. Stipped of all its side

issue, the essence of the matter is this: that the directors of the defendant

company are proposing that a very large part of its funds should be given to

its former employees rather than the company and that is an application of the

company’s funds which the law will not allow”.

In another illustrative case, Re. Toth (1967) I WLR 432

Roith was the major shareholder of two companies which he operated. As a result of poor heath, he
consulted his

solicitor about possible arrangements after his death. The solicitor advised that Toith should enter

into a service agreement with any of the two companies. Consequently, at an extra ordinary general

meeting of one of the companies, the memorandum was altered by the inclusion of

a new clause permitting the company to “give pension gratuitous pay or any

charitable and to any person who may have served the company or presecessor”.

A service agreement was entered between Roith and the

company. Roith promised that as general

manager he would devote the whole of his time and ability to the company’s

business. In return the company promised

to make pension payments to Mrs. Roith.

Roith died after about one year.

Four years later the company went into liquidation widows claim. The company’s memorandum
provided for the

situation expressly and the issue was whether the agreement between Roith and

the company was ultravires. It was held

that the pension had not bee made bonafide for the benefit of the company and

to promote the prosperity of the company but rather the whole object of the

amendment was to benefit Mrs. Roith. If

directors act malafide they are in breach of their duty to the company. One of the cases in which the
courts have

interpreted the ultravires doctrine in favour of the transaction in issue is

Evans v. Brunermound & Co. [1921] 1 ch. 359. The principal object of the company was to

carry on business as chemical manufacturers.

There were various other ancillary objects enabling the company to do

all such business as may be incidental or conducive to the attainment of the

other objects. A meeting of the company

authorised the directors to distribute {10,000 to universities or scientific

institutions as they may select for the furtherance of scientific education and

research. A shareholder petitioned the

court that this resolution was ultrvires.

It was held that the proposed expenditure was anticipated to create a

trained reserviour of the company could draw its personnel in future and the

expenditure was beneficial to the company and conducive to its progress as a

chemical manufacturer. It was held to be

intravires. What attitude should the

courts in this country adopt in respect of the payment of funds gratuitously?

The judicature Act, allows us to apply English law to suit our

requirements. There is however, no

authority on this matter in this country.

The socio-economic conditions will require us to apply, English law to

suit our conditions – see Nyali Ltd. v. Attorney General [1957] I ALLER 646;
[1956]IQB1.

REMEDIES TO ULTRAVIRES

TRASANSCTION VICTIMS:

Whether a contract is ultravires or not will depend on the

knowledge of the party dealing with the company. In Re David Payne [1904] 2 ch. 608 X who was

a director of a company, A and who was also interested in company B learnt in

his private capacity that company B, which had general borrowing powers

proposed to borrow a loan for purposes outside its business. It induced company A, to make a loan to

company B, which used the money as proposed.

The money was borrowed on the security of a debenture. Was this debenture valid? The money was
borrowed for a purpose outside

the objects of the company and yet the directors knew this. This court held that where a company has a

general power of borrowing for its purposes, where the company borrows within

the limits of that power the person who lend the money is not bound to inquire

for what purpose the borrowing company is to apply the money so borrowed. The director’s private
knowledge could not be

imputed to the company. L.J. Romer hled.

“Where you

have a limited company with a memorandum of association

 authorising the company to embark on a

series of transactions, and among

those

purposes you find a power to borrow generally for the purposes of the

company, I

take it to be clear beyond controversy that when money is being

borrowed within the limits of the power of

borrowing, the person who lent the

money is

not bound to inquire to what purpose the borrowing company is about

to apply

the money so borrowed"

In respect of property transferred under an ultravires

transaction, since the effect of ultravires is to render the whole transaction

null and void it follows that the purchaser shall not acquire any rights in

such property. This also applies to any

money lend to the company, on an ultravires borrowing. So long as the money can be traced, in law or

in equity. If the money has been paid

into the account of a separate transaction it may be traced into such an

account. If the money is mixed up with

other funds and leases to be identifiable in equity, the lender is still

entitled to a charge on the mixed fund proportionate to his own share if there

are other claimants. The directors are

treated as trustee and the money is treated as trust money.

A third party may also bring a personal action against the

directors with whom he had dealt. The third parties have an equitable claim

against them for restitution.

WHAT REFORMS TO ULTRA VIRES

In 1945 in England,

the cohen committee proposed that as regards third parties, a company should

have all the powers of a natural person and the objects clause in the

memorandum should operate only as a contract between the company and the

members regarding the scope of the authority vested in the directors.

 This

recommendation overlooked the fact that third parties dealing with the company

will still be presumed to have constructive knowledge of the company’s public

documents and that they will be presumed to know when the directors exceed

their authority.

In

1962. The Jenkins committee recommended

that even the constructive notice rule should also be abolished so that even

the abolish so that even actual knowledge of the contents of the memorandum and

Articles should not deprive a third party of the right to renounce a contract

if he reasonable failed to appreciate that this precluded the company or its

officers from entering the

contract. The constructive notice rule

has now been abolished in England,

but it still remains the law in this country.

In order to avoid the ultra vires rule, the objects clause may be

amended by the company. Section 8 of the

companies Act, empowers a company by special resolution to alter its

objects. So long as 85% of the

shareholders of the issued sharecapital support a proposed alteration,

companies can easily alter their objects clauses and thereby avoid the trap of
ultravires. Such alterations only

operate in future and not retrospectively.

The next

clause in the memorandum states the nominal capital to which the company wishes

to be registered and the division thereof into shares of fixed amounts.

The last

clause states that the liability of the members shall be limited.

ARTICLES OF ASSOCIATION

The Articles of Association is one of the important

documents relating to the company’s constitution section 9 of the companies

Act, states that a company limited by guarantee must register with the

registrar Articles for the company.

Under Section 10 it is provided that in the case of an unlimited company

the Articles should state the number of members with which the company proposes

to be registered.

A company

limited by shares or may not register Articles of Association. The Articles so registered may adopt all or
any of the regulations in schedule 1 Table A of the companies Act. Table A is a model form of Articles of

Association for a company limited by shares.

It is in two parts; part 1 is designed for public companies and part 2

for private companies. In registering

its Articles, a company has those options:

a) it

may adopt table A in full.

b) It

may adopt table A subject to amendments.

c) It

may register its our set of Article and exclude table A altogether. In the case of a company limited by
shares if

Article are not registered or even if Articles are registered in so far as they

do not modify or exclude table A, then the regulations in Table A automatically

become the company’s Articles of Association in the same manner and to the same

extent as if they were contained in the duly registered Articles.

Section 12 requires that the

Articles must be:

i)

in English language.
ii)

Printed

iii)

Divided into paragraph numbered consecutively

iv)

Dated

v)

Signed by each subscriber to the memorandum of

Association in the presence of at lease one witness who should attest the

signatures and add his occupation and address whereas the memorandum confers

powers upon the company the Articles determines how such powers shall be

exercised. In other words, the Articles

regulate how the internal affairs shall be managed. Among other things, the Articles deals with:

the issue of shares.

Alteration of share capital

Transfer of shares
-

General meetings

Voting rights

Appointment of directors

Payment of dividends

Accounts

Winding up and other miscellaneous matters.

The Articles also provide the dividing live between the

powers of shareholders and those of directors.

THE JURIDICAL EFFECT OF THE ARTICLES

Under section 22 of the companies Act, subject to the

provisions of the Act when the memorandum and Articles are registered they bind

the company and the members as if they had been signed and sealed by each

member and contain covenants on the part of each member to observe all the

provisions. This section has been

interpreted to mean that once the Article have been registered they constitute

a contract between the company and each individual member. In Hrkman v. Kent or Romney Marsh
sheep Breeders Association Ltd [1915] I

ch. 881, the Articles of the company provided for reference of disputes between

a member and the company to arbitration.

A dispute arose between Hickman who was a shareholder and the

company. Hickman filed a court action

against the company. The company

contended that the court action was premature since Hickman was bound under the

Articles to refer the matter to arbitration.

The company applied for the action to be stayed. It was held that the company was entitled to

have the action stayed as the Articles amounted to a contract between the

company and Hickman to refer disputes between them to arbitration. The court decided, as per Justice
Astbury

that:

i)

No Article can constitute a contract between the

company and a third party.

ii)

No right merely purporting to be given by an Article to

a person whether member or not in capacity other than that of a member as for

instance, solicitor promoter or director can be enforced against the company.

iii)

Article regulating the rights and obligations of the

members, generally as such do create rights and obligations between them and

the company. It is a basic rule that the

Articles do not confer rights upon an outsider or upon a member who claims rights

in a capacity other than a member e.g as a director.

Eley v. Positive government security life Assurance Co.

Ltd [1876] I Ex. D. 88

The Articles provided that the Plaintiff should be the

company’s solicitor for life removable only for misconduct. He became the solicitor and a member.
Later the company terminated his

employment. The Plaintiff sued the

company for breach of the contract contained in the Articles could function as

an agreement between the members to appoint the Plaintiff, or a director tot he

directors to appoint him but the Articles did not, of themselves constitute a

contract between the plaintiff in his capacity as solicitor and the company.

There is a dicta in the cases that the contract in the

Articles of Association is not amerely a contract between the company and the

members, but also among the members amongst themselves.

In word v. odessa

waterworks Co. (1889) 42 ch. D. 636, the

plaintiff, who was a member of the company petitioned the court to stay the

implementation of a resolution not too pay a dividend but to issue debentures

instead. The shareholder challenged this

resolution. Conceding that the shareholder was entitled to the remedy, sterling

J. said,

“The

Articles of Association constitute a contract not merely between the

shareholder and the company, but also between the individual shareholder and

every other”. This is the legal effect of section 22.

In Ray field v. Hands, [1960] ch. 1 a member of a company

in an action against the directors sought to compal the directors to purchase

his shares in terms of the Article. The

company was not joined as a party.

Article 11 of the company’s Article provided”

“Every

member who intends to transfer shares shall inform the directors who will
 take the

set shares equally between them at a fair value.

The Plaintiff called upon the directors to take his shares

at a fair value but they declined to do so.

The issue was whether the plaintiff could enforce this Article against

the directors. It was held that the

Articles bound the defendant directors to bury the plaintiff’s shares and

related to the relationship between the Plaintiff as a member and the

defendant, not as directors, but as members of the company, the Article

amounted to a contract, between the directors in their capacity as members and

in that capacity they were bound to take up the shares.

ALTERATION OF THE ARTICLES

Section 13 of the companies Act, empowers a company by

special resolution to alter or add to its articles. Any such alteration or addition is as valid

as if it was originally contained in the Articles. Special resolution is defined in section 141

as a resolution supported by ¾ of the members voting, either in person or by

proxy, at a general meeting of which twenty one days notice of the intention to

propose the resolution as a special resolution has been given. In Andrews v. has meter Co. Ltd [1897]I
ch.

361, the issue was whether a company, which under its memorandum and Articles had
no power to issue preference shares could alter its articles so as to authorise

the issue of such shares by way of increased capital. Held, that on so far as the company’s

constitution depends on the Articles of Association, it is clearly alterable by

a special resolution under powers conferred by the Act. The power to alter the Articles is a

statutory power and the company cannot deprive itself of the right to exercise

that power.

Although companies have power to alter their Articles,

there are limitations to this power. A

resolution to alter the Articles of a company must not:

1. Be

inconsistent with any statute.

2. Exceed

conditions contained in the memorandum

3. Increase

liability of a member or require him to take more shares, unless he agrees to

do so in writing – see S. 24.

4. Remove
the restrictions contained in section 30, if the company is to remain a private

company.

5. The

variation of the Articles must not conflict with section 74 of the companies

Act, as to the rights of shareholders affected by a variation of class rights

to apply to the court for cancellation of the variation.

6. The

resolution must not be incusion tent with an order of the court made under

section 211 dealing with cases of oppression by the majority of the minority in

a company. Anybody claiming that there

is oppression can petition the court to bring to an end. Once the court makes such an order, the

company cannot alter its articles to contravene that order.

7. The

alteration of the Articles must be in good faith and for the benefit of the

company as a whole. In Allen v. the hold

Reefs of West Africa [1900] ch 656, The company had by its articles given

itself a lieu on all the shares which were not fully paid. The company sought to extend the lieu to all

the shares by an alteration of the articles.

It was held that the company was entitled to extend the lieu by an

alteration of the articles, in exercise of statutory power Lord hindley M.R.

stated:
 “Wide

however as the language of section 13(a), the powers conferred by it must

like

all other powers be exercised subject to those general principles of law and

equity

which are applicable to all powers conferred on majorities and enabling

them

to build minorities. It must be

exercised not only in the manner

required

by law but also bonafide as required

for the benefit of the company as a whole”

Similarly in shuttleworth v. Cox Brothers [1927] 211 B9

The Articles of Association of the company stated that the Plaintiff and four

others should be the first directors of the company and that they should be

entitled to hold office as long as they hived unless the director was

disqualified on any one of some six stated grounds:

1.

bankruptcy

2.

insanity

3.

Connection on a criminal offence

4.

Failure to acquire the necessary share quantification

5.

Absence from directors meetings for more than six

months.

6.

Resignation.

The plaintiff failed to account to the company for certain

monies he had received on its behalf. At

a general meeting of the company a special resolution was passed that the

Articles should be altered to add a 7th ground for the

disqualification of a director. The was

a request in writing by all the directors that a director should vacate office

on such request. Such request was

subsequently made to the Plaintiff. He

brought action upon the company for breach of an alleged contract contained in

the original Articles to the effect that the Plaintiff was to be a permanent

director and that he was still a director of the company. There was no malafides on the part of the

directors. It was held that the

contract, if any between the Plaintiff and the company contained in the

Articles in their original form was subject to the statutory power of

alteration and if the alteration was made bonafide for the benefit of the company,

then it was valid and there was no breach of contract Bank L.J. stated:

“In this

case the contract denies its force and effects from the Articles itself

which

may be altered. It is not an absolute

but a conditional contract”

The court had to decide the meaning of what is beneficial

to the company, L.J. Scotton observed:

“It is not

the business of courts to manage the affairs of the company. That is for
 the

shareholders and their directors. The

absence of any reasonable grounds for

deciding

that a certain course of actin is conducive to the benefit of the company

may be a

ground for finding lack of good faith or for finding that the shareholders,

with the

best motives have not considered the matters which they ought to have

considered …But I should be sorry to see the courts go beyond these and

take

upon

itself the management of concerns which others may understand better than

the

court does”.

It is not for the court to decide what is of benefit to

the ompany. In side bottom v. Pershow

Leese & Co. [1920] I ch. 154 in a director controlled private company a

minority shareholder was interested in some competing business. The company passed a special
resolution

empowering the directors to require any shareholders who competed with the

company to transfer the shares at a fair value to a nominance of the

directors. The plaintiff was served with

such a request to transfer his shares. He filed a court action challenging the

validity of the new Article. It was held

that the company had a power to introduce into its article anything that could

have been validity included in the original article provided that the

alteration was made in goodfaith and for the benefit of the company as a

whole. Since it was beneficial for the

company to get ride of competitors among its members, the alteration was valid.

In Brown v. British Abrassive Wheel Co. [1919]I ch. 290, A

public company was in urgent need of further capital which the majority holding

98% of the shares were willing to supply provided that they could buy out the

minority. The tried to persuade the

minority to sell their shares to them but the minority refused. They proposed to pass a special
resolution

adding to the Articles a clause whereby any shareholder was bound to transfer

his shares upon request by the holders of 90% of the issued share capital. It was held that this was an
attempt to add

the new clause in order to acquire compulsively the shares of the minority when
there was no such power. Such an attempt

was not for the benefit of the company as a whole but only for the benefit of

the majority. An injunction was issued

to stop the company doing so.

EFFECT OF ALTERATION ON CONTRACT

Sometimes, the Articles may be altered in such a way that

implementation in their altered form might lead to a breach of contract such is

particularly the case as regards contracts of between companies and their

Directors. Can a company alter its Articles in such a way as to dismiss a

director from office? A director may hold office in one of three ways: He may hold office either.

1. under

the Articles without any contract of service.

2. Under

a service contract which is entirely independent of the Articles.

3. Under

a service contract which expressly or by implication embodies the relevant

provision of the Articles. Where a

director holds office under the Articles without a service contract then his

service is conditional that the Articles may be altered at anytime in exercise

of the statutory power. If however, the

directors appointment is entirely independent of the Articles then any

alteration which affects his contract with the company will constitute a breach

of contract in respect of which the company will be liable in damages. In Southern Foundries v. Shirlaw
[1940]A.C.

701 H.L. The Plaintiff was by a written contract appointed a managing Director

of the company for a period of 10 years.

The agreement was not expressed to be subject to the Articles any

way. The original Articles set out

grounds on which the office of the director should be vacated subject to this

terms of any subsisting agreement. The

Articles also provided that should the MD cease to be a director he should also

be a director he should also cease upso facto to hold office as MD. As a result of some company
reorganisation,

new Articles were subsequently readopted removal of any director by

notice. Persuant to this Article the

company purported to remove the Plaintiff from his office of director with the

consequence that his appointment as Managing Director was also terminated. There was a contract
independent of the

Articles. The Plaintiff brought action

for breach of contract. Held, Plaintiff

entitled to damages for breach of contract.

Lord Atkin, stated, “If a party

enters into an arrangement which can only

take effect by the continuance of an existing state of

circumstances, the law is

that there is an implied

engagement on his part that he shall do nothing of

his own motion to put an end to that state of

circumstances under which the arrangement can be

operative.

This decision was followed in shindler v. Northern

Raincoat Co. Ltd [1960] IWLR 1038. The Plaintiff was engaged by the defendant

company as managing Director under a 10 year written service agreement. Four months later, the share
capital of the

company was sold by the existing holding

company to another company which did not wish to retain the Plaintiff’s

services. The company accordingly passed

a resolution removing him as director where he ceased being managing

Director. He bought an action for

wrongful dismissed. Held, that where a

director has an express contract for a specified period, there is an implied

undertaking that the company will not revoke his appointment as a director

during that period. If the company

therefore alters its article in a manner that breaches an independent contract,

it will be liable for damages in that breach.

Where a Director is appointed in general terms and without limitation of

time the company may dismiss him at any time and he is not entitled to notice. In Read v. Astoria
Garage Ltd [1952]ch. 637

one of the Articles of the company stated that the appointment of the Managing

Director shall be subject to determination if he cease for any cause to be a

director of the company or if the General

meeting resolves that his term of office as Managing Director be determined. The Plaintiff was
appointed and served as

managing Director for 17 years.

Thereafter the directors decided to relieve him of his position as

Managing Director. This decision was

subsequently ratified by the General meeting.

The Plaintiff claimed damages for

wrongful dismissed. Held, that it was

not a breach of contract for the company to dismiss the Plaintiff without

notice because on the time constructions of that Article , the company had

expressly reserved to itself the power to do so and therefore the Plaintiff’s

appointment was immediately and automatically determined on the passing of the

resolution at the General meeting. When

a company proposes to alter its Articles in a manner which may give rise to

breach of contract can it be restrained for taking a course of action? There

are two conflicting cases. Point v.

Symon [1903]2 ch. 506. It was held that

be granted because the company had a statutory right to alter its articles and

could not contract out of that right. In

British out of that right. In British

Murac Syndicate v. Alperton Pubber Co. Ltd [1915] 2 ch 186 the court granted an

injunction restraining of contract. In

Southern Foundries v. Shirlaw, Lord Porter stated;

‘A

company cannot be precluded from altering its articles thereby giving itself

power to act upon the provisions of the altered articles but, so to act,

may

nevertheless be a breach of contract if it is contrary to a stipulation

to contract

validly made before the alteration nor an injunction be made to grant an

adoption of the new Articles of Association but the company to act upon

them

will nevertheless render it liable in damages if such action is contrary

to the

provisions engagement of the

company”

VARIATION OF CLASS RIGHTS

Class rights in company law recognises the existence of

clauses of shareholders in the company.

Bowen L.J. in sovereign Life Assurance Co. v. Dodd [1892] 2 QB 513 defined

the word class. He stated:

“The word class is vaque. It must

be confirmed to those persons whose rights

are not so dissimilar as to make it impossible for them to consult

together

with a view to their common interest.

“The term relate to those people whose

rights are similar to the extent that they can consolidate

them together. In the case itself, it

was held that policy holders whose rights had matured, were a different class

from those whose policies had not matured.

Article 4 of Table A provides that where the share capital

is divided into different classes of shares, may be varied with the consent in

writing of the holders of ¾ of the issued shares of that class or with, the

sanction of a special resolution passed at a separate general meeting of the

holders of the shares of class.

Under s. 74 within 30 days of the day the consent was

given or the resolution was passed an application may be made in court for the

variation to be cancelled. Such an

application can only be made by way of petition by the holders of at least 15%

of the issued shares of that class which did not consent to or vote in favour

of the variation. Where such an

application is made the variation will not have any effect unless and until it

is confirmed by the court. Class rights may be set out in the Articles of

Association or in the Memorandum of Association s.5(2) of the companies Act,

states that if class rights are contained in the memorandum or if the

memorandum prohibits alteration , then these rights cannot be altered. The company can entrench
these rights such

that there is no alteration.

COMPANIES ORGANS AND OFFICERS

Since a company is an Artificial person, it can only act

through the agency of natural or human persons.

The decisions of the majority of the members of the company in the

General meeting is deemed to be the decision of the company. In practice, it is impossible for the

company’s day to day position to attend to the company’s meetings and this rule

had to be changed. The constitution of

the company provides for a Board of

Directors which delegates powers of management to a managing Director. For this reason companies
have two main

organs: General meeting and the Board of

Directors. The authority to exercise the

company’s powers is delegated to the Directors acting as a Board.

BOARD OF DIRECTORS:

s. 177-205 Under s. 177 every public company must have at lease two

directors and every private company must have at lease two directors.

In practice, the first directors of a company are

appointed by being:

i)

named in the Articles of Association.

ii)

Manner laid down in the Articles

Article 75 of table A states that the names of the first

Directors shall be determined in writing by the subscribers of the memorandum

shall be the first directors.

 In the case of a

public company, with a share capital section 182 requires that a person may not

be appointed a director by the Articles unless on registration of the Article,

he has:

1. Signed

and delivered to the registrar a consent in willing to act as a director.

2. (a) Signed the memorandum for a number of shares

not less than his qualification if any.

(c) Taken

from the company or paid or agreed to pay for his qualification shares.

(d) Signed

and delivered to the registrar an undertaking to take from the company and pay

for his qualification shares, if any.

(e) Made

and delivered to the registrar a statutory declaration that the number of

shares not less than the qualification, if any are registered in his name.

After the initial appointment,

it is usual for Articles to provide for an annual retirement of directors and

filling of vacancies at the annual General Meeting.

Under s. 185 a director can be

removed by an ordinary resolution in addition to other means of removal embodied

in the Articles. Subject to any

modification or exclusion of Table A Article 88 requires the office of director

to be vacated if the director:

(a)

Ceases to be a director by virtue of section 183

relating to share qualification or S. 186, removal on attainment of 70 years.

(b)

If he becomes bankrupt or makes any arrangement or

composition of his creditors. An

undercharged bankrupt is not allowed to act as a director without leave of the

court. A bankrupt is looked upon as a

person not able to manage himself.

(c)

Becomes prohibited from being a director by an order

under s. 189 which empowers the court to restrain the person from managing the

company.
(d)

Is of unsound mind.

(e)

Resigns his office by notice in writing.

(f)

Absents himself without permission from directors

meeting for more than six months. Where

the Articles require a share qualification, then s. 183, requires, the shares

to be taken up within two months or else

the office will be vacated if they are not taken or subsequently

relinguished. A director need not be a

natural person. A company can be

appointed a director of another company.

DIVISION OF POWERS BETWEEN THE GENERAL MEETING AND THE

BOARD OF DIRECTORS:

Until the end of the 19th century, it was

generally assumed that the general meeting was the company and the directors
were merely the agents of the company.

Although this view held sway for a longtime, it was modified on the

advent of the 20th century.

The earliest authority or the relationship between the General Meeting

and the Board of Directors is Automatic Self Cleansing Filter Syndicate v.

Cunning Game [1906] 2 ch. 34. The

court of Appeal made it clear that the division of powers between the Board and

the General Meeting depends in the case of registered companies entirely on the

Articles of Association and where the powers have been vested on the Board

by the Articles then the General Meeting

cannot interfere with the exercise of those powers. The company’s relevant Articles provided that
subject to such regulations as might be

made by extra ordinary resolution the management of the company shall be vested

in the directors who might exercise all the powers of the company which were

not by statute expressly required to be exercised by the company in the General

meeting. Another Article expressly

empowered the directors to deal with any property of the company on such terms

and conditions as they might deem fit.

At the general meeting of the company, a resolution was passed by a

simple majority of the shareholders directing the Board shareholders directly

the Board to sell the company’s assets on specified terms. The directors were of the opinion that a sale

on those terms was not of benefit to the company, and therefore declined to

carry out the sale. Were the directors

bound to carry out the directives of the General Meeting? It was held that the

Articles constituted a contract by which the members had agreed that the
Directors and the directors alone shall manage the affairs of the company. Unless and until the powers
vested in the directors

were reduced by an extra ordinary alteration of the Articles, they could ignore

resolutions of the General Meeting on matters of management. They were entitled to refuse to carry
out the

Sale Agreement adopted by an ordinary resolution of the General Meeting.

The division of the powers between the General meeting and

the Board of Directors in respect of the company’s management is found in

Article 80 of Table A which states:

“The

Business of the company shall be managed by the directors who many 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 the general meeting.” In QUIN & AXTENS V. SALMON [1909]
A.C.

442. It was established that where

the formula contained in Article 80 is employed as invariably is in practice,

the general meeting cannot interfere with a decision of the directors unless

they are acting contrary to the provisions of the Act or the Articles. The company’s two managing
Directors who were
Axtens and Salmon held between then the bulk of the company’s ordinary

shares. One of the Articles provided

that the company’s business should be managed by the directors who might

exercise all the powers of the company subject to such regulations be inconsistent

with the provisions of the Articles as may be prescribed by the company in the

General meeting. Another Article stated

that no resolution of a meeting of the directors having for its object, the

acquisition or letting of certain premises should be valid if either Salmon or

Axtens dissented. The directors resolved

to acquire and to let certain properties but Salmon dissented. An extra ordinary General meeting was
held at

which the shareholders by a majority passed similar resolutions. Upholding the court of Appeal, the A.L.
held

that the shareholders resolutions were inconsistent with the Articles and

granted an injunction restraining the company from acting.

In Shaw Sons Ltd v. Shaw [1935] 2 ub 113 The Directors were empowered to manage the company’s

affairs. They decided to commence an

action for and on behalf of the company and in the company’s name in order to

recover moneys owed to the company by the two defendants. The General meeting passed a resolution

disapproving of the commencement of the action resolving that the proceedings

was part of the management of the company's affairs, since the power to manage

was vested in the directors, the resolution of the general meeting was a
mullity. Lord Justice Greer summarized:

“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 the General meeting. If

powers

of management are vested in the directors they and alone can exercise

those

powers. The only way in which the

General meeting of shareholders can

control

the exercise of powers vested by the Articles in the directors is by altering

the

Articles or if the opportunity arises under the Articles by refusing to reelect

 the

directors of whose actions they disapprove.

The inability of the General Meeting to useup the powers

of the directors was recognised in Scott v. Scott [1943] I ALLIER 582 The

company’s Articles consisted of the reegulation contained in Table A. The relevant Article was in terms
of Article

115 of our Table A. It provided that the

directors may from time to time pay to the members such interim dividend as

appears to the directors to be justified by the profits of the company.” The shareholders resolved in the
General

meeting that the directors should declare the dividends. It was held that it was quite clear that the

payment of interim dividend was a matter which by the Articles was placed in

the exclusive power of the directors. By

passing the resolution the general meeting encroached on the sphere of activity

which in most express terms was confirmed in the directors. The conclusion is that with the Articles of

Association in the formal of table A, it becomes difficult for the members in

the General meeting to give directions on how the affairs of the company are to

be managed.

The General meeting retains the ultimate control but only

through its process to amend the articles thereby taking away the Director’s

power, and also through its process to remove the directors from office and

appointing new ones. Unless any of these is taken, the directors can, if they

so wish, disregard the wishes and instructions of the members in all matters

not specifically reserved by the Act, or Articles to the General meeting. The
old idea that the General meeting is the Company and the Directors merely

agents or servants of the Company, subservient to the General meeting is no

longer the law.

EXCEPTIONS

1.LITIGATION: Although the General meeting cannot restrain

the director’s from conducting litigation in the name of the company, the

General meeting can institute proceedings on behalf of the Company if the

directors neglect or refuse to. This situation changes if the directors know

that they are the ones on the wrong. Marshalls

Value Gear Co vs. Manning Wardle & Co. [1909] 1 Ch 267 . Marshalls was the majority

shareholder Managing Director of the plaintiff company which was formed to

exploit an invention which he had patented. On the board he was outvoted by the

other three directors who were interested in the defendant company. The latter

was infringing the plaintiff’s patent and Marshall’s

inspite of the opposition of his co-directors instituted the action to restrain

the infringement. HELD: that as the majority shareholders, he had a right to

bring the action.

Grant v. United Kingdom

suitchback Railways (1988) 40 ch. D. 135 C.A is authority that the company, in

its general meeting many, by an ordinary resolution ratify an act of the

directors. Baniford v. Baniford [1970]

ch. 212 the General meeting may also ratify an act of the directors which is

voidable as an abuse of its powers.

2. Where there is deadlock in the management of the board

so that any material respect then the power to do so reverts back to the

general meeting. In Bannon v Potter(1914)inch 895, the company articles

provided that the number of the directions should not be less than two or more

than ten and that quantum for the directors for transacting business should be

2 two years after the company’s incorporation the company had two

directors. Mr. Porter as chairman and

M.D and colonel Bawon. The two directors

were not on talking terms and colonel Bawon refused to attend any board

meeting with Mr. Potter. The company’s affairs came to a standstill

the only solution would have been to appoint additional directors but the power

to do so was vested by the Articles in the Board of Directors. There was therefore no Board meeting. It
was held that where the Articles give the

Board of Directors the Power of appointing additional directors owing to

differences between the directors no Board meeting can be held, the company had the power of
appointing

additional Directors at the General meeting.

DIVISION OF POWERS
BETWEEN THE BOARD OF DIRECTORS AND THE MANAGING DIRECTOR

Article 107 of table A allow directors to appoint one or

more of their number to the office of Managing Director for such period and on

such terms as they may think for. The

main duty of the M.D is to exercise some or all of the directors powers of

management. This is sanctioned by

Article 109 which authorises the Board to delegate to a managing Director all

their powers. The wording of Article 109

suggests that the Board of Directors may effectively divest itself of its

powers in favour of the managing Director.

THE COMPANY SECRETARY

s. 178 of the companies Act requires every company to have

a company secretary. The Secretary must

not be the sole director. If anything is

required to be done by a director and the secretary, it cannot be done by the

same person acting as both. Under S. 177

a private company should have at least one director while it is at least 2 in a

public company. The secretary is

appointed by the Board and not by the General meeting. Generally speaking, the secretary’s duties
are managerial for Administrative. The

traditional view is that he does not normally have authority to enter contracts

(Managerial) on behalf of the company. In

Bamett Hoares & Co. v. London Granrays Co. (1887) 18 QBD 815 Lord

Escher said” A Secretary is a mere servant.

His position is that he is to do what he is told and no person can

assume that he had any authority to represent any thing at all.”

In the past the secretary has been treated as a

subordinate servant without authority to commit the company by his actions

except the engagement of clerical staff.

In Panorama investments v. Fidelis Furnishing Fabrics Ltd (1971) 2QB 711

C.A. It was held that where the company secretary

ordered self driven cars for his own purposes but Atensibly for the business

purposes of the Defenda