corporate law manual mzumbe university

LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (LAW 650)

PREPARED BY:

Hilary Lubengo LL.B (Hons) Dar, LL.M (International Business Law) Wales, UK

Joel Laurent LL.B (Hons) Dar, LL.M (Corporate Law and Finance)

Widener, USA

LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW

INTRODUCTION AND BASIC CONCEPTS

The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together" and ‘Pains’ meaning, "bread". Originally, it referred to a group of persons who took their meals together. Section 2 of the Companies Act, 2002 (Cap 212) defines Company as “…a company formed and registered under this Act or an existing company”.

A company is nothing but a group of persons who have come together or who have contributed money for some common purpose and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose.

Lindley L.J defines a company as “an association of many persons who contribute money or money’s worth to a common stock, and to employ it in some common trade or business, and who share the profit or loss arising therefrom”1

Lord Justice Marshall defines a corporation as “an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only properties which the charter of its creation confers upon it either expressly or as incidental to its very existence”

Under Halsbury’s Laws of England, the term "company" has been defined as a collection of many individuals united into one body under special domination, having perpetual succession under an artificial form and vested by law with the capacity of acting in several respect as an individual, particularly for taking and granting of property, for contracting obligation and for suing and being sued, for enjoying privileges and immunities in common and exercising a variety of political rights, more or less extensive, according to the design of its institution or the powers upon it, either at the time of its creation or at any subsequent period of its existence. Normally, in the world of commerce the word “company” is used to denote an association of people so associated for an economic purpose e.g. business. Please note that companies can be formed for other purposes as well – for example – for charity.

A company is also define to mean a group of persons associated together for the attainment of a common end, social or economic or a voluntary association of persons or individuals formed for some common purpose (Smith v Anderson 1880 Ch. D. 247).

1 Taken from Saleemi N.A & Opiyo, A.G, Company Law Simplified (1997) at p.1

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A company as an entity has several distinct features which together make it a unique organization. The following are the defining characteristics of a company:

Separate Legal Entity: On incorporation under the law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt and borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. The legal personality or separate entity was recognized in Oakes v Turquant (1867) L.R. 2 H.L. 325, but the importance was firmly established in Salomon v Salomon (1897) A.C 22. In this case, Salomon sold his boots business to a newly formed company for ₤ 30000. His wife, one daughter and four sons took up one share of ₤ 1 each. Salomon took 23000 shares of ₤ 1 each and ₤ 10,000 debentures in the company. The debentures gave Salomon a charge over the assets of the company as the consideration of the transfer of business. Subsequently, when the company was wound up, its assets were found to be worth ₤ 6,000 and its liabilities amounted to ₤ 17,000 of which ₤ 10000 was due to Salomon (secured by debentures) and ₤ 7000 due to unsecured creditors. The unsecured creditors claimed that Salomon and the company were one and the same person and that the company was merely agent for Salomon and hence they should be paid in priority to Salomon. It was held that the company was, in the eyes of law, a separate person independent from Salomon and was not his agent though initially the holder of all shares of the company was also a secured creditor, and was entitled to repayment in priority to unsecured creditors.

Lord Macnaghten observed:“The company is at law a different person altogether from the subscribers to the memorandum, and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee of them. Nor are subscribers liable, in any shape or form except to the extent and in a manner provided by the Act”

Limited Liability: The liability of the members of the company is limited to contribution to the assets of the company up to the face value of shares held by them. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its

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assets. The personal property of a shareholder cannot be attached for the debts of the company if he/she holds fully paid up share.

A company may be limited by shares or by guarantee (s. 3(2) of the Companies Act, 2002). In a company limited by shares the liability of members is limited to the unpaid value of shares. In a company limited by guarantee, the liability of a member is limited to such amount, as the members may undertake to contribute to the assets of a company, in the events of its being wound up. The importance of limited liability was expressed in Senkin v Pharmaceutical Society of GB (1921) 1 Ch. 392. Limited liability is the offspring of a proved necessity that, men should be entitled to engage in commercial pursuit without involving the whole of their fortune in that particular pursuit in which they are engaged.

Perpetual Succession: A company is a Juristic person with perpetual succession. A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of members does not affect the existence of the company. It is created by the process of the law and can only be put to an end by the process of law.

Separate Property: A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company's property during the existence of the company. A shareholder doesn’t even have insurable interest in the property of the Company. Macaura v Northern Ins. Co. (1925) AC 619 M was holder of nearly all shares of a timber company. He was also a substantial creditor of the company. He insured the Company’s timber in his own name. The timber was destroyed by fire. It was held that the insurance company was not liable.

Transferability of Shares: S. 74 of the Companies Act states that “the shares or any other interests of any member in a company shall be transferable in a manner provided by the articles of the company.” Shares in a public company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.

Section 27 of the Companies Act restricts the right of the members of a private company to transfer shares.

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Capacity to sue and being sued: A company can sue or be sued in its own name as distinct from its members. It may also inflict or suffer wrongs. It can in fact do or have done to it most of the things which may be done by or to a human being.

The company is only able to sue or be sued in its own name when it has been registered. If the company has not acquired legal personality (not fully registered) it cannot institute a suit2. In the case of Fort Hall Bakery Supply co. v. Federic Muigai Wangoe (1959) E.A. 474 a suit was instituted by an unregistered firm of over twenty members whose existence as body was not recognized in law. The high Court of Kenya stated at page 475.

“It is not registered as a company under Companies Ordinance or formed in pursuance of some other Ordinances or Act of parliament or letters of patent. It cannot therefore be recognized as having any legal existence.

In the words of Bankes, L.J. in Banque Internationale de Commerce de Petrograd vs. Goankassaow (1923) 2. K.B. 682 at 688

“ The party seeking to maintain the action is in the eye of law no party at all but a mere name only, with no legal existence…A non- existence person cannot sue, and once the court is made aware that the plaintiff is non- existence, and therefore incapable of maintaining the action, it cannot allow the action to proceed

Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.

The Meaning and Nature of Corporate Personality

2 The proper procedure for seeking legal remedy in a court by a body of persons who have no corporate existence, is by way of a representative suit as provided under Order 1 rule 8 of the Civil Procedure Code

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Corporate personality is the fundamental principle or doctrine that goes to the root of company law that a company, being a legal person, is entirely distinct from its members who formed it. After being incorporated, a company becomes an independent legal entity vested with a personality separate from that of its shareholders. The personality gives a company an artificial life, perpetual succession, the right to own and dispose property, and limited liability. Thus, a company has full legal personality and is, so far as possible, to be treated analogous to an individual.

This theory is a by-product of the English House of Lords decision in Salomon v. Salomon& Co. Ltd 3. In that landmark case Aron Solomon, a successful leather merchant, decided to incorporate his business in 1892, with himself, his wife and five children as the only shareholders. The business assets were transferred into the corporate name for the somewhat ambitious value of 39,000 pounds. Each of the other members of the family took one share; Salomon himself took 20,001 shares. A 10,000-pound debenture was created charging the assets of the company. Less than a year later the corporation encountered financial difficulties and, after paying off the debenture holder, the company’s assets were insufficient to pay off the unsecured creditors. These creditors then attempted to fix financial liability on Aron Salomon.

Both trial judge and the Court of Appeal held that Mr. Salomon was liable for the company’s debts, on the ground that the company was either an agent, a trustee or a nominee of the true owner. The House of Lords rejected this view on corporations. Lord Halsbury said4:

“Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all”.

Corporate law, therefore, erects an imaginary wall between a company and its shareholders from liability for a company’s actions. Once shareholders have made their promised capital contributions to the company, they have no further financial liability. All these mean that contracts of a company are not contracts of the shareholders, and debts of a company are not debts of its shareholders5.

3 [1897] A.C. 22 (Eng., H.L.)4 See Salomon v. Salomon., op. cit., at p. 315 See MALLOR J. et al., Business Law and the Regulatory Environment. Concepts and Cases: 10th Edn: Boston: Mc Graw-Hill Companies, Inc., 1998, at p. 826.

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Lifting/Piercing the Cooperate Veil

From juristic point of view a company is a legal person different from its members Salomon v Salomon & Co Ltd. (1897) A.C. 22.The principle may be referred to as the ‘Veil of incorporation”. The courts in general consider themselves bound by this principle. The effect of this principle is that there is a fictional veil (and not a wall) between the company and its members. That is, the company has a corporate personality which is distinct from its members.

The human ingenuity however, started using this veil of corporate personality blatantly as a crack for fraud or improper conduct, thus it became necessary for the courts to break through or lift the corporate veil or crack the shell of corporate personality and look at the persons behind the company who are the real beneficiaries of the corporate fiction. In United States v. Milwaukee Refrigerator Co.6, the court observed

“A corporation will be looked upon as a legal entity as a general rule… but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons”.

In Littlewoods Mail Order Stores Ltd. V. Inland Revenue7, Denning MR. Observed:

“The doctrine laid down in Solomon v. Solomon & Co. Ltd. has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind”.

The power to pierce the corporate veil, though, is to be exercised “reluctantly” and “cautiously” and the burden of establishing a basis for disregard of corporate fiction rests on the party asserting such claim.

The circumstances which have been considered significant by the courts in actions to disregard the corporate fiction have been “rarely articulated with any clarity”. This is true because the circumstances necessary vary according to the circumstances of each case and every 6 (1905) 142 Fed 2477 (1969) WLR 1241

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case where the issue is raised is to be regarded as sui generic (to be decided in accordance with its own underlying facts.)

Various Cases in which corporate veil can be lifted.

Protection of RevenueThe court may ignore the corporate entity where company is used for tax evasion. Tax planning may be legitimate as it is within the framework of the law. Where it is desired to determine for tax purposes the residence of a company the court will lift the veil and find out where its central management is, and that place will determine the residence of the company.

Prevention of fraud or improper conducts

The legal personality of a company may also be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose. In Jones v Lipman (1962) All ER 442. L agreed to sell certain land to J. He subsequently changed is mind and to avoid the specific performance of the contract, he sold it to a company which was formed specifically for that purpose. L and a clerk of his solicitors were the only members. J brought action for specific performance against L & and the company. The court looked at the reality of the situation, ignored transfer and ordered that the company should convey the land to J.

Determination of character of a company whether it is enemy.

A company may assume an enemy character where persons in de facto control of its affairs are residents in an enemy country. In Daimler Co. v Continental Tyre & Rubber Co. Ltd (1916) a company was incorporated in England for the purpose of selling in England tires made in Germany by a German Company which held bulk of shares in the English company. The holders of remaining shares except one, and all the directors were Germans, resident in German. During the First World War, the English company commenced an action for recovery of a trade debt. Held: The Company was an alien company and the payment of the debt to it would amount to trading with enemy, and therefore the company was not allowed to proceed with the action.

Where the Company is a sham or is formed to avoid legal obligations

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Where the use of an incorporated company is being made to avoid legal obligations the court may disregard the legal personality. Nicole & Sandra partners, sell their business to Benja and undertake not to start a similar business and not to compete with Charles for certain number of years. After some time they form a private company, become the principal shareholders and directors and start a similar business. The court may restrain the company from carrying business.

In the case of Gilford Co. Ltd v Horne (1933) Ch. 935 C.A. Horne a former employee of a company was subject to a covenant not to solicit its customers. He formed a company to carry on a business which, if he had done so personally, would have been a breach of the covenant. An injunction was granted against him and the company to restrain from carrying business. The company was described in a judgment as “a device, a stratagem” and a as a mere crack or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation.”

Protecting public policy

The courts invariably lift the corporate veil to protect public policy and prevent transactions contrary to public policy. In the case of Connors v. Connors Ltd (1940) 4 All ER 174 it was held that where there is a conflict with public policy, the court will lift the veil of incorporation.

Statutory lifting

Apart from judicial considerations, the exercise may also be carried out statutorily under the provisions of Companies Act e.g. where the number of members is reduced bellow the statutory minimum

Enlightenment to Business associations

One must also not confuse a business with a company. For that purpose it is important to appreciate distinction between Sole Proprietorship, a Partnership & a Company:

Sole Proprietorship: This is an individual carrying on business either in his own name or in an assumed name which is usually referred to as the Trade Name. For example: Mr.Kagya buys diamonds from Kenya and sells it to Malawi. He does so in his own name. The law permits Mr. Kagya to make his purchases of diamonds and to sell it to any person whether in Tanzania or elsewhere. As with any business he will have a capital, some assets, liabilities from time to time and profits or losses. As with all business, if need be, he is required to register his

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business under the Business Names Registration Ordinance and any other relevant law. He is required to file tax returns and he is taxed on his profits. He merely has to satisfy the Tanzania Revenue Authority of the extent of his profit or loss from his own balance sheet which need not be audited. The TRA may require him to audit his balance sheet if there is suspicion as to his income or expenses. As the business grows Mr. Kagya may hire employees, consultants, and establish branch offices. In all respects Mr.Kagya is running a business but is not a company. Mr. Kagya may at the beginning adopt a trading name or register a trading name later. For example he may call is business “Nshomi Trading Company”. As far as the General Public is concerned they will be dealing with a business called Nshomi Trading Company. However the legal position is that it is Mr. Kagya trading as Nshomi Trading Company. If a supplier or buyer of diamonds wishes to institute proceedings against the business he would do so against “Mr. Kagya trading as Nshomi Trading Company. The liability of Mr. Kagya is personal. If there is a judgment against Mr. Kagya he is personally responsible to satisfy the judgment. In the event of a judgment being entered against him he will have to pay up the damages that are assessed against him personally. If he cannot satisfy the judgment he runs the risk of being declared bankrupt by the judgment creditor. It is important to remember that a sole proprietor is personally responsible for his liabilities. So too, he is the only person entitled to profits. He need not share his profits.

When two or more people join together for a common purpose, usually the purpose of doing business for profit, such an association is called a Partnership. Partners do business under a trade name for instance Mr. Kagya of the Sole Proprietorship can bring in his friend Mr. Lau as a partner and can trade under the name of Nshomi Trading Company. For purposes of the law it really means Kagya and Lau trading in partnership under the name and style of Nshomi Trading Company. The Partnership has an existence of its own to the extent that it can sue and be sued in its own name. However, the consequences of a liability against the partnership are that each of the partners is fully liable to the entire extent of the debt. In law, each partner is the agent for the other. The act of one partner binds the firm and the other partners.

Distinction between Company and Partnership

1. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law.

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2. Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder.

3. Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members.

4. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be transferred without the permission of the other members, in absence of any provision to the contrary in the articles of association of the company.

5. There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public company is seven and two for a private company.

6. On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder, the company' existence does not get terminated.

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TYPES OF COMPANIES

There are various ways by which companies may be classified. Companies may be classified on the basis of ownership or members, on the basis of liability, on the basis of control and on the basis of incorporation

On basis of ownership/members: Public and Private Companies

1.) Public Company means a company, which is not a private company.

Basic Characteristics

a. The general public is allowed to subscribe for membership on fulfilling of few general conditions. The minimum number of members is seven.

b. It can not commence business unless it obtains a certificate of commencement of business]

c. The memorandum of public company shall state that it is a public company

d. Transfer of shares is free

Under the Companies Act a public company is the company limited by shares or guarantee and having a share capital, being a company the memorandum of which states that it is to be a public company.

2.) Private Company

This is normally what Americans call a close corporation. A private company (sometimes refereed as to quasi- partnership company) is in nature of a partnership of persons with mutual confidence in each other and its articles place positive restrictions on absolute transfer of shares. See S. 27 of Cap 212.

Basic characteristics

a. Restricted membership. Section 27(1) (b) of Cap 212 limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered.

b. Restricts the right of members to transfer its shares S. 27(1) (a) of Cap 212

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c. Prohibits any invitation to the public to subscribe to any shares in or the debentures of the company. S. 27(1) (c) of Cap 212. The Companies Act, 2002 creates an offence for a private company which is not a private company limited by guarantee and not having a share capital to offer to the public (whether for cash or otherwise) any shares in or debentures of a company.

S 28 of the Act states that if a private company alters its articles such that they no longer include the provisions required for a private company (s.27), the company shall on the date of the alteration, cease to be a private company and shall amend its memorandum to state that it is a public company. The company should, within 14 days send notification to the registrar who shall issue a certificate to the effect that the company is the public company.

On the basis of liability: Limited and Unlimited companies

Companies may be limited or unlimited companies. Company may be limited by shares or limited by guarantee. "Limited Liability" - this refers to the liability of the members, not the liability of the company. The company will always be liable to the full extent of its debts.

(a) Company limited by shares (s.3(2)(a) of Cap 212

(i) The most common kind of registered company.

(ii)Members of the company take shares issued by the company. Each share is assigned a nominal value - the amount that must be paid to the company for the share.

(iii)When the company is registered, its memorandum must state the total nominal value of all the shares it is going to issue (called the registered capital, or nominal capital or authorised share capital).

The memorandum also states the number of shares to be issued: e.g. 10,000 shares of Tshs. 100 each = registered capital of Tshs. 1,000,000.

(iv) Liability of a member (shareholder), when the company is wound up is limited to the amount, if any, on the nominal value of his shares which has not been paid. No member of company limited by shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid.

(v) Shares are normally partly or fully paid for when issued, so company will have a contributed capital.

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b) Company limited by the guarantee. S. 3(2)(b) of Cap 212 A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. Members agree to contribute a specified amount to the company’s assets in the event of the company being wound up. (Total amount payable by all members is called the "guarantee fund"). Companies limited by guarantee are not usually formed for business ventures

The liability of members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. Members, therefore, do not have to pay anything as long as company is a going concern - so company has no contributed capital.

C. Unlimited Company: S.3(2)(c)

The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm. The following are basic characteristics of unlimited companies

I. Members have unlimited liability (If company is being wound up, members can be made to contribute to the company’s assets without limit to enable it to pay its debts.)

II. Cannot be public companies.

III. Can be set up with or without a share capital.

IV. Not subject to the same restrictions on alteration of capital as other types of company, and do not normally have to file annual accounts.

On the basis of control (Holding and Subsidiary companies)

When a company has control over another company it is known as a holding company. The company so controlled is known as a subsidiary company. A company shall be deemed to be subsidiary of another company if: -

1. That other company controls the composition of its board of directors; or

2. That other company holds more than half in face value of its equity share capital

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3. Subsidiary of another subsidiary. Where the company is a subsidiary of another company which is itself a subsidiary of the controlling company, the former becomes the subsidiary of the controlling company e.g. Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A.

The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove majority of directors of the subsidiary company without consent or concurrence of any other person.

In determination whether one company is subsidiary of another, shares held or powers exercisable in the following cases shall not be taken into account.

a) Any shares held or power exercisable by the other company in fiduciary capacity

b) Where shares are held or power is exercisable by any person by virtue of the provisions of any debenture or of a trust deed for securing any issue of such debentures; and

c) Where shares are held or power is exercisable by lending company by way of security only for the purpose of a transaction entered into in the ordinary course of that business

You may also refer to section 487 of the Companies Act.

On the basis of incorporation

(1) Statutory: - these are companies created by special Act of the legislature. Such companies are generally formed to carry out some special undertakings. These companies are owned by the government and the main objectives of these companies are to provide some necessary services for the benefit of the entire country. The provisions of companies Act may apply if not inconsistent with the special Act.

S.2 of the Companies Act defines Statutory Corporation as the meaning given in the public corporations Act: ''public corporation'' means any corporation established under the Public Corporation Act or any other law and in which the Government or its agent owns fifty one percent or more of the shares but does not include an institution of learning, a district development corporation, a research institution or a sports institution;

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(2) Registered: - these are Companies formed and registered under Companies Act 2002, Cap 212. Such companies come into operation only when they are registered under the Act and the certificate of incorporation has been issued by the registrar. Such companies derive their powers from the Companies Act, memorandum and articles of associations.

(3) Unregistered Companies – S.425 of Companies Act, 2002

(4) Foreign Companies means a company incorporated in a country other than Tanzania under the law of that other country and has established the place of business in Tanzania. According to S.433 of the Companies Act, foreign companies are companies incorporated outside Tanzania, which, after the appointed day, establish a place of business within Tanzania and companies incorporated outside Tanzania which have, before the appointed day, established a place of business within Tanzania and continue to have a-place of business within Tanzania on and after the appointed day.

A foreign company shall not be deemed to have a place of business in Tanzania solely on account of its doing business through an agent in Tanzania at the place of business of the agent.

According to section 434 of the Companies Act, Foreign companies which, after the appointed day, establish a place of business within Tanzania shall, within thirty days of the establishment of the place of business, deliver to the Registrar for registration -

(a) a certified copy of the charter, statutes or memorandum and articles of the company or other instrument constituting or defining the constitution of the company, and, if the instrument is not written in the English language, a certified translation thereof,(b) a list of the directors and Secretary of the company containing the following particulars; his present name and surname and any former name or surname, his usual address, his nationality and his business occupation, if any; Provided that, where all the partners in a firm are joint secretaries of the company, the name and principal office of the firm may be stated instead of the particulars mentioned(c) a statement of all subsisting charges created by the company, being charges of the kinds set out in section 99 and not being charges comprising solely property situate outside Tanzania;(d) The names and addresses of one or more persons resident inTanzania authorised -

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(i) to accept on behalf of the company service of process and any notices required to be served on the company, and(ii) to represent the company as its permanent representative for the place of business, including a statement as to the extent of the authority of the permanent representative, including whether he is authorised to act alone or jointly.

(e) the full address of the registered or principal office of the company, and the full address of the place of business in Tanzania;(f) a statutory declaration made by a director or Secretary of the company stating the date on which the company's place of business on Tanzania was established, the business that is to be carried on and, if different from the registered name of the company, the name under which that business is to be carried on;(g) a copy of the most recent accounts and related reports of the company including, where such are not in English, a translation of the same.

On the registration of the documents specified above, the Registrar shall certify under his hand that the company has complied with the provisions of that section and such certificate shall be conclusive evidence that the company is registered as a foreign company. This certificate is commonly known as “Certificate of Compliance”.

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PROMOTION AND FORMATION OF A COMPANY

Promotion: refers to the entire process by which a company is brought into existence. It starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. The persons who conceive the idea of forming a company and invest the initial funds are known as the promoters of the company. These are persons who do the necessary preliminary work incidental to the formation of a company. Chronologically, the first persons who control Company’s affairs are its promoters.

Promoter not a term of law, but of business, usually summing up in a single word a number of business operations familiar to the commercial world, by which a company is generally brought into existence. Whaley Bridge Calico printing Co. v Green & Smith (1880) 5 QBD.

The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital. However, a person who merely acts in his professional capacity on behalf of the promoter (e.g. lawyer, Accountants, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter.

Legal Status

As to exact legal status of a promoter, the statutory provisions are silent. His legal status is incapable of precise statement but Lindely L.J describe his position in Lydeny & Wigpool Iron Co vs. Bird (1886) 33 Ch.D as follows

“Although not an agent for the company nor trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very popularly extended to meet such cases.”

Thus, it appears that promoter is neither agent nor trustee of the company under incorporation but fiduciary duties have been imposed in him Erlanger v New Simbrero Phosphate (1878) 3 AC 1218. From the moment the promoter acts with the company in mind, a promoter stands in the fiduciary position towards the company.

The promoters’ fiduciary duties may be summed up as follows

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1. He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sells the property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members8. He must also make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

2. He must not make unfair use of position and must take care to avoid anything which has appearance of undue influence or fraud

3. The promoter, once he has begun to act in the promotion of the company, must give the benefit of any negotiations or contracts into which he enters in respect of the company. Thus where he purchases some property he cannot rightfully sell the property to the company at a price higher than he gave for it. If he does so the company may upon discovering it, rescind the contract and recover purchase price.

Remedies available to a company against the promoters: -

1. Rescind or cancel the contract made and if he has made profit on any related transaction, that profit may also be recovered

2. Retain the property and paying no more for it than what the promoter has paid for.

3. If these are not appropriate (e.g. cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are: -

1. The company may decide to pay some remuneration for the services rendered.

8 disclosure may be made to either an independent board of directors or the existing and intended shareholders e.g. by making disclosure in the prospectus

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2. The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members.

3. The promoter may sell his property for fully paid shares in the company after making full disclosures.

4. The promoter may be given an option to buy further shares in the company.

5. The promoter may be given commission on shares sold.

6. The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement.

Pre-Incorporation Contracts

The legal position is that two consenting parties are necessary to a contract, whereas company, before incorporation, is not an entity. Kelmer v Baxter (1866) L.R. 174). The promoters cannot therefore, act as agent for a company which has not yet come into existence. As such the company is not liable for the acts of the promoters done before incorporation. A pre-incorporation contract purported to be made by a company which does not exist is a nullity. As such the company when it comes into existence can neither sue nor be sued on that contract.

Position of promoters: Company is not bound by pre-incorporation contracts Company cannot enforce pre-incorporation contract Promoters remain personally liable.

Can a company ratify/adopt a pre-incorporation contact after it comes into existence?

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Company cannot ratify a contract entered into by the promoters on its behalf before incorporation. The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of contract by agent.

It cannot by adoption or ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence.

Pre-incorporation contract - solutions to personal liability

The following methods may be used to ensure that the company becomes, after incorporation, an effective party to a pre – incorporation contract:

a. A draft agreement may be settled with the other party so that when the company is formed it enters into the draft agreement thus giving it contractual force when signed also by the other party. In order to ensure that the company does enter into the contract, the memorandum or articles of a new company can be drafted to include a provision binding the directors to adopt it. It will be noted here that the promoter here is not liable because there is no contract with him.

b. The promoter can make the contract himself and be bound by it, provided the other party agrees that the promoter shall be released from his obligations under the contract if and when the company enters into a new, but as regards terms, identical contract with the other party after incorporation. This is really recommended for those cases – which are many – where the promoter(s) will be in effective control of the company after incorporation and can ensure the making of a new contract9.

c. Where the promoter is anxious that the company should acquire property which he does not himself own, he may take an option to purchase for, say three months. If the company later wishes to take the property, the promoter may assign the benefit of the option to the company or enforce it for the benefit of the company. If the company does not take over the property, the promoter is not liable to do so but he may loose any money which he paid for option.

9 Simply making the contract with the third party and allowing the promoter to assign the benefit of it

to the company when it is formed is not recommended because the law does not allow a person to

assign the burden of a contract. Therefore the promoter remains personally liable for the performance

of the agreement even after the assignment to the contract.

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d. Section 40 (1) of the companies Act states that the promoter is personally liable ‘subject to any agreement to the contrary’. Thus the promoter could agree when making of a contract that he should not be personally liable on it, even if the company after incorporation do not make a new contract.

e.

Formation of companies

Currently in Tanzania companies are formed under the companies Act 2002, Cap 212. Those forming companies are called promoters. The main tasks of the promoters are to prepare various documents, and lodge these, with the necessary fees, with the Registrar of Companies.

Forming a company under Cap 212 one is expected to follow the following steps:

Name: The first thing the promoter should do is to think of a name in light of section 30(2) of the Cap 212. The promoter can make a written application to the Registrar for reservation of a name. Such reservation will remain in force for a period of thirty days or such longer period not exceeding sixty days, as the Registrar may, for special reasons allow. (s. 30(1) of Cap 212

If the proposed name of the company is approved then the following document duly stamped together with the necessary fees are to be filed with the registrar:

1) The memorandum of association duly signed by subscribers. This in effect, defines the company and what it can do. It is the requirement under section 5 (1) of the Act that there should be at least one witness who must attest the signature by subscribers to the memorandum.

2) The articles of Association, if any, signed by the subscribers to the memorandum of Association. These usually regulate the internal management, and the rights and duties of shareholders vis-à-vis the company and each other. They deal with matters such as transfer of shares, meetings, voting and other rights of shareholders, dividends, and directors’ powers of management. A public or private limited company by shares need not, in fact, submit any articles. If it does so, it will be taken to have adopted Table A, a model articles in regulations made under the companies Act.

3) A statement in prescribed form containing the names and address (or registered office) of:-

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(a)the person or persons being the first director or directors of the company

(b)the person or persons being the first secretary or joint secretaries of the company; and in the case of a first director or directors, the particulars of any other directorship held during the five years preceding the date on which the statement is delivered to the Registrar.

4) A statement specifying the intended address of the company’s registered office on incorporation.

5) A statutory declaration, in pursuant to section 16(2) of Cap 212 by the advocate of the High Court or by the person named in the articles as a director or the company secretary declaring that the requirements of the ordinance have been complied with, and the registrar may accept such declaration as sufficient evidence of compliance.

If all the requirements in respect to registration and matters incidental to it have been satisfied, the registrar issues a certificate of incorporation which is the company’s birth certificate10.

10 It is very important to take not that the registrar has absolute discretion to register the memorandum and articles of association. The registrar is not bound to give reasons. However, where the registrar refuses to register the Memorandum and articles delivered to him, he shall return the same to the person who tendered them for registration and shall advise the applicant in writing that in exercise of the power or, as the case may be, he refuses to register the memorandum and articles of association.

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MEMORANDUM AND ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

A: Meaning and ImportanceMemorandum means the memorandum of association of a company, as originally framed or as altered from time to time11. This definition is neither exhaustive nor explanatory.

The memorandum of association is a document of great importance in relation to proposed company12. It contains fundamental conditions upon which alone the company is allowed to be incorporated. It is a charter of the company and defines its reason for existence. It also regulates the external affairs of the company in relation to outsiders13. Its purpose is to enable shareholders and those who deal with the company to know what its permitted range of enterprise is. It does not only show the object of the formation of a company but also the utmost possible scope of it. The memorandum defines the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulation for their own governance as they think fit14. The importance of the memorandum of a company can be gauged by the fact that it contains rules regarding the capital structure of the company, the liability of its members, and scope of activities.

The following facts indicate the importance of the memorandum:-(1) It provides the basis of incorporation(2) It determines the areas of operation of the company.(3) It defines the relationship of the company with the

outsiders.(4) It is unalterable charter of the company. Although it can

be altered under some special circumstances.

B: Purposes of MemorandumThe purposes of memorandum of are two-fold:-

(i) The prospective shareholders shall know the field in or the purpose for which their money is going to be used by the company and what risks they are undertaking in making investment.

(ii) The outsiders dealing with the company shall know with certainty as to what objects of the company are and as to whether the contractual relation into which they

11 S.2 of the Companies Act, Cap.21212 Kapoor N.D. Elements of Company Law (1991) at pg.67.13 Saleemi NA & Opiyo, A.G. Company Law simplified (1997) at pg.5714 Ashbury Rly carriage & Iron Co. Ltd. V. Riche (1875) LR7 HL.653

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contemplate to enter with the company is within the objects of the company15.

C: Preparation of Memorandum of Association (s. 12 of cap 212)

The promoters must prepare the memorandum of association in accordance with the requirements of the Law, which relate to the formats and content of the memorandum of association. Examples of various forms of memoranda; depending on the nature of companies are given in various tables in schedule 1 of the Companies Act, Cap.212.

Table B for memorandum of Company Limited by sharesTable C for memorandum of Company Limited by guarantee and not having share capital.Table D for memorandum of company Limited by guarantee and having a share capital.Table E for memorandum of unlimited company having a share capital

Section 4(1) of the Companies Act 2002 states that the memorandum of every company shall be printed in English language. Section 5 of the same Act states that the memorandum shall be dated and shall be signed by each subscriber in the presence of at least one attesting witness. Opposite the signature of every subscriber and attesting witness there shall be written in legible characters his full names, his occupation and postal address.

D: Contents of Memorandum and the procedure to alter them.

Clause I: The Name

The name of the company establishes the identity and is a symbol of the company. The promoters have to choose the name with which the company is to be registered. They should avoid undesirable names16, names which are misleading or too similar. No company is to be registered with a name that is similar with the existing company. This is due to the fact that the name of a company is part of its business reputation.

Every company is required to paint or affix its name on the outside of every office or place in which its business is carried on, in conspicuous 15 Cotman v Brougham (1918) AC 51416 s.30 (2) of cap.212 e.g names which suggest a criminal or immoral intent, or names which are

misleading.

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position, in letters easily legible17. The name of Public Company must end with the words “Public Limited Company” and for private company with the word “Limited”18.

Section 34 (1) makes it an offence for a person who is not dully incorporated with limited liability, to trade or carry on any business or profession under a name or title of which “limited” or any contractions or imitation of the word is the last word.

Alteration

The company can change its name by passing a special resolution in a general meeting to that effect. After passing a special resolution the registrar need to approve the changes in writing for the alteration to be effective19. If the Registrar refuses to approve the changes, he is required to give reasons for such refusal (s.31)

The minister responsible for trade may direct the company to change its name if, in his opinion the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public (s.33(1)

The direction must be complied with within six weeks unless there is an application to the court to set aside. Such an application to the court must be made within three weeks from the date of the direction (s. 33(2) & (3)

Clause II: Registered Office (ss. 14(3), 110 &111)

A company shall at all times have a registered office which all communications and notices may be addressed. On incorporation, the situation of the company’s registered office is that specified in the statement sent to the Registrar under s. 14 of the Companies Act.

The company may change the situation of its registered office from time to time by giving notice in the prescribed form to the Registrar within fourteen days after the date of change.

17 s.112 of Cap.21218 s.4(1)(a) of Cap.21219 s.31(1) of Cap.212

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Clause III: The objects of the company

The objects clause defines the sphere of the company’s activities, the aims that its formation seeks to achieve and the kind of activities or business that it proposes to undertake. A company cannot conduct any business foreign to its objects clause. If anything which is not authorized by the object clause is undertaken, it is considered ultra vires and hence not biding on the company20.

The objects clause gives protection to shareholders who learn from it the purposes for which their money can be applied. It ensures them that their money will not be risked in any business other than that for which they have been asked to invest. Similarly, it protects individuals who deal with the company and who can infer from it the extent of the company’s powers.

The subscribers to the memorandum may choose any object or objects for the proposed company. However the objects should not;

(i) Include anything illegal(ii) Be in contravention of the Companies Act(iii) Include anything which is against public policy

Alteration (s. 8)

By special resolution Application for confirmation – who can apply? – s.8(2)

Holder of not less in the aggregate than 10% in nominal value of the company’s issued share capital or any class thereof or, if the company is not limited by shares, not less than 10% of the company’s members or

Holders of not less than 15% of the company’s debentures entitling the holders to object the alterations of its memorandum

Application should be made within 30 days after the date on which the resolution altering the company’s memorandum was passed.

If no application is made the company shall within fourteen days from the end of the period for making such application deliver to the registrar a printed copy of its memorandum as altered [s.8(9)(a)].s,

If application is made – s.8(9)(b).

20 Saleem et al., op.cit. at p.61

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The company shall immediately give notice of that fact to the Registrar

Within fourteen days from the date of the order canceling or confirming the alteration wholly or in part, deliver to the Registrar a certified copy of the order, and in case an order confirming the alteration wholly or in part, a printed copy of the memorandum as altered

The doctrine of ultra vires

The company has the power to do all such things are:(a) Authorized to be done by the Companies Act, Cap.212.(b) Essential to the attainment of its objects specified in the

memorandum.(c) Reasonably and fairly incidental to its objects. Anything

else is ultra vires the company.

Ultra vires act is void, as such it can not create any legal relationship. Such an act being void cannot be ratified even by the whole body of shareholders. The leading case on this point is Ashbury Rly carriage and Iron Co. Ltd. V. Riche (1878) Lt 7 HL 653. In this case a company was incorporated with the following objects

(a) to make, sell or lend on hire, railway carriages and wagons;(b) to carry on the business of mechanical engineers and

general contractors;(c) to purchase, lease, work and sell mines, minerals, land and

buildings. The company entered into a contract with Riche for financing of the construction of railway line in Belgium. The question raised was whether that contract was covered within the meaning of “general contractors”. The House of Lords held that the contract was ultra vires the company and void so that not even the subsequent assent of the whole body of shareholders could ratify it.

To overcome the obstacles imposed by the ultra vires doctrine, experts have come up with three ways/methods of drafting the objects clause:

1. The inflicted object clause – state any imaginable business2. The Independent object clause – each of the clauses shall stand

as if it severally formed an object clause of an independent company.

3. Subjective objects clause – The company can engage in any business which in the opinion of the directors, the company can advantageously engage in.

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Clause IV: Liability Clause [s.4 (2) & (3) of Cap.212]

(a) Whether the liability of the company is limited or unlimited.

(b) If limited, is it by shares or by guarantee.

Clause V: The capital clause

The capital clause of a company states the amount of capital with which it is registered, divided into shares of fixed amount. The amount of such capital is determined by the cost of starting the business and there is no statutory limitation regarding minimum or maximum. The capital is called authorized, nominal or registered.

Alteration of Share Capital

The power of a limited liability company to alter share capital is provided under s.64 (1) of Cap.212. Such powers can only be exercised by the company in general meeting. And it must be authorized to do so by its articles of association.

A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: -

1. Increase its share capital by new shares of such amount as it thinks expedient.

2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares.

3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.

4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived.

5. Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general

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meeting of the company and does not require any confirmation by the court.

A: Reduction of share Capital21

The law relating to the capital of a company has something sacred. The general principles of law founded on principles of public policy and rigidly enforced by courts is that no action resulting in a reduction of capital should be permitted unless reduction is effected

a. Under statutory authority or forfeitureb. In strict according to procedure, if any, laid down in that behalf in

the articles of Association. Any reduction contrary to this principle is illegal and ultra vires.

A reduction of capital may be effected in different ways

a. Reduction of capital without sanction of the court

1. Forfeiture of shares. The company may, if authorized by its articles, forfeit shares for non payment of calls. This result in forfeiture of shares if the forfeited shares are not re- issued.

2. Surrender of shares. The company may accept surrender of shares partly paid to save it from going through the formalities of forfeiture.

3. Cancellation of shares. The company may if so authorized by its articles, cancel shares which have not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so canceled.

4. Redemption of redeemable preference shares. The company may redeem preference shares in accordance of the provision of the ordinance.

b. Reduction of capital with the consent of the court.

21 Under the new Companies Act reduction of share capital do not apply to an open – ended investment company whose establishment has been duly authorized under the Capital Markets and Securities Act. See Section 68. Open-ended investment companies (OEIC) is a company that is able to redeem its own shares for cash and manages a portfolio of investments on behalf of its members.

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Reduction of capital in any other form apart from the ways stated above must be carried out in conformity with the provision of sections 68 – 72

of Cap 212. According to these sections, a company limited by shares or guarantee can reduce its capital if

a. Authorized by the articlesb. A special resolution has been passed to this effect

c. It has been confirmed by the court

Section 69 gives the company the power to reduce its share capital in any way but specifically mentioning the following ways in which the reduction of capital may be effected.

a. It may extinguish or reduce the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Tsh 1000 each with Tsh. 600 paid up, the company may reduce them to Tsh. 600 fully paid and thus release the shareholder from the liability on uncalled capital of Tsh. 400/-.

b. Pay off or return part of the unpaid capital not wanted for the purpose of the company. For example, where the shares are fully paid of Tsh1000 they may be reduced Tsh. 400 each and Tsh. 600 may be paid back to the shareholders.

c. Cancel paid up capital which is lost or unrepresented by the available assets either with or without extinguishing or reducing the liability on any shares. Due to heavy trading losses, C Company reduces its equity share of Tsh 100 each fully paid up to Tsh. 20 per share. If the company extinguishes liability on these shares the Tsh 100 shares will become shares of Tsh. 20 fully paid up. If it does not extinguish liability on these shares the Tsh 100 shares will continue to be shares of Tsh. 100 each, Tsh. 20 paid up.

The procedure to follow in order to reduce share capital

1. Special resolution Notice calling a meeting to propose a resolution must be

accompaniedi. Director’s certificate of solvencyii. Auditors report

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Any director of a company giving a certificate of solvency without reasonable ground shall be liable to imprisonment or fine or both.

2. Advertise in the gazette, and in case of a public company, one national news paper, in each case within five working days

of the resolution being passed

3. Application to the court by any creditor to object to the reduction within twenty eight days from the advertisement of the

resolution.

4. File a resolution to the Registrar thirty five days from the date when a resolution was passed.

B: Increase in share capital ss. 64 -67

The nominal share capital of a company can be increased, even though it has not yet issued all its authorized capital, by ordinary resolution of the company in general meeting. The company’s articles usually contain the authority to allow the company to increase its capital but in case the articles does not allow they must be altered by special resolution to this effect. The law requires that where the company has increased its share capital beyond the registered capital, notice must be given to the registrar within thirty days from the date of passing the resolution by which the increase is affected

The increase must not be done with ill motive. In the case of Clemens v. Clemens Bros. Ltd (1976) 2 All E.R 268 resolutions to increase the capital and issue of new shares in such a way as to deprive the plaintiff, a shareholder her “negative control” of the defendant company were set aside as having been passed by an inequitable use of defendant’s rights. In this case the plaintiff owned 45% of the issued share capital of the defendant company and her aunt owned the remaining 55%. Although at one time both the plaintiff and her aunt had been directors of the defendant company, at the relevant time the plaintiff was no longer a director, the aunt and her fellow directors proposed to increase the company’s share capital by the creation and issue of further shares. The plaintiff concerned was that the proposed share issue would dilute her holding and voting power from 45% to

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25%. She commenced proceedings against the company and the aunt seeking a declaration that the resolutions were oppressive, and an order setting them aside. It was held that resolutions were specifically and carefully designed to ensure not only that the plaintiff can never get the control of the company but deprive her of what has been called her negative control i.e. powers to prevent the passage of any special resolution of which she disapproved.

In the case of Tanzania Knitwear Ltd. v. Shamsu Esmail (1989) 1 T.L.R 48 resolution was passed by directors of the company to issue 800 shares. It was also resolved that each shareholder be offered to purchase the said shares according to individual shareholding. It was held that where shareholders are offered to purchase new shares on a pro-rata basis, the applicant cannot be heard to complain that the resolution was oppressive to him. However the resolution was declared illegal because it was passed by directors contrary to the requirement of section 51(2) of the Companies Ordinance which required such resolution to be passed by a company in general meeting.

Clause VI: Association Clause

In this clause, the subscribers declare that they desire to be formed into a company and agree to take the shares stated against their names.

2. ARTICLES OF ASSOCIATION

A: MeaningThe articles of association are the rules and regulations of a company formed for the purpose of internal management. The articles regulate the manner in which the company’s affairs will be managed. While the memorandum lays down the objects and purposes for which the company is formed, the articles lay down rules and regulations for the attainment of these objects.

Lord Cairns defined articles of association as:“The articles play a part subsidiary to the memorandum of association. They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which business of the company is carried on, and the mode

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and form in which changes in the internal regulations of the company may from time to time be made”22.

According to section 2(2) of Cap.212, “articles” means the articles of association of a company, as originally framed or as altered by special resolution, including, so far as they apply to the company, the regulations contained in Table A in the first schedule to either the repealed Ordinances or in Table A in the first schedule to the Act.

In framing the articles of a company, care must be taken to see that regulations framed do not go beyond the powers of the company itself as stipulated in the memorandum. They should not violate any provisions of the Act. If they do, they would be ultra vires the memorandum or the Act, and will be null and void.

The company may adopt all or part of the regulations contained in Table A to be its articles of association [s.11 of cap.212].

B: Contents of Articles of Association(a) Share capital, rights of shareholders, variation of

these rights, payment of commissions, share certificates

(b) Lien on shares(c) Calls on shares(d) Transfer and transmition of shares(e) Forfeiture of shares(f) Conversion of shares into stock(g) Alteration of capital(h) General meeting and proceedings thereat(i) Voting rights of members; voting & poll; proxies(j) Directors, their appointment, remuneration;

qualification; powers and proceedings of Board of directors.

(k) Manager(l) Dividends & reserves(m) Accounts, Audit and borrowing powers.(n) Winding up.

C: Alteration of Articles of AssociationThe company can alter articles by special resolution. (s. 13(1) & (2)

22 Taken from Saleemi & Opiyo, op cit., at p.71

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3: LEGAL EFFECTS OF MEMORANDUM & ARTICLESThe memorandum and articles when registered bind the company and the members thereof to the same extent as if;(1) They had been signed and sealed by each member;(2) They contained covenants by the company and each

member to observe all the provisions of the memorandum and of the articles [s.18 (1)].

The effect of s.18 is to constitute through the memorandum and articles of a company, a contract between each member and the company. The legal implication can be discussed under four headings on how the documents bind different groups.

(1) Members to the companyThe memorandum and articles constitute a binding contract between the members and the company. Each member is bound as if he/she actually signed the memorandum and articles.

In Borland’s Trustee v Steel Bros & Co. Ltd.23 the article of a company as altered provided that the shares of any member who become bankrupt should be sold to certain persons at a fair price. B. a shareholder became bankrupt and his trustee in bankruptcy claimed that he was not bound by the altered articles. It was held that the articles were a personal contract between B and the rest of the members and B and his trustee were bound.

(2) A company to membersA company is bound to the members in the same manner as are the members bound to the company. The company can exercise its rights as against any member, only in accordance with the provisions in the memorandum and the articles.

(3) Members Inter seAs between members themselves the memorandum and articles constitute a contract between them and are also binding on each member against the other or others. However, such a contract can be enforced through the medium of the company. This was elaborated by Lord Horschell in Welton v. Saffery24 where he observed.

23 (1901)1 Ch.27924 (1897) AC.299

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“It is true that the articles constitute a contract between each member and the company and there is no contract in terms between the individual members of the company but the articles do not, any the less, regulate their rights inter se. Such rights can only be enforced by or against a member through the company or through the liquidator; representing the company but…. No member has as between himself and other members any right beyond that which the contract of the company gives”.

In some cases, the articles seek to regulate the rights of shareholders in their capacity as members. In such a case they constitute a contract between the members ‘qua’ members. Such contracts can be directly enforced by a member against another without joining the company as a party.

(4) Company to the Outsiders.The articles do not constitute any binding contract as between a company and an outsider. An outsider cannot take advantage of articles to found a claim against a company. This is based on a general rule of law that a stranger to a contract cannot acquire any right under such contract.

4: CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLESOn registration, the memorandum and articles of association of a company become public documents. These documents are available for public inspection in the Registrar’s office on payment of such fees as may be prescribed.

Every outsider dealing with the company is deemed to have notice of the contents of the memorandum and articles of association. This is known as “Doctrine of constructive Notice” or “Constructive Notice of Memorandum and Articles”. It is presumed that persons dealing with the company have not only read these documents but that they have also understood their proper meaning.

The documents are open and accessible to all. It is the duty of every person dealing with a company to inspect these documents and see that it is within the powers of the company to enter into the proposed contract. The presumption that an outsider has read and understood the memorandum and articles

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was elaborated by Lord Hatherley in Mahoney v East Holyford Mining Co.25 as follows:

“But whether he actually reads them or not it will be presumed he has read them. Every Joint Stock Company has its memorandum and articles of association… open to all who are minded to have any dealings whatever with the company and those who so deal with them must be affected with notice of all that is contained in these two documents”.

Thus, anyone dealing with a company is presumed to know the contents of the memorandum and articles.

5. DOCTRINE OF INDOOR MANAGEMENTThis doctrine imposes an important limitation on the doctrine of constructive notice. The persons dealing with the company are presumed to have read the memorandum and articles. Once they are satisfied that the company has powers to enter into the proposed transaction, they are required to do no more. They are entitled to assume that as far as internal proceedings of the company are concerned, everything has been regularly done. The outsider is presumed to know the constitution of a company but not what may or may not have taken place within the doors that are closed to him. This doctrine is also known as the rule in Royal British Bank v. Turquand or just Turquand Rule.

Royal British Bank v Turquand26

The directors of a company had issued bond to Turquand. They had the powers under the articles to issue such bond provided they were authorised by a resolution passed by the shareholders at a general meeting of the company. No such required resolution was passed by the company. It was held that Turquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution had been passed.

Exceptions to the doctrine of Indoor Management.The doctrine is subject to the following limitation:(1) Knowledge of irregularity.A person dealing with the company will not be entitled to protection under this rule if he has notice, actual or constructive,

25 (1875) LR7 HL 86926 (1856) 6E & B 327

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that the prescribed procedure has not been complied with by the company.

(2) ForgeryThe doctrine does not protect a person where forgery is involved. A company cannot be held liable for forgeries committed by its officers.

(3) Negligence on the Part of the OutsiderIf an individual is put upon enquiry he cannot claim the benefit under the doctrine in the circumstances under which he would have discovered irregularity if he had made proper enquiry.

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MEMBERSHIP OF A COMPANY (S.24 OF CAP 212)

One can become a member of a company by any one of the following ways: -.

1. By subscribing to the memorandum of association: A subscriber to the memorandum of association becomes a member on incorporation of the company in respect of the shares subscribed by him without any further act by him. He will be liable for whatever number of shares he has subscribed for up to the unpaid amount on those shares. A Subscriber to the memorandum cannot have canceled his membership on the ground that he was induced to become a subscriber by the promoters of the company.

2. By a director undertaking to take and pay for his qualification shares. [s. 191]

3. By agreeing in writing to become a member in any of the following ways provided the name is entered in the Register of Members of the Company.

By application and allotment

By taking a transfer of shares

By transmission of shares

Membership may be acquired from an existing member by purchase of the shares of the transferor and lodging with the company a transfer deed duly executed by both the transferor and the transferee together with the share certificate. When the transfer is registered by the company, the name of the transferee is entered in the register of members of the company in place of the transferor.

In the case of transmission, a person can become a share holder in consequence or by reason of the death or bankruptcy of a member or any other event constituting transmission. But that person will become a member only when he applies in writing requesting the company to make him a member and the company puts his name on the register of members.

4. By allowing his name to be on the register of members or otherwise holding himself out as a member or allowing himself to be held out as a member. A person will be deemed to be a

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member if he allows his name to be on the register of members or otherwise holds himself or allows himself to be held out as a member. Any person competent to enter into a contract can become a member of the company. (Read s. 121 on remedy for a person whose name is entered erroneously or retained)

Who can become a member?

Any person competent to enter into a contract can become a member of a company. There is no prohibition on minors being shareholders or members although a company may refuse to accept a minor as a shareholder. However an infant can become a member of a company but he or she must act through parent or guardian. When minor applies for and receives allotment of shares, the same rules prevails as when he subscribes to the memorandum. Applying ordinary contract law rules, a contract to purchase shares is voidable by the minor within a reasonable time of attaining the age of majority. If the minor repudiate the contract, he will not be liable for future calls but cannot recover the purchase price unless there has been a total failure of consideration Steiberg v. Scala (Leeds) Ltd. (1923) 2 Ch 452, which is likely to be the case. Until minor repudiates, the minor has full rights of membership.

Partnership firm

A firm cannot be registered as a member because it is not a legal person and partners may not remain constant. A firm however may purchase share in a company in the individual names of its partners as joint shareholders.

Insolvents

A bankrupt person May be a member of a company although the beneficial interest in his shares is vested in the trustee in bankruptcy as from time to time when is adjudged bankrupt. Unless the articles provides to the contrary, a shareholder does not cease to be a member of a company on becoming bankrupt.

Companies

A registered company cannot become a member of another company unless authorized by its memorandum to hold such shares. A company cannot hold its own shares. Cannot be a member of itself. A subsidiary company cannot hold shares in its holding company, except where the subsidiary company is acting as personal representative or trustee and the holding company has no beneficial interest under the trust.

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Register of members (ss 115 – 127 of Cap 212)

Every company must keep a register of its members at its registered office stating the names, addresses and occupation, if any, and number of shares held by each member and the date which each person became ( ceased) to be a member. If there more than 50 members there must be an index (s.116). The register is to be open for inspection by members and the public during business hours and copies must be sent on request within ten days on paying prescribed fee.

Rectification of the register

The court may order rectification of the register if any one is improperly omitted or included in it (s. 121). This is in fact the procedure where by title to shares is established.

Cessation of membership

A person ceases to be a member of the company in any of the following ways: -

a. By transferring his shares to another person. However, the transferor will continue to be a member until the shares are registered in the name of the transferee.

b. By forfeiture of his shares on non-payment of calls due

c. By a valid surrender of shares to the company

d. By death but until the shares are transmitted to his legal heirs, his estate will be liable for any money due on the shares;

e. By the company selling his shares in exercise of its right under the articles of association of the company (e.g. right to lien)

f. By the Court or any other competent authority attaching and selling the share in satisfaction of decree or claim

g. By redemption of the preference shares;

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h. By the official assignee disclaiming his shares on his adjudication as an insolvent

i. By rescission of contract of membership on the ground of misrepresentation or mistake.

j. By the company buying back the shares

Rights of members

The members of a company enjoy various rights in relation to the company. These rights are conferred on members of the company by Companies Act or by the memorandum and articles of association of the company or by the general law. These rights are such as right to vote, right to demand a poll or join in the demand for poll, right to transfer shares, rights to participate in appointing directors and auditors in the annual general meeting, rights to receive dividend when declared.

Voting Rights of the Members

Every member of a company limited by shares holding equity shares with voting rights will have votes in proportion to his share in paid up equity capital of the company. In respect of equity shares with differential rights, voting rights shall depend on the prescribed rules.

Generally, preference shareholders like debenture holders do not have any voting rights. The rights to vote at meetings are usually restricted by providing that they shall have no rights to attend such meetings. However, they can vote on matters directly relating to the rights attached to the preference share capital. Any resolution for winding up of the company or for the reduction or repayment of the share capital shall be deemed to affect directly the rights attached to preference shares. Whenever preference shares are, however, authorized to vote by poll, their shares are weighted more than other classes. Weighting here means so many votes will be allocated to each share a member holds so that when such member votes, his votes are calculated by multiplying each share by the number of votes attached to each share.

Every equity shareholder with voting rights has a right to vote at a general meeting. However, a member’s voting rights can be revoked if that member does not make payment of calls or other sums due against him or where the company has exercised the right of lien on his shares.

Liability of members

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Liability of a member depends upon the nature of the company. (See types of companies on the basis of liability)

No Notice of Trust

The company is not allowed to enter any notice of trust on the register – thus the registered owner is treated as the beneficial owner so far as the company is concerned even if he is a trustee for someone else.

Sometimes the shares of a company belonging to a person may be registered in the name of other person. The person in whose name the shares are registered is the trustee and the person to whom the shares belong is the beneficiary of the shares.

For all practical purposes, a trustee is the shareholder and is liable for calls, even though the calls exceed the value of the trust property in his hands (Phoenix Life Ass. Co. Re.(1862) 31 L.J. Ch. 749). The trustee, however, is entitled to be indemnified by the beneficiary who is ultimately liable for calls [Hardoon v. Belilios (1901) A.C. 118. Section 122 clearly states that no notice of any trust, express, implied or constructive, shall be entered on the register of members. The object of S. 122 is

To relieve the company from any obligation to take notice of the rights of third parties in respect of shares registered in the names of any members, and

To preclude any person claiming an equitable interest in shares from treating the company as trustee in respect thereof.

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PROSPECTUS

After obtaining a certificate of Incorporation the promoters will take steps to raise the necessary capital for the company. A public Company may invite the general public to subscribe to the capital of the company and for this purpose a prospectus has to be issued. The basic objective of issuing a prospectus is to arouse public interest in the proposed company and induce the general public to buy its shares and debentures. If the promoters are confident of raising the required capital privately they need not issue prospectus. In such a case a statement in lieu of prospectus must be filed with the registrar of companies.The word prospectus is not used under Companies Act and instead the term offer document is used to mean any document, prospectus, notice, circular, advertisement or other invitation, offering to the public for subscription or purchase any share or debentures of a company. Private companies are not required to issue prospectus see s. 27 of cap 212.The central theme of a prospectus from money raising point of view, is that it sets out the prospects of the company and the purpose for which the capital is required. The prospectus is the basis in which the prospective investors form their opinion and take decision as to the worthiness of the company. From legal point of view prospectus is not an offer but a mere invitation to treat. When a person makes an application for shares on the basis of the prospectus that application is the offer.Offer document is defined by S.2 of Cap 212 but in simple words it is any document inviting deposits from the public or inviting offers from the public for subscription of shares or debentures of a company (subscription in the definition of prospectus means taking or agreeing to take shares for cash.Prospectus must be in writing; oral invitation advertisements in TV or film are not treated as prospectus.Invitation to PublicThe document will be treated as prospectus only when it invites general public to subscribe to it. The public is of course general word. But if the document satisfies the condition of invitation to the public, it is a prospectus even though it is issued to a defined class of the public. In Nash v. Lynde (1929) A.C. 158.it was stated that If however, the invitation is made to a small circle of friends of the directors or the existing shareholders, It is not an offer to the general public. Whether the shares have been offered to the public is a matter of fact and will depend on the circumstances of each case. In South of England Natural

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Gas & petroleum Co. Ltd Re (1911) I Ch. 573. A prospectus was issued marked ‘for private circulation only’ it also contained a statement that a copy of it has been filed with the registrar. It was not publicly advertised and was stated to have been distributed by the promoters only to shareholders in certain gas companies in which they were interested. 3000 copies were sent out. It was held that it was offer of shares to the public.An offer will not be treated as made to the public

(1) If it is not calculated to result directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation.

(2) It is domestic concern of the persons making and receiving the offer or invitation. Thus an offer to one’s kid cannot be considered to be an invitation to public; Sherevell V Combined Incandescent Mantle’s Syndicate (1907) 2.3 T.L.R 482.

FORM AND CONTENTS OF A PROSPECTUS.Prospectus is the window through which an investor can look into the soundness of a company’s venture. The investor must, therefore be given a complete picture of the company’s intended activities and its position.This is done through prospectus which must secure the fullest disclosure of all materials and essential particulars and lay the same in full view of all intending purchasers of shares or debentures.S. 46 provided that every prospectus issued by or on behalf of a company must be filed, and the date, unless the contrary is proved, is taken to be the date of publication of the prospectus.

S.47 (1) States that offer document issued before on behalf of the company or, by or on behalf of any person who was engaged or interested in the formation of a company must state the matters specified and contains in the reports required to be included from time to time in regulations made by the Minister for the time being responsible for finance or by the Capital Markets and Security Authority or such other authority as may be designated by that minister for the purpose.Prospectus is not required to be issued in the following cases.(1) Where shares are not issued to the public.(2) Where shares or debentures are offered to existing members or

debentures holders.

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(3) Where shares/debentures offered are uniform in all respects with previously issued shares/debentures.

(4) Where an offer is made in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares/debentures.

Registration of offer document (s. 49)No offer document shall be issued by or on behalf of the company or in relation to intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof approved by the Capital Markets and Securities Authority. Misstatements in ProspectusIf there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact, there may arise

1) Civil liability – s. 502) Criminal liability- s. 51 & 472

A person who has been induced to subscribe for shares (or debentures) on the faith of a misleading prospectus has remedies against the Company, and the directors, promoters and experts.

Remedies against the Company1) Rescission of the Contract

Any person, who takes shares on faith of statements of fact contained in a prospectus, can apply to the court for rescission of the contract if those statements are false or fraudulent or if some material information has been withheld. He must however, apply for the rescission with a reasonable time and before he will have to surrender to the Company the shares allotted to him. His name is then removed from the register of members and he gets back the money paid by him for the Company along with interest.

Conditions for rescinding a) The statement must be a material misrepresentation of fact. The

misrepresentation is material when it is likely to influence a reasonable man in his judgment whether or not to apply for shares. In Henderson V Lacon (1867) L.R. 5 Eq. 249. A prospectus stated that the directors and their friends have subscribed a large portion of the capital and they now offer to

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the public remaining shares, where as the fact was that the directors had subscribed only 10 shares each it was held that, the subscriber could rescind the contract.

A statement of fact must be distinguished from a statement of opinion. statement that property of a company is worth a certain sum of money or that due to hard work and efficiency of directors the profits are expected to reach a certain figure are only opinions and will give no ground for an action for rescission. The statement that “the surplus assets, as appear by the last balance sheets, are more than Tshs. 10,000/= is a statement of fact.

b) Statement must have induced the shareholder to take the shares.This in fact is a question of fact depending on circumstance of each case if a statement would influence a reasonable man, the court will readily infer that it influenced the applicant. In the case of Smith V Chadwick (1087) A.C 187 it was stated that if the applicant’s acts show that he did not rely on the statements, he is not entitled to rescind.

c) It must be untrueA statement is deemed to be untrue if it is misleading in the form and context in which it is included. Where an omission is calculated to mislead, the prospectus is deemed in respect to such omission, to be a prospectus in which untrue statement is included. But a mere non-disclosure does not amount to misrepresentation unless the concealment has prevented an adequate appreciation of what was stated.

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CONCEPT OF CAPITAL AND THE FINANCING OF COMPANIES

As Latham CJ said in the Australian Case of Incorporated Interest Pty Ltd V Federal commissioner of Taxation (1943) 67 CLR 508 at 515:’ it is impossible to say that capital has a single technical meaning which prima facie should be attributed to the word in any statutory provision’

The legal concept of capital crops up in the law of trusts and revenue law as well as company law. In trust law it describes the original trust fund and any assets which replace the items in the original fund. A distinction is drawn between capital and income. In revenue law, there is the same capital and income distinction. In modern company law capital is used to cover:

a. Share capital – the funds subscribed by members;b. Loan capital – the fund provided by commercial finance providers

and investors holding debentures or debenture stocks;

c. All funds whether provided by members, creditors or by retention of profits and

d. The assets in which funds have been invested.

Share

Share is the interest of a shareholder in a company. The interest is what is owned and it gives a shareholder certain rights as defined by the articles of association and has a nominal value.

Share Certificate

The ownership of interest is evidenced by a document called share certificate. When a share has been allotted to a member the company is required to issue certificate within six days. Where shares are transferred from one member to another, the company must send a share certificate to the new member within two months (s.82). [This does not apply to shares transferred within the membership of the Stock Exchange]

A share certificate is merely a prima facie evidence of the fact that the person stated as being the owner of the shares is the owner and that the shares are paid up to the amount so stated (s. 83(1). On the other hand the company cannot deny the truth of these statements against anyone who relied on the certificate to his detriment unless the share

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certificate is a forgery. (See Re Bahia and San Fransico Rly Co. (1868) LR 3 QB 584 and Reuben v. Great Fingall Consolidated (1906) AC 439)

Share Capital

This means the capital raised by a company by the issue of shares. The capital clause in Memorandum of Association must state the amount of capital with which company is registered giving details of number of shares and the type of shares of the company. A company cannot issue share capital in excess of the limit specified in the Capital clause without altering the capital clause of the memorandum of association. The following different terms are used to denote different aspects of share capital: -

Nominal authorized or registered capital means the sum mentioned in the capital clause of Memorandum of Association. It is the maximum amount, which the company raises by issuing the shares and on which the registration fee is paid. This limit cannot be exceeded unless the Memorandum of Association is altered.

Issued capital means the nominal value of the shares which are offered to the public for subscription. A company does not normally issue capital at once, so that issued capital in such case is less than the authorized capital. The issued capital can never exceed the authorized capital, it can at most be equal to the authorized capital which is the case when all shares have been issued to the public.

Subscribed capital means that part of the issued capital at nominal or face value which has been subscribed or taken up by purchaser of shares in the company and which has been allotted. The subscribed capital may be less than the issued capital.

Called-up capital this is that part of the issued capital which have been called up on the shares. It is the total amount called upon the shares issued and which the shareholders continue to be liable to pay as and when called. I.e. if the face value of a share is Tsh. 500/- but the company requires only Tsh 200/- at present, it may call only Tsh. 200/- now and the balance Tsh 300/- at a later date. Tsh. 200/- is the called up share capital and Tsh. 300/- is the uncalled share capital.

Paid-up capital means the total amount of called up share capital, which is actually paid to the company by the members. Often some

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shareholders fail to pay the calls made on them and the amount thus owing is known as “calls in arrears” or “calls unpaid”

Call on shares

A call is a demand by a company on its shareholders to pay the whole or in part of the balance remaining unpaid on each share. It is made in pursuance of a resolution of the board of directors and terms of articles of association. It may be made at anytime during the lifetime of the company or its winding up.

Transfer of shares

The shares of a company are movable property, transferable in the manner prescribed in the articles of association of the company (S. 74). Although the right of a shareholder to transfer his shares in a company is absolute as it is inherent in the ownership of the shares it can still be restricted by contract which has to be found in the articles of association of a company.

Transfer of shares shall not be lawful unless a proper instrument of transfer duly stamped and executed and signed by both the transferor and the transferee is delivered to the company (s. 77).

A transfer executed by legal representative of the deceased member, although he is not himself a member, is valid as the one executed by the member himself.

An application for the registration of a transfer of shares of a company may be made either by the transferor or the transferee. On the application of the transferor of any share, the company shall enter in its register of members the name of the transferee in the same manner and subject to the same conditions as if the application was made by the transferee.

A company may refuse to register the transfer of its shares and shall within sixty days from the date, on which the instrument of transfer was delivered to the company, send a notice of the refusal to the transferee (S. 80(1)). If default is made in complying with this provision, the company, and every officer of the company who is in default, shall be liable to the default fine.

Forged transfer

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An instrument of transfer of shares on which the signature of the transferor is forged is called forged instrument and any transfer of shares effected on such instrument is called forged transfer. The first thing that the company should do when an instrument of transfer is tendered to it is to inquire into its validity. The company should send a notice to the transferor at his address and inform him/her that such transfer has been lodged and that if no objection is made before a specified day, it would be registered. But in spite of these precautions forged transfer may be registered.

Consequences of forged transfer

1) A forged transfer is a nullity. It does not pass legal title to the transferee. The true owner can have his name restored on the register of members.

2) If the company has issued a share certificate to the transferee on a forged transfer and he has sold these shares to an innocent buyer, the buyer gets no right to be registered as a shareholder. In such case, he can claim damages from the company on the ground that he acted on the share certificate of the company (See Balkis Consolidated Co. Ltd v. Tomkinson (1893) A.C 396.

3) If the company has been put to a loss by reason of the forged transfer, it may recover the loss from the person who procured registration, even if he might have acted in good faith. In Sheffield Corp. v. Barclay (1905) A.C 392, the respondent lodged with a company for registration a forged transfer of some shares which stood in names of T and H, T having forged H’s signature to the transfer. The respondent was ignorant to this. The company registered the transfer in the name of the respondent. The respondent transferred the shares to C and a certificate was issued in his name. H subsequently discovered the forgery and compelled the company to issues new shares. The respondent was bound to indemnify the company which in turn was bound to indemnify C.

[Read s. 86 on impersonation of shareholder]

Restriction on the transfer of shares

Unless the articles provide some restriction on transfer all shares are freely transferable. Listed companies can not impose any restriction because of stock exchange rules. Restrictions take one of the following forms:-

Directors’ powers to refuse transfer

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Such clauses usually allow the director to refuse to register any transfer in their absolute discretion and without giving any reason thereof. The court will not interfere unless the directors have acted in bad faith, nor can they be compelled to state their reasons unless the articles require them to do so. (See Re smith and Fawcett Ltd (1942) Ch. 304 and Berry and Stewart v. Tottenham Hotspur Football (1935) Ch 718.) Any transfer in breach cannot be registered but the director must call a meeting to exercise the power of refusal. Unreasonable delay will lead to the Veto being lost.

Pre- emption clauses

Such clauses require members to offer their shares first to the existing members before they may sell them to outsiders. A transfer in breach of the pre- emption clause cannot be registered but it may operate as a transfer of the beneficial interest.

Transmission of shares

This occurs where the rights encompassed in the holding of shares vest in another by operation of law and not by reason of transfer. It occurs in the following circumstances:-

Death of a shareholder – the shares of the deceased shareholder vest, in terms of the rights they represent, in executor or administrator who can sell or otherwise dispose of them, e.g. to the beneficiary, without actually being registered, subject to any restrictions on transfer which the articles may contain.

Bankruptcy – On the bankruptcy of a member, the right to deal with the shares passes to trustee in bankruptcy, and he can sell without actually being registered or he can elect to register subject to any restrictions in articles.

Forfeiture of shares

If the shareholder having been called upon to pay on any call of his shares fails to pay the call, the company has two remedies against the shareholder

1. it may sue him for the amount2. it may forfeit his shares

Forfeiture means depriving a person of his property as a penalty for some act or omission. However, shares can be forfeited for non- payment of call if only special powers in the articles is given to the directors to do so. The forfeiture must be made strictly in accordance

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with the regulations regarding notice, procedure and manner stated in Articles. Re Esparto Trading Co.(1879) 12 Ch D 191. The power to forfeit shares must be exercised by the directors in good faith and for the benefit of the company. A person whose shares have been forfeited ceases to be a member of that company.

Classes of shares

The capital of a company is divided into certain indivisible units of a fixed amount called shares. Farewell J, in the case of Borland’s Trustee v. Steel Bros. (1901) 1 Ch 279 defines a share as the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the fist place and of interest in the second place but also consists of a series of mutual covenants entered into by all shareholders. Shares in the company may be similar i.e. they may carry the same rights and liabilities and confer on their holders the same rights, liabilities and duties.

Equity shares/ ordinary Shares

Ordinary shares are also referred to as the equity capital. Members holding them are said to have the equity in the company and equity here means ownership of the company. This is because just has much as they take the “lions share” of the company’s profits when dividends are declared handsomely; they also take the greater part of companies’ financial losses.

Ordinary shares will have a right to return of capital ranking after preference shares, but in the same way as the payment of dividend, ordinary shares will claim the pool of surplus assets in the solvent winding up after the return of capital to all other shareholders.

Ordinary shares will usually carry one vote per share although companies may attach such voting rights as they choose. As preference shares have only a restricted right to vote, ordinary shares will carry voting control in general meetings. Non- voting ordinary shares can be issued but they are not common.

Preference Shares

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Preference Shares means shares which fulfill the following two conditions. Therefore, a share which is does not fulfill both these conditions is an equity share.

a. It carries preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable is payable on fixed figure or percent and this dividend must be paid before the holders of the equity shares are paid dividend.

b. It also carries preferential right in regard to payment of capital on winding up or otherwise. It means the amount paid on preference share must be paid back to preference shareholders before anything is paid to the equity shareholders. In other words, preference share capital has priority both in repayment of dividend as well as capital.

Types of Preference Shares

1. Cumulative or Non-cumulative: A non-cumulative or simple preference shares gives right to fixed percentage dividend of profit of each year. In case no dividend is declared in any year because of absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the profits are available for distribution. In this case dividends which are not paid in any year are accumulated and are paid out when the profits are available.

2. Redeemable and Non- Redeemable: Redeemable Preference shares are preference shares, which have to be repaid by the company after the term for which the preference shares have been issued expires. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. A company can issue the preference shares which from the very beginning are redeemable provided it comprises of following conditions provided by Section 61 of Cap 212. : -

a. It must be authorized by the articles of association to make such an issue.

b. The shares will be only redeemable if they are fully paid up.

c. The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of

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proceeds of new issue of shares made for the purpose of redeem shares.

d. If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed.

e. When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve fund. This amount should then be utilized for the purpose of redemption of redeemable preference shares.

3. Participating Preference Share or non-participating preference shares. Participating Preference shares are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. Non-participating shares are those that earn dividends at a fixed rate only once whether or not there is a surplus still available for distribution to the members

Deferred or founders Shares

These types of shares are usually issued to the founders of the company as reward to their services. They are usually given rights to a portion of the profits if the dividend on ordinary shares exceeds a certain fixed amount. The rights attaching to them are determined by the memorandum or articles.

Corporate shares

These are shares created by a company for issue to its employees. They are, therefore, shares that serve special purpose. They are usually given to employees as a means of winning their corporation with the company’s management and owners. Normally, the company pays for them to the employees as fully paid up shares. Since the employees will one day leave the company employment, the company’s trustee will look after these shares in the event of an employee leaving the company. These shares are normally issued without voting rights but have the rights to earn dividends.

Stocks

Instead of creating or maintaining its capital in shares a company can decide to convert its shares into stocks and issue the same to the members. A stock by definition is one unit of a company’s capital

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comprising several number of shares put together e.g. a company may decide that every ten shares shall be converted to constitute one stock so that instead of members buying shares they buy stock each one of which represent ten shares.

The conditions under which the shares may be converted into stock are governed by Section 51 and 52 of Cap 212. These conditions may be summarized has follows:

a. It must be a type of a company that is allowed to convert its shares. According to section 51 it must be a limited company.

b. Conversion can only be undertaken if only articles of association of the company in question contain express provisions to that effect

c. The shares to be converted must only be paid up shares

d. Only company itself can take a decision to convert shares into stock and not board of directors. Section 51 (2) The powers to convert shares to stock can only be exercised by the company in general meeting

e. Where the company has taken a decision to convert shares into stock, that company must give notice of conversion to the Registrar of companies within one month from the date the resolution was taken i.e. see Section 52(1) if default is made every officer responsible shall suffer default fine as per section 52(2).

Variation of shareholders rights (s. 73 of Cap 212)

The rights, duties and liabilities of all shareholders are clearly defined at the time of issue of the shares. Once the rights of shareholders are fixed, they cannot be altered unless the provisions of the Companies Act for this purpose are complied with. The rights attached to the shares of any class can be varied only with the consent of any specified proportion of the holders of the issued shares of that class or with the sanction of special resolution passed at a separate meeting of the holders of issued shares of that class. However, the following conditions also must be complied with: -

1. The variation of rights is allowed by the Memorandum or Articles of Association of the Company.

2. In absence of such provision in the Memorandum or Articles of company, such variation must not be prohibited by the terms of issue of shares of that class.

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Rights of Dissenting Shareholders:

The rights of the shareholders who did not consent to or vote for variation of their rights are protected by the Companies Ordinance. If the rights of any class of the shareholders are varied, the holders of not less than 15 per cent of the shares of that class, being persons who did not consent to or vote in favor of resolution for variation of their rights can apply to the court to have the variation cancelled. Where such application is made to the court, such variation will not be given effect unless and until it is confirmed by the court.

Application and allotment of shares

An application for shares is an offer by a prospective shareholder to take shares. Allotment is the acceptance by the company of such an offer and it results in a binding contract between the company and the applicant.

General provision regarding Allotment

The general principle as regard to offer and acceptance in the law of contract apply to a contract involving an application for and allotment of shares in a company.

a) Proper Authority – An allotment must be made by a resolution of the board of directors of the company. This duty cannot be delegated by the directors except in accordance with the provisions of the articles.

b) Reasonable time – Allotment must be made within reasonable time otherwise the applicant is not bound to accept it.

c) Communication – Allotment must be communicated to a person making the application so that it is legally complete. Where post is used as a means of communication between parties then S. 4(2) of Law of Contract Ordinance Cap 433 applies.

d) Absolute and unconditional – the allotment must be absolute and unconditional. If an application for shares is conditional and the condition is not fulfilled, the applicant is not bound to take shares.

Loan Capital / Debt Financing

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Debt capital is a common method of financing business enterprise and for successful companies, particularly listed companies. Debt capital represents the obligation of a company to repay the loan made by the debt holder. A company is bound by contract to make payments of principal and interest on a fixed schedule. Companies may borrow money in many ways; by making short term commercial notes, taking shareholders loan, accepting bank lines or credits and issuing debt securities/ stocks. Debt financing can be from outside third parties or inside shareholders.

Debentures

The most usual form of borrowing by a company is by issue of debentures. According to section 2 of Cap 212 and Companies Act, debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the asset of a company or not.

In Levy v Abercorris Slate & Slab Co. (1897) 37 Ch. D 260; Debenture was said to mean a document which either creates a debt or acknowledges it.

In Edmonds v Blaina Co. (1887) 36 Ch.D 215 Chitty J: the meaning of debenture was described as follows:” the term itself imports a debt or an acknowledgment of debt and obligation or covenant to pay. This obligation or covenant is in most cases accompanied by some charge or security”

It follows from the above judgments that a debenture is an acknowledgement in writing of a debt by a company to some person or persons, and it is issued to the public by means of a prospectus in the same manner as shares. It normally contains provisions for the payment of interest and eventual repayment of the sum loaned at a fixed date.

Debentures are therefore, a form of a security which may be bought and sold in such a way as shares. In order to give lenders some security against non- repayment of their loan, a charge is often made against the assets of the company.

Debentures are commonly issued through prospectus. The amount might be payable by installments on application, allotment and calls. But usually the amount is payable in one lump sum.

As a general matter debts do not have the participation, voting, conversion and redemption rights that constitute the fundamental

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ingredients of equity securities/ stocks. It is not uncommon for a company to issue debentures that are convertible at holder’s option into specified equity securities or that are redeemable at the holder’s option (“put” debentures). Generally the issue of debt securities/stocks (like entering into any other contractual arrangement) is a matter left to board’s discretion.

Classes of debentures

According to negotiability

Bearer debentures – these are known as unregistered debentures, are payable to its bearer. These are regarded as negotiable instruments and are transferable instruments by delivery and a bona fide deliveree for value is not affected by the defect in title of the prior holder. In Bechuanaland Exploration Co. v. London trading bank ltd (1898) 2 Q.B 648 B co held debentures of an English company, payable to bearer. It kept them in the safe of which the secretary had the key. The secretary pledged the debentures with a bank security for a loan taken by him. The bank took the debenture bona fide. It was held that the bank was entitled to the debentures as against the company.

Registered debentures – These are debentures payable to the registered holders. A holder is one whose name appears both on the debenture certificate and in the company register of debentures. It usually contain the following clauses

a. A covenant to pay the principal sumb. A covenant to pay interest

c. A description of the charge on the company’s undertakings and property

d. A statement that it is issued subject to conditions endorsed thereon

According to security

a. Secured debentures – Debentures which create some charge on the property of the company are known as secured debentures

b. Unsecured or naked debentures – debentures which do not create charge on assets of the company. The holder of these debentures like unsecured creditor may sue the company for recovery of debt.

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According to permanence

a. Redeemable debentures – Debentures usually issued on condition that they shall be redeemable after a certain period

b. Irredeemable debentures – when debentures are irredeemable they are called perpetual debentures. They are so treated where wither there is no fixed period for payment of the principle sum or repayment of it is made conditional on the happening of an event which may not happen for indefinite period or may happen only in certain specified and contingent event i.e. winding up.

Debts priority over equity

When a company becomes insolvent or dissolves, creditors or debt holders are entitled to pay before equity shareholders.

If a company has insufficient equity cushion to satisfy all inside and outside creditors’ claims, outside claims will seek to have inside debt characterized as equity. This is essentially an equitable subordination question. During winding up courts can subordinate or lower the nominal priority of claims by corporate insiders if based on transaction that based on breach of fiduciary duties or fraud. Courts will also consider factors used in lifting the veil of incorporation.

Charge on assets of a company

Whenever a company has power to borrow; it has as an incident to such power, a power to security for the debt by a charge on all or any its property. A power to borrow includes, if there is nothing to the contrary in the memorandum and the articles, the power to charge uncalled capital of the company Jackson vs. Rainfford Coal Co (1896) 3 Ch 360.

A company cannot however borrow on the security of its reserve capital. In Re May fair Property Co (1898) 2 Ch. 28 A company’s memorandum and articles gave it power to charge uncalled capital. The company passed a special resolution in a general meeting not to call the last ₤ 5 per share remaining uncalled except in the event of and for the purpose of the winding up of the company. Later the directors charged the undertaking including the uncalled capital by issuing debentures. It was held that the reserve capital of ₤ 5 per share was not subject to the charge₤ 5 per share.

A charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt. Charges are of 2 types: -

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1. Fixed charge: Such a charge is against a specific clearly identifiable and defined property. The property under charge is identified at the time of creation of charge. The nature and identity of the property does not change during the existence of the charge. The company can transfer the property charged only subject to that charge so that the charge holder or mortgage must be paid first whatever is due to him before disposing off that property.

2. Floating charge: Such a charge is available only to companies as borrower. A Floating charge does attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc. It attaches to the property charged in the varying conditions in which happens to be from time to time. Such a charge remains dormant until the undertaking charge ceases to be a going concern or until the person in whose favor charge created takes steps to crystallize the floating charge. A floating charge on crystallization becomes a fixed charge.

Characteristics of a floating charge

1) It is a charge on the class of assets of the company both present and future

2) That class of assets is one which, in the ordinary course of the business of the company, is changing from time to time.

3) It is contemplated by the charge that, until some steps are taken by or on behalf of those interested in the charge, the company may carry on its business in ordinary way

Consequences of the floating charge

The company can:-

1) Deal with the property on which a floating charge is created, till the charge crystallizes

2) Notwithstanding the floating charge, create specific mortgage of its property having priority over the floating charge.

3) Sell the whole of its undertaking if that is one of its objects specified in the Memorandum, in spite of the floating charge on undertaking see Re Foster Vs Borax Co (1901) 1 Ch 326.

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Crystallization of floating charge: When the charge holder takes steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge. Until a floating charge becomes a fixed charge, the company is free to deal with the property charged in any manner it deems fit. But once the floating charge crystallizes, the company cannot dispose off the charged assets without paying of the charge holder. Otherwise, the charge holder can recover his dues from the proceeds. A floating charge crystallizes or becomes the fixed in following situations: -

1. Where the company ceases to carry on the business, whether the principal money has become payable or not, unless the debenture or trust deed contains the stipulation to the contrary.

2. Upon the commencement of winding up of the company. 3. If a debenture holder, having become entitled to realize the

securities by the reason of the fact that the principal money has become payable, intervenes for the purpose by appointing the receiver or by making an application to the court for appointment of the receiver.

Registration of charges: Every company must keep at its registered office a register of charges in which all the charges and mortgages specifically affecting the property of the company must be entered. The register must contain short description of the property charged, the amount of the charge, the name of the person entitled to the charge, etc. The company must keep at its registered office, a copy of every instrument creating any charge requiring the registration. Particulars of the charge together with the instrument by which the charge was created must be delivered to the Registrar for registration.

Charges requiring registration: A company must file within 42 days of creation of a charge with the Registrar complete details of the charge together with the instrument of charge or its verified copy in respect of certain charges( See Section 97 of Cap 212) Otherwise the charge will be void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them. The following charges are compulsorily registrable: -

1. a charge for the purpose of securing any issue of any debentures..

2. a charge on uncalled share capital of the company

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3. a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale

4. a Charge on land, whenever situated, or any interest therein

5. a charge on book debts of the company

6. a floating charge of on the undertaking or property of the company

7. a charge on calls made but not paid

8. a charge on ship, or aircraft, or any share in a ship

9. a charge on goodwill, or any intellectual property

Effects of Registration: Once a charge is registered, it acts as a notice to the public at large that the charge holder has an interest in the charged property. No person can take a defense against the charge holder that he was not aware that a charge was created against the property. That person will be entitled to the property subject to the interest of the charge holder. Once certificate of charge is issued by the Registrar, it is conclusive evidence that the document creating the charge is properly registered.

Consequences of Non-Registration:

1. A charge which is compulsorily registerable but which is not registered is void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them. In Monotholic Building Co.(1915) 1 Ch. 643. In March, M ltd mortgaged land to T, to secure a loan of ₤ 500. The charge was not registered. In December, the company issued debentures secured by a floating charge on all company’s assets to J, who knew of the charge in favor of T to secure ₤ 500. These debentures were registered. It was held that J had priority over the claim of T.

2. Although the security becomes void by non-registration, it does not affect the contract or obligation of the company to repay the money thereby secured.

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3. Omission to registrar particulars of charge as required is punishable with fine. A company or every officer of company is in default shall be liable to fine.

Memorandum of satisfaction: the registrar may, on evidence being given to his satisfaction that the debt for which any registered charge was given has been paid or satisfied, order that a memorandum of satisfaction be entered on the register, and shall, if required furnish the company with a copy thereof. See section 104 of Cap 212.

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DIRECTORSA company from juristic point of view is a legal/artificial person. It has no physical existence. As such it cannot act in its own person. It can only do so only through human agency i.e. directors.

Cairns LJ in Furguson v Wilson27 observed:“The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent”.

Lord Cranworth L.C. observed in Aberdeen Rly Co. v. Blaikie Bros.28;

“The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting”.

The persons who are in-charge of the management of the affairs of the company are termed as directors. They are collectively known as the Board of Directors. The importance of the directors as par Neville J. is that they are the brains of the company:

“The Board of Directors are the brain and only brain of the company which is the body, and the company can and does act only through them”

27 (1866) LR 2 Ch. App.7728 (1854) 1 Macq 461

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Definition:Section 2 of Cap.212 defines director to include any person occupying the position of director by whatever name called.

The important factor to determine whether a person is or is not a director is to refer to the nature of the office and its duties. It does not matter by whatever name he/she is called. If he/she performs the functions of a director he would be termed a director in the eyes of the law even though he may be termed differently.

In Re forest of Dean Mining Company29 Jessel MR said “It does not much matter what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and shareholders in it”.

A director may generally be defined as a person having control over the direction, conduct, management or superintendence of the affairs of a company.

Number of directors:Every company must have at least two directors [s.186 & 187)].

Qualifications of directorsFor a person to be appointed a director he must have the following qualifications.

29 (1878) 10 chD 450

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(1) Must be of the age of majority according to the law to which he is subject.

Section 194(1) of the Companies Act 2002 provides: “subject to the provisions of this section, no person shall be capable of being appointed a director of a company which is subject to this section if at the time of appointment he had not attained the age of twenty one or he has attained the age of seventy”.

(2) Must be of sound mind(3) Must not be disqualified by any law to which he/she is subject.

Undischarged bankrupts – under Bankruptcy Ordinance

(4) Must not be disqualified by an order of the court [s.197](5) If the articles so require, the director must have share qualification. In such cases, a person cannot be appointed as director unless he acquires he acquires a certain minimum number of shares in a company (share qualification). Such qualification shares may be acquired within two months after his appointment or such shorter time as may be fixed by the articles [s.190) of Cap.212].

A person shall not be capable of being appointed director unless he signs and deliver to the registrar for registration a consent in writing to act as such director [s.141(1)].

10. POSITION OF DIRECTORSIt has been very difficult to pinpoint the exact legal position of the directors of a company. They have been described by various names; sometimes as agents, as trustee, and sometimes as managing partners.

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Directors as agents:A company being an artificial person, acts through directors who are elected representatives of the shareholders. They are, in the eyes of the law, agents of the company for which they act, and the general principles of the law of principal and agent regulate in most respects, the relationship between the company and its directors.

It cannot, however, be said that directors are nothing more than agents of a company. They have in certain matters independent powers. They are not bound to consult the shareholders in all matters. Some powers may, according to the articles, be exercised by the directors.

Directors as TrusteesDirectors are treated as trustees

(1) of the company’s money and property; and(2) of the powers entrusted to them.

In Great Eastern Rly Co. v. Turner30 Lord Selborne observed:“The directors are mere trustees or agents of the company – trustees of the company’s money and property – agents in the transactions which they enter into on behalf of the company”..

(1) Directors are trustees of the company’s money and property in the sense that they must account for all the company’s money and property over which they exercise control. They have also to refund to the company any of

30 (1872) LR 8 Ch.App.149

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its money or property which they have improperly paid away or transferred [Cook v. Deeks (1916) AC 554](2) Directors are trustees of the power entrusted to them in the sense that they must exercise their powers honestly and in the interest of the company and shareholders and not in their own interest. In Percival v. Wright31, the directors of a company had the power to issue the unissued shares of the company. The company was in no need of further capital but the directors made fresh issue for themselves and their supporters with a view to maintaining control of the company. It was held that the allotment was invalid and void.

Directors are, however, not trustees in the real sense of the word because they are not vested with the ownership of the company’s property. It is only as regards some of their obligations to the company and certain powers that they are regarded as trustees of the company.

(3) True position is that directors are in fiduciary relationshipJessel MR in Forest of Dean Coal Mining Co., Re32 observed:“Directors have sometimes been called as trustee or commercial trustees and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is; which is that they are really commercial men managing a trade concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the

31 (1920) 1 Ch.7732 (1878) 10 Ch.D 450

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company in respect of their powers and capital under control”.

11. POWERSThe Board of directors of a company is entitled to exercise such powers, and to do all such acts and things, as the company is authorized to exercise and do. However, wherever the law requires authorization by the members in a general meeting, the directors can do such act only on receiving such authorization.

12. DUTIES OF THE DIRECTORSThe essence of the duties of directors is twofold. On the one hand, having been elected to office, directors become responsible for the company finances and assets. As such, in the absence of any legal controls, the directors have virtually a free hand over the manner the corporate property may be used. As trustees, the directors become subject to fiduciary duties. On the other hand, the directors are in practice conferred with almost unlimited powers by the company Articles of Association. The agency principle relates to the exercise of directorial powers in that the directors, as agents, owe a duty to exercise their directorial powers carefully, skillfully and with diligence.Before examining the directors’ duties in extenso it is important to note that the extent of the duties of directors is limited to the company. That is, the directors owe these duties to the company only and not to individual shareholders. Courts have reasoned that shareholders choose their own directors and if they decide to choose incompetent amateurs to run their business, then law would not prevent them. The only exception to the above rule restricting the scope of the duties of directors is where shareholders appoint directors specifically as their agents in any matter. In such cases the directors

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will owe such shareholders the ordinary fiduciary duties arising form that agency relationship. In the New Zealand case of Colemn v. Myers the court of appeal held that in determining whether the duty arises when a director is dealing with a shareholder, regard must be paid to all surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder.

Duties of directors The fiduciary position occupied by directors, that which arise from their being characterized as trustees and agents, gives rise to three major duties.

1. Duty to act bonafide in the interest of the company (181 & 182(1)A director of the company when performing his duties is required to act honestly and in good faith and in what he believes to be the best interest of the company.

Evershed, M.R. in Greenhalgh v. Arderne cinema Ltd. stated that it is the subjective opinion of the director as to the interests of the corporations as a general body which courts.

The gist of this rule is that, where a director makes some judgment which he is required or permitted to exercise under his company’s constitution, if he does so bonafide, there is no liability for the consequences of a faulty judgment.

2. Duties of care, skill and diligence (s. 185)The director owes the company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both-

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a) The knowledge and experience that may reasonably be expected of a person in the same position as the director, and

b) Any special knowledge and experience which the director has.

Romer, J. in Re: city equitable fire insurance co. Ltd laid down three propositions which define the directors’ duty of care, skill and diligence. First, that a director need not exhibit in the performance of his duties a greater skill than may reasonably be expected of a person of his knowledge and experience. This means that no minimum reasonable amount of skill is required. Thus, the less knowledge and experience a director has, the less skill is expected of him and the less likely he is to be liable when something goes wrong. The standard of care expected of a director is that of a reasonable man. This proposition positively encourages incompetent people to accept directorship, because the law expects little or nothing of them.

Second that a director is not bound to give continuous attention to the affairs of his company. The law thus considers the director’s duties to be of an intermittent nature in that a director executes his duties at periodic board meetings and at meetings of any committee of the board upon which he happens to be placed, but he is not bound to attend all such meetings.For example, in Re: Cardiff Savings Bank, Marguis of Bute’s case where Marguis of Bute was not liable as president of Cardiff irregularities in the bank for losses resulting from irregularities in the bank’s operations. He had been appointed president when only six months old, and had attended one board meeting in thirty eight years.In Re: city equitable fire insurance co. Ltd (supra) no blame was attached to a director who lived in Aberdeen and found it difficult to

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attend board meeting in London, or another director who attended no board meeting for five years due to illness.Lord Hatherly opined in Land credit company of Ireland v. Lord Fermay that where a director does attend, however, it is reassuring to know that the law expects him to remain awake.Third, that a director is, in the absence of grounds for suspicious, justified in trusting some other official to perform certain duties honestly. That is a director is not necessarily required to do everything himself, or to distrust and continuously supervise those to whom he has delegated task. However, as pointed out in Fisheries development corporation of SA Ltd. V. Jorgenson.

They are not absolved from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of lack of knowledge of wrongdoing, if that ignorance is the result of gross inattention.

3. The non-conflict rule

This rule imposes a duty upon a director not to place himself in a position where his duty to the company and his personal interests conflict. Also that he should not profit from his position in that he should not divert company opportunities to himself. The law thus imposes strict prophylactic rules involving onerous disclosure rules to prevent directors shrouding their transactions in secrecy. 4. Duty to exercise powers for proper purpose (s. 185)5. Duty to have regard to interests of employees

DIRECTORS’ LIABILITY Fraudulent trading (s.383) Wrongful trading (s.384 CA)

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Disqualification order (s. 197) Criminal liability (s.314 Penal Code)

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COMPANY MEETINGS

A company is an association of several persons. Decisions are made according to the view of the majority. Various matters have to be discussed and decided upon. These discussions take place at the various meetings, which take place between members and between the directors. Needless to say, the importance of meetings cannot be under-emphasized in case of companies. The Companies Ordinance, Cap 212 contains several provisions regarding meetings. These provisions have to be understood and followed.

For a meeting, there must be at least 2 persons attending the meeting. One member cannot constitute a company meeting even if he holds proxies for other members.

Kinds of Company Meetings: Broadly, meetings in a company are of the following types: -

I. Meetings of Members:

These are meetings where the members / shareholders of the company meet and discuss various matters. Member’s meetings are of the following types: -

A. Annual General Meeting: [s.133 of Cap 212]

Must be held by every type of company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 18

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months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only.

A notice of not less than 21 days before the meeting is required to be served to all members entitled to attend a meeting [S.117 (2)] The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be mentioned in the notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the company, director’s report on the position of the company for the year and auditor’s report on the accounts. Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. A proxy need not be a member of that company. A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting.

The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated.

A company may, by appropriate provisions in its articles, fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings.

In case of default in holding an annual general meeting, the consequences are provided under section 133(4) & (7)

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Business to be transacted at Annual General Meeting: At every AGM, the following matters must be discussed and decided. Since such matters are discussed at every AGM, they are known as ordinary business. All other matters and business to be discussed at the AGM are special business.

The following matters constitute ordinary business at an AGM (s. 133(1): -

(a) Consideration of annual accounts, director’s report and the auditor’s report

(b) Declaration of dividend

(c) Appointment of directors in the place of those retiring

(d) Appointment of and the fixing of the remuneration of auditors.

In case any other business (special business) has to be discussed and decided upon, an explanatory statement of the special business must also accompany the notice calling the meeting. The notice must also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings.

C. Extraordinary General Meeting [s.134]

Every general meeting (i.e. meeting of members of the company) other than the annual general meeting or any adjournment thereof,

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is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The notice must/ should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings.

The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting. E.g. it may provide that "the board may, whenever it thinks fit, call an extraordinary general meeting" or it may provide that "if at any time there are not within the country, directors capable of acting who are sufficient in number to form a quorum, any director or any two members of the company may call an extraordinary general meeting".

Extraordinary General Meeting on Requisition (s. 134(2):

The members of a company have the right to require the calling of an extraordinary general meeting by the directors. The board of directors of a company must call an extraordinary general meeting if required to do so by the following number of members: -

(a)Members of the company holding at the date of making the demand for an EGM not less than one-tenth of paid-up capital of the company as at the date of the deposit carries the right of voting in general meeting of the company.

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(b)If the company has no share capital, the members representing not less than one-tenth of the total voting rights of all the members having at the said date a right to vote at a general meeting.

The requisition must state the objects of the meetings and must be signed by the requisitioning members. The requisition must be deposited at the company's registered office. When the requisition is deposited at the registered office of the company, the directors should within 21 days, move to call a meeting. If the directors fail to call and hold the meeting as aforesaid, the members who required the meeting or any of them meeting the requirements at (a) or (b) above, as the case may be, may themselves proceed to call meeting within 3 months from the date of the requisition, and claim the necessary expenses from the company. The company can make good this sum from the directors in default. At such an EGM, any business which is not covered by the agenda mentioned in the notice of the meeting cannot be voted upon.

D. Class Meeting

Class meetings are meetings which are held by holders of a particular class of shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to vary the rights of that particular class of shares. At such meetings, these members discuss the pros and cons of the proposal and vote accordingly. (See provisions on variations of shareholder’s rights s.73 of Cap212). Class meetings are held to pass resolution which will bind only the members of the class concerned, and only members of that class can attend and vote.

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Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company.

II. Meetings of the Board of Directors

(a) Meeting of the Board of Directors

(b) Meeting of a Committee of the Board

III. Other Meetings

A. Meeting of debenture holders

A company issuing debentures may provide for the holding of meetings of the debenture holders. At such meetings, generally matters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debenture holders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority.

B. Meeting of creditors

Sometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. E.g. U/s 261 & 262, a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors. The court, on application,

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may order the holding of a creditors' meeting. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the three-fourth of the total value of the debts, the court may sanction the scheme. A certified copy of the court's order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar.

Similarly, in case of winding up of a company, a meeting of creditors and of contributors is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company.

Requisites of Valid Meetings:

The following conditions must be satisfied for a meeting to be called a valid meeting: -

(a) It must be properly convened. The persons calling the meeting must be authorized to do so.

(b)Proper and adequate notice must have been given to all those entitled to attend.

(c) The meeting must be legally constituted. There must be a chairperson. The rules of quorum must be maintained and the provisions of the Companies Act, Cap 212 and the articles must be complied with.

(d)The business at the meeting must be validly transacted. The meeting must be conducted in accordance with the regulations governing the meetings.

Notice of every meeting of company must be sent to all members entitled to attend and vote at the meeting. Accidental

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omission to give notice to or the non-receipt of notice by, any member or any other person on whom it should be given will not invalidate the proceedings of the meeting. The notice may be given to any member either personally or by sending it by post to him at his registered address, or if there is none in India, to any address within India supplied by him for the purpose. Where notice is sent by post, service is effected by properly addressing, pre-paying and posting the notice. A notice may be given to joint holders by giving it to the joint holder first named in the register of members. A notice of meeting may also be given by advertising the same in a newspaper circulating in the neighborhood of the registered office of the company and it shall be deemed to have been dully served on every member.

A notice calling a meeting must state the place, day and hour of the meeting and must contain the agenda of the meeting. If the meeting is a statutory or annual general meeting, notice must describe it as such. Where any items of special business are to be transacted at the meeting, an explanatory statement setting out all materials facts concerning each item of the special business including the concern or interest, if any, therein of every director and manager, is any, must be annexed to the notice. If it is intended to propose any resolution as a special resolution, such intention should be specified.

A notice convening an AGM must be accompanied by the annual accounts of the company, the director’s report and the auditor’s report. The copies of these documents could, however, be sent less than 21 days before of the date of the meeting if agreed to by all members entitled to vote at the meeting.

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Proxy

In case of a company having a share capital and in the case of any other company, if the articles so authorize, any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself. Every notice calling a meeting of the company must contain a statement that a member entitled to attend and vote is entitled to appoint one proxy in the case of a private company and one or more proxies in the case of a public company and that the proxy need not be member of the company.

A member may appoint another person to attend and vote at a meeting on his behalf. Such other person is known as "Proxy". A member may appoint one or more proxies to vote in respect of the different shares held by him, or he may appoint one or more proxies in the alternative, so that if the first named proxy fails to vote, the second one may do so, and so on.

The member appointing a proxy must deposit with the company a proxy form at the time of the meeting or prior to it giving details of the proxy appointed. However, any provision in the articles which requires a period longer than forty eight hours before the meeting for depositing with the company any proxy form appointing a proxy, shall have the effect as if a period of 48 hours had been specified in such provision. [For a sample of proxy form: see Article 61 of Table A to the first schedule]

The proxy form must be in writing and be signed by the member or his authorized attorney duly authorized in writing or if the

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appointer is a company, the proxy form must be under its seal or be signed by an officer or an attorney duly authorized by it.

The proxy can be revoked by the member at any time, and is automatically revoked by the death or insolvency of the member. The member may revoke the proxy by voting himself before the proxy has voted, but once the proxy has exercised the vote; the member cannot retract his vote. Where two proxy forms by the same shareholder are lodged in respect of the same votes, the last proxy form will be treated as the correct proxy form.

A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of hands (s. 138).

Quorum

Quorum refers to the minimum number of members who must be present at a meeting in order to constitute a valid meeting. A meeting without the minimum quorum is invalid and decisions taken at such a meeting are not binding. The articles of a company may provide for a quorum without which a meeting will be construed to be invalid. Unless the articles of a company provide for larger quorum, 2 members personally present shall be the quorum for a general meeting of a company (s. 136(c)

It has been held by Courts that unless the articles otherwise provide, a quorum need to be present only when the meeting commenced, and it was immaterial that there was no quorum at the time when the vote was taken.

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Chairman

The chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the Chairman of the meeting. Unless the articles otherwise provide, the members present in person at the meeting elect one of themselves to be the chairman thereof on a show of the hands. If there is no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is unwilling to act as chairman of the meeting, the directors present may elect one among themselves to be the chairman of the meeting. If, however no director is willing to act as chairman or if no director is present within 15 minutes after the appointed time of the meeting, the members present should choose one among themselves to be chairman of the meeting. If, after the election of a chairman on a show of hands, poll is demanded and taken and a different person is elected as chairman, then that person will be the chairman for the rest of the meeting.

Voting and Demand for Poll

Generally, initially matters are decided at a general meeting by a show of hands. If the majority of the hands raise their hands in favor of a particular resolution, then unless a poll is demanded, it is taken as passed. Voting by a show of hands operates on the principle of "One Member-One Vote". However, since the fundamental voting principle in a company is "One Share-One Vote", if a poll is demanded, voting takes place by a poll. Before or on declaration of the result of the voting on any resolution on a show of hands, the chairman may order sua moto (of his own motion) that a poll be taken. However, when a demand for poll is made, he must order the poll be taken. The chairman may order

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a poll when a resolution proposed by the Board is lost on the show of hands or if he is of the opinion that the decision taken on the show of hands is likely to be reversed by poll. When a poll is taken, the decision arrived by poll is final and the decision on the show of hands has no effect.

A poll is allowed only if the prescribed number of members demands a poll. A poll must be ordered by the chairman if it is demanded (s. 139 & 140):-

(a) By such number of members for the time being entitled under the articles to vote at the meeting, as may be specified in the articles.

(b) If no provision is made by the articles with respect to the right to demand poll, by three members who hold not less than fifteen percent of the paid up share capital of the company.

Motion

Motion means a proposal to be discussed at a meeting by the members. A resolution may be passed accepting the motion, with or without modifications or a motion may be entirely rejected. A motion, on being passed as a resolution becomes a decision. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. Only those motions which are mentioned in the agenda to the meeting can be discussed at the meeting. However, motions incidental or ancillary to the matter under discussion may be moved and passed. Generally, a motion is proposed by one member and seconded by another member.

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Amendment

Amendment means any modification to a motion before it is put to vote for adoption. Amendment may be proposed by any member who has not already spoken on the main motion or has not previously moved an amendment thereto. There can be an amendment to an amendment motion also. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. An amendment must not raise any question already decided upon at the same meeting and must be relevant to the main motion which it seeks to amend. The chairman has the discretion to accept or reject an amendment on various grounds such as inconsistency, redundancy, irrelevance, etc. If the amendment is adopted on a vote by the members, it is incorporated in the body of the main motion. The altered motion is then discussed and put to vote and if passed, becomes a resolution.

Kinds of Resolutions

Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be passed at a properly convened meeting with the required quorum. There are broadly three types of resolutions: -

1. Ordinary Resolution: An ordinary resolution is one, which can be passed by a simple majority. I.e. if the votes (including the casting vote, if any, of the chairman), at a

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general meeting cast by members entitled to vote in its favour are more than votes cast against it. Voting may be by way of a show of hands or by a poll provided 14 days notice has been given for the meeting.

2. Special Resolution (s. 143): A special resolution is one in regard to which is passed by a 75 % majority only i.e. the number of votes cast in favour of the resolution is at least three times the number of votes cast against it, either by a show of hands or on a poll in person or by proxy. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. Special resolutions are needed to decide on important matters of the company. Examples where special resolutions are required are:-

(a) To alter the domicile clause of the memorandum from one State to another or to alter the objects clause of the memorandum.

(b) To alter / change the name of the company with the approval of the central government

(c) To alter the articles of association

(d) To reduce share capital.

3. Resolution requiring Special Notice (s. 144): There are certain matters specified in the Companies Act, Cap 212 which may be discussed at a general meeting only if a special notice is given regarding the proposal to discuss these matters at a meeting. A special notice enables the members to be prepared on the matter to be discussed

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and gives them time to indicate their views on the resolution. In case special notice of resolution is required by the Companies Ordinance or by the articles of a company, the intention to propose such a resolution must be notified to the company at least 28 days before the meeting. The company must within 21 days before the meeting give the notice of the proposed resolution to its members. Notice of the resolution is required to be given in the same way in which notice of a meeting is given, or if that is not practicable, the company may give notice by advertisement in a newspaper having an appropriate circulation or in any other manner allowed by the articles, not less 7 days before the meeting.

The following matters requiring Special Notice before they are discussed before that meeting: -

(a) To appoint at an annual general meeting an auditor a person other than a retiring auditor.

(b) To resolve at an annual general meeting that a retiring auditor shall not be reappointed.

(c) To remove a director before the expiry of his period of office.

(d) To appoint another director in place of removed director.

(e) Where the articles of a company provide for the giving of a special notice for a resolution, in respect of any specified matter or matters.

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Please note that a resolution requiring special notice may be passed either as an ordinary resolution (simple majority) or as a special resolution (75 % majority).

Registration of Resolutions and Agreements (s. 145)

A copy of each of the following resolutions along with the explanatory statement in case of a special business and agreements must, within 30 days after the passing or making thereof, be printed and duly certified under the signature of an officer of the company and filed with the Registrar of Companies who shall record the same: -

(a) All special resolutions

(b) All resolutions of the board of directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director

(c) All resolutions or agreements which have been agreed to by all members of any class of members but which, if not so agreed, would not have been effective unless passed by a particular majority or in a particular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members.

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(d) Resolutions for voluntary winding up of a company

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THE MAJORITY RULE AND THE PROTECTION OF MINORITY

Supremacy of the majority is the fundamental principal of Company law. Generally, a majority of members of a company is entitled to exercise powers of the company and generally to control its affairs. There is no doubt that directors enjoy wide powers in respect of controlling, direction and managing the affairs of the company but one must not forget the fact that directors are elected by majority shareholders. The Companies Ordinance lays down some matters which can be decided by the shareholders at general meeting by simple majority, whereas certain more important matters can be decided by a special majority of the three-forth of the shareholders. It is therefore, obvious that in the administration of the affairs of the company, it is the wish of the majority shareholders that prevails. Majority shareholders determine the fate of the company.

The principle of majority rule

The principle rule was recognized in Foss v. Harbottle (1843) Hare 461. The rule in Foss v. Harbottle is known as the ‘Majority rule’ or the ‘Proper plaintiff principle’. The rule is that the proper plaintiff in an action to redress an alleged wrong to a company on the part of any one, whether director, member or outsider to recover money or damages alleged to be done to it, is prima facie the company and, where the alleged wrong is any irregularity which might be made binding on the company by simple majority of members, no individual member can bring an action in respect to it.

In Foss v. Harbottle two minority shareholders in a company alleged that its directors were guilty of buying their own land for company’s use and paying themselves a price greater than its value. This act of the directors resulted in a loss to a company. The majority shareholders, therefore, decided to take action for damages against the directors. The majority shareholders in general meeting resolved not to take any action against the directors alleging that they were not responsible for the loss which has been incurred. The court dismissed the suit on the ground that the acts of the directors were capable of confirmation by the majority of members and held that the proper plaintiff for wrongs done to the company is the company itself and not the majority shareholders and the company can act only through its majority shareholders.

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The rationale of the above rule is that a company is a separate legal entity from the members composes it. As such, if any right of the company is violated, it is the company which can bring an action.

The principle laid down in Foss v. Harbottle was stated by Mellish L. J in Macdougall v. Gardiner (1875) 1 Ch. D 13 in these words If the thing complained is the thing which, in substances, the majority of the company are entitled to do, or something has been done irregularly which the majority of the company are entitled to do so regularly or if something has been done irregularly which the majority of the company are entitled to do regularly or if something has been done illegally which the majority of the company are entitled to legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called and then ultimately the majority gets wishes.

In Macdougall v. Gardiner (1985) 1 Ch. D 13, the article of a company empowered the chairman, with the consent of the members in a meeting to adjourn a meeting and also provided for taking a poll, if demanded by the shareholders. The adjournment was moved and declared by the chairman. A shareholder brought an action for declaration action that the chairman’s conduct was illegal. It was held that the action could not be brought by the shareholder. If the chairman was wrong only the company could sue.

Advantages of Rule in Foss v. Harbottle 1. Recognition of the separate legal personality of a company

i.e. if a company has suffered some injury, and not the individual members, it is the company itself which can seek redress.

2. Need to preserve the right of majority to decide i.e. the principle in Foss v. Harbottle preserves the right of the majority to decide how affairs of the company shall be conducted. It is fair that the wish of the majority should prevail.

3. Multiplicity of futile suits avoided i.e. clearly, if every individual member were permitted to sue anyone who was injured the company through a breach of duty there could be enormous waste of time and resources.

4. Litigation at the suit of minority is futile if majority do wish it. If the irregularity complained of is one which can be subsequently ratified by the majority, it is futile to have

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litigation about it except with the consent of the majority in general meeting.

Protection of minority Shareholders (Exception to the rule in Foss v. Harbottle)It has become clear from the Rule in Foss v. Harbottle that is the majority rule that prevails in company management. Such wide powers concentrated in their hand may be misused to exploit the minority shareholders and serve their personal ends. The possibility of such domination will be even more in case of private companies where a majority of shares may be held by few individuals. It is therefore, rightly pointed out by Palmer that “a proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company.

In order to prevent the majority from misusing this privilege and at the same time to ensure justice to minority shareholders, certain exceptions to Foss v. Harbottle have been admitted which are as follows

1. Acts which are ultra vires-

It may be noted that the rule in Foss v. Harbottle will apply only when the act done by the majority is one which the company is authorized by its memorandum to do. Any act done by the majority beyond the object clause is ultra vires and it can not be ratified even if every shareholder is willing to do so. In the case of ultra vires acts even a single shareholder can restrain the company from committing those acts by filling a suit for injunction. Similarly the majority rule will not apply if the act is illegal.

2. Acts Supported by insufficient majority

For Certain acts, the companies Ordinance or the articles of accompany require a special majority of three-forth of the shareholders. The Rule in Foss v. Harbottle cannot be invoked to override these requirements by a resolution passed by a simple majority. If the requirements of a special majority are not fulfilled, any shareholder can restrain the company from acting on the resolution.

3. Where the act of majority constitute fraud on Minority

The rule in Foss v. Harbottle will not apply to such acts of majority which constitute fraud on majority. Majority powers

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must be exercised bona fide for the benefit of the company as whole. A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as whole. In such case the decision of the majority can be challenged by the minority. In Menier v Hooper’s Telegraph works Ltd. (1874) Companies A and B were rivalry. The majority shareholders of company A were also the shareholders of company B. Company A had filed a suit against company B. later, shareholders of a company. A passed a resolution to compromise the action against company B in such a manner that the terms of compromise were favorable to company B and unfavorable to company A. The minority shareholders questioned the power of the majority to make said compromise and the court set aside the same. It was observed that “it would be a shocking thing if that could be done….then the majority have put something in their pockets at the expenses of the majority.”

4. Where it is alleged that the personal membership rights of the plaintiff shareholders have been infringed

Every shareholder has individual membership rights against the company, conferred either by the Companies Ordinance Cap. 212. or the articles of the company. Such individual rights include the right to attend meetings, the right to receive dividends etc. If such right is in question, a single shareholder can on principle defy the majority consisting of all the shareholders

5. Where there is a breach of duty

The minority shareholders may bring an action against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company. In Daniels v. Daniels (1978) Ch 406 a company on the instruction of the two directors (who were husband and wife) having majority shareholding sold the company’s land to one of them at gross undervalue. The minority shareholders brought an action against the directors and the company, it was held that the company and minority shareholders had a valid cause of action as the directors knew or ought to have known that the sale was at gross undervalue.

6. Oppression and mismanagement.Where there is oppression of minority or mismanagement of the affairs of the company, the rule in Foss v. Harbottle does not apply. Oppression refers to an act performed in a burdensome,

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harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement. MINORITY PROTECTION UNDER COMPANIES ACT There are number of sections under the companies Act which enable a number of shareholders to defy the majority. For example under s 8 dissentient holders of 10 per cent of issued shares or if the company is not limited by shares not less than ten per cent can apply for cancellation of an alteration of objects. Furthermore under s 73 where the class rights are varied in pursuance of a clause in the memorandum or articles dissentient holders of 10 per cent of the issued shares of the class can apply for cancellation of the variation. Under s 8 where a public company passes a special resolution to register has a private company or where a private company passes a special resolution to register as a public company, holders of 10 per cent in nominal value of the company’s issued share capital or any class thereof or 10 per cent in number of the members of the company.Read also derivative rights u/s 233(1)

WINDING UP AND DISSOLUTION

The terms "Winding up" and "Dissolution" are sometimes erroneously used to mean the same thing. However, they are quite different in their meanings. Winding up is a process whereby all assets of the company are realized and used to pay off the liabilities and members. Dissolution of the company takes place after the entire process of winding up is over. Dissolution puts an end to the life of the company. A dissolution order passed by the Court is like the Death Certificate of the company. One common confusion of terminology occurs in the use of the term ‘bankruptcy’. Bankruptcy is a legal process by which the assets of the insolvent individual or partnership are realized and proceeds distributed to the creditors. Company cannot be made bankrupt.

A company to be wind up may be solvent or insolvent. A solvent company may be wound up because the business opportunity which the company was formed to exploit has come to an end, the members of a family business may wish to retire or because of internal disputes i.e. winding up on just and equitable ground.

Modes of Winding Up (s. 267)

A Company may be wound up in any of the following modes:

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1. By the Court i.e. compulsory winding

2. Voluntary winding up, which may be

(a) Member's voluntary winding up;

(b) Creditor's voluntary winding up;

3. Winding up subject to supervision of the Court

WINDING UP BY THE COURT S. 272

Winding up of a company under order of a court is known as compulsory winding up. A petition for winding up the company must be filed before the court. It is the High Court, which has the jurisdiction to wind up companies. The following are the situations where a company may be wound up by the Court (s. 279): -

1. A company by special resolution resolves that the company be wound up by the court. It should be borne in mind that, without such act directors cannot pass a resolution that the company be wind up by the court. The resolution has to be passed at a general meeting. The members can however ratify the act of directors already done.

2. if the company does not commence business within one year from its incorporation or it suspends business for a whole year.

3. The number of its members falls below the minimum required i.e. 2

4. It is unable to pay its debts. A company will be deemed to be unable to pay its debts if (s. 280): -

(i) If a creditor to whom the company owes more than fifty thousands shillings has served a notice on the company in writing demanding that his debt be settled and the company has failed to pay or secure or compound that debt within 3 weeks.

(ii) If it is proved to the satisfaction of the Court that the company cannot pay its debts

(iii) If an execution or other process on a decree or order of any court in favor of a creditor of a company has not been satisfied by the company.

6. The Court is of the opinion that it’s just and equitable to wind up the company e.g. (a) Where the whole object of the company was

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fraudulent (b) Where the substratum of the company is gone33. (c) Where the company is insolvent. (d) Where there has been mismanagement of funds by the directors. (e) Where there is honest difference of a director and the other directors (f) Where there was a deadlock in the management of a public company.

Persons entitled to petition in a winding up by Court: The following persons may petition the Court for winding up: -

1. The Company i.e. the company itself may present a petition to the court for winding up after it has passed a special resolution. A company does not often represent a petition to have itself wound up by the court as it can achieve this object more conveniently by passing a special resolution to wind up voluntarily. If at the general meeting the company resolves that it shall, however, be wound up by the court; it may present a petition for winding up order.

2. Any creditor of the Company (Note that contingent and prospective creditors can also petition for winding up but only if security for cost has been given as the court thinks reasonable and until a prima facie case for winding up has been established to the satisfaction of the court. S. 169(c).

3. Any contributory / shareholder. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of its fully paid shares. A contributory shall not be entitled to present winding up petition unless a) either the number of members is reduced in case of a private company below two and in case of a public company below seven. b) The shares in respect of which he is contributory or some of them either were originally allotted to him or have been held by him, and registered in his name for at least six months during the 18 months before the commencement of the winding up.

Powers of the Court (s. 282)

On hearing the petition the court may

a) dismiss it with or without costb) adjourn the hearing conditionally or unconditionally

c) make an interim order that it thinks fit

d) Make an order for winding up the company with or without costs or any other order as it thinks fit.

33 See pages 304 – 308 Saleemi & Another, Company law Simplified, Saleemi Publishers, Nairobi, 1997

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The words “ on hearing a winding up petition occurring in section 170 cover the entire period from the date of entertainment of the petition and issuing of notice until an actual order of winding up is made or the winding up petition is dismissed

In determining the petition the interest of the applicant alone is not of predominant consideration. The interest of the shareholders as a whole apart from those of other interests have to be kept in mind at the time of consideration, as to whether the application should be admitted on the allegations mentioned in the petition.

Commencement of winding up (s. 286)

Where, before the presentation of the petition for the winding up of the company by the court, a resolution has been passed by the company for voluntary winding up, the winding up shall be deemed

Consequences of winding up order (s 287- 289)

Copy of winding up order to be forwarded by the company to the registrar who shall make a minute thereof in the books relating to the company.

The order for winding up shall be deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued, where the servant of a company is on contract of service for a fixed term and that term has not expired on the date of the order of the winding up of the company, the order operates has a wrongful termination and damages are allowed for a breach of contract of service.

Midland Countries Bank district v. Attwood (1905) 1 Ch. 357

When winding up order has been made no suit or other legal proceedings shall be commenced against the company except by the leave of the court.An order for winding up a company shall operate in favour of all the creditors and all of the contributories of the company as if it had been made on the joint petition of a creditor and a contributory.

Liquidator (s. 294)

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For the purpose of conducting proceedings in winding up company and performing such duties in reference thereto as the court may impose the court may appoint a liquidator or liquidators. The liquidator may be appointed provisionally at any time after presentation of a winding up petition and before making of a winding up order, and either the official received or any other fit person may be appointed. See also SS 184 – 189.Powers of liquidators (s. 301)With Sanction of the court S. 190 (1)

a. To bring or defended any action or other legal proceedings in the name and on behalf of the company

b. To carry business of the C=company, so far as may be necessary for the beneficial up of the company.

c. To appoint an advocate to assist him/her in performance of his/her duties

d. To pay any classes of creditors in fulle. To make compromise or arrangements with creditors or

persons claiming to be creditors and all other claims whereby the company may be rendered liable.

f. To compromise all calls and liabilities capable of resulting in debts.

Powers of liquidators without sanction of the court are all powers explained by S. 190(2)

VOLUNTARY WINDING UP

In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntary are: -

When the period fixed for the duration of the company in its articles has expired.When an event on the happening of which the company is to be dissolved as per its articles happens.

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The company resolves by a special resolution at a general meeting to be voluntarily wound up.

If the company resolves by special resolution to the effect that it cannot by reason of its liabilities continues its business and that is advisable to wind up.

A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up.

The effects of the voluntary winding

a. Company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.

b. Board’s power cease on appointment of liquidator in case of members voluntary winding up.

c. A voluntary winding up does not necessarily operates as a discharge of the company’s servants but if it takes place because the company is insolvent, it will operate as a discharge of the servants of the company without prejudice either to their right to claim compensation for premature termination. Reigate v. Union Mfg. (1918) 1 K.B 592

Member’s Voluntary Winding Up

In case of a company which is solvent and able to pay its liabilities in full and which desires to be wound up voluntarily, the majority of its directors at a Meeting of the Board must make a declaration of solvency verified by an affidavit stating that in their opinion the company will be able to pay its debts in full. The company must appoint liquidators for the purpose of winding up and fix their remuneration at a general meeting. On the appointment of the liquidators, the Board of directors, managing director and manager of the company cease to have any management power. The liquidator may transfer or sell the assets of the company and pay off its liabilities. If the winding up proceedings continue for more than one year, the liquidator must call a general meeting at the end of each year the liquidation continues. At the last meeting, the accounts of the liquidator must be approved by the members. Such accounts must be filed

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by him with the registrar of Companies within one week after the meeting. The Registrar on receiving such accounts must register them.

Creditors’ Voluntary Winding Up (s. 348)

Where the company is not solvent or where the declaration of solvency of the company is not made and delivered to the Registrar in a voluntary winding up, it amounts to creditor’s voluntary winding up. In such case the company must call the meeting of the creditors on the same day as or the next day after the meeting at which the resolution for voluntary winding up is to be proposed. The notice of the meeting of creditors must be advertised in the Gazette and the directors must lay before the meeting of creditors a statement of the position of the company with a list of its creditors. The directors must also appoint one of their members to preside at the meeting whereupon it is the duty of that director to attend the meeting and preside thereat. S. 234.

Powers of the Court in case of voluntary winding up

1. It may appoint liquidator where the appointed liquidator is not acting.

2. It may remove the liquidator and appoint another liquidator on justifiable cause being shown.

3. On an application of the Liquidator or contributory or creditor, it may determine any question arising in the winding up of a company and it may exercise, as respects the enforcing of calls, the staying of suits or other legal proceedings or any other matter, all or any of the powers which the Court might exercise if the company were being wound up by the Court

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