MAKERERE UNIVERSITY BUSINESS SCHOOL

BUSINESS LAW DEPARTMENT

COMPANY LAW GUIDANCE NOTES - 2021

TOPIC ONE

COMPANY LAW

At the end of this chapter the student will be able to:

1. Understand what the meaning of a company;
2. Understand the concept of a Company as a separate legal
entity;
3. Analyze and Evaluate the different types of companies and
their characteristics; and
4. Evaluate and analyze the distinction between private and
public companies.

COMPANY LAW
Company law is governed by the Companies Act 2012 and
Table A.

Definition of a Company
The word “company” has no strict legal meaning. In legal theory
2
Companythe
Lawword implies Notes
Guidance an association
- 2021 of a number of people for some
common object or objects.

Under the Companies Act 2012, the word “company” means a

company formed and registered under this Act or an existing
company.

A Company or Corporation is also defined as an artificial legal

entity separate and distinct from its members or shareholders.

This legal personality is an artificial one, which is

distinguishable from natural personality. The possession of a
legal personality implies that a company is capable of enjoying
rights and being subject to duties, separately from its members.

The Company as a Separate Legal Entity

The fundamental attribute of corporate personality from which
all other consequences flow is that the corporation is a separate
legal entity distinct from its members. Hence it’s capable of
enjoying rights and being subject to duties which are not the
same as those enjoyed or borne by its members. In other words
it has a legal personality and it is often described as an artificial
person in contrast with a human being-a natural person.

This principle was first distinctly articulated in the British House

of Lords Judgment in the case of Salomon Vs. Salomon &
company limited (1897) In this case, for 30 years, Salomon
carried on business as a sole trader of boots and shoes. In 1892,
he converted the business into a Limited Company by forming
Salomon & Company Limited at the request of his sons who
worked in the business as his employees. The company
consisted of Salomon, his wife and five children as members.
Salomon was the Managing Director. Salomon held 20,001 of
the 20,007 issued shares. The remaining 6 shares were each
held by a member of his family. Immediately after
incorporation, the company experienced difficulties and a year
later was wound up. It had sufficient assets to satisfy the
debentures but nothing for the unsecured creditors. The
company almost immediately run into difficulties and only a
year later the then holder of the debenture appointed a receiver
and the company went into liquidation. Its assets were enough to
discharge the debenture but nothing was left for the unsecured
creditors. In these circumstances the creditors sued Salomon and
the Court of Appeal held that the whole transaction was contrary
to the true intent of the companies Act and that the company was
a mere sham, and an alias, agent, trustee and nominee for
Salomon who remained the real proprietor of the business. As
such he was liable to indemnify the company against its trading
debts.

But the House of Lords unanimously reversed this decision.

They held that the company had been validly formed hence the
business belonged to the company and not to Salomon, and
Salomon was its agent and not it the agent of Salomon.

In the words of Lord Halsbury L.C;

“Either the company was a legal entity or not. If it was, the
business belonged to it and not to Salomon. If it was not, there
was no person and nothing to be an agent at all; and it is
impossible to say at the same time that there is a company and
there is not.”

Or, as Lord Macnaghten put it:

“The company is at law a different person from the
subscribers….; 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
for them. Nor are the subscribers, as members liable, in any
shape or form, except to the extent and in the manner provided
by the Act.”

The importance of Salomon’s case is that the highest court in

the land recognized the necessary consequences of the
distinction between a company and its members as separate
persons. On the facts of the case Salomon’s sale of the business
to the company, owned by him alone, made no change in the
commercial position – effectively it was still his business. Yet by
separating its legal ownership from himself he could become a
creditor with priority rights (against other creditors of the
business) over the assets. Since the Salomon case the separation
between the company and its members has been complete.

The principle of corporate personality has been applied in other

cases, for instance in Lee Vs. Lee’s Air Farming Ltd. (1960) 3
All E.R.420 Lee formed a company of which he held 2999
shares and his wife (the plaintiff) held one. Lee was sole
“governing director” and chief pilot in the company’s business
of aerial crop-spraying in New Zealand. He was killed in a crash
while flying for the company. His wife sued the company for
compensation since if her claim against the company was valid
the company could in turn recover the amount from the
government insurance scheme. It was argued by the company
that on the fact that Lee had taken a decision, as a director, to
employ himself (as pilot) he could not claim as an employee
against the company.
It was held by the Court that Lee and his company were distinct
(separate) legal entities which had entered into contractual
relationships under which Lee as chief pilot became a servant of
the company. In his capacity as governing director he could, on
behalf of the company, give himself orders in his other capacity
as pilot and hence the relationship between himself, as pilot, and
the company was that of servant (employee) and master
(employer). The court further said that the contract by which the
company employed Lee was valid and so his widow could
recover compensation for his estate on the basis that he was an
employee killed while in the course of his employment. In effect
the magic of corporate personality enabled him to be master and
servant at the same time and to get all the advantages of both-
and of limited liability.

In the case of Macaura Vs. Northern Assurance Co. Ltd

(1925) A.C.619, the plaintiff, a landowner, sold the timber on
his estate to a company of which he was the sole owner and
major creditor. Before the sale to the company, he had insured
the timber which lay on his land in his own name. He did not
transfer the insurance policy to the company name. Two weeks
later almost all the timber was destroyed by fire. He claimed for
the loss under his private policy. But the insurers denied liability
on the grounds that he personally did not have, as insurance law
requires, an insurable interest in the timber.
It was held that the claim must fail since it was the company
which owned the timber; the plaintiff merely owning the shares
in the company, the timber was not effectively covered by his
insurance policy.

TYPES OF COMPANIES
i) Registered companies
Registration under the Companies Act is the normal method of
incorporating a commercial concern. It is also available for non-
commercial concerns such as charities, NGO, Clubs or research
institutions which may need corporate status as a convenient
method of, for example, owning property. This is the typical and
most important type of company today and shall be the one that
we shall be concerned with.

ii) Statutory companies

A special Act of Parliament may be used to create a statutory
company. In the past when public utilities such as railways,
water and electricity undertakings, telecommunications & posts
and provident funds and other sectors of the economy were
exclusively run by governments, statutory companies were set
up under several Acts of Parliaments. Examples of these were
UEB, UP&TC, NSSF, NH&CC etc. Most of these statutory
corporations have since been privatized.

iii) Chartered companies

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

iv) Corporation sole

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

v) Holding and Subsidiary Companies

Section 161 (1) provides that for the purpose of this Act, a
company shall, subject tosubsection (1), be taken to be a
subsidiary of another only if—
(a) that other company either—
(i) is a member of it and controls the composition of its board of
directors; or
(ii) holds more than half in nominal value of its equity share
capital; or
(b) the first-mentioned company is a subsidiary of any company
which is that other’s subsidiary.
subsection (2) provides that for the purposes of subsection (1)
the composition of a company’s board of directors shall be taken
to be controlled by another company only if, that other company
by the exercise of some power exercisable by it without the
consent or concurrence of any other person, can appoint or
remove the holders of all or a majority of the directorships.
The subsidiary- Holding company relationship is of much
commercial importance since large business enterprises find it
convenient to operate through a structure of a holding or `parent'
company and subsidiaries, which are wholly or less partly
owned. Subsidiary status may have been acquired by purchase
or takeovers. Example is MTN Uganda is a subsidiary of MTN
South Africa, Stanbic Bank Uganda is a subsidiary of Standard
Bank South Africa.

REGISTERED COMPANIES
Section 4 provides for Registered Companies
Under the Companies Act, provision is made for different types
of registered Companies, which can be lawfully formed in
Uganda.
Section 4 (1)provides that any one or more persons may for a
lawful purpose, form a company, by subscribing their names to a
memorandum of association and otherwise complying with the
requirements of this Act in respect of registration, form an
incorporated company, with or without limited liability. The
different types of registered companies that may be formed
include;

• Companies Limited by Shares section 4 (2) (a)

A company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares
respectively held by them in this Act is referred to as “a
company limited by shares”. A company limited by shares has
the liability of its members limited by the company’s
memorandum to the amount, unpaid on the shares held by those
members. Thus, where members hold shares which they have
completely paid for they have no fear that upon liquidation they
will be held personally liable for the debts of the firm.

• Companies Limited by Guarantee section 4 (2) (b)

A company having the liability of its members limited by the
memorandum to the amount that the members undertake in the
memorandum to contribute to the assets of the company if it is
being wound up, in this Act is referred to as “a company
limited by guarantee”. A company limited by shares has the
liability of its members limited by the company’s memorandum
to the amount, unpaid on the shares held by those members.
Thus, where members hold shares which they have completely
paid for they have no fear that upon liquidation they will be held
personally liable for the debts of the firm.

• Unlimited Companies section 4 (2) (c)

A company not having any limit on the liability of its members
in this Act is referred to as “an unlimited company”. Unlimited
companies are those companies where there is no limit on the
liability of their members. In the event of an unlimited company
being wound up in circumstances where its liabilities exceed its
assets, in other words where it is insolvent, the liquidator will go
to the members asking a contribution to make good the deficit.

• Public or Private section 4 (2) (d)

Companies may be private or public.

Private Companies provided for under section 5

The Companies Act defines a private company under section 5
as;
✓ A Company, which by its articles restricts the rights to
transfer shares of the company.
✓ One that limits the number of its members to 100
 excluding past and present employees of the company
who are shareholders.
✓ One that prohibits any invitations to the public to
subscribe for any shares or debentures of the company
(investments in the company).

Where a private Company does not comply with these

requirements, it loses exemptions and privileges conferred on a
private company. This failure can only be remedied upon
showing court that it was caused by accident or inadvertence or
some other sufficient cause.

Public Companies provided for under section 6

Section 6 provides for the meaning of a public company and it is
defined as a company which is not a private company as defined
under section 5.
Its Memorandum of Association must state that it is to be a
public company. Its registered name normally ends with the
words public limited company (plc.). A Company, which has
obtained registration as a public company, in its original
certificate of incorporation or subsequent certificate of
incorporation issued by the registrar must state that it is a public
company.

• Single member company section 4

Any one or more persons may for a lawful purpose form a
company with or without limited liability.

Distinction between Private and Public Companies

Statutory rules differentiate between private companies and
public companies in a number of respects and these differences
are the mean of a reflection of the larger size of public
companies. The differences are illustrated in the table below.

No. Private Companies Public Companies

1. maximum is 100 No maximum.

2. It restricts transfer of shares. There is free transfer of shares.

3. No Prospectus required Prospectus required

It prohibits invitation to the public to Can issue a prospectus calling upon the public to
4.
subscribe to the shares. subscribe to the shares.
The minimum number of Directors is
5. The minimum number of Directors is two (2).
one (1)
Can commence business immediately Cannot immediately commence business after
6. after the issue of a certificate of obtaining a certificate of registration. It must
registration. have obtained in addition, a certificate of trading.
7. Quorum at meetings 2 members Quorum at meetings 3 members

Not required to hold Annual General

8 Required to hold Annual General Meetings
Meetings

Activity
Discuss the different types of registered companies.

Solution
The question is testing the student’s understanding of the
different types of companies that can be registered as provided
under the Companies Act. The student is expected to define
what a company is and further discuss the different types of
companies provided for under the Companies Act.

Test Questions
1. Discuss the concept of legal personality as used in
company law
2. Discuss the different types of companies that exist
3. Discuss the difference between limited and unlimited
companies
4. Discuss the differences between a private company and a
public company
5. Discuss the principle as laid out in the case of Salomon
Vs Salomon

TOPIC TWO
PROMOTION OF A COMPANY
At the end of this Chapter, the student will be able to:
1. Understand the Meaning of Promotion;
2. Understand the different functions undertaken by a
promoter;
3. Evaluate and analyze the various duties performed of a
promoter;
4. Evaluate and apply the different remedies incase of breach
of duty by the Promoter;
 5. Understand the remuneration of a promoter;
6. Evaluate and analyze the meaning of Pre-Incorporation
contracts;
7. Analyze the Rights of a promoter.

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

Definition of a Promoter
A promoter is defined in Twycross Vs Grant (1877) as “any
person who undertakes to form a company, or who, with regard
to a proposed newly formed company, undertakes part in raising
capital for it. A person is prima facie a promoter of the
company, if he has taken part in setting a company formed with
reference to a given object.”

Thus a promoter is someone whose profession it is to take part

in setting up a company. A typical example would be a village
grocer who converts his business into a limited company. He of
course is in no sense a professional company promoter but he
would be the promoter of his little company and the difference
between him and a professional promoter is basically one of
degree rather than of kind. Both create or help to create the
company. The only difference is that the grocer is less likely
than the professional to abuse his position since he will probably
continue to be the majority shareholder in his company whereas
the promoter if a shareholder at all, will intend to offload his
holdings on to others as soon as possible.

Thus the expression “promoter” covers a wide range of persons.

Both the professional promoter and the village grocer are
promoters to the fullest extent, in that each undertakes to form
the company with reference to a specific object and to set it
going and takes the necessary steps to accomplish that purpose.
Thus, a person may be a promoter though he has taken a
comparatively minor part in the promoting proceedings.
However those who act in their professional capacity such as
solicitors and accountants will not be classified as promoters
because they undertake their normal professional duties.

Therefore, who constitutes a promoter in any case is therefore a

question of fact.
Duties of a Promoter
1. Disclosure and Accountability:
A promoter stands in a fiduciary relationship to the company and
consequently owes it certain fiduciary duties i.e. duties of
disclosure and accounting and this implies that they must not
make any secret profit out of the promotion without disclosing it
to the company. This was illustrated in the case of Erlanger Vs
New Sombrero Co Ltd (1978) 3AC 1218. Members in a
syndicate bought the lease of an island containing a phosphate
mine at £55,000. The members of the syndicate then promoted a
company and appointed themselves its directors. They sold the
lease to the company for £110,000. This was unfortunately not
revealed in the prospectus inviting the public to subscribe for its
shares but was subsequently discovered. The company instituted
an action to recover profits from the promoters who in turn
argued that they had made a disclosure of their profits to a board
of directors.

Nevertheless, the BOD was:

i. Appointed by the promoters themselves,
ii. The first director could not attend meetings because of his
state in life (ill health)
iii. The second director was not present when the profits of
the promoters were approved.
iv. The third director was one of the promoters themselves.
v. The fourth and fifth directors were ignorant of the subject
matter.

The issue was whether there was a disclosure. It was held that
the company was entitled to rescind the contract. That the
promoters must repay the purchase price and the company in
turn must convene the lease to the promoters so as to restore the
status quo (original position)

A promoter cannot escape liability by disclosing to a few

friendswho constitute the initial members of the company
especially if their intention is to float the company to the public
and hoodwink shareholders. This was illustrated in the case of
GLUCKSTEIN Vs BARNES (1900) AC 240Lord Harlsbury
stated that: “it is too absurd to suggest that a disclosure to the
parties to this transaction is a disclosure to the company.”

Mode of Disclosure
Thus a disclosure must be made to the company either by
making it to
 ✓ an entirely independent board of directors or to
✓ the existing and potential members as a whole.

If the first method is employed the promoter will be under no

further liability to the company although the directors will be
liable to the shareholders if the information has not been passed
on in the invitation to subscribe (prospectus) and if the promoter
is a party to the invitation to subscribe he too will be liable. If
the second method is employed, the veil of incorporation will be
ignored.

Disclosure must be made in the Prospectus or in the Articles of

Association so that those who are or become members have full
information regarding the promoters’ transactions.

A partial or incomplete disclosure will not do, the disclosure

must be full or explicit.
2. Duty of skill and care:
In the process of promotion, a promoter must carry out his work
with great care and skill and due diligence expected of a
reasonable man.

3. Duty to act in the best interests of the company.

Consequently, a promoter may do anyone or more of the
following activities:
Solicit capital
4. Prepare a prospectus
5. Solicit directors for the company
6. Arrange the preparation of the Memorandum and Articles
of Association
7. Obtain premises
8. Obtain whatever equipment is necessary for the running of
the business

Remedies for Breach of Duty

• A promoter can be made to account for any secret profit
made.
• Damages for misrepresentation where the promoter has
made an actual misrepresentation and cannot prove that he
had reasonable ground to believe and did believe up to the
time the contract was made the facts represented were true.
• Damages for failure to disclose
• Rescission: Since the promoter owes a duty of disclosure to
the company, the primary remedy against him in the event
of breach is for the company to bring proceedings of
rescission (termination) of any contract with him.
 • Damages for negligence in allowing the company to
purchase property at an excessive price since they are to act
with skill and care.

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

However, in practice, the company’s articles may allow directors

to pay preliminary expenses from the company’s funds.

However, the promoter will not be content merely to recover his

expenses and if he is a professional promoter, he will expect to
be handsomely remunerated. In the case of Touche Vs
Metropolitan Railway Warehousing Company (1871) LR 6
CH.APP 671 Lord Hatherly said: “the services of a promoter
are very peculiar, great skill, energy and ingenuity may be
employed in constructing a plan and in bringing it out to the best
advantages.”

Hence, it is perfectly proper for the promoter to be rewarded

provided he fully discloses to the company the rewards which he
obtains. The remuneration must be fully disclosed not only by
the promoter to the company but also by the company in the
prospectus.

Pre-Incorporation Contracts
In promoting a company, promoters usually enter into contracts
with third parties and when they do so, they purport to do so on
behalf of the unincorporated company. Such contracts are not
binding on the company because it is not yet in existence and
consequently have no capacity to contract.

Pre-incorporation contracts are provided for under section 54 of

the Companies Act 2012. Subsection (1) provides that a
contract which purports to be made on behalf of acompany
before the company is formed, has effect, as one made withthe
person purporting to act for the company. This was illustrated in
the case of Kelner Vs. Baxter (1866) the defendants entered
into a contract with the plaintiff to buy goods, “on behalf of the
proposed Gravesand Royal Alexandra Hotel Company”. The
goods were supplied and consumed in the business. Shortly
after incorporation, the company collapsed and the plaintiff sued
he promoters on the contract for the price of the goods. Held: It
was held that the defendants were personally liable on the
contract.

Similarly in the case of English & Colonial Produce Company

Ltd (1906) 2 Ch. 435 Where persons who afterwards become
directors of the company instructed solicitors to prepare the
memorandum and articles of association so that the company
might be formed but on formation the company failed to pay the
solicitors’ charges and denied that it was liable to do so. It was
held that although the company had taken benefit of the
contract, it did not impose on it any liability to pay since the
contract was made before the company was formed.

In the Ugandan case of Central Masaka Coffee Co. V. Masaka

Farmers and Producers Ltd (1991) ULSLR 220 it was held
that a company lacked the capacity to conclude an agreement for
lease of a coffee processing factory made five days before its
incorporation.

Section 54 (2) provides that a company may adopt a pre-

incorporation contract with its formation and registration made
on its behalf without a need for novation.

Subsection (3) provides that in all cases where the company

adopts a pre-incorporation contract, the liability of the promoter
of that company shall cease.

Rights of the Promoter

After incorporation it is in order for a promoter to enter into a
contract with the company to recover his expenses and to collect
a fee for work done however because of his fiduciary
relationship they must be full disclosure to the company or its
potential directors and utmost good faith in his dealings.

Activity
Discuss the various duties Promoters owe towards the company.

Solution
A student should be able to define who a promoter is then go
ahead to state that promoters owe various duties to the company
which. The student should further discuss the various duties in
detail clearly showing what the duty involves.

Test Questions
1. Discuss the duties of promoters and the remedies available
to the company for their breach
2. Discuss the liability of a company in regard to Pre-
Incorporation contracts
3. Discuss the promoter’s duty of disclosure towards the
company
4. In May 2014, John, Peter and James incorporated a
company called ASANTE Co. Ltd with the major objective
of dealing in stationary and printing services. The company
was duly incorporated on 2 May 2014. But some few days
nd

before that, John entered into a contract with ZION

LOGISTICS Ltd, a leading company in provision of
stationary and printing services on behalf of the company
whereby ASANTE Co. Ltd was to be supplied with
stationary on credit by ZION LOGISTICS Ltd at the cost of
UGX 5,000,000=. ZION LOGISTICS Ltd supplied the
stationary but to date the company has not paid them and
they have approached you for some legal advice. Advise
them
TOPIC THREE

FORMATION OF A COMPANY

At the end of this Chapter the student should be able to:

1. Understand the meaning of Formation in respect to
Companies;
2. Understand the process through which a company is
formed;
3. Understand and examine the different documents required
for formation of companies;
4. Examine the need and legal requirements for a company
name;
5. Examine and analyze the importance and content of the
Memorandum of Association;
6. Examine and analyze the importance and content of the
Articles of Association;
7. Examine and analyze the importance and content of the
Statement of Nominal Capital;
8. Examine and analyze the importance and content of the
Statutory declaration of compliance; and
9. Analyze the term registration and its legal implication in
respect to companies.

FORMATION OF A COMPANY
Meaning of Formation
Formation means the process of registering a company with the
Registrar of Companies and obtaining a certificate of
incorporation.

Documents Required for Formation

Type of Company
The promoters will have to make up their minds which of the
many types of registered company they wish to form because
this will affect the content of the documents required. First they
must choose between a limited and an unlimited company,
second between a public or private company and third between a
company limited by shares or by guarantee.

Documents
In order to effect the registration of companies, the following
documents must be submitted to the Registrar:
 • Reservation of name
• Memorandum of Association
• Articles of Association
• A statement of nominal capital
• A statutory declaration of compliance.

If the company is a public company, the following additional

documents are required to be registered:
• A statement with the names and particulars of directors and
secretary.
• Prospectus or statement in lieu of prospectus.

Name of the Company

Reservation of name and prohibition of undesirable names.
Section 36 (1) provides that the registrar may, on written
application, reserve a name pending registration of company or a
change of name by an existing company, any such reservation
shall remain in force for thirty days or such longer period, not
exceeding sixty days as the registrar may, for special reasons,
allow and during that period no other company is entitled to be
registered with that name.

Requirements to be taken into account when reserving a

name
The name must not be undesirable
Subsection (2) provides that no name shall be reserved and no
company shall be registered by a name, which in the opinion of
the registrar is undesirable.

Application for reservation

Once a name has been decided upon, the promoters write to the
Registrar inquiring whether the proposed name is available for
registration and if the reply is favorable, the promoters are safe
in preparing documents using that name.
To guard against the possibility of a negative reply from the
Registrar, promoters must have in mind one or more suitable
alternatives.
Once a company has secured reservation of a particular name it
secures a virtual monopoly of corporate activity under that
name.

Where the Registrar refuses to register a name without good

reason, an application for an order of mandamus can be filed in
the High Court.
Name having the word “limited”
Subsection (3) provides that upon registration, a limited liability
company shall add the initials “LTD” or the word “Limited” at
the end of its name.

Power to require a company to abandon misleading name

Section 37 (1)provides that where in the registrars’ opinion the
name by which a company is registered gives a misleading
indication of the nature of its activities as to be likely to cause
harm to the public, the registrar may direct it to change its name.

Prohibition of improper use of “limited”.

Section 39 provides that a person shall not trade or carry on
business under a name or title of which “limited” or any
contraction or imitation of that word is the last word, unless duly
incorporated with limited liability.

Change of name.
Grounds under which a company may change its name
• By passing a special resolution
Section 40 (1) provides that a company may by special
resolution and with the approval of the registrar signified in
writing change its name.

• Having a name similar to one already in existence

Section 40 (2) provides that where, through inadvertence or
otherwise, a company on its first registration or on its
registration by a new name is registered by a name which, in the
opinion of the registrar, is too similar to the name by which a
company in existence is previously registered, the first-
mentioned company may change its name with the consent of
the registrar and, if the registrar so directs within six months
after it is registered by that name, shall change it within six
weeks from the date of the direction or such longer period as the
registrar may allow. In the case of Overseas Trading Company
Vs. Lale Cycle Company Limited, the Registrar refused to
register a company with the name Lale as a trade mark because
the respondent opposed it for reasons that it was phonetically
identical to another word Raleigh which was already in
existence.

Subsection (3) provides that where a company defaults in

complying with a direction under this subsection, it is liable to a
fine of five currency points or a fine of five currency points for
every day on which the offence continues.
Memorandum of Association section 7
The Memorandum of Association of a company, which is
required to be registered for purposes of incorporation, is
regarded as the company’s most important document in the
sense that it determines the powers of the company.

Consequently, a company may only engage in activities and

exercise powers, which have been conferred upon it expressly
by the memorandum or by implication there from.

Contents of the Memorandum

The Memorandum of Association of a company limited by
shares must state the following:
• The name of the company with “Limited” as the last word in
the case of a company limited by shares or by guarantee.
• The registered office of the company is situated in Uganda.
• May state the objects of the company.
• A statement as to the liability of the members.
• A statement to the nature of the company (Whether private or
public).
• The amount of share capital and division thereof into shares of
a fixed amount.

a) Name of the Company section 7 (1) (a)

The name of the company must be clearly stated with the word
limited at the last word of the name.
Publication of name by company.
Section 117 (1) provides that Every company—
(a) shall paint or affix, and keep painted or affixed, its name on
the outside of every office or place in which its business is
carried on in a conspicuous position in legible letters;
(b) shall have its name engraved in legible letters on its seal
which shall take the form of embossed metal die; and
(c) shall have its name mentioned in legible letters in all
business letters of the company and in all notices and other
official publications of the company and in all bills of exchange,
promissory notes, endorsements, checks and order for money or
goods purporting to be signed by or on behalf of the company
and in all bills of parcels, invoices, receipts and letters of credit
of the company.

b) Registered officesection 7 (1) (b)

The memorandum must state that the registered office is situated
in Uganda. However, the actual address must be communicated
to the Registrar of Companies within 14 days of the date of
incorporation or from the date it commences business.

Section 115 (1) provides that a company shall, as from the day
on which it commences tocarry on business or as from the
fourteenth day after the date of itsincorporation, whichever is the
earlier, have a registered office and aregistered postal address to
which all communications and noticesmay be addressed.

Notification of the situation of the registered office, the

registered postal address and of any change in them.
Section 116 (1) provides that notice of the situation of the
registered office and the registered postal address, and of any
change in them shall be given within fourteen days after the date
of incorporation of the company or of the change as the case
may be, to the registrar, who shall record the change.

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

A company may or may not state the objects. The Objects clause
sets out the principle activities the company has been
incorporated to pursue as well as the powers the company will
have in order to enable it achieve its activities. The objects must
be lawful and should include all the activities which the
company is likely to pursue. The objects or powers of the
company as laid down in the memorandum or implied there
from determine what the company can do. Thus the objects
clause consists of Activities (objectives) that the company can
legally pursue and Powers that the company can carry out to
achieve its objectives.

d) Statement as to the liability of memberssection 7 (2) and

(3)
The memorandum of a company limited by shares or by
guarantee should indicate that the liability of members is
limited. With respect to a company limited shares, the liability
of a member is the amount, if any, unpaid on his shares. With
regard to the liability of a member of a company limited by
guarantee, this is limited to the amount he undertook to
contribute to the assets of the company in the event of winding
up.

A company may also be registered with unlimited liability. In

such a situation, the members hereof act as guarantors in respect
of the company’s obligations. While a creditor of such a
company has no right of action against the members themselves,
his action being against the company in turn looks to the
members to discharge its debts by providing the necessary
funds.

e) Share capital clause section 7 (4)

The memorandum requires that a company having a share
capital must state the amount of share capital with which the
company is to be registered and that such capital is divisible into
shares of a fixed amount. Under section 7 (4) (b), a subscriber
of the memorandum may not take less than one share.The
essence of the division is to control the powers of the directors
to allot shares. The law does not prescribe the value but they are
usually small amounts to encourage people to hold as many
shares as possible.

The amount of capital with which a company is to be registered

and the amount into which it is to be divided are matters to be
decided upon by the promoters and will be determined by the
needs of the company and finance available.

The division of capital into shares is also important because

under the law shares cannot be issued at a discount.

The Memorandum of association under section 7 (1) states that

they must be printed in the English language, divided into
paragraphs, numbered consecutively and under section 8 (1)
they must be signed by each subscriber to the memorandum in
the presence of at least one witness who must attest the
signature. Each subscriber to the memorandum must state his or
her names, address, occupation and descriptions of the
subscribers thereof and

Alteration of the Memorandum of Association

A company may not alter the provision in its memorandum
except in the cases in the mode and to the extent for which
expression provision is made in the Act (Sec.9.)

Under section 10 (1) it provides that a company may by special

resolution alter its memorandum with respect to the objects of
the company to enable it:
(a) To carry on its business more economically or more
efficiently.
(b) To attain any of its objects by new or improved means.
(c) To enlarge or change the local area of its operations.
(d) To carry on some business which under existing
circumstances may conveniently or advantageously be
combined with the business of the company.
(e) To restrict or abandon any of the objects specified in the
 memorandum.
(f) To sell or dispose off the whole or any part of the
undertaking of the company.
(g) To amalgamate with any other companies or body of
persons as long as the objects of the other company are
intra vires the objects of the company.

Procedure of alteration
Under section 10 (2) a resolution may be passed by the holders
of not less in aggregate than 15% in nominal value of the
company’s issued share capital or any class of them if the
company is not limited by shares, not less than 15% of the
company’s members or by the holders of not less than 15% of
the company’s entitling the holders to object except that an
alteration shall not be made by any person who has consented to
or voted in favour of the alteration.

Under section 10 (10) (a) and (b) where a company passes a

resolution altering its objects and no application for cancellation
is made to the Registrar under this section, it shall within 14
days from the end of the period for making the application
deliver to the registrar a printed copy of its memorandum as
altered, where the application for cancellation is made, the
registrar shall stay the registration of the resolution for alteration
until the application is heard and disposed of.

Articles of Association section 11

The Articles of Association contains regulations for managing
the internal affairs of the company i.e. the business of the
company. They are applied and interpreted subject to the
memorandum of association in that they cannot confer wider
powers on the company than those stipulated in the
memorandum. Thus, where there is a conflict or divergence
between the memorandum and articles, the provisions of the
memorandum must prevail.

Contents of the Articles

Section 12 (1) in the case of an unlimited company, the articles
must state the number if members with which the company
proposes to be registered and if the company has a share capital,
the amount of share capital with which the company proposes to
be registered.

Section 12 (2) in the case of a company limited by guarantee the

articles must state the number of members with which the
company proposes to be registered.
Section 12 (3) where an unlimited company or a company
limited by guarantee has increased the number of its members
beyond the registered number, it shall within 14 days after the
increase was resolved on or took place, give to the registrar
notice of the increase and the registrar shall record the increase.
In case of default the company and officer shall be liable to a
default fine of 25 currency points Section 12 (4).

Contents of the Articles of Association

• Quorum at meetings and types
• Right to receive notice and to attend and vote
• Appointment and powers of directors
• Rights attached to different classes of shares
• The number of directors and their rotation, appointment of a
company secretary and duties, appointment of auditors
• Number of members with which it proposes to be registered
in case it is an unlimited company section 12 (1).
• Transfer of shares.

Adoption and application of Table A.

Section 13 (1) provides that Articles of association may adopt
all or any of the regulations contained in Table A. The
Companies Act contains a standard form of articleswhich
applies to companies limited by shares but other types of
companies are free to adopt them with the necessary
modifications under.

The advantage of statutory model articles (Table A) are:-

• That legal drafting of special articles is reduced to a
minimum since even special articles usually incorporate
much of the text of the model.
• There is flexibility since any company can adopt the model
selectively or with modifications and include in its articles
special articles adapted to its needs.

Every company except that limited by shares must have its own
articles of association. In practice, public companies have their
own articles. Companies limited by shares may also have their
own articles but if they don't register them, Table A
automatically applies. These must also be signed and their
signatures attested by the subscribers.

Subsection (2) provides that in the case of a company limited by

shares and registered after the commencement of this Act, if
articles are not registered or, if articles are registered in so far as
the articles do not exclude or modify the regulations contained
in Table A, those regulations shall, so far as applicable, be the
regulations of the company in the same manner and to the same
extent as if they were contained in the duly registered articles.

Under Section 15 the Articles must be printed in the English

language, divided into paragraphs, numbered consecutively,
signed by each subscriber to the memorandum in the presence of
at least one witness who must attest the signature.

Alteration of the Articles section 16

It is provided that subject to the provisions of the Act and to the
conditions contained in its memorandum, a company may by
special resolution alter or add to its articles.

Registration of memorandum and articles.

Section 19 (1) provides that the memorandum and the articles, if
any, shall be delivered to the registrar and he or she shall retain
and register them and shall assign a registration number to each
company so registered.
Section 19 (2) provides that a company shall indicate its
registration number on all its official documents.

Adoption of and application of Table F - Section 14

Under Section 14 (1) a public company shall at the time of
registration of its articles adopt and incorporate into its articles
the provisions of the code of corporate governance contained in
Table F.
Under Section 14 (2) a private company may at the time of
registration of its articles adopt and incorporate into its articles
the provisions of the code of corporate governance contained in
Table F.
Where a company adopts all or part of Table F, a printed copy
shall be annexed to the articles of association under Section 14
(3).

Where a company has adopted the code of corporate governance

it shall file annually a statement of compliance with the registrar
and the Capital Markets Authority, under Section 14 (4) failure
of which the company shall be liable to pay a fine of 50
currency points Section 14 (5).

Statement of Nominal Capital

This is a simple document, which is basically intended to show
the capital with which a company is registered i.e. the startup
capital the company actually has. This statement of nominal
capital does not have to be in any particular currency.

The statement is intended to convey to the public the seriousness

of the venture. However, to avoid stamp duty, most companies
are registered with minimal share capital moreover Companies
can alter the amount of capital by a special resolution. Thus it is
not an appropriate guide to the financial soundness of the
company.

Statutory Declaration of Compliance section 22(2)

Section 22 (2) provides that a statutory declaration by an
advocate engaged in the formation of the company or by a
person named in the articles as a director or secretary of the
company, of compliance with all or any of the requirements
referred to in subsection (1) shall be produced to the registrar
and the registrar may accept the declaration as sufficient
evidence of compliance.

The statutory declaration is sworn by a by a legal practitioner,

promoter or by a person named in the articles as directors or
secretary of company indicating that all requirements have been
complied with in the formation of the company.

Statement of the Registered Office of the Company

This is a form that is filled out and it is referred to as Form 9.
The form requires the company to provide a statement of the
address of the intended registered office of the company and it is
signed by subscribers to the Memorandum of Association,
director of company secretary and it must be delivered to the
registrar to obtain incorporation. This address becomes the
registered office of the company on incorporation.

Refer to section 7 (1) (b) and Section 115 as discussed above

under contents of the Memorandum of Association.

Particulars of Directors and Company Secretary

This is a form that is filled out and it is referred to as Form 7. A
statement signed by subscribers of the Memorandum of
Association setting out the names of the subscribers and the
secretary of the company and containing the information in
respects thereof or thereto required to be contained in respect of
directors and secretaries together with the consent of those
people who have consented to act in those capacities must be
sent to the registrar of companies on incorporation.
Registration Form
Attach one passport photo of the subscribers and signature of
subscriber

Additional documents for a public company

If the company is a public company, the following additional
documents are required to be registered: Prospectus or statement
in lieu of prospectus.

Registration of prospectus.
Section 60 provides that a prospectus shall not be issued by or
on behalf of a company or in relation to an intended company
unless, on or before the date of its publication—
(a) the Capital Markets Authority has approved the company’s
prospectus in accordance with the Capital Markets Authority
Act; and
(b) there has been delivered to the registrar for registration a
copy of the prospectus signed by every person who is named in
it as a director or proposed director of the company or by his or
her agent authorised in writing.

Registration/issuance of a Certificate of Incorporation

This is provided for under SECTION 22 (1)
Section 22 (1) provides that a certificate of incorporation given
by the registrar in respect of any association shall be conclusive
evidence that all the requirements of this Act in respect of
registration and of matters precedent and incidental to
registration have been complied with and that the association is
a company authorized to be registered and duly registered under
this Act.

This is a certification that a company has been recognized as a

legal person and accordingly registered. After it has been
issued, a private company can commence business.

Effect of registration and the role of Registrar

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

In the case of Jubilee Cotton Mills Ltd V Lewis (1924)

A.C.958 the certificate was dated 6 January 1920 but it was not
th
signed and issued until 8 January. On the 6 of January the
th th

directors allotted shares and debentures. The allottee later

refused to pay the amount due on the shares arguing that the
company did not exist on the date of issue. It was held that the
company was deemed to have come into existence on the 6 of th

January 1920. Therefore, the allotment was valid and the allottee
must pay for the securities allotted to him.

The basic role of registrars is to ensure that business entities are

not formed without proper documents, ensure compliance with
the law in the process of registration and thereafter. Where the
registrar is not satisfied with the documentation, he/she can
decline to register the business/company.
However, the Registrar may refuse to register a company whose
objects are unlawful. In the case of R. V Registrar of
Companies Exparte More (1931) 2 K. B. 197 the Registrar’s
refused to register to sell tickets in a lottery because the lottery
was illegal in England.

However, where he declines without a reasonable excuse, an

order of Mandamus can be obtained from the High Court
compelling him/her to perform the duty.

Activity
Discuss the essential requirements that must be fulfilled before a
Private Company comes into existence.

Solution
The student should be able define a company and go on to
define a private company. The student should also go on to
define the meaning of formation and then give a step by step
analysis of how the company is formed clearly stating the
various documents that are submitted for registration.

Test Questions
1. Jane, Joan and Joy are three friends who would like to
form a company to carry on the business of pest control
and cleaning services. They have approached you.
Advise them on the best type of company they can form.
2. Discuss the different formalities that must be satisfied
before a name can be reserved by the registrar of
companies
3. Critically analyze the different contents found within the
Memorandum of Association.
TOPIC FOUR

CONSEQUENCES OF INCORPORATION

At the end of this Chapter the student will be able to:

1. Evaluate the advantages that arise from
incorporation of a company; and
2. Evaluate the disadvantages that arise from
incorporation of a company.

CONSEQUENCES OF INCORPORATION
Advantages that Arise from Incorporation of a Company
The fundamental attribute of corporate personality which is as a
result of incorporation and from which all other consequences
flow is that the corporation is a legal entity distinct from its
members. This was illustrated in the case of Salomon Vs
Salomon & Co (1897) AC 22.

Since the Salomon case, the complete separation of the company

and its members has never been doubted. It is from this
fundamental attribute of separate personality that most of the
particular advantages of incorporation spring and these are:

1. Liability:
The company being a distinct legal “persona” is liable for its
debts and obligations. The company is liable without limit for its
own debts. The liability of the members or shareholders of the
company is limited to the amount remaining unpaid on the
shares. For instance, where a shareholder has been allotted 100
shares at UGX 100= each and he pays UGX 5, 000= to the
company, at the time of winding up the company, if the shares
remain not fully paid for, he will be required to pay UGX 5,
000=.

In the case of a guarantee company, each member is liable to

contribute a specific amount to the assets of the company and
their liability is limited to the amount they have guaranteed to
contribute.

It follows that the company’s creditors can only sue the

company and not the shareholders.
If the company has unlimited liability, the members liability to
contribute is unlimited and their personal property can be looked
at to discharge the company creditors.

2. Property:
An incorporated company is able to own property separately
from its members. Thus, the members cannot directly interfere
with the company property. Thus, one of the advantages of
incorporation (corporate personality) is that it enables the
property of the company to be clearly distinguished from that of
the members. In the case of Macaura Vs North Assurance Co
(1925) AC 619the company was dealing in timber and the
majority shareholder took out an insurance policy in his own
name regarding the timber. The timber was destroyed by fire and
the insurance company refused to pay arguing that he had no
insurable interest at the time of the policy. The shareholder
argued that he was the substantial owner of the company and so
the beneficial owner of the property, thus he had an insurable
interest. Court disagreed and held that a shareholder even if he
owns all the shares has no interest in the property of the
company.

Thus corporate personality is clearly distinguished from the

members’ property and members have no direct proprietary right
in the company’s property but merely to their shares. A change
in membership causes a transfer in shares but the company’s
property remains untouched.

3. Legal Proceedings:
As a legal person, a company can take action to enforce its legal
rights or be sued for breach of its duties. However, the action
for or against the company should be instituted in the company’s
registered name.

4. Perpetual Succession:
One of the advantages of incorporation is that the company will
not be susceptible to “the thousand natural shocks that flesh is
subject to.” It (the company) cannot become incapacitated by
illness, mental or physical. This is not to say that the death or
incapacity of its human members may not cause the company
considerable embarrassment obviously this will occur if all the
directors are imprisoned. But the vicissitudes of the flesh have
no direct effect on the company. The death of a member leaves
the company unmoved, members may come and go but the
company can go on forever. Changes in membership arising
from the bankruptcy or death do not affect the company’s
existence. The life of a company can only be ended either by
winding up, striking off the register of company’s or through
amalgamation and reconstruction as provided by the Companies
Act. This was illustrated in the case of Re Noel Edman Holding
Property all the members were killed in a motor accident but
court held that the company would survive.

Thus, this perpetual succession gives the certainty required in

the commercial world even when ownership of shares changes
there is no effect on the performance of the company and no
disruption in the company business.

5. Transfer of Shares:
A share constitutes an item of property, which is freely
transferable, except in the case of private companies. With an
incorporated company freedom to transfer both legally and
practically can be readily attained. The company can be
incorporated with its liability limited by shares and these shares
constitute items of property which are freely transferable in the
absence of express provision to the contrary and in such a way
that the transferor drops out and the transferee steps into his
shoes.

In private companies, there is a restriction on the transfer of

shares and this is essential and is in any event desirable if such a
company is to retain its character of an incorporated private
company.

6. Borrowing:
A company can borrow money and provide security in the form
of a floating charge. A floating charge is a charge that floats like
a cloud over the whole assets of the company from time to time
but without preventing the mortgagor (company) from disposing
of these assets in the usual course of business until something
occurs to cause the charge to become crystallized or fixed. This
type of charge is particularly suitable when a business has no
fixed assets such as land but carries a large and valuable stock in
trade.
Disadvantages that Arise from Incorporation of a Company

Apart from the advantages mentioned above which arise from

incorporation, there are certain disadvantages of incorporation
and these are:
• Formalities have to be followed,
• Loss of privacy,
• The exercise is too expensive.
Activity
Discuss the different consequences that arise from the
incorporation of a company

Solution
The student should be able to define what a company and
discuss briefly what is required in the formation of companies
and then discuss the attendant consequences that result from the
company’s formation. The student should be able to discuss the
positive and negative consequences.

Test Questions
1. Discuss the advantages and disadvantages that arise
upon incorporation
2. Analyze the concept of corporate personality as used
in company law
TOPIC FIVE
MEMORANDUM AND ARTICLES OF ASSOCIATION

At the end of this Chapter the student should be able to:

1. Analyze the effect of registration of the memorandum
and Articles of Association;
2. Understand the meaning of extrinsic contracts as applied
in company law; and
3. Examine and analyze the Interpretation of the
memorandum and Articles of Association.

THE CONTRACTUAL EFFECT OF THE

MEMORANDUM AND ARTICLES OF ASSOCIATION
S.21 (1) of the Companies Act provides that subject to the
provisions of this Act, the memorandum and articles shall when
registered bind the company and the members thereof to the
same extent as if they respectively had been signed and sealed
by each member and contain the warranty on the part of each
member to observe all the provisions of the memorandum and
articles.

Thus, registration gives a legal effect i.e. the company is now

bound by the provisions of the memorandum and articles in
other words a contract is created between the company and the
members of the company. A member need not have signed the
document but once they become members then they are deemed
to have signed the contract and therefore they have to observe
all the provisions of the memorandum and articles i.e. it’s the
memorandum and articles that form the terms of the contract.
The memorandum and articles form three contracts and these
are:
a) Contract between the company and each member
b) Contract between members interse (members themselves)
c) Contract between the company and each member in his/her
capacity as member

The memorandum and articles constitute a contract between

the company and each member
The memorandum and articles of association are enforceable by
a member against the company and other members as illustrated
by the case of Wood V Odessa Waterworks Co. (1889) 42
ChD 636. In this case the articles empowered the directors with
the approval of the general meeting to declare “a dividend to be
paid to the members”. The directors recommended that instead
of paying a dividend, members should be given debenture bonds
bearing interest paid at par, by annual drawings, extending over
30 years. The recommendation was approved by the company in
general meeting by an ordinary resolution. Wood, a shareholder
successfully sought an injunction restraining the company from
acting on the resolution on the grounds that it breached the
articles. Stirling J. stated in this case that “the articles of
association constitute a contract not merely between the
shareholders and the company but between each individual
shareholder and every other…”

The question in this case was whether it is within the power of

the majority of the shareholders to insist against the will of a
minority that profits which have been earned shall be divided,
not by the payment of cash, but by the use of debenture bonds.
The articles of the company provided that the directors may,
with the sanction of a general meeting, declare dividends to be
paid to the shareholders. Prima facie this means to be paid in
cash. The debenture bonds that the company was proposing to
pay are not payments in cash but amount to agreements or
promises to pay. They are a debt of the company payable at
some uncertain future period which amounts to breach of the
contract between the company and the members.

Secondly, the contract under S.21 (1) is between the

members interse (members themselves)
Thus, a direct action between members is possible where one of
the members breaches the contract in the memorandum and
articles. This was illustrated in the case of A. O. Obikoya Vs
Ezewa & Ors (1964) 2 ALL NLR 133 the applicant and
respondents were the permanent directors of a limited liability
company by virtues of Article 28 of their company articles.
Article 32 of their Act provided that a permanent director shall
not vote for the removal from office of another permanent
director. In breach of both articles 28 & 32, the respondents
purported to alter article 28 by a special resolution and inserted
article 86 of Table A which voted for the removal of the
applicant from office as director of the company and the
applicant sued for damages against the respondents personally
and for breach of the contract in article 32 and for an injunction
to restrain the respondents from further preventing the applicant
from acting as director of the company. Held that when the 3
members of the company who are also the 3 permanent directors
agreed by virtue of article 32 not to vote for the removal of each
other from office, they were agreeing between themselves as
members in which capacity they exercised their voting rights not
to vote. A contract did exist between them and the applicant was
within his right to sue because the respondents were in breach of
articles 28 & 32.

Thirdly, S.21 (1) creates a contract a contract between the

company and the members only in their capacity as member
and not in some other special capacity
If therefore an article provides that someone shall be the
company’s solicitor, he cannot rely on that as a contract to
enforce his right to be the solicitor, even if he is in fact also a
member, for the article concerns him in his capacity as an
outsider not as member. Nor will a provision that disputes
between the company and its members must be referred to
arbitration avail a person whose dispute is between the company
and himself as a director, even though he happens also to be a
member.

This was illustrated in the case of Hickman Vs Kent (1915) 1

CH 881 the defendant sheep-breeders association was a non-
profit making company incorporated in 1895. Under Article 49
of its articles of association, any disputes between the
association and its members should be referred to arbitration.
The plaintiff brought this action in court in breach of article 49,
claiming an injunction to restrain the association from expelling
him from membership, damages for refusing to register his
sheep, and a declaration that he was entitled to have his sheep
registered. The court granted the association a stay of
proceedings on the ground that article 49 was binding as
between the company and its members under the Companies
Act.
Ashbury J stated that: “ an outsider to whom rights purport to be
given by the articles in his capacity as such outsider, whether he
is or subsequently becomes a member, can not sue on those
articles treating them as contracts between himself and the
company to enforce those rights…No right merely purporting to
be given by an article to a person whether a members or not, in a
capacity other than that of a member as for instance as solicitor,
promoter, director, can be enforced against the company…”

In Beattie V E. & Beattie Ltd (1938) Ch 708, in proceedings

brought against a director, who was also a member of the
company, alleging breach of duty, the director sought to rely on
a clause in the articles of association obliging all disputes
between the company and a member to be referred to arbitration.
The court held that the director was not entitled to rely on the
article because it did not constitute a contract between the
company and the defendant director in his capacity as director.

Thus, if an article provides that someone should be the

company’s director or solicitor he cannot rely on the article as
giving him a right to be the company’s director or solicitor even
if he is a member. This is because the article concerns him only
in his capacity as an outsider (i.e., director or solicitor), not as
member.

Exception to the above contract

However, in the case of Quin & Axtens Ltd V Salmon (1909)
AC 442 the House of Lords was prepared to give effect to the
articles of association even though this had the effect of
enforcing rights given to certain members in their capacity as
directors. In this case the articles of the company provided that
the business of the company was to be managed by the directors
“subject to such regulations (being not inconsistent with the
provisions of the articles) as may be prescribed by the company
in general meeting”. The articles also provided that no resolution
of the directors on certain important matters would be valid if
either of two named managing directors voted against the
resolution. The plaintiff one of the two managing directors,
voted against such a resolution to acquire and let premises but
the company purported to ratify the resolution by a simple
majority. He therefore successfully brought an action against the
company and the directors involved for an injunction restraining
them from acting on the resolution. It was held that the
resolution was inconsistent with the provisions of the articles.

In summary, the following should be noted:

• No article can constitute a contract between the company and a
third party.
• No right merely purporting to be given by an article to a
person, whether a member or not, in a capacity other than that
of a member, can be enforced against the company.
• That articles regulating the rights and obligations of the
members generally as such do create rights and obligations
between them and the company respectively.

Extrinsic Contracts
Contracts outside the memorandum and articles are sometimes
called extrinsic contracts. Where there is an extrinsic contract
between the company and a director (such as for employment),
an article may be expressly or impliedly incorporated into the
extrinsic contract. In this event any rights given by the articles
can be enforced under the contract without relying on Section 21
of the Companies Act.

In the case of ReNew British Iron Co., ex parte Beckwith

(1898) 1 Ch 324 a director had served the company without any
express agreement for remuneration. However the articles of
association provided that the remuneration of the board shall be
an annual sum of GBP 1,000. The director claimed arrears of
fees during the winding up of the company and it was held that
he would succeed because the service contract incorporated the
articles by implication.

However, where a contract has incorporated provisions of a

company’s articles it must contemplate that the articles can be
altered in the usual way provided that such alteration does not
have a retrospective effect. In the case of Swabey V Port
Darwin Mining Co. (1889) 1 Meg 385 the companies articles
provided that the directors were to be paid at a rate of GBP 200
per annum. Later the company passed a special resolution
altering the articles so that the directors were entitled to receive
GBP 5 per month retrospectively from the 31 of December
st

1887. The plaintiff who was a director claimed fees at the old
rate which had accrued prior to the alteration. It was held that
the director would be entitled to their salary at the rate originally
stated in the articles up to the time the articles were altered.

INTERPRETATION OF THE MEMORANDUM AND

ARTICLES OF ASSOCIATION
There are different rules that have been put in place regarding
the interpretation of the Memorandum and Articles of
Association which can be discussed as follows:
a) Memorandum of Association is superior to the Articles of
Association
The Memorandum of Association is the basic law or constitution
of the company and the articles are subordinate to the
Memorandum of Association. If follows therefore like light
follows darkness, that if there is a conflict, the Memorandum of
Association prevails.

The articles are void to the extent of the inconsistency or

conflict. In Guinness Vs Lion Corporation Of Island Ltd
(1822) 22 CH.D.349, the Memorandum of Association stated
that its object was the development of land in an island and the
activities incidental thereto. The court held the provision in its
articles void by which part of the capital was to be used as a
guarantee fund for the payment of dividends on its preference
shares. The intention of the Memorandum of Association was
that the whole of its capital should be employed in achieving its
objectives of land development and establishing a guarantee
fund was inconsistent with it.

b) Memorandum and Articles of Association may be read

together to clear any ambiguity
If there is no conflict, the Memorandum of Association and
articles must be read together and any ambiguity or uncertainty
in either can be removed by the other e.g. in Re South Durham
Brewery Co Ltd, (1885) 31ch. D 261, the Memorandum of
Association was silent as to whether the companies’ shares were
to be all one class or might be of difficult classes. It was held
that a power given by articles to issue shares of different classes
resolved the uncertainty and enabled the company to do so.

Also, in the case of Rainford Vs-James Kett & Blackman

Co.Ltd (1905) 2ch.147,the Memorandum of Association of the
trading company allowed it to do things incidental to its objects.
It was held that the provisions in the articles empowering the
company to lend money merely exemplified the general words
of the Memorandum of Association and the company was
therefore entitled to lend money to its employees.

In Repyle Works (1891) 1 Ch.173, the Memorandum of

Association empowered the company to borrow on security of
its assets or credit while the articles provided that it might
mortgage its uncalled capital. It was held that the articles merely
made specific the general words of the Memorandum of
Association and so the company did have the power to mortgage
its uncalled capital.

Though the Memorandum of Association and articles can only

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

Activity
Discuss the contractual effect that is created by the registration
of the Memorandum and Articles of Association

Solution
The student will be expected to discuss the memorandum and
articles and then clearly highlight the different types of contracts
that arise from the documents.

Test Questions
1. Discuss the different rules as applied in the
interpretation of the Memorandum and Articles of
Association
2. Discuss the extrinsic contract as used in company law.

TOPIC SIX

LIFTING THE VEIL OF INCORPORATION

At the end of this Chapter the student should be able to:

1. Understand the meaning of “veil of incorporation”; and
 2. Analyze the circumstances under which the veil of
incorporation may be lifted.

The Meaning of the Veil of Incorporation

The veil of incorporation means merely that a company is to be
distinguished as a separate person from its members.

Lifting the Veil of Incorporation

In such a situation, the law looks at the people behind the
company rather than the corporation.

It has been observed in Dunlop Nigerian Industries Ltd Vs.

Forward Nigerian Enterprises Ltd & Farore, that in
particular circumstances; e.g. where the device of incorporation
is used for some illegal or improper purpose, the court may
disregard the principle. That a company is an independent legal
entity and “lift the veil” of corporate identity so that if it is
proved that a person used a company he controls for an
improper transaction he may be made personally liable to a third
party.

The effect of so doing is either:

• To identify the company with other persons, that is its
members or directors, or
• To treat a group of companies as a single commercial
entity.

There is no consistent principle applied in making these

exceptions, each of which has been learnt separately, but their
general purpose is

• To enforce the rules of company law;

• To prevent fraud or evasion of legal obligations by the
use of companies; or
• To recognize that in economic reality the enterprise is the
group and not the individual companies within it.

There are two circumstances under which the veil of

incorporation may be lifted
• Under statute
• Under Case law

Lifting the veil under statute

It has always been recognized that the legislature can forge “a
sledgehammer capable of cracking open the corporate shell” as
was observed by Delvin J in Bank voor Handel en
Scheepvaart N.V. Vs. Slatford (1953) 1.Q.B.248 at 278).

Section 20 provides that the High Court may, where a company

or its directors are involvedin acts including tax evasion, fraud
or where, save for a single membercompany, the membership of
a company falls below thestatutory minimum, lift the corporate
veil.
The legislature has lifted the veil in the following circumstances:

1. Where the number of members is below legal minimum

Section 49 provides that if a company other than a private
company limited by shares or by guarantee carries on business
for more than 6 months after its membership has fallen below
two members every member during the time the business is
carried on after the six months and who knows that the company
is carrying on business with only one member is liable jointly
and severally for the company’s debts incurred during that time.

2. Where the company is not mentioned in the Bill of

Exchange
An officer of the company is personally liable if he signs a bill
of exchange, cheque, etc. on behalf of the company without
mentioning the company’s name on it in legible (clear)
characters or without express or implied authority to do so.
Under section 56 it is provided that a bill of exchange or
promissory note shall be taken to have been made, accepted or
endorsed on behalf of a company if made, accepted or endorsed
in the name of or by or on behalf or on account of, the company
by any person acting under its authority, express or implied.

In the case of Penrose Vs Martyr (1958) E.B.& E. an officer of

a company was held personally liable when the word limited
was omitted from the name.

In DurhamFancy Goods Ltd Vs Micheal Jackson (Fancy

Stores) Ltd (1968) 2 Q.B. 839 it was decided that an officer of a
company can be held personally liable when the company is
described by a wrong name.

When a company’s name is given wrongly on a cheque or other

financial instrument, a creditor can proceed against the officer
responsible personally.

The position in England has since changed. In the 1993 case of

Jenice Ltd and Others Vs Dan Mr. Dan was a director of a
company called “Primekeen Ltd”. The bank incorrectly printed
the company’s cheques in the name of “Primkeen Ltd”. Mr. Dan
signed several of these. They were dishonoured and returned by
the several plaintiffs including Jenice. Primekeen Ltd then went
into creditors’ winding up and the various plaintiffs sued Mr.
Dan as personally liable on the cheques because of the
misdescription of the company’s name.

Mr. Dan was not liable because the purpose of the section was to
ensure that outsiders knew that they were dealing with a limited
liability company. There was no doubt that in this case outsiders
knew that they were dealing with a limited liability company, so
no mischief had been done.

3. Holding and Subsidiary Companies

Where companies are in relationship of holding and subsidiary
companies, group accounts should be presented before the
holding company in general meeting. In this regard, the holding
and subsidiary companies are regarded as one for accounting
purposes, and the separate nature of the subsidiary company is
ignored.

4. Reckless or Fraudulent Trading

If during the winding up a company, it appears that any business
of the company has been conducted recklessly or fraudulently,
those responsible for such business may be held liable without
limitation of liability for any of the company’s debts or
liabilities.

5. Land Act
Under the Land Act, non-Ugandans are restricted from acquiring
land in Uganda. Consequently, if the purchaser is a company,
the veil has to be lifted to determine the nationality of the
company.

6. Taxation
Under the Income Tax Act, the veil of incorporation may be
lifted to ascertain where the control and management of the
company is exercised in order to determine whether it is a
Ugandan company for income tax purposes.
Under the Income Tax Act a company may be identified with
those who control it, to determine its residence for tax. The
Revenue is the only outside creditor in whose favor the Salomon
rule has been substantially mitigated.
Lifting the veil under case law
Even without the aid of a legislative sledgehammer the courts
also have sometimes been prepared to have a crack at the
corporate veil. Sometimes the courts may also ignore the
distinction between a company and its members and managers if
the latter use that distinction to evade their legal obligations.

1. Where the company acts as agent of the shareholders

Where the shareholders of a company use the company as an
agent, they will be liable for the debts of the company.

The courts are also prepared in certain circumstances to regard a

company as an agent of its controlling shareholders but when the
controlling shareholder is an individual they are unwilling to do
this unless there is fraud or improper conduct or unless an
agency relationship can be establish on normal agency principles
of principle and agent. Where, however, the controlling
shareholder is another company they are less reluctant.

2. Where there has been fraud or improper conduct

The veil of incorporation may also be lifted where the corporate
personality is used as a mask for fraud or illegality.

Thus in Gilford Motor Company Vs. Horne the defendant was

plaintiff’s former employee. He agreed not to solicit its
customers when he left the employment. He then formed a
company, which solicited the customers. Both the company and
defendant were held liable for breach of covenant not to solicit.

3. Determination of residence
The courts also look behind the façade of the company and its
place of registration in order to determine its residence. For this
purpose the test laid down has long been the place of its central
control. Normally this place will be where the board of directors
functions or the place of business of the managing director
especially if he holds a controlling interest or that of the parent
company.

In Unit Construction Co. Ltd Vs Bullock (1960) A. C. 351

H.L Three companies wholly owned by a UK company, were
registered in Kenya. Although the companies’ constitutions
required board meetings to be held in Kenya, all three were in
fact managed entirely by the holding company in the UK. It was
held that for tax purposes the three the companies were resident
in the United Kingdom. The Kenyan connection was a sham, the
question being not where they ought to have been managed, but
where they were managed. It was irrelevant that for the purposes
of Kenyan law the companies might also be resident in Kenya.

Residence is important mainly in connection with taxation, but it

may also govern enemy status or the subjection of a company to
the jurisdiction of Ugandan or foreign courts.

In Daimler Co. Ltd Vs Continental Tyre and Rubber Co.

(1916) 2 A.C 307 H.L it was indicated that a company could
have an “enemy character”. This is so if its agents or persons in
de facto control of its affairs are resident in an enemy country or
are taking instructions or acting under the control of enemies. To
determine the enemy character of a company the court looks
behind the artificial persona – the corporation – and takes
account of and is guided by the natural persons.

4. Trusts
Attempts to use trust, rather than agency as a tool for piercing
the corporate shall have been fewer and less successful.
Nevertheless there are cases where the courts have been
prepared to recognize that a subsidiary company held all its
property in trust for its parent company.

In LittlewoodsStores Vs I.R.C (1969) 1 W.L.R. 1241 C.A. the

court relied on trust doctrines to ignore the effect of the
corporate entity principle in a tax case involving a holding
company and it’s wholly -owned subsidiary where the former
had provided the whole of the purchase price for property that
had been purchased by the latter.

5. Ratification of corporate acts

The law insists that a company will be bound only by resolution
of its organs, the board of directors or the members in general
meeting, or by duly authorized acts of its agents, which its
members individually or collectively are not. Nevertheless in a
number of cases questions have arisen whether something less
formal than a resolution duly passed at a properly convened
meeting of the members can be regarded as equivalent to a
resolution of the members in general meeting. The courts have
come to recognize that individual assents given separately by all
members entitled to vote are equivalent to the assent of a
meeting. It is now recognized that a company is bound in a
matter intra vires by the unanimous agreement of its members
even when not arrived at in a formal meeting. If the directors or
the members resolve to do any act that is ultra vires the company
or if they act beyond their powers then they risk being held
personally liable.

In conclusion, the courts regard themselves as precluded by the

Salomon’s case from treating a company as an “alias, agent,
trustee or nominee” of its members. However they are prepared
to recognize that a company is an alias of its members when
corporate personality is being blatantly used as a cloak for fraud
or improper conduct.

Activity
Once a Company comes into existence it assumes liability for its
own actions and never can a member or shareholder be liable for
the acts of the Company. Discuss.

Solution
The student is expected to define what a company is and state
the fact that upon incorporation of a company, it acquires a
corporate personality and this personality makes that company
liable for its actions. The student is then expected to discuss the
meaning of the veil of incorporation and its rationale and to
discuss the different circumstances under which the veil may be
lifted i.e. under statute law and under case law.

Test Questions
1. The doctrine of corporate personality is not always a
guaranteed defence.
2. Once a company has been formed, it becomes liable for
its debts and obligations.
3. Never under any circumstances can the members or
officers be held liable for the acts of the company.
Discuss
4. As soon as the case of Salomon Vs Salomon & Co Ltd
(1896) AC 22 was designed certain, problems arose
there from that needed quick solution. The judges over
the years have introduced the concept of lifting the veil
to solve the said problems. Discuss.
TOPIC SEVEN

MANAGEMENT OF A COMPANY

At the end of this Chapter, the student will be expected to:

1. Understand the different organs that are responsible for
the management;
2. Analyze and Evaluate the role of members in the
management of companies; and
3. Understand the procedures regarding meeting

ORGANS RESPONSIBLE FOR MANAGEMENT OF A

COMPANY
The control and management of a co is distributed among its
principal officers and these include the auditors, accountants,
Board of Directors, Managing director (if any) and any other
officers of a company. There are basically two organs
responsible for the management of a company. These are: -
▪ The Members through company meetings and
▪ The Board of Directors.

MANAGEMENT OF THE COMPANY BY THE

MEMBERS AND COMPANY MEETINGS
The Members have an opportunity of influencing the company's
management through the company's meetings. There are 4 types
of meetings through which the shareholders can participate in
the affairs of a company.

1. Statutory meeting and statutory report.

These are provided for under Section 137 of the Companies Act
which requires A company limited by shares and every company
limited by guarantee and having a share capital shall, within a
period of not less than one month nor more than three months
from the date at which the company is entitled to commence
business, hold a general meeting of the members of the company
which shall be called “the statutory meeting”.. The section has 3
basic elements.
▪ It is a requirement for all companies limited by shares and
limited by guarantee
▪ The meeting is held once in the company's life and never
again
▪ It must be held within one month from the date of the
company’s commencement of business and not before three
months elapse after such commencement.

A statutory report must be sent to the members before the

meeting is held. This must be 14 days before the date the
meeting is to be held according to Section 137(2) by the
directors of the Company.

Subsection (3) provides that Subject to subsection (2), if the

statutory report is forwarded later than is required by that
subsection, it shall, notwithstanding that fact, be taken to have
been duly forwarded if it is so agreed by all the members
entitled to attend and vote at the meeting.

Contents of the statutory report

According to section 137 (4) the statutory report shall be
certified by not less than two directors of the company and shall
state—
(a) the total number of shares allotted, distinguishing shares
allotted as fully or partly paid up or otherwise than in cash and
stating in the case of shares partly paid up, the extent to which
they are so paid up and in either case the consideration for which
they have been allotted;
(b) the total amount of cash received by the company in respect
of all shares allotted, distinguished as described in paragraph (a);
(c) an abstract of the receipts of the company and of the
payments made out of them, up to a date within seven days
before the date of the report, exhibiting under the distinctive
headings the receipts of the company from shares and
debentures and other sources, the payments made on them and
particulars concerning the balance remaining in hand and an
account or estimate of the preliminary expenses of the company;
(d) the names, postal addresses and descriptions of the directors,
auditors, if any, managers, if any and secretary of the company;
and
(e) the particulars of any contract the modification of which is to
be submitted to the meeting for its approval, together with the
particulars of the modification or proposed modification.

Subsection 7 provides that the directors shall cause a list

showing the names and postal addresses of the members of the
company and the number of shares held by them respectively, to
be produced at the commencement of the meeting and to remain
open and accessible to any member of the company during the
continuance of the meeting.

What is discussed in the meeting?

Under subsection 8, the members of the company present at the
meeting are free to discuss any matter relating to the formation
of the company or arising out of the statutory report, whether
previous notice has been given or not but no resolution of which
notice has not been given in accordance with the articles may be
passed.

Adjournment of the meeting

Under subsection (9) the meeting may adjourn from time to
time and at any adjourned meeting any resolution of which
notice has been given in accordance with the articles, either
before or subsequently to the former meeting, may be passed
and the adjourned meeting shall have the same powers as an
original meeting.

Default in complying with provisions relating to statutory

meeting
Under subsection (10) where there is a default in complying
with this section, every director of the company who knowingly
and willfully commits a default or in the case of default by the
company, every officer of the company who is in default is
liable to a fine of twenty five currency points.

Under subsection (11) it is provided that this section does not

apply to a private company but applies to a company which was
a private company before becoming a public

2. Annual general meeting.

This is a meeting that is held once every year.

Who holds this meeting?

Section 138 (1) provides that a Public company shall in each
year hold a general meeting in addition to any other meetings in
that year and shall specify the meeting as general meeting in the
notices calling it and not more than fifteen months shall elapse
between the date of one annual general meeting of a company
and that of the next.

Subsection (2) provides that a private company may at the

requisition of a member hold an annual general meeting.

When is the meeting held?

The meeting is held once in a year and a year means twelve
calendar months and not more than fifteen months shall elapse
between the date of one annual general meeting of a company
and that of the next.
Subsection 3 provides that subject to subsection (1), if a
company holds its first annual general meeting within eighteen
months after its incorporation, it need not hold it in the year of
its incorporation or in the following year.

What is discussed in the meeting?

The object of this meeting is to give members an opportunity to
meet and participate in the decision making process of the
company at least once a year. This meeting is technically
referred to as an ordinary meeting; the resolutions thereof are
ordinary resolutions. This is the most important meeting of the
company and concerns a number of issues e.g. to consider
accounts, balance sheets, reports of directors and auditors,
consideration of dividends, appointment of directors etc.

Default in holding this meeting

Further Section 138 (4) provides that where default is made in
holding a meeting of the company in accordance with subsection
(2), the registrar may, on the application of any member of the
company, call or direct the calling of a general meeting of the
company and give such ancillary or consequential directions as
the registrar thinks expedient including directions modifying or
supplementing in relation to the calling, holding and conducting
of the meeting, the operation of the company’s articles.
Under subsection (8) where default is made in holding a
meeting of the company in accordance with subsection (1) or in
complying with any directions of the registrar under subsection
(3), the company and every officer of the company who is in
default are liable to a default fine of twenty five currency points
and if default is made in complying with subsection (4), the
company and every officer of the company who is in default are
liable to a default fine of five currency points.
3. Extra-Ordinary general meeting on requisition.
Where there are some burning issues that may not hold on to the
next annual general meeting, then an extra ordinary general
meeting may be held. The directors may whenever they think fit
convene an extra ordinary general meeting but in default may be
convened on requisition.

Section 139 (1)provides that that the directors of a company,

notwithstanding anything in its articles, shall, on the requisition
of the members holding not less than one tenth of the paid up
capital of the company as at the date of the deposit carries the
right of voting at general meetings of the company or in the case
of a company not having a share capital, members of the
company representing not less than one tenth of the total voting
rights of all the members having that date a right to vote at
general meetings of the company, shall proceed duly to convene
an extraordinary general meeting of the company.

Under subsection (2) the requisition must state the objects of the
meeting and must be signed by the requisitionists and deposited
at the registered office of the company and may consist of
several documents in like form each signed by one or more
requisitionists.

Under subsection (3) it is provides that where the directors do

not within twenty one days after the deposit of the requisition
under subsection (2) held the meeting attended by members
representing more than one half of the total voting rights at a
general meeting then after the expiration of three months after
the date of deposit of the requisition the meeting shall not be
held.

Under subsection (4) a meeting convened under this section

shall be convened in the same manner as nearly as possible as
that in which meetings are to be convened by the directors.

Under subsection (5) any reasonable expenses incurred by the

requisionists by reason of the failure of the directors duly to
convene a meeting shall be repaid to the requisitionists by the
company and any sum regard shall be retained by the company
out of any sums due or to become due from the company by way
of fees or other remuneration, in respect of their services to the
directors who are in default.

Under subsection (6) for the purposes of this section, the

directors shall, in the case of a meeting at which a resolution is
to be proposed as a special resolution, be taken not to have duly
convened the meeting if they do not give the notice required by
section 149.

All meetings other than the AGM are referred to as extra-

ordinary meetings. The resolutions passed at an extra-ordinary
meeting are referred to as special resolutions

4. General meeting convened under Court Orders section

142
The section provides that under section 142 (1) that if, for any
reason it is impracticable to call a meeting in any manner in
which the meeting may be called or conduct the meeting as per
the Articles, the court may on its own motion or application by a
director or member entitled to attend and vote at the meeting
order that a meeting be called, held and conducted in such
manner as the court thinks fit.
Subsection (2) provides that where an order is made under this
section the court may give such ancillary or consequential
directions as it thinks expedient and it is declared that the
directions that may be given under this subsection include a
direction that one member of the company present in person or
by proxy shall be taken to constitute a meeting.

Subsection (3) provides that a meeting called, held and

conducted in accordance with an order under subsection (1)
shall for all purposes be taken to be a meeting of the company
duly called, held and conducted.
If for any reason it is impractical to call a meeting the court may
order that a meeting be called, held and conducted in such a
manner as the court thinks fit.
The courts have used this discretion and power to prevent
majority shareholders or persons in control oppressing the
minority or where individual shareholders use the quorum
provisions under the articles as a tool to delay or defeat
meetings.
However, it must be noted that this jurisdiction and discretion
only applies whenever as a practical matter the desired meeting
can be conducted and only if it is impractical to hold it in the
first place.
In the case of ReSombrero Ltd (1958) Ch.900, one member
was allowed by court to constitute a meeting. The court
observed that in determining whether it is impracticable to call
and convene, the court must examine the circumstances of each
particular case and ask itself whether as a practical matter the
desired meeting can be called, convened and or conducted. In
this case, two directors who were also shareholders absented
themselves to defeat the quorum of a meeting which was meant
to pass a resolution removing them from office. The court
pointed out that this application was proper since the applicant
(the majority shareholder) had a statutory right to remove
directors

In the case of Re Air Rep.International Ltd (Companies

Cause No 3 of 1984), there were only 2 shareholders and one
complained that his co-shareholder had never stepped into the
company's premises for the previous two years. The court asked
him to make an application requesting to be allowed to convene
a general meeting, which he dully did and it was granted.

How can a person i.e. shareholder, convince the court that it has
been impractical to convene such a meeting?
▪ By showing that the directors have bought up the shares.
▪ By showing that the directors are the only members of the
company.

PROCEDURE, ATTENDANCE AND QUORUM AT

MEETINGS
Every company's meeting must be convened by a notice given to
all those who are entitled to attend and vote 21 days before the
general meeting.
Section 141 gives the General provisions as to meetings and
votes. It provides that; the following provisions shall have effect
in so far as the articles of the company do not make other
provision for the purpose—
(a) notice of the meeting of a company shall be served on every
member of the company in the manner in which notices are
required to be served by Table A and for the purpose of this
paragraph, the expression "Table A" means that Table as for the
time being in force;
(b) two or more members holding not less than one tenth of the
issued share capital or, if the company has not a share capital,
not less than five per cent in number of the members of the
company may call a meeting;
(c) in the case of a private company two members, and in the
case of any other company three members, personally present
shall form a quorum;
(d) any member elected by the members present at a meeting
may be chairperson of the meeting;
(e) in the case of a company originally having a share capital,
every member shall have one vote in respect of each share or
each twenty currency points of stock held by him or her and in
any other case every member shall have one vote.
NOTICES
Form and Duration of Notice
Section 140 (1) and (2) of the Companies Act and Article 50
(1) of Table A provides that a general meeting must be called by
not less than 21 days written notice.

Exception
Section 140 (4) (a) and Article 50 (3) of Table A provides that
all members entitled to attend and vote must consent and agree
to a shorter notice. A meeting convened by consent of all
members shall be deemed to have been duly called and
convened. The bottom line under this section generally is
adequate notice must be given. In the case of RE ARCE DUFF
& CO LTD (1960) 1 WLR 1014 it was held that the resolutions
passed at a meeting where shorter notice than 21 days was given
must be qualified and a note put that a resolution was passed.
In re-engineering works ltd (1920) 1 ch 466 the court held that
it is incompetent for all the shareholders to waive the
requirements as regards to notice of meetings.
Service of Notice
Section 141 (a) provides that notice of the meeting of a
company shall be served on every member of the company.
Accordingly, if notice is not given to every person entitled to
notice, the meeting is invalid and any resolution passed thereof
will be void and of no legal effect. In the case of YOUNG Vs
LADIES IMPERIAL CLUB LTD (1920) 2 KB 523 the
Committee of a club met and passed a resolution expelling
another member from the club but that member was not
summoned or invited for the meeting since she had previously
informed the chairman that she would not be in position to
attend. This omission invalidated the meeting.

Omission to give notice

Most AOA provide for situations where notice was not given,
where there was accidental omission or general non receipt of
notice. In such a situation, the meeting shall be valid and the
resolutions passed thereof valid resolutions.
Article 51 of Table A provides that accidental omission to give
notice or non-receipt of notice shall not invalidate the
proceedings of a meeting.
The onus of proof is on the person claiming that the meeting is
valid to show that the omission was accidental and not
deliberate. In RE WEST CANADIAN COLLIERIES [1962]
CH 370 it was held that the omission to give notice of a meeting
to a few members because the plate of the these members was
inadvertently kept out of the machine when the envelopes were
being addressed was held to be accidental omission within the
meaning of A.51
However, in MUSSELWHITE Vs MUSSELWHITE & SONS
LTD (1962) CH 964 the omission to give notice of a general
meeting to the unpaid vendors of shares but who were on the
register of members and who the directors believed were no
longer members was declared an error of law and not an
accidental omission.
Content of Notice
Article 50 (2) of Table A provides that the notice must disclose
the place, day, hour of the meeting and in case of special
business, the general nature of that business.
If any shareholder is absent from the meeting whose notice had
not fully disclosed the agenda, he can seek a court order to
declare such a meeting null and void. This is because the
shareholder has a legal right to get notified duly or clearly of an
incumbent general meeting. However, directors have no legal
right to attend general meetings but can only do so as
administrators and therefore, matters discussed cannot be
invalidated by any director.
In the case of HENDERSON Vs BANK OF AUSTRO ASIA
[1890] 45 CH 330 the court held that notice must be sufficiently
full and specific to enable the shareholders receiving it to decide
whether to attend or not.
The effect of this section is the preclusion of general circulars
which do not give a fair warning of what is likely to transpire.
However, if a meeting goes beyond what is specified in the
agenda but is within the limits of any other business then that
meeting is valid and the resolutions thereof.
However, if a meeting goes beyond what is specified in the
agenda (notice) but it is still within the limits of any other
business then that meeting is valid and the resolutions thereof.
In CHOPPINGTON [1944] 1 ALLER 462 the notice had the
business as to elect directors. The chairman refused a motion to
fill up the vacant posts of the directors. The court held that the
refusal was wrong since the notice specified the general nature
of business as election of directors.
In BAILLIE Vs ORIENTAL TELEPHONE [1915] 1 CL 503
a resolution was declared not binding since the notice was
insufficient.
QUORUM
No business is to be transacted at the general meeting unless a
quorum of members is present. Technically speaking, quorum
refers to an effective quorum i.e. members qualified to take part
in and decide upon questions before the meeting. In addition, if
the articles require the quorum of members to be present,
without any additions or qualifications, then the word present
means present in person.
Section 141 (c) in the case of a private company two members,
and in the case of any other company three members, personally
present shall form a quorum;.
The word meeting prima facie means the coming together of
more than one person. Accordingly, one person can’t constitute a
meeting even where he attends in more than one capacity or
holds proxies for other persons.
Effect of Lack of quorum
Article 54 (1) of Table A provides that if for a meeting
requisitioned by members the quorum is not present within half
an hour, the meeting shall stand adjourned to the same day in the
next week, same time and place or such other day and such other
time and place as the directors may determine.

Article 54 (2) of Table A provides if at the adjourned meeting

the quorum is not present, within half an hour from the time
appointed for the meeting, the members present shall form a
quorum.

Appointment of Chairperson
Section 141 (d) provides that any member elected by the
members present at a meeting may be chairperson of the
meeting. A person elected as a chairperson has the responsibility
of presiding over meetings of the company. The CA or Table A
does not provide for the qualifications of the chairperson hence
the general meeting has the power to appoint any person as a
chairperson.

Article 55 (1) of Table A provides that the chairperson of the

board of directors shall preside at every general meeting of the
company.

Article 55 (2) of Table A provides that if there is no chairperson

or if he or she is not present within fifteen minutes of the time
appointed for the meeting or is unwilling to act, the directors
present shall elect one of their members to be appointed
chairperson of the meeting.

Article 56 of Table A provides that if no director is willing to

act as chairperson or if no director is present within fifteen
minutes after the time appointed for holding the meeting, the
members present shall choose one of their member to be
chairperson of the meeting.
There are specific attributes but no legal requirements e.g. you
must appoint a person who is honest and fair in his her dealings,
reputable character, beyond reproach etc.
Under the law, a chairperson has the following duties:
- To preserve order,
- To preside over meetings and ensure that the
proceedings are regulry conducted
- To take care that the sense of the meeting is properly
ascertained
- To decide important questions and whether a proxy is
valid, time keeoing, alw and order, has to be impartial
and handle issues of adjournment
- Regulation of speakers
Conduct of meetings
It should be noted that subject to the provisions in the AOA and
CA the way in which the business at the meeting is conducted is
decided by the meeting itself and this is the principle in the case
of CARUTH Vs ICI LTD [1931] AC 707 at 761
In BYING Vs LONDON LIFE ASS, the court held that a
meeting could be held in more than one room provided all the
rooms are connected with audio and visual links so that the
people in the rooms can see and hear what is going on in other
rooms and that due steps must be taken to direct members who
are unable to get into the main meeting room.
Voting at a company meeting
The essence of voting is clear in company matters. However, as
general rule, a shareholder has the right to vote and to vote how
he/she wishes. However, there are instances where the court may
nullify a members voting if it was not bonafide and or in the
interest of the company.

Methods of Voting
• By show of hands
Article 58 (1) of Table A provides that at any general meeting, a
resolution put in a meeting shall be decided by show of hands.
Under the vote on a show of hands, each member is entitled to
vote in person and has one vote i.e. one man one vote and no
proxies.
No member shall vote at any meeting either in person or by
proxy unless he/she is paid up for at least a share.
A director who is also a shareholder can vote on any question
even if he has a personal interest but he must declare that
interest.
Article 60 of Table A provides that where the votes are equal,
the chairperson shall have a casting vote.
▪ By Poll
This is the voting on the strength of the shareholding. The public
policy behind voting by poll is that voting on a show of hands
may first of all not reflect the wishes of the company since the
proxy votes are not counted. However, a member has a right to
demand for a poll and it’s a statutory right under S. 144 CA any
provision contained in the AOA shall be void in so far as it
excludes the right to demand for a poll.
Article 58 (1) provides that a poll may be demanded but by the
following people;
▪ Chairperson
▪ Atleast three members present in person or by proxy
▪ By any member or members present in person or by proxy and
representing not less than one tenth of the total voting rights
or all members havng the right to vote at the meeting, or
▪ By any member or members holding shares in the company
conferring a right to vote at the meeting being shares on
which an aggregate sum has been paid up equal to not less
than one tenth of the total sum paid up on all the shares
conferring the right
Article 58 (3) provides that a demand for a poll may be
withdrawn.
Section 144 (1) provides that a provision in a company’s articles
is void in so far as it would have the effect—
(a) of excluding the right to demand a poll at a general meeting
on any question other than the election of the chairperson of the
meeting or the adjournment of the meeting; or
(b) of making ineffective a demand for a poll on the question
which is made—
(i) by not less than five members having the right to vote at the
meeting;
(ii) by a member or members representing not less than one
tenth of the total voting rights of all the members having the
right to vote at the meeting; or
(iii) by a member or members holding shares in the company
conferring a right to vote at the meeting, being shares on which
an aggregate sum has been paid up equal to not less than one
tenth of the total sum paid up on all shares conferring that right.

Subsection (2) provides that the instrument appointing a proxy

to vote at a meeting of a company shall be taken also to confer
authority to demand or join in demanding a poll and for the
purposes of subsection (1) a demand by a person as proxy for a
member shall be the same as a demand by the member.

▪ By Proxy
Section 143 (1) provides that a member of a company entitled to
attend and vote at a meeting of the company is entitled to
appoint another person whether a member or not as his or her
proxy to attend and vote instead of him or her and a proxy
appointed to attend and vote instead of a member of a private
company shall also have the same right as the member to speak
at the meeting.

Subsection (2) provides that Subject to subsection (1), unless

the articles otherwise provide—
(a) that subsection shall not apply in the case of a company not
having a share capital;
(b) member of a private company shall not be entitled to appoint
more than one proxy to attend on the same occasion; and
(c) a proxy shall not be entitled to vote except on a poll.

Who can appoint a proxy and who can be appointed a proxy

Subsection (3) provides that every notice calling a meeting of a
company having a share capital, shall state clearly that a
member entitled to attend and vote is entitled to appoint a proxy
or, where that is allowed, one or more proxies to attend and vote
instead of him or her and that a proxy need not also be a
member.

Default in complying with the above provisions

Subsection (4) provides that where there is default in complying
with subsection (2) in respect of any meeting, every officer of
the company who is in default is liable to a default fine of
twenty five currency points.

Subsection (5) provides that a provision in a company’s articles

is void in so far as it would have the effect of requiring the
instrument appointing a proxy or any other document necessary
to show the validity of or otherwise relating to the appointment
of a proxy or any other document necessary to show the validity
of or otherwise relating to the appointment of a proxy, to be
received by the company or any other person more than forty
eight hours before a meeting or adjourned meeting in order that
the appointment may be effective at the meeting.

Subsection (6) provides that where for the purpose of any

meeting of a company, invitations to appoint as proxy a person
or one of a number of persons specified in the invitations are
issued at the company’s expense to only some of the members
entitled to be sent a notice of the meeting and to vote by proxy,
every officer of the company who knowingly and willfully
authorises or permits their issue is liable to a default fine of
twenty five currency points.

Subsection (7) provides that Subject to subsection (5), an officer

shall not be liable under that subsection by reason only of the
issue to a member at his or her request in writing of a form of
appointment naming the proxy or of a list of persons willing to
act as proxy if the form or list is available on request in writing
to every member entitled to vote at the meeting by proxy.

Subsection (8) provides that this section does apply to meetings

of any class of members of a company as it applies to general
meetings of the company.

A proxy in Company law is a document which authorises

somebody to attend a meeting on behalf of a shareholder. That
appointment may or may not be a shareholder of the company.

▪ Voting Agreements
This is where shareholders enter into an arrangement to vote in a
particular person or not to vote against a particular person. In
such a situation where a person has entered into an agreement,
his right to vote contrary to the agreement is curtailed. The
public policy behind voting agreements is that courts should not
interfere with the freedom of competent parties to make their
own contract. Unlike ordinary contracts, a voting agreement
does not bind successors in title.

MINUTES
Section 152 (1) of the Companies Act provides that every
company shall cause minutes of every proceedings of all
meetings to be kept in books for that purpose. Under subsection
(2) it provides that the minutes must be signed by the
chairperson of that meeting or the next meeting at which they
are passed. Why? Because minutes are evidence of proceedings
but unless specifically specified in the articles the minutes are
not conclusive evidence of what transpired. Thus if a resolution
was passed and was not captured in the minutes, extrinsic
evidence can be adduced. In the case of RE FIRE PROOF
DOORS [1916] 2 CH 142 it was held that where the articles
expressly provide that minutes duly signed shall be conclusive
evidence without further proof, extrinsic evidence cannot be
called to contradict the minutes except in the event of fraud.

Subsection (3) provides that where minutes have been made in

accordance with the proceedings at any general meeting of the
company or meeting of directors then, until the contrary is
proved, the meeting shall be taken to have been duly held and
convened and all proceedings had to have been duly had and all
appointments of directors or liquidators shall be taken to be
valid.

Subsection (4) provides that where a company fails to comply

with subsection (1), the company and every officer of the
company who is in default is liable to a default fine of twenty
five currency points.

Under section 153, books containing minutes shall be kept at the

registered office of the company and shall be open to inspection
of any member without charge. Inspections may be restricted to
not less than 2 hours a day. A member may be furnished with a
copy of the minutes within 14 days from the date of request of
the minutes. Under subsection 4 where any inspection required
under this section is refused or if any copy required under this
section is not sent within the proper time, the company and
every officer of the company who is in default is liable in
respect of each offence to a fine of twenty five currency points
and in case of a continuing default, to a further fine of five
currency points in respect of each day the default continues.
Under subsection (5) In the case of a refusal or default referred
to in subsection (4), the court may, by order compel an
immediate inspection of the books in respect of all proceedings
of general meetings or direct that the copies required shall be
sent to the persons requiring them.
Resolutions:
The Companies Act provides for three types of resolutions at
meetings, namely, ordinary, extra-ordinary and special.
An ordinary resolution is not defined by the Act but it is a
resolution passed by a simple majority of those voting. It is
employed with respect to matters, which do not require an
extraordinary or special resolution under the articles or the Act
like resolutions of the AGM.
An extra-ordinary resolution is not defined by the Act and is
passed by a three quarters majority at a general meeting of
which notice specifying the intention to propose the resolution
as an extraordinary resolution is required for specific matters
relating to winding up, although the articles may require one in
other cases such as the modification of class rights at class
meetings.
A special resolution
Section 148 (1) provides that a resolution shall be a special
resolution when it has been passed by a majority of not less than
three fourths of such members as, being entitled so to do, vote in
person or, where proxies are allowed, by proxy, at a general
meeting of which notice specifying the intention to propose the
resolution as a special resolution has been duly given.

Subsection (2) provides that Subject to subsection (1), if it is

agreed by a majority in number of the members having the right
to attend and vote at a meeting referred to in subsection (1),
being a majority together holding not less than ninety five per
cent in nominal value of the shares giving that right or in the
case of a company not having a share capital, together
representing not less than ninety five percent of the total voting
rights at that meeting of all the members, a resolution may be
proposed and passed as a special resolution at a meeting of
which less than twenty one days’ notice has been given.

Subsection (3) provides that at any meeting at which a special

resolution is submitted to be passed, a declaration of the
chairperson that the resolution is carried shall, unless a poll is
demanded, be conclusive evidence of the fact without proof of
the number or proportion of the votes recorded in favour of or
against the resolution.

Subsection (4) provides that in computing the majority on a poll

demanded on the question that a special resolution be passed,
reference shall be had to the number of votes cast for and against
the resolution.

Subsection (5) provides that for the purposes of this section,

notice of a meeting shall be taken to be duly given and the
meeting to be duly held when the notice is given and the
meeting held in the manner provided by this Act or the articles.

Activity
Discuss the various meetings through which members are able
to participate in the management of meetings.

Solution
This question is testing the students’ ability to analyze the
different meetings that members can hold as a way of managing
the company’s affairs. The student will be expected to define
who a member is and further discuss the different meetings that
members call.

Test Questions
1. The shareholders have an opportunity of influencing the
company's management through the company's
 meetings. Discuss the different meetings through which
shareholders participate in management of companies.
2. Discuss the concept of notice in company meetings
3. Discuss the different resolutions that may be passed at a
meeting
4. Discuss the different methods of voting that are available
during meetings.
TOPIC EIGHT

MANAGEMENT OF A COMPANY THROUGH THE BOARD OF DIRECTORS

At the end of this Chapter, the student will be expected to:

1. Understand the meaning of a director and the different
types of directors;
2. Understand the procedure of appointment of directors;
3. Understand and analyze the role of nominee and
alternate directors;
4. Understand the qualifications and disqualifications to the
position of director;
5. Understand the procedure for removal of directors;
6. Analyze and Evaluate the role of Directors in the
management of companies; and
7. Understand the procedures regarding meetings of
directors

Management of the Company through Board of Directors

There is no definition of a director whether in the Act or by case
law. Nevertheless, S.2 of the Act states that a director includes
any person occupying the position of a director by whatever
name called and shall include a shadow director

Categories of directors
i) defacto director
ii) dejure director

▪ Defacto directors
These operate or act as directors. A defacto director assumes the
office of a director and is held out as a director by the company.
There must be proof or evidence that the person undertook the
functions of the director and discharged those functions and the
company was aware. R Vs CAMPS (1962) EA.403. Camps
never kept proper books of accounts, never held AGM’s and was
an unqualified director of a company contrary to S.142. Court
held that where the acquisition of a share qualification is not a
condition precedent in the appointment of a director, he may be
appointed and act before he qualifies and his acts as a director
are valid if done before he is bound by law to acquire his
qualification share. The East Africa Court further held that as a
matter of law (dejure), he was not a director but as a matter of
fact (defacto), he was a director.

▪ Executive and Non-Executive Directors

Executive directors are directors appointed to manage the day to
day affairs of the company e.g. the Executive Director of PPDA,
while Non- Executive directors are not involved in the day to
day management of the company.

▪ Shadow directors:
Includes any person occupying the position of director by
whatever name called and shall include a shadow director.
Shadow directors operate behind the scenes.

Appointment of Directors
Directors are appointed by a company in a general meeting in
conformity with the Articles of Association. The AOA do
usually contain an article on appointment of directors and how
to fill vacant posts of directors. It must be noted that
appointment of directors is normally at the AGM. Unless the
Articles empower the board to appoint or co-opt directors, the
inherent power to appoint directors is in the general meeting.

Once directors are appointed, the registrar of companies must be

notified. The company fills in a form called Company Form No
7 which indicates the particulars of the directors.

Number of directors
Section 185 provides that every company other than a private
company, registered after thecommencement of this Act shall
have at least two directors, and everycompany registered before
that date other than a private company andevery private
company shall have at least one director.

Prohibition of certain persons being sole director or

secretary
Section 188 provides that a company shall not—
(a) have as secretary to the company, a corporation the sole
director of which is a sole director of the company; or
(b) have as sole director of the company a corporation the sole
director of which is secretary to the company.

Section 189 provides that a provision requiring or authorising a

thing to be done by or to a directorand the secretary shall not be
satisfied by its being done by or to the same person acting both
as director and as or in place of, the secretary.

Minimum age for appointment of directors and retirement

of directors over the age limit.
Section 196 provides that a person shall not be capable of being
appointed a director of a company if at the time of appointment
he or she has not attained the age of eighteen years.

Section 197 (1)provides that a person who is appointed or to his

or her knowledgeproposed to be appointed director of a
company at a time before he orshe has attained the age of
eighteen years shall give notice of his or her age to the company.

Default in complying with the above provisions

Subsection (2) provides that a person who—
(a) fails to give notice of his or her age as required by this
section; or
(b) acts as director under any appointment which is invalid by
reason of his or her age, commits an offence and is on
conviction liable to a fine not exceeding ten currency points for
every day during which the failure continues or during which he
or she continues to act as described in this subsection.

Nominee director of a single member company.

Section 186 (1) provides that a single member shall nominate
two individuals, one of whom shall become nominee director in
case of death of the single member and the other shall become
alternate nominee director to work as nominee director in case
of non-availability of the nominee director.

Duties of the nominee director

Subsection (2) provides that the nominee director shall—
(a) manage the affairs of the company in case of death of the
single member until the transfer of shares to legal heirs of the
single member;
(b) inform the registrar of the death of the single member,
provide particulars of the legal heirs and in case of any
impediment report the circumstances seeking directions within
fifteen days after the death of the single member;
(c) transfer the shares to the legal heirs of the single member;
and
(d) call the general meeting of the members to elect directors.

Role of the Registrar

Subsection (3) provides that in case of any impediment due to
transfer of shares, or election of directors or any other
circumstances, the registrar shall call, or direct the calling of the
meeting of legal heirs, in exercise of the powers conferred by
section 138 in such manner as he or she deems fit and give such
directions with regard to election of directors and making
alteration in the articles, if any, and such ancillary and
consequential directions as he or she thinks expedient in relation
to calling, holding and conducting of the meeting.

Qualifications of Directors
Section 192 requires that before a person can be appointed a
director of a company with share capital, he must have:
✓ signed and delivered for registration his consent to act as
a director.
✓ He or she has;
I. Signed the memorandum for a number of shares not
less than his or her qualification, if any;
II. taken from the company and paid or agreed to pay
for his or her qualification shares, if any
III. signed and delivered to the registrar for
registration an undertaking in writing to take from
the company and pay for his or her qualification
shares, if any; or
IV. made and delivered to the registrar for registration
a statutory declaration to the effect that a number of
shares, not less than his or her qualification, if any,
are registered in his or her name.

subsection (4) provides that on the application for registration

of the memorandum and articles of a company, the applicant
shall deliver to the registrar a list of the persons who have
consented to be directors of the company and, if the list contains
the name of any person who has not consented, the applicant
commits an offence and is liable on conviction to a fine not
exceeding five hundred currency points.

Exclusion of this requirement

Subsection (5) provides that this section does not apply to—
(a) company not having a share capital;
(b) a private company;
(c) a company which was a private company before becoming a
public company; or
(d) a prospectus issued by or on behalf of a company after the
expiration of one year from the date on which the company was
entitled to commence business.

Duration within which to acquire Share qualifications of

directors
Section 193 (1) provides that Without prejudice to the
restrictions imposed by section 192, it shall be the duty of every
director who is by the articles of the company required to hold a
specified share qualification and who is not already qualified, to
obtain his or her qualification within two months after his or her
appointment or such shorter time as may be fixed by the articles.

Default in acquiring qualification shares

Section 193 (3) provides that the office of director of a company
shall be vacated if the director does not within such shorter time
as may be fixed by the articles, obtain his or her qualification or
if after the expiration of that period or shorter time he or she
ceases at any time to hold his or her qualification.

Subsection (4) provides that a person vacating office under this

section shall be incapable of being re-appointed director of the
company until he or she has obtained his or her qualification.

Subsection (5) provides that where after the expiration of the

period or shorter time any unqualified person acts as a director
of the company, he or she commits an offence and is liable on
conviction to a fine not exceeding fifty currency points for every
day between the expiration of the period or shorter time or the
day on which he or she ceased to be qualified as the case may be
and the last day on which it is proved that he or she acted as a
director.

Disqualification of directors.
Section 199 (1) provides that a person shall be disqualified from
acting as a director for a period of three years if he or she fails to
—
(a) keep proper accounting records;
(b) prepare and file accounts;
(c) send returns to registrar;
(d) file tax returns and pay tax; or
(r) allows a company to trade while insolvent
(2) A person disqualified as a director shall not—
(a) be a director of any company;
(b) act as a director before the expiry of the disqualification
period;
(c) influence the running of a company through the directors;
(d) be involved in the formation of a new company;
(e) act in a way that promotes a company;

Article 88 of Table A provides for disqualification of directors

under the following grounds;
(a) ceases to be a director by virtue of section 195 of the Act
(section 195 provides for removal of directors), or
(b) becomes bankrupt or
(c) becomes prohibited from being a director by reason or any
order made under section 201 of the Act (section 201 is
 discussed below) or
(d) becomes of unsound mind
(e) resigns his/her office by notice in writing to the company or
(f) is for more than six months absent without permission of the
directors from meetings of the directors during that period

Dismissal/Removal of Directors
The CA has laid down procedures to be followed when
dismissing a director. Before a director is dismissed/removed he
must be given a special notice for the purpose. It is not an
ordinary letter; reasons for the dismissal must be given.

Section 195 (1) and Article 96 (1) of Table A provides that a

company may by ordinary resolution remove a director before
the expiration of his or her period of office, notwithstanding
anything in its articles or in any agreement between the
company and the director but this subsection shall not in the
case of a private company authorise the removal of a director
holding office for life at the commencement of this Act whether
or not subject to retirement under an age-limited by virtue of the
articles or otherwise.

Procedure for removal of director

Subsection (2) provides that Special notice shall be required of
any resolution to remove a director under this section or to
appoint somebody instead of a director so removed at the
meeting at which he or she is removed.
In BUGERERE GROWERS Vs SEBADDUKA, the court
pointed out that the effect of the provision with regard to special
notice is very important and as long as special notice has been
made it does not matter whether the company convenes the
extra-ordinary general meeting within one week.

Subsection (3) provides that on receipt of notice of an intended

resolution to remove a director under this section the company
shall send a copy of the notice to the director concerned and the
director whether or not he or she is a member of the company
shall be entitled to be heard on the resolution at the meeting.

Subsection (4) provides that where notice is given of an

intended resolution to remove a director under this section and
the director concerned makes with respect to it representations
in writing to the company in respect of the intended resolution
and requests their notification to members of the company, the
company shall as soon as practicable—
(a) in any notice of the resolution given to members of the
company state the fact of the representation having been made;
and
(b) send a copy of the representations to every member of the
company to whom notice of the meeting is sent whether before
or after receipt of the representations by the company.

Subsection (5) provides that where a copy of the representations

is not sent as required by subsection (3) because it was received
too late or because of the company’s default, the director may
without prejudice to his or her right to be heard orally require
that the representations shall be read out at the meeting, except
that copies of the representations need not be sent out and the
representation need not be read out at the meeting if, on the
application either of the company or of any other person who
claims to be aggrieved, the court is satisfied that the rights
conferred by this section are being abused to secure needless
publicity for defamatory matter.

Subsection (6) provides that the court may in the circumstances

described in subsection (5) order the company’s costs on an
application under this section to be paid in whole or in part by
the director, notwithstanding that he or she is not a party to the
application.

Subsection (7) and Article 97 (1) of Table A provides that a

vacancy created by the removal of a director under this section,
if not filled at the meeting at which the director is removed, may
be filled as a casual vacancy.

Subsection (8) and Article 97 (3) of Table A provides that a

person appointed director in place of a person removed under
this section shall be treated, for the purpose of determining the
time at which he or she or any other director is to retire as if he
or she had become director on the day on which the person in
whose place he or she is appointed was last appointed a director.

Subsection (9) provides that this section does not deprive a

person removed under this section of compensation or damages
payable to him or her in respect of the termination of his or her
appointment as director or of any appointment terminating with
that as director or as derogating from any power to remove a
director which may exist apart from this section.

Section 191 provides that the acts of a director or manager shall

be valid notwithstanding any defect that may afterwards be
discovered in his or her appointment or qualification.
Remuneration of Directors
It is the law that directors have no right of payment for their
services while performing their functions thus a director has no
automatic right to remuneration and as it was emphasized in Re
George Newman & Co.(1895) 1 ch.674, the directors have no
right to be paid for their services and cannot pay themselves or
each other or make presents to themselves out of the company's
assets unless authorised so to do by the instrument which
regulates the company or by the shareholders at a properly
convened meeting.

Legal holding of the holding in the above case

i) Directors have no automatic right to remuneration/ to be
paid
ii) Payment can only be made if there is a provision within the
Articles or where there is a resolution of a company
meeting

Proceedings of BOD
The rule is that directors must act collectively and any director
who is prevented from carrying out his duties can seek an
injunction from court to restrain his co-directors.

Article 98 (1) of Table A provides that the directors may meet

together for the dispatch of business, adjourn and otherwise
regulate their meetings as they think fit.

However, there is no legal requirement that in the discharge of

their duties, directors must meet formally. The mode of meeting
is said to have been agreed upon as implied by Barrow Vs
Porter (1914) 1 ch.895. In this case, the company had only 2
directors who developed personal differences to the extent that
they could no longer meet. One director, staying in town wanted
to carry out a transaction. He waited for the other village
director at the railway station and told him about an incumbent
meeting which the other one never agreed with. The town
director met alone and elaborated on many issues and purported
to have resolved together with the director in the village. The
Court held any of those resolutions that the town director
purported to pass invalid because the directors never agreed on
the mode of the meeting.

Voting
Article 98 (2) of Table A provides that decisions shall be
arrived at by a majority of the votes.
Article 98 (3) of Table A provides that where there is an
inequality of votes, the chairperson shall have a second or
casting vote.

Who calls for the meeting?

Article 98 (4) of Table A provides that a director or secretary at
the requisition of a director shall at any time summon a meeting
of the directors.

Notice of meeting
Article 98 (5) of Table A provides that it is not necessary to
give notice of a meeting of directors to any director who is for
the time being absent from Uganda.

Quroum
Article 99 of Table A provides that the quorum for the
transaction of the business of the directors may be fixed by the
directors and if not fixed the quorum is two.

In-case of vacancy
Article 100 of Table A provides that the continuing directors
may act notwithstanding any vacancy in their body, but, if and
so long as their number is reduced below the number fixed by or
under the regulations of the company as the necessary quorum
of directors, the continuing directors or director may act for the
purpose of increasing the number of directors to that number or
of summoning a general meeting of the company but for no
other purpose.

Chairperson
Article 101 of Table A provides that the directors may elect a
chairperson of their meetings and determine the period for
which he or she is to hold office, but of no chairperson is
elected, or if at any meeting the chairperson is not present within
five minutes after the time appointed for holding the meeting,
the directors present may choose one of their number to be a
chairperson of the meeting.

Delegation of powers and duties

Directors have no right to delegate unless authorized by the
Articles of Association. Article 102 (1) of Table A provides
that directors may delegate any of their powers to committees
consisting of such member or members of their body as they
think fit.
Article 102 (1) of Table A provides that a committee formed
under sub regulation (1) shall, in the exercise of the powers
delegated conform to any regulations that may be imposed on it
by the directors.

Managing Director
Article 107 (1) of Table A provides that the directors may from
time to time appoint one or more of their fellow directors to the
office of the managing director for such period and on such
terms as they think fit, and subject to the terms of any agreement
entered into in any particular case, may revoke the appointment.

Article 107 (2) of Table A provides that a director appointed

under subsection (1) shall not while holding office be subject to
retirement by rotation or be taken into account in determining
the rotation of retirement of directors, but his or her appointment
shall be automatically determined if he or she ceases from any
cause to be a director.

Article 108 of Table A provides that a managing director shall

receive such remuneration whether by way of salary,
commission or participation in profits or partly in one way and
partly in another as the directors may determine.

Article 109 of Table A provides that the directors may entrust to

and confer upon a managing director any of the powers
exercisable by them upon such terms and conditions and with
such restrictions as they may think fit, and either collaterally
with or to the exclusion of their powers and may from time to
time revoke, withdraw alter or vary all or any of those powers.

Resolution of directors
Article 106 of Table A provides that a resolution in writing,
signed by all the directors for the time being entitled to receive
notice of a meeting of directors is valid and effectual as if it had
been passed at a meeting duly convened and held.

Rotation
Further, good corporate governance provides for rotation of
directors and most AOA do provide for rotation. Rotation is the
process where directors retire to give other members a chance to
participate in the management of the company.

Article 89 of Table A provides that at the first annual general

meeting of the company all the directors shall retire from office
and at the annual general meeting in every subsequent year one
third of the directors for the time being or if their number is not
three or a multiple of three then the number to one third shall
retire from office.

Procedure regarding rotation

Article 90 of Table A provides that the directors to retire in
every year shall be those who have been longest in office since
their last election but as between persons who became directors
on the same day those to retire shall unless they otherwise agree
among themselves be determined by lot.

Article 91 of Table A provides that a retiring director shall be

eligible for re-election.

Conflict Between Directors and Shareholders

As between shareholders and directors, the issue of who has the
final say in the management of the company will depend on the
articles of association. Where the company adopts Article 80 of
Table A, the Articles provide that the business of the company
shall be managed by the Board of Directors i.e. shareholders
cannot interfere in such management unless they are specifically
empowered by the articles on such issue.

THE DUTIES OF DIRECTORS

Common law developed duties and concepts which vested upon
directors with specific responsibilities. These responsibilities
revolve around the directors’ role in the management of the
assets of the company on behalf of the other shareholders.

In addition, the responsibilities also took into account the fact

that the company was recognized as a separate entity from its
members. Accordingly, directors were viewed as agents of the
shareholders and as such, they also became trustees for the
shareholders.

In light of the aforesaid, the board of directors was seen as

fiduciaries and as such, principles of agency and the law of trust
had to be applied to directors. A fiduciary is a person in a
position of confidence or trust. He has a duty of loyalty and
must act in good faith in the interest of a person who depends on
the fiduciary to act on his/her behalf. A fiduciary must also act
with care on behalf of the person(s) for whom he is a fiduciary.

There are other corresponding duties that developed in corporate

law and these duties constitute further duties of directors but
they all rotate around the view of consideration that a director is
a fiduciary.

As far as directors are concerned, they have two duties to

discharge in respect of a company.
1. The duty of skill and care
2. The duty of good faith

Duty of Skill and Care

There is no criteria for measuring the standard of duty of skill
and care expected of a director and consequently this will
depend on the circumstances of each case. Nevertheless, courts
have tried to set some guidelines as to what these duties entail.
In Re City Equitable Fire Insurance Co. Ltd, the directors left
the company's management to the Managing Director and as a
result, a number of the company's assets disappeared and a
number of misleading items were entered into the books.

While holding the directors liable for breach of duty of skill and
care, the court laid down two criteria against which the standard
of duty of a director must be judged.
▪ It pointed out that we have to look at the nature of a
company's business. Where such a company is a small
concern, the standard of duty expected of a director is not
as high as in a big company.
▪ The mode in which the company's work is distributed
among various officers has to be determined e.g. directors
of operations, finance, etc. Where the company's operations
are divided among many directors duty of skill and care is
higher than otherwise.

The Common law standard of care is a lenient standard and at

times it is impossible to find a party liable for this breach of duty
of care. In RE CARDIKK SAVINGS BANK [1892] 2 CH 100,
Mr Bute had become a director at the age of 6. He did not attend
meetings until he was 27. Financial difficulties occurred at the
Caddik savings bank and the liquidator sought for compensation
from Bute for the imprudent decisions that led to the downfall of
the bank. The court held that Bute was not liable for his failure
to attend the company meetings. It further held that directors are
not responsible for fraud perpetuated in the company and that
the degree of care required of a director is that which is expected
to be taken in the particular circumstances and also taking into
account the particular directors abilities.

In RE-BRAZILIAN RUBBER PLANTATIONS [1920] a

director who was 75 years old and deaf was required to exercise
the degree of care that might be expected of someone who was
75 years old and deaf. In the same case, the degree of care
required of a person who proclaimed to be ignorant of business
was the degree of care that would be expected of person who
was ignorant of business. Accordingly, in this case, these two
directors were not held responsible for the fraud in the company.

The duty of good faith

In determining whether or not a director or any other officer has
breached his duty of good faith to the company, we must always
remember that the officer stands in a fiduciary relationship to his
company. Whenever a party has an upper hand in any
relationship e.g. a Lawyer -client, doctor-patient, teacher-pupil,
trustee-beneficiary, etc in any commercial transaction, we term
this party's position as a fiduciary position and any cheating by
this party can be upheld in courts of law.

The duty of good faith is divided into a number of

components.
▪ Use of directors’ powers.
As agents of the company, directors are supposed to act within
the scope of their authority and must exercise the power vested
upon them for a proper purpose. They must identify the purpose
for which the power was given and must use that power for that
specific purpose.

If the power was exercised by the directors for a proper purpose

the court could proceed to the next step of analysing whether the
exercise for this power was done in good faith and in the best
interest of the company and this analysis has been referred to as
the proper analysis test.

This is the basic principle and is illustrated in the case of

HOGG V CRAMPTON LTD (1962) Ch. 64 in which the
directors honestly feared that the plaintiff who was the majority
shareholder would take over the company and that this was not
in the best interests of the company. The directors created a
share fund in favour of the workers but only the directors could
vote in respect of those shares. Using that voting power, they
defeated a take over bid by the majority shareholder i.e. plaintiff.
It was held that the directors were liable for having utilised their
powers for an improper purpose, which according to the court
they wanted to defeat the majority shareholder. The decision was
left for the general meeting, which re-endorsed the director’s
results, and so Hogg never achieved his objectives.
In HOWARD SMITH Vs AMPOL PETROLEUM LTD
[1974] 2 WLR 689 the Court instead of looking out for a
specific purpose or set of purposes, it asked whether the purpose
for which the power was exercised would fit within any of the
purposes for which the power was likely to have been given.
This duty manifests itself in a number of ways;
- the duty of care does not require or directors are not
obliged to give continuous attention to the companies’
affairs but if directors have information that requires
further investigation but fail to do so, that is a breach
of that duty of care. Thus the standard of care is for a
director to be responsible and not passive
- directors act collectively as a board in the supervision
of the company. However, they are not a homogeneous
group and their conduct is not to be governed by a
single objective standard and the courts have taken
into account personal knowledge and background of
the directors individually and severally eg directors
with superior qualifications or those with experienced
business background cannot stand in the same position
as any other director

▪ Dealing with the company's properties.

Directors have a duty to protect the company's properties and
not to expend them anyhow. If they do so, they are liable to
make good the loss. In the case of Re George Newman (Supra)
the term company's property is widely defined to include
contracts to which the company is entitled even if the company
has lost no funds at all.
In Cooks Vs Deeks (1916) AC 554 Deeks as a director entered
into a contract for himself rather than the company and cooks
co-director sued. It was held that Deeks had breached the duty of
good faith and he paid the proceeds to the company i.e. the
profits. The court tried to draw a distinction in this way i.e.
where the company's property belongs to the company both at
law and equity, then the directors cannot appropriate such
property. Also where the property belongs to the company at
law but not at equity, again the directors cannot appropriate such
property. A contract entered into by the director is his by law but
not by equity if the company was dealing in such contracts.

▪ Avoid Conflict of interest/Making Secret Profits out of the

Company.
A director must never use his position to make any profits at the
expense of the company. The rule in the case of Aberdeen Rail
Co Vs Blaike Bros(1843) AER "R" 249; It was stated that
since a director is in a fiduciary relationship, he is not allowed to
enter into any transaction in which he has a personal interest if
to do so will result into a conflict with the interest of the
company. The facts of the case are that AR had a contract to
purchase chairs from Blaike Bros which was a partnership. One
of the partners of Blaike bros was a director of AR Co ltd. The
contract required the delivery of 4,100 tons of chairs over a
couple of years. AR Co ltd accepted delivery of about 2,700 tons
of chairs but then refused to take delivery of other chairs. Blaike
Bros sought for specific performance or damages in lieu thereof.
One of the defences by AR Co ltd was that the contract was
voidable since there was a conflict of interest. The court held
that AR Co ltd could avoid the contract and noted further that
the co acts through its agents and that its agents have a duty not
to have their interests and the interests of their principal conflict.
That the rule is strict rule and there can be no question of
fairness. Accordingly in this case, the contract was voidable
notwithstanding the fact that Blaike was just one of the 16
directors and all the other directors voted in favour of the
contract.

This rule in Blaike's case has been slightly modified since it was
never regarded fair. S 200 and article 84 of Table A modify the
rule, to allow a director make profit out of the transaction
provided he has disclosed his interest to the Board. In the case of
Hely Hutchinson (Supra), it was said that where the director
has not disclosed his interest in the contract, this does not make
the contract void but voidable.
Article 84 (1) of Table A provides that a director who is in any
way whether directly or indirectly interested in a contract or
proposed contract with the company shall declare the nature of
his or her interest at a meeting of the directors.

▪ Insider trading.
This is where a well-positioned officer in the company uses
sensitive and important information about that company to his
benefit. This is more common in deals concerning securities and
capital markets. In the case of Purcival Vs Wright (1902) I Ch.
421. The directors of the company bought shares from X whose
value stood at £ 12 per share on the open market. The directors
did not disclose to him that negotiations were being conducted
for the sale of the company's shares at a higher price than they
were paying X. X sued to have the sale set aside. It was held that
the sale was binding as the directors were under no obligations
to disclose the negotiations to X. That the directors duty of good
faith is owed to the company and rather than individual
shareholders and so they failed.

Duties of directors under the Companies Act

Section 198 provides for the duties of the directors shall
include the following—
(a) act in a manner that promotes the success of the business of
the company;
(b) exercise a degree of skill and care as a reasonable person
would do looking after their own business;
(c) act in good faith in the interests of the company as a whole,
and this shall include—
(i) treating all shareholders equally;
(ii) avoiding conflicts of interest;
(iii) declaring any conflicts of interest;
(iv) not making personal profits at the company's expense;
(v) not accepting benefits that will compromise him or her from
third parties; and
(d) ensure compliance with this Act and any other law.

Disclosure of Conflict of Interest

Section 218 (1)provides that subject to this section, a director of
a company who is in anyway, directly or indirectly, interested in
a contract or proposed contract with the company shall declare
the nature of his or her interest at a meeting of the directors of
the company.

Subsection (2) provides that in the case of a proposed contract

the declaration required by this section to be made by a director
shall be made at the meeting of the directors at which the
question of entering into the contract is first taken into
consideration or if the director was not at the date of that
meeting interested in the proposed contract, at the next meeting
of the directors held after he or she became so interested and in a
case where the director becomes interested in a contract after it
is made, the declaration shall be made at the first meeting of the
directors held after the director becomes so interested.

Subsection (3) provides that for purposes of this section, a

general notice given to the directors of a company by a director
to the effect that he or she is a member of a specified company
or firm or acts for the company in a specified capacity and is to
be regarded as interested in any contract which may, after the
date of the notice, be made with that company or firm or with
himself or herself in that specified capacity shall be taken to be a
sufficient declaration of interest in relation to any contract so
made but the notice shall not be of effect unless either it is given
at a meeting of the directors or the director takes reasonable
steps to secure that it is brought up and read at the next meeting
of the directors after it is given.

Subsection (4) provides that a director who fails to comply with

the above provisions is liable to a fine not exceeding two
hundred currency points.

Subsection (5) provides that nothing in this section shall be

taken to prejudice the operation of any rule of law restricting
directors of a company from having any interest in contract with
the company.

Register of directors and secretaries.

Section 228 (1) provides that company shall keep at its
registered office a register of its directors and secretaries.

Activity
Benita, Graham and Grant have been appointed directors in
Standard Chartered Bank. They wish to acquaint themselves
with the different duties they owe to the bank and what would
happen in the event of breach. Discuss.

Solution
This question is testing the students ability to analyze the
different duties owed by directors to the company they manage.
The student will be expected to define who a director is and
further discuss the different duties that directors owe to a
company. The student is also expected to discuss the different
remedies that are available to the company in case the directors
are in breach of their duties.

Test Questions
1. Discuss the qualifications and disqualifications in regard
to directors
2. Discuss the right of directors to receive a remuneration
3. Discuss the different types of directors
4. Discuss the various grounds under which a director may
be disqualified
5. Discuss the procedure that has to be followed before
directors can be removed from office
6. A company has no mind of its own. It operates through
its agents called directors. The directors are placed in
such a position of trust that the law imposes certain
duties on them. Discuss
TOPIC NINE

THE COMPANY SECRETARY

At the end of this Chapter, the student will be expected to:

1. Understand and evaluate the role of the company secretary in

regard to companies; and
2. Analyze the duties that the company secretary owes a
company.

THE COMPANY SECRETARY

A company secretary is not defined under the Companies Act.

Appointment
Article 110 (1) of Table A provides that the secretary shall be
appointed by the directors on such terms and conditions as they
may think fit.
Article 110 (2) of Table A provides that a secretary appointed
under subregulation (1) may be removed by the directors.

Qualifications of company secretaries.

These are provided for under section 190 of the Companies
Act.
(1) It is the duty of the directors of a public company to take all
reasonable steps to ensure that the secretary, or each joint
secretary of the company is a person who appears to them to
have the requisite knowledge and experience to discharge the
functions of secretary of the company and who—
(a) is an advocate of the High Court;
(b) is a person who, by virtue of his or her holding or having
held any other position or his or her being a member of any
other body, appears to the directors to be capable of discharging
those functions;
(c) is a member of or is qualified to be a member of any of the
bodies specified in subsection (2).
(2) The bodies referred to in subsection (1)(c) are—
(a) the Institute of Chartered Public Accountants in Uganda; or
(b) the Institute of Chartered Secretaries and Administrators.

Article 111 of Table A provides that a person shall not be

appointed or hold office as secretary who is;
(a) The sole director of the company
(b) A corporation the sole director of which is the sole director
of the company
(c) The sole director or a corporation which is the sole director
of the company

Duties and Authority of Company Secretary

There is no clear-cut definition for the secretary's duties but
these will depend on the company in question. Nevertheless, a
company's secretary is a very important person or officer of the
company who can legally bind the company in its transactions.
In Panorama Development (Guildford Ltd) Vs Fe Fideli's
Furnishings Fabrics Ltd (1971) 3WLR 12, the company's
secretary ordered self drive cars using a different companies
letterheads and when the cars arrived, he diverted them to his
personal use. When the defendant company was sued for the
price of the cars, it raised a defence that it was not bound
because the secretary who made the order was an insignificant
person in a company (depending on earlier conception of the
secretary). The court of appeal rejected the defence and pointed
out that the secretary is an important company officer with in-
exhaustive powers, duties and responsibilities who can make
representations on behalf of the company and can enter into
contracts in the day to day running of the company's business.
Consequently, because of his position in the company, the
secretary can be held liable not only to his company but also to
the shareholders in civil suits.

Generally the Company Secretary will need to fulfil the

following duties;
1. Board Meetings
Facilitating the smooth operation of the company’s formal
decision making and reporting machinery; organising board and
board committees meetings (e.g. audit, remuneration,
nomination committees etc.); formulating meeting agendas with
the chairman and/or the chief executive and advising
management on content and organisation of memoranda or
presentations for the meeting; collecting, organising and
distributing such information, documents or other papers
required for the meeting; ensuring that all meetings are minuted
and that the minute books are maintained with certified copies of
the minutes and that all board committees are properly
constituted and provided with clear terms of reference.

2. General Meetings
Ensuring that an annual general meeting is held in accordance
with the requirements of the Companies Act and the companies’
Articles of Association; obtaining internal and external
agreement to all documentation for circulation to shareholders;
preparing and issuing notices of meetings, and distributing
proxy forms; trying to prepare directors for any shareholder
questions and helping them create briefing materials; overseeing
the preparations for security arrangements. At meetings,
ensuring that proxy forms are correctly processed and that the
voting is carried out accurately; co-ordinating the administration
and minuting of meetings.

3. Memorandum & Articles of Association

Ensuring that the company complies with its Memorandum and
Articles of Association and, drafting and incorporating
amendments in accordance with correct procedures.

4. Statutory Registers
Maintaining the following statutory registers:
• members
• company charges
• directors and secretary
• directors’ interests in shares and debentures
• interests in voting shares (substantial holdings & those notified
in pursuance of a s.212 notice)
• debenture holders (if applicable).

5. Statutory Returns
Filing information with the Registrar of Companies to report
certain changes regarding the company or to comply with
requirements for periodic filing. Of particular importance in this
regard are:
• annual returns
• report & accounts
• amended Memorandum & Articles of Association
• returns of allotments
• notices of appointment, removal & resignation of directors and
the secretary
• notices of removal or resignation of the auditors
• change of registered office
• resolutions in accordance with The Companies Act.

6. Report & Accounts

Co-coordinating the publication and distribution of the
company’s annual report and accounts and interim statements, in
consultation with the company’s internal and external advisers,
in particular, when preparing the directors’ report.

7. Share Registration
Maintaining the company’s register of members; dealing with
transfers and other matters affecting share-holdings; dealing
with queries and requests from shareholders.

8. Shareholder Communications
Communicating with the shareholders (e.g. through circulars);
arranging payment of dividends and interest; issuing
documentation regarding rights issues and capitalisation issues;
maintaining good general shareholder relations; maintaining
good relations with institutional shareholders and their
investment committees.

9. Shareholder Monitoring
Monitoring movements on the register of members to identify
any apparent ‘stakebuilding’ in the company’s shares by
potential take-over bidders; making appropriate inquiries of
members as to beneficial ownership of holdings.
10. Share and Capital Issues and Restructuring
Implementing properly authorised changes in the structure of the
company’s share and loan capital; devising, implementing and
administering directors’ and employees’ share participation
schemes.

11. Acquisitions, Disposals & Mergers

Participating as a key member of the company team established
to implement corporate acquisitions, disposals and mergers;
protecting the company’s interests by ensuring the effectiveness
of all documentation; ensuring that due diligence disclosures
enable proper commercial evaluation prior to completion of a
transaction; ensuring that the correct authority is in place to
allow timely execution of documentation.

12. Corporate Governance

Continually reviewing developments in corporate governance;
facilitating the proper induction of directors into their role;
advising and assisting the directors with respect to their duties
and responsibilities, in particular compliance with company law
and, if applicable, Stock Exchange requirements; counseling
them when preparing presentations and memoranda
13. Non-Executive Directors
Acting as a channel of communication and information for non-
executive directors.

14. Company Seal

Ensuring the safe custody and proper use of any company seals.

15. Registered Office

Establishing and administering the registered office; attending to
the receipt, co-ordination and distribution of official
correspondence received by the company, sent to its registered
office; ensuring the provision of facilities for the public
inspection of company documents.

16. Company Identity

Ensuring that all business letters, notices and other official
publications of the company show the name of the company and
any other information as required by the statutes and that
company name plates are displayed in a conspicuous place.
 17. Subsidiary Companies
Ensuring that procedures are in place for the correct
administration of subsidiary companies and that correct
information is given to the holding company; maintaining a
record of the group’s structure.

18. General Compliance

Monitoring and laying in place procedures which allow for
compliance with relevant regulatory and legal requirements,
particularly under the Companies Acts including legal
requirements on retention of documents; retaining the minimum
set of records required for commercial reasons; ensuring that
procedures are in place to allow adequate historical archive to be
maintained.

Institution of Suits
Although the Secretary is the officer mainly charged with the
duty to institute suits on behalf of the company as it was held in
the earlier judicial view in the decision in Bugerere Coffee
Growers Ltd. V Zukuberi Kikuyaand Another [1970] EA
147. These have been held as no longer good law by the Court
of Appeal of Uganda in the case of M/s Tatu Naiga &
Emporium V Uverjee Brothers (U) Ltd (C.A-U),
citingUnited Assurance Co. Ltd V Attorney General, Civil
Appeal No. 1/1986 which overturned those earlier decisions.
Any authorised director can give the necessary authority to
institute a suit in the name of the company.

Activity
Discuss the different roles of the Company Secretary

Solution
The student is expected to define who a company secretary is
and then go ahead and state the different functions that are
performed by the company secretary.

Test Questions
1. A company secretary is an insignificant officer of a
company. Discuss
2. Examine the grounds for qualification and
disqualification of the company secretary
TOPIC TEN
THE AUDITORS OF A COMPANY
At the end of this Chapter the student will be expected to:
1. Understand and evaluate the role of auditors in regard to
companies; and
2. Analyze the duties that the auditor owes a company.
3. Analyze the grounds for appointment for and
remuneration of auditors;
4. Analyze the grounds and procedure for removal of
auditors;
5. Analyze the grounds for the disqualification of auditors

THE AUDITORS OF A COMPANY

The provisions of the Accountants Statute stipulate that a person
is not qualified to act as an auditor unless he is a member of the
institute of registered accountants or he is registered as an
associate accountant. It is therefore important that this be read
together with what is contained hereunder for a proper
understanding.

Appointment and remuneration of auditors.

Section 167 (1) provides that every company shall at each
annual general meeting appoint an auditor to hold office from
the conclusion of that annual general meeting, until the
conclusion of the next, annual general meeting.

Procedure for appointment

Subsection (2) provides that notwithstanding subsection (1), at
any annual general meeting a retiring auditor, however
appointed, shall be taken to be reappointed without any
resolution being passed unless—
(a) he or she is not qualified for reappointment;
(b) a resolution has been passed at that meeting appointing
somebody instead of him or her or providing expressly that he or
she shall not be re-appointed; or
(c) he or she has given the company notice in writing of his or
her unwillingness to be reappointed.

Requirement for Notice

Subsection (3) provides that where notice is given of an
intended resolution to appoint a person in place of a retiring
auditor and by reason of the death, incapacity or disqualification
of that person, the resolution cannot be proceeded with, the
retiring auditor shall not be taken to be automatically
reappointed by virtue of subsection (2).

Power of registrar to appoint auditor

Subsection (4) provides that where at an annual general meeting
no auditors are appointed or re-appointed, the registrar may
appoint a person to fill the vacancy.
Subsection (5) provides that the company shall, within one
week of the registrar’s power under subsection (4) becoming
exercisable, give the registrar notice of that fact.

Default in compliance with the above provision

Subsection (6) provides that where a company fails to give
notice as required by subsection (5), the company and every
officer of the company who is in default is liable to a default
fine of twenty five currency points.

Appointment of first auditors

Subsection (7) provides that subject to this section the first
auditors of a company may be appointed by the directors at any
time before the first annual general meeting and the auditors
appointed shall hold office until the conclusion of that meeting.
Removal of auditors
Subsection (8) provides that subject to subsection (7)—
(a) the company may at a general meeting remove any auditors
appointed under subsection (7) and appoint in their place any
other persons who have been nominated for appointment by any
member of the company and of whose nomination notice has
been given to the members of the company not less than
fourteen days before the date of the meeting; and
(b) if the directors fail to exercise their powers under this
subsection, the company in general meeting may appoint the
first auditors and upon the appointment the powers of the
directors shall cease.

Subsection (9) provides that the directors may fill any casual
vacancy in the office of auditor but while any such vacancy
continues, the surveying or continuing auditors, if any, may act.

Remuneration of auditors
Subsection (10) provides that the remuneration of the auditors
of a company—
(a) in the case of an auditor appointed by the directors or by the
registrar may be fixed by the directors or by the registrar as the
case may be; or
(b) subject to paragraph (a), shall be fixed by the company in a
general meeting or in such manner as the company in a general
meeting may determine.

Subsection (11) provides that for the purposes of subsection (8),

any sums paid by the company in respect of the auditors’
expenses shall be taken to be included in the expression
“remuneration.”

Provisions as to resolution relating to appointment and

removal of auditors.
Section 168 (1) provides that Special notice shall be required for
a resolution at a company’s annual general meeting appointing a
person as auditor other than a retiring auditor or providing
expressly that a retiring auditor shall not be re-appointed.

Subsection (2) provides that on receipt of notice of an intended

resolution under subsection (1) the company shall forthwith send
a copy of the notice to the retiring auditor, if any.

Subsection (3) provides that where notice is given of an

intended resolution under subsection (2) and the retiring auditor
makes with respect to the intended resolution representations in
writing to the company and requests that the representation be
notified to the members of the company, the company shall,
unless the representations are received by it too late for it to do
so—
(a) in any notice of the resolution given to members of the
company, state that the representations have been made; and
(b) send a copy of the representations to every member of the
company to whom notice of the meeting is sent whether before
or after receipt of the representations by the company, and if a
copy of the representations is not sent as required by this
paragraph because it is received too late or because company has
declared, the auditor may without prejudice to his or her right to
be heard orally require that the representations shall be read out
at the meeting.

Subsection (4) provides that subject to subsection (3), copies of

the representations need not be sent out and the representations
need not be read out at the meeting if, on the application either
of the company or of any other person who claims to be
aggrieved, the court is satisfied that the rights conferred by this
section are being abused to secure needless publicity for
defamatory matter and the court may order the company’s costs
on an application under this section to be paid in whole or in
part by the auditor, notwithstanding that he or she is not a party
to the application.

Subsection (5) provides that subsection (3) shall apply to a

resolution to remove the first auditors by virtue of section 167(8)
as it applies in relation to a resolution that a retiring auditor shall
not be reappointed.

Disqualifications for appointment as auditor.

Section 169 (1) provides that a person or firm shall not be
qualified for appointment as an auditor of a company unless he
or she or in the case of a firm, every partner in the firm is a
member of—
(a) one or more of the professional bodies specified in the
Accountants Act; or
(b) the Institute of Certified Public Accountants of Uganda
established under the Accountants Act, or is a person registered
as an associate accountant under the Accountants Act.

Subsection (2) provides that none of the following persons shall

be qualified for appointment as auditor of a company—
(a) an officer or servant of the company;
(b) a person who is a partner of or in the employment of an
officer or servant of the company; or
(c) a body corporate;

Subsection (3) provides that subsection (2)(b) shall not apply in

the case of a private company.

Subsection (4) provides that references in subsection (2) to an

officer or servant shall be construed as not including references
to an auditor.

Subsection (5) provides that a person shall also not be qualified

for appointment as auditor of a company if he or she is, by virtue
of subsection (2), disqualified for appointment as auditor of any
other body corporate which is that company’s subsidiary or
holding company or would be so disqualified if the body
corporate were a company.

Subsection (6) provides that where a person who is not qualified

to act is appointed as auditor of a company that person and the
company and every officer in default is liable to a default fine of
twenty five currency points.

Auditors’ report and right of access to books and to attend

and be heard at general meetings.
Section 170 (1) provides that the auditors shall make a report to
the members on the accounts examined by them and on every
balance sheet, every profit and loss account and all group
accounts laid before the company in a general meeting during
their tenure of office and the report shall contain statements as to
the matters mentioned in the Sixth Schedule to this Act.

Subsection (2) provides that the auditors’ report shall be read

before the company in general meeting and shall be open to
inspection by any member.

Subsection (3) provides that every auditor of a company has a

right of access at all times to the books and accounts and
vouchers of the company and is entitled to require from the
officers of the company such information and explanation as he
or she thinks necessary for the performance of the duties of the
auditors.

Right to receive notice for meeting

Subsection (4) provides that the auditors of a company are
entitled to attend any general meeting of the company and to
receive all notices of and other communications relating to any
general meeting which any member of the company is entitled to
receive and to be heard at any general meeting which they attend
on any part of the business of the meeting which concerns them
as auditors.

Duties:
Basically, an auditor is to investigate and examine the company's
accounts. His report is to be read at the company's general
meeting and an auditor has a right to attend all such relevant
general meetings. The standard of duty has been set by the court
in Re London And General Bank Case that an auditor must be
honest and must exercise reasonable care and skill in what he
certifies.

It was further stated in the case that an auditor is not bound to do

more than exercise reasonable care and skill in making inquiries
and investigations even in the case of suspicion.

It is the duty of an auditor to bring to bear on the work he has

to perform that skill, care and caution a cautious auditor
would use. In the case of Formento (Steeling Area) Vs
Selsdon Fountain Pen Co Ltd (1958)1 ALLER where Lord
Denning stated that an auditor is not to be confined to checking
vouchers and adding or subtracting figures but he must take care
that errors are not made and that he should approach his duty
suspecting that someone may have made a mistake and that a
check must be taken to ensure that none has been made. That he
is not to be written off as a professional "added-up subtractor".
That his vital task is to take care that errors of omission or
commission or down right untruths are not done.

In the case of Hedley Byrne & Co Ltd Vs Hellen Partners Ltd

(1964) AC 465 it was stated that an auditor will not be liable
to a third party if he has made a disclaimer to his work. This
disclaimer does not apply in case of the company and for
shareholders and criminal liability is covered in the sections laid
above.

In the case of Roberts Vs Hopwood (1925) AC 578 and in Re

Ridsell (1914) CH. 59, it was stated that where an auditor does
not have sufficient legal knowledge to deal with a matter as
accountants do, he is entitled to take legal advice. In the case
of BEVAN VS WEBB (19010) 2 Ch. 59, it was held that
"permission to a man to do an act which he cannot do
effectually without the help of an agent carries with it the right
to employ an agent”. According to S.328, an auditor is an
officer of the company. His duty is to ascertain and state the true
financial position of the company at the time of audit but not to
care about declaring dividends.

In the case of Re Kingston, it was stated that he is a watchdog

but not a blood-bound but if there is anything calculated to
excite suspicion, he should probe it to the bottom but he does
not guarantee the discovery of all fraud.

Nevertheless, an auditor will not be made liable for not tracking

out ingenious and carefully laid schemes of fraud, when there is
nothing to arouse suspicion, and when those frauds are
perpetuated by tried servants of the company who are
undetected for years by the directors. In the case of Thomas
Gerald And Sons Ltd (1968) Ch.455 has expressly presented
the current provision in contemporary company structures. It
was held that circumstances had changed since Re Kingston
and the auditor is now a blood-bound. That auditors of the
company owe a statutory duty to make the members a report
containing certain statements.

Activity
Discuss the different duties that auditors owe a company

Solution
The student is expected to know and explain who an auditor is
and then discuss the different duties that auditors owe to the
company e.g. investigating the company’s accounts etc

Test Questions
1. Discuss the different ways in which an auditor may be
appointed
2. Analyze the duties owed by an auditor to a company
3. Discuss the grounds and procedure for removal of
auditors
4. Discuss the qualification and disqualifications for
auditors

TOPIC ELEVEN

LIABILITY OF A COMPANY FOR THE ACTS OF ITS

OFFICERS
At the end of this Chapter, the student will be expected to:
1. Understand ability of a company to acquire liability;
2. Understand the extent of a company’s liability for the
acts of its officers;
3. Evaluate the liability of a company on a corporate
contract;
4. Analyze the concept of “authority” and the doctrine of
“holding out”.

LIABILITY OF A COMPANY FOR THE ACTS OF ITS

OFFICERS
Liability may be criminal or civil. A company being an artificial
person commits crimes and civil wrongs and its mind has to be
thought to be the directing will of the officer involved in the
wrong committed. Officers may be thought of as the BOD,
accountants, and as was enunciated in the case of
SMITHFIELD BUTCHERY CO.V REP.(1939) 23 KLR 81,
wrongful acts committed by the subordinate staff of the
company would not attach liability to a company. Here, it is the
law of agency that is appropriately applied. Since it is the
principal and agent that dominate the law of agency, the
company is the principal and the officer is the agent. When an
agent in the course of agency commits a wrong, the aggrieved
party has two options i.e. sue the agent, or sue the principal

In determining whether a company is liable for the acts of its

officers, one has to consider two issues:
i) whether the company has the authority to enter into the
transaction
ii) whether the officer was authorised to enter into the
transaction

Whether the officer was authorised to enter into the

transaction
In determining whether the company is liable for the acts of its
officers, the court has to ascertain whether the officer was the
directing mind and will of the company.
Under common law, a company is liable for the acts of its
officers but the company’s liability is based on the principle of
attribution (transferability from the officer to the company)

A company is akin to a human body and the individuals behind

these transactions are the ones who bind the company in its
transactions. In LEONARD’s case, the company owned a ship.
Leonard was the active director in the company but he also took
over an active role in the management of the ship. The ship was
un-seaworthy to carry oil. It later caught fire and the cargo was
destroyed. Under S.502 of the Merchant Shipping Act, the ship-
owner was not liable for any loss or damage happening without
his fault. The company relied on this provision and argued that
the loss arose not from its fault but from the fault of the
Leonard. The issue was whether the company was liable in the
circumstances and whether Leonard’s fault could be attributed to
the company. The HOL held that Leonard’s default was
attributed to the company and hence it could not rely on this
provision. Lord Viscount said that the company is an abstraction
i) it has no mind of its own ii) its acting and directing will must
be sought in the person of somebody who for some purposes
may be called an agent iii) but who is really the directing mind
and will of the company the very ego and the personality of the
company.

How do you ascertain whether an officer had or constituted the

directing mind and will of the company (whether the person had
the authority to act?)?
This will depend on the circumstances of each particular case. In
HL BOTON & JJGRAHAM [1957] 1 ALLER 624, a
corporate landlord was sued for intending through its MD to
occupy premises for its own use. There was an argument that
there was no meeting of the board of directors to express the
landlord’s intention and that therefore the landlord of the
company can not say that it had the necessary intention. Lord
Denning held that a company may in many ways be like a
human being, it has a brain and nerve centre which controls
what it does. It also has hands which hold the tools and act in
accordance with the directions from the centre that some of the
people in the company like directors and managers do represent
the directing mind and will of a company and control what it
does.

In TESCO SUPERMARKETS Vs NATTRASS [1972] AC

153 the case involved a large supermarket. It had an advert
displayed on the window with a particular item on sale. When
the reduced price items had all been sold, the shop assistant put
out on display the same items but marked them at normal price
which was higher than that on sale. It was not reported to the
store manager and the advert remained on the window. The HOL
held that the directing mind can be employees to whom
managerial powers have been delegated but it should be noted
that it is only those managers who are entrusted with significant
degree of freedom from supervision of high authority who are so
regarded.

The public policy consideration for this directing mind and will
concept is that a company must be treated as a natural person for
purposes of acts done in its course of business so it must take
precaution and exercise due diligence, default of which the fault
of the human beings/natural persons performing the functions of
the company is attributed to the company.

If control is by more than one person whose intention should be

looked at in determining the mind of the company, in such a
situation e.g. in a bank where you have aggregate knowledge or
different people in control of one transaction, it is a fallacy to
say that the state of mind to be attributed to the company must
always be the state of mind of one particular officer. In
BRAMBLES HOLDINGS Vs CAREY [1976] the
responsibility for ensuring that the company complied with
legislation was delegated to the following officers in the
company – the company’s main driver, the heavy trucks
supervisor and the operations manager. The company was
charged with offences related to overloading. The offences
occurred when the main driver was on sick leave and replaced
by another who had not been properly instructed by the
operations manager. The company argued that this was an
honest and reasonable mistake since the heavy trucks supervisor
honestly believed that the vehicles were correctly loaded. The
other side argued that the operations manager knew or ought to
have known that proper loading instructions had not been given
to the drivers. Whose knowledge and belief could be attributed
to the company to hold it liable? The court considered the
knowledge of the operations manager and heavy truck manager
and held that in the circumstances, the operations manager was
the directing mind and will of the company. The court further
observed that it is a fallacy to say that any state of mind to be
attributed to a corporation must always be the state of mind of
one particular officer alone and that the corporation can never
know or believe more than one man knows and believes.

CORPORATE CONTRACTS
Whether the company has the authority to enter into the
transaction
These are of two types:
i) direct contract
ii) Indirect contract

Indirect Contract
In a direct contract, there are two questions to consider:
a) whether the company authorised entry into the contract
b) whether the company authorised execution of the contract

For the first question, one looks at the memorandum if the

transaction is intravires and for the second question one looks at
any form of authorisation.

For direct contracts, one looks at whether the agent has authority
to bind the company.

Authority
Actual authority is where the company has agreed that an officer
or agent can act on behalf of the company and this can be
established from the AOA, the company’s resolutions in the
board or general meetings.

Apparent or ostensible authority does not require a company

conferring upon the officer or agent authority. The officer binds
the company because the agent appears to have the required
authority. Accordingly, an officer or agent may have apparent
authority even if he/she does not have actual authority.

For actual authority, a company gives consent to the officer or

agent to act for the company and it can be express or implied.
There are four sources of express actual authority:
1) companies Act especially with matters to do with directors
powers like allotment of shares, declaration of dividends
etc.
2) The companies AOA when the board collectively executes
such powers via a resolution
3) Where the directors delegate authority which they are
authorised to delegate
4) Any instrument by the company expressly authorising or
appointing a person to act on his behalf even if it’s just a
letter of appointment.

All in all express authority is the actual authority of an agent

created by a principal whether orally, by deed or in writing. The
scope of the agents’ actual authority is determined from the
principal’s oral statement or the interpretation of the deed or
writing.

The MD has implied actual authority to do all things that fall

within the usual scope of that office. However it should be noted
that the usual scope of the MDs powers will depend on what is
customary or usual for an MD in a similar company carrying on
a similar business e.g. MD has authority to supervise junior
executives or to enter into a contract for the provision of
services for the company but the MD has no implied actual
authority (usual authority) to sell the company’s undertaking or
to sell the company’s main business.

For the chairperson, he has implied actual authority to chair

meetings of the board and to use a casting vote to break the
deadlock but unless he had delegated powers, he does not have
sufficient implied authority to bind the company in contracts.

Directors: In general a director who is not the MD does not

have sufficient implied authority to bind the company to a
contract unless a director has delegated powers. Directors act
collectively as aboard so a single director has no power to bind
the company.

Company secretary: Has implied actual authority to discharge

administrative matters, signing contracts relating to
administrative matters like employment of officers so in a way,
he is a chief administrative officer but he has no sufficient
implied authority to bind the company to the contract. In
PANORAMA’S case, it was held that the company secretary has
extensive duties and responsibilities and is no longer a mere
clerk

Apparent Authority
It is based and established on the principle of agency by
estoppel. The company is precluded from denying that the agent
lacked authority e.g.
a) if a company permits an agent to carry out acts beyond the
scope of the agents express or implied authority
b) if the company permits the agent to occupy a particular
position e.g. a defacto MD
c) where the agent holds no position but the company permits
the agent to act as if he/she has the necessary authority to
act. This is what is technically referred to as holding out or
a representation.

A company just like an individual can represent by words or

conduct to an outsider that another person has authority. If the
outsider acts on this representation and transacts business with
the apparent agent on the faith of it then the company will be
estopped from denying the representation. For the company to
be bound by this principle of holding out, there are common law
requirements which must be satisfied. In the case of
FREEMAN & LOCKYER, the court stated four conditions;
1) There must be a representation (by word or conduct to an
outsider that the person had authority)
2) The representation must be by a person or officer or body
with actual authority
3) The person making the representation must have intended it
to be relied upon and it must be shown that the representation
was in fact relied upon
4) The transaction must be intravires

Exceptions where a person cannot claim ostensible authority

or holding out
An outsider cannot claim that an agent had ostensible authority
where the outsider had knowledge of the persons who are vested
with the actual authority and that there was no actual authority
given to the agent.

An outsider cannot argue for ostensible authority if a reasonable

person in the outsiders’ position had doubts as to whether the
agent had the authority to enter into the transaction.

Activity
Examine the extent of the ability of the officers of the company
to make the company liable for their actions

Solution
The student will be expected to discuss who directors are and go
further to discuss the circumstances under which the company
will be made liable for their actions. The student is expected to
critically analyze the issues of the company’s authority to enter
into the transaction and the issue of the officer having authority
to enter into the transaction

Test Questions
1. Discuss the principle of attribution as applied under
liability of a company for the acts of its officers.
2. Discuss concept of “authority” and the doctrine of
“holding out”

TOPIC TWELVE

COMPANY MEMBERSHIP
At the end of this Chapter, the student will be able to:
1. Understand the concept of membership in a company;
2. Understand the concept of shares,
3. Understand the different ways of becoming a shareholder
4. Understand the various ways of ceasing to be a
shareholder;
5. Understand the rights and duties of shareholders;
6. Examine the different types/classes of shares;
7. Analyze the right to transfer and procedure for transfer
of shares;
8. Understand the nature of consideration used for payment
of shares;
9. Understand the concept of share warrants and their
advantages;
10. Analyze the concept of transmission of shares;
11. Analyze the importance of filing annual returns;
12. Evaluate and analyze the process of allotment of shares;
13. Understand the meaning of call on shares, forfeiture
and surrender of shares and
14. Evaluate the importance of the share certificate and its
effect.

SHARES AND COMPANY MEMBERSHIP

Definition of member.
Section 47 (1) provides that the subscribers to the memorandum
of a company shall be taken to have agreed to become members
of the company, and on its registration shall be entered as
members in its register of members.
Subsection (2) provides that a person who agrees to become a
member of a company, and whose name is entered in its register
of members shall be a member of the company.
In MAWOGOLA COFFEE FACTORY VS. KAYANJA, it
was held that to be a member of a company, there must have
been a valid allotment of shares to the person and his name
entered on the register. It was further observed that a certificate
of allotment of shares is the best evidence but in its absence, the
register of members shall suffice.

THE REGISTER OF MEMBERS

Duty to keep a register
Every company is under a duty to maintain a register of
members in which it entered their names, addresses and
descriptions.

Section 119 (1) provides that a company shall keep a register of

its members.

Contents of the register

Section 119 (1) further provides for the register to include the
following particulars;
(a) the names and postal addresses of the members and in the
case of a company having a share capital a statement of shares
held by each member, distinguishing each share by its number if
the share has a number and of the amount paid or agreed to be
considered as paid on the shares of each member;
(b) the date on which each person was entered in the register as
a member; and
(c) the date on which any person ceased to be a member, except
that where the company has converted any of its shares into
stock the register shall show the amount and class of stock held
by each member instead of the amount of shares and the
particulars relating to shares specified in paragraph (a).

Where is the register kept?

The register has to be kept at the registered office of the
company. However, if the maintenance of the register is done at
another office of the company (other than the registered office)
or is done on behalf of the company by some other person, it
may be kept where the work is done, provided that this is not
outside Uganda. In addition, a company should give to the
Registrar of Companies notice of where the register is kept.
except where this is done at its registered office.

Section 119 (2) provides that the register of members shall be

kept at the registered office of the company; except that—
(a) if the work of making it up is done at another office of the
company, it may be kept at that other office; and
(b) if the company arranges with some other person for the
making up of a register to be understood on behalf of the
company by that other person, it may be kept at the office of that
person at which the work is done but it shall not be kept at a
place outside Uganda.

Notice to be given to Registrar of where the register is kept

Subsection (3) provides that a company shall send notice to the
registrar of the place where its register of members is kept and
of any change of place.

Subsection (4) provides that a company shall send notice under

this section where the register has, at all times since it came into
existence or in the case of a register in existence at the
commencement of this Act, at all times since the
commencement of this Act been kept at the registered office of
the company.

Subsection (5) provides that in the case of a company which

does not have a share capital but has more than one class of
members, there shall be entered in the register, with the names
and addresses of the members, the class to which each member
belongs.

Default in complying with the above provisions

Subsection (6) provides that where a company defaults in
complying with subsection (1) or makes default for fourteen
days in complying with subsection (5), the company and every
officer of the company who is in default is liable to a daily
default fine of twenty five currency points.

Inspection of the Register

Section 122 (1) provides that except when the register of
members is closed under this Act, the register and index of the
names, of the members of a company shall, during business
hours be open to inspection of any member without charge and
of any other person on payment of one currency point or such
less sum as the company may prescribe, for each inspection.

Subsection (2) provides that the company may in a general

meeting impose reasonable restrictions on inspection under
subsection(1) but the restrictions shall not be such as to reduce
the period of inspection to less than two hours in each day.

Right of member to access register

Subsection (3) provides that a member or other person may
require a copy of the register or of any part of it, on payment of
one currency point or such less sum as the company may
prescribe.

Subsection (4) provides that the company shall cause any copy
required under subsection (3) by any person to be sent to that
person within a period of fourteen days commencing on the day
next after the day on which the requirement is received by the
company.

SHARES.
A share is defined in section 2 to mean a share in the share
capital of a company and includes stock except where a
distinction between stock and shares is expressed.
A share has been defined as a bundle of rights. In the case of
SPARLING Vs CASEY [1988] the SC of Canada held that a
share is not an isolated piece of property but a bundle of inter
related rights and liabilities. That a share is not an entity
independent on its own but its possession and exchange is
governed by a statutory provisions and it is those provisions that
make up its constituent elements. The provisions define the very
rights and liabilities that constitute the shares existence. The
court concludes by saying that a share and a shareholder are
concepts which are inseparable from the comprehensive bundle
of rights and liabilities created by the Act.
A share has also been defined in Borland Trustee V Steel Bros
& Co. Ltd as “… the interest of a shareholder in the company
measured by a sum of money for the purpose of liability in the
first place and of interest in the second, but also consisting of a
series of mutual covenants entered into by all the shareholders
interest…”
The holding of a share thereof carries with it certain property
rights and liabilities in the company.

Rights
✓ Right to vote.
✓ Right to share in the profits (receive dividends when
declared)
✓ Right to a share in the proceeds upon dissolution
✓ Right to attend meetings and participate in management by
taking resolutions

Obligations.
• Pay for the shares.
• Attend meetings
• Contribute to the liabilities of the company where the
liability of the company is unlimited.
Specific terms
Nominal Share Capital:
Is the amount of money the company’s memorandum entitles the
company to raise. It is also referred to as authorized share
capital. It comprises of issued share capital and unissued share
capital. It also comprises of paid up capital and unpaid capital. It
is also comprised of called up capital or capital on hold and
uncalled capital.

Reserve Capital:
This is uncalled capital which the company resolves only to call
upon liquidation or where there is a financial crisis/need.
• Classes of Shares
Shares as noted above are bundles of rights. These rights and the
consequent bundles of rights can only be defined by the creation
of classes in the shares. Accordingly, the company can create
several different bundles of rights and these separate bundles of
rights are referred to as classes.
The CA allows for the creation of different classes of shares
with different rights and restrictions. Whereas there are more
than one class of shares the different rights and restrictions must
be set out in the AOA but where there is just one class of shares,
you do not have to specify the rights and restrictions related to
the shares in question.
However, it must be noted that as a general rule, if there is just
one class of shares, common law presupposes that the three
basic rights are attached to these shares namely:
- The right to vote on company matters e.g. voting in respect of
appointment of directors, increment of share capital, amendment
of MOA and AOA
- The right to receive dividends when declared by the BOD
- The right to a share in the proceeds upon dissolution.
BECOMING A SHAREHOLDER.
Who can be a shareholder?
• Infants:
A minor can be a member of the company except where the
articles of association prevent this.
If he is a member, he is subject to the general contractual rights
and liabilities of a minor. This means that if he has bought
shares, he can repudiate the contract at any time before he
reaches 18 years of age or within a reasonable time thereafter. A
minor thus can become a shareholder but he incurs no liability
until he obtains the majority age and fails to repudiate the
contract within a reasonable time.
• Personal Representative.
A person representative of a deceased shareholder can be
registered as a member. This is subject though to the directors’
right to refuse registration.
• Trustee in Bankruptcy.
A bankrupt shareholder remains a member. However, votes as
directed by his trustee in bankruptcy.
• Another Company.
Another company can become a member of a company, be
appointing a representative thereon. However, a company
cannot buy its own shares, as this is likely to lead to reduction in
its registered capital.
There are various ways in which a person can become a
company member and these include the following:
Ways of becoming a member
1. By subscribing to the memorandum and articles of
association;
2. Through allotment and payment for the shares allotted;
3. By buying from an existing member of the company;
4. By transmission after the death of a shareholder (eg to an
executor or an administrator of the estate of the deceased
shareholder);
5. By gift.

Cessation of membership
A shareholder loses company membership on the occurrence of
the following events or under the following circumstances:
1. Being struck from the list of members;
2. By the company redeeming redeemable shares;
3. By death;
4. On the winding up or liquidation of the company;
5. On voluntarily transferring or giving shares to another person;
6. For a director of a public company, failure to pay for
qualification shares within two months of incorporation;
7. On forfeiture for failure to answer a call on unpaid shares;
8. Take-over bids where the shares of the existing members are
bought off by the company taking over.

TYPES OF SHARES
Shares may be issued with special rights relating to payment of
dividend, voting, return of capital, etc. as the company may
decide (Article 2 of Table A). However, it is normal to divide
shares into three main classes:-
• Ordinary shares
• Deferred (founders) shares
• Preference shares.
• Redeemable preference shares
Ordinary Shares.
Ordinary shares comprise the residuary class of shares in which
it is vested everything after the special rights of other classes, if
any, have been satisfied.
They bear the main financial risk of the business in the event of
the company failing and the greater reward, if it is successful.
They have three main rights ie right to vote on matters requiring
shareholders voting, right to receive dividends when declared on
a prorate basis and subject to the rights of other shareholders and
the right to the prorate share of the surplus proceeds on
dissolution, ordinary shareholders are presumed to be equal in
all respects unless indicated otherwise in the AOA.
Deferred (Founders) Shares
These shares are entitled to a fixed dividend relative to the
profits available to the company following the declaration of
dividends on the preference and ordinary shares.

Preference Shares.
These shares are referred to as preference or preferred because
they typically have a preference over other shares with respect to
some right and usually this preference is in respect to dividends
or share in the surplus proceeds. Thus these shares confer on the
holder some preference over other classes in respect either of
dividend or of repayment of capital or both. With preference
shares, the amount of the share is indicated in the company’s
articles and it is this specific amount that will constitute the
basis for computing the dividend i.e. a shareholder has a
subordinate right to the dividends or to the proceeds. In accounts
they are referred to as subordinate loans.

Redeemable preference shares.

These are preference shares which may be bought out by the
company in exception to the general rule relating to the
maintenance of a company’s capital that a company must not
buy its own shares. This is referred to as redeeming shares. This
allows for the company to do some refinancing at a future time
at a predetermined price for the re-purchase of these shares. The
predetermined price is usually set at an amount above the
nominal value of the share. However, there are certain
conditions attached to a company’s redemption of its shares.
• The shares must be fully paid up.
• The redemption must be out of the company’s profits or
fresh issue of shares done for purposes of redemption.
Variation of Class rights.
Shares may be issued with certain rights. Variation considers
the circumstances and mode by which such rights may be
altered. Where the class rights are defined in the company’s
memorandum of association, they can only be varied if the
memorandum provides a method of alteration. Alternatively,
provision for variation may be made in the articles.

PAYMENT FOR SHARES.

Normally, shares are paid for in cash. However, they may also
be paid for in kind.

Issue of Shares at a Discount:

The law does not allow the issue of shares at a discount. The
full nominal value of the shares must be paid because otherwise
the capital yardstick of the company would be misleading.

Power to issue shares at a discount.

Section 67 (1) provides that subject to this section, a company
may issue at a discount shares in the company of a class already
issued, except that—
(a) the issue of the shares at a discount must be authorised by
resolution passed in a general meeting of the company and must
be sanctioned by the court;
(b) the resolution must specify the maximum rate of the discount
at which the shares are to be issued;
(c) not less than one year must at the date of the issue have
elapsed since the date on which the company was entitled to
commence business; and
(d) the shares to be issued at a discount must be issued within
one month after the date on which the issue is sanctioned by the
court or within such extended time as the court may allow.

Subsection (2) provides that where a company has passed a

resolution authorising the issue of shares at a discount, it may
apply to the court for an order approving the issue and upon
such application the court, if having regard to all the
circumstances of the case, thinks it proper so to do, may make
an order approving the issue on such terms and conditions as the
court thinks fit.
The position with regard to shares may be contrasted with that in
respect of debentures, which may be issued at a discount
provided that they are not rapidly converted into shares.
ISSUE OF SHARES AT A PREMIUM.
The issue of shares above their nominal value is permissible.
However, the amount of the premium thereby realized, whether
in cash or otherwise must be transferred to a share premium
account in the company’s balance sheet.

Application of premiums received on issue of shares.

Section 66 (1) provides that where a company issues shares at a
premium, whether for cash or otherwise, a sum equal to the
aggregate amount or value of the premiums on those shares shall
be transferred to an account, to be called “the share premium
account”, and the provisions of this Act relating to the reduction
of the share capital of a company shall, except as provided in
this section, apply as if the share premium account were paid-up
share capital of the company.

Subsection (2) provides that the share premium account may,

notwithstanding anything in subsection (1), be applied by the
company in paying up un-issued shares of the company to be
issued to members of the company as fully paid bonus shares in
writing off—
(a) the preliminary expenses of the company;
(b) the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company; or
(c) in providing for the premium payable on redemption of any
redeemable preference shares or of any debentures of the
company.

Subsection (3) provides that where a company has before the

commencement of this Act issued any shares at a premium, this
section shall apply as if the share had been issued after the
commencement of this Act.

Subsection (4) provides that any part of the premium which has
been applied as referred to in subsection (3) that it does not at
the commencement of this Act form an identifiable part of the
company’s reserves within the meaning of the Fifth Schedule to
this Act shall be disregarded in determining the sum to be
included in the share premium account.

ALLOTMENT OF SHARES
This is the process through which the company distributes the
shares to successful applicants i.e. is the process through which
a potential shareholders or subscriber is given the number of
shares which he has successfully applied for.
Private companies under S.5 restrict the issue of new shares by
requiring that:-
o A private company is not entitled to invite the public to
subscribe to any of its securities.
o A private company must in its Articles of Association
contain a clause restricting the right of transferability of its
securities as far as its shares are concerned.
Such clauses are called pre-emptive clauses. Lack of such a pre-
emptive clause automatically makes the company a public ltd
company.

Return as to allotment.
Section 61 (1) provides that whenever a private company
limited by shares or a company limited by guarantee and having
a share capital makes any allotment of its shares, the company
shall, within sixty days thereafter, deliver to the registrar for
registration—
(a) a return of the allotments, stating the number and nominal
amount of the shares comprised in the allotment, the names,
addresses and descriptions of the allottees and the amount if any,
paid or due and payable on each share; and
(b) in the case of shares allotted as fully or partly paid up
otherwise than in cash, a contract in writing constituting the title
of the allottee to the allotment together with any contract of sale
or for services or other consideration in respect of which that
allotment was made such contract being duly stamped and a
return stating the number and nominal amount of shares so
allotted, the extent to which they are to be treated as paid up and
the consideration for which they have been allotted.

Subsection (2) provides that where a contract under subsection

(1) is not reduced into writing, the company shall, within sixty
days after the allotment deliver, to the registrar for registration
the prescribed particulars of the contract stamped with the same
stamp duty as would have been payable if the contract had been
reduced into writing and those particulars shall be deemed to be
an instrument within the meaning of the Stamps Act and the
registrar may, as a condition of filing the particulars, require that
the duty payable on it be adjudicated under section 36 of that
Act.

Subsection (3) provides that where default is made in

complying with this section, every officer of the company who
is in default is liable to a fine of twenty five currency points and
an additional fine of five currency points for every day during
which the default continues.

ALLOTMENT PROPER
The company upon application may make an allotment of shares
to the applicant. The application, in line with ordinary
contractual principles is only an offer to the applicant, which
may or may not be accepted by the company. Directors
normally make the allotment of shares at a meeting of the board
intended for that purpose. As a general rule the responsibility for
allotment of shares lies with the BOD.

In the discharge of this responsibility, the directors must act

bonafide and in the interests of the company, otherwise they will
be in breach of their duty of good faith.
An allottee becomes a member of the company when his name
is entered on the register of members.
SHARE CERTIFICATES
Duties of a company with respect to issue of certificates.
Section 91 (1) provides that a company shall, within sixty days
after the allotment of any of its shares, debentures or debenture
stock and within two months after the date on which a transfer
of the shares, debentures or debenture stock is lodged with the
company, complete and have ready
for delivery the certificates of all shares, the debentures and the
certificates of all debenture stock allotted or transferred, unless
the conditions of issue of the shares, debentures or debenture
stock otherwise provide.

Subsection (2) provide that for the purposes of subsection (1),

"transfer" means a transfer duly stamped and otherwise valid
and does not include a transfer which the company is for any
reason entitled to refuse to register and does not register.

Effect of default
Subsection (3) provides that if default is made in complying
with this section, the company and every officer of the company
who is in default is liable to a default fine of twenty five
currency points.

Subsection (4) provides that if a company on which a notice has

been served requiring the company to make good any default in
complying with subsection (1), fails to make good the default
within ten days after the service of the notice, the registrar may,
on the application of the person entitled to have the certificates
or the debentures delivered to him or her, make an order
directing the company and any officer of the company to make
good the default within the time specified in the order.

Subsection (5) provides that the order may provide that all costs
of and incidental to the application shall be borne by the
company or by any officer of the company responsible for the
default.

Certificate to be evidence of title.

A share certificate with a company seal is prima facie evidence
that the owner has title to the shares. Prima facie evidence is
evidence, which cannot be rebutted (challenged). In the case of
Kulubya Vs UTC (1988), here the judge held that absence of
the company's seal in the share certificate in itself does not
negate ownership of the shares.

Section 92 provides that a certificate, under the common seal

of the company or any other title evidencing securities under this
Act or any other law specifying any shares held by any member
shall be prima facie evidence of title of the member to the
shares.

Legal Effects of the Share Certificate and Estoppel.

The certificate operates as an estoppel against the company in
two instances:
1. It estops the company from denying that the person to
whom it is granted was at the date of the issue of the certificate
the registered owner of the shares issued and that shareholder is
entitled to the shares mentioned in the certificate.
2. It estops the company from denying that the company
shares are paid up as indicated in the certificate.
It is prima facie evidence that the holder is the owner of the
shares. Therefore if a third party detrimentally alters his position
on the basis of that certificate, he cannot be defeated by the
company's denial of the certificate unless it was forged.

TRANSFER/TRANSMISSION OF SHARES
Generally speaking, the proprietor of shares has the right to
transfer or deal with his/her shares as he/she wishes. Public
limited companies can transfer shares, while private limited
companies place restrictions on the transfer of their shares and
provide for rights of pre-emption i.e. that the shares should be
offered to existing members of the company for sale.
Directors are given absolute discretion to refuse registration of
any transfer of shares. In RE SIMTH & FAWCETT [1942] CH
306 the case involved a widow who sought to be registered as a
proprietor on transmission. The court observed that the test is
whether the transfer is in the best interest of the company and
that the directors had the power to reject or refuse a transfer
though it is a general rule for a shareholder to transfer his/her
shares.
A legal representative or a beneficiary of the estate has no
automatic right to be a member of a company. Table A provides
that until the legal representative is registered, he/she cannot
enjoy or exercise any right conferred upon members including
the right to attend meetings.
Transmission of Shares
This is a form of transfer of shares by operation of law arising
either from the death or bankruptcy of the shareholder.
Article 29 (1) of Table A provides that in the case of the death
of a member, the survivor or survivors where the deceased was a
joint holder, and the personal representatives of the deceased
where he or she was a sole holder, shall be the only persons
recognized by the company as having any title to his or her
interest in the shares.
Article 30 of Table A provides that any person becoming
entitled to a share in consequence of the death or bankruptcy of
a member may, upon such evidence being produced as may from
time to time properly be required by the directors and subject to
these regulations, elect either to be registered himself or herself
as holder of the share or to have some person nominated by him
or her registered as the transferee of the shares but the directors
shall, in either case have the same right to decline or suspend
registration as they would have had in the case of a transfer of
the share by that member before his or her death or bankruptcy.

Article 31 (1) of Table A provides that where the person entitled

under subregulation 30 elects to be registered himself or herself
he or she shall deliver or send to the company a notice in writing
signed by him or her stating that he or she so elects.

Article 32 (1) of Table A provides that provides that where a

person becomes entitled to a share by reason of death or
bankruptcy of the holder that person is entitled to the same
dividends and other advantages to which he or she would be
entitled if he or she were registered holder of the share except
that he or she shall not before being registered as member in
respect of the share be entitled in respect of it to exercise any
right conferred by membership in relation to meetings of the
company.

FORM OF TRANSFER
Nature of shares.
Section 83 provides that the shares or other interest of any
member in a company shall be movable property transferable in
the manner provided by the articles of the company.

Transfer not to be registered except on production of

instrument of transfer.
Section 85 (1) provides that notwithstanding anything in the
articles of a company, it is not lawful for the company to register
a transfer of shares in or debentures of the company unless a
proper instrument of transfer has been delivered to the company.

Subsection (2) provides that nothing in this section shall

prejudice any power of the company to register as shareholder or
debenture-holder any person to whom the right to any shares in
or debentures of the company has been transmitted by operation
of the law.

Article 22 of Table A provides that the instrument of transfer f

any share shall be executed by or on behalf of the transferor and
transferee and the transfer shall be taken to remain a holder of
the share until the name of the transferee is entered in the
register of members in respect of the share.

PROCEDURE FOR TRANSFER

Article 23 of Table A provides that any member may transfer
all or any of his or her shares by instrument in writing in any
usual or common form or any other form which the directors
may approve.
• Sale of all shares on a share certificate.
If the transfer involves the sale of all the shares, which are
mentioned in share certificate, the seller is required to hand to
the buyer the instrument of transfer as well as the share
certificate. The company will in turn send the buyer a new
certificate.
• Sale of only part of shares on a certificate
If the seller is only selling some of his shares, which are
mentioned, in a single certificate, the procedure of certificate
must be compiled with. The company will in turn send a new
certificate to the buyer.
• The duties of seller and buyer.
The seller must hand over to the buyer a valid instrument of
transfer and relevant share certificate.
In return the buyer must pay the price for the shares.

Registration of a transfer at request of the transferor.

Section 88 provides that on the application of the transferor of
any share or interest in a company, 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
for the entry were made by the transferee.

Notice of refusal to register a transfer.

Article 24 of Table A provides that the directors may decline to
register the transfer of a share not being a fully paid share to a
person of whom they do not approve and they may also decline
to register the transfer of a share on which the company has a
lien.

Section 89 (1) provides that where a company refuses to register

a transfer of any shares or debentures, the company shall, within
sixty days after the date on which the transfer was lodged with
the company, send to the transferee notice of the refusal.
Subsection (2) provides that where default is made in complying
with this section, the company and every officer of the company
who is in default is liable to a default fine of twenty five
currency points.

Certification of a transfer.
Section 90 (1) provides that the certification by a company of
any instrument of transfer of shares in or debentures of the
company shall be taken as a representation by the company to
any person acting on the faith of the certification that there have
been produced to the company, such documents as on the face of
them show a prima facie title to the shares or debentures in the
transferor named in the instrument of transfer but not as a
representation that the transferor has any title to the shares or
debentures.

Subsection (2) provides that where a person acts on the faith of

a false certification by a company made negligently, the
company shall be under the same liability to him or her as if the
certification had been made fraudulently.
Subsection (3) provides that for the purposes of this section—
(a) an instrument of transfer shall be taken to be certified if it
bears the words “certificate lodged” or words to the like effect;
(b) the certification of an instrument of transfer shall be taken to
be made by a company if—
(i) the person issuing the instrument is a person authorised to
issue certificated instruments of transfer on the company’s
behalf; and
(ii) the certification is signed by a person authorised to
certificate transfers on the company’s behalf or by any officer or
servant either of the company or of a body corporate so
authorised;
(c) a certification shall be taken to be signed by a person if—
(i) it purports to be authenticated by his or her signature or
initials whether handwritten or not; and
(ii) it is not shown that the signature or initials was or were
placed there by himself or herself or by any person authorised to
use the signature or initials for the purpose of certificating
transfers on the company’s behalf.
PRIORITIES.
Where there are competing claims to the shares and one of the
claimants is on the register, he will have priority over the shares
unless he had notice of the prior equitable claim.
THE COMPANY LIEN
This is usually regulated by the company’s Articles, which give
the company a lien on the shares of a member, who has not fully
paid for them. The lien is basically an interest and it covers the
amount unpaid on the shares.
FORGED TRANSFER.
These are null and void in that they do not affect the real owner.
Consequently, a person who lodges a transfer for registration
impliedly warrants that it is genuine. If it is not, he is liable to
indemnify the company from liability.

MORTGAGE OF SHARES
Shares can be mortgaged to raise capital. There are two types of
mortgages:
• Legal mortgages
• Equitable mortgages.
A legal mortgage is one where upon borrowing money, a
borrower executes a transfer of his shares, by way of mortgage,
to the lender. The transfer is registered with the registrar of
companies and the company. The instrument of transfer
indicates the terms of the mortgage and also provides for re-
transfer when the loan has been repaid. The lender is entitled to
payment of dividends on the shares and to vote at the company’s
general meetings.
Should the mortgagor default in repaying the loan, the
mortgagee may sell the shares without recourse to the court,
since he is the legal owner thereof.
An equitable mortgage is where the borrower deposits his share
certificate with the lender as a security. If the borrower defaults,
the lender can apply to court for the sale of shares.
The usual practice is for the borrower to deposit the relevant
certificate plus a blank transfer signed by him, with the lender.
If the borrower defaults, the lender has an implied power to sell
the shares.
CALLS ON SHARES
It is common for the articles to give the director’s power to
make calls on members regarding sums of money that remain
unpaid on their shares. The call must be made in accordance
with the articles; otherwise it will be regarded as null and void.
Article 15 (1) of Table A provides that the directors may from
time to time make calls upon the members in respect of it, all or
any monies unpaid on their shares, whether on account of the
nominal value of the shares or by way of premium and not by
the conditions of allotment of the shares made payable at fixed
times.
Article 15 (2) of Table A provides that a call shall not exceed
one fourth of the nominal value of the share or be payable less
than one month from the date fixed for the payment of the last
preceding call.
Article 15 (1) of Table A provides that each member shall
subject to receiving at least 14 days’ notice specifying the time
and place of payment pay to the company at the time and place
specified the amount called on his or her shares.
Article 15 (4) of Table A provides that a call may be revoked or
postponed as the directors may determine.

FORFEITURE AND SURRENDER OF SHARES

Forfeiture and surrender of shares are effective ways of
reductions of capital without the court’s consent although the
shares can be reissued.
The directors have power to forfeit the shares of members if so
authorized by the articles. The power is only exercisable in
respect of non-payment of a call or an installment. In any other
event, the forfeiture will be a reduction of capital contrary to the
Company’s Act.

Article 33 of Table A provides that where a member fails to

answer any call or installment of a call on the day appointed for
payment of the call, the directors may, at any time after that
when any part of the call or installment remains unpaid, serve a
notice on him or her requiring payment of so much of the call or
installment as is unpaid together with any interest which may
have accrued.

Article 34 of Table A provides that the notice shall name a

further day not earlier than the expiration of fourteen days from
the date of service of the notice on or before which the payment
required by the notice is to be made and shall state that if the
payment is not made at or before the time appointed the shares
in respect of which the call was made will be liable to be
forfeited.
Article 35 of Table A provides that where the notice is not
complied with any share in respect of which the notice has been
made shall be forfeited by resolution of the directors to that
effect.
Article 36 of Table A provides that Upon the forfeiture of
shares, they may be sold or otherwise disposed off in a manner
decided upon by the directors.
Forfeiture effectively vests the ownership of the shares into the
company, which may sell or reissue them. The buyer thereof, if
any becomes liable for future calls, while the forfeiting
shareholder ceases to be a member in respect of the forfeited
shares Article 37 of Table A provides that, however, he remains
liable in respect of liabilities on such shares, which were
incurred before the date of forfeiture. Essentially, forfeiture is in
nature of a penalty.
ANNUAL RETURN
Every company must deliver an annual return to the registrar of
companies within 42 days after the holding of an annual general
meeting. Essentially, details relating to members and their
shareholding, change of directors and company secretary must
be supplied.

Annual return to be made by a company having a share

capital.
Section 132 (1) provides that a company having a share capital
shall, once at least in every year, make a return containing with
respect to the registered office of the company, registers of
members and debenture holders, shares and debentures
indebtedness, past and present members and directors and
secretary, the matters specified in Part I of the Fourth Schedule
to this Act and the return shall be in the form and shall be made
up to the date set out in Part II of that Schedule or as near to it as
circumstances admit.

Default in filing annual returns

Subsection (4) provides that where a company fails to comply
with this section, the company and every officer of the company
who is in default is liable to a default fine of twenty five
currency points.
Subsection (5) provides that for the purposes of Part I of the
Fourth Schedule to this Act, "director" and "officer" include any
person in accordance with whose directions or instructions the
directors of the company are accustomed to act.

Annual return to be made by a company not having a share

capital.
Section 133 (1) provides that a company not having a share
capital shall at least once in every calendar year make a return
stating—
(a) the situation of the registered office of the company and the
registered postal address of that office;
(b) in a case in which the register of members is under this Act,
kept elsewhere than at the registered office, the address of the
place where it is kept;
(c) in a case in which any register of holders of debentures of a
company or any duplicate of the register or part of the register
is, under this Act, kept in Uganda, elsewhere than at the
registered office of the company, the address of the place where
it is kept;
(d) all such particulars with respect to the persons who at date of
the return are the directors of the company and any person who
at that date is secretary of the company as are by this Act
required to be contained with respect to directors and the
secretary in the register of directors and secretaries of a
company; and
(e) to what extent the company has complied with the principles
of good corporate governance contained in Table F.

Subsection (2) provides that subject to subsection (1), a

company need not make a return under that subsection either in
the year of its incorporation or, if it is not required by section
140 to hold an annual general meeting during the following year,
in that year.

Default in filing annual returns

Subsection (3) provides that where a company fails to comply
with this section, the company and every officer of the company
who is in default is liable to a default fine of twenty five
currency points.
Subsection (4) provides that for the purposes of this section,
“officer” and “director” include a person in accordance with
whose directions or instructions the directors of the company are
accustomed to act.

Time for completion of the annual return.

Section 134 (1) provides that the annual return shall be
completed within forty two days
after the annual general meeting for the year, whether or not that
meeting is the first or only ordinary general meeting, or the first
or only general meeting of the company in the year and the
company shall within that period forward to the registrar a copy
signed both by a director and by the secretary of the company.

Default in filing returns in time

Subsection (2) provides that where a company fails to comply
with this section, the company and every officer of the company
who is in default is liable to a default fine of twenty five
currency points.
Subsection (3) provides that for the purposes of subsection (2),
"officer" includes any person in accordance with whose
directions or instructions the directors of the company are
accustomed to act.

Activity
Discuss the different ways in which a person may cease to be a
shareholder in a company

Solution
The student is expected to discuss who a shareholder is and also
discuss the different people who have capacity to become
shareholders in a company then also discuss the different ways
in which members can cease to be shareholders in a company

Test Questions
1. Examine the different classes of share that are available
for issue by a company
2. Discuss the difference between forfeiture and surrender
of shares
3. Discuss the process of allotment and the consequences
incase of improper allotment
4. Examine the differences between a share tock and share
warrant
5. Discuss the process of transfer/transmission of shares
6. Discuss the importance and effect of the certificate of
incorporation

TOPIC THIRTEEN

COMPANY FINANCE

At the end of this Chapter, the student will be expected to:

1. Understand the concept of capital as applied in
companies;
2. Analyze the different types of capital a company may
have;
3. Evaluate the different ways in which a company can
raise capital; and
4. Evaluate and analyze the need for maintenance of
capital.

COMPANY FINANCE
Definition of Capital
Capital is the wealth or assets. Technically, it refers to the net
worth of the business i.e. the amount of property that has been
invested in a business.
Types of Capital
• Share capital is contributed by members. In Re Air Inn
Safaris Ltd, it was said that share capital does not
include loans by the members to the company. Share
capital entitles a dividend as a return to that member.
• Credit (loan) Capital is that returnable portion of capital
that entitles interest to the creditor.
• Nominal Capital: this is the authorized maximum amount
of share capital that can be realized. This is the amount
 with which a limited company is registered. At
registration, a company is required to state the nominal
capital, which is divisible into shares of a fixed amount.
This amount remains constant until it is increased or
reduced. If the capital is not enough, the company may
alter it by a special resolution if articles allow.
• Issued capital is the nominal value of shares availed for
subscription and has been allotted. This is a portion of
the nominal capital, which has been issued out to the
shareholders. Usually, only part of the nominal capital is
issued, leaving the company to issue further shares
normally at a premium.
• Capital at call is issued capital not yet paid for.
• Called up capital is the portion of issued capital that the
company has requested for settlement from the holder of
shares that have not been fully paid for who is entitled to
all benefits as if the shares were fully paid provided the
articles of association allow. This is the amount, which
has been issued by the company and actually paid for by
the shareholders. For instance if the issued capital is
worth Shs.10,000 and Shs.50 have been paid up capital
will be Shs.5,000 leaving uncalled capital of
Shs.5,000.the company may later resolve to make a call
of Shs.50 on each share.
• Reserve Capital(S.70 (1)) is a portion of the issued capital
which is at call but is not to be called up except in the
event of winding up that company. It is issued only by a
company limited by shares or by guarantee. A company,
by special resolution decides that any part of its share
capital, which has not been called up, shall not be called
up except in the event of its winding up. Such capital is
known as reserve capital and as such it cannot be
mortgaged.

Raising Capital
Ordinarily when an idea of forming a company has been
conceived, ways and methods of raising capital to make the
company run must be sought. The different ways a copany can
raise capital are:
1. By floating shares for sale
2. By borrowing
3. By ploughing back the profits.
Due to limited funds available to shareholders for purposes of
running large companies with heavy capital involvement, it is
normal to resort to the public, through invitation to subscribe for
shares or debentures in the company as a means of raising
additional funds. This applies basically to public companies.
There are a number of mechanisms by which this is issue of
shares is effected;

Methods of Issue
1. Rights issue:
2. Placings (private)
3. Offers for sale
4. Direct offers e.g. by issuing prospects
5. Offer by tender.

➢ Placings
These take place in the issuing house. A company issues
securities, placing them in the issuing house for purposes of the
latter selling them to its clients. The issuing house (may
purchase securities and place them with clients) or may not
place them with the clients. When it purchases the securities,
then it ceases to be an agent of the company.

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

➢ Bonus issue
A listed company may capitalize part of its reserves by making a
bonus issue to the existing shareholders, and no cash will be
paid to such issues. For instance, if a corporation declares a 1 for
5 bonus issue, that means for every 5 shares held, an existing
shareholder will receive 1 share for free.
Like the rights issue, the bonus issue method is an internal affair
of the company concerned. Under this method, instead of the
company paying to shareholders a dividend it may have
declared, it holds on to those funds by issuing shares to the
shareholders.

➢ Rights issue/script issue

A corporation may make a rights issue to its ordinary
shareholders. Existing shareholders will be given the rights to
buy a new share at a price lower than that listed in the stock
exchange.
The company invites its own shareholders to subscribe for new
shares or debentures. As an incentive, such securities are sold at
a lower price than what they would normally obtain in the new
market. But the existing shareholders will subscribe to the new
issues only when the past performance and future prospects of
the company are good.

➢ Offer for sale

This method involves a corporation selling a new issue of share
to an issuing house, and the issuing house will bear the risks of
selling shares to other investors.

The company concerned issues its securities in an issuing house

and the latter sells them to the public at a higher price. This
method has a number of advantages to this company:

1. The company is not responsible for unsuccessful issue to

the public.
2. It is the issuing house which bears the responsibility for
the prospectus.
3. Unlike the method of placings, the company does not pay
anything since the issuing house pays itself a commission, the
difference of the price at which the sells and the price which he
bought.

➢ Private placings
This method involves an issue of new shares to financial
institutions and large private clients rather than making an
invitation to the general public to subscribe to shares.

➢ Direct issue
This involves a corporation making an invitation to the general
public to subscribe or purchase its shares. For instance, a listed
company made a public issue of 1,000,000 New Ordinary
Shares of $1 each at an issue price of $1.20 per ordinary share
payable in full on application.

The company itself deals with the public without an intervention

of the issuing house. This method is cumbersome for a number
of reasons.
- The company has to use a prospectus i.e. legal liability
are conferred upon a company.
- The company bears a risk of unsuccessful issue.
- Although it may protect itself against unsuccessful
issue by underwriting such issue, the underwriters
have to be paid a commission for that issue.

Usually the Articles of Association provides that the

commission must not exceed 10% of the price at which the
shares are issued and that there must be authority from the
articles to pay that commission. This means that a company
cannot transact with underwriters who demand more than 10%
of the price. If the articles authorise more than 10% the company
cannot exceed such figure. And finally such payment must be
disclosed in the prospectus.
Underwriting.
Upon the formation of a company, the promoter, where
appropriate, ensures that the share offered to the public are
underwritten. However, where an existing company is desirous
of raising capital, it is the directors’ duty to ensure that new
shares are underwritten. The aim of underwriting is to ensure
that the issue of shares is successful. Underwriting is a form of
insurance against possible poor reception of the issue by the
public. (an underwriting agreement means an agreement entered
into before the shares are brought before the public, that in the
event of the public, not taking the whole of them or the number
mentioned in the agreement, the underwriter will, for an agreed
commission, take an allotment of such part of the shares as the
public has not applied for.) Like all forms of insurance, the
promoters must make full disclosure (duty of good faith,
otherwise the contract can be rescinded.
Underwriting commissions are different from brokerage i.e.
sums payable to a share broker who agreed to place shares and
not to take the shares.
The Prospectus
According to S.2, a prospectus means a prospectus, notice,
circular, advertisement or other invitation offering to the public
for subscription or purchase and includes;
(a) A prospectus relating to an offer of debt securities to the
public;
(b) A prospectus in respect of any other securities to the
public. The definition in S.2 is very vague and
consequently the courts have come up with some guidelines
to be employed in determining whether an invitation
amounts to a prospectus or not. There must be voluntary
delivery.

Firstly, according to Nash Vs Lynd (1929) AC 158, for a

document to amount to a prospectus, not only must it be
delivered but also there must be some publicity with the aim of
inducing subscription e.g. if a thief stole the document and
publicized the issue of shares which the public purport to buy,
the document does not amount to a prospectus.

Secondly for a document to amount to a prospectus, it must be

issued to the public.
Then what amounts to the Public?
The section seems to indicate that a public means a public
whether selected by members or debenture holders of the
company concerned or as clients of the person issuing the
prospectus or in any other manner. In Re Govt Stocks & other
Securities investment Co. Ltd Vs Christopher (1956) 1 WLR
237 a company issued a circular in which it offered to acquire
shares in another company in return for its own shares. The
question was did that circular amount to a prospectus. The court
held that where an offer is acceptable only by the shareholders
of a company, such an offer is deemed not to be to the public
unless the shares are to be issued under renounceable letters or
terms.

Renounceable letters are contracts of allotment of shares under

which the allotees can pass those shares to third parties. Where
the shares have been issued at non-renounceable terms, the
allottee cannot sell them to a third party.

Secondly, the invitation must be one inviting the public to

subscribe or purchase the securities. The terms subscribe or
purchase means taking or agreeing to take securities for cash.

Legal Aspects of A Prospectus

• A prospectus must be issued by or on behalf or in relation to a
company or an intended company.
• It must be dated;
• It must be delivered to the registrar for registration;
• If it contains a statement by an expert, that expert’s written
consent must accompany the prospectus

If these requirements are contravened, the company and any

office responsible for that prospectus are liable to a fine per each
day the default continues.

Contained in the prospectus are the following:-

• The number of founders or management
• The nominal share capital
• Types of shares and the interest of the holders thereof in
the company’s property and profits.
• The share qualification of directors.
• Names, description and addresses of directors.
• Particulars of contracts relating to property acquired and
liabilities of the company.
• The names and addresses of the auditors.
Liability for Defective Prospectus
Under common law an aggrieved subscriber can institute an
action for deceit or misrepresentation which entitles him to
damages or rescission of a contract or allotment. However, there
are a number of limitations to these remedies.

Limitations to damages for misrepresentation

The court may deny the action or dismiss it as disclosing no
cause of action unless:-
i. The plaintiff's complaints must be against a
misrepresentation of fact and not of merely an opinion e.g. if we
say, I hope to become an accountant" as opposed to "as I am
going to become an accountant".
ii. That misstatement or misrepresentation must be true if a
prospectus omits stating what it should have mentioned, then a
company cannot be sued e.g. we are going to import maize from
Uganda without mentioning the part of Uganda and bearing in
mind that some parts of Uganda are insecure. However, if a
statement mentions articulately the area, then it can be sued.

Limitations for rescissions

1. The plaintiff must indicate his intention of rescinding the
contract i.e. immediately i.e. he must not do anything which
amounts to an affirmation of the contracts. If he applies for
shares on the basis of a defective prospectus, he must
immediately return them on acquisition of this knowledge e.g.
attending meeting, setting shares to third party, receiving
dividends etc.
2. He must take steps to rescind the contract of allotment
before winding up proceedings have commenced. The rationale
is to safeguard the interests of creditors since such a shareholder
would avoid his liability or even fall among the directors to that
company. However, there are 2 exceptions:

Statement In Lieu Of a Prospectus

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

DEBENTURES AND BORROWING (LOAN CAPITAL)

Authority to Borrow:
Article 79 (1) of Table A provides that the directors may
exercise all the powers of the company to borrow money and to
mortgage or charge its undertaking, property and uncalled
capital, or nay part of it and to issue debentures, debenture stock
and other securities but the money borrowed or secured shall not
at any time without the previous approval of the company in
general meeting exceed the nominal amount of the share capital
of the company but the lender or other person dealing with the
company shall not be concerned to see or inquire whether the
limit is observed.

Article 79 (1) of Table A provides that a debt incurred or

security given in excess of the limit referred to in sub regulation
(1) is not invalid or ineffectual except in the case of express
notice to the lender or the recipient of the security at the time
when the debt was incurred or security given that the limit
imposed by sub regulation (1) had been or was as a result
exceeded.

In practice, the power to borrow money is provided for in the

articles with an indication that the directors may borrow money
up to a certain limit. The excess over that limit requires the
sanction of the general meeting. Once it is established that the
company has power to borrow money; then there is an implied
power to charge its property for purposes of securing the
repayment of the money borrowed.
Corporate borrowing may be by line of credit or overdraft or a
long term bank loan. Loans are contractual agreements and a
loan obtained from a bank by a company will be based on a
contract between a company and a bank. Accordingly, there
must be a written document evidencing the loan e.g. a loan
agreement and the terms of these agreements vary depending on
the nature of the loan whether it’s a term loan or an overdraft.
Thus the financial institution must take into account the fact that
it is dealing with an entity which is a legal fiction and it is
presumed to have constructive notice of the contents of the
MOA and AOA. Therefore banks usually have terms that are
intended to provide some protection for the bank and also to
create a framework for the recovery of this loan. For instance,
the bank may require that the company should provide security
i.e. a collateral (security) over certain assets of the company and
if the company fails to pay the bank then the bank can seize the
assets of the security applies. These are technically referred to as
default clauses,
In the corporate context, financial institutions will require the
execution of a document called a debenture which provides
terms and conditions of the debt. Debentures are subject to the
contractual terms and depending on the nature of the debenture
executed. But generally, debentures will include terms such as
the control of any other debt in the company, interest to be paid
on the principal, and in the case of default, the right to seize the
assets of the company and the right to appoint receivers or
managers or board of directors.
DEBENTURES.
A debenture is defined under section 2 to include debenture
stock, bonds and any other securities of a company whether
constituting a charge on the assets of the company or not.
A debenture is also defined as a document acknowledging the
indebtedness of the company, which is normally, but not
necessarily secured by a charge over property. The debenture is
an acknowledgement of a distinct debt. Consequently, a
company may raise money by way of borrowing from the public
and in return issue debentures. Incidentally a private company is
not allowed to raise money by borrowing from the public
(Section 5).
Where the debenture is not secured, the document will be
referred to as a naked debenture or unsecured loan stock.
The document will also ordinarily contains a promise to repay
the principal sum borrowed on a given date with interest at
specified intervals.
Instead of a company raising capital by borrowing and issuing
debenture the company may decide to create a debenture stock.
A debenture stock may be a defined as a loan fund which is
created by the company and it’s divisible among various
creditors who each holds a debenture stock certificate.

Provisions as to registers of debenture holders.

Section 98 (1) provides that a company which, issues a series of
debentures shall keep at the
registered office of the company a register of holders of the
debentures.
Subsection (3) provides that a company shall give notice to the
registrar of the place where the register and any duplicate is kept
and of any change in that place.

Rights of debenture holders and shareholders to inspect the

register of debenture holders and to have copies of a trust
deed.
Section 99 (1) provides that a register of holders of debentures
of a company shall, except when duly closed be open to the
inspection of the registered holders of the debentures or any
holder of any shares in the company without fee and to any other
person, on payment of a fee of half a currency point or such less
sum as may be prescribed by the company.

Subsection (2) provides that the company may, in a general

meeting, impose reasonable restrictions on inspection under
subsection (1) but the restrictions shall not be such as to reduce
the period of inspection to less than two hours in each day.

Subsection (3) provides that every registered holder of

debentures and every holder of shares in a company may require
a copy of the register of the holders of debentures of the
company or any part of it on payment of a reasonable fee
prescribed by the company for every hundred words required to
be copied.

Subsection (4) provides that a copy of any trust deed for

securing any issue of debentures shall be forwarded to every
holder of any such debentures at his or her request on payment
in the case of a printed trust deed of the sum of a reasonable fee
prescribed by the company or, where the trust deed has not been
printed, on payment of a reasonable fee prescribed by the
company for every hundred words required to be copied.

Default in complying with the above provisions

Subsection (5) provides that if inspection is refused or a copy is
refused or not forwarded, the company and every officer of the
company who is in default is liable to a default fine of twenty
five currency points and further fine of five currency points for
each day the default continues.
Subsection (6) provides that where a company is in default
under this section, the registrar may by order compel an
immediate inspection of the register or direct that the copies
required shall be sent to the person requiring them.
Subsection (8) provides that a person aggrieved by a decision of
the registrar under this section may appeal to court.

Liability of trustees for debenture holders.

Section 100 (1) provides that subject to this section, any
provision contained in a trust deed for securing an issue of
debentures or in any contract with the holders of debentures
secured by a trust deed is void in so far as it would have the
effect of exempting a trustee under the trust deed from or
indemnifying him or her against liability for breach of trust
where he or she fails to show the degree of care and diligence
required of him or her as trustee, having regard to the provisions
of the trust deed conferring on him or her any powers,
authorities or discretion.

Differences between a debenture and debenture stock

▪ As a general rule, debentures rank according to the time of
issue. The first debenture takes priority over all other
debentures on repayment. On the other hand, since a
debenture stock is a fund, each beneficiary ranks in pari
passu (equally) with others (no priorities).
▪ Easy transferability - The debenture covers a district debt
which is indivisible and therefore must be transferred as a
whole in case the present holder wishes to get money from
it. On the other hand a debenture stockholder can always
sub-divide his holdings and transfer the same to a person of
his choice.

THE TRUST DEED

The trust deed contains the company’s covenant to repay with
interest the money borrowed. It will specifically charge the
company’s property and indicate when the charge becomes
enforceable. This is usually done where the company defaults in
the payment of interest. The deed also provides powers to deal
with the charged property and to appoint a receiver to enforce
the security.

PAYMENT OF DEBENTURE HOLDERS

Debenture holders are not members of the company. Their
interest can be paid out of the company’s capital. In contrast
dividends on shares can only be paid out of profits. Again in
contradiction with shares, debentures can be issued at a discount
since they are not part of the company’s capital. In the same
way, a company can buy its own debentures, whereas it cannot
buy its own shares. Debentures are convertible into shares.
PRIORITY.
Where debentures are issued in pari passu and there are
insufficient assets to pay all the debenture-holders in full, the
available amount would be distributed in proportions to the
amount owing to each of them. Where they do not rank pari
passu, they will be paid according to the date of issue.
Classes:
(a) Registered Debentures:
These are payable to registered holders. They indicate the
amount secured and interest thereof are payable to the person
named therein or the registered holder.
(b) Bearer Debentures:
These are payable to the bearer for the time being. This type of
debenture is negotiable. It can be transferred by mere delivery.
Remedies for Debenture Holder:
1.Can exercise this power to sale or prove his claim to the
liquidator.
2. Where the debenture is not registered, the holder has to prove
his debt in an ordinary suit.
CHARGES:
A charge is defined in section 2 to mean a form of security for
the payment of a debt or performance of an obligation consisting
of the right of a creditor to receive payment out of some specific
fund or out of the proceeds of the realization of specific property
and includes a mortgage.
Thus, a charge is an interest or encumbrance on the assets of the
company. It is a type of security given by a company when it
borrows money.

Creditors may be secured or unsecured.

Such collateral assets attached to secured creditors are
sometimes referred to as charges. A secured creditor may have
his security or charge in form of a fixed charge or a floating
charge.

Fixed Charge:
A fixed charge is attributed to a creditor entitled to a particular
asset as security while a floating charge relates to a creditor who
is entitled to any of the company's assets that have no fixed
charge at all. This is a mortgage of defined property and the
company cannot deal with it without the mortgagees consent. It
is advantageous over the floating charge because you cannot
deal with the property without the consent of the
mortgagee/debenture holder.

Floating Charge.
A floating charge is that form of charge or security which covers
assets (current assets) of the same generic name but which assets
are indeterminable at any given time since the borrower has to
use them during his day to day business to the extent of
disposing them and replacing them with others. This affects the
company’s property, which is constantly changing its advantage
over a fixed charge is that the company can continue dealing
with the property until the charge crystallizes. It was defined in
Illingworth V Houldsworth (1904) as ambulatory and shifting
in nature ….the property it is intended to affect until some event
occurs or some act is done which causes it to settle ….
A floating charge crystallizes (becomes fixed) the moment there
is default to repay by the company and notice has been given to
the company for default.

Registration of Charges:
Section 105 (1) provides that subject to this Part, every charge
created by a company registered in Uganda and being a charge
to which this section applies is, so far as any security on the
company’s property or undertaking is conferred by it, is void
against the liquidator and any creditor of the company, unless
the prescribed particulars of the charge, together with the
instrument, if any, by which the charge is created or evidenced
are delivered to or received by the registrar for registration in a
manner required by this Act within forty two days after the date
of its creation.

Subsection (2) provides that subsection (1) shall apply without

prejudice to any contract or obligation for repayment of the
money secured by the charge and when a charge becomes void
under this section the money secured by the charge shall
immediately become payable.

Subsection (3) provides that this section applies to the following

charges—
(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge created or evidenced by an instrument which, if
executed by an individual, would require registration as a bill of
sale;
(d) a charge on immovable property, wherever situated or any
interest in it;
(e) a charge on book debts of the company;
(f) a floating charge on the undertaking or property of the
company;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship; and
(i) a charge on goodwill, on a patent or a licence under a patent,
on a trade mark or on a copyright or a licence under a copyright.

Charges created outside Uganda

Subsection (4) provides that in the case of a charge created
outside Uganda comprising
property situated outside Uganda, the delivery to and the receipt
by the registrar of a copy verified in the prescribed manner of
the instrument by which the charge is created or evidenced shall
have the same effect for the purposes of this section as the
delivery and receipt of the instrument itself and forty two days
after the date on which the instrument or copy could in due
course of post and if dispatched with due diligence, have been
received in Uganda shall be substituted for forty two days after
the date of the creation of the charge as the time within which
the particulars and instrument or copy are to be delivered to the
registrar.
Subsection (5) provides that the instrument creating or
purporting to create the charge may be sent for registration
under this section notwithstanding that further proceedings may
be necessary to make the charge valid or effectual.
Subsection (12) provides that for the purposes of this Part a
charge shall be taken to be created in the case of an instrument
creating a charge, on the date of the execution of the charge by
or on behalf of the company, and in the case of a charge created
by deposit of title deeds on the date of the deposit of the title
deeds.

Duty of a company to register charges created by the

company.
Section 106 (1) provides that it shall be the duty of a company
to send to the registrar for registration the particulars of every
charge created by the company and of the issues of debentures
of a series, requiring registration under section 105, but
registration of any such charge may be effected on the
application of any person interested in the charge.
Subsection (2) provides that where registration is effected on
the application of some person other than the company, that
person is entitled to recover from the company the amount of
any fees properly paid by him or her to the registrar on
registration.

Default in registering a charge

Subsection (3) provides that if a company fails for forty two
days or such extended period as the registrar may order to send
to the registrar for registration the particulars of any charge
created by the company or of the issues of debentures of a
series, requiring registration, then unless the registration has
been effected on the application of some other person, the
company and every officer or other person who is a party to the
default is liable to a default fine of fifty currency points.

Subsection (4) provides that for the purpose of subsection (3)—

(a) in the case of a mortgage the forty two days referred to in
that subsection shall be taken to run from the time of filing the
mortgage instrument with the registrar of titles;
(b) in the case of a debenture, the time shall run from the date of
execution of the debenture.
Certificate of registration of a charge.
Section 108 (1) provides that the registrar shall issue a
certificate signed by him or her of the
registration of the charge registered under this Part and within
any period allowed under this Part, stating the amount secured
by the charge.

Subsection (2) provides that the certificate shall be conclusive

evidence that the requirements of this Part as to registration have
been compiled with.

Endorsement of certificate of registration on debentures.

Section 109 (1) provides that the company shall cause a copy of
every certificate of registration given under section 108 to be
endorsed on every debenture or certificate of debenture stock
which is issued by the company and the payment of which is
secured by the registered charge.

Default in endorsing
Subsection (3) provides that where a person knowingly and
willfully authorises or permits the delivery of any debenture or
certificate of debenture stock which under this section is
required to have endorsed on it a copy of a certificate of
registration without the copy being endorsed upon it, he or she
shall without prejudice to any other liability, is liable to a fine of
twenty five currency points.

Entries of satisfaction and release of property from charge.

Section 110 provides that the registrar on evidence being given
to his or her satisfaction with respect to any registered charge—
(a) that the debt for which the charge was given has been paid or
satisfied in whole or in part; or
(b) that part of the property or undertaking charged has been
released from the charge or has ceased to form part of the
company’s property or undertaking, may enter on the register a
memorandum of satisfaction in whole or in part, or of the fact
that part of the property or undertaking has been released from
the charge or has ceased to form part of the company’s property
or undertaking, as the case may be, and where he or she enters a
memorandum of satisfaction in whole he or she shall, if
required, furnish the company with a copy of the memorandum
of satisfaction.

Extension of time to register charges.

Section 111 (1) provides that the registrar, on being satisfied that
the omission to register
a charge within the time required by this Act or that the
omission or misstatement of any particular with respect to any
such charge or in a memorandum of satisfaction was accidental,
or due to inadvertence or to some other sufficient cause or is not
of a nature to prejudice the
position of creditors or shareholders of the company or that on
other grounds it is just and equitable to grant relief, may, on the
application of the company or any person interested and on such
terms and conditions as seem to the registrar just and expedient,
order that the time for registration shall be extended or as the
case may be, that the omission or misstatement shall be rectified.

Default in compliance with the above provision

Subsection (2) provides that where a person defaults in
complying with the requirements of this section, he or she is
liable to a default fine not exceeding ten currency points for
each day of which the default continues.

PLOUGHING BACK PROFITS:

A company can decide to raise capital by ploughing back profits
without declaring any dividends or proposing a dividend and
instead of paying it out, employ a bonus issue.

OTHER WAYS OF RAISING CAPITAL

FAMILY AND FRIENDS:
When your own funding is not an option, there is another great
way to raise capital – friends and relatives. Your family and
friends could be approached to chip in, but even if they do have
the financial resources, it usually won’t be long before you
exhaust your options here.
Though it may seem shameful to ask them for capital, it seems
to be quite a popular option because according to a survey it is
the option of choice for 30% of entrepreneurs who are looking
for ways to raise capital. If you decide to go this way for
funding, you must have your attorney draw up a business
contract because though you approach people you know for
funds in an informal, non-business way, business is best done
transparent, telling them how their investment will profit and
ensuring that you will keep up your part of the agreement is the
most professional way to do business.

EMPLOYEES:
You could invite your employees to participate in your business
success and growth through an employee share ownership plan
which would provide you with some capital to fund expansion,
and release your equity.

GOVERNMENT GRANTS:
Funding may be available to assist in the growth of your
business, particularly for innovative projects, but these are rare,
often difficult to access and can be laden with restrictions
inhibiting your entrepreneurial flare.

INVESTORS:
Attracting investors or venture capitalists (sometimes described
by some as ‘vulture’ capitalists) is another useful option but can
be difficult to organise and place you under a lot of pressure to
perform in a very short space of time. Most will not consider
investing in your company unless you can tick all boxes on a
detailed list of criteria including a clearly defined and formalised
exit strategy.

PERSONAL CAPITAL
When you have money of your own, why look at external
sources? But before you opt for this, make sure you have a good
talk with subject matter experts, look into the long-term
consequences, and decide which form of equity fund is the best
way for raising capital via equity. You could have savings,
mutual funds, life insurance or credit cards (the last being the
most risky funding option), so when you use the funds for your
business venture you will need to understand which of the
options have scope of bringing in better returns on investment.

ANGEL INVESTORS
Private investors are those who are interested in making money
with their capital through non-traditional markets. These
“angels” could be anyone – someone you know, your banker,
your attorney, like-minded individuals, or an individuals who for
the love of business, seek out new opportunities to invest in
return for equity ownership. These people can give you ways to
raise capital, guidance for start-ups, improve your ideas and
mould your business, but they usually demand high returns for
their investments.

Activity
Examine the different ways in which a company can raise
capital
Solution
The student is required to define what capital and then discuss
the available ways through which a company can raise capital
e.g. floating shares and under this the student is expected to
discuss the different ways a company can float its shares to the
public.

Test Questions
1. Discuss the different types of capital that a company may
hold
2. Discuss the concept and importance of underwriting as
applied in company law
3. Examine the difference between the prospectus and the
statement in lieu of the prospectus
4. (a) Discuss the various methods of issue of shares clearly
pointing out the advantages and disadvantages of each
(b) Which of these methods would you recommend
to the managers of Uganda’s Stock Exchange if they
sought your professional opinion
5. What is the legal importance of share certificate?

CHAPTER FOURTEEN

ENFORCEMENT OF MEMBERS RIGHTS

At the end of this Chapter, the student will be able to generally

understand the position of members in a company and the
remedies available to an aggrieved shareholder and the
Procedure and specifically the student will be able to:
1. Understand the concept of the majority versus minority
rule;
2. Examine the proper plaintiff; and
3. Evaluate the exceptions under which the proper plaintiff
principle will not apply or circumstances through which
 members can enforce their rights.

THE POSITION OF MEMBERS IN A COMPANY

(REMEDIES AVAILABLE FOR AN AGGRIVED
SHAREHOLDER AND THE PROCEDURE)

Remedies available to minority shareholders by the majority

who are alleged to be oppressive, unfair or prejudicial.

The recent trend is that management is now vested in the board

of directors (Article 80 of Table A) or the shareholders in a
general meeting.

To what extent do the minority shareholders have control over

the conduct of their fellow shareholders?

In the process of managing corporate affairs, the minority

shareholders are bound to be aggrieved by omissions or
commissions of their fellow shareholders or decisions taken or
made in the company.

According to Sealy, all powers of the company rest with one or

the other of the two organs ie shareholders in the general
meeting or the board of directors. That in taking decisions, the
two organs base on the majority rule i.e. the decisions of the
general meeting is the decision of the majority – 51% of the
votes or shares are what constitutes the majority.

In addition, power lies with the majority and the minority must
in principle, accept the decisions of the majority. They must
acknowledge that this power enjoyed by the majority is a fact of
business life and it is also democratic. That if the minority want
to bring about change, and then it is open for them to seek for
change through the normal democratic processes which are:
- lobbying
- persuasion
- publicity

The issue then is whether the members have a right of suing the
directors who are managing the company.It has generally been
held that the courts cannot entertain such a suit, because the
wrong has been done to the company. Thus where a wrong has
been committed to the company, the proper plaintiff to sue for
the wrong is the company and not any shareholder. This is what
is referred to as the proper plaintiff principle.
The proper plaintiff principle is derived from the case of FOSS
Vs HARBOTTLE. In this case, the plaintiffs instituted a suit or
brought an action against the directors of a company who had
sold their own land to the company at an overpriced value. The
court held that even if this allegation was true, if something
injurious has been done to the company, the proper plaintiff to
sue is the company and not the individual or a group of
shareholders.

This raises what is commonly referred to as the proper plaintiff

principle. If a company is injured or aggrieved by an omission or
commission of a group of shareholders, it is the company to
complain and not the shareholders.

The wisdom of FOSS Vs HARBOTTLE can only be

appreciated or derives its history from the case of CARLEN Vs
DRURU [1812] 1 B& B where the court observed that “this
court is not to be required on every occasion to take the
management of every play house and brew house in the
kingdom” In other words, court should not interfere
unnecessarily with the matters of the boardroom.

In MACDOUGAL Vs GARDENER [1875] 1 CH 13, the court

observed that the court would be overwhelmed with cases if
every dispute about the internal management of the company
had to be brought to court. This decision establishes the true
rationale of FOSS Vs HARBOTTLE.

The rationale of FOSS Vs HARBOTTLE is:

a) to prevent or limit unnecessary suits and futile actions
b) to protect the company from unnecessary suits
c) to protect the principle of corporate personality

THE JUDICIAL ANALYSIS OF THE RULE

The rule in FOSS Vs HARBOTTLE consists of two
complimentary arguments/ principles:
a) the right of the majority to bar a minority action whenever
they might lawfully ratify an alleged misconduct
b) the exclusive right of the company to sue upon a corporate
course of action as a person (SLAOMON Vs SALOMON)
and this is referred to as the proper plaintiff principle

In a single statement, these two grounds or arguments form the

basis of the case in FOSS Vs HARBOTTLE. It has been
contended that the will of the majority vis a vis the minority is to
be identified with that of the company. Accordingly, the
company is prima-facie the proper plaintiff in actions
concerning its affairs.

It must be noted that the case in FOSS Vs HARBOTTLE did

not distinguish between a corporate wrong and a personal
wrong.

Enforcement of the Member's Rights/(Exceptions to the rule

in Foss vs Harbottle)
We are here concerned with the avenues through which
members can enforce their rights e.g. payment of declared
dividends, removal of incompetent directors, etc. He can do this
under statute law or under common law, depending on whether
it is personal or derivative actions.

A. Enforcement under Common Law

The following are circumstances under which an individual
shareholder is allowed to sue on his behalf notwithstanding the
fact that the wrong was committed against the company.
▪ Infringement of personal rights of the member: The
infringement of personal rights is considered as the most
important exception. Where and once the rights of a personal
shareholder have been infringed or threatened, the aggrieved
shareholder can bring a personal action notwithstanding the
fact that the company is aggrieved as well. This action relates
to constitutional rights of a shareholder. It is limited to
constitutional rights of a shareholder ie the basic rights under
the Companies Act e.g. the right to vote. If the wrong being
complained of amounts to an infringement of the personal
rights of a shareholder, he can petition under a personal action
notwithstanding that the company had been wronged. In
Misango Vs Musigire (1966) E.A. 390, a general meeting
purported to alter Articles of Association to the detriment of
the plaintiff. Nine (9) shareholders attended that meeting and
voted in favour of the resolution. Sir Udo Udoma C.J, held
that the action could be determined in so far as what was
complained of infringed on the rights of the plaintiff.
▪ Illegal/ultra vires transactions: Where the act being
complained of is illegal or ultra vires, any aggrieved
shareholder can proceed to court notwithstanding the rule in
Foss. Vs Harbottle e.g. in Mawanda's case, it was held that
contravention of S.7,8,13 & 14 of the Act is an ultra vires act
and any aggrieved shareholder could sue on it. In HUTTON
Vs WESTCOKE, the company entered into an agreement
which would lead to its winding up by selling its major assets.
 After the sale, the shareholders passed a resolution to effect
compensation to the company’s employees and remuneration
to its directors. A personal action was brought since this was
ultravires. The court held that the plaintiff’s action was in
order although the payment was to affect the company
primarily.

▪ Fraud on the minority shareholder; This has been descried

as the true exception to the rule in FOSS Vs HARBOTTLE.
This exception includes two components:
a) There must be a fraudulent act being carried out in the
company
b) Those committing the act are the people in control either as
majority shareholders or board of directors.

What constitutes control may include defacto as well as

dejure control. Control is defined in PRUDENTIAL
ASSURANCE where court concluded that it is necessary to
prove that the breach/fraud was committed by the people in
control.

In North West Transport Company Vs Beatty (1887) AC

589 a director of a company in which he was the majority
shareholder used his votes in favour of a contract to buy his
own shop. Shareholders sued so that the resolution could be
set aside. The court held that every shareholder has a right to
vote on any question even if he has a personal interest, which
is opposed to the interests of the company. However, there are
a number of instances when the right of voting can be
restricted and this is when the “majority” are said to have
committed a "fraud" on the "minority".

According to the case of Borland Vs Earle (1902) AC 83,

fraud does not mean deceit, rather it means an abuse of power
as well as acts of a fraudulent nature e.g. when the majority
are attempting to appropriate themselves money, property or
advantages belonging to the company, the minority
shareholders are entitled to participate. Consequently, the
courts have held that where there is:-
o expropriation of the company's properties
o release of director's duty of good faith
o expropriation of members' property.
Then courts will interfere with a member's right of voting
since such voting amounts to fraud on the minority.
In DANIELS Vs DANIELS [1978] CH 406, at page 414,
Justice Templeton held that the negligence or breach of duty
 which resulted in loss of the company did amount to fraud to
the minority.
▪ Expropriation of member’s property such as declared
dividends; Majority shareholders must not use their powers to
expropriate the shares of minority shareholders. If they do so,
that will amount to a fraud and the transaction will be set
aside. In Brown Vs British Wheel Co (1979) 1 ch 290, the
majority shareholders wanted to buy the minority
shareholders out and the court held that the action was not
bonafide to the company as a whole.
▪ Breach of Articles of Association:If a breach of articles takes
place, any aggrieved shareholder can proceed to court
notwithstanding that the company itself may have been
prejudiced. In Edwards Vs Hallowell, the trade union and its
executive committee members were sued for having used
union dues by a resolution of a simple majority and contrary
to the articles of association. It was held that a breach of the
articles by a company or any other shareholder can be
challenged by any member without the restrictive effect of the
rule in Foss vs. Harbottle.
▪ Interests of justice: Courts are ready to entertain any action of
a shareholder which falls outside the above exceptions if it is
in the interests of justice e.g. in Daniel's case, a shareholder
complained that the majority shareholders who were also
directors negligently sold a company's plot of land to one of
the directors at a price of £ 120,000. The issue before the
court was whether this suit should be maintained in light of
the rule in Foss Vs Harbottle since there was no allegation of
fraud. It was held that the shareholders could maintain the
suit. The judge said that it is one thing to put up foolish
directors but it is another thing to put up directors who are so
foolish to enter such a transaction.
▪ Release of directors' duties of good faith
A general meeting cannot authorize directors to breach their
duty of good faith nor can it ratify any such breach. Once it
does so, that will amount to a fraud on the minority and the
transaction in issue will be set aside. But the general meeting
can legally release the Director of the duty of skill and care.
▪ Expropriation of the company's property
This can be illustrated by the case of Munier V Hoopers
Telegraphic Works (1874)L.R, 9 Ch.1) APP 350, two
company's A ltd and B ltd existed. A ltd was the majority
shareholder in B ltd. B ltd received a contract to construct a
telegraphic line. A ltd appropriated the contract to itself and
immediately resolved to wind up B ltd. Minority shareholders
in B ltd sued. It was held that the defendant company as a
 majority shareholder had benefited from the contract, which
was the property of its subsidiary. The minority shareholders
were entitled to participate in the benefits of the contract
which the defendant company had misappropriated. However,
winding up had already taken place and there was no
alternative remedy.

❖ A Derivative Action
This is an action which a shareholder who cannot proceed under
common law because of the rule in Foss Vs Harbottle or under
statute can take a complaint to court for the wrongs committed
in his company. The plaintiff is not suing on his behalf but on
behalf of the company. However there are some conditions that
a shareholder must satisfy before a derivative action can be
entertained.
1. The plaintiff must have "clean hands" i.e. not to have
connived with other members or the directors. He who comes
to equity must do so with clean hands; and
2. It must be proved impracticable for the company to sue by
itself. For example, where the other shareholders are also the
directors committing the wrongs complained of against the
company.
3. The action must allege fraud on the minority.
4. The plaintiff is not suing on his own behalf or on behalf of the
others but rather on behalf of the company

❖ A Representative Action
This is a hybrid of the two actions above. In all the above
actions, the plaintiff must have clean hands.
In a representative action, one person represents the rest in
pursuit of a common cause.

B. STATUTORY LAW
Section 247 provides for Alternative remedy to winding up
in cases of oppression.
Subsection (1) provides that a member of a company who
complains that the affairs of the company are being conducted in
a manner oppressive to some part of the members including
himself or herself or in a case falling within section 178(5) may
make a complaint to the registrar by petition for an order under
this section.

Role of the Registrar

Subsection (2) provides that where on any petition under
subsection (1) the registrar is of the opinion—
(a) that the company’s affairs are being conducted as referred to
in subsection (1); and
(b) that to wind up the company would unfairly prejudice that
part of the members but otherwise the facts would justify the
petitioning for a winding up order on the ground that it was just
and equitable that the company should be wound up, the
registrar may, with a view to bringing to an end the matters
complained of, make such order as he or she thinks fit whether
for regulating the conduct of the company’s affairs in future or
for the purchase of the shares of any members of the company
by other members of the company or by the company and in the
case of a purchase by the company, for the reduction
accordingly of the company or by the company’s capital, or
otherwise.

Effect of the Orders made

Subsection (3) provides that where an order under this section
makes any alteration in or addition to any company’s
memorandum or articles, then, notwithstanding anything in this
Act but subject to the provisions of the order, the company
concerned shall not have power without the leave of the court to
make any further alteration in or addition to the memorandum or
articles inconsistent with the provisions of the order; but, subject
to this subsection, the alterations or addition made by the order
shall be of the same effect as if duly made by resolution of the
company and the provisions of this Act shall apply to the
memorandum or articles as so altered or added to accordingly.

Registration of Order
Subsection (4) provides that a certified copy of an order under
this section altering or adding to or giving leave to alter a
company’s memorandum or articles shall, within fourteen days
after the making of the order, be delivered by the company to the
registrar for registration.

Default in complying with the above

Subsection (5) provides that where a company makes default in
complying with subsection (4), the company and every officer of
the company who is in default is liable to a default fine of
twenty five currency points.

Protection of members against prejudicial conduct.

section 248 (1) provides that a member of a company may apply
to the court by petition for an order under this Part on the ground
that the company’s affairs are being or have been conducted in a
manner which is unfairly prejudicial to the interests of its
members generally or of some part of its members including at
least himself or herself or that any actual or proposed act or
omission of the company including an act or omission on its
behalf is or would be so prejudicial.

Application of this section

Subsection (2) provides that the provisions of this Part apply to
a person who is not a member of a company but to whom shares
in the company have been transferred or transmitted by
operation of law as those provisions apply to a member of the
company and references to a member or members are to be
construed accordingly.

Order on application of the registrar.

section 249 (1) provides that where in the case of any company
—
(a) the registrar has received a report under section 177; and
(b) it appears to him or her that the company’s affairs are being
or have been conducted in a manner which is unfairly prejudicial
to the interests of its members generally or of some part of its
members or that any actual or proposed act or omission of the
company including an act or omission on its behalf is or would
be so prejudicial, the registrar may personally in addition to or
instead of presenting a petition for the winding up of the
company, apply to the court by petition for an order under this
Part.

Subsection (2) provides that in this section and so far as

applicable for its purposes in section 250 "company" means
anybody corporate which is liable to be wound up under this
Act.

Provisions as to petitions and orders under this Part.

Section 250 (1) provides that where the court is satisfied that a
petition under this Part is well founded, it may make such order
as it thinks fit for giving relief in respect of the matters
complained of.

Subsection (2) provides that without prejudice to the general

effect of subsection (1), the court’s order may—
(a) regulate the conduct of the company’s affairs in the future;
(b) require the company to refrain from doing or continuing an
act complained of by the petitioner or to do an act which the
petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on
behalf of the company by such person or persons and on such
terms as the court may direct;
(d) provide for the purchase of the shares of any members of the
company by other members or by the company itself and in the
case of a purchase by the company itself, the reduction of the
company’s capital accordingly.

Subsection (3) provides that where an order under this Part

requires the company not to make any or any specified alteration
in the memorandum or articles, the company does not then have
power without leave of the court to make any such alteration in
breach of that requirement.
Subsection (4) provides that any alteration in the company’s
memorandum or articles made by virtue of an order under this
Part is of the same effect as if duly made by resolution of the
company and the provisions of this Act apply to the
memorandum or articles as so altered accordingly.

Default in complying with the above provisions

Subsection (5) provides that an office copy of an order under
this Part altering or giving leave to alter a company’s
memorandum or articles shall, within fourteen days after the
making of the order or such longer period as the court may
allow, be delivered by the company to the registrar for
registration and if a company makes default in complying with
this subsection, the company and every officer of it who is in
default is liable to a default fine and, for continued
contravention, to a daily default fine of five currency points in
respect of each day the default continues.

Inspections and Investigations:

These can be initiated either by the registrar or the members
themselves.
a) Members: There are 2 instances when members can
initiate an inspection or investigation:
• Under Section173 of the Act, either 200 members or members
holding at least 10% of the shares in a company with share
capital or at least 10% of the members in a company without
share capital may make an application to court for the
appointment of competent inspectors for the investigations.
However, the applicants may be required to pay a deposit of
1000 currency points before the investigations commence.
They must also prove that they are not malicious.
b) Registrar: under section174, the registrar—
(a) shall appoint one or more competent inspectors to investigate
the affairs of a company and to report thereon in such manner as
the registrar directs, if the company by special resolution
declares that its affairs ought to be investigated by an inspector
appointed by the registrar; and
(b) may appoint one or more competent inspectors to investigate
the affairs of a company, if it appears to the registrar that there
are circumstances suggesting—
(i) that the company’s business is being conducted with intent to
defraud its creditors or the creditors of any other person or
otherwise for a fraudulent or unlawful purpose or in a manner
oppressive of any part of its members or that it was formed for
any fraudulent or unlawful purpose;
(ii) that persons concerned with its formation or the management
of its affairs have in connection with formation or management
been guilty of fraud, misfeasance or other misconduct towards it
or towards the company or towards its members;
(iii) that its members have not been given all the information
with respect to its affairs which they might reasonably expect; or
(iv) that it is desirable to do so.

Inspector’s report
Section 177 provides for the Inspector’s report and states
that;
Subsection (1) provides that an inspector may and if directed by
the registrar, shall make interim reports to the registrar and on
the conclusion of the investigation shall make a final report to
the registrar.
Subsection (2) provides that any report under subsection (1)
shall be written and if the registrar directs printed.
Subsection (3) provides that the registrar shall—
(a) forward a copy of report made by an inspector to the
company;
(b) if the registrar thinks fit, forward a copy of the report on
request and on payment of the prescribed fee to any other person
who is a member of the company or of any other body corporate
dealt with in the report by virtue of section 173 or whose
interests as a creditor of the company or any such other body
corporate as referred to in section 175 as appears to the registrar
to be affected; or
(c) where any inspector is appointed under section 184, furnish,
at the request of the applicants for the investigation a copy to
them, and may also cause the report to be printed and published.
Under section 180 it is provided that the Inspector’s report
to be evidence, it states that a copy of any report of any
inspector appointed under sections 173and 174, authenticated by
the seal of the company whose affairs he orshe has investigated
shall be admissible in any legal proceedings asevidence of the
opinion of the inspector in relation to any matter contained in
the report.

Activity
Once a wrong has been done to a company, the proper plaintiff
to bring the suit before court is the company itself. Discuss

Solution
The student should be able to understand what the proper
plaintiff principle is and should discuss the rule as stated in the
case of Foss Versus Harbottle. The student should further
discuss the exceptions under which the rule may be set aside.

Test Questions
1. “A derivative action should not be utilized as a means of
side stepping the rule in Foss. V Harbottle” strongly
asserted a BBA 11 student in a heated class discussion.
Elaborate the statement in quotes.
2. Discuss the rule in Foss Vs Harbottle and the
circumstances under which the rule will not apply
3. Discuss the view that the rule in Foss Vs Harbottle was
designed to oppress the minority shareholders
CHAPTER FIFTEEN
DISSOLUTION OF COMPANIES

At the end of this Chapter, the student will be expected to:

1. Understand the different ways in which the life of a company
can come to an end;
2. Examine the procedures that are required during the winding
up of a company; and
3. Examine and analyze the role of the liquidator in winding up.
DISSOLUTION OF COMPANIES
A company’s life can be ended in any of the following ways:
Mergers, Takeovers, Reconstructions, Schemes of arrangement
and Winding up.

Merger
A merger (also called an amalgamation) is a transaction whereby
two or more companies are combined in some way in united
ownership. Example Hewlett pacquard and Compaq merged to
form Hewlett pacquardcompaq

Take-over
The simplest method is a takeover whereby Company A
acquires the issued share capital of Company B so that they
form a single group. Example is Bank of Africa which took over
Allied bank, Barclays Bank took over Nile Bank etc

Arrangements and reconstructions.

Power to compromise with creditors and members.
Section 234 (1) provides that where a compromise or
arrangement is proposed between a company and its creditors or
any class of them or between the company and its members or
any class of them, the court may, on the application of the
company or of any creditor or member of the company or where
the case of a company being wound up, of the liquidator order a
meeting of the creditors or class of creditors or of the members
of the company or class of members as the case may be, to be
summoned in such manner as the court directs.

Subsection (2) provides that where the majority in number

representing three-fourths in value of the creditors or class of
creditors or members or class of members as the case may be,
present and voting either in person or by proxy at the meeting,
agree to any compromise or arrangement, the compromise or
arrangement shall, if sanctioned by the court, be binding on all
the creditors or the class of creditors or on the members or class
of members as the case may be and also on the company or in
the case of a company in the course of being wound up, on the
liquidator and contributories of the company.

Subsection (3) provides that an order made under subsection (2)

shall have no effect until a certified copy of the order has been
delivered to the registrar for registration and a copy of the order
shall be annexed to every copy of the memorandum of the
company issued after the order has been made or in the case of a
company not having a memorandum, of every copy so issued of
the instrument constituting or defining the constitution of the
company.

Subsection (4) provides that where a company defaults in

complying with subsection (3), the company and every officer of
the company who is in default is liable to a fine not exceeding
ten currency points for each copy in respect of which default is
made.

Subsection (5) provides that in this section and section 235,

"company" means any company liable to be wound up under
this Act and "arrangement" includes a reorganisation of the
share capital of the company by the consolidation of shares of
different classes or by the division of shares into shares of
different classes by both or by both methods.

Information as to compromise with creditors and members.

Section 235 (1) provides that where a meeting of creditors or
any class of creditors or of members or any class of members is
summoned under section 234, there shall—
(a) with every notice summoning the meeting which is sent to a
creditor or members, be sent also a statement explaining the
effect of the compromise or arrangement and in particular
stating any material interests of the directors of the company
whether as directors or as members or as creditors of the
company or other and the effect on them of the compromise or
arrangement in so far as it is different from the effect on the
similar interests of other persons; and
(b) in every notice summoning the meeting which is given by
advertisement, be included either the statement referred to in
paragraph (a) or a notification of the place at which and the
manner in which creditors or members entitled to attend the
meeting may obtain copies of the statement.

Subsection (2) provides that where the compromise or

arrangement affects the rights of debenture-holders of the
company, the statement referred to in subsection (1) shall give
similar explanation as respects the trustees of any deed for
securing the issue of the debentures as it is required to give as
respects the company’s directors.

Subsection (3) provides that where a notice given by

advertisement includes a notification that copies of a statement
explaining the effect of the compromise or arrangement
proposed can be obtained by creditors or members entitled to
attend the meeting, every such creditor or member shall, on
making application in the manner indicated by the notice, be
furnished by the company free of charge with a copy of the
statement.

Subsection (4) provides that where a company defaults in

complying with any requirement of this section, the company
and every officer of the company who is in default is liable to a
fine not exceeding one thousand currency points and for the
purposes any liquidator of the company and any trustee of deed
for securing the issue of debentures of the company.

Subsection (5) provides that a person is not liable under

subsection (4) if that person shows that the default was due to
the refusal of any other person, being a director or trustee for
debenture-holders, to supply the necessary particulars as to his
or her interests.

Subsection (6) provides that a director of the company and any

trustee for debenture holders of the company shall give notice to
the company of such matters relating to himself or herself as
may be necessary for the purposes of this section.

Subsection (7) provides that a person who makes default in

complying with subsection (6) is liable to a fine not exceeding
one hundred currency points.

Provisions for facilitating reconstruction and amalgamation

of companies.
Section 236 (1) provides that where an application is made to
the court under section 234
for the sanctioning of a compromise or arrangement proposed
between a company and the persons mentioned in that section
and it is shown to the court that the compromise or arrangement
has been proposed for the purposes of or in connection with a
scheme for the reconstruction of any company or the
amalgamation of any two or more companies and that under the
scheme the whole or any part of the undertaking or the property
of any company concerned in the scheme in this section referred
to as "a transferor company" is to be transferred to another
company in this section referred to as "the transferee company",
the court may by the order sanctioning the compromise or
arrangement or by any subsequent order, make provision for all
or any of the following matters—
(a) the transfer to the transferee company of the whole or any
part of the undertaking and of the property or liabilities of any
transferor company;
(b) the allotting or appropriation by the transferee company of
any shares, debentures, policies or other similar interests in that
company which under the compromise or arrangement are to be
allotted or appropriated by that company to or for any person;
(c) the continuation by or against the transferee company of any
legal proceedings pending by or against any transferor company;
(d) the dissolution without winding up, of any transferor
company;
(e) the provision to be made for any persons who, within such
time and in such manner as the court directs, dissent from the
compromise or arrangement;
(f) such incidental, consequential and supplemental matters as
are necessary to secure that the reconstruction or amalgamation
shall be fully and effectively carried out.

Subsection (2) provides that where an order under this section

provides for the transfer of property or liabilities, that property
shall, by virtue of the order, be transferred to and vest in and
those liabilities shall, by virtue of the order, be transferred to and
become the liabilities of the transferee company, freed from any
charge which is by virtue of the compromise or arrangement to
cease to have effect.

Subsection (3) provides that where an order is made under this

section, every company in relation to which the order is made
shall cause a certified copy of the order to be delivered to the
registrar for registration within seven days after the making of
the order.

Subsection (4) provides that where there is default in complying

with subsection (3), the company and every officer of the
company who is in default is liable to a default fine of twenty
five currency points.

Subsection (5) provides that in this section—

“company” does not include any company other than a company
within the meaning of this Act, not withstanding section 234(5);
“liabilities” includes duties; and
“property” includes rights and powers of every description.

Amalgamations.
Section 237 provides that subject to any restrictions in their
respective incorporation documents and to sections 238, 239,
240 and 241, two or more companies may amalgamate and
continue as one company which may be one of the
amalgamating companies or may be a new company.

Authorisation of amalgamation.
Section 238 provides that each company which proposes to
amalgamate must authorise in the manner set out in section 241
—
(a) an amalgamation proposal which complies with section 239;
and
(b) the proposed incorporation documents of the amalgamated
company which complies with section 240.

Amalgamation proposal.
Section 239 (1) provides that an amalgamation proposal for
authorisation under section 240 must set out the terms of the
amalgamation and in particular—
(a) the manner in which shares of each amalgamating company
are to be converted into shares of the amalgamated company;
(b) if any shares of an amalgamating company are not to be
converted into shares of the amalgamated company, the
consideration what the holders of those shares are to receive
instead of shares of the amalgamated company;
(c) any payment to be made to any shareholder or director of an
amalgamating company, other than a payment of the kind
described in paragraph (b); and
(d) details of any arrangements necessary to perfect the
amalgamation and to provide for the subsequent management
and operation of the amalgamating company.
Subsection (2) provides that an amalgamation proposal may
specify the date on which the amalgamation is intended to
become effective.
Subsection (3) provides that where shares of one of the
amalgamating companies are held by or on behalf of another of
the amalgamating companies, the amalgamation proposal must
provide for the cancellation of those shares when the
amalgamation becomes effective without any payment in respect
of those shares and no provision may be made in the proposal
for the conversion of those shares into shares of the
amalgamated company.
Incorporation document of amalgamated company.
Section 240 (1) provides that the incorporation document for
authorisation under section 238 must be in the prescribed form
and must in particular state—
(a) the name of the amalgamated company;
(b) the share structure of the amalgamated company, specifying
—
(i) the number of shares of the amalgamated company; and
(ii) the rights, privileges, limitations and conditions attached to
each such share or class of share and its transferability, if
different from fundamental rights attached to shares;
(c) the full names, postal and residential addresses of each
director of the amalgamated company;
(d) in the case of a public company or a private company with a
secretary, the full name, postal and residential address of the
secretary of the amalgamated company;
(e) the registered office of the amalgamated company;
(f) the place where the amalgamated company’s records are to
be kept if not the registered office; and
(g) the amalgamated company’s accounting reference date.

Subsection (2) provides that the incorporation document may

also contain—
(a) any restriction on the amalgamated company’s capacity and
powers; and
(b) any provision permitted by this Act or otherwise relating to
the internal management of the amalgamated company.

Subsection (3) provides that if the proposed amalgamated

company is to be the same as one of the amalgamating
companies, the incorporation document for authorisation may
comprise the incorporation document of that amalgamating
company and proposed notice of change of the incorporation
document.

Manner of authorising amalgamation.

Section 241 (1) provides that the directors of each
amalgamating company must resolve that in their opinion—
(a) the amalgamation is in the best interests of the shareholders
of the company; and
(b) the amalgamated company will be solvent immediately after
the time at which the amalgamation is to become effective.
Subsection (2) provides that the directors voting in favour of a
resolution required by subsection (1) must sign a certificate that
in their opinion, the conditions set out in subsection (1) are
satisfied.
Subsection (3) provides that the directors of each amalgamating
company must send to each shareholder of that company not less
than twenty working days before the amalgamation is to take
effect—
(a) a copy of the amalgamation proposal;
(b) a copy of the proposed incorporation document which
complies with section 240;
(c) copies of the certificates given by each set of directors under
subsection (2) and a statement of any material interests of the
directors whether in that capacity or otherwise; and
(d) any further information and explanation necessary to enable
a reasonable shareholder to understand the nature and
implications for the company and its shareholders of the
proposed amalgamation.

Subsection (4) provides that the amalgamation must be

authorised—
(a) by the shareholders of each amalgamating company by
special resolution; and
(b) by any class of an amalgamating company, where any
provision in the amalgamation proposal would if contained in an
alteration to that company’s incorporation document or
otherwise proposed in relation to that company, require the
authorisation of that class.

Registration of amalgamation.
Section 242 (1) provides that after an amalgamation has been
authorised under section 241, the following documents must,
within ten working days after the resolution passed under this
Act for the purpose be delivered, duly completed, to the registrar
in relation to the amalgamated company—
(a) its incorporation document or if the amalgamated company is
the same as one of the amalgamating companies, notice of
change of incorporation document; and
(b) consents in the prescribed form signed by each of the
persons named as director or secretary in the incorporation
document or in the notice of change of incorporation document
as the case may be; and
(c) certificates required by section 243.
Subsection (2) provides that Subsection (1)(a) does not apply to
any part of the amalgamated company’s incorporation document
relating to the internal management of the company.

Certificates on amalgamation.
Section 243 (1) provides that the registrar must send to the
company or person from whom the documents required under
section 242 were received—
(a) if the amalgamated company is the same as one of the
amalgamating companies, a certificate of amalgamation in the
prescribed form, together with an amended certificate of
incorporation if necessary; or
(b) if the amalgamated company is a new company, a certificate
of amalgamation in the prescribed form together with a
certificate of incorporation in the prescribed form.

Subsection (2) provides that where an amalgamation proposal

specifies a date on which the amalgamation is intended to
become effective and that date is the same as or later than the
date on which the registrar receives the documents required
under section 242, the certificate of amalgamation and any
certificate of incorporation issued by the registrar must be
expressed to have effect on that date.

Subsection (3) provides that on the date shown in a certificate

of amalgamation—
(a) the amalgamation becomes effective;
(b) the registrar must remove the amalgamating companies other
than the amalgamated company from the register;
(c) the amalgamated company succeeds to all the property, rights
and privileges of each of the amalgamating companies;
(d) the amalgamated company succeeds to all the liabilities of
each of the amalgamating companies;
(e) proceedings pending by or against any amalgamating
company may be continued by or against the amalgamated
company;
(f) any conviction, ruling order or judgment in favour of or
against an amalgamating company may be enforced by or
against the amalgamated company; and
(g) the shares and rights of the shareholders in the amalgamating
companies are converted into the shares and rights provided for
in the incorporation document of the amalgamated company.

Creditors’ rights on amalgamation.

Section 244 provides that where immediately after the time
when an amalgamation becomes effective, an amalgamated
company becomes insolvent, any creditor of any of the
amalgamating companies may recover any loss he or she has
suffered by reason of the amalgamation—
(a) if no certificate was given by the directors of that
amalgamating company at the time the amalgamation was
approved; or
(b) if the certificate was given and if there were no reasonable
grounds for the opinion that the amalgamated company would
be solvency from the directors who signed the certificate.

Powers of court in relation to amalgamations.

Section 245 (1) provides that notwithstanding anything in this
Act or in the incorporation document of any company, where it
is not practicable to effect an amalgamation in accordance with
the procedures set out in this Act or the incorporation document
of the amalgamating companies, those
companies may apply to the court for approval of an
amalgamation and the court may approve the proposal on such
terms and subject to such conditions as it thinks fit.

Subsection (2) provides that within ten working days after an

order is made by the court under subsection (1), the directors of
each amalgamating company must deliver a copy of the order to
the registrar who must take such steps if any as the order may
specify.
Liquidation or Winding Up
Winding up basically means liquidation of a company.
It’s a process by which the company’s life is brought an end
and its property managed for the benefit of its creditors and
members.

It involves an operation of putting to an

end the transactions of the company,
realising the assets and discharging its liabilities.

There are two types of winding up.

• Voluntary winding up:

This is provided for under PART IX of the Companies Act
Voluntary winding up of company under section 268 (1) occurs
when a company may by special resolution resolve to be
woundup voluntarily.
Subsection (2) provides that a voluntary winding up of a
company shall be taken to commence at the time of the passing
of the resolution under subsection (1).

Notice of resolution for voluntary winding up.

Section 269 (1) provides that where a company passes a
resolution for voluntary winding up, it shall, within fourteen
days after passing the resolution, give notice of the resolution in
the Gazette and in a newspaper with a wide national circulation
in the official language.
Subsection (2) provides that the resolution for voluntary
winding up shall be registered with the registrar and a copy sent
to the official receiver within seven days from the date of
passing the resolution.
Subsection (3) provides that where default is made in
complying with this section, the company and every officer of
the company who is in default shall be liable to a default fine
and for the purposes of this subsection the liquidator of the
company shall be taken to be an officer of the company.

Consequences of voluntary winding up.

Effect of voluntary winding up on the business and status of
a company.
Section 270 (1) provides that a company shall, from the
commencement of voluntary liquidation, cease to carry on
business, except so far as may be required for the beneficial
winding up of the company.
Subsection (2) provides that subject to subsection (1), the
corporate status and powers of the company shall,
notwithstanding anything to the contrary in its articles, continue
until it is dissolved.

Declaration of solvency
Statutory declaration of solvency in case of a proposal for
voluntary winding up.
Section 271 (1) provides that where it is proposed to wind up a
company voluntarily, the directors of the company or, in the case
of a company having more than two directors, the majority of
the directors, may, at a meeting of the directors make a
declaration in the prescribed form to the effect that they have
made a full inquiry into the affairs of the company and that,
having done so, they have formed the opinion that the company
will be able to pay its debts in full within a period not exceeding
twelve months from the commencement of the liquidation as
may be specified in the declaration.
Subsection (2) provides that a declaration made under
subsection (1) shall have no effect for the purposes of this Act
unless—
(a) it is made within thirty days before the date of the passing of
the resolution for winding up the company and is delivered to
the registrar with a copy to the official receiver for registration
before that date; and
(b) it includes a statement of the company’s assets and liabilities
as at the latest practicable date before the making of the
declaration.
Subsection (3) provides that a director of a company who makes
a declaration under this section, without reasonable grounds for
the opinion that the company will be able to pay its debts in full
within the period specified in the declaration commits an offence
and shall be liable on conviction to imprisonment not exceeding
twelve months or to a fine not exceeding twenty four currency
points or both.

Subsection (4) provides that where the company is wound up in

accordance with a resolution passed within the period of thirty
days after the making of the declaration, but its debts are not
paid or provided for in full within the period stated in the
declaration, it shall be presumed until the contrary is shown that
the director did not have reasonable grounds for his or her
opinion.

Application of Insolvency Act, 2011 to voluntary winding up

of a company.
Section 272 provides that where a company passes a resolution
for the voluntary winding up of the company in accordance with
this Act, the provisions of the Insolvency Act, 2011 relating to
liquidation shall, with the necessary modifications apply to the
voluntary winding up of the company.

Compulsory winding up/ Winding up by court

This is provided for under Part IV of the Insolvency Act, 2011
Winding up by court is also known as
compulsory winding up. Compulsory winding can be effected
under the following circumstances:

Modes of liquidation.
Section 57 provides that the liquidation of a company may be—
a. by the court;
b. voluntary; or
c. subject to the supervision of the court.
Voluntary liquidation.
Voluntary liquidation provided for under section 58
Subsection (1) provides that a company may be liquidated
voluntarily if the company resolves by special resolution, that it
cannot by reason of its liabilities continue its business and that it
is advisable to liquidate.
Subsection (2) provides that Voluntary liquidation shall be taken
to commence at the time of passing the resolution for voluntary
liquidation.
Notice of resolution for voluntary liquidation.
Section 59 (1) provides that where a company passes a
resolution for voluntary liquidation, it shall, within fourteen days
after passing the resolution, give notice of the resolution in the
Gazette and in a newspaper in the official language with a wide
national circulation.
Section 59 (2) provides that the resolution for voluntary
liquidation shall be registered with the registrar and a copy sent
to the official receiver within seven days from the date of
passing the resolution.
Section 59 (3) provides that where default is made in complying
with this section, the company and every officer of the company
who is in default shall be liable to a default fine and for the
purposes of this subsection the liquidator of the company shall
be taken to be an officer of the company.
Consequences of voluntary liquidation: Effect of voluntary
liquidation on the business and status of a company.
• Company ceases to carry on business
Section 60 (1) provides that a company shall, from the
commencement of voluntary liquidation, cease to carry on
business, except so far as may be required for the beneficial
liquidation of the company.
• Corporate status and powers to continue until dissolved
Section 60 (2) provides that subject to subsection (1), the
corporate status and powers of the company shall,
notwithstanding anything to the contrary in its articles, continue
until it is dissolved.

• Transfers or alterations after commencement of voluntary

liquidation are void.
Section 61 provides that any transfer of shares, not being a
transfer made to or with the sanction of the liquidator and any
alteration in the status of the members of the company, made
after the commencement of a voluntary liquidation, is void.

Creditors’ voluntary liquidation.

Section 69 provides for Meeting of creditors.
Section 69 (1) provides that for the creditors’ voluntary
liquidation, the company shall—
a. cause a meeting of the creditors of the company to be
summoned on the same day as the meeting for the
resolution for liquidation is to be proposed or on the
following day; and
b. send to the creditors, notices for the meeting of the
creditors of the company, together with the notices for the
meeting for proposing the resolution for liquidation.
Section 69 (2) provides that the notice for the meeting of the
creditors shall be advertised once in the Gazette and in the
official language in a newspaper of wide circulation in Uganda.
Section 69 (3) provides that the directors of the company shall—
a. appoint one of them to preside at the meeting; and
b. present a full statement of the position of the company’s
affairs and a list of the creditors of the company and the
estimated amount of their claims, to the meeting of the
creditors.
Section 69 (3) provides that the director appointed to preside at
the meeting of the creditors shall attend and preside over the
meeting.
Section 69 (3) provides that the where the meeting of the
company at which the resolution for voluntary liquidation is to
be proposed is adjourned and the resolution is passed at an
adjourned meeting, any resolution passed at the meeting of the
creditors held under subsection (1), shall have effect as if it has
been passed immediately after the passing of the resolution for
liquidating the company.
Section 69 (3) provides that the where default is made—
a. by the company contrary to subsections (1) and (2);
b. by the directors contrary to subsection (3); or
c. by any director of the company contrary to subsection (4),
the company, directors or director, shall be liable to a fine not
exceeding fifty currency points, and, in the case of default by
the company, every officer of the company who is in default
shall be liable to a similar penalty.
Appointment of liquidator – section 70
Section 70 (1) provides that the creditors and the company at
their respective meetings under section 69, may nominate a
person to be liquidator for the purpose of liquidating the affairs
and distributing the assets of the company, and if the creditors
and the company nominate different persons, the person
nominated by the creditors shall be the liquidator, and if the
creditors do not nominate any person, the person nominated by
the company shall be the liquidator.
Section 70 (2) provides that where different persons are
nominated by the company and the directors, any director,
member or creditor of the company may, within seven days after
the nomination by the creditors, apply to court for an order—
a. directing that the person nominated as liquidator by the
company shall be liquidator instead of or jointly with the
person nominated by the creditors; or
b. appointing another person to be liquidator instead of the
person appointed by the creditors.
Appointment of committee of inspection – section 71
Section 71 (1) provides that the creditors at the creditors’
meeting or at any subsequent meeting may appoint not more
than five persons to be members of a committee of inspection.
Section 71 (2) provides that here the creditors meeting appoints
a committee of inspection, the company may, at the meeting at
which the resolution for voluntary liquidation is passed or at a
subsequent time in a general meeting, appoint a number of
persons as the company thinks fit, to act as members of the
committee, but the majority of the members of the committee
shall be persons appointed by the creditors.
Section 71 (3) provides that the creditors may by resolution
declare that all or any of the persons appointed by the company
ought not to be members of the committee of inspection, and, if
the creditors so resolve, the persons mentioned in the resolution
shall not unless the court otherwise directs, be qualified to act as
members of the committee.
Section 71 (4) provides that on the application of the creditors,
the court may appoint any other person to act as a member of the
committee in place of a person mentioned in the resolution.
Proceedings of committee of inspection – section 72
a. the committee shall meet at least once a month and the
liquidator or any member of the committee may call a
meeting of the committee as and when he or she considers
necessary;
b. the committee shall act by a majority of its members
present at a meeting;
c. a member of the committee may resign by notice in writing
signed by him or her and delivered to the liquidator;
d. where a member of the committee appointed by the
creditors or contributories, becomes bankrupt, compounds,
arranges with his or her creditors or is absent from five
consecutive meetings of the committee without the leave of
the other members who also represent the creditors or
contributories as the case may be, his or her office shall
immediately become vacant;
e. a member of the committee may be removed by an ordinary
resolution at a meeting of creditors or contributories, for
which fifteen days’ notice stating the object of the meeting
is given;
f. where there is a vacancy in the committee, the liquidator
shall immediately call a meeting of creditors or of
contributories, to fill the vacancy and the meeting may, by
resolution, reappoint the same person or appoint another
creditor or contributory to fill the vacancy unless the
liquidator, having regard to the position in liquidation, is of
the opinion that it is not necessary to fill the vacancy, in
 which case he or she may apply to the court for an order
that the vacancy shall not be filled or shall be filled under
the circumstances specified in the order; and
g. where there is a vacancy, the remaining members of the
committee, if not less than two, may continue to act as the
Final meeting and dissolution – section 77
Section 77 (1) provides that as soon as the company is fully
liquidated, the liquidator shall—
a. prepare an account of the liquidation, showing how the
liquidation was conducted and how the property of the
company was disposed of; and
b. call a general meeting of the company and a meeting of the
creditors of the company, to present the account and to give
any required explanation.
Section 77 (2) provides that if the liquidator fails to call a
general meeting of the company or a meeting of the creditors as
required by this section, he or she commits an offence and is
liable on conviction to a fine not exceeding fifteen currency
points.
Section 77 (3) provides that the meetings under subsection (1)
shall be called by a notice in the Gazette and in a newspaper of
wide circulation in Uganda, specifying the time, place and the
objects of the meetings, and shall be published at least thirty
days before the meetings.
Section 77 (4) provides that within fourteen days after the
meeting or if the meetings are not held on the same day, after the
date of the later meeting, the liquidator shall—
a. send a copy of the account to the registrar; and
b. make a return of holding the meetings and of the dates of
the meetings to the registrar,
and if the copy of the account is not sent or the returns of the
meetings are not made in accordance with this subsection, the
liquidator shall be liable to a fine not exceeding five currency
points for every day for which the default continues.
Members’ and creditors’ voluntary liquidation.
Members’ and creditors voluntary liquidation – section 78
Sections 79 to 86, apply to both members’ and creditors’
voluntary liquidation.

Distribution of the property of a company.

Section 79 provides that subject to the provisions of this Act on
preferential payments, the assets of a company shall, on its
liquidation, be applied in satisfaction of its liabilities
simultaneously and equally, and, subject to that application,
shall unless the articles of association otherwise provide, be
distributed among the members according to their rights and
interests in the company.
Powers and duties of a liquidator in voluntary liquidation –
section 80
Section 80 (1) provides that the liquidator in a voluntary
liquidation may—
a. exercise any of the powers given to the liquidator in a
liquidation by the court, under this Act;
b. exercise the power of the court under this Act, of settling a
list of contributories and the list of contributories shall be
prima facie evidence of the liability of the persons named
in the list as contributories;
c. exercise the power of the court of making calls on shares or
any other matter;
d. summon general meetings of the company for the purpose
of obtaining the sanction of the company by special
resolution or for any other purpose as he or she may think
fit.
Section 80 (2) provides that the liquidator shall pay the debts of
the company and shall adjust the rights of the contributories
among themselves.
Section 80 (3) provides that where several liquidators are
appointed, any power given by this Act may be exercised by one
or more of the liquidators as may be determined at the time of
their appointment, or, in default of such determination, by any
number of liquidators of not less than two.
Section 80 (4) provides for Power of court to appoint and
remove liquidator in voluntary liquidation.
1. The court may appoint a liquidator in any case where there
is no liquidator acting.
2. The court may, where cause is shown, remove a liquidator
and appoint another liquidator.
Notice by liquidator of his or her appointment – section 82
1. The liquidator shall, within fourteen days after his or her
appointment, publish in the Gazette and deliver to the
registrar for registration, a notice with a copy to the official
receiver of his or her
2. Costs of voluntary liquidation.

Costs of liquidation
Section 85 provides that all costs, charges and expenses
properly incurred in the liquidation, including the remuneration
of the liquidator, shall be payable out of the assets of the
company in priority to all other claims.
Liquidation subject to supervision by court.
Section 87 provides that where a company passes a resolution
for voluntary liquidation, the court may make an order that the
voluntary liquidation shall continue, subject to the supervision
of court and with the liberty for the creditors, contributories or
other interested persons, to apply to court and generally on such
terms and conditions as the court may think just.
Effect of application for liquidation subject to supervision.
Section 88 provides that an application for the continuance of a
voluntary liquidation subject to the supervision of the court
shall, for the purpose of giving jurisdiction to the court over
actions, be taken to be a petition for
Effect of supervision order – section 90
Section 90 (1) provides that where an order is made for
liquidation subject to supervision, the liquidator may, subject to
any restrictions imposed by the court, exercise all his or her
powers without the sanction or intervention of the court, in the
same manner as if the company were being liquidated
voluntarily.
Section 90 (2) Where the order for liquidation subject to
supervision is made in relation to a creditors’ voluntary
liquidation in which a committee of inspection has been
appointed, the order shall be taken to be an order for liquidation
by the court for the purpose of section
Liquidation by court.
Jurisdiction – section 91
The jurisdiction in liquidation matters shall be exercised by the
High Court.
Section 92 (1) provides for the Circumstances in which the court
may appoint liquidator and the court may appoint a liquidator on
the application of—
(a) the company;
(b) a director of the company;
(c) a shareholder of the company;
(d) a creditor of the company;
(e) a contributory; or
(f) the official receiver.
Commencement of liquidation by court.
Section 93 (1) provides that where, before the presentation of a
petition for the liquidation of a company by the court, a
resolution is passed by the company for voluntary liquidation,
the liquidation of the company shall be deemed to commence
when the resolution is passed and unless the court, on proof of
fraud or mistake, thinks fit and directs, all proceedings of the
voluntary liquidation shall be taken to be valid.
Section 93 (2) provides that in all other cases, liquidation of a
company by the court shall be taken to commence at the time of
presentation of the petition for liquidation.
Provisional liquidator.
Section 94 (1) provides that the order made under section 92
shall appoint the official receiver or any insolvency practitioner
the court considers fit as provisional liquidator of the company,
for the preservation of the value of the assets owned or managed
by the company.
Section 94 (2) provides that the provisional liquidator shall, have
the powers to sell or dispose of any perishable and any other
goods, the value of which is likely to diminish if they are not
disposed of, unless court limits the powers or places conditions
on the exercise of the powers.
Notice of liquidation – section 95
The provisional liquidator shall, within fourteen days after the
commencement of the liquidation—
a. give public notice of the date of commencement of the
liquidation; and
b. call a shareholders’ meeting.
Notice of appointment and of liquidation – section 96
Section 96 (1) provides that the liquidator shall, within five
working days after his or her appointment—
a. give notice in the Gazette and a newspaper of wide
circulation of—
i. the date of commencement of the liquidation;
ii. the liquidator’s full name;
iii. the liquidator’s physical office address and daytime
telephone number; and
a. deliver to the official receiver a copy of the notice.
Section 96 (2) provides that a liquidator shall give notice of the
liquidation—
a. on every invoice, order for goods or business letter issued
by or on behalf of the company on which the company’s
name appears stating after the company’s name the words
“in liquidation”; and
b. otherwise, when entering into any transaction or issuing
any document by or on behalf of the company.
Section 96 (3) Failure to comply with subsection (2) does not
affect the validity of a document issued by or on behalf of the
company.
Section 96 (4) A liquidator who does not comply with
subsection (2) commits an offence and is liable on conviction to
a fine not exceeding one hundred currency points.
Effect of liquidation - section 97
1. At the commencement of liquidation—
a. the liquidator shall take custody and control of the
company’s property;
b. the officers of the company shall remain in office but cease
to have any powers, functions or duties other than those
 required or permitted to be exercised by this Act;
c. proceedings, execution or other legal process shall not be
commenced or continued and distress shall not be levied
against the company or its property;
d. shares of the company shall not be transferred or other
alteration made in the rights or liabilities of any shareholder
and a shareholder shall not exercise any power under the
company’s memorandum and articles of association or the
Companies Act; and
e. the memorandum and articles of association of the
company shall not be altered, except that the liquidator may
change the company’s registered office or registered postal
Fundamental duties of a liquidator – section 99
Section 99 (1) provides that the fundamental duties of a
liquidator are to take, in a reasonable and expeditious manner,
all steps necessary to—
a. collect;
b. realize as advantageously as reasonably possible; and
c. distribute,
the assets or the proceeds of the assets of the company in
accordance with this Part and Part VIII.
Section 99 (2) provides that the duties in subsection (1) are
without prejudice to the liquidator’s power in section 139 to
appoint a provisional administrator where the liquidator is of the
view that the appointment is likely to result in a more
advantageous realisation of the company’s assets than would be
effected in a liquidation.

General duties of liquidator – section 100

Without prejudice to section 99, a liquidator shall have all the
other functions and duties specified in this Act and shall in
particular—
a. take custody and control of all the company’s assets;
b. register his or her interest in all land and other assets
belonging to the company notwithstanding any interest
other;
c. keep company money separate from other money held by
or under the control of the liquidator;
d. keep, in accordance with generally accepted accounting
procedures and standards, full accounts and other records
of all receipts, expenditure and other transactions relating
to the liquidation, and retain the accounts and records of the
liquidation and of the company for not less than six years
after the liquidation ends; and
e. permit those accounts and records and the accounts and
records of the company, to be inspected by—
 i. any committee of inspection unless the liquidator believes
on reasonable grounds that inspection would be prejudicial
to the liquidation; or
ii. where the court so orders, any creditor or shareholder.
General provisions relating to liquidation.
General powers of liquidator – section 101
A liquidator shall have all the powers necessary to carry out the
functions and duties of liquidator under this Act and may
delegate the powers to his or her appointed agent.
Liquidator’s preliminary report – section 102
Section 102 (1) provides that before the expiry of forty working
days after the commencement of the liquidation or during a
longer period as the court may allow, a liquidator shall prepare a
preliminary report showing—
a. the state of the company’s affairs, proposals for conducting
the liquidation and the estimated date of its completion; and
b. the right of any creditor or shareholder to require the
liquidator to call a creditors’ meeting under section 69,
and shall make the report available at his or her address for
inspection by every known creditor, shareholder or contributory.
Section 102 (2) provides that the liquidator shall publish the
notice given under subsection (1) in the official language in a
newspaper of wide circulation in Uganda and shall send a copy
of the report to the registrar.

Liquidator’s interim reports – section 103

Section 103 (1) provides that a liquidator shall, within twenty
working days after the end of every six months during the
liquidation, make an interim report and give public notice of the
conduct of the liquidation during the preceding six months
period and the liquidator’s further proposals for the completion
of the liquidation.
Section 103 (2) provides that the liquidator shall make the report
available at his or her address for inspection by every known
creditor, shareholder or contributory.
Section 103 (3) provides that the liquidator shall publish the
notice given under subsection (1) in the official language in a
newspaper of wide circulation in Uganda and shall send a copy
of the report to the registrar and the official receiver.
Liquidator’s final report- section 104
Section 104 (1) provides that before completion of the
liquidation, a liquidator shall, give public notice of—
a. the final report, final accounts and statement referred to in
section 114; and
b. the grounds on which a creditor or shareholder may object
to the removal of the company from the register under the
 Companies Act.
Section 104 (2) provides that the liquidator shall make the report
available at his or her address for inspection upon payment of a
prescribed fee, by every known creditor, shareholder or
contributory.
Section 104 (3) provides that the liquidator shall publish the
notice given under section (1) in the official language in a
newspaper of wide circulation in Uganda and shall send a copy
of the report to the registrar and the official receiver.
Completion of liquidation – section 114
The liquidation of a company shall be complete when the
liquidator delivers to the official receiver a final report and final
accounts of the liquidation and a statement indicating that—
a. all known assets have been disclaimed, realised or
distributed;
b. all proceeds of realisation have been distributed; and
c. in the opinion of the liquidator, the company should be
removed from the register.
Grounds for compulsory winding up
1. Where the company is unable to pay its debts – section
3

Subject to subsection (2) and unless the contrary is proved, a

debtor is presumed to be unable to pay the debtor’s debts if—
• the debtor has failed to comply with a statutory demand;
• the execution issued against the debtor in respect of a
judgment debt has been returned unsatisfied in whole or in
part; or
• all or substantially all the property of the debtor is in the
possession or control of a receiver or some other person
enforcing a charge over that property.
On a petition to the court for the liquidation of a company or
bankruptcy order, evidence of failure to comply with a statutory
demand by the creditor, shall not be admissible as evidence of
inability to pay debts unless the application is made within 30
working days after the last date for compliance with the demand.
Priority of Settlement of debts
1. Preferential debts.
Section 12 (1) provides that Subject to section 11, and
subsection (2), the liquidator or trustee shall apply the assets to
the preferential debts listed in subsections (4), (5) and (6), which
debts shall be paid in priority to other debts.
Subsection (2) provides that Preferential debts shall so far as the
assets are insufficient to meet them, have priority over the
claims of secured creditors in respect of assets—
a. which are subject to a security interest; and
 b. become subject to that security interest by reason of its
application to certain existing assets of the grantor and
those of its future assets which were after-acquired property
or proceeds, and shall be paid accordingly out of those
assets.
Subsection (3) provides that preferential debts are as listed in
subsections (4), (5) and (6) and shall be paid in the order of
priority in which they are listed.
Priority of payment
Subsection (4) provides that first to be paid shall be—
a. remuneration and expenses properly incurred by the
liquidator or trustee;
b. any receiver’s or provisional administrator’ s indemnity
under sections 159 or 187 and any remuneration and
expenses properly incurred by any receiver, liquidator,
provisional liquidator administrator, proposed supervisor or
supervisor; and
c. the reasonable costs of any person who petitioned court for
a liquidation or bankruptcy order, including the reasonable
costs of any person appearing on the petition whose costs
are allowed by the court.
Subsection (5) provides that after making the payments listed in
subsection (4), next to be paid shall be—
a. all wages or basic salary, wholly earned or earned in part by
way of commission for four months;
a. all amounts due in respect of any compensation or liability
for compensation under the Worker’s Compensation Act,
accrued before the commencement of the liquidation or
bankruptcy, not exceeding the prescribed amount;
b. all amounts that are preferential debts under section 33 or
105.
Subsection (6) provides that after paying the sums referred to in
subsection (5), the liquidator shall then pay—
a. the amount of any tax withheld and not paid over to the
Uganda Revenue Authority for twelve months prior to the
commencement of insolvency; and
b. contributions payable under the National Social Security
Fund Act.
Subsection (7) provides that this section shall apply
notwithstanding any other law.
2. Non-preferential debts
Section 13 provides that after paying preferential debts in
accordance with section 12, the liquidator or trustee shall apply
the assets in satisfaction of all other claims.
The claims referred to in subsection (1) shall rank equally
among themselves and shall be paid in full unless the assets are
insufficient to meet them, in which case they abate in equal
proportions.
Where before the commencement of a liquidation or bankruptcy,
a creditor agrees to accept a lower priority in respect of a debt
than that which the creditor would otherwise have under this
section, nothing in this section shall prevent the agreement from
having effect according to its terms.
Where there is a surplus after making the payments referred to
in section 13—
a. in the case of a bankruptcy, the trustee in bankruptcy shall
pay the surplus to the bankrupt; and
b. in the case of a liquidation, the liquidator shall distribute
the company’s surplus assets in accordance with the
memorandum and articles of association of the company
and the Companies Act.
Final meeting and dissolution.
Section 67 (1) provides that subject to section 68, as soon as the
company is fully liquidated, the liquidator shall—
a) prepare an account of the liquidation, showing how
the liquidation was conducted and how the property of
the company was disposed of; and
b) call a general meeting of the company to present the
account and to give any required explanation.
Section 67 (2) provides that the meeting under subsection (1) (b)
shall be called by a notice in the Gazette and in a newspaper of
wide circulation in Uganda, specifying the time, place and the
object of the meeting, published at least thirty days before the
meeting.
Section 67 (3) provides that within fourteen days after the
meeting, the liquidator shall—
a. send a copy of the account to the registrar; and
b. make a return of the meeting and of its date to the registrar,
and if the copy of the account is not sent or the return of the
meeting is not made in accordance with this subsection, the
liquidator shall be liable to a fine not exceeding five currency
points for every day during which the default continues.
Section 67 (4) provides that where there is no quorum at the
meeting, this subsection shall be taken to have been complied
with if the liquidator, in lieu of the return of the meeting, makes
a return that the meeting was duly summoned but that no
quorum was realised.
Section 67 (5) provides that the registrar shall, on receiving the
account and the returns in subsections (3) or (4), register them.
Section 67 (6) provides that upon the expiration of three months
from the date of registration of the return, the company shall be
taken to be dissolved unless the court, on the application of the
liquidator or any other person who appears to the court to have
an interest in the company, makes an order deferring the date on
which the dissolution of the company is to take effect, for such
time as the court may considers fit.
Section 67 (7) provides that the person on whose application an
order of the court under subsection (6) is made, shall deliver to
the registrar, with a copy to the official receiver ,a certified copy
of the order for registration within seven days after the making
of the order.
Section 67 (7) provides that a person who contravenes
subsection (7) shall be liable to a fine not exceeding five
currency points for every day that the person is in contravention.
Activity
Discuss the circumstances under which a company may be
wound up by court

Solution
The student should be able to define what winding up. The
student should further discuss what it means to wind up a
company by court then go further and discuss the grounds under
which a company can be wound up by court

Test Questions
1. “Any company that is registered under the Companies’
Act can be wound up with the intervention of the
members or creditors for various reasons” Discuss
2. Once a company has been formed then it acquires
perpetual succession and the life of the company can
never under any circumstances come to an end. Discuss
3. Discuss the difference between a merger and take over
4. Discuss the powers and duties owed by a liquidator to a
company undergoing winding up

CHAPTER SIXTEEN

OTHER FORMS OF BUSINESS ASSOCIATIONS

At the end of this Chapter the student should be able to:

1. Understand the different forms of business associations
which include Sole Proprietors, Partnerships, Clubs and
Societies, Co-operative Societies and Unit Trust;
2. Evaluate the advantages and disadvantages of the
 different business associations; and
3. Analyze the importance of having different business
associations.

OTHER FORMS OF BUSINESS ASSOCIATIONS

In order to understand the concept of legal personality, it is

necessary to compare registered companies with other forms of
business organizations particularly the sole trader, partnerships,
clubs and societies, cooperative societies, unit trusts etc

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

Advantages of being a sole trader

• No formal procedure required to set up the business.
• A sole trader is independent and accountable only to himself.
He does not have to consult anybody about business
decisions.
• Personal supervision of the business can ensure its
effectiveness and close conduct with customers/clients may
enhance commercial flexibility.
• All the profits of the business belong to the sole trader.

Disadvantages
• Unlimited liability means that if the business gets into debt a
personal trader’s personal wealth can be lost.
• Expansion of the business is only possible if the profits are
ploughed back into the business.
• Since the business depends on an individual it means long
working hours and difficulty if the individual is indisposed or
incapacitated.
• The death of the proprietor normally results in the death of the
business.
• The individual may lack technical skills to effectively manage
the business.
• Disadvantages associated with small size, lack of
diversification, absence of economies of scale, problems of
raising finance etc.
Partnerships
Under section 2(1) of the Partnership Act a partnership is the
relation which subsists between persons carrying on a business
in common with a view of profit.

Advantages
• Two or more persons can provide more capital than a sole
trader.
• Responsibilities are shared between the partners.
• Partners contribute a wider range of skills and experience to
the business.
• The affairs of the business are private and no one except the
partners has any right to inspect the accounts.

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

Clubs and Societies

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

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

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

In essence the managers of the trust purchase a block of various

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

The managers have power from time to time to increase the

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

Activity
Discuss the advantages and disadvantages of sole traders

Solution
The student is expected to know what sole trader is and the
characteristics of such a business association. The student
should then be able o discuss the advantages and disadvantages
of such a business association.

Test Questions
1. Discuss the different forms of business organizations and
the legal implications of conducting business as such
2. Discuss the difference between a co-operative society
and a club
3. Discuss the advantages and disadvantages of forming a
Partnership
4. Discuss what is meant by unit trusts