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on November 13, 2017
INTRODUCTION
This course is primarily concerned with companies as defined in the companies Act,
Cap. 2015 of the Laws of Kenya. These are companies which are formed and registered
under that Act. There are companies incorporated otherwise than under the companies
Act. Some Companies are formed under specific Acts of Parliament. The Parastatal
bodies were created under statutes as bodies corporate. Most companies derive their
existence via the process of registration under the companies Act, 2015.
Early forms business organisation owing their existence to Royal Charter were primarily
Ecclesiastical bodies or public bodies such as boroughs. Trading on Joint Account was
accomplished through forms of partnerships known as the commenda and the societa
and later, through the company. The commenda was a partnership in which one of the
partners supplied the capital in money or goods without personally taking part in the
management of the venture. The financier advanced a sum of money to the active trader
upon the understanding that he should share in the profits of the enterprise, but with no
The societies was a form of Association which developed into the present day
partnership, each partner being an agent of the others and liable to the full extent of his
private fortune and partnership debts charters of incorporation were sought in order to
give members a monopoly over the trading and to give the Government authority to
regulate and control foreign trade and colonisation. In this form of organisation, the
proprietors pooled their stock and traded on the basis of the joint stock. This is
developed. It received its charter in 1600, granting it monopoly of trade with the East
Indies. This kind of Company represented state interests, formed primarily for the
government of a particular trade and the more modern type of company, designed to
trade for the profit of its members. On the other hand, charters of incorporation
could sue outsiders and its own members, and the possession of a common seal
facilitated the distinction between the acts of the company and those of its members.
COMPANY: A DEFINITION
The companies Act, 2015 Section 3 defines a company to mean "a company formed and
registered under this Act or an existing company". This definition is vague. In legal
theory the word company demands an association of a member of persons who come
together for some common object or objects. A company is an artificial legal person
created by complying with the provisions of the companies Act, 2015 of the Laws of
Kenya.
FUNDAMENTAL CONCEPTS
IN COMPANY LAW
There are two fundamental concepts on the operational aspects of company law. These
Legal personality: A company must be treated as a person in its own right. This
separates and creates a distinction between the personalities which constitutes the
created entity. This concept also incorporates other aspects such as life and death. A
legal person is any person, human or otherwise which has rights and duties. The Non
human persons are called corporations. The word corporation derives from the latin
word, ‘corpus' meaning body. These are legal persons brought into being by artificial
Limited liability: Liability means the extent to which a person can be called upon to
account for something. A person can be called upon to pay the amount of the debt or to
account for a debt upto a certain amount. In the context of company Law, liability can be
particular company. Under Section 6 of the companies Act, Cap. 2015 a limited liability
company is one in which the liability of its members is limited by the memorandum to
the amount, if any, unpaid on the shares respectively held by them. This is a company
limited by shares. A share is the interest which someone has in a company measured in
monetary terms.
The members in a company may sometimes enter an agreement where they may agree
to contribute towards the company's assets while they are still members to enable the
company to discharge its debts. They cannot be called upon to pay more than they
companies Act, Cap. 2015, a company limited by guarantee is a company having the
liability if its members limited by the memorandum to such amount as the members
may respectively thereby undertake to contribute to the assets of the company in the
In the event that a company does not have this guarantee or liability then it is an
unlimited company. Thus section 8 of the companies Act, 2015 defines an unlimited
company as "a company not having any limit on the liability of its members."
These are the only groups of people protected by the Act. However, when a company is
formed its activities may affect the public or its employees. Whether or not companies
should have the interest of the community put into account is still a matter of debate.
There are various legal forms that a business may take VIZ:
SOLE TRADER:
The sole trader is the single owner of the business. He may be on his own or may be
assisted by other people mainly members of his family. He procures the necessary
capital on his own, makes all the decisions necessary in running the business. He gets
the profits alone and equally shoulders any houses. Since a sole trader has no
Association in law, he is not in any way regulated by any special rule of law.
PARTNERSHIPS
Cap. 29 defines a partnership as the relation that subsists between two or more persons
carrying on business in common with a view to profit. Under Section 389 of the
companies Act, Cap. 486, "No company, association or partnership consisting of more
than twenty persons shall be formed for the purpose of carrying on any business that
has for its object the acquisition of gain by the company, association or partnership, or
by the individual members thereof, unless it is registered as a company under [the] Act.
The effect of this section is to prohibit the formation of a partnership of more that 20
people. In case of Forth Hall Bakery Ltd v. Wangoe the Plaintiffs brought an action to
recover certain sums of money from the Defendant. During the hearing, evidence
disclosed that the Plaintiffs were an association consisting of more than 45 people
trading in partnership for gain and that the firm was not registered under the
registration of Business Names Ordinance. The counsel for the Defendant thereupon
submitted that the action was not properly before the court; that the association was
more than twenty persons formed for the purpose of business that has for its object the
acquisition of gain unless it is registered as a company under the ordinance and that the
maintaining the action and therefore, the court would not allow the action to proceed.
ii) Since a non existent Plaintiff can neither pay not receive costs, there could be not
Why should the partnership number be limited at all? The number should be limited for
public policy reasons. Lord Justice James in Smith v. Anderson (1880) 15 ch. 247 at P.
"The Act was intended to prevent the mischief arising from large trading undertakings
being carried on by large fluctuating bodies so that persons dealing with them did not
know with them did not know with whom they were contracting and may be put to great
sue or grounds of public policy. In Paul Gardette v. Republic (1960) EA 728, the
appellant was convicted by the supreme court of Seychelles on two counts of stealing by
Accountant by cable and wireless Ltd., and was sentenced to 2 years imprisonment. An
appeal against conviction and sentence one of the principal grounds of appeal was that
since cable and wireless Ltd had not been authorised by the Government to do business
it had no legal existence and could not own property in Seychelles. It was held that an
unauthorised foreign company has not legal existence and can enforce no rights in
Seychelles but since as a matter of public policy a citizen can never the less enforce
rights against such a company, it would also be contrary to public policy to allow it
assets which would otherwise be available to satisfy legitimate claims to be embezzled or
Partnerships are fowarded or mutual trust and confidence. The rights of the partners are
Articles of Partnership or the partnership Deed. The provisions of the partnerships Act
govern whatever the partners may have left out in the partnership Deed. A Partnership
need not be formed formally. It need not even be in writing. It can be formed orally or
may be referred from the conduct of the parties. In Mohammed v. Hussein [1950] 17
EACA1, there was a verbal partnership between the parties and it did not contain any
term as to how the partnership could be dissolved. One party owned the premises or
which the business was carried on but the terms of occupation by the partnership were
not clear. The defendant forcibly ejected the plaintiff from the premises and refused him
to take part in the management of the business. Every partner is entitled by law to take
part in the management of the business. In holding that this action terminated the
partnership Sir Paul Grayham said, "A partnership…is determinable at any moment by
one partner by notice to the other. The notice need to be in any particular form or in
dissolve the partnership. Forcible ejection and refusal to allow one partner to take part
Under Section 11 of the partnership Act, every partner in a firm is liable jointly with
other partners for all the obligations and debts of the firm incurred while he is a partner.
This is in contract to companies. Companies are thus better organ for doing business.
Where an action is brought against a partnership, it is one against all the partners. For
this reason, where a sole trader carries or business in a name other than his own name
he cannot commence action in that name in V.A. Patel v. National contractors (1954) 21
execution by the appellant in respect of a decree against one Devrah Ramji, on the
ground that National contractors was a partnership between Devraj Ramji and one J.P.
Patel, at the time of execution that the goods were partnership property and that they
were not subject to attachment for the separate debt of Devraj Ramji. There was
evidence that J.P. Patel had retired from the partnership and that Devrj Ramji had
notice of the retirement. It was held that an individual had no right to institute legal
companies they must choose which one of the various types of company they wish to
form. The first choice is for the promoters to consider between limited and unlimited
would be an unlimited company. Section 8 of the companies Act provides that for
b) Its certificate of incorporation states that the liability of its members is unlimited.
"Any seven or more persons or where the company to be formed will be a private
company, any two or more persons associated for any lawful purpose may by
If the company is a profit making concern then it is wise to have a company limited by
The promoters must also decide whether the company is to be private or public. Section
9 of the companies Act, defines a private company to mean a company which by its
Articles
(ii) Limits the number of its members to filling not including persons who are the
company and persons who having been formally in the employment of the company
were while in that employment, and have continued after the determination of that
(iii) Prohibits any invitation to the public to subscribe for any shares or debentures of
the company.
Any company which does not fall in this definition is a public company. In order to form
a public company, there must be at least seven persons to sign the memorandum of
Association.
REGISTRATION OF THE COMPANY
Under section 11 of the companies Act, In order to secure registration of a company, one
formed into a company with a specific name and objects. They declare their intention to
These documents must be signed by at least seven or two persons where it is a public or
a share capital each subscriber must state opposite his name the member of shares he
takes and must not take less than one share. Section 5 (4) (b) of the companies Act
states that no subscriber to the memorandum shall take less than one share.
to the effect that all the requirements of the companies Act have been complied with in
the case of public companies only the other document is a list of persons who have
agreed to become the directors and also the written consent of the directors to act. These
are the only documents which are to be lodged with the registrar of companies so as to
have the company registered. There are other documents which the law requires to be
"Notice of the situation of the registered office and the registered postal address, and of
any change therein, shall be given within 14 days after the date of incorporation of the
company or of the change as the case may be, to the registrar, for registration".
"The company shall within a period of 14 days from the date of the appointment of the
first directors, deliver to the registrar for registration a return in the prescribed, form
containing the particulars specified in the register and a notification in the prescribed
form of any change among its directors or in its secretary or in any of the particulars
These documents are lodged with the Registrar of companies who sensitizes them and
on finding then in order he registers then and issues a certificate of incorporation and
subscribers to the memorandum together with such other persons as may from time to
time become members of the company shall be a body corporate by the name contained
company with power to own land and having perpetual succession and a common seal
under section 19. A certificate of incorporation given by the registrar in respect of any
association shall be conclusive merits of this Act, in respect of the registration and of
matters precedent and incidental thereto have been complied with and that the
association is a company authorised to be registered and duly registered under this Act.
This is intended to clear any doubts that may arise thereafter. Together with registered
companies, we also have statutory corporations. The difference between the two is that a
statutory corporation is created by an Act of Parliament. The companies Act does not
create a company as such but merely lays down the process by which two or more
persons may create such a corporation by complying with the rules set by the Act.
all the other consequences and advantages flow is that a company is regarded in law as
having its own legal personality distinct and separate from its members. It is therefore
capable of enjoying rights and being subject to duties. The company is a legal entity in
its own right. The full implications of legal personality were never understood fully not
even by the courts until the case of Solomon v. Salomon & Co. (1897) A.C. 22 Salomon
of seven being Salomon, his wife, daughter and four sons. The shares were allortted as
hereunder:
Salomon took 20,000 ordinary shares of { 1 each plus a debenture worth {10,000
The rest owned one share of {1 each. Later, there were industrial strikes which pushed
the company into in solemnly and was finally wound up. The company's assets proved
inadequate to pay the {10,000 worth debentures owed to unsecured creditors. Solomon
took {10,000 before paying the creditors. The unsecured creditors sought legal action
entitled to the assets of the company before Solomon, the debentures holder could be
paid. They said Solomon & Co. Ltd were really the same person with Solomon, and
argued that Solomon could not owe money to himself. In the HighcourtUpjohn J.
Stated;
Unsecured creditors be paid first. Salomon appealed to the court of Appeal which
upheld the decision of the High Court stating that the company was a were agent for
Salomon and that he must pay the {7000 to unsecured creditors. Salomon appealed
again to the House of Lords which overruled the decision of the Lower Courts and held:
(i) Salomon & Co. Ltd is a separate and distinct entity from Salomon and any other
member.
(ii) Salomon as a debenture holder/secured creditor) has a priority claim over the assets
In order to form a company limited by shares the companies Act requires that a
memorandum of Association should be signed by seven persons who are each to take
one share at least. If those conditions are complied with, what can it matter whether the
signatures are relatives or strangers?. There is nothing in the Act requiring that the
any one of them should take a substantial interest in the undertaking or that they should
have a mind of their own or that there should be anything like a balance of power in the
constitution of the company when the memorandum is duly signed and registered,
through there may be only 7 shares taken, the subscribes are a body corporate capable
forthwith of exercising all the functions of an incorporated company. These are strong
words. The company attains maturity at its birth. There is no period of minority no
interval of incapacity. A body corporate thus made capable by statute cannot loose its
individuality by issuing the bank of its capital to one person, whether he be a subscriber
or not.
though it may be that after in corporation, the business is precisely the same
as it was before and the same persons are managers and the same hands
receiver the profit the company is not in law an agent or trustee for them.
Nor are the subscribers as member liable in any shape or from except to the
extend and the manner provide by the Act".
As is illustrated by the following case, the assets of the company belong to it and not to
the members. Shareholders do not have an insurable interest in other assets nor do
Macaura v. Northern assurance co. Lts [1925] a.c 619. Macaura owned a timber estate in
Britain. He formed an Estate company and sold the timber by obtaining 42000 fully
paid up shares of {1 each. The total was issued to Macaura and his nominees. He was
He took out an insurance policy bearing his own name to secure the company. Later,
most of the timber was gutted by fire and Macaura went to the insurance company and
claimed compensation or against the fire in his own name. It was held that Macaura as a
In Ratate v. Nyakatukura (1956) 7 YLR 47, the Respondent sued the petitioner for the
Commercial Society Ltd. It was alleged that while he was a director and Deputy
Chairman of the company the petitioner had collected various sums of money from
debtors of the company and failed to pay them over to the company or to account for
them. The action was filed in the Native court. The relevant stature, the jurisdiction of
the Native courts Act was limited to those cases in which all the parties were natives. In
suing the petitioner the respondent admitted quite frankly that he was acting on behalf
of Angole African Society Ltd as an agent. The problem was Angole African commercial
society Ltd was or was not a native. It was held that a limited liability company is a
corporation and as such has an existence distinct from the shareholders who own it. The
distinct legal entity is not capable of having racial attributes and was not therefore a
native, even if all the shareholders were natives. Another case explaining the concept of
corporate personality is Lee v. Lee's Air farming Ltd. Lee formed the (1961) (A.C) 12
respondent company for the purpose of carrying on the business of aerial top dressing
method of farming of praying crops from the air the nominal capital of the company was
{3000 divided into 3000 shares of {1 each. Lee owned 2999 of the shares and the
remaining shares was held by a solicitor in trust for him. Lee was therefore the
beneficial owner of all the shares. Lee was appointed the company's director and
employed at a salary as the chief pilot. Ac was killed in an aircraft while working for the
company. His widow claimed compensation under the workmens compensation Act.
The issue was whether Lee was entitled to any compensation and whether he was a
worker. A worker was defined as a person who had entered into a contract of service
with an employer as per the stature. Had Lee entered into a contract with the company
or the company was another face of Lee? It was held that it was a logical consequences
of the decision of Salomon v. Salomon & Co. Ltd., that a company is separate from its
members and that Lee and the company were two different persons capable of
establishing contractual relationships between them. The deceased was a workman and
personality and the members are not liable for the company's debts. In the case of a
company limited by shares a member will be liable only for the amount payable on his
shares if the company is limited by guarantee, then the liability is limited to the amount
Under Section 5 of the Companies Act 2015, a company is a company limited by shares
if the
liability of its members is limited by the Company's Articles to any amount unpaid on
the
(c) in the case of a company unlimited by shares no contribution shall be required from
any member exceeding the amount if any unpaid on the shares in zrespect of which he is
from any member exceeding the amount, if any unpaid on the shares in respect of which
(e) In the case of a company limited by guarantee no contribution shall be required from
any member exceeding the amount undertaken to be contributed by him to the assets of
the company on its being wound up. How does this compare with unincorporated
Associations?
In the case of clubs and society's, there will be an implied term that the members are not
personally liable for obligations on behalf of the clubs. In Bradley Egg farm Ltd. v.
Clifford & others (1943) 2 LLER 378 the Plaintiffs wanted their poultry to be tested for
bacillary white Diarrhea. They contracted with a society was not incorporated. The
society official who carried out the test was negligent and as a result some of the poultry
died and the Plaintiff sought to recover damages from the society. The issue was that
since the society did not have a separate legal existence from the members who was
liable for the negligence of the official was it the society or the executive committee? It
was held that to make all the members liable will amount to giving the society the status
of separate legal entity which they did not have. The society therefore was not liable only
association is found liable it will be entitled to be indemnified from the funds of the
Association.
3. HOLDING OF PROPERTY
Corporation personality enables the company to hold property in its own name distinct
The company being a separate legal personality may sue to enforce its rights and it may
also be sued for breaching its own legal duties. Unincorporated associations can sue
under a representative capacity, where one party represents the rest in a representative
Advocate, and not by an official such as a manager. In East African Roofing Co. Ltd. v.
Dandit (1954)27 JKR 86, the Plaintiff company filed an action for the recovery of money
from the Defendant. The Defendant entered appearance and filed a defence admitting
liability, but praying to be allowed to pay the money by instalments. The Company
secretary thereby took a hearing date exparte. On the hearing date no appearance was
made by either party and the court dismissed the action. The company opted to set aside
the exparte dismissal. At the hearing the company was represented by an Advocate. The
only ground for setting aside was that the company had hoped to be represented by their
manager who had gone to court but was in the wrong court room at the first hearing. It
was the first hearing. It was held that a corporation such as a limited liability company
can only be represented by a Lawyer. This was the commonlaw position. To remove this
commonlaw rule Order 3 Rule 4 of the civil procedure rules provides that appearance in
under the corporate seal. There must be a written message under seal, otherwise
5. PERPETUAL SUCCESSION
Since a company is a corporation and an artificial person it has no body, mind or soul
but it rests only on the intendment and consideration of the law. It can not die like a
human person since it is born by a process of law it can only be destroyed by the same
process. Unless and until that process is brought into play, it cannot be brought to an
6. TRANSFER OF SHARES
"The shares and any other interest of a member in a company are transferable in
This however, is subject to section 30 of the companies Act shares in a company are
freely transferable and the transferee steps into the shoes of the transferor as a member.
Section 30 provides that private companies should restrict the right to the transfer of
shares. One must comply with conditions under the Articles in case of private
companies. In a partnership one partner cannot assign his interest except with the
consent of all the other parties. Even then, the outgoing partner continues to be liable
for all the debts and obligations of the firm incurred while he was a partner. The only
way he can escape liability for such debts is by entering a tripartite agreement between
himself, the remaining partners and the creditors whereby he will be released from
liability for the debts of the firm. This agreement is referred to as a oration.
7. BORROWING FACILITIES
A company can borrow money much more easily than sole traders and partnerships.
This is facilitated by the device of a floating charge. A floating charge is "a charge which
floats like a cloud over all the assets of the company from time to time falling within a
generic description but without preventing company from disposing of those assets in
the ordinary course of business until something causes it to crystallise and fasten on the
assets". A floating charge is an equitable security. It does not attach on any property at
all as opposed to the legal charge which is attached to a particular property of the
company.
The company is not limited from disposing such a charge. Sole traders and partnerships
are not allowed to do so. Anything in the possession of the bankrupt can be attached but
DISADVANTAGES OF INCORPORATION:
(i) Formality
(ii) Expense
iii) Publicity
In order to form a company the promoters must prepare and register certain
documents. Throughout its life a company is required to file certain documents like
annual returns balance sheets and profit and loss Accounts. These are public Documents
and may be examined by any member of the public on paying of an examination fee.
Their preparation requires the payment of money. The company's affairs are therefore
publicised and there is no more privacy, as there is a lot of interference in the company's
affairs.
Companies are also subject to the partnership doctrine to which partnership and sole
Although Salomon's case finally established that a company is a separate and distinct
legal person, there are situations in which this fundamental principle of corporate
personality is ignored. In such situations, the law ignores the corporate entity of the
These situations must be referred to as exceptions to the instances under which the
corporate personality is ignored are provided for under statue and by commonlaw.
Under section 129 of the companies Act 2015 a company is required to have at least one
director who is a natural person. This is complied with if the office of director is held by
1. NEGLIGENCE
Under section 194 (2) a provision in the company's constitution, contract or scheme of
management that purports to exempt a director from any liability that would otherwise
attach to the director in connection with any of text on relation to the company is void.
2. INDEMNITY
Under section 194 (3) provision by which a company provides directly or indirectly for
attaching to the director in connection with any negligence, default or breach of duty or
trust in relation to the company is void. However under section 194 (4) the company
3. ACCOUNTS
Under section 630 of the companies Act, every company shall keep its accounting
records at its registered office and ensure that the records are open to inspection by the
officers of the company for a period of not less than seven years. Under section 631, of
the company does not comply, then the company and each officer of the company who is
in default commits an offence and is liable, in the case of the corporate body to a tune of
2. FRAUDULENT TRADING
"If in the course of the winding up of a company it is shows that proper works of account
were not kept by the company at any time during the period of two years immediately
proceedings the commencement of winding up, whichever is the shorter every offices of
the company who is in default shall unless he shows that he acted honestly in which the
It is shown that any person has been carrying on business with intend defraud creditors
or for any fraudulent purpose, the courts in the application of the official receiver or
liquidator or creditor may declare that any person who were knowingly parties to the
fraud shall be personally responsible for the debts or any others liabilities of the
directors of the company william and this brother appointed william as the managing
director with a salary of {1000 p.a. Within he first six months, the company was debited
with the whole of that salary which was more than he should have got. During that
period the company made a loss of {2200. During that year when the company was still
in financial problems the directors paid themselves {250 dividends. Towards the end of
1929 to March 1930 the company was in serious financial troubles that it could not pay
its dents as they dell due. Inspite of this William ordered goods worth {6000 which
became the substance of a charge contained in a debenture held by him. Around the
same time William continued to repay himself a loan of {600 which he had lent to the
company. By mid 1930, the company with the knowledge of William Owed about {5600
for goods supplied. Dividends, by law are not declared when the company is making
losses. William continued doing this and ordered goods making the company to incur
debts. The liquidator applied for William to be held liable under section 323 in that he
knew that the company could not pay debts, he was doing so fraudulently and should be
personaally liable.
It was held that for the company to carry on business yet William knew, was
fraudulently and William was personally liable to the credidors. In the words of Justice
Mongham:
"If a company continues to carry on business and incurs debts at a time when
In Re Patrick and Lyon LTD(1933) CH. 786, A Company had financial problems and
"The word fraud and fraudulent purpose where they appear in the section are words
which
connote actual dishonesty involving, according to the correct notions of fair trading
among commercial men real moral blame. No Judge has even been willing to define
fraud
In Re Cyona Distributors, Ltd [1967] Ch. 889 an application to court was made by a
creditor and it was held that the creditor was to be paid his money for the discharge of
his debt. Because the creditor made the application he was entitled to payment. Loard
Denning held that where the application is made by the official receiver or liquidator,
then the money will from part of the general assets liable for distribution to the
creditors.
Officers have been held liable for the omission of the word Ltd. The importance of the
word limited is that it is a red flag warning that members enjoying limitation of liability.
and coach contractor. Locally it was venom as Goldsmith & coaches and this was the
name printed at its premises. It purchased some property which was registered in the
name Goldsmith's coaches (Sicklesmere) Ltd. It then entered into a contract for the sale
of that property to the defendant. When the defendant realised that there was no
company under that name he refused to finalise the contract. Meanwhile a
supplementary conveyance was made in favour of the Plaintiff in its proper name. The
Plaintiff sued for specific performance. Held, applying the rule that a contract is to be
was clear that holdsmith coaches (sicklesmere) Ltd was an inaccurate description of the
Plaintiff company.
A limited company like a natural person has characteristics other than its name. Such as
essential to the validity of a contract made on behalf of a limited company that the
company should be described with precision. The Plaintiff company was entitled to an
(ii) Holds more than half in nominal value of its equity share capital or
(iii) The first mentioned company is a subsidiary of any company which is that other's
subsidiary.
The Accounts of the holding company may not give the proper picture of the economic
"150(1) where at the end of its financial year, a company has subsidiaries, accounts or
statements (in this Act, referred to as group Accounts) dealing as hereinafter mentioned
with the
state of affairs and profit or loss of the company and the subsidiaries shall .. be laid
before the
company in general meeting when the company's own balance sheet and the profit and
loss
(a) a consolidated balance sheet dealing with the state of affairs of the company and all
(b) A consolidated profit and loss Account dealing with the profit or loss of the company
1. AGENCY RELATIONSHIPS
Logically, there is no reason why a company may not act as an agent of another. Where
there is an agency relationship, the courts will ignore the separate entity of each
company and instead give effect to the economic reality behind the legal theory. The
best example of agency relationship is where one company is a subsidiary of another. In
Smithstone & Knight Ltd. v. Birtningham corporation [1939] 4 ALIER 116, the Plaintiffs
were paper manufacturers in Birningham. In the same city there was a partnership
called Birningharm Waste Co. which did business as merchants and dealers in waster
paper. The Plaintiffs bought out the partnership as a going concern and caused it to be
registered as a company. The share capital of the newly formed company was {502
divided into 502 shares of {1 each. The Plaintiffs beneficially owned all the shares. The
newly formed company carried on business which previously belonged to the Plaintiffs.
It occupied business premises as tenants of the Plaintiff but never paid any rent. It
employed no separate staff, kept no books of accounts: such books being kept by the
Plaintiffs. All the profits made by the company was credited to the Plaintiffs.
removal and disturbances. The issue was who would be entitled to the compensation.
Under the legislation giving the corporation the power to make a compulsory purchase
order an occupier could not claim for compensation unless it enjoyed a tenancy for a
period longer than one year. The subsidiary's tenancy was a one year. The Plaintiff, the
parent company argued that it was really the person in occupation. It was held that
while the subsidiary was a separate legal entity it might be acting as the agent of its
shareholders in this case the Plaintiff company. Further more the occupation of the
premises by the subsidiary was technical only and solely for the purposes of the parent
Re F.G. Films Ltd [1953]I Alier 615; [1953] Iwlr 483 The company was incorporated in
England. Its capital was {100 in {1 shares; 90 of which were held by the President of an
American company and 10 were held by another director a British Subject. The company
contended that it was the maker of a film which should therefore be registered as a
British film. The court refused to agree that the film was made by the British company
merely the nominee or agent of the United States company which had provided {80000
for the making of the film and which had brought the British company into existence for
the sole purpose of enabling the film. The modest capital of the British company and its
shareholding were treated by the court as evidence that the British company had been
Another case which explains this point is RE BUGLE PRESS LTD [1961) Ch. 270. A, B
and C were the only shareholders in a company. A held 45% of the shares, B held 45% of
A & B persuaded C to sell his shares to them but he refused to do so. A and B thereupon
formed another company, AB Ltd. which made an offer to the shareholders of ABC Ltd.
The offer was accepted by A & B. They then incurred section 200 of the companies Act,
which provides that if one company makes an offer to take the shares of one company
and if the offer is accepted and it gets 90% of the shares by buying out the shareholders,
then it can buy up the remaining 10%. Upon inworking section 210, they took all the
shares. It was held that this was a far fetched attempt to evade the fundamental rule of
company law which for bade the majority shareholders from expropriating the minority.
The courts will not recognise the corporate entity in such a case. Similarly, the separate
legal entity principle was ignored in GILFORD MOTOR CO. LTD v. HERWE [1935] ch.
935 where the company was formed to avoid the burden of a covenant restricting the
businesses which could be carried on by the company's former Managing Director in in
property to the Plaintiffs. He later refused to convey the property to the Plaintiffs but
formed a company for the purpose of acquiring that property and he transferred the
property to the company. The Plaintiff sued for specific performance. In ordering
"a creative of the Defendant, a device and a sham, a mark which he holds before his face
in an
GROUP ENTERPRISE
There is a general tendency by the courts to ignore the legal entity of various companies
within a group and instead at the economic reality of the entire group. In doing so, the
courts are following the interpretation of the legislature under s. 150 – 154 where group
Accounts are needed in respect of associated companies. In Holdsmith & Co. v. Caddies
[1955 IWLR 352, the Plaintiff was appointed Managing Director of the Defendant
company for a period of 5 years. At that time the defendant company controlled three
subsidiary in terms that he should perform his duties and exercise his powers in
relation to the company and its existing subsidiaries which from time to time may be
assigned to him by the Board of Directors. One year later, the Board of Directors of the
Defendant company resolved that the Plaintiff should confine his attention to only one
of the company’s subsidiaries. The Plaintiff regarded this as a breach and sued for
damages. It was held that in essence, the subsidiary company and the Plaintiff were one
economic entity and there was no breach of contract.
RESIDENCE
The issue of the residence of a company is important for taxation purposes. In De
Beers Consolidated mines Ltd. v. Howe [1906] A.C. 455, the appellant company was
registered in South Africa. Its general meetings were always held there. Some of the
directors lived in Smith Africa. Its meetings were hold in Kinmberley and
in London. However, a majority of the directors lived in London and most of the
director’s meetings were held there. Most of the Chief operations of the company were
controlled from London. It was held that the company was resident in
the Unlimited Kingdom for purposes of taxation. Lord Loveburn L.C. stated:
“A company cannot eat or steep; but it can keep house and do business. We
where it kept house and did business. A company’s real business is carried on
matters. In Re Crown Bank (1890) 44 ch. 634 Mr. Justice North expressed the view that
a clause which states that the business of the company is to carry on any business which
the directors consider beneficial to the company is not a statement of the company’s
objects as required by the Act. As per section 17 of the companies Act the Registrar’s
certificate of incorporation is conclusive evidence that the company has stated its
objects clearly. If the objects clause were to state for example, “that the company will do
anything beneficial to the company”, then it need not be registered The registrar need
not register as this may lead to ultravires trains action. This is subjective clause and the
company can do anything that is ultravires.The doctrine of ultravires is thus long over
The counts have made sure that companies do not evade this need. The counts use
(a) The Ejusdem geneis rule or the main objects rule of construction
This is where the memorandum of association expresses the objects of the company in a
series of paragraphs and one paragraphs or the first, second and third paragraphs
appear embody the main objects of the company or the other paragraphs will be treated
as merely ancillary to these main objects and as limited or controlled thereby. However
not withstanding these rules the business community has invented the independent
objects. This is a situation where the promoters state at the bottom of the memorandum
that each of the objects is independent and each of the subclauses should be created as
equally important. The leading interpretation is cotman v brongham (1918)A C 514, The
company was formed to acquire certain members and tabacco estates.The objects
clauses clause contained clause 8 giving the power to promote and form companies and
deal in the stock and shares of such companies clause is giving a general power to deal in
(a) That the objects specified in any clause were not to be restrictively construed by
(b) That no object should be construed as subsidiary or ancillary to any other entry in the
objects clause. The company underwrote shares in another company dealing in oil into
liquidation and was placed on the list of contributions- It applied to be struck off that
list on the ground that the entire transaction was ultravires. The house of Lords
concluded however that the underwriting transactions were authorised by clauses 8 and
and powers specified as objects and its clauses designed to prevent any
However, the independent objects clause cannot turn powers into objects. Thus, a
Bank Ltd [1969] 2 WLR 791 the company was created with objects enabling it to provide
services and accommodation to overseas visitors. Some years later, after a change in
management it begun pig farming. The objects did not include the power to carry on pig
farming but they did enable the company to borrow money contained a subjective
ancillary clause enabling the company to carry on any trade or business which in the
ancillary to the business of the company and provided that all the items in the objects
clause were to be construed as separate and independent objects. The bank knowing
that the company was engaging in pig farming, and knowing of the objects clause,
advanced money to the company on the security of a debenture was resisted by the
liquidator. It was held that not withstanding the ancillary clause and the clause
requiring each itemto be read as an independent object, the entry relating to borrowing
was a power rather than an object that borrowing for any purpose not warranted by the
objects clause was utravires and that the bank could not rely on the debenture.
Under this rule if the main object of the company fails then the rest of the objects also
fail. Such an object is the substratum meaning the main object of the company. If the
main object fails, then the company subject to winding up. In Re German Date Coffee
Co. Ltd (1882) 20 ch. D. 169 The major object of the company was to acquire a German
patent to manufacture coffee from dates. The German patent was not granted but the
company obtained a Dutch patent for the same purpose. Two shareholders petitioned
the court for a winding up order on the grounds that the company’s object had failed. It
was held that the substration had failed as it was not possible to carry out the objects for
which the company was formed and therefore it was just and equitable for the company
to be wound up. See S. 219 of the companies Act. Kay J. stated that where the company
“…then, although the memorandum may contain other general words, which include
the doing of the other objects, those general words must be read as being ancillary to
that which the memorandum shows to be the main purpose and if the main purpose
However, the substration of the association may fail but the court will not make an order
until members of the company petition for a winding up order if members denied not to
petition them then the company continues in business. The ultra vires doctrine is to
protect members and creditors. The creditors unless they are secured cannot sue on
ultra vires transactions perse. The doctrine, under current business practices has been
prejudicial to creditors. This is illustrated by Re jon Beanforte London Ltd. [1953] ch.
131 [1953] I ALLER 634 the company was empowered to carry on business as
manufacturers of womens clothing. Later it begun to manufacturer veneer plywood
panelling. The company later went into liquidation. A supplier of coal later claimed
inter alier on the ground that the fuel supplied by him could have been used for an
company’s letterhead disclosed that the company was carrying on the business of
plywood manufacturers. It was held that the supplier was fixed with knowledge of the
memorandum which did not empower the company to carry the plywood business and
had actual knowledge that the company was carrying on business that was ultra
vires. Although the supplier could have recovered had he had no notice of the purpose
for which the coal was being used, he could not having such knowledge from the letter
head prove for the debt which was incurred on an ultravires contract.
There are areas where the doctrine is vigorously enforced. This is mainly in the field of
these are made for the benefit of the company. In Huthon C. Wstcork the company
(1883) 23 ch. D. 654 the company had disposed of the whole of its undertakings and it
was no longer a going concern as trading body. It existed only for purposes of winding
up. In its general meeting it resolved to expend part of the purchase money on
gratuitous payments to directors and other officials. It was held that since the company
“The law does not say that there are to be no cakes and ale…except such as are
required for the benefit of the company. Charity has no business to sit with the
Board of Directors”
Suppose there was an express provision in the company’s memorandum providing for
this, would this be ultra vires? This was decided in RE LEE BEHRENS
[1832]2 CH. 36. The objects clause contained an express power to provide for the
welfare of the employees ex employees, widows, children and other dependents by
granting money or pensions. Three years before the company was wound up, the Board
of Directors decided that the company should enter into a contract for the payment of
pension to the widow of a former managing Director. The liquidator rejected the
pension on grounds that it was ultravires it was held that the transaction was not for the
business and was ultravires, null and void. The question of whether this was going to be
beneficial to the company in any way never presented itself in any way. The payment
Eve J. stated:
“But whether it be made under an express or implied power all such grants
involve an expenditure of the company’s money and that money can only be
business and the validity to such grants is to be tested by the answers to three
pertinent questions:
(a) is the transaction reasonably incidental to the carrying on of the company’s business?
(c) Is it done for the benefit and to promote the prosperity of the company”
Should the courts interfere and direct the activities of companies? In charterbridge
corporation v. Lloyds bank [1970] ch. 62, the case is one in which directors have abused
the powers entrusted to then, but have acted within the ambits of powers possessed by
the company. In this case castleford, a company in group of companies executed first
and second mortgages on its freehold property in order to guarantee the indebtedness of
other companies in the group of which it was a member. A second mortgage was
executed in favour of the bank. Castleford had express power to mortgage its properties
to secure the obligations of any other person or company with whom it had dealings or
in whose business it was concerned. Ultimately castleford sold the mortgaged property
to the Plaintiff company but failed to pay off the mortgage to the bank. The bank
threatened to realize its security and the Plaintiff company thereupon brought action for
a declaration that the mortgage in favour of the bank was ultravires. The ground upon
which the Plaintiff company relied was that the directors of castleford in granting the
mortgage acted ultravires in not considering whether the granting of the mortgage was
for the benefit of the castleford company alone. The action was dismissed.
1. the directors in considering the transaction could have regard not only to the affairs of
the company considered in isolation but also to its affairs as a member of the group.
2. Where the directors act under an express power, the disposition cannot be ultravires
but it may be voidable where in so acting the directors bade themselves upon
considerations which they are not entitled to take into account when determining
whether the transaction is for the benefit of the company. In Parke v. Daily News Ltd
(1962) ch. 927 A shareholder sued to restrain the company from distributing among its
former employees a sum in excess of {1,000,000 which was to be received from the sale
money. The company ws under no obligation to make such payments. It was held that
proposed payment was ultrvires and that the proposed payment accordingly could not
“The defendants were prompted by motives which however londable and however
enlightened from the point of view of indutrial relations were such as the law would not
recognise as a sufficient justification. Stipped of all its side issue, the essence of the
matter is this: that the directors of the defendant company are proposing that a very
large part of its funds should be given to its former employees rather than the company
and that is an application of the company’s funds which the law will not allow”.
In another illustrative case, Re. Toth (1967) I WLR 432 Roith was the major shareholder
solicitor about possible arrangements after his death. The solicitor advised that Toith
should enter into a service agreement with any of the two companies. Consequently, at
an extra ordinary general meeting of one of the companies, the memorandum was
altered by the inclusion of a new clause permitting the company to “give pension
gratuitous pay or any charitable and to any person who may have served the company or
presecessor”.
A service agreement was entered between Roith and the company. Roith promised that
as general manager he would devote the whole of his time and ability to the company’s
Roith. Roith died after about one year. Four years later the company went into
liquidation widows claim. The company’s memorandum provided for the situation
expressly and the issue was whether the agreement between Roith and the company was
ultravires. It was held that the pension had not bee made bonafide for the benefit of the
company and to promote the prosperity of the company but rather the whole object of
the amendment was to benefit Mrs. Roith. If directors act malafide they are in breach of
their duty to the company. One of the cases in which the courts have interpreted the
ultravires doctrine in favour of the transaction in issue is Evans v. Brunermound & Co.
[1921] 1 ch. 359. The principal object of the company was to carry on business as
chemical manufacturers. There were various other ancillary objects enabling the
the other objects. A meeting of the company authorised the directors to distribute
{10,000 to universities or scientific institutions as they may select for the furtherance of
scientific education and research. A shareholder petitioned the court that this
resolution was ultrvires. It was held that the proposed expenditure was anticipated to
create a trained reserviour of the company could draw its personnel in future and the
expenditure was beneficial to the company and conducive to its progress as a chemical
manufacturer. It was held to be intravires. What attitude should the courts in this
country adopt in respect of the payment of funds gratuitously? The judicature Act,
allows us to apply English law to suit our requirements. There is however, no authority
on this matter in this country. The socio-economic conditions will require us to apply,
English law to suit our conditions – see Nyali Ltd. v. Attorney General [1957] I ALLER
646; [1956]IQB1.
REMEDIES TO ULTRAVIRES
TRASANSCTION VICTIMS:
Whether a contract is ultravires or not will depend on the knowledge of the party
dealing with the company. In Re David Payne [1904] 2 ch. 608 X who was a director of
a company, A and who was also interested in company B learnt in his private capacity
that company B, which had general borrowing powers proposed to borrow a loan for
which used the money as proposed. The money was borrowed on the security of a
debenture. Was this debenture valid? The money was borrowed for a purpose outside
the objects of the company and yet the directors knew this. This court held that where a
company has a general power of borrowing for its purposes, where the company
borrows within the limits of that power the person who lend the money is not bound to
inquire for what purpose the borrowing company is to apply the money so
borrowed. The director’s private knowledge could not be imputed to the company. L.J.
Romer hled.
“Where you have a limited company with a memorandum of association
borrowed within the limits of the power of borrowing, the person who lent the
money is not bound to inquire to what purpose the borrowing company is about
ultravires is to render the whole transaction null and void it follows that the purchaser
shall not acquire any rights in such property. This also applies to any money lend to the
equity. If the money has been paid into the account of a separate transaction it may be
traced into such an account. If the money is mixed up with other funds and leases to be
identifiable in equity, the lender is still entitled to a charge on the mixed fund
proportionate to his own share if there are other claimants. The directors are treated as
A third party may also bring a personal action against the directors with whom he had
dealt. The third parties have an equitable claim against them for restitution.
In 1945 in England, the cohen committee proposed that as regards third parties, a
company should have all the powers of a natural person and the objects clause in the
memorandum should operate only as a contract between the company and the members
This recommendation overlooked the fact that third parties dealing with the
company will still be presumed to have constructive knowledge of the company’s public
documents and that they will be presumed to know when the directors exceed their
authority.
In 1962. The Jenkins committee recommended that even the constructive notice
rule should also be abolished so that even the abolish so that even actual knowledge of
the contents of the memorandum and Articles should not deprive a third party of the
right to renounce a contract if he reasonable failed to appreciate that this precluded the
company or its officers from entering the contract. The constructive notice rule has
now been abolished in England, but it still remains the law in this country. In order to
avoid the ultra vires rule, the objects clause may be amended by the company. Section 8
of the companies Act, empowers a company by special resolution to alter its objects. So
alteration, companies can easily alter their objects clauses and thereby avoid the trap of
The next clause in the memorandum states the nominal capital to which the
company wishes to be registered and the division thereof into shares of fixed amounts.
The last clause states that the liability of the members shall be limited.
ARTICLES OF ASSOCIATION
The Articles of Association is one of the important documents relating to the company’s
constitution section 9 of the companies Act, states that a company limited by guarantee
must register with the registrar Articles for the company. Under Section 10 it is
provided that in the case of an unlimited company the Articles should state the number
A company limited by shares or may not register Articles of Association. The Articles
so registered may adopt all or any of the regulations in schedule 1 Table A of the
companies Act. Table A is a model form of Articles of Association for a company limited
by shares. It is in two parts; part 1 is designed for public companies and part 2 for
c) It may register its our set of Article and exclude table A altogether. In the case of a
company limited by shares if Article are not registered or even if Articles are registered
in so far as they do not modify or exclude table A, then the regulations in Table A
automatically become the company’s Articles of Association in the same manner and to
the same extent as if they were contained in the duly registered Articles.
i) in English language.
ii) Printed
iv) Dated
lease one witness who should attest the signatures and add his occupation and address
whereas the memorandum confers powers upon the company the Articles determines
how such powers shall be exercised. In other words, the Articles regulate how the
internal affairs shall be managed. Among other things, the Articles deals with:
- Transfer of shares
- General meetings
- Voting rights
- Appointment of directors
- Payment of dividends
- Accounts
- Winding up and other miscellaneous matters.
The Articles also provide the dividing live between the powers of shareholders and those
of directors.
Under section 22 of the companies Act, subject to the provisions of the Act when the
memorandum and Articles are registered they bind the company and the members as if
they had been signed and sealed by each member and contain covenants on the part of
each member to observe all the provisions. This section has been interpreted to mean
that once the Article have been registered they constitute a contract between the
company and each individual member. In Hrkman v. Kent or Romney Marsh sheep
Breeders Association Ltd [1915] I ch. 881, the Articles of the company provided for
arose between Hickman who was a shareholder and the company. Hickman filed a
court action against the company. The company contended that the court action was
premature since Hickman was bound under the Articles to refer the matter to
arbitration. The company applied for the action to be stayed. It was held that the
company was entitled to have the action stayed as the Articles amounted to a contract
between the company and Hickman to refer disputes between them to arbitration. The
i) No Article can constitute a contract between the company and a third party.
not in capacity other than that of a member as for instance, solicitor promoter or
iii) Article regulating the rights and obligations of the members, generally as such do
create rights and obligations between them and the company. It is a basic rule that the
Articles do not confer rights upon an outsider or upon a member who claims rights in a
capacity other than a member e.g as a director.
Eley v. Positive government security life Assurance Co. Ltd [1876] I Ex. D. 88
The Articles provided that the Plaintiff should be the company’s solicitor for life
removable only for misconduct. He became the solicitor and a member. Later the
company terminated his employment. The Plaintiff sued the company for breach of the
contract contained in the Articles could function as an agreement between the members
to appoint the Plaintiff, or a director tot he directors to appoint him but the Articles did
not, of themselves constitute a contract between the plaintiff in his capacity as solicitor
There is a dicta in the cases that the contract in the Articles of Association is not amerely
a contract between the company and the members, but also among the members
amongst themselves.
In word v. odessa waterworks Co. (1889) 42 ch. D. 636, the plaintiff, who was a member
of the company petitioned the court to stay the implementation of a resolution not too
pay a dividend but to issue debentures instead. The shareholder challenged this
resolution. Conceding that the shareholder was entitled to the remedy, sterling J. said,
shareholder and the company, but also between the individual shareholder and every
In Ray field v. Hands, [1960] ch. 1 a member of a company in an action against the
directors sought to compal the directors to purchase his shares in terms of the
Article. The company was not joined as a party. Article 11 of the company’s Article
provided”
“Every member who intends to transfer shares shall inform the directors who will
The Plaintiff called upon the directors to take his shares at a fair value but they declined
to do so. The issue was whether the plaintiff could enforce this Article against the
directors. It was held that the Articles bound the defendant directors to bury the
plaintiff’s shares and related to the relationship between the Plaintiff as a member and
the defendant, not as directors, but as members of the company, the Article amounted
to a contract, between the directors in their capacity as members and in that capacity
add to its articles. Any such alteration or addition is as valid as if it was originally
meeting of which twenty one days notice of the intention to propose the resolution as a
special resolution has been given. In Andrews v. has meter Co. Ltd [1897]I ch. 361, the
issue was whether a company, which under its memorandum and Articles had no power
to issue preference shares could alter its articles so as to authorise the issue of such
shares by way of increased capital. Held, that on so far as the company’s constitution
under powers conferred by the Act. The power to alter the Articles is a statutory power
and the company cannot deprive itself of the right to exercise that power.
Although companies have power to alter their Articles, there are limitations to this
3. Increase liability of a member or require him to take more shares, unless he agrees to do
company.
5. The variation of the Articles must not conflict with section 74 of the companies Act, as
to the rights of shareholders affected by a variation of class rights to apply to the court
6. The resolution must not be incusion tent with an order of the court made under section
company. Anybody claiming that there is oppression can petition the court to bring to
an end. Once the court makes such an order, the company cannot alter its articles to
7. The alteration of the Articles must be in good faith and for the benefit of the company as
a whole. In Allen v. the hold Reefs of West Africa [1900] ch 656, The company had by
its articles given itself a lieu on all the shares which were not fully paid. The company
sought to extend the lieu to all the shares by an alteration of the articles. It was held
that the company was entitled to extend the lieu by an alteration of the articles, in
“Wide however as the language of section 13(a), the powers conferred by it must
like all other powers be exercised subject to those general principles of law and
equity which are applicable to all powers conferred on majorities and enabling
them to build minorities. It must be exercised not only in the manner required
by law but also bonafide as required for the benefit of the company as a whole”
Similarly in shuttleworth v. Cox Brothers [1927] 211 B9 The Articles of Association of the
company stated that the Plaintiff and four others should be the first directors of the
company and that they should be entitled to hold office as long as they hived unless the
1. bankruptcy
2. insanity
6. Resignation.
The plaintiff failed to account to the company for certain monies he had received on its
behalf. At a general meeting of the company a special resolution was passed that the
Articles should be altered to add a 7th ground for the disqualification of a director. The
was a request in writing by all the directors that a director should vacate office on such
request. Such request was subsequently made to the Plaintiff. He brought action upon
the company for breach of an alleged contract contained in the original Articles to the
effect that the Plaintiff was to be a permanent director and that he was still a director of
the company. There was no malafides on the part of the directors. It was held that the
contract, if any between the Plaintiff and the company contained in the Articles in their
original form was subject to the statutory power of alteration and if the alteration was
made bonafide for the benefit of the company, then it was valid and there was no breach
“In this case the contract denies its force and effects from the Articles itself
The court had to decide the meaning of what is beneficial to the company, L.J. Scotton
observed:
“It is not the business of courts to manage the affairs of the company. That is for
the shareholders and their directors. The absence of any reasonable grounds for
deciding that a certain course of actin is conducive to the benefit of the company
may be a ground for finding lack of good faith or for finding that the
shareholders,
with the best motives have not considered the matters which they ought to have
considered …But I should be sorry to see the courts go beyond these and take
upon itself the management of concerns which others may understand better
than
It is not for the court to decide what is of benefit to the ompany. In side bottom v.
Pershow Leese & Co. [1920] I ch. 154 in a director controlled private company a
minority shareholder was interested in some competing business. The company passed
competed with the company to transfer the shares at a fair value to a nominance of the
directors. The plaintiff was served with such a request to transfer his shares. He filed a
court action challenging the validity of the new Article. It was held that the company
had a power to introduce into its article anything that could have been validity included
in the original article provided that the alteration was made in goodfaith and for the
benefit of the company as a whole. Since it was beneficial for the company to get ride of
In Brown v. British Abrassive Wheel Co. [1919]I ch. 290, A public company was in
urgent need of further capital which the majority holding 98% of the shares were willing
to supply provided that they could buy out the minority. The tried to persuade the
minority to sell their shares to them but the minority refused. They proposed to pass a
special resolution adding to the Articles a clause whereby any shareholder was bound to
transfer his shares upon request by the holders of 90% of the issued share capital. It
was held that this was an attempt to add the new clause in order to acquire compulsively
the shares of the minority when there was no such power. Such an attempt was not for
the benefit of the company as a whole but only for the benefit of the majority. An
altered form might lead to a breach of contract such is particularly the case as regards
contracts of between companies and their Directors. Can a company alter its Articles in
such a way as to dismiss a director from office? A director may hold office in one of three
provision of the Articles. Where a director holds office under the Articles without a
service contract then his service is conditional that the Articles may be altered at
entirely independent of the Articles then any alteration which affects his contract with
the company will constitute a breach of contract in respect of which the company will be
liable in damages. In Southern Foundries v. Shirlaw [1940]A.C. 701 H.L. The Plaintiff
was by a written contract appointed a managing Director of the company for a period of
10 years. The agreement was not expressed to be subject to the Articles any way. The
original Articles set out grounds on which the office of the director should be vacated
subject to this terms of any subsisting agreement. The Articles also provided that
should the MD cease to be a director he should also be a director he should also cease
upso facto to hold office as MD. As a result of some company reorganisation, new
Articles were subsequently readopted removal of any director by notice. Persuant to this
Article the company purported to remove the Plaintiff from his office of director with
the consequence that his appointment as Managing Director was also terminated. There
was a contract independent of the Articles. The Plaintiff brought action for breach of
contract. Held, Plaintiff entitled to damages for breach of contract. Lord Atkin,
stated, “If a party enters into an arrangement which can only
operative.
This decision was followed in shindler v. Northern Raincoat Co. Ltd [1960] IWLR
1038. The Plaintiff was engaged by the defendant company as managing Director under
a 10 year written service agreement. Four months later, the share capital of the
company was sold by the existing holding company to another company which did not
wish to retain the Plaintiff’s services. The company accordingly passed a resolution
action for wrongful dismissed. Held, that where a director has an express contract for a
specified period, there is an implied undertaking that the company will not revoke his
appointment as a director during that period. If the company therefore alters its article
in a manner that breaches an independent contract, it will be liable for damages in that
breach. Where a Director is appointed in general terms and without limitation of time
the company may dismiss him at any time and he is not entitled to notice. In Read v.
Astoria Garage Ltd [1952]ch. 637 one of the Articles of the company stated that the
any cause to be a director of the company or if the General meeting resolves that his
term of office as Managing Director be determined. The Plaintiff was appointed and
served as managing Director for 17 years. Thereafter the directors decided to relieve
him of his position as Managing Director. This decision was subsequently ratified by the
General meeting. The Plaintiff claimed damages for wrongful dismissed. Held, that it
was not a breach of contract for the company to dismiss the Plaintiff without notice
because on the time constructions of that Article , the company had expressly reserved
to itself the power to do so and therefore the Plaintiff’s appointment was immediately
and automatically determined on the passing of the resolution at the General
meeting. When a company proposes to alter its Articles in a manner which may give rise
to breach of contract can it be restrained for taking a course of action? There are two
conflicting cases. Point v. Symon [1903]2 ch. 506. It was held that be granted because
the company had a statutory right to alter its articles and could not contract out of that
right. In British out of that right. In British Murac Syndicate v. Alperton Pubber Co. Ltd
‘ A company cannot be precluded from altering its articles thereby giving itself
power to act upon the provisions of the altered articles but, so to act, may
adoption of the new Articles of Association but the company to act upon them
Class rights in company law recognises the existence of clauses of shareholders in the
company. Bowen L.J. in sovereign Life Assurance Co. v. Dodd [1892] 2 QB 513 defined
“The word class is vaque. It must be confirmed to those persons whose rights
with a view to their common interest. “The term relate to those people whose
rights are similar to the extent that they can consolidate them together. In the case
itself, it was held that policy holders whose rights had matured, were a different class
from those whose policies had not matured.
Article 4 of Table A provides that where the share capital is divided into different classes
of shares, may be varied with the consent in writing of the holders of ¾ of the issued
shares of that class or with, the sanction of a special resolution passed at a separate
Under s. 74 within 30 days of the day the consent was given or the resolution was passed
application can only be made by way of petition by the holders of at least 15% of the
issued shares of that class which did not consent to or vote in favour of the
variation. Where such an application is made the variation will not have any effect
unless and until it is confirmed by the court. Class rights may be set out in the Articles
that if class rights are contained in the memorandum or if the memorandum prohibits
alteration , then these rights cannot be altered. The company can entrench these rights
Since a company is an Artificial person, it can only act through the agency of natural or
human persons. The decisions of the majority of the members of the company in the
impossible for the company’s day to day position to attend to the company’s meetings
and this rule had to be changed. The constitution of the company provides for a Board
reason companies have two main organs: General meeting and the Board of
Directors. The authority to exercise the company’s powers is delegated to the Directors
acting as a Board.
BOARD OF DIRECTORS: s. 177-205 Under s. 177 every public company must have at
lease two directors and every private company must have at lease two directors.
Article 75 of table A states that the names of the first Directors shall be determined in
In the case of a public company, with a share capital section 182 requires that a person
may not be appointed a director by the Articles unless on registration of the Article, he
has:
2. (a) Signed the memorandum for a number of shares not less than his qualification if
any.
(c) Taken from the company or paid or agreed to pay for his qualification shares.
(d) Signed and delivered to the registrar an undertaking to take from the company and pay
(e) Made and delivered to the registrar a statutory declaration that the number of shares
not less than the qualification, if any are registered in his name.
After the initial appointment, it is usual for Articles to provide for an annual retirement
(a) Ceases to be a director by virtue of section 183 relating to share qualification or S. 186,
removal on attainment of 70 years.
(b) If he becomes bankrupt or makes any arrangement or composition of his creditors. An
undercharged bankrupt is not allowed to act as a director without leave of the court. A
(c) Becomes prohibited from being a director by an order under s. 189 which empowers the
(f) Absents himself without permission from directors meeting for more than six
months. Where the Articles require a share qualification, then s. 183, requires, the
shares to be taken up within two months or else the office will be vacated if they are not
DIRECTORS:
Until the end of the 19th century, it was generally assumed that the general meeting was
the company and the directors were merely the agents of the company. Although this
view held sway for a longtime, it was modified on the advent of the 20th century. The
earliest authority or the relationship between the General Meeting and the Board of
Directors is Automatic Self Cleansing Filter Syndicate v. Cunning Game [1906] 2 ch.
34. The court of Appeal made it clear that the division of powers between the Board and
the General Meeting depends in the case of registered companies entirely on the Articles
of Association and where the powers have been vested on the Board by the Articles then
the General Meeting cannot interfere with the exercise of those powers. The company’s
relevant Articles provided that subject to such regulations as might be made by extra
ordinary resolution the management of the company shall be vested in the directors who
might exercise all the powers of the company which were not by statute expressly
required to be exercised by the company in the General meeting. Another Article
expressly empowered the directors to deal with any property of the company on such
terms and conditions as they might deem fit. At the general meeting of the company, a
resolution was passed by a simple majority of the shareholders directing the Board
shareholders directly the Board to sell the company’s assets on specified terms. The
directors were of the opinion that a sale on those terms was not of benefit to the
company, and therefore declined to carry out the sale. Were the directors bound to
carry out the directives of the General Meeting? It was held that the Articles constituted
a contract by which the members had agreed that the Directors and the directors alone
shall manage the affairs of the company. Unless and until the powers vested in the
directors were reduced by an extra ordinary alteration of the Articles, they could ignore
refuse to carry out the Sale Agreement adopted by an ordinary resolution of the General
Meeting.
The division of the powers between the General meeting and the Board of Directors in
“The Business of the company shall be managed by the directors who many
exercise all such powers of the company as are not by the Act or by these regulations
required to be exercised by the company in the general meeting.” In QUIN & AXTENS
V. SALMON [1909] A.C. 442. It was established that where the formula contained in
with a decision of the directors unless they are acting contrary to the provisions of the
Act or the Articles. The company’s two managing Directors who were Axtens and
Salmon held between then the bulk of the company’s ordinary shares. One of the
Articles provided that the company’s business should be managed by the directors who
might exercise all the powers of the company subject to such regulations be inconsistent
with the provisions of the Articles as may be prescribed by the company in the General
meeting. Another Article stated that no resolution of a meeting of the directors having
for its object, the acquisition or letting of certain premises should be valid if either
Salmon or Axtens dissented. The directors resolved to acquire and to let certain
properties but Salmon dissented. An extra ordinary General meeting was held at which
Appeal, the A.L. held that the shareholders resolutions were inconsistent with the
In Shaw Sons Ltd v. Shaw [1935] 2 ub 113 The Directors were empowered to manage
the company’s affairs. They decided to commence an action for and on behalf of the
company and in the company’s name in order to recover moneys owed to the company
by the two defendants. The General meeting passed a resolution disapproving of the
commencement of the action resolving that the proceedings was part of the
management of the company's affairs, since the power to manage was vested in the
directors, the resolution of the general meeting was a mullity. Lord Justice Greer
summarized:
“A company is an entity distinct alike from its shareholders and its directors.
Some of its powers may according to its articles be exercised by directors, certain
other powers may be reserved for the shareholders in the General meeting. If
powers of management are vested in the directors they and alone can exercise
those powers. The only way in which the General meeting of shareholders can
control the exercise of powers vested by the Articles in the directors is by altering
the Articles or if the opportunity arises under the Articles by refusing to reelect
the directors of whose actions they disapprove.
The inability of the General Meeting to useup the powers of the directors was recognised
in Scott v. Scott [1943] I ALLIER 582 The company’s Articles consisted of the
reegulation contained in Table A. The relevant Article was in terms of Article 115 of our
Table A. It provided that the directors may from time to time pay to the members such
company.” The shareholders resolved in the General meeting that the directors should
declare the dividends. It was held that it was quite clear that the payment of interim
dividend was a matter which by the Articles was placed in the exclusive power of the
directors. By passing the resolution the general meeting encroached on the sphere of
activity which in most express terms was confirmed in the directors. The conclusion is
that with the Articles of Association in the formal of table A, it becomes difficult for the
members in the General meeting to give directions on how the affairs of the company
are to be managed.
The General meeting retains the ultimate control but only through its process to amend
the articles thereby taking away the Director’s power, and also through its process to
remove the directors from office and appointing new ones. Unless any of these is taken,
the directors can, if they so wish, disregard the wishes and instructions of the members
in all matters not specifically reserved by the Act, or Articles to the General meeting. The
old idea that the General meeting is the Company and the Directors merely agents or
servants of the Company, subservient to the General meeting is no longer the law.
EXCEPTIONS
1.LITIGATION: Although the General meeting cannot restrain the director’s from
conducting litigation in the name of the company, the General meeting can institute
proceedings on behalf of the Company if the directors neglect or refuse to. This situation
changes if the directors know that they are the ones on the wrong. Marshalls Value
Gear Co vs. Manning Wardle & Co. [1909] 1 Ch 267 . Marshalls was the majority
shareholder Managing Director of the plaintiff company which was formed to exploit an
invention which he had patented. On the board he was outvoted by the other three
directors who were interested in the defendant company. The latter was infringing the
plaintiff’s patent and Marshall’s inspite of the opposition of his co-directors instituted
the action to restrain the infringement. HELD: that as the majority shareholders, he had
Grant v. United Kingdom suitchback Railways (1988) 40 ch. D. 135 C.A is authority that
the company, in its general meeting many, by an ordinary resolution ratify an act of the
directors. Baniford v. Baniford [1970] ch. 212 the General meeting may also ratify an act
2. Where there is deadlock in the management of the board so that any material respect
Potter(1914)inch 895, the company articles provided that the number of the directions
should not be less than two or more than ten and that quantum for the directors for
transacting business should be 2 two years after the company’s incorporation the
company had two directors. Mr. Porter as chairman and M.D and colonel Bawon. The
two directors were not on talking terms and colonel Bawon refused to attend any board
meeting with Mr. Potter. The company’s affairs came to a standstill the only solution
would have been to appoint additional directors but the power to do so was vested by
the Articles in the Board of Directors. There was therefore no Board meeting. It was
held that where the Articles give the Board of Directors the Power of appointing
additional directors owing to differences between the directors no Board meeting can be
held, the company had the power of appointing additional Directors at the General
meeting.
of Managing Director for such period and on such terms as they may think for. The
main duty of the M.D is to exercise some or all of the directors powers of
management. This is sanctioned by Article 109 which authorises the Board to delegate
to a managing Director all their powers. The wording of Article 109 suggests that the
Board of Directors may effectively divest itself of its powers in favour of the managing
Director.
s. 178 of the companies Act requires every company to have a company secretary. The
Secretary must not be the sole director. If anything is required to be done by a director
and the secretary, it cannot be done by the same person acting as both. Under S. 177 a
private company should have at least one director while it is at least 2 in a public
company. The secretary is appointed by the Board and not by the General
Administrative. The traditional view is that he does not normally have authority to
enter contracts (Managerial) on behalf of the company. In Bamett Hoares & Co. v.
London Granrays Co. (1887) 18 QBD 815 Lord Escher said” A Secretary is a mere
servant. His position is that he is to do what he is told and no person can assume that
In the past the secretary has been treated as a subordinate servant without authority to
commit the company by his actions except the engagement of clerical staff. In
Panorama investments v. Fidelis Furnishing Fabrics Ltd (1971) 2QB 711 C.A. It was held
that where the company secretary ordered self driven cars for his own purposes but
Atensibly for the business purposes of the Defendant company who were his employer
the defendant was liable to the care hire company. Loard Deming said;
“But times have changed. A company secretary is a much more important
person than he was in 1887- (Bamett’s case). He is an officer of the company with
extensive duties and responsibilities. This appears not only in the modern companies
Acts but also by the role which he plays in the day to day business of the company. He is
and enters into contracts on its behalf which come within the day to day running of the
company so much that he may be held out as having authority to do such things o behalf
Administrative side of the company's affairs such as employing staff and ordering cars
etc. All such matters now come within the ostensible authority of the company
secretary”.
Sahmon C.J. described the company secretary as the Chief Administrative Officer of the
documentation is in order that the relevant returns have been made and that the
company’s registers have been properly maintained. The company’s Articles also
In respect of the law of Agency as applied to company law the company is bound by the
activities of its officers. However, there are situations in which the law refuses to
recognise the concept of vicarious liability and instead insists on the personal fault as a
prelude to liability. For certain purposes the court have elected to treat the actions of
certain officers in the company as those of the company itself. This position sprang
from the words of viscount Haldane in Leonards carrying Co. Ltd v. Asiatie Petroleum
Co. [1915] A.C 705 H.L. under the relevant section of the merchant shipping Act, the
owners of any sea going versel loss which occurred without their personal fault or
privity. Leonard was the managing director of the company. He knew that the ships
boilers were faulty and he led the ship put to sea. As a result of the fault in the boilers,
the ship was destroyed and the Cargo of the Asiatie Petroleum company
destroyed. Could the company escape liability? It was held that since Leonard was the
managing Director, his knowledge was the company’s and the company was delivered to
have known that the ship was unseaworthy and the company could not escape liability
. The knowledge of the managing Director must be insisted upon the company which
My Lords, a corporation is an abstraction. It has no mind of its own any more than it
has a body of its own. Its active and directing will must consequently be sought in the
person of somebody who for some purposes may be called an agent but who is really the
directing mind and will of the corporation …if Mr. Leonard was the directing mind of
the company, then his action must, unless a corporation is not to be liable at all have
been an action which was of the company itself within the meaning of the section.”
In Bolton Engineering Co. v. Grayham & Sons [1957] 1QB 159 certain business premises
were owned by a company. The tenants were entitled to a renewal of their lease unless
the landlord intended to occupy the premises. Would this intention be regarded as that
of the company where no general meeting of the company was held but the directors
were of the opinion that the company should occupy the premises. It was held that it
was the company that had manifested an intention to occupy the premises and the
Plaintiffs were not entitled to a renewal of the lease. Deming L.J. stated,
“A company many in many ways be likened to a human body. It has a brain and
a remove centre which controls what it does. It also has hands which hold the
tools and act in accordance with directions from the centre. Some of the people
in the company are mere servants or agents who are nothing more than hands to
do the work and cannot be said to represent the mind or will. Others are
directors
and managers who represent the directing mind and controls what is does. The
state of mind of these managers, is state of mind of the company, and is treated
by the law as such. The intention of the company can be derived from the state
The rule deals with the liability of the company for the acts of its officers. The question
as to whether or not the company is bond by such actions depends on normal agency
situations of an officer or responsible organ acts within the scope of his authority then
the company will be bound. However, the problem which might arise is that even if the
act in question is within the scope of the officer’s or organs authority, there might be
In some occasions, certain actions may be carried out by the company’s organs
irregularly. For example, the Board meeting may not have been convened with proper
notice or the particular act may not have been passed by a proper resolution. In these
circumstances on the company disclaim liability by alleging that the meeting was
irregular? Is the company bound by an at in which its officers have acted irregularly?
Must a third party dealing with the company satisfy himself that there was no
irregularity, in the board of Directors meeting? Must the third party satisfy himself that
the regulations up the company have been complied with without access to the
documents? These questions were negatively assured in Royal British Bank v. Traguand
[1856] 6 E & B 327. The directors of the company were authorised by the company’s
some money from the Plaintiff bank. When the company went into liquidation the bank
sought to recover. The liquidator argued that since there was no resolution authority
the borrowing it was irregular and the company was not bound to repay the money. It
was held that even through there was no resolution to back up the borrowing the
company was nevertheless bound to refund the money to the bank . Jervis C.J. said,
“ A party dealing with a company is bound to read the deed of settlement (Articles
and memorandum) but he is not bound to do more. In this case, a third party
reading
the deed of settlement would find not a prohibition from borrowing, but permission
by a resolution, he would have the right to infer the resolution on the face of the
This rule is also referred to as the indoor management rule. The is because whatever
happens in the company does not bind third parties dealing with the company. The rule
business with the company. Satisfy himself that the requirements have been followed
before he contracts with the company. The rules also protects the creditors, of the
company it would be unfair if the company was to deny liability on its contracts on the
However, for the purposes of the protection of the company, the rule had had to be
1. Anyone dealing with a company is deemed to have notice of the contents of its public
documents. Any act which is contrary to these documents will not bind the company,
company’s public documents are not confirmed to the memorandum and Articles
of Association but also includes other documents which are filed at the company’s
registry and these are such documents as special and secretary and charges.
2. An outsider dealing with the company is entitled to assume that all the internal
regulations of the company are being complied with unless he had knowledge to the