The word company is derived from the Latin word, COMPANIS which means

people sharing together. Therefore, a company is a group of people associating

together and sharing resources to pursue a common interest.
According to Gower, a company has three functions, i.e;
a) There are companies formed for purposes other than making profit for the
owners or memberse.g charitable organizations. The charities are
substitutes af a trust and are limited by guarantee i.e the liability of
members is limited to the extent of the owners undertaking (guarantee) in
the event of liquidation.
b) A company formed between small groups of people basically called a private
company or a close corporation. These companies are meant to pursue
business for profit in most cases.
c) Companies formed in order to involve the public in investment and share the
profit without necessarily getting involved in the management thereof. These
are called public companies.
It must be noted that for categories c and b the companies are limited by shares
and the liability is limited in respect to the shares allot to a particular member in
event of liquidation.
The primary motive of a company limited by share is to curry out trade with a
profit motive and the basic distinction between a company limited b share and
one limited by guarantee is the fact that in the case of a company limited by share,
the working capital will be contributed by the members and in case of a financial
problem, the creditors can be compensated from the members contributions
whereas for one limited by guarantee, the members undertake to pay or indemnify
upto a specific amount, ie the guarantee.
HISTORICAL FOUNDATION OF COMPANY LAW
The foundation of company law as par Musisi, Business structures and the laws
thereof, belongs to an era of class divided society and that commodity production
was very essential in the evolution of company law. In other wards, when society
was divided into producers and non producers, exchange developed and this
development necessitated or called inn evolution of business structures and the
law.(refer to MusisiPg 6)
THE GUILD
During the middle ages, craft and mercantile were common. From the 12 th century
onwards, relatively small local associations were formed by the traders. The
associations regulated trade in the local market and members of the various guilds
exercised monopolies save for the monarchs.
They set qualifications for the guild members and ensured that the product quality
satisfied the set standards. They also controlled competition by limiting the
working hours of their members. The guild became a powerful institution and its
member became rich and prosperous.
Many of the guilds obtained charters form the crown for the purpose of obtaining
monopolies for particular product or branches of trade. However they were not
incorporated or registered since each member traded on his own account under
the guidance of the guild regulations.

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Trading on joint accounts was curried out through partnerships and later the
chartered companies .The first form of business association was known as
COMEDAS AND SOCIOETAS.
The Comedas allowed sleeping partners where one person provided money and
others provided skill and time. The comedas were not so popular in the UK but
very popular in the rest of Europe and sometimes they traded overseas.
The socioetas were a more solid association and were forerunners of the modern
partnership sand hereunder, the partner was an agent of all others and all partners
were vicariously liable for all the debts incurred in the part of the partnership i.e
all risks and rewards were shared equally notwithstanding the extent of ones
participation or default.
(Refer to MusisiPg 30)
The other form of business structure in this period was the CHARTTERED
COMPANY. These were formed under the royal charter and the process of forming
the company led to incorporation. These companies were first used by merchants
and adventurers abroad e.g. to India or America.
Chartered companies were formed in the form of an international guild in the
sense that they were genuine associations of people for a common purpose of
trading with individual stock and capital.
The chartered companies only provided a framework for the collective action eg by
providing rules and regulations and premises. The crown benefited a lot from the
actions of the chartered companies by controlling and regulating overseas trade.
During the 17th Century, it became apparent that the chartered companies could
pool their goods or stock instead of trading as individuals and this led to what was
referred to as JOINT STOCK COMPANIES, a name still persisting to date
although in a different form. Joint stock companies like East India Company and
North Eastern Pacific company were formed and by 1692, individual overseas
trading had been declared illegal.
Under the joint stock trading, the risk and reward of trading were standard ie
shared in terms of ones contribution or proportion to the respective investment.
COMPANY STRUCTURES AND PERSONALITIES
During the 2nd half of the 17th century, joint stock companies were now registered
under seal. These registered corporations would exist in perpetuity and it would
also sue outsiders and its own members but the idea of limited liability was never
emphasized at the time, in fact, according to Gower, it was realized as an
afterthought.
Even after incorporated companies became common, the bulk of trading was still
done by sole proprietors and partners. Soon later, wealthy individuals loaned
capital to traders in return for profit or they bought shares and became sleeping
partners . They were however liable for the acts of the active members and this
discouraged investment since the investors wanted to make profits from their
money at no cost.
Despite the risk of personal liability, unincorporated partnerships were also
common. At the end of the 17th century, a distinction between the acts of the
company and those of the members involved. The formal company was for the first
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time recognized as owning property and able to sue in its own name for the first
tome.
This development was necessary to compel business structures under mercantilism
and the company started to develop characteristics of of indefinite existence even
after te existence of its founders and owners hence evolving the idea of perpetual
existence.
Furthermore, companies became liable for their own liability and debts and by
necessary implication, members; liability became limited, i.e. the concept of
limited liability. Accordingly, in cases of insolvency, the respective creditors or
claimants against the company had access to the company assets and not
individual owners although this did not work in practice as the members of the
company were always called upon to settle the debts and creditors therefore found
a way of suing members directly.
The unwillingness to allow the limited liability was the fact that it was likely to be
abused by spectators eg those who are not skilled in the business could hide
behind this exercise.
RISE OF COMPANY LAW IN EAST AFRICA.
(Refer to Musisi)
As soon as colonialism had been completed and imperialism was in control, there
was surplus capital in Europe which had to be remitted to the colonies and the
proper means of channeling this capital was through corporations.
Before colonialism Africans did not have any associations similar to the modern
day companies structures and accordingly the companies structure in East Africa
has its foundation rooted I the colonialism era.
I the few societies which attempted a state structure, some form of commercial
activity was carried out but in a primitive nature through barter trade and the
village acted as the market place. The only form of commercial activity at the time
equivalent to the European guilds was that of the clans e.g., In BunyoroKitara
kingdom, clans had monopoly over iron making and smelting
and divided
themselves into two groups, i.e., that of smelter and the other for the black smiths
and they were trading with the Baganda.
It must be noted that the law relating to company structures in East Africa as they
operate today is not indigenous in the area. This is not to say that a structure
equivalent to companies in Europe would not have evolved, the stage of
development was hijacked.
In Uganda for example, the earliest legislation was the Indian Companies act of
1882 governing companies, which legislation itself was a replica of the English
companies act.
The act remained in operation for about 40 years until it was repealed by the
companys ordinance of 1922.
In 1935, a new legislation, the companys ordinance of 1935 was enacted and it
operated up to 1958 when the present companies act replaced it. The economic
base of the region was firmly integrated with that of the British to the extent that
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non of them could develop its own legislation. The statute therefore became very
difficult to understand by an ordinary businessman because it was not developed
basing on the circumstances in Uganda.
FORMATION OF A COMPANY
The process is referred to as incorporation and the process involves a number of
steps from the initial meeting of promoters, then drafting of the relevant
documents, organizing and payment of the relevant fees and then actual
registration of the company.
It should be ascertained whether the proposed company is to be a private or a
public company. The law specifically states that any association, either partnership
or a company, for the purposes of currying out any business with an object of gain
has to be registered in accordance with the companys act.
S 4 (1) 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 the act in respect of the registration,
form an incorporated company, with or without limited liability.
(2) Such a company may be either
(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 termed a company limited by shares);
(b) a company having the liability of its members limited by the
memorandum to such amount as the members may respectively thereby
undertake to contribute to the assets of the company in the event of its
being wound up (in this Act termed a company limited by guarantee); or
(c) a company not having any limit on the liability of its members (in this
Act termed an unlimited company
(d) private or public
It follows therefore that for a private company, the membership is fixed to a
minimum of 1 person and a maximum of 100 whereas for a public company, the
minimum membership is 7 members. There is no limit for the membership of a
public company but for a private company, the maximum membership is limited to
100 members.
A public company or publicly traded company is a company that offers its
securities (stock/shares, bonds/loans, etc.) for sale to the general public, typically
through a stock exchange, or through market makers operating in over the counter
markets. This is not to be confused with a Government-owned corporation which
might be described as a publicly-owned company.
The definition of a private company is laid down under section 5 of the Companies
Act as a company that; restricts the right to transfer its shares, limits the number
of its members to one hundred, not including persons, who are in the employment
of the company and persons who having been formerly in the employment of the
company, were while in that employment, and have continued after the
determination of that employment to be, members of the Company; and prohibits
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any invitation to the public to subscribe for any shares or debentures of the
company.
Accordingly, in private companies, transferability of shares and raising of company
capital has some restrictions and the law prohibits inviting the public to subscribe
for shares (s.5 (1) c).
For a public company, the presumption is that one is free to transfer the shares
subscribed at any time without any restrictions. The restriction on private
companies is meant to avoid a situation where an individual or a new comer in the
company may disturb the operations of the company.
The commencement of business is effective form the date of issuance of. a
certificate of incorporation by the registrar for a private company (s.22 CA)
Before issuing the certificate, the registrar has to ascertain first that specific issues
have been fulfilled;
For public companies, incorporation and registration per say is not sufficient as
one should satisfy other processes. Before commencement of business you must as
a public company issue a prospectus inviting the public to subscribe for shares and
must obtain fro the registrar of companies a certificate of commencement of
business.
There is a statutory meeting every public company must hold within three months
from the date it is supposed to commence business and 14 days before the
meeting, all the members entitled to attend and vote in the meeting must be given
a statutory report which must be signed by at least 3 directors giving the details of
the status of the company(s.137. CA).
Failure to comply with the requirement of the statutory meeting makes one liable
to payment of a fine. For a private company, the statutory meeting may not be held
and the statutory report may not be issued.
A private company must have at least one director but for a public company, the
minimum of directors is 2 directors (s.185 CA). For a private company, if it has
only one director, he can not act as the secretary at the same time.(s.187 CA). It is
a requirement that the registrar is furnished with the particulars of Directors and
the company secretary.
For public companies, there are fixed qualifications for one to be a director and
they must be contained in the articles of association for instance, a provision may
be that of holding shares or having substantial shareholding in the company.
For public companies, members must sign and deliver for registration consent in
writing an undertaking to act as a director and showing that the director has either
signed the memorandum of association undertaking to pay the qualification shares
or has actually paid the qualification shares. These provisions however do not
apply to private companies.

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Its also important that after determining whether the company is to either be
private or public, it should be determined whether the company should have
limited or unlimited liability of its members. As a general requirement, members of
a limited liability company are not liable for the company debts beyond the amount
which is still unpaid on the share he or she holds.
There are situations where a company can have unlimited liability and in such
situations, such members become liable for the company debts if its assets can no
sufficiently pay off the creditors, liabilities (s.4 (2) c).
MEMORINDUM OF ASSOCIATION
Every company incorporated by registration with the Registrar of Companies must
have a memorandum. The memorandum contains the fundamental conditions upon
which alone the company is allowed to be incorporated. These are the conditions
introduced for the benefit of the creditors, and the outside public, as well as of the
shareholders.. These include S. 7CA provides that every company must have a
memorandum of association which must state the name of the company and also
whether the company is limited by share or by guarantee and the word limited
must appear at the end of the name of all limited companies. However this
requirement may be dispensed with if the minister is satisfied upon application
that the company is being promoted for promoting commerce, art, science
education, religion charity or any other essential object which that company
intends to promote and apply its profits to promote such plans and to prohibit
payment of any dividends to its members. Such companies also enjoy such
privileges and rights of limited companies and are also subject to the obligations of
limited companies. It is an offence for a company to omit the word limited at the
end without any prior exemption by the minister.
The memorandum of association must indicate the registered office, its location
and it must indicate the objects for which the company is being formed and this is
most important. The memorandum must state the share capital and the nominal
value of the share in their fixed amount. It must be dated and signed by all the
share holders indicating their full names, occupations and addresses and it must
be witnessed and such witness mist state their occupation and address. Where
there is a conflict between the memorandum and the Articles, the memorandum
prevails
The Memorandum of Association commands a paramount echelon in the process of
establishment and development of a company especially in the regard of the
delegation and demarcation of authorities to respective individuals who are
connected with the company some way or the other. In other words, it is meant to
be a company charter that encloses in itself the essential conditions based on
which the company could be conveniently commenced and incorporated. It
highlights the major elements that constitute the foundation of the company and
adumbrates its scope beyond which the company could not go.
As for the purpose of the Memorandum, it is of two dimensions. The first
dimension comprises the shareholder where it tells the shareholder the field and
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scope of the company and with the help of that the shareholder decides the
suitability of his investment in the company. The second dimension involves
any stakeholder of the company. The Memorandum tells these companies and
entities whether the objectives that the respective stakeholder aims to accomplish
with the help of the company are within the realm of the company's objectives or
not.
The memorandum must be dated and sugned by each subscriber in the presence of
atleast one attesting witness (s.8). Alteration of the memorandum is allowed
provided its done in accordance with the companies act and pursuant to a special
resolution of the company to that effect(s 9 and 10)
ARTICLES OF ASSOCIATION (s 11-16)
The articles of association are the regulations governing the companys internal
management where a company limited by shares has no registered articles or, if
articles are registered, in so far as they do not exclude or modify Table A, that
Table (so far as applicable, and in force at the date of the companys registration)
constitutes the companys articles, in the same manner and to the same extent as if
articles in the form of that Table had been duly registered. Articles of association
are not only a contract between the company and its members but they also
constitute a contract between the members to regulate their rights inter se.
All companies limited by guarantee or companies with unlimited liability must
register a document called the articles of association but for private companies
limited by share, there is no mandatory requirement to register the articles of
association.
For private companies, they must at the time of registration of the articles adopt
and incorporate into their articles the provisions of the code of corporate
governance contained in Table F.(S 14).
It is not mandatory however for a private company to adopt Table F as it is for a
public company. And a company that adopts table F must annex a printed copy of
the same to its articles and must annually file a statement of compliance with the
registrar and the capital markets authority.
Articles of association must be in English and signed by all the subscribers of the
memorandum of association and they must indicate their postal addresses and
occupations. It must be attested by a witness who must also indicate their
addresses and occupation.
RELATIONSHIP OF ARTICLES WITH MEMORANDUM OF ASSOCIATION
The Memorandum and Articles of Association together constitute the contract
between each member, each of whom contracts with other of them that each would
be governed by the provisions of the Memorandum and Articles of Association.
Sarbjit Singh AndOrs. vs All India Fine Arts & Crafts Soclety And Ors: ILR
1989 Delhi 585
The provisions of the articles are binding on the company with reference to
members and vice versa to the extent they have signed the contract. But the
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question arises whether any provision in the articles which is violative of the
provisions of any statute can be enforced.
The memorandum must prevail where its object is clear and the articles should
not be so construed as to nullify a provision in the memorandum. Bye-laws of a
company are framed in order to carry out the provisions contained in the articles
of association themselves. Bye-laws are subordinate to the articles of association
and the articles of association are subordinate to the memorandum.
Memorandum and articles of association are statutory terms of a contract
governing the relationship between the company and the shareholders. However,
the articles of association or the memorandum have no force of law and will not be
binding on every member of the society. Articles of association are essential for
internal management of the company and the memorandum defines the powers of
the company as well as those of the directors.
In view of this, it is very clear that if any provision of the articles or the
memorandum is contrary to any provisions of any law, it will be invalid ab initio.[4]
Moreover, in Co-operative. Central Bank Ltd. v. Additional Industrial
Tribunal [[1970] 40 Comp Cas206 ; AIR 1970 SC 245, it has been held that
bye-laws that can be framed by co-operative societies, under the Co-operative
Societies Act are similar in nature to the articles of association of a company
incorporated under the Companies Act and such articles of association have never
been held to have force of law or statute.
The memorandum of a company sets forth the objects to be achieved by the
working of the company during its life time. It does not usually provide for what is
to happen during its winding up. Parts I to Vi of the Companies Act contain
provisions regulating the formation and the management of companies. Part Vii
relates to the winding up of companies. Similarly, the majority of the articles of
association concern with the formation and working of the company.
Memorandum of Association is the basic constitution of the company whereas
Articles of Association provides for rules of indoor management. The Articles of
Association, therefore, are subordinate to Memorandum of Association. If any
article is found repugnant to the provisions of Memorandum of Association, the
particular article is void ab initio. Bhagyodayam Co. Ltd. vs Income-Tax Officer
1993 45 ITD 524 Coch
If the articles are read literally and it runs counter to the objects Clause of the
Memorandum of Association and as such it is an invalid article and cannot take
effect. It is not unknown principle of interpretation that any construction more
favourable to the object can be adopted in the event of ambiguity in the language
employed in the article. Such an interpretation besides advancing the cause for
which the trust was formed will also avoid the conflict between the Memorandum
of Association and Articles of Association of the company.
A.P. State Civil Supplies Corpn.vs Income-Tax Officer 1991 37 ITD 1 a Hyd
The memorandum is the more fundamental of the two documents and is the one to
which the original parties forming the company will subscribe their names. These
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subscribers agree to take a certain number of shares in the company and become
its first members. The memorandum is the more fundamental both because of its
content and because, if conflict arises between the terms of the memorandum and
the articles, the memorandum takes precedence.
Further, the articles cannot modify any of the contents of the memorandum. There
was, historically, always a greater reluctance to allow the clauses of the
memorandum to be alterable, whereas that was not the case with the articles. Thus
the Memorandum of Association of a corporate entity provides the entire business
structure for the corporate entity as relating to the scope of business activities, the
related activities that can be undertaken by the corporate entity to achieve its core
business and the maximum amount the corporate entity can raise by way of share
capital.
While the Memorandum of Association provides the business structure for the
corporate entity, the Articles of Association provides for the management and
terms and conditions of shareholding in the corporate entity. In other words the
Articles of Association of a corporate entity generally incorporates the provisions
for transfer of shares, composition of the Board of Directors, management of the
corporate entity, the powers of the Board of Directors etc. amongst others.
The Articles of Association of a corporate entity is the basis for the functioning of
the corporate entity including the terms of shareholding and therefore becomes a
binding contract between the members/shareholders and the corporate entity. A
member being a shareholder of a corporate entity can enforce the Articles against
the corporate entity and vice versa.
The contractual force of the Articles is however limited to matters arising out of
the relationship of the members with the corporate entity and vice versa and does
not extend beyond the membership in the corporate entity. The Memorandum and
Articles of Association when registered binds the corporate entity and its members
to the same extent as if they respectively had been signed by each member and the
corporate entity.
The memorandum is the more fundamental of the two documents and is the one to
which the original parties forming the company will subscribe their names. These
subscribers agree to take a certain number of shares in the company and become
its first members.
The memorandum is the more fundamental both because of its content and
because, if conflict arises between the terms of the memorandum and the articles,
the memorandum takes precedence.
COMPANY NAME
In the process of incorporation, is important to consider the name with which the
company is to be registered. In the first place, its a requirement of the law that a
company must reserve its business name prior to incorporation. The reservation is
valid for 30 days or not exceeding 60 days in case of any special circumstances as
may be determined by the registrar. Upon completion of the process of
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registration, a limited liability company must add the word LIMITED at the end
of its reserved name.(S.36)
The name must be reserved on a written application to the registrar inquiring
whether the proposed name is available and the registrar by searching his register,
ascertains whether the name is available or not and if its valid, then ones
reservation of the name remains valid for a period of 30 days but this period may
be extended by the registrar.
Mere choice of a name and its reservation wit the registrar is not sufficient to
ensure that such a name will be allowed by the law. The registrar has wider powers
to refuse the registration of any name which in his opinion is undesirable ( s.36
(2)CA).
Accordingly, any name which is similar or identical to that already registered, or
that which has any connotations or referring to any government company,
commonwealth country or centrally to the law or morality shall not be registered.
The registrar on his own motion or upon application may refuse to register a name
but the aggrieved party has an alternative remedy in the courts of law and may
seek an injunction prohibiting the registrar from registering such a name or may
seek damages(s. 14 and 16 Business names registration act)
London Oversea Trading Co. VsRaleigh
Bass Vs Nicholson & Sons Limited .
The rationale behind prohibition of registration of identical business names is to
protect the public from being deceived and to protect the investments of
established businesses
East African Electric company vs Registrar of companies (1952)1 KLR
Where the Supreme Court of Kenya observed that as long as the aggrieved party
shows that there is a likelihood of an injury to his business as a result of the
defendants registration, of the name, its immaterial whether or not the defendant
intended to injure the Plaintiffs business and that the protection is extended to
local and foreign incorporated companies. It must be noted that court has to look
at the particular circumstances of each particular case.
Under s.40 CA, a company may change its name but to do so, the registrar must
be informed and all company proprietors must agree. However, it must be noted
that he change of name shall not relieve the company of its past liabilities and
obligations.
Esso Vs Shell
A company may by special resolution and with the written approval of the registrar
change its name and upon completion of the process of change of name, a
certificate of change of name is issued by the registrar and the new name is
entered in the place of the old name. However, change of name does not in any
way affect any rights and or obligations of the company. (S.40)
MEMBERSHIP OF THE COMPANY

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S..47 CA provides that all persons who may have subscribed to the memorandum
of the company shall be taken to have agreed to be member of the company and
when the company is registered, the names shall be entered on the register of the
members.
From the reading osS 47, a subscriber to the memorandum and articles of
association does not become a member of the company before he or she is entered
on to the list of members. Likewise, any other person who agrees to become a
member becomes a member upon being registered in the register of members of
that company. Therefore, payment for shares par se does not make one a member
of the company automatically but only makes one entitled to be a shareholder.
(S.47(2))
Apart from subscribers to the memorandum, the companies act provides for two
other categories of people who can be deemed members of the company, the first
category includes directors of the company who are supposed to take up
qualification shares(s.193 CA) and the other category is that of individuals who
have paid up for share and upon allotment and upon subscription.
It must be noted that courts have been a little bit relaxed when it comes to
enforcement of
s.47 CA, In Mawogola Farmers VsKayanjawhere the
respondent had contributed money on an understanding that when the company is
registered, they will be allotted shares in the company. After the incorporation,
they were never allotted shares and they sued the company for the allotment.
In the trial and appellate court, the company sought to rely on S.27 that for one to
be a member of a company there must have been an agreement to that effect and
his name must have been entered on the company register and that these two were
cumulative.
Court unanimously held for the respondent and they quoted Buckley on the
Company Act that The register of the company is most important but not
conclusive
Nampeera Trading Co.Vs Yusuf Ssemwanje

CORPORATE PERSONALITY
The most important legal characteristic of registered companies is that they
are Incorporated and so have what is known os Legal personality. The
principle requirements for registration are among others that the
memorandum and articles of incorporation must be signed by the
subscribers and thereafter presented to the registrar of companies for
registration and upon which a certificate of incorporation is issued
describing the company as incorporated means that it is a corporate body.
(See S 18(3), 22)
From the date of incorporation, the subscribers to the memorandum and all
such other persons as may become members shall be a body corporate
capable of excising all the powers of an incorporated company with powers
to own property, perpetual succession and a common seal but with such
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liability on the part of the members to contribute to the assets in case of

winding up.
The effect of the section is to summarize the consequence of incorporation.
It should also be noted that the section in a way establishes the principle of
CORPORATE PERSONALITY.
READ:
Corporate personality
Legal person
Legal fiction
Corporate entity
Corporation
Artificial entity
CONSEQUENCIES OF LEGA PERSONALITY
LIMITED LIABILITY
The company is liable for its own debts. The shareholders are not liable for
the debts and liabilities of the company and cannot be sued by the
companys creditors. A shareholder can be a debtor or creditor of the
company and can sue or be sued by the company.
Salomon v A Salomon & Co Ltd (1897)
Aaron Salomon carried on a sole trading business as a leather merchant.
His sons wanted to be partners, thus in 1892, Salomon formed a limited
company with 20,007 shares, of which he held 20,001 shares with his wife
and five children each holding one share. He then sold the business to his
newly-formed company for 39,000, paid in 10,000 worth of debentures,
20,000 in 1 shares and 9,000 cash. He also paid off all the creditors of
the sole trading business in full. As such, he was the majority shareholder
as well as a secured debenture that had a charge over all the companys
assets. The company then went into financial difficulties and Salomon sold
his debentures to one Edmund Broderip for 5,000. The company failed and
upon liquidation, there was not enough money to pay Broderip and as such,
Broderip challenged the validity of the transaction to convert the business
into a company and sought to make Salomon personally liable for the
companys debts, alleging that the company was but a sham, an agent for
Salomon.
The Court of Appeal held that Salomon was liable to indemnify the company
against its trading debts, and he appealed to the House of Lords.
The Lords unanimously reversed that decision and held that the company
was validly formed according to the Joint Stock Companies Act 1844, thus
limiting Salomons personal liability as he was held to be only an agent of
the company, not the company his agent.
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Lord Macnagten
The company is at law a different person altogether 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.
Lord Herschell
The creditor has notice that he is dealing with the company, the liability of
members of which is limited and the register of shareholders informs him
how the shares are held and that they are substantially in the hands of one
person if this be the fact. The creditors in the present case gave credit to
and contracted with a limited company.
Lord Halsbury
Either the limited company was a legal entity or it was not. If it was, the
business belonged to it and not to Mr. Salomon. If it was not, there was no
person and no thing to be an agent at all and it is impossible to say at the
same time that there is a company and there is not.
The case only goes to show that a company formed in compliance with the
regulations of the Companies Acts is in law, a separate person and not per
se the agent or trustee of its controller.
Gower Pg 99 states that the decision in the Salomon case permitted the
trader not only to limit his liability to the money he put into the company
but also to avoid any serious risk by subscribing for debentures rather than
shares. He goes on to state that the only justification for the decision is that
the public the public deals with a ;limited liability company at their own
peril and at least should know what to expect.
Gower is unhappy with the law that it does not protect the little man who
grants credit to the company or the unemployed workman who would like to
work for the company .
Gower states that although searches of the company file at the registry to
show the details to do with the charges made to the company assets and its
balance sheets together with heprofits and loss accounts, such documents
are not easy to be appreciated by every person. But for the experienced
businessman there will actually be no problem. It is therefore the little man
whom the law should particularly be protecting who runs into the risk
when he grants credit to the company and the same applies to an
Page | 13

unemployed workman whom upon being given a job is expected not to

accept such an offer before searching the company files.
KHAN-FREUD (Some reflection on Company law reform 1944-7Modern
law review 55) says that this was a bad decision and that rigid application of
this decision would see more and more traders adopting limited liability
companies just to avoid the risk and the company has always become a
means of evading liability and of concealing the real interest behind the
business.
The court talks about the fact that Salomon owned virtually all the shares
and court also observes the allegation that the company was defrauded
especially by two lower courts and House of Lords answered that all the
other shareholders were in the know.
Qns
Was the H.L decision a subjective one?
Was Lord Herschels argument that he was just interpreting he law in this
case fair?
Lee v Lees Air Farming (1961)
Lee incorporated a company, Lees Air Farming Limited, which has a
nominal capital of 3,000, divided into 3,000 of 1 each, with Lee holding
2,999 shares and a solicitor holding the single remaining share. Lee was
also employed as the chief pilot of the company as stated in the companys
articles of association. As such, he was the vast majority shareholder, sole
governing director as well as an employee of the company. He was later
killed in a plane crash while operating the company plane, leaving behind a
widow and four children. The company had been paying an insurance policy
which the widow sought to claim as the widow of a worker.
The New Zealand Court of Appeal held that he was not an employee
pursuant to the Workers Compensation Act 1922 and so no compensation
was payable. The Privy Council however held that Lee and the company
were distinct legal entities and was contractually the chief pilot of the
company. As such, he was held to be a worker and his widow was entitled
to insurance compensation. The Privy Council disagreed with the court of
appeal and observed that the mere fact that one is a director of the
company can not be a impediment to ones capacity to enter into a contract
to serve the company. It was therefore held that the deceased and the
company were separate and distinct legal entities and there was no reason
to deny the existence of the contractual relationship.
Qn.
If Lee was a sole proprietor and later converted his business into a limited
company, would the decision have been different?
Does this case explain why corporate personality is referred to as Legal
fiction?
Page | 14

Note:The goals of limiting liability are:

(a) Facilitating enterprise and encouraging investments and economic
activity.
(b) Reduces monitoring on managers.
(c) Promotes liquidity and efficient operation of the securities market.
(d) Permits investors to acquire shares in multiple companies.
In Mac Aura Vs Northern Assurance Company Limited court stated
that
Now no share holder has a right to any item of the property owned by the
company for he has no legal or equitable interest therein and that a
shareholder even if he holds all the shares, he is not the company and
neither he nor any creditors of the company have any interest, legal or
equitable in the company assets.
The effect of the decision on the Mac Aura case emphasizes that the rights
of the shareholders as far as the company is concerned are limited to a
share in the profits if the company is a growing concern or to a share in the
distribution of the surplus assets in the event of winding up.
GramfordAndTypewittersVs Stanley (1968)2 Kb 89
THE ATTRIBUTE OF PERPETUAL SUCCESSION
Upon incorporation, a company is deemed to be immortal and its deemed to
exist beyond its founders. Accordingly, even if some of its shareholders die
or are declared bankrupt, the company will continue to exist in the eyes of
the law.
The death of a company can only occur if its wound up or if its struck off the
register by the registrar. Unlike partnerships, where there is a general rule
that the death or bankruptcy of a partner automatically dissolves the
partnership, a company will continue to exist.
According to Musisi, the attribute of perpetual succession must be looked at
in the light of the need for the capitalists system to protect a permanent
vehicle of mobilizing capital i.e, to allow a situation where the bankruptcy
or death of the shareholder will be an end to the company structures by
necessary implication killing capitation.
CONTRACTS
S.50 of the companies act provides tha an incorporated company can
contract on its own behalf e.g. it can enter into any form of contract Hindu
DispenseryVs N.A. Patuwa&SonaA company may also hold shares in
another company and can even enter into a contract with one of its
shareholders
Page | 15

In Re. Air Safaris [1969]EA 595, It was held that a company can enter
into a valid and effective contract with one of its members even if such a
member is a principle shareholder or even the MD. This in itself does not
invalidate the contract entered into as long as its within the company
objects.
KintuVsKyoteraCofee Growers [9176]Hcb 336
SentamuVsUcb [1982hcb59
COMPANY PROPERTY
A company owns its own property the
this or any share of it. A person who no
company is only entitled to whatever
shareholder has no legal interest in the
insure it against theft, damage, etc.

shareholders have no direct right to

longer wishes to be a member of the
price he can get for his shares. A
companys property and thus cannot

Macaura v Northern Assurance Co Ltd (1925)

Macaura, owner of the Killymoon estate agreed to sell all the timber on the
estate to the Irish Canadian Saw Mills Ltd in exchange for the entire issued
share capital of the company, to be held by himself and his nominees. The
timber, which constituted approximately all the assets of the company was
stored on the estate, with a policy insuring the timber taken out in the name
of Macaura. A fire then destroyed all the timber and Macaura sought to
claim under the policy. The insurance company contended that he had no
insurable interest as the timber belonged to the company and not to
Macaura himself.
The House of Lords found for the insurance company, stating that the
timber belonged to the company and although Macaura owned all the
shares in the company, he had no insurable interest in the companys
property.
Henry MunyangaizaVs General Machinery Limited [1994]1 KALR 1 in
this case, between 1978 and 1980, the plaintiff paid for the purchase of a
tractor from the defendant which th defendant did not deliver. The plaintiff
later obtained an order for specific performance but the manufactures had
closed that model. The plaintiff applied to reviw the order to attach the
property of the company. The application was granted and court ordered the
rehearing of the suit. Before rehearing the suit, the plaintiff sought for leave
to amend his plaint whereof he stated that in order to obtain the tractor, he
had applied for a loan and before obtaining the loan, the bank advised him
to float the company which he did with himself, the wife and brother as the
shareholders in the memorandum and articles of association.
The issue was whether the Plaintiff could claim ownership of the tractor?
Page | 16

It was held that the company was a legal entity irrespective of the motive of
its promoters. Once its formed under the provisions of the law, the rules
governing it must be followed. That the company property is clearly
distinguishable from that of its members and members have no direct or
proprietary interest /right to company property but only entitled to shares.
Accordingly, the Plaintiff could not be said to own the tractor bought by the
company in which he was a shareholder. That the tractor belonged to the
company and not the individual (in other wards, he ought to have sued in
the name of the company and not in his own name.)
In SsentamuVs UCB &Ors, the Plaintiff obtained a loan of 250,000/= as
the MD Bunyoro stationers and printers limited. The loan was for the
company and he negotiated with he bank in his capacity as the MD. In July
and august, the defendant wrote 3 threatening letters to the plaintiff to the
effect that the plaintiff would be arrested by military personnel unless the
loan was paid. The 2nd defendant knew tha the company was a limited
Liability Company. The plaintiff was arrested and locked up on the orders of
the servants of the first defendant. He was released after the debt was paid
up by a friend. He sued the defendant.
The issues was whether the plaintiff was liable to pay the company debt as
an individual
It was held that a limited liability company is a separate entity from ts
directors, shareholders and members and its individual members are not
liable for the company debts . Even as the MD, the Plaintiff could not be
personally hel liable for the company debts and that the 2 nd defendants
actions in holding the plaintiff so liable was therefore unjustifiable and
unlawful.
Eriya Milling Project Limited Vs Adams
FerrahVsGarmy Limited (1888)40 Ch.D 395
A company can be convicted of a crime, regardless of whether its directors
are also convicted. There are however, some limitations to this rule, which
include:
(a) It has been held that a company cannot be convicted of a crime which
requires the physical act of driving a vehicle. Richmond-on-Thames
Borough Council v Pinn& Wheeler Ltd (1989)
(b) A company cannot be convicted of any crime for which the only available
sentence is imprisonment. There are particular problems with crimes which
require mensrea (a guilty mind) most common law crimes require
Page | 17

mensrea, while many statutory offences involve strict criminal liability. In

order to convict companies of common law crimes, courts may regard the
mensrea of those individuals who control the company to be the mensrea of
the company. However, the courts have been very restrictive in their use of
this approach:
Threfore, a company as a general rule has the capacity to institute legal
actions and to defend in the event of a suit being instituted against it. In any
case, the company can sue in its own name and can sue its shareholders as
well as third parties if its rights have been infringed
Likewise, legal proceedings can be instituted by shareholders against the
company because in law the company Is capable of committing crimes and
torts.
In WaniVs Uganda Tiber and Joiners Limited the plaintiff had applied
for a warrant of arrest issued against the MD of the defendant company in
order ofr him to show cause why he should not furnish security for its
company affairs.
KIWANUKA CJ pointed out that;
Its all well to say that he is the MD of the defendant company but the MD
is not the company. Directors of a company are only touched in matters
involving the company in special circumstances, which do not exist in this
particular case
In National Grindleys bank & Co. limited VsKentiles& Co. limited
[1966] EA 17 it was an application from the under Kenyan law where
under any mortgage or charge on any land in the highland without the the
governors consent was void . The respondent without any such consent
purported to create a legal mortgage on this land in favour of the applicant
which advanced them a loan.
It was agued by the counsel for the applicant that the security was valid
since the law in question was the roads act and that race is a characteristic
of an individual and not a company and therefore the law could not apply to
a company.
Court observed that the legislation in question defined a personas human
beings and the security was void as exempting companies would defeat the
purpose of the statute.
In KatateVsNyakatura, the respondent sued the petitioner for 2225/= in
1956which was alleged to belong to the AnkoleAnkole African community
Society limited which he alleged that the petitioner had converted to his
own use while he was the director and administrator of the company. The
Page | 18

respondent alleged that the petitioner had collected various sums of money
from the debtors of the company and that he failed to account for those
sums. The respondent had taken the matter to the central native court
which ruled in his favour.
On a fourth appeal by the petitioner to the high court, the issue was
whether a limited liability company can be a party to a civil suit in a native
court.
The high court observed that a limited liability company is a corporation
and as such it has the existence which is distinct from that of its
shareholders. That being a distinct legal entity and abstract un nature, its
not capable of having racial attributes and accordingly, the native court had
no jurisdiction.
Tesco Supermarkets Ltd v Nattrass (1971)
Tesco Supermarkets was offering a discount on flash packs of Radiant
washing powder, advertised on posters in its stores. Once they ran out of
the lower priced stock, they replaced it with the regularly priced ones, and
the manager had failed to take down the posters. One Mr. Coane was
charged the higher price and complained to the Inspector of Weights and
Measures. Tesco Supermarkets was charged under Section 11(2) Trade
Descriptions Act 1968 for falsely advertising the price of washing powder,
and in its defence, Tesco Supermarkets argued that the manager had taken
all reasonable precautions and all due diligence, and that the conduct of the
manager could not attach liability to the corporation.
The House of Lords accepted this defence and held that the managers
conduct was not attributable to that of the corporation. Lord Morris
There was no delegation of the duty of taking precautions and exercising
diligence. There was no such delegation to the manager of a particular
store. He did not function as the directing mind or will of the company. His
duties as the manager of one store did not involve managing the company.
He was one who was being directed.
Viscount Dilhorne
...shop managers in a business such as that conducted by the Appellants...
cannot properly be regarded as part of the Appellants directing mind and
will...
R v P&O European Ferries (Dover) Ltd (1991)
The ferry company along with five of its managers was indicted for
manslaughter after a ferry services ran by them caused the loss of 192 lives
when a ferry capsized in 1987.
Page | 19

The judge held that the indictment was valid, saying Where a corporation
through the controlling mind of one of its agents does an act which fulfills
the prerequisite of the crime of manslaughter, it is properly indictable for
the crime of manslaughter.
R v Kite and OLL Ltd (1994)
OLL Ltd was a company specialised in organising outdoor activities. On a
canoeing trip organized by OLL Ltd, four 6th year students drowned after
their group drifted off to sea and their canoes became swamped. Evidence
showed that the company did not employ qualified instructors and had given
no training to them.
The company was accordingly convicted of manslaughter and was fined
60,000. The Managing Director, Peter Kite, who had total control of the
company was sentenced to 3 years imprisonment. OLL Ltd was the first
company in English law to be convicted of corporate manslaughter, but it
should be noted that the company was very small and Peter Kite was one of
only two directors, making it relatively easy for the Prosecution to show that
he was the controlling mind behind the company.
Transco plc v Her Majestys Advocate (No 1) (2004)
An explosion in Larkhall resulted in the death of a family of four, and the
complete destruction of their house. Following investigation by the police
and the Health and Safety Executive, Transco plc, a corporate body
responsible for gas distribution, was charged with culpable homicide.

false

false

KatongoleVsSsevumbi Estates Limited [1969]Ea 557

KajubiVsKayanja
Nampeera Trading Co. Ltd Vs Y. Ssemwogerere 7 Co.
MEMORUNDUM AND ARTICLES OF ASSOCIATION
Section 2 CA defines memorandum as a memorandum of association of a
company as originally formed or as altered from time to time. There is no
comprehensive definition for the term memorandum of association by the
companys act. However, the memorandum of association is like a chartesr
Page | 20

and defines the limits of the powers of the company. Likewise, there is no
comprehensive definition for the Article of Association but still its like a
charter defining all the rights and duties, privileges and powers of the
governing bodies and individuals.
The memorandum of association can be conveniently referred to as the
constitution of the company fro which the company derives its powers to
carry out the purpose for which it was formed.

THE MEMORUNDUM OF ASSOCIATION AS A CONTRACT

Section 21(1) CA provides that the memorandum and articles of
association of a company shall when registered bind the company and all
the members to the same extent as if they respectively had been signed and
sealed by each member and contained a warranty on the part of each
member to observe the provisions thereof.
This section o the face of it introduces the notion of contract by use of the
words shall bind the company and members thereof
In BattieVsBattie limited [1938]CH 708 at 721, court observed that
the section had been the subject of considerable controversy in the past and
will remain a controversy in the future.
The controversy emerges from the wording of the subsection. As a general
rule of the law of contract, under the doctrine of privity, a non partycan not
be a party to an action based on a contract or be responsible on a contract.
Accordingly, no party is party to any written contract which he has not
signed.
The section provides that upon registration, the memorandum and articles
of association bind all the members and shareholders thereof as if they had
been signed and sealed by each member and the members undertake t
observe all the provisions of the documents.
The strict application of the section would lead to a verdict that if one had
not signed the memorandum and articles of association, they would nit be
bound by the documents.
However it also talks about a contract between the company and individual
members. I.e. Its talking of a company yet its not a signatory to the
documents and the company isnt incorporated at the time the
memorandum and articles are formulated yet its deemed to have been
bound by it already.
KELNER Vs BAXTER
Page | 21

PRICE Vs KELSALL
The above cases provide that pre-incorporation contracts can not bind
companies yet the act binds this company on such contracts.
Hickman Vs Kent [1915]1 CH 881
THE
RELATIONSHIP
BETWEEN
THE
MEMORUNDUM
ASSOCIATION AND THE ARTICLES OF ASSOCIATION

OF

Since the two documents are contemporaries, it appears that they are to be
read together such that the ambiguities in one can be cleared by reading
the other.
But in all matters required by statute, it is only the memorandum that can
be resorted to as the authority as it contains the fundamental conditions
upon which the company is incorporated while the articles of association
only regulate the internal affairs of the company.
In Guinness Vs Land Corporation of Ireland,
it was held that
notwithstanding the suggestion that the fundamental conditions of the
memorandum and articles of Association are concurrently construed, for
anything the act requires, one must look at the memorandum alone. That
where the legislation provides for one document to be dominant over the
other, one can not turn to the instrument
for assistance as
that would amount to modification of the major document.
However, the articles usually give effect to the provision that the
memorandum
EFFECTS
OF
ASSOCIATION.

THE

MEMORUNDUM

AND

ARTICLES

OF

Section 21(1) expressly provides that the memorandum and articles of

association shall bind the company and its members upon registration.
Section (21)2 provides that under the memorandum and articles of
association, any money payable by a member to a company is deemed a
debt to the company.
These two provisions combined have the effect of declaring a contract to
which a company is party even though it may not have been registered at
that time.
In KelnerVs Baxter, Pre-incorporation contracts are held not to bind
companies and on the face of it, there appears some confusion as to
whether the draftsman of the law lost sight of this principle.
However, In HikmanVs Kent, it was observed in relation to S21(1) that;

Page | 22

a company could not in the ordinary course of business be

bound other than by statute or contract and that its in this
section that the obligations must be found. As far as members
are concerned, the section does not mention with whom they
are deemed to have covenanted but the section does not mean
that the company is not to be bound when it says its to be
bound nor can the section mean that members are to be under
no obligation under the articles in which their rights and
duties are to be found .The formers treated in law the company
a party to its own memorandum and articles of association
In Baring Gold VsShrubing Toy (1894) it was held that as between the
company and the shareholders, the memorandum and articles of association
do not create any contract and the company can not sue a member and
neither can a member sue the company as if there was an agreement
between them.
In Wood Vs Odessa Waterworks Co. (1889)42 Ch D 636, it was held
that the articles of association constitute a contract between each individual
shareholder and the company.
In Welton V Saffery (1897)Ac 299, it was held that the articles constitute
a contract between each member and the company and that this is no
contract between in terms between the individual members of the company
but the articles regulate the rights interse and such rights can only be
enforced against a member through the company otherwise no member as
between himself and another has any right beyond that.
OBLIGATIONS AND RIGHTS UNDER THE CONTRACT IN S.21
1. The company can force the shareholders in their capacity as
such to act within the articles.
In Hickman Vs Kent, it was held that the Plaintiffs action was in
substance to enforce his rights as a member under the articles including
49(arbitration clause) which creates contractual obligations and rights
enforceable as between the plaintiff and the association which rights
were contained in the document forming
a contract between the
company and the members as well as members interse . Thus the
company was entitles to force him to seek arbitration first as par article
49.
2. The company may enforce against a member as a member.
In Nampeera Trading Co limited VsMuliisa, it was held that pursuant
to Salomon Vs Salomon, once a company is registered, it has a
separate existence from its members and shareholders and can even
enter into contractual relationship with its members. That under S.
21(1), the memorandum and articles of association are binding onto the
Page | 23

members and the company and thus formed a contract between the
company and the members but the defendant had contracted in his
private capacity hence the requirement for the companys articles were
inapplicable.
3. The shareholders may sue to prevent any alteration of the
articles if this will amount to fraudulent infringement of his
interest.
In Brown Vs British Abrasive wheel Co. [1919] 1 Ch.D 290 it was
held that the proposed alteration of the articles was not just just and
equitable or for the benefit of the company but was simply for the
benefit of the majority shareholders and thus they could not enforce it
against the minority shareholders even in the absence of malafide.
4. The shareholders may bring an action to force the company to
be registered as a shareholder and obtain a share certificate
thereof.
In Moodievs Shepard [1949]2 All E.R. 1044 IT was held that a
shareholder may sue for a declaration that he be registered as a
shareholder to enforce delivery of a share certificate in accordance with
the articles.
5. Enforcement of members rights to vote.
In Pender VSLushington, it was held that under the articles, a person
whose name was in the register of shareholders which reflected the
rights of the members to vote at a general meeting and the no vote of
properly qualified members could be rejected because shares had been
obtained by transfer ..
6. Prevent directors from holding office in breach of articles.
Inn Catesby VsBumell, the articles of association of the company
provided that a member should not be qualified to be elected director
unless a written notice was given to the company not less than 14 days
before he date of voting. Notice was given but the sitting director
rejected it. A meeting was held and new directors were appointed
pursuant to the notice. The shareholders sued for an injunction
restraining the former directors from acting as such. It was held that the
notice was in compliance with the articles of association and the first two
persons elected as directors in lue of the defendant who had retired
were duly elected and the injunction ought to be granted.
7. To enforce members rights in respect to transfer of shares and
the right to vote.
In MisangoVsMusige, it was held that a though courts rarely interfere
with the inherent powers and management of a company , a member can
sue when the acts complained of injure him or are either fraudulent or
ultra vires.
Page | 24

8. To prevent infringement on fundermental rights,

MisangoVsMusige,
The contract made under S21 can only be enforced by a member
against a member in his capacity as a member and according
Hickman Vs Kent it was held that there was no right given by
articles to a member in that capacity other than that of a member can
enforced against the company.

or
to
he
be

In ElleyVs Positive Security Life Assurance Co Limited it was held

that the legal effect of the articles of association is such that they form a
contract and an engagement to which the Plaintiff was not party, the
contract and engagement is between the members of the company alone.
Tha an outsider to whom rights purport t be given by the articles in his
capacity as such, whether he subsequently becomes a member , he can
not sue on the articles treating them as a contract between himself and
the company whether he is to subsequently to become a member and can
not sue to enforce such a right as they are not rights of general
application to shareholders and can only exist by virtue some contract
between the company and such a person
That the articles will always remain in a particular form but any
alteration must be done bonafide and in the interest of the company.
In Allen VS Gold reffs of W.A.IT was held that a company had powers
to alter its articles. That the powers to alter the articles of the company
must be exercised bonafide of the company as a whole and such
alterations so made is valid and binding on the members.
In Shuttleworth V Cok Brothers & Co, it was held that a contract, if
any between the plaintiff and the company contained in the articles on
the original form was subject statutory powers of alteration and if the
alteration was bonafide, and for the benefit of the company, it was valid
and constituted no breach.
N.B. S 21 prima facie introduces the notion of a contract but
controversy arises as to the parties of the contract.
S.3 requires members to subscribe their manes to the memorandum and
articled must also be signed by the members under S 11. A company can
not be said to be bound when the two documents are prepared and
registered before its incorporation.
However, a combined reading of S.21 (1 & 2) is to the effect that that is
a contract to which the company is a party.
Rationale of the contract:

Page | 25

Ross J. stated that the contract under S.21 was of the most sacred
character since its upon its reliance that the shareholders advance
money to protect individual shareholders as well as to make the
company answerable to such shareholders for its activities thus a
number of doctrines like ultra vires are referred to the contract.
Gower states that the section no longer means what it says be cause of
the numerous judicial opinions expressed on it and that its rephrasing is
overdue. That courts have however settled any doubts.

PROMOTERS
Before a Company is incorporated, or in the process of incorporation, it is
common for someone lay the groundwork of the Company.In practice, one
does not always wait to receive the Certificate of Incorporation before
commencing business.Negotiations for the purchase of material or land
would already have commenced. The people who take the responsibility of
starting
the
Company
are
referred
to
as
Promoters.
In Tengku Abdullah v MohdLatiff bin Shah Mohd,[1996] 2 MLJ 265
Gopal Sri Ram JCA said:
"A promoter is one who starts off a venture-any venture-not solely
for
himself,
but for others, but of whom, he may be one."
However the most cited case in this regard is Twycross v Grant where CJ
Cockburn
said,
" One who undertakes to form a company with reference to a given
subject
and
to
set it going and who takes all the necessary steps to accomplish that
purpose.'
The promoter lays the foundations for a Company in terms of negotiations,
registration of the Company, obtaining directors and shareholders and
preparing
all
the
paperwork.
However, because the Promoter is such an important person in the
formation of the company, the law places several responsibilities on him.
These
are
known
as
fiduciary
duties.
THE FIDUCIARY DUTIES
Page | 26

The following are some of the fiduciary duties that the Courts will insist that
a
Company
promoter
has
to
observe.
1.Top of the list is not to make a secret profit at the expense of the company.
In Erlanger Vs New Sombrero, court observed that it was the duty of the
promoters to ensure that a company had an independent board of directors
and that there was good disclosure to them. Court further observed that the
promoters of a company were in a fiduciary relationship with the company
being promoted.
2.A duty to account to the company for the benefit for any property he
might
purchase with the intent of selling the property to Company for a pfofit
later. Kololo Curing Co. Ltd v West Mengo Cooperative Union Ltd
3.a duty not to defraud the Company by active concealment of any affairs
relating
to
the company
4. a duty not to disclose confidential information to outsiders
5. a duty not to hide his personal interests through a nominee.
A Promoter is in a fiduciary relationship with the Company he promotes and
as such he owes fiduciary duties towards it.This means that he is in a
position of trust and must at all times act honestly and in good faith for the
Company
as
a
whole.
However, the most important aspect of his duty is not to make a secret
profit at the expense of the Company. In the case of Fairview Schools Sdn.
Bhd
v
Indrani
a/p
Rajaratnam
(No1)[1998]
1
MLJ
110MahadevShanker JCA said,
" Promoters have a legal duty not to make a secret profit out of the
promotion
of
the Company without the Company's consent and also to disclose to
the Company any interests the promoters have in any transaction
proposed
to
be
entered
into
by
the Company"

Page | 27

There are many cases where Promoters did not remain true to their
fiduciary duties. The bottomline requirement from Promoters is that they
must be transparent in their dealings with the Company
There are three remedies in situations where the Promoters have breached
the
Fiduciary
Duties.
1. Rescission 2. Recovery of the Secret Profit.
3. Damages for breach of FD or deceit

RESCISSION
If the Company has entered into a Contract with the promoter and it is later
discovered there had been no transparency, the Company is entitled to
rescind the contract.It is irrelevant that the promoter has made no profit
from the contract.S17 Contracts Act states that non-disclosure amounts to a
fraud
and
by
Sect
19
the
Contract
becomes
viodable.
Under Sect 34(1) Specific relief Act 1950 the Company can apply to the
Court to rescined the contract.Once the contract is rescinded, restitution
has to take place. This is where the Company has to return whatever it
received from the Promoter and the Promoter has to return all monies
received from the company.

ERLANGER
v
NEW
SOMBRERO
PHOSPHATE
CO.
(1878)
In this case, Erlanger bought an island containing phospates for 55,000
pounds.Later, Erlanger promoted a Company and sold the property to it for
110,000 pounds.All the Directors of that Company were nominees of
Erlanger annd two of them were directly under his control.Later the old
board was replaced by a new board which brought an action to rescind the
contract with Erlanger.

TheCourt held that there had been no adequate disclosure of the

circumstances of the sale and the Company was entitled to rescind the
contract.
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RECOVERY OF THE SECRET PROFIT

GLUCKSTEIN V BARNES In this case the Defendants bought debentures
cheaply in a Company at a time when the Company was faring very badly.
Later they bought over the Company for 140,000 pounds. The debentures
were redeemed at full value and they made a good profit.
Here they made a profit of 20,000 pounds. Later still, they formed another
company and soold the Company to a new Company at a profit of 40,000
pounds.This profit was disclosed in the prospectus but not the amount of
profit they made on the redemption of the debentures.(20,000 pounds)
The Court held that there were in breach of their duties as promoters and
the Company was entitled to recover the profit from them. The Company
can recover the secret profit even though they chose not to rescind the
contract. The liability of the promoters is "joint or several". A Promoter who
is found liable may recover contributions from the other promoters.
DAMAGES FOR BREACH OF FIDUCIARY DUTIES.
In the case of RE LEEDS & HANLEY THEATRES OF VARIETIES LTD.
(1902)
The Court ordered the Promoter to pay damages to the Company. The Court
held that the Promoters had fraudulently omitted to disclose the profit made
by t hem on the sale of the property to the Company.The amount of damages
was equivalent to the amount of profit made by the promoters.
MAKING CONTRACTS FOR THE COMPANY
The Company's Act 1965 S35(4) details the circumstances in which
contracts may be made on behalf of a Company.The Section compares the
situation that would exist between private persons and relates it tpo the
Company.
S34(4)(a) the common seal should ber affixed by the authority of the Board
of Directors, signed by a Director and countersigned by the Company
Secretary. Table A Art 96
PREINCORPORATION CONTRACTS
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INTRODUCTION
Often promoters of companies try to enter into contracts on behalf of
proposed corporations in order to secure the contract before the time for
incorporation or to confirm the contracts for the corporation before the
expense of incorporation is incurred. Normally the promoter does not have
any intention of being personally liable on the contracts.
In some cases the promoter is aware that the corporation has not been
incorporated but the person dealt with is not aware that the corporation has
not been incorporated. In other cases neither the promoter nor the person
the promoter deals with is aware that the corporation has not been
incorporated. In some cases the corporation is never actually incorporated.
In other cases the corporation in incorporated and purports to ratify
contracts entered into on its behalf before it was incorporated. In some
cases the corporation that is purporting to ratify the contract is insolvent.
The third party may be left to bear a loss if the promoter is relieved of
personal liability and the third partys claim is solely against the insolvent
corporation. The questions that typically arise are whether the promoter
can be personally liable on the contract and whether the corporation can
ratify the contract.
A BRIEF REVIEW OF RATIFICATION
Since a pre-incorporation contract involves a situation in which the
corporation has yet to be incorporated, a person who purports to act on
behalf of the corporation cannot have any authority as an agent for the
corporation (the corporation would have to exist first before the steps could
be taken to grant a person authority as an agent). Could a corporation ratify
a contract that was entered into on its behalf before it was incorporated? To
assess this, and to understand the problems that arose with the common
law position, it is important to review the circumstances in which a
principal can ratify a contract that a promoter purported to enter into on
behalf of the corporation. A person
can ratify a contract entered into by another person on his or her behalf if:
(i) the other person purported to act on behalf of the person who seeks to
ratify;
(ii) the person who seeks to ratify must have been in existence and
ascertainable at the time the other person purported to act on his or her
behalf; and
(iii) the person who seeks to ratify must have the capacity to do the act both
at the time the other person acted and at the time of the ratification.
Conditions (ii) and (iii) above make it impossible for a corporation to ratify a
preincorporation contract. The corporation would not have been in
existence at the time the person act on behalf of the corporation and the
Page | 30

corporation would not have had the capacity to do the act (enter into the
contract) at the time the other person purported to act on its behalf.
THE COMMON LAW POSITION
S. 54(1) A contract which purports to be made on behalf of the company
before the company is formed has effect, as one made with the person
purporting to act for the company.
This part reviews several cases that set out the common law position on preincorporation contracts.
Kelner v. Baxter (1866), L.R. 2 C.P. 174
In Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas) the plaintiff and
the defendants were promoters of the Gravesend Royal Alexandra Hotel
Company, Limited. The plaintiff was to be the manager of the hotel under
the new company. Before the company was incorporated the plaintiff offered
to sell a stock of wine to the proposed company for 900 which was
accepted by the defendants on January 27th, 1866 on behalf of the
Gravesend Royal Alexandra Hotel Company Limited. On February 1st the
directors of the Gravesend Royal Alexandra Hotel Company Limited ratified
the agreement. However, the promoters did not receive a certificate of
incorporation for the
Gravesend Royal Alexandra Hotel Company Limited until February 20,
1866. The directors then purported to ratify the agreement again on April
11, 1866 just days before the company made an assignment in bankruptcy.
The court held that the ratification of February 1, 1866 was not a valid
ratification because the company was not in existence at the time. The
ratification on April 11 was also held not to be a valid ratificiation because
of the requirement that a ratification can only be done by a principal having
capacity to contract at the time the contract was entered into as well as at
the time of the ratification. It was also not valid on the basis that the
company was not in existence at the time of the promoters purported to act
on its behalf. The court nonetheless still felt there was clearly an intended
contract and the only way in which there could be a valid contract was if the
defendants were the other contracting parties. They thus held that there
was a valid contract in which the plaintiff was one party and the defendants
were the other parties.
Kelner v. Baxter thus confirmed that a company cannot ratify a contract, or
purported contract, entered into on its behalf if the company was not in
existence at the time a person purported to enter into a contract on its
behalf. Kelner v. Baxter also highlighted the potential for promoters to be
liable on contracts they purport to enter into on behalf of an as yet
unincorporated entity. What was not clear after Kelner v. Baxter was
Page | 31

whether promoters were automatically liable in these situations (sometimes

referred to as the rule of law approach) or whether the promoters
liability depended on whether it was intended that the promoter be a party
to the contract (sometimes referred to as the rule of construction
approach).
Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708
Many years later in Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All
E.R. 708 the English Court of Appeal made it clear that promoter liability
was to be based on a rule of construction approach i.e. promoters were
only liable if it was intended in the circumstances that they were themselves
to be parties to the contract.
In Newborne v. Sensolid Ltd. Newborne had entered into a contract with
Sensolid Ltd. To supply tinned ham to Sensolid Ltd. The price of tinned ham
fell and Sensolid Ltd. refused to take further deliveries of tinned ham from
Newborne. The contract had been signed by Leopold Newborne underneath
the words Leopold Newborne (London) Ltd. It was not formally signed on
behalf of Leopold Newborne (London) Ltd. as had been the case in Kelner
v. Baxter. Unfortunately, Leopold Newborne (London) Ltd. had not been
incorporated. Leopold Newborne (London) Ltd. was later incorporated and
it brought an action against Sensolid Ltd. That action was dismissed
because Leopold Newborne (London) Ltd. had not been incorporated at the
time the contract was entered into. Leopold Newborne then sued Sensolid
Ltd. in his own name seeking to enforce the preincorporation contract on
the basis that he was a party to the contract himself. The argument was
made on the basis of Kelner v. Baxter saying that if the contract was not
with Leopold Newborne (London) Ltd. then it must have been with the
person who signed on behalf of the company, namely, Leopold Newborne.
The English Court of Appeal held that the correct approach was a rule of
construction approach. The real test was whether the promoter was
intended, in the circumstances, to be a party to the contract or not. It was
held that given the way in which the contract was signed by Leopold
Newborne it was intended to be a contract with the company and only the
company. In other words, given the way in which it was signed it indicated
that it was not intended that Leopold Newborne be a party to the contract
himself. Thus Leopold Newborne could not enforce the contract in his own
name.
Black v. Smallwood & Cooper (1966), 117 C.L.R. 52 (High Court of
Australia)
The High Court of Australia took the same rule of construction approach to
Kelnerv.Baxterin Black v. Smallwood, (1966) 117 C.L.R. 52 (High Court of
Australia). Black and others had contracted to sell land to Western Suburbs
Holdings Pty. Ltd. which was signed by the defendants as follows:
Page | 32

Western Suburbs Holdings Pty. Ltd.

Robert Smallwood }
} Directors
J. Cooper }
Western Suburbs Holdings Pty. Ltd. was not incorporated at the time and
Smallwood and Cooper signed as directors thinking the company had been
incorporated and that they were directors. The plaintiffs wanted to impose
liability on the basis of a rule of law reading of Kelner v. Baxter saying that a
contract was clearly intended and since it could not be with the principal
(i.e. the company) which was not in existence it must have been with the
purported agents Smallwood and Cooper personally.
The majority of the court followed the earlier English case of Newborne v.
Sensolid Ltd. It was held that Kelner v. Baxter was not authority for the
principle that an agent signing for a non-existent principal is bound. The
court said that the basis of the decision in Kelnerwas the inference that the
defendant promoters were bound by the contract according to the nature of
the contract itself. In this case it appeared to be clear that a contract with
the company was intended. The company did not exist and thus it was a
contract with a non-existent party and therefore no contract at all. It was
nonetheless suggested that the defendants could be liable for a breach of
warranty of authority.
Wickberg v. Shatsky(1969), 4 D.L.R. (3rd) 540 (B.C.S.C.)
Wickberg v. Shatsky(1969), 4 D.L.R. (3rd) 540 (B.C.S.C.) is a British
Columbia case that also addresses the question of the interpretation of
Kelner v. Baxter and addresses the possibility of an action against the
promoters on the basis of a breach of warranty of authority. Lawrence and
Harold Shatsky became shareholders in Rapid Addressing Systems Ltd. and
became directors. They decided to expand the business and to incorporate a
new company, Rapid Data (Western) Ltd., to take over Rapid Addressing
Systems Ltd. Rapid Data (Western) Ltd. was never formed. It was later
proposed that Celer Data Ltd. be formed to do the takeover. A certificate of
incorporation for Celer Data Ltd. Was issued on May 11, 1966. On May 9,
1966, days two before the certificate of incorporation was issued the
plaintiff (Wickberg) was hired as a manager. The terms of employment were
written in a letter dated May 9 and was on letterhead with the name of
Rapid Data (Western) Ltd. on top. The letter was signed by Lawrence
Shatsky. The letter noted that Wickberg was to get a salary of $15,000 per
annum. A few days later Lawrence Shatsty told Wickberg that the company
was to be referred to as Rapid Data (Western) without the Ltd.
The business did not go as well as had been anticipated and Lawrence and
Harold Shatsky could not keep up with paying Wickbergs salary. They
asked him to work on straight commission. With the companys business not
Page | 33

doing particularly well, Wickberg refused to work on straight commission.

On Aug. 26, 1966 Wickberg was dismissed for his failure to work on straight
commission. Wickberg sued and his claim was for wrongful dismissal. His
difficulty though was that he had to prove he had an employment contract.
It couldnt be a contract with Celer Data Ltd. because the purported
contract was concluded on May 9th, two days before as certificate of
incorporation was issued for Celer Data Ltd. Wickberg made the following
arguments (among others):
(i) Lawrence Shatsky was liable as a party to the contract on the basis that
the contract was a contract on behalf of a non-existent principal and thus
applying the rule of law approach in Kelner v. Baxter Lawrence Shatsky was
a party to the contract.
(ii) Lawrence and Harold Shatsky were liable for a breach of warranty of
authority in warranting that the company was in existence and that they
had authority to act on behalf of the company
The court held that the plaintiff was entitled to nominal damages on the
basis of a breach of warranty of authority. The court held that it is not the
case that a person signing on behalf of a non-existent company is
automatically personally liable. The distinction between Kelner v. Baxter
andBlack v. Smallwood is that in Kelner v. Baxter it could reasonably be
implied from the circumstances that there was a contract between the
plaintiff and the persons who signed on behalf of the non-existent
corporation. In Black v. Smallwood the circumstances suggested that it was
not intended that the contract bind Smallwood or Cooper.
In other words, the court took the rule of construction approach to
Kelnerv.Baxter. The court concluded that it was not the intention that either
Lawrence Shatsky or Harold Shatsky would be personally liable on the
employment contract (it was intended that it be a contract with a company
Rapid Data (Western) Ltd.).
The court further held that there was a breach of warranty of authority in
that Lawrence Shatsky and Harold Shatsky represented the existence of
Rapid Data (Western) Ltd. And that they could sign on behalf of Rapid Data
(Western) Ltd. while they knew the company did not exist. However, there
was no connection between the damage suffered by the plaintiff and the
breach of warranty of authority. There were no damages because all
Wickberg would have had had the representations been correct would be an
action against Rapid Data (Western) Ltd. on a claim of wrongful dismissal.
Such an action would have yielded nothing because the company through
which the business was operated was now bankrupt and thus had the
business been carried on through Rapid Data (Western) Ltd. as originally
planned that business would have been bankrupt on Wickberg would have
collected nothing on a wrongful dismissal claim against that company.
Page | 34

Summary
The following points can be derived from the agency law on ratification and
the cases noted above:
(i) A corporation cannot ratify a contract that a promoter purported to enter
into on behalf of the corporation before the corporation came into existence
(Kelner v. Baxter).
(ii) A promoter can be liable on a pre-incorporation contract but only if it
can be said that it was intended in the circumstances that the promoter be a
party to the contract (Kelner v. Baxter as interpreted by Newborne v.
Sensolid Ltd., Black v.Smallwood, and Wickberg v. Shatsky).
(iii) Where the promoter purported to act on behalf of a corporation before
it cameinto existence the promoter can be liable for a breach of warranty of
authority (Black v. Smallwood and Wickberg v. Shatsky). However, the
damages may be nominal where the corporation, or the business which it
was intended would be carried on by the corporation, is now insolvent
(Wickberg v. Shatsky).
NB:Ratification, adoption, and novation have similar, but not identical
meanings in contract law. Adoption of a contract is accepting it as your
own, where it was entered into by someone acting for you. Ratification
differs in that the contract was entered by someone who lacked authority to
act for you. A novation is the substitution of a new contract instead of an
existing one between parties, or the substitution of a new party in an
existing contract.
PROBLEMS WITH THE COMMON LAW
The common law position created a risk for both the promoter and the third
party that there would be no enforceable contract. Black v. Smallwood and
Wickberg v. Shatskyinvolved cases in which the third party could not
enforce the contract against the company. Newborne v. Sendolid Ltd.
involved a situation in which the neither the promoter nor the company
could enforce the purported contract.
This creates a risk that reliance on the purported contract will be defeated
along with the potential for an unjust enrichment of promoters at the
expense of third parties or third parties at the expense of promoters. For
instance, had the court not found the promoters liable in Kelner v. Baxter
Kelner would have borne the entire loss on the wines that he supplied for
the hotel company rather than having that loss shared amongst all the
promoters (including Kelner as a co-promoter). A similar problem could
arise if promoters performed the purported contract but could not enforce
the contract against the third party.
The common law position also creates unnecessary costs. To deal with the
risk of a potentially unenforceable contract both parties will have to take
Page | 35

precautions to ensure that the corporation has in fact been incorporated. It

would make more sense to have just one party incur the cost of confirming
that the corporation has in fact been incorporated. Then it would make
sense to allocate this cost to the person who can confirm the existence of
the corporation at least cost. In most cases the promoters will know
whether the corporation has been incorporated or not without having to do
any checking. In other cases, where they were in doubt, they could simply
check with their lawyer.
The third party would have expected to have a contract with the corporation
itself so, in most cases, it would be reasonable to allow the corporation to
adopt the contract as its own and relieve the promoter of liability unless it
was genuinely intended that the promoter be a party to the contract.
However, one needs to address the opportunistic use of an adoption of a
contract by a corporation.
This might arise in a situation where the contract is no longer beneficial to
the promoters. The promoters might then incorporate the corporation but
fail to put any assets in the corporation. They could then have the
corporation adopt the contract relieving the promoters of liability and
leaving the third party with an action against an insolvent corporation. This
would give the promoters the
opportunity to gain on a contract if it continued to be beneficial to them but
avoid liability on the contract if it was not beneficial to them i.e. they
would be speculating at the expense of the third party.
WAYS OF ENFORCING PRE-INCORPORATION CONTRACTS UNDER
THE COMMON LAW
A creative use of the common law (in the broader sense of law and equity)
provides a number of ways of avoiding the common law pre-incorporation
contract problem discussed above.
1. S 54(2) Adoption: A company may adopt a pre incorporation contract
with its formation and registration made on its behalf without the
need for novation.
2. Promoter as Trustee of a Chose in Action: The promoter could be
treated as a trustee of a chose in action for the corporation. This
would put the promoter under a fiduciary obligation to enforce the
contract and would allow an order permitting the company to sue in
the name of the promoter as trustee.
3. Company as Assignee: The circumstances may allow the court to treat
the contract as having been assigned to the company (as opposed to
ratification by the company).
Page | 36

4. Restitutionary Principles: The court might accept that although there

was no valid contract with the corporation there was a quasi
contract allowing for a restitutionary based remedy. This could allow
a court to redress an enrichment of one party by the performance of
another in the believe that there was a valid contract.
5. Infer a Second Contract from a Course of Dealings: The court might
look at part performance of the terms of the original attempted
contract and infer another contract between the third party and the
corporation.
6. Offer to Promoter as Agent for the Third Party to Make an Offer to the
Company: The promoter might be viewed as an agent of the third
party with authority to make an offer to the corporation on the same
terms as those involved in the dealing between the promoter and the
third party. A purported ratification or adoption by the company could
then be considered an acceptance of an offer conveyed by the
promoter as agent for the third party.
7. Provisional Contract to Become Binding on a Future Event (the
Incorporation of the Company): Yet another alternative is to consider
the contract a provisional (or conditional) contract that would take
effect on the incorporation of the company and its adoption of the
contract.

LIFTING THE VEIL (Piercing of the veil by Common Law Courts)

How do Common Law courts pierce the veil?
Lifting the veil of incorporation or better still; "Piercing the corporate veil"
means that a court disregards the existence of the corporation because the
owners failed to keep one or more corporate requirements and formalities.
The lifting or piercing of the corporate veil is more or less a judicial act,
hence it's most concise meaning has been given by various judges.
Staughton LJ, for example, in Atlas Maritime Co SA v Avalon Maritime
Ltd (No 1) [1991] 4 All ER 769, defined the term thus:
"To pierce the corporate veil is an expression that I would
reserve for treating the rights and liabilities or activities
of a company as the rights or liabilities or activities of its
shareholders. To lift the corporate veil or look behind it,
therefore should mean to have regard to the shareholding
in a company for some legal purpose."
Page | 37

Young J, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd(1986) 5

NSWLR 254 (SCNSW,on his part defined the expression "lifting the
corporate veil" thus:
"That although whenever each individual company is
formed a separate legal personality is created, courts will
on occasions, look behind the legal personality to the real
controllers."32
The simplest way to summarize the veil principle is that it is the direct
opposite of the limited liability concept. Despite the merits of the limited
liability concept, there is the problematic that it can lead to the problem of
over inclusion, to the disadvantage of the creditors. That is to say the
concept is over protected by the law. When the veil is lifted, the owners'
personal assets are exposed to the litigation, just as if the business had
been a sole proprietorship or general partnership.
Common law courts have the lassitude or exclusive jurisdiction "lift" or
"look beyond" the corporate veil at any time they want to examine the
operating mechanism behind a company
This wide margin of interference given common law judges has led to the
piercing of the corporate veil becoming one of the most litigated issues in
corporate law.
But it should be worthy of note that a rigid application of the piercing
doctrine in common law jurisdictions has been widely criticized as
sacrificing substance for form. Hence, Windeyer J, in the case of Gorton v
Federal Commissioner of Taxation(1965) 113 CLR 604, remarked that
this approach had led the law into "unreality and formalism."
As aforementioned, when the judges pierce the veil of incorporation, they
accordingly proceed to treat the company's members as if they were the
owners of the company's assets and as if they were conducting the
companies business in their personal capacities, or the court may attribute
rights and/or obligations of the members on to the company.
The doctrine is also known as "disregarding the corporate entity".
In his 1990 article, Fraud, Fairness and Piercing the Corporate Veil,
Professor Farrar remarked that the Commonwealth authority on piercing
the corporate veil as "incoherent and unprincipled". 36 That claim has been
earlier backed up by Rogers AJA, a year ago in the case of Briggs v James
Hardie& Co Pty (1989) 16 NSWLR 549 thus:

Page | 38

"There is no common, unifying principle, which underlies

the occasional decision of the courts to pierce the
corporate veil. Although an ad hoc explanation may be
offered by a court which so decides, there is no principled
approach to be derived from the authorities."
Another scholar in the person of M. Whincop in his own piece:
'Overcoming Corporate Law: Instrumentalism, Pragmatism and the
Separate Legal Entity Concept'1997) 15 Company and Securities Law
Journal 411, argued that the main problem with the Salomon case was
not so much the argument for the separate legal entity, but rather
the failure by the English House of Lords to give any indication of
"What the courts should consider in applying the separate legal
entity concept and the circumstances in which one should refuse to
enforce contracts associated with the corporate structure."
Basis for court lifting of the veil of incorporation under Anglo-Saxon
Jurisdictions
As aforementioned, common law courts are empowered to; under limited
circumstances ignore the limited liability rule, and "pierce the corporate
veil", so that the members of the company in question may become liable for
the actions of the company, in spite of the limited liability rule that the two
have separate identities
It's worth re-iterating that the piercing of the corporate veil remains one of
the most litigated issues in English company law. There are however a
number of general factors that Anglo-Saxon would normally take into
considering before piercing the veil, since as much as possible, the courts
will like to maintain the preserve of companies to keep separate identity
from its owners.
By and large, the separate legal personality of a company will be
disregarded only if the court deems that there is, in fact or in law, a
partnership between companies in a group, or that there is a mere sham or
facade in which that company is playing a role, or that the creation or use of
the company was designed to enable a legal or fiduciary obligation to be
evaded or a fraud to be perpetrated.
In a nutshell, common law courts have ever since the Salomon case
recognized a number of discrete factors that would prompt them to piercing
the corporate veil. The most outstanding factors would be examined
hereunder:
STATUTORY LIFTING THE VEIL
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S. 20.
The High Court may, where a company or its directors are involved in
acts including tax evasion, fraud or where, save for a singlemember
company, the membership of a company falls below the
statutory minimum, lift the corporate veil.
MEMBERSHIP.s. 20, 49
Under S. 20CA ,he veil of a company may be lifted if members or members
continued to act as members after the reduction of the membership below
the statutory minimum. The section imposes liability o members for any
company debts which are contracted during the period after the expiry of 6
months after the company membership has been reduced below the
statutory minimum.
Accordingly, any person aware of the reduction of the membership below
the statutory minimum for a period exceeding 6 months wilbe personally
held liable for the company debts. It must be noted that the doctrine of
membership does not in itself automatically lead to termination of the
company in the eyes of the law and not until the expiry of the six months ca
the veil be lifted. Section 20 and 49 only covers members who have
remained as such after the expiry of the six month and it only covers
liquidated demands and not obligations like general damages. And the
knowledge of the members about the reduction in membership is of
significant importance.
The justification behind the membership requirementwas to protect the
creditors of the company fro m dealing with a company which no longer
complies with the law and prevent its members from hiding behind the veil
of incorporation.
Fraud
The Companies Act, Section 20 still provides for lifting the veil of
incorporation where the company business has been operated fraudulently.
The particular provision may also apply if during the winding up of the
company its discovered that the company business has been carried out
with an intent to defraud the creditors or for any other fraudulent purpose.
In such a situation, the liquidator or the receiver may apply to court to
declare any person was knowingly a party to the fraud personally liable for
such debts and obligations.
The section covers a wider range of people as long as one is aware that the
fraudulent activities were gping on. It also goes beyond liquidated debts to
cover all company liabilities that are affected by such fraud. However an

Page | 40

application under this section has a heavier burden of proof since fraud is
involved and must be proved strictly.
In Re : Maimgstone, court observed that a company secretary who was
also the financial advisor of the company was ot a party to the fraudulent
carrying out of business just because he omitted to give advice to the
company.
English courts would allege fraud where its owners of a corporation merely
used it as a window dressing to evade either fiduciary or legal obligations.
This will most notably be the case where the company owner intentionally
used it to deny the creditors pre-existing legal rights. These were the facts
in issue in the case of Re Edelsten ex parte Donnelly(Unreported, Federal
Court, Northrop J, 11 September 1992), even though the court could not
ascertain fraud on a company owner who had apparently denied his
obligations towards his creditors on the grounds of limited liability. The
court was faced with the question of ascertaining whether the company was
incorporated and then used for the purpose of evading a legal obligation or
perpetrating a fraud, as argued by the trustee. The court ruled thus.
"The argument of fraud is, of course circular. It can only
succeed if the argument of sham succeeds, because if no
property was acquired by, or devolved upon, Edelsten, no
duty capable of being evaded could arise under the Act
The submission that the VIP Group had been used to
perpetrate a fraud was coincident, and stood, or fell, with
the submissions which sought to have the transactions, by
which the VIP Group acquired property, treated as
shams."
In other words, the court could not ascertain fraud for the reason that the
corporation had not been created out of sham, and had merely taken
adequate steps to ensure that any property acquired after bankruptcy did
not fall into the hands of any of the trustee in bankruptcy.
It has been said that the more conspicuous the sham, the more likely it
would be for the Anglo-Saxon courts to ascertain that fraud had been
perpetrated. In the 1997 Australian case of Re Neo: (Unreported,
Immigration Review Tribunal, Metledge M, 30 July 1997)., the Immigration
Review Tribunal took this view in a case where a decision to refuse an
application for a visa by an employee, where sponsorship had been
arranged by a company formed on the same day that the application was
lodged, and interestingly, the company never carried out any business.
The Australian Immigration Review Tribunal ruled thus:

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"The company was merely a vehicle used to circumvent

Australian migration law. It was only a faade, its true
purpose being to allow the applicants to remain in the
country.
Group Enterprises
According to Section 156& 157 ca, where the accents of a holding
company are in issue, the veil of incorporation may be lifted e.g. if at the
end of a financial year, the holding company fails to present is accounts with
those of the subsidiary, an order may be sought that the accounts be
presented together with those of the subsidiary unless such a holding
company is a wholly owned subsidiary of a body corporate of a company
incorporated outside Uganda.
A wholly owned subsidiary is a company without any other members apart
from the holding company. If in the opinion of the holding company it was
cheaper to present the accounts as group accounts, the law would allow
such a situation to occur not withstanding Salomon Vs Salomon.
A subsidiary is defined under S161 (1)a(i) as a company of which the
parent holding company is a member and exercises control over it by
controlling the composition of its members or its shareholders. This control
must be in such a way that the holding company has powers to appoint and
remove directors without the consent or consultation with any other
person.
The argument of group enterprises is to the effect that in certain cases,
some companies that act as a corporate group, may operate to hide behind
the advantages of limited liability to the disadvantage of their creditors.
They may operate in a way that the parent entity is not clearly
distinguishable from the subsidiaries. The argument in favor of piercing the
corporate veil in these circumstances is to ensure that a corporate group
which seeks the advantages of limited liability must also be ready to accept
the corresponding responsibilities. This was the opinion of Doyle CJ in the
1998 case of Taylor v Santos Ltd Corporate Law Electronic Bulletin. No.
13, September 1998.
The most outstanding instance however where Anglo-Saxon courts would
most probably pierce the corporate veil on the ground of group enterprises
is where there exists a sufficient degree of common ownership and common
enterprise. In the case of Bluecorp Pty Ltd v ANZ Executors and
Trustee Co Ltd (supra), (1995) 18 ACSR 566 the following Lord Justices
identified the main grounds under which Anglo- Saxon courts would be
prompt to pierce the corporate veil as a result of group enterprises. The
court stated thus:
Page | 42

"The inter-relationship of the corporate entities here, the

obvious influence of the control extending from the top of
the corporate structure and the extent to which the
companies were thought to be participating in a common
enterprise with mutual advantages perceived in the
various steps taken and plans implemented, all influence
the overall picture."
The above hints notwithstanding, the common law courts may hesitate to
pierce the corporate veil where the outcome would produce a different
result.
JUDICIAL LIFTING THE VEIL
Agency
The doctrine of separate legal entity that the company is a legal entity with
a different identity from that of its members means that a company does not
exist to become an agent for its shareholders. Where this is the case, AngloSaxon courts would not hesitate to pierce the corporate veil. In Rowland J,
in Barrow v CSR Ltd(Unreported, 4 August 1988, Supreme Court of
Western Australia, Rowland J), where the court found out that a parent
company was responsible for the actions of a subsidiary in relation to an
employee, it did not hesitate to lift he veil. The court stated:
"Now, whether one defines all of the above in terms of
agency, and in my view it is, or control, or whether one
says that there was a proximity between CSR and the
employees of ABA, or whether one talks in terms of lifting
the corporate veil, the effect is, in my respectful
submission, the same.
But Anglo-Saxon courts do not have any unique judicial approach to
determining whether the company acted as an agent. Hence, it is a bit too
difficult to rationalize the judgments. For instance, the court refused to
pierce the veil in The Electric Light and Power Supply Corporation
Limited v Cormack: (1911) 11 NSWSR 350 a one-man company that had
contracted with the plaintiffs to use their power supply for his work during
two years, and not to install any other alternative source of energy power
during that period of time. But within that period, the defendant sold his
company to another company of which he was both the manager and the
main shareholder. The new company thereupon installed energy power
other than he one contracted with the plaintiffs. The court refused to pierce
the veil, considering the act as a personal undertaking. Lord Rich AJ found
no evidence that the sale of the business by the defendant was done with
the object of evading his personal obligations.
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It has been remarked that Anglo-Saxon courts are generally less prepared
to pierce the separate legal status, in the case of very small companies,
such as the one business. In the case of small businesses, they are rather
more prepared to apply agency principles. This is particularly the case
where control was absolute, that is where the business was an integral part
of it's owner, such that the company itself can properly be seen as a mere
agent for the shareholder. Hence in Ampol Petroleum Pty Ltd v
Findlay(Unreported, Fullagar J, Supreme Court of Victoria, 30 October
1986),Fullagar J. was only willing to pierce the veil, only after the owner of
a small private company sought the lifting of the veil himself to demonstrate
that the losses of the company were in fact his losses. The learned judge
stated:
"If the defendant does embark on establishing loss of
profits (or capital or goodwill) at an enquiry as to
damages, I consider on the present state of the evidence
that the "corporate veil" may be pierced for these
purposes, that is to say, I consider that the defendant will
be entitled to include losses to his company or companies
flowing from the breach, provided he establishes (in
addition to causation) that the loss to the company was
his loss. The evidence presently before me strongly
suggests that the defendant wholly controlled the
relevant companies and their monies and other assets,
and dealt with the monies and assets as though they were
his own."
In a nutshell, it can be said that the main reason while Anglo-Saxon courts
in he case of small companies tend to prefer agency principles is because
they want to reduce the severity of a penalty as a consequence of piercing
the corporate veil.
In Re F.G Films Limited [1916]1WLR 483, a company was incorporated
in the U.K. with a purpose of making and producing fils . Its share capital
was 100 and was incorporated by American investors but had no physical
place of business apart from the registered offices and it did not employ any
staff.
Court held that the company was an agent of the American company and
sought to employ the privileges which would not have been open to it
because it was a foreign company.
In Smith, Stone and Knight Limited Vs Birmingham Corporation, the
Defendant was asked to compensate the Plaintiff Company for the
compulsory acquisition of the subsidiary company. The Defendant said that
one can own a company because its a distinct entity.
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Court affected the claim of the Plaintiff.

Lord Atkins laid down the 6 tests if a subsidiary would entitle the parent
company to compensation.
a. Sharing of profits
b. Whether the officers of the subsidiary are appointed by the
parent company.
c. Whether the parent company is the head and brain of the
subsidiary.
d. Whether the decisions of the subsidiary are made by the parent
company
e. Whether the parent company is paid by the subsidiary for skill
and direction
f. Whether the parent company is in effect the controller of the
subsidiary.
In KyewalabyeVs U.C.B It was stated that before court can decide that the
veil of incorporation be lifted, there must be facts to assist court to conclude
that the directors were one and the same with those of the subsidiary.
Unfairness
One other serious ground under which Anglo-Saxon courts would be so
ready to pierce the corporate veil is in cases where it is deduced that there
was unfairness on the part of the company in question. The plaintiff may for
example pray the court to pierce the corporate veil on the grounds that
doing so would help bring a fair and just result. Such was the case in the
Australian case of RMS Glazing Pty Ltd v The Proprietors of Strata
Plan No 1444(Unreported, Supreme Court of New South Wales, Cole J, 17
December 1993), where a body corporate bringing in an action against a
defendant company argued that he veil be pierced because it's Managing
Director, Mr. Lo Surdo had play a very active role in the court proceedings
and would normally not have done so if the company was in effect not just a
"a body of straw". The court in he pronouncement of Cole J. rejected this
argument, finding that with the company's record of profitable trading it
could not be said to be a body of straw. Cole J. said thus:
"Quite apart from that I am not satisfied that justice
would require the making of such an order. The Body
Corporate dealt with RMS over a period of more than a
decade. It was prepared to deal with the company rather
than Mr Lo Surdo personally and to enter into contractual
relationships with the company resulting in the payment
of many millions of dollars. I do not think that the
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interest of justice requires that it now be permitted to

simply disregard the corporate veil.
Sham or Faade
An argument that the company under scrutiny is a sham or a faade is one
of he strongest points that would prompt a common law court to lift the veil
of incorporation. The argument is quite close to he argument of fraud, but
usually stands on it's own. In short, to say a company was merely a faade
or a sham means the corporate form was incorporated or merely used as a
mask to hide the real purpose of the corporate controller. In the English
case of Sharrment Pty Ltd v Official Trustee in Bankruptcy,
(Unreported: Federal court, 3rd June 1988 Lockhart J, stated that:
"A 'sham' issomething that is intended to be mistaken
for something else or that is not really what it purports to
be. It is a spurious imitation, a counterfeit, a disguise or a
false front. It is not genuine or true, but something made
in imitation of something else or made to appear to be
something which it is not. It is something which is false
or deceptive."
To say the least, a fraud argument is usually dependent upon a sham
argument, and common law jurisdictions have indicated over the years that
no fraud can be perpetrated where he corporate form is real and not a
faade.
In Re Derby (1911) two undercharged bankrupts who had been convicted
on a number of fraud charges incorporated a company with an impressive
share capital of 3,000 and sold to the company property worth 3,000 at
18,000. The bankrupts as the promoters enticed the public to subscribe for
shares in the company without disclosing in their prospectus that they were
behind the company. Immediately after the incorporation of the company,,
the company went into liquidations. The liquidators called upon them to
show cause why they had to form this company. They sought to hind under
the veil of incorporation.
Court lifted the veil and observed that the company was bankrupt and the
latter would be answerable to the liquidators.

Recent Development of the Doctrine in Common law jurisdictions

(Resume)

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The doctrine of piercing the corporate veil is apparently in a transitory state

in many common law jurisdictions. Current practice by Her Majesty's courts
demonstrates that the courts are increasingly becoming as interested with
legal and equitable principles as they are with the traditional fraud
requirement. In other words, what the Common law courts typically
consider is injustice and impropriety. Where this is the case, the only motive
of the courts in lifting he veil is the restoration of equity.
The fraud requirement however remains of very vital importance in many
common law jurisdictions. But other courts such as in the United States
have adopted a more liberal approach to veil piercing in favor of tests such
as for instance: what is the veracity in the shareholder control of the
corporation? The shareholders' improper conduct in controlling he
corporation and the causal link between improper conduct and the
plaintiff's injury.
III CONCLUSION
The act of piercing the corporate veil until now remains one of the most
controversial subjects in corporate law, and it would continue to remain so,
even for the years to come. By and large, as discussed in the essay, the
doctrine of piercing the corporate veil remains only an exceptional act
orchestrated by courts of law. Courts are most prepared to respect the rule
of corporate personality, that a company is a separate legal entity from it's
shareholders, having it' own rights and duties, and can sue and be sued in
it's own name.
As we move from jurisdiction to jurisdiction across the globe, it's application
narrows down to how that system of the law appreciates the subject.
Common law jurisdictions are examples par excellence where the piercing
of the corporate veil has gained notoriety, and as the various cases indicate,
courts under this system of the law generally appreciates every case by it's
merits.
The above notwithstanding, there are general categories such as fraud,
agency, sham or faade, unfairness and group enterprises; which are
believed to be he most peculiar basis under which the common law courts
would pierce he corporate veil. But these categories are just a guideline and
by no means far from being exhaustive
MEMORUNDUM AND ARTICLES OF ASSOCIATION
Section 1 CA defines memorandum as a memorandum of association of a
company as originally formed or as altered from time to time. There is no
comprehensive definition for the term memorandum of association by the
companys act. However, the memorandum of association is like a chartesr
Page | 47

and defines the limits of the powers of the company. Likewise, there is no
comprehensive definition for the Article of Association but still its like a
charter defining all the rights and duties, privileges and powers of the
governing bodies and individuals.
The memorandum of association can be conveniently referred to as the
constitution of the company fro which the company derives its powers to
carry out the purpose for which it was formed.

THE MEMORUNDUM OF ASSOCIATION AS A CONTRACT

Section 21(1) CA provides that the memorandum and articles of
association of a company shall when registered bind the company and all
the members to the same extent as if they respectively had been signed and
sealed by each member and contained a warranty on the part of each
member to observe the provisions thereof.
This section o the face of it introduces the notion of contract by use of the
words shall bind the company and members thereof
In BattieVsBattie limited [1938]CH 708 at 721, court observed that
the section had been the subject of considerable controversy in the past and
will remain a controversy in the future.
The controversy emerges from the wording of the subsection. As a general
rule of the law of contract, under the doctrine of privity, a non partycan not
be a party to an action based on a contract or be responsible on a contract.
Accordingly, no party is party to any written contract which he has not
signed.
The section provides that upon registration, the memorandum and articles
of association bind all the members and shareholders thereof as if they had
been signed and sealed by each member and the members undertake t
observe all the provisions of the documents.
The strict application of the section would lead to a verdict that if one had
not signed the memorandum and articles of association, they would nit be
bound by the documents.
However it also talks about a contract between the company and individual
members. I.e. Its talking of a company yet its not a signatory to the
documents and the company isnt incorporated at the time the
memorandum and articles are formulated yet its deemed to have been
bound by it already.
KELNER Vs BAXTER
Page | 48

PRICE Vs KELSALL
The above cases provide that pre-incorporation contracts can not bind
companies yet the act binds this company on such contracts.
Hickman VsKent [1915]1 CH 881
THE
RELATIONSHIP
BETWEEN
THE
MEMORUNDUM
ASSOCIATION AND THE ARTICLES OF ASSOCIATION

OF

Since the two documents are contemporaries, it appears that they are to be
read together such that the ambiguities in one can be cleared by reading
the other.
But in all matters required by statute, it is only the memorandum that can
be resorted to as the authority as it contains the fundamental conditions
upon which the company is incorporated while the articles of association
only regulate the internal affairs of the company.
In Guinness Vs Land Corporation of Ireland,
it was held that
notwithstanding the suggestion that the fundamental conditions of the
memorandum and articles of Association are concurrently construed, for
anything the act requires, one must look at the memorandum alone. That
where the legislation provides for one document to be dominant over the
other, one can not turn to the instrument
for assistance as
that would amount to modification of the major document.
However, the articles usually give effect to the provision that the
memorandum
EFFECTS
OF
ASSOCIATION.

THE

MEMORUNDUM

AND

ARTICLES

OF

Section 21(1) expressly provides that the memorandum and articles of

association shall bind the company and its members upon registration.
Section (22)2 provides that under the memorandum and articles of
association, any money payable by a member to a company is deemed a
debt to the company.
These two provisions combined have the effect of declaring a contract to
which a company is party even though it may not have been registered at
that time.
In KelnerVs Baxter, Pre-incorporation contracts are held not to bind
companies and on the face of it, there appears some confusion as to
whether the draftsman of the law lost sight of this principle.
However, In HikmanVs Kent, it was observed in relation to S21(1) that;

Page | 49

a company could not in the ordinary course of business be

bound other than by statute or contract and that its in this
section that the obligations must be found. As far as members
are concerned, the section does not mention with whom they
are deemed to have covenanted but the section does not mean
that the company is not to be bound when it says its to be
bound nor can the section mean that members are to be under
no obligation under the articles in which their rights and
duties are to be found .The formers treated in law the company
a party to its own memorandum and articles of association
In Baring Gold VsShrubing Toy (1894) it was held that as between the
company and the shareholders, the memorandum and articles of association
do not create any contract and the company can not sue a member and
neither can a member sue the company as if there was an agreement
between them.
In Wood Vs Odessa Waterworks Co. (1889)42 Ch D 636, it was held
that the articles of association constitute a contract between each individual
shareholder and the company.
In Welton V Saffery (1897)Ac 299, it was held that the articles constitute
a contract between each member and the company and that this is no
contract between in terms between the individual members of the company
but the articles regulate the rights interse and such rights can only be
enforced against a member through the company otherwise no member as
between himself and another has any right beyond that.
OBLIGATIONS AND RIGHTS UNDER THE CONTRACT IN S.21
9. The company can force the shareholders in their capacity as
such to act within the articles.
In Hickman Vs Kent, it was held that the Plaintiffs action was in
substance to enforce his rights as a member under the articles including
49(arbitration clause) which creates contractual obligations and rights
enforceable as between the plaintiff and the association which rights
were contained in the document forming
a contract between the
company and the members as well as members interse . Thus the
company was entitles to force him to seek arbitration first as par article
49.
10.
The company may enforce against a member as a member.
In Nampeera Trading Co limited VsMuliisa, it was held that pursuant
to Salomon Vs Salomon, once a company is registered, it has a
separate existence from its members and shareholders and can even
enter into contractual relationship with its members. That under S.
21(1), the memorandum and articles of association are binding onto the
Page | 50

members and the company and thus formed a contract between the
company and the members but the defendant had contracted in his
private capacity hence the requirement for the companys articles were
inapplicable.
11.
The shareholders may sue to prevent any alteration of the
articles if this will amount to fraudulent infringement of his
interest.
In Brown Vs British Abrasive wheel Co. [1919] 1 Ch.D 290 it was
held that the proposed alteration of the articles was not just just and
equitable or for the benefit of the company but was simply for the
benefit of the majority shareholders and thus they could not enforce it
against the minority shareholders even in the absence of malafide.
12.
The shareholders may bring an action to force the
company to be registered as a shareholder and obtain a share
certificate thereof.
In Moodievs Shepard [1949]2 All E.R. 1044 IT was held that a
shareholder may sue for a declaration that he be registered as a
shareholder to enforce delivery of a share certificate in accordance with
the articles.
13.
Enforcement of members rights to vote.
In Pender VSLushington, it was held that under the articles, a person
whose name was in the register of shareholders which reflected the
rights of the members to vote at a general meeting and the no vote of
properly qualified members could be rejected because shares had been
obtained by transfer ..
14.
Prevent directors from holding office in breach of articles.
Inn Catesby VsBumell, the articles of association of the company
provided that a member should not be qualified to be elected director
unless a written notice was given to the company not less than 14 days
before he date of voting. Notice was given but the sitting director
rejected it. A meeting was held and new directors were appointed
pursuant to the notice. The shareholders sued for an injunction
restraining the former directors from acting as such. It was held that the
notice was in compliance with the articles of association and the first two
persons elected as directors in lue of the defendant who had retired
were duly elected and the injunction ought to be granted.
15.
To enforce members rights in respect to transfer of shares
and the right to vote.
In MisangoVsMusige, it was held that a though courts rarely interfere
with the inherent powers and management of a company , a member can
sue when the acts complained of injure him or are either fraudulent or
ultra vires.
Page | 51

16.
To prevent infringement on fundermental rights,
MisangoVsMusige,
The contract made under S21 can only be enforced by a member
against a member in his capacity as a member and according
Hickman Vs Kent it was held that there was no right given by
articles to a member in that capacity other than that of a member can
enforced against the company.

or
to
he
be

In ElleyVs Positive Security Life Assurance Co Limited it was held

that the legal effect of the articles of association is such that they form a
contract and an engagement to which the Plaintiff was not party, the
contract and engagement is between the members of the company alone.
Tha an outsider to whom rights purport t be given by the articles in his
capacity as such, whether he subsequently becomes a member , he can
not sue on the articles treating them as a contract between himself and
the company whether he is to subsequently to become a member and can
not sue to enforce such a right as they are not rights of general
application to shareholders and can only exist by virtue some contract
between the company and such a person
That the articles will always remain in a particular form but any
alteration must be done bonafide and in the interest of the company.
In Allen VS Gold reffs of W.A.IT was held that a company had powers
to alter its articles. That the powers to alter the articles of the company
must be exercised bonafide of the company as a whole and such
alterations so made is valid and binding on the members.
In Shuttleworth V Cok Brothers & Co, it was held that a contract, if
any between the plaintiff and the company contained in the articles on
the original form was subject statutory powers of alteration and if the
alteration was bonafide, and for the benefit of the company, it was valid
and constituted no breach.
N.B.S 21 prima facie introduces the notion of a contract but controversy
arises as to the parties of the contract.
S.3 requires members to subscribe their manes to the memorandum and
articled must also be signed by the members under S 11. A company can
not be said to be bound when the two documents are prepared and
registered before its incorporation.
However, a combined reading of S.21 (1 & 2) is to the effect that that is
a contract to which the company is a party.
Rationale of the contract:

Page | 52

Ross J. stated that the contract under S.21 was of the most sacred
character since its upon its reliance that the shareholders advance
money to protect individual shareholders as well as to make the
company answerable to such shareholders for its activities thus a
number of doctrines like ultra vires are referred to the contract.
Gower states that the section no longer means what it says be cause of
the numerous judicial opinions expressed on it and that its rephrasing is
overdue. That courts have however settled any doubts.

DOCTRINE OF ULTRA VIRES-EFFECTS AND EXCEPTIONS

CONCEPT
The object clause of the Memorandum of the company contains the object
for which the company is formed. An act of the company must not be
beyond the objects clause, otherwise it will be ultravires and, therefore,
void and cannot be ratified even if all the members wish to ratify it. This is
called the doctrine of ultra vires, which has been firmly established in the
case of Ashtray RailwayCarriage and Iron Company Ltd v. Riche. Thus the
expression ultra vires means an act beyond the powers. Here the expression
ultra vires is used to indicate an act of the company which is beyond the
powers conferred on the company by the objects clause of its memorandum.
An ultra vires act is void andcannot be ratified even if all the directors wish
to ratify it. Sometimes the expression ultra vires is used to describe the
situation when the directors of a company have exceeded the powers
delegated to them. Where a company exceeds its power as conferred on it
by the objects clause of its memorandum, it is not bound by it because it
lacks legal capacity to incur responsibility for the action, but when the
directors of a company have exceeded the powers delegated to them. This
use must be avoided for it is apt to cause confusion between two entirely
distinct legal principles. Consequently, here we restrict the meaning of ultra
vires objects clause of the companys memorandum.
Basic principles included the following:
1. The doctrine of estoppel usually precluded reliance on the defense of
ultra vires where the transaction was fully performed by one party
2. A fortiori, a transaction which was fully performed by both parties
could not be attacked.

Page | 53

3. If the contract was partially performed, and the performance was held
to be insufficient to bring the doctrine of estoppel into play, a suit for
quasi contract for recovery of benefits conferred was available.
4. If an agent of the corporation committed a tort within the scope of his
or her employment, the corporation could not defend on the ground
the act was ultra vires.
ORIGIN AND DEVELOPMENT
Doctrine of ultra vires has been developed to protect the investors and
creditors of the company. The doctrine of ultra vires could not be
established firmly until 1875 when the Directors, &C., of the Ashbury
Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75)
L.R. 7 H.L. 653 was decided by the House of Lords. A company called The
Ashbury Railway Carriage and Iron Company, was incorporated under the
Companies Act, 1862. Its objects, as stated in the Memorandum of
Association, were to make, and sell, or lend on hire, railway carriages and
waggons, and all kinds of railway plant, fittings, machinery, and rollingstock; to carry on the business of mechanical engineers and general
contractors ; to purchase, lease, work, and sell mines, minerals, land, and
buildings; to purchase and sell, as merchants, timber, coal, metals, or other
materials, and to buy and sell any such materials on commission or as
agents. The directors agreed to purchase a concession for making a
railway in a foreign country, and afterwards (on account of difficulties
existing by the law of that country), agreed to assign the concession to a
Socit Anonyme formed in that country, which socit was to supply the
materials for the construction of the railway, and to receive periodical
payments from the English company.
The objects of this company, as stated in the Memorandum of Association,
were to supply and sell the materials required to construct railways, but not
to undertake their construction. The contract here was to construct a
railway. That was contrary to the memorandum of association; what was
done by the directors in entering into that contract was therefore in direct
contravention of the provisions of the Company Act, 1862
It was held that this contract, being of a nature not included in the
Memorandum of Association, was ultra vires not only of the directors but of
the whole company, so that even the subsequent assent of the whole body of
shareholders would have no power to ratify it. The shareholders might have
passed a resolution sanctioning the release, or altering the terms in the
articles of association upon which releases might be granted. If they had
sanctioned what had been done without the formality of a resolution, that
would have been perfectly sufficient. Thus, the contract entered into by the
company was not a voidable contract merely, but being in violation of the
Page | 54

prohibition contained in the Companies Act , was absolutely void. It is

exactly in the same condition as if no contract at all had been made, and
therefore a ratification of it is not possible. If there had been an actual
ratification, it could not have given life to a contract which had no existence
in itself; but at the utmost it would have amounted to a sanction by the
shareholders to the act of the directors, which, if given before the contract
was entered into, would not have made it valid, as it does not relate to an
object within the scope of the memorandum of association.
Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this
doctrine was made clearer. In this case the House of Lords affirmed the
principle laid down in Ashbury RailwayCarriage and Iron Company Ltd v.
Riche5 but held that the doctrine of ultra vires ought to be reasonable, and
not unreasonable understood and applied and whatever may fairly be
regarded as incidental to, or consequential upon, those things which the
legislature has authorized, ought not to be held, by judicial construction, to
be ultra vires.
The doctrine of ultra vires was recognised in Indian the case of Jahangir R.
Mod i v. ShamjiLadhaand has been well established and explained by the
Supreme Court in the case of A. LakshmanaswamiMudaliarv. Life Insurance
Corporation Of India8. Even in India it has been held that the company has
power to carry out the objects as set out in theobjects clause of its
memorandum, and also everything, which is reasonably necessary to carry
outthose objects.9 For example, a company which has been authorized by
its memorandum to purchaseland had implied authority to let it and if
necessary, to sell it.However it has been made clear bythe Supreme Court
that the company has, no doubt, the power to carry out the objects stated in
theobjects clause of its memorandum and also what is conclusive to or
incidental to those objects, but it has no power to travel beyond the objects
or to do any act which has not a reasonable proximate connection with the
object or object which would only bring an indirect or remote benefit to the
company.
To ascertain whether a particular act is ultra vires or not, the main purpose
must first be ascertained, then special powers for effecting that purpose
must be looked for, if the act is neither within the main purpose nor the
special powers expressly given by the statute, the inquiry should be made
whether the act is incidental to or consequential upon. An act is not ultra
vires if it is found:
(a) Within the main purpose, or
(b) Within the special powers expressly given by the statute to effectuate
the main purpose, or

Page | 55

(c) Neither within the main purpose nor the special powers expressly given
by the statute but incidental to or consequential upon the main purpose and
a thing reasonably done for
effectuating the main purpose.
The doctrine of ultra vires played an important role in the development of
corporate powers. Though largely obsolete in modern private corporation
law, the doctrine remains in full force for government entities. An ultra vires
act is one beyond the purposes or powers of a corporation. The earliest
legal view was that such acts were void. Under this approach a corporation
was formed only for limited purposes and could do only what it was
authorized to do in its corporate charter.
This early view proved unworkable and unfair. It permitted a corporation to
accept the benefits of a contract and then refuse to perform its obligations
on the ground that the contract was ultra vires. The doctrine also impaired
the security of title to property in fully executed transactions in which a
corporation participated. Therefore, the courts adopted the view that such
acts were voidable rather than void and that the facts should dictate
whether a corporate act should have effect.
Over time a body of principles developed that prevented the application of
the ultra vires doctrine. These principles included the ability of
shareholders to ratify an ultra vires transaction; the application of the
doctrine of estoppel, which prevented the defense of ultra vires when the
transaction was fully performed by one party; and the prohibition against
asserting ultra vires when both parties had fully performed the contract.
The law also held that if an agent of a corporation committed a tort within
the scope of the agent's employment, the corporation could not defend on
the ground that the act was ultra vires.
Despite these principles the ultra vires doctrine was applied inconsistently
and erratically. Accordingly, modern corporation law has sought to remove
the possibility that ultra vires acts may occur. Most importantly, multiple
purposes clauses and general clauses that permit corporations to engage in
any lawful business are now included in the articles of incorporation. In
addition, purposes clauses can now be easily amended if the corporation
seeks to do business in new areas. For example, under traditional ultra vires
doctrine, a corporation that had as its purpose the manufacturing of shoes
could not, under its charter, manufacture motorcycles. Under modern
corporate law, the purposes clause would either be so general as to allow
the corporation to go into the motorcycle business, or the corporation would
amend its purposes clause to reflect the new venture.
State laws in almost every jurisdiction have also sharply reduced the
importance of the ultra vires doctrine. For example, section 3.04(a) of the
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Revised Model Business Corporation Act, drafted in 1984, states that "the
validity of corporate action may not be challenged on the ground that the
corporation lacks or lacked power to act." There are three exceptions to this
prohibition: it may be asserted by the corporation or its shareholders
against the present or former officers or directors of the corporation for
exceeding their authority, by the attorney general of the state in a
proceeding to dissolve the corporation or to enjoin it from the transaction of
unauthorized business, or by shareholders against the corporation to enjoin
the commission of an ultra vires act or the ultra vires transfer of real or
personal property.
Government entities created by a state are public corporations governed by
municipal charters and other statutorily imposed grants of power. These
grants of authority are analogous to a private corporation's articles of
incorporation. Historically, the ultra vires concept has been used to
construe the powers of a government entity narrowly. Failure to observe the
statutory limits has been characterized as ultra vires.
In the case of a private business entity, the act of an employee who is not
authorized to act on the entity's behalf may, nevertheless, bind the entity
contractually if such an employee would normally be expected to have that
authority. With a government entity, however, to prevent a contract from
being voided as ultra vires, it is normally necessary to prove that the
employee actually had authority to act. Where a government employee
exceeds her authority, the government entity may seek to rescind the
contract based on an ultra vires claim.
EFFECT OF SECTION 51 ON ULTRA VIRES TRANSACTIONS
Previously, a contract beyond the objects clause of the companys
memorandum is an ultra vires contract and cannot be enforced by or
against the company as was decided in the cases of In Re, Jon Beaufore
(London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And Others v.
Butterfly Marketing PrivateLtd., (2001) 105 Comp. Cas Mad 763, A
borrowing beyond the power of the company (i.e. beyond the objects clause
of the memorandum of the company) is called ultra vires borrowing.
However, Section 51 provides that;
(1)The validity of an act done by a company shall not be called into
question on the ground of lack of capacity by reason of anything
contained in the companys memorandum.
(2)A member of a company may bring proceedings to restrain the doing
of an act which but for subsection (1) would be beyond the companys
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capacity; but no such proceedings shall lie in respect of an act to be

done in fulfillment of a legal obligation arising from a previous act of
the company.
(3)The directors shall observe any limitations on their powers contained
in the companys memorandum, and any action by the directors
which but for subsection (1) would be beyond the companys capacity
may only be ratified by the company by special resolution.
(4)A resolution ratifying the action under subsection (3) shall not affect
any liability incurred by the directors or any other person and relief
from the liability must be agreed to separately by special resolution.
From the above section, a company is precluded from relying on the
doctrine of ultra vires to deny validity of any contract irrespective of what
the circumstances might be. The section however does not necessarily wipe
out the doctrine of ultra vires and indeed, sub section 2 of the section
allows members of a company to take preventive measures to restrain the
company from engaging into would be ultra vires transactions. This sub
clause is premised on the very essence of the doctrine aimed at the
protection of both the subscribers as well as people who may m=deal with
the copany.
However, the courts have developed certain principles in the interest of
justice to protect such lenders. Thus, even in a case of ultra vires
borrowing, the lender may be allowed by the courts thefollowing reliefs:
(1) Injunction --- if the money lent to the company has not been spent the
lender can get the injunction to prevent the company from parting with it.
(2) Tracing--- the lender can recover his money so long as it is found in the
hands of the company in its original form.
(3) Subrogation---if the borrowed money is applied in paying off lawful debts
of the company, the lender can claim a right of subrogation and
consequently, he will stand in the shoes of thecreditor who has paid off with
his money and can sue the company to the extent the money advanced by
him has been so applied but this subrogation does not give the lender the
same priority that the original creditor may have or had over the other
creditors of the company.
EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES
There are, however, certain exceptions to this doctrine, which are as
follows:
1. An act, which is intra vires the company but outside the authority of the
directors may be ratified by the shareholders in proper form.S 51(3)
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2. An act which is intra vires the company but done in an irregular manner,
may be validated by the consent of the shareholders. The law, however, does
not require that the consent of all the shareholders should be obtained at
the same place and in the same meeting.
3. If the company has acquired any property through an investment, which
is ultra vires, the companys right over such a property shall still be
secured.
4. While applying doctrine of ultra vires, the effects which are incidental or
consequential to the act shall not be invalid unless they are expressly
prohibited by the Companys Act.
5. There are certain acts under the company law, which though not
expressly stated in the memorandum, are deemed impliedly within the
authority of the company and therefore they are not deemed ultra vires. For
example, a business company can raise its capital by borrowing.
6. If an act of the company is ultra vires the articles of association, the
company can alter its articles in order to validate the act.
CASE NOTES:
Eley v The Positive Government Security Life Assurance Company,
Limited, (1875-76) L.R. 1 Ex. D. 88
It was held that the articles of association were a matter between the
shareholders inter se, or the shareholders and the directors, and did not
create any contract between the plaintiff and the company and article is
either a stipulation which would bind the members, or else a mandate to the
directors. In either case it is a matter between the directors and
shareholders, and not between them and the plaintiff.
The Directors, &C., of the Ashbury Railway Carriage and Iron
Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653.
The objects of this company, as stated in the Memorandum of Association,
were to supply and sell the materials required to construct railways, but not
to undertake their construction. The contract here was to construct a
railway. That was contrary to the memorandum of association; what was
done by the directors in entering into that contract was therefore in direct
contravention of the provisions of the Company Act, 1862
It was held that this contract, being of a nature not included in the
Memorandum of Association, was ultra vires not only of the directors but of
the whole company, so that even the subsequent assent of the whole body of
shareholders would have no power to ratify it. The shareholders might have
passed a resolution sanctioning the release, or altering the terms in the
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articles of association upon which releases might be granted. If they had

sanctioned what had been done without the formality of a resolution, that
would have been perfectly sufficient. Thus, the contract entered into by the
company was not a voidable contract merely, but being in violation of the
prohibition contained in the Companies Act , was absolutely void. It is
exactly in the same condition as if no contract at all had been made, and
therefore a ratification of it is not possible. If there had been an actual
ratification, it could not have given life to a contract which had no existence
in itself; but at the utmost it would have amounted to a sanction by the
shareholders to the act of the directors, which, if given before the contract
was entered into, would not have made it valid, as it does not relate to an
object within the scope of the memorandum of association.
Shuttleworth v Cox Brothers and Company (Maidenhead), Limited,
and Others, [1927] 2 K.B. 9
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 bona fide for the benefit of the company it was
valid and there was no breach of that contract;

there was no ground for saying that the alteration could not
reasonably be considered for the benefit of the company;

there being no evidence of bad faith, there was no ground for

questioning the decision of the shareholders that the alteration was
for the benefit of the company; and,

the plaintiff was not entitled to the relief claimed.

In Re New British Iron Company, [1898] 1 Ch. 324

It was held that the article is not in itself a contract between the company
and the directors; it is only part of the contract constituted by the articles of
association between the members of the company inter se. But where on the
footing of that article the directors are employed by the company and
accept office the terms of art. 62 are embodied in and form part of the
contract between the company and the directors. Under the article as thus
embodied the directors obtain a contractual right to an annual sum of 1000l
as remuneration. It was held also that although these provisions in the
articles were only part of the contract between the shareholders inter se,
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the provisions were, on the directors being employed and accepting office
on the footing of them, embodied in the contract between the company and
the directors; that the remuneration was not due to the directors in their
character of members, but under the contract so embodying the provisions;
and that, in the winding-up of the company, the directors were entitled to
rank as ordinary creditors in respect of the remuneration due to them at the
commencement of the winding-up.
Rayfield v Hands and Others, [1957 R. No. 603.]
Field-Davis Ltd. was a private company carrying on business as builders and
contractors, incorporated in 1941 under the Companies Act, 1929 , as a
company limited by shares, having a share capital of 4,000, divided into
4,000 ordinary shares of 1 each, of which 2,900 fully-paid shares had been
issued. The plaintiff, Frank Leslie Rayfield, was the registered holder of 725
of those shares, and the defendants, Gordon Wyndham Hands, Alfred
William Scales and Donald Davies were at all material times the sole
directors of the company. The plaintiff was a shareholder in a company.
Article 11 of the articles of association of the company required to inform
the directors of his intention to transfer shares in the company, and which
provided that the directors will take the said shares equally between them
at a fair value. In accordance with this the plaintiff so notified the
directors, who contended that they need not take and pay for the plaintiffs
shares, on the ground that the articles imposed no such liability upon them.
The plaintiffs claimed for the determination of the fair value of his shares,
and for an order that the directors should purchase such shares at a fair
value. It was found that the true construction of the articles required the
directors to purchase the plaintiffs shares at a fair price. Article 11 is
concerned with the relationship between the plaintiff as a member and the
defendants, not as directors, but as members of the company.
Guinness v Land Corporation of Ireland,(1883) L.R. 22 Ch. D. 349
The Land Corporation of Ireland, Limited , was incorporated under the
Companies Act on the 12th of July, 1882, as a company limited by shares. By
the memorandum of association of a company limited by shares it was
stated that the objects of the company were, the cultivation of lands in
Ireland , and other similar purposes there specified, and to do all such other
things as the company might deem incidental or conducive to the
attainment of any of those objects.
The 8th clause of the articles of association, provided that the capital
produced by the issue of B shares shall, so far as is necessary, be applied in
making good to the holders of A shares the preferential dividend of 5 per
cent., which they are to receive on the amounts paid up on their shares.
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This action was brought by one of the B shareholders on behalf of himself

and the others, to restrain the directors from issuing any A shares on the
footing of their being entitled to the benefit of that article, and to restrain
the directors from applying in accordance with it the capital arising from
the B shares.
It was held that the application of the B capital provided for by the articles
is not an application of capital to carrying on the business of the company,
but is providing an inducement to people to take shares and subscribe
capital to carry on the business and that article 8 was invalid, as it
purported to make the B capital applicable to purposes not within the
objects of the company as defined by the memorandum of association, and
in a way not incidental or conducive to the attainment of those objects, and
that the directors must be restrained from acting upon it. The articles of
association of a company cannot, except in the cases provided for by sect.
12 of the Companies Act, 1862 , modify the memorandum of association in
any of the particulars required by the Act to be stated in the memorandum.

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