Memorandum and Articles of Association

Memorandum of Association

A: Meaning and Importance

The memorandum of association is a document of great importance in relation to

proposed company1. It contains fundamental conditions upon which alone the
company is allowed to be incorporated. It is a charter of the company and
defines its reason for existence. It also regulates the external affairs of the
company in relation to outsiders2. Its purpose is to enable shareholders and
those who deal with the company to know what its permitted range of enterprise
is. It does not only show the object of the formation of a company but also the
utmost possible scope of it. The memorandum defines the area beyond which
the action of the company cannot go; inside that area the shareholders may
make such regulation for their own governance as they think fit3. The importance
of the memorandum of a company can be gauged by the fact that it contains
rules regarding the capital structure of the company, the liability of its members,
and scope of activities.

The following facts indicate the importance of the memorandum:-

(1) It provides the basis of incorporation
(2) It determines the areas of operation of the company.
(3) It defines the relationship of the company with the outsiders.
(4) It is unalterable charter of the company. Although it can be altered
under some special circumstances.

B: Purposes of Memorandum
The purposes of memorandum of are two-fold:-
(i) The prospective shareholders shall know the field in or the purpose
for which their money is going to be used by the company and what
risks they are undertaking in making investment.
(ii) The outsiders dealing with the company shall know with certainty
as to what objects of the company are and as to whether the
contractual relation into which they contemplate to enter with the
company is within the objects of the company4.

C: Preparation of Memorandum of Association (s. 12 of CA)

1
Kapoor N.D. Elements of Company Law (1991) at pg.67.
2
Saleemi NA & Opiyo, A.G. Company Law simplified (1997) at pg.57
3
Ashbury Rly carriage & Iron Co. Ltd. V. Riche (1875) LR7 HL.653
4
Cotman v Brougham (1918) AC 514

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

Table B for memorandum of Company Limited by shares

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

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

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

Clause I: The Name

The name of the company establishes the identity and is a symbol of the
company. The promoters have to choose the name with which the company is to
be registered. They should avoid undesirable names5, names which are
misleading or too similar. No company is to be registered with a name that is
similar with the existing company. This is due to the fact that the name of a
company is part of its business reputation.

Every company is required to paint or affix its name on the outside of every office
or place in which its business is carried on, in conspicuous position, in letters
easily legible6. The name of Public Company must end with the words “Public
Limited Company” and for private company with the word “Limited”7.

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

Alteration

5
s.30 (2) of cap.212 e.g names which suggest a criminal or immoral intent, or names which are
misleading.
6
s.112 of Cap.212
7
s.4(1)(a) of Cap.212

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The company can change its name by passing a special resolution in a general
meeting to that effect. After passing a special resolution the registrar need to
approve the changes in writing for the alteration to be effective8. If the Registrar
refuses to approve the changes, he is required to give reasons for such refusal
(s.31)

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

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

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

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

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

Clause III: The objects of the company

The objects clause defines the sphere of the company’s activities, the aims that
its formation seeks to achieve and the kind of activities or business that it
proposes to undertake. A company cannot conduct any business foreign to its
objects clause. If anything which is not authorized by the object clause is
undertaken, it is considered ultra vires and hence not biding on the company9.

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

The subscribers to the memorandum may choose any object or objects for the
proposed company. However the objects should not;
8
s.31(1) of Cap.212
9
Saleem et al., op.cit. at p.61

3
 (i) Include anything illegal
(ii) Be in contravention of the Companies Act
(iii) Include anything which is against public policy

Alteration (s. 8)

 By special resolution
 Application for confirmation – who can apply? – s.8(2)
 Holder of not less in the aggregate than 10% in nominal value of
the company’s issued share capital or any class thereof or, if the
company is not limited by shares, not less than 10% of the
company’s members or
 Holders of not less than 15% of the company’s debentures entitling
the holders to object the alterations of its memorandum
 Application should be made within 30 days after the date on which the
resolution altering the company’s memorandum was passed.
 If no application is made the company shall within fourteen days from the
end of the period for making such application deliver to the registrar a
printed copy of its memorandum as altered [s.8(9)(a)].s,
 If application is made – s.8(9)(b).
 The company shall immediately give notice of that fact to the
Registrar
 Within fourteen days from the date of the order canceling or
confirming the alteration wholly or in part, deliver to the Registrar a
certified copy of the order, and in case an order confirming the
alteration wholly or in part, a printed copy of the memorandum as
altered

The doctrine of ultra vires

The company has the power to do all such things are:

(a) Authorized to be done by the Companies Act.
(b) Essential to the attainment of its objects specified in the
memorandum.
(c) Reasonably and fairly incidental to its objects. Anything else is ultra
vires the company.

Ultra vires act is void, as such it can not create any legal relationship. Such an
act being void cannot be ratified even by the whole body of shareholders. The
leading case on this point is Ashbury Rly carriage and Iron Co. Ltd. V. Riche
(1878) Lt 7 HL 653. In this case a company was incorporated with the following
objects
(a) to make, sell or lend on hire, railway carriages and wagons;
(b) to carry on the business of mechanical engineers and general
contractors;

4
 (c) to purchase, lease, work and sell mines, minerals, land and
buildings. The company entered into a contract with Riche for
financing of the construction of railway line in Belgium. The
question raised was whether that contract was covered within the
meaning of “general contractors”. The House of Lords held that the
contract was ultra vires the company and void so that not even the
subsequent assent of the whole body of shareholders could ratify it.
To overcome the obstacles imposed by the ultra vires doctrine, experts have
come up with three ways/methods of drafting the objects clause:
1. The inflicted object clause – state any imaginable business
2. The Independent object clause – each of the clauses shall stand as if it
severally formed an object clause of an independent company.
3. Subjective objects clause – The company can engage in any business
which in the opinion of the directors, the company can advantageously
engage in.

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

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

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

Clause V: The capital clause

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

Clause VI: Association Clause

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

2. ARTICLES OF ASSOCIATION

A: Meaning
The articles of association are the rules and regulations of a company formed for
the purpose of internal management. The articles regulate the manner in which

5
the company’s affairs will be managed. While the memorandum lays down the
objects and purposes for which the company is formed, the articles lay down
rules and regulations for the attainment of these objects.

Lord Cairns defined articles of association as:

“The articles play a part subsidiary to the memorandum of
association. They accept the memorandum as the charter of
incorporation of the company, and so accepting it, the articles
proceed to define the duties, the rights and the powers of the
governing body as between themselves and the company at large,
and the mode and form in which business of the company is
carried on, and the mode and form in which changes in the
internal regulations of the company may from time to time be
made”10.

According to section 2(2) of Cap.212, “articles” means the articles of association

of a company, as originally framed or as altered by special resolution, including,
so far as they apply to the company, the regulations contained in Table A in the
first schedule to either the repealed Ordinances or in Table A in the first schedule
to the Act.

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

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

B: Contents of Articles of Association

(a) Share capital, rights of shareholders, variation of these
rights, payment of commissions, share certificates
(b) Lien on shares
(c) Calls on shares
(d) Transfer and transmition of shares
(e) Forfeiture of shares
(f) Conversion of shares into stock
(g) Alteration of capital
(h) General meeting and proceedings thereat
(i) Voting rights of members; voting & poll; proxies
(j) Directors, their appointment, remuneration; qualification;
powers and proceedings of Board of directors.
(k) Manager
(l) Dividends & reserves
10
Taken from Saleemi & Opiyo, op cit., at p.71

6
 (m) Accounts, Audit and borrowing powers.
(n) Winding up.

C: Alteration of Articles of Association

The company can alter articles by special resolution. (s. 13(1) & (2)

3: LEGAL EFFECTS OF MEMORANDUM & ARTICLES OF ASSOCIATION

The memorandum and articles when registered bind the company and the
members thereof to the same extent as if;
(1) They had been signed and sealed by each member;
(2) They contained covenants by the company and each member to
observe all the provisions of the memorandum and of the articles
[s.18 (1)].

The effect of s.18 is to constitute through the memorandum and articles of a

company, a contract between each member and the company. The legal
implication can be discussed under four headings on how the documents bind
different groups.

(1) Members to the company

The memorandum and articles constitute a binding contract between the
members and the company. Each member is bound as if he/she actually signed
the memorandum and articles.

In Borland’s Trustee v Steel Bros & Co. Ltd.11 the article of a company as altered
provided that the shares of any member who become bankrupt should be sold to
certain persons at a fair price. B. a shareholder became bankrupt and his trustee
in bankruptcy claimed that he was not bound by the altered articles. It was held
that the articles were a personal contract between B and the rest of the members
and B and his trustee were bound.

(2) A company to members

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

(3) Members Inter se

As between members themselves the memorandum and articles constitute a
contract between them and are also binding on each member against the other
or others. However, such a contract can be enforced through the medium of the

11
(1901)1 Ch.279

7
company. This was elaborated by Lord Horschell in Welton v. Saffery12 where he
observed.
“It is true that the articles constitute a contract between each
member and the company and there is no contract in terms
between the individual members of the company but the articles
do not, any the less, regulate their rights inter se. Such rights
can only be enforced by or against a member through the
company or through the liquidator; representing the company
but…. No member has as between himself and other members
any right beyond that which the contract of the company gives”.

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

(4) Company to the Outsiders.

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

12
(1897) AC.299

8
4: MEMBERSHIP OF A COMPANY (S.24 OF CA)

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

1. By subscribing to the memorandum of association: A subscriber to the

memorandum of association becomes a member on incorporation of the
company in respect of the shares subscribed by him without any further
act by him. He will be liable for whatever number of shares he has
subscribed for up to the unpaid amount on those shares. A Subscriber to
the memorandum cannot have canceled his membership on the ground
that he was induced to become a subscriber by the promoters of the
company.
2. By a director undertaking to take and pay for his qualification shares. [s.
191]
3. By agreeing in writing to become a member in any of the following ways
provided the name is entered in the Register of Members of the Company.

• By application and allotment

• By taking a transfer of shares
• By transmission of shares

Membership may be acquired from an existing member by purchase of the

shares of the transferor and lodging with the company a transfer deed duly
executed by both the transferor and the transferee together with the share
certificate. When the transfer is registered by the company, the name of the
transferee is entered in the register of members of the company in place of the
transferor.

In the case of transmission, a person can become a share holder in

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

4. By allowing his name to be on the register of members or otherwise

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

Who can become a member?

9
Any person competent to enter into a contract can become a member of a
company. There is no prohibition on minors being shareholders or members
although a company may refuse to accept a minor as a shareholder. However an
infant can become a member of a company but he or she must act through
parent or guardian. When minor applies for and receives allotment of shares, the
same rules prevails as when he subscribes to the memorandum. Applying
ordinary contract law rules, a contract to purchase shares is voidable by the
minor within a reasonable time of attaining the age of majority. If the minor
repudiate the contract, he will not be liable for future calls but cannot recover the
purchase price unless there has been a total failure of consideration Steiberg v.
Scala (Leeds) Ltd. (1923) 2 Ch 452, which is likely to be the case. Until minor
repudiates, the minor has full rights of membership.

Partnership firm

A firm cannot be registered as a member because it is not a legal person and

partners may not remain constant. A firm however may purchase share in a
company in the individual names of its partners as joint shareholders.

Insolvents

A bankrupt person May be a member of a company although the beneficial

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

Companies

A registered company cannot become a member of another company unless

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

Register of members (ss 115 – 127 of CA)

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

10
Rectification of the register

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

Cessation of membership

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

a. By transferring his shares to another person. However, the transferor will

continue to be a member until the shares are registered in the name of the
transferee.
b. By forfeiture of his shares on non-payment of calls due
c. By a valid surrender of shares to the company
d. By death but until the shares are transmitted to his legal heirs, his estate
will be liable for any money due on the shares;
e. By the company selling his shares in exercise of its right under the articles
of association of the company (e.g. right to lien)
f. By the Court or any other competent authority attaching and selling the
share in satisfaction of decree or claim
g. By redemption of the preference shares;
h. By the official assignee disclaiming his shares on his adjudication as an
insolvent
i. By rescission of contract of membership on the ground of
misrepresentation or mistake.
j. By the company buying back the shares

Rights of members

The members of a company enjoy various rights in relation to the company.

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

Voting Rights of the Members

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

11
Generally, preference shareholders like debenture holders do not have any
voting rights. The rights to vote at meetings are usually restricted by providing
that they shall have no rights to attend such meetings. However, they can vote on
matters directly relating to the rights attached to the preference share capital. Any
resolution for winding up of the company or for the reduction or repayment of the
share capital shall be deemed to affect directly the rights attached to preference
shares. Whenever preference shares are, however, authorized to vote by poll,
their shares are weighted more than other classes. Weighting here means so
many votes will be allocated to each share a member holds so that when such
member votes, his votes are calculated by multiplying each share by the number
of votes attached to each share.

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

Liability of members

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

No Notice of Trust

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

Sometimes the shares of a company belonging to a person may be registered in

the name of other person. The person in whose name the shares are registered
is the trustee and the person to whom the shares belong is the beneficiary of the
shares.

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

• To relieve the company from any obligation to take notice of the rights of
third parties in respect of shares registered in the names of any
members, and
• To preclude any person claiming an equitable interest in shares from
treating the company as trustee in respect thereof.

12
 TOPIC TWO

CONCEPT OF CAPITAL AND THE FINANCING OF COMPANIES

As Latham CJ said in the Australian Case of Incorporated Interest Pty Ltd V

Federal commissioner of Taxation (1943) 67 CLR 508 at 515:’ it is impossible to
say that capital has a single technical meaning which prima facie should be
attributed to the word in any statutory provision’

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

a. Share capital – the funds subscribed by members;

b. Loan capital – the fund provided by commercial finance providers and
investors holding debentures or debenture stocks;
c. All funds whether provided by members, creditors or by retention of
profits and
d. The assets in which funds have been invested.

Share

Share is the interest of a shareholder in a company. The interest is what is owned

and it gives a shareholder certain rights as defined by the articles of association
and has a nominal value.

Share Certificate

The ownership of interest is evidenced by a document called share certificate.

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

A share certificate is merely a prima facie evidence of the fact that the person
stated as being the owner of the shares is the owner and that the shares are paid
up to the amount so stated (s. 83(1). On the other hand the company cannot
deny the truth of these statements against anyone who relied on the certificate to
his detriment unless the share certificate is a forgery. (See Re Bahia and San
Fransico Rly Co. (1868) LR 3 QB 584 and Reuben v. Great Fingall Consolidated
(1906) AC 439)

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Share Capital

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

Alteration of Share Capital

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

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

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

expedient.
2. Consolidate and divide all or any of its share capital into shares of larger
amount than its existing shares.
3. Convert all or any of its fully paid shares into stock and re-convert stock
into fully paid shares of any denomination.
4. Subdivide shares or any of shares into smaller amounts fixed by the
Memorandum so that in subdivision the proportion between the amount
paid and the amount if any unpaid on each reduced shares shall be same
as it was in case of from which the reduced share is derived.
5. Cancel shares which have been not been taken or agreed to be taken by
any person and diminish the amount of share capital by the amount of the
shares so cancelled.

The alteration of the capital of the company in any of the manner specified above
can be done by passing a resolution at the general meeting of the company and
does not require any confirmation by the court.

A: Reduction of share Capital13

13
Under the new Companies Act reduction of share capital do not apply to an open – ended investment
company whose establishment has been duly authorized under the Capital Markets and Securities Act. See

14
The law relating to the capital of a company has something sacred. The general
principles of law founded on principles of public policy and rigidly enforced by
courts is that no action resulting in a reduction of capital should be permitted
unless reduction is effected

a. Under statutory authority or forfeiture

b. In strict according to procedure, if any, laid down in that behalf in the
articles of Association. Any reduction contrary to this principle is illegal and
ultra vires.

A reduction of capital may be effected in different ways

a. Reduction of capital without sanction of the court

1. Forfeiture of shares. The company may, if authorized by its articles, forfeit

shares for non payment of calls. This result in forfeiture of shares if the forfeited
shares are not re- issued.

2. Surrender of shares. The company may accept surrender of shares partly

paid to save it from going through the formalities of forfeiture.

3. Cancellation of shares. The company may if so authorized by its articles,

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

4. Redemption of redeemable preference shares. The company may redeem

preference shares in accordance of the provision of the ordinance.

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

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

of CA. According to these sections, a company limited by shares or guarantee

can reduce its capital if

a. Authorized by the articles

b. A special resolution has been passed to this effect
c. It has been confirmed by the court

Section 68. Open-ended investment companies (OEIC) is a company that is able to redeem its own shares
for cash and manages a portfolio of investments on behalf of its members.

15
Section 69 gives the company the power to reduce its share capital in any way
but specifically mentioning the following ways in which the reduction of capital
may be effected.

a. It may extinguish or reduce the liability of member in respect of

uncalled or unpaid capital. For example, where shares are of Tsh
1000 each with Tsh. 600 paid up, the company may reduce them to
Tsh. 600 fully paid and thus release the shareholder from the liability
on uncalled capital of Tsh. 400/-.
b. Pay off or return part of the unpaid capital not wanted for the purpose
of the company. For example, where the shares are fully paid of
Tsh1000 they may be reduced Tsh. 400 each and Tsh. 600 may be
paid back to the shareholders.
c. Cancel paid up capital which is lost or unrepresented by the available
assets either with or without extinguishing or reducing the liability on
any shares. Due to heavy trading losses, C Company reduces its
equity share of Tsh 100 each fully paid up to Tsh. 20 per share. If the
company extinguishes liability on these shares the Tsh 100 shares will
become shares of Tsh. 20 fully paid up. If it does not extinguish
liability on these shares the Tsh 100 shares will continue to be shares
of Tsh. 100 each, Tsh. 20 paid up.

The procedure to follow in order to reduce share capital

1. Special resolution
 Notice calling a meeting to propose a resolution must be
accompanied
i. Director’s certificate of solvency
ii. Auditors report
Any director of a company giving a certificate of solvency without
reasonable ground shall be liable to imprisonment or fine or both.

2. Advertise in the gazette, and in case of a public company, one

national news paper, in each case within five working days of the
resolution being passed

3. Application to the court by any creditor to object to the reduction

within twenty eight days from the advertisement of the resolution.

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

B: Increase in share capital (ss. 64 -67)

16
The nominal share capital of a company can be increased, even though it has
not yet issued all its authorized capital, by ordinary resolution of the company in
general meeting. The company’s articles usually contain the authority to allow the
company to increase its capital but in case the articles does not allow they must
be altered by special resolution to this effect. The law requires that where the
company has increased its share capital beyond the registered capital, notice
must be given to the registrar within thirty days from the date of passing the
resolution by which the increase is affected

The increase must not be done with ill motive. In the case of Clemens v.
Clemens Bros. Ltd (1976) 2 All E.R 268 resolutions to increase the capital and
issue of new shares in such a way as to deprive the plaintiff, a shareholder her
“negative control” of the defendant company were set aside as having been
passed by an inequitable use of defendant’s rights. In this case the plaintiff
owned 45% of the issued share capital of the defendant company and her aunt
owned the remaining 55%. Although at one time both the plaintiff and her aunt
had been directors of the defendant company, at the relevant time the plaintiff
was no longer a director, the aunt and her fellow directors proposed to increase
the company’s share capital by the creation and issue of further shares. The
plaintiff concerned was that the proposed share issue would dilute her holding
and voting power from 45% to 25%. She commenced proceedings against the
company and the aunt seeking a declaration that the resolutions were
oppressive, and an order setting them aside. It was held that resolutions were
specifically and carefully designed to ensure not only that the plaintiff can never
get the control of the company but deprive her of what has been called her
negative control i.e. powers to prevent the passage of any special resolution of
which she disapproved.

In the case of Tanzania Knitwear Ltd. v. Shamsu Esmail (1989) 1 T.L.R 48

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

Note the following different terms which are used to denote different aspects of
share capital: -

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

17
Issued capital means the nominal value of the shares which are offered to the
public for subscription. A company does not normally issue capital at once, so
that issued capital in such case is less than the authorized capital. The issued
capital can never exceed the authorized capital, it can at most be equal to the
authorized capital which is the case when all shares have been issued to the
public.

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

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

Paid-up capital means the total amount of called up share capital, which is
actually paid to the company by the members. Often some shareholders fail to
pay the calls made on them and the amount thus owing is known as “calls in
arrears” or “calls unpaid”

Call on shares

A call is a demand by a company on its shareholders to pay the whole or in part

of the balance remaining unpaid on each share. It is made in pursuance of a
resolution of the board of directors and terms of articles of association. It may be
made at anytime during the lifetime of the company or its winding up.

Transfer of shares

The shares of a company are movable property, transferable in the manner

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

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

18
A transfer executed by legal representative of the deceased member, although
he is not himself a member, is valid as the one executed by the member himself.

An application for the registration of a transfer of shares of a company may be

made either by the transferor or the transferee. On the application of the
transferor of any share, the company shall enter in its register of members the
name of the transferee in the same manner and subject to the same conditions
as if the application was made by the transferee.

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

Forged transfer

An instrument of transfer of shares on which the signature of the transferor is

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

Consequences of forged transfer

1) A forged transfer is a nullity. It does not pass legal title to the transferee.
The true owner can have his name restored on the register of members.
2) If the company has issued a share certificate to the transferee on a forged
transfer and he has sold these shares to an innocent buyer, the buyer gets
no right to be registered as a shareholder. In such case, he can claim
damages from the company on the ground that he acted on the share
certificate of the company (See Balkis Consolidated Co. Ltd v. Tomkinson
(1893) A.C 396.
3) If the company has been put to a loss by reason of the forged transfer, it
may recover the loss from the person who procured registration, even if he
might have acted in good faith. In Sheffield Corp. v. Barclay (1905) A.C
392, the respondent lodged with a company for registration a forged
transfer of some shares which stood in names of T and H, T having forged
H’s signature to the transfer. The respondent was ignorant to this. The
company registered the transfer in the name of the respondent. The
respondent transferred the shares to C and a certificate was issued in his
name. H subsequently discovered the forgery and compelled the company

19
 to issues new shares. The respondent was bound to indemnify the
company which in turn was bound to indemnify C.

[Read s. 86 on impersonation of shareholder]

Restriction on the transfer of shares

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

Directors’ powers to refuse transfer

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

Pre- emption clauses

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

Transmission of shares

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

• Death of a shareholder – the shares of the deceased shareholder vest, in

terms of the rights they represent, in executor or administrator who can
sell or otherwise dispose of them, e.g. to the beneficiary, without actually
being registered, subject to any restrictions on transfer which the articles
may contain.
• Bankruptcy – On the bankruptcy of a member, the right to deal with the
shares passes to trustee in bankruptcy, and he can sell without actually
being registered or he can elect to register subject to any restrictions in
articles.

Forfeiture of shares

20
If the shareholder having been called upon to pay on any call of his shares fails
to pay the call, the company has two remedies against the shareholder

1. it may sue him for the amount

2. it may forfeit his shares

Forfeiture means depriving a person of his property as a penalty for some act or
omission. However, shares can be forfeited for non- payment of call if only
special powers in the articles is given to the directors to do so. The forfeiture
must be made strictly in accordance with the regulations regarding notice,
procedure and manner stated in Articles. Re Esparto Trading Co.(1879) 12 Ch D
191. The power to forfeit shares must be exercised by the directors in good faith
and for the benefit of the company. A person whose shares have been forfeited
ceases to be a member of that company.

Classes of shares

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

Equity shares/ ordinary Shares

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

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

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

Preference Shares

21
Preference Shares means shares which fulfill the following two conditions.
Therefore, a share which is does not fulfill both these conditions is an equity
share.

a. It carries preferential rights in respect of Dividend at fixed amount or

at fixed rate i.e. dividend payable is payable on fixed figure or percent
and this dividend must be paid before the holders of the equity shares
are paid dividend.
b. It also carries preferential right in regard to payment of capital on
winding up or otherwise. It means the amount paid on preference
share must be paid back to preference shareholders before anything
is paid to the equity shareholders. In other words, preference share
capital has priority both in repayment of dividend as well as capital.

Types of Preference Shares

1. Cumulative or Non-cumulative: A non-cumulative or simple preference

shares gives right to fixed percentage dividend of profit of each year. In
case no dividend is declared in any year because of absence of profit, the
holders of preference shares get nothing nor can they claim unpaid
dividend in the subsequent year or years in respect of that year.
Cumulative preference shares however give the right to the preference
shareholders to demand the unpaid dividend in any year during the
subsequent year or years when the profits are available for distribution. In
this case dividends which are not paid in any year are accumulated and
are paid out when the profits are available.
2. Redeemable and Non- Redeemable: Redeemable Preference shares are
preference shares, which have to be repaid by the company after the term
for which the preference shares have been issued expires. Irredeemable
Preference shares means preference shares need not repaid by the
company except on winding up of the company. A company can issue the
preference shares which from the very beginning are redeemable
provided it comprises of following conditions provided by Section 61 of
CA. : -

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

issue.
b. The shares will be only redeemable if they are fully paid up.
c. The shares may be redeemed out of profits of the company which
otherwise would be available for dividends or out of proceeds of new
issue of shares made for the purpose of redeem shares.
d. If there is premium payable on redemption it must have provided out of
profits or out of shares premium account before the shares are
redeemed.
e. When shares are redeemed out of profits a sum equal to nominal
amount of shares redeemed is to be transferred out of profits to the

22
 capital redemption reserve fund. This amount should then be utilized
for the purpose of redemption of redeemable preference shares.

3. Participating Preference Share or non-participating preference shares.

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

Deferred or founders Shares

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

Corporate shares

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

Variation of shareholders rights (s. 73 of CA)

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

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

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

Rights of Dissenting Shareholders:

23
 The rights of the shareholders who did not consent to or vote for variation of
their rights are protected by the Companies Ordinance. If the rights of any class
of the shareholders are varied, the holders of not less than 15 per cent of the
shares of that class, being persons who did not consent to or vote in favor of
resolution for variation of their rights can apply to the court to have the variation
cancelled. Where such application is made to the court, such variation will not be
given effect unless and until it is confirmed by the court.

Application and allotment of shares

An application for shares is an offer by a prospective shareholder to take shares.

Allotment is the acceptance by the company of such an offer and it results in a
binding contract between the company and the applicant.

General provision regarding Allotment

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

a) Proper Authority – An allotment must be made by a resolution of the

board of directors of the company. This duty cannot be delegated by
the directors except in accordance with the provisions of the articles.
b) Reasonable time – Allotment must be made within reasonable time
otherwise the applicant is not bound to accept it.
c) Communication – Allotment must be communicated to a person
making the application so that it is legally complete. Where post is
used as a means of communication between parties then S. 4(2) of
Law of Contract Ordinance Cap 433 applies.
d) Absolute and unconditional – the allotment must be absolute and
unconditional. If an application for shares is conditional and the
condition is not fulfilled, the applicant is not bound to take shares.

Loan Capital / Debt Financing

Debt capital is a common method of financing business enterprise and for

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

24
Debentures

The most usual form of borrowing by a company is by issue of debentures.

According to section 2 of CA and Companies Act, debenture includes debenture
stock, bonds and any other securities of a company, whether constituting a
charge on the asset of a company or not.

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

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

It follows from the above judgments that a debenture is an acknowledgement in

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

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

Debentures are commonly issued through prospectus. The amount might be

payable by installments on application, allotment and calls. But usually the
amount is payable in one lump sum.

As a general matter debts do not have the participation, voting, conversion and
redemption rights that constitute the fundamental ingredients of equity securities/
stocks. It is not uncommon for a company to issue debentures that are
convertible at holder’s option into specified equity securities or that are
redeemable at the holder’s option (“put” debentures). Generally the issue of debt
securities/stocks (like entering into any other contractual arrangement) is a
matter left to board’s discretion.

Classes of debentures

According to negotiability

Bearer debentures – these are known as unregistered debentures, are payable

to its bearer. These are regarded as negotiable instruments and are transferable
instruments by delivery and a bona fide deliveree for value is not affected by the
defect in title of the prior holder. In Bechuanaland Exploration Co. v. London

25
trading bank ltd (1898) 2 Q.B 648 B co held debentures of an English company,
payable to bearer. It kept them in the safe of which the secretary had the key.
The secretary pledged the debentures with a bank security for a loan taken by
him. The bank took the debenture bona fide. It was held that the bank was
entitled to the debentures as against the company.

Registered debentures – These are debentures payable to the registered

holders. A holder is one whose name appears both on the debenture certificate
and in the company register of debentures. It usually contain the following
clauses

a. A covenant to pay the principal sum

b. A covenant to pay interest
c. A description of the charge on the company’s undertakings and property
d. A statement that it is issued subject to conditions endorsed thereon

According to security

a. Secured debentures – Debentures which create some charge on the

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

According to permanence

a. Redeemable debentures – Debentures usually issued on condition that

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

Debts priority over equity

When a company becomes insolvent or dissolves, creditors or debt holders are

entitled to pay before equity shareholders.

If a company has insufficient equity cushion to satisfy all inside and outside
creditors’ claims, outside claims will seek to have inside debt characterized as
equity. This is essentially an equitable subordination question. During winding up
courts can subordinate or lower the nominal priority of claims by corporate

26
insiders if based on transaction that based on breach of fiduciary duties or fraud.
Courts will also consider factors used in lifting the veil of incorporation.

Charge on assets of a company

Whenever a company has power to borrow; it has as an incident to such power,

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

A company cannot however borrow on the security of its reserve capital. In Re

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

A charge means an interest or right which a lender or creditor obtains in the

property of the company by way of security that the company will pay back the
debt. Charges are of 2 types: -

1. Fixed charge: Such a charge is against a specific clearly identifiable and

defined property. The property under charge is identified at the time of
creation of charge. The nature and identity of the property does not
change during the existence of the charge. The company can transfer the
property charged only subject to that charge so that the charge holder or
mortgage must be paid first whatever is due to him before disposing off
that property.
2. Floating charge: Such a charge is available only to companies as
borrower. A Floating charge does attach to any definite property but covers
the property of a circulating and fluctuating nature such as stock-in-trade,
debtors, etc. It attaches to the property charged in the varying conditions
in which happens to be from time to time. Such a charge remains dormant
until the undertaking charge ceases to be a going concern or until the
person in whose favor charge created takes steps to crystallize the
floating charge. A floating charge on crystallization becomes a fixed
charge.

Characteristics of a floating charge

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

and future

27
 2) That class of assets is one which, in the ordinary course of the
business of the company, is changing from time to time.
3) It is contemplated by the charge that, until some steps are taken by
or on behalf of those interested in the charge, the company may
carry on its business in ordinary way

Consequences of the floating charge

The company can:-

1) Deal with the property on which a floating charge is created, till the
charge crystallizes
2) Notwithstanding the floating charge, create specific mortgage of its
property having priority over the floating charge.
3) Sell the whole of its undertaking if that is one of its objects specified
in the Memorandum, in spite of the floating charge on undertaking
see Re Foster Vs Borax Co (1901) 1 Ch 326.

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

1. Where the company ceases to carry on the business, whether the

principal money has become payable or not, unless the debenture or trust
deed contains the stipulation to the contrary.
2. Upon the commencement of winding up of the company.
3. If a debenture holder, having become entitled to realize the securities by
the reason of the fact that the principal money has become payable,
intervenes for the purpose by appointing the receiver or by making an
application to the court for appointment of the receiver.

Registration of charges: Every company must keep at its registered office a

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

28
Charges requiring registration: A company must file within 42 days of creation of
a charge with the Registrar complete details of the charge together with the
instrument of charge or its verified copy in respect of certain charges( See
Section 97 of CA) Otherwise the charge will be void. This does not mean that the
creditors cannot recover their dues. It merely means that the benefit of the
charged security will not be available to them. The following charges are
compulsorily registrable: -

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

2. a charge on uncalled share capital of the company
3. a charge created or evidenced by an instrument which, if executed by an
individual, would require registration as a bill of sale
4. a Charge on land, whenever situated, or any interest therein
5. a charge on book debts of the company
6. a floating charge of on the undertaking or property of the company
7. a charge on calls made but not paid
8. a charge on ship, or aircraft, or any share in a ship
9. a charge on goodwill, or any intellectual property

Effects of Registration: Once a charge is registered, it acts as a notice to the

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

Consequences of Non-Registration:

1. A charge which is compulsorily registerable but which is not registered is

void. This does not mean that the creditors cannot recover their dues. It
merely means that the benefit of the charged security will not be available
to them. In Monotholic Building Co.(1915) 1 Ch. 643. In March, M ltd
mortgaged land to T, to secure a loan of ₤ 500. The charge was not
registered. In December, the company issued debentures secured by a
floating charge on all company’s assets to J, who knew of the charge in
favor of T to secure ₤ 500. These debentures were registered. It was held
that J had priority over the claim of T.
2. Although the security becomes void by non-registration, it does not affect
the contract or obligation of the company to repay the money thereby
secured.
3. Omission to registrar particulars of charge as required is punishable with
fine. A company or every officer of company is in default shall be liable to
fine.

29
 TOPIC THREE

CORPORATE MANAGEMENT

INTRODUCTION

A company being an artificial person can only act through natural persons
commonly referred to as Directors who are usually entrusted with the
management of its affairs. Company Law in Tanzania normally vests the
Directors with enormous powers to manage and direct the affairs of the company.
Given such enormous powers, it has no doubt that in the absence of proper
regulation, the Directors can virtually have more freedom over the manner the
corporate affairs are to be run. Thus the performance and prosperity of the
company to a great extent lies in the Directors’ hands. This fact brings the law on
Directors’ duties and responsibilities at the heart of Company Law. Thus the
prosperity of the company can largely be enhanced by raising the standard of the
management through efficient and effective monitoring.
Rapid changes in the business world environment plus the overall changes in the
general and legal set up of the modern companies have made it clear that a new
law to deal with the changed situation was a must, thus the birth of companies
Act 2002 which

Meaning of the term Director

A precise definition of the expression Director has not been given in any Act
relating to companies in Tanzania. However according to s. 2 of the Companies
Act 2002 the expression “Director” includes any person occupying the position of
Director by whatever name called. This means that the definition is functional one
and the exact name by which a person occupying the position of Directors is
called, is immaterial.14 So the important factor to determine whether a person is
or is not a Director is to refer to the nature of the office and its duties. 15 A Director
may therefore, be defined as a person having control over the direction, conduct,
management or superintendence of the affairs of a company or a person in
accordance with whose direction or instructions, the Board of Directors of a
company is accustomed to act. This term therefore16 applies to persons properly
appointed as “Directors” (“de jure” Directors) but who may operate under a
different title, e.g. as a “governor” president, manager etc17 and others though not
properly appointed are to be regarded as Directors (these “de facto” Directors
and shadow “Directors”)
14
Morse G., et el, Charlesworth Company law, 7th edn., Sweet and Maxwell, London, 2005 at p6
15
if one performs the functions of director, he would be termed a director in the eyes of the law
even though he may be named differently.
16
Kapoor, N.D., Company Law and Secretarial Practice, op cit, p. 347
17
“de jure” directors are directors because they have been properly appointed as such

30
Types of Directors

The following are legal categories of company Director.

a. Shadow Directors

This is any person, other than a professional adviser, with whose instructions the
Directors of the company normally comply (a person in accordance with whose
directions or instructions the Directors of a company are accustomed to act. 18 In
other words, where a person who is not a Director exerts such an influence over
the company’s Directors that those Directors are accustomed to act in
accordance with that person’s instructions, that person is a shadow Director. In
order to establish that one is a shadow Director one has to allege and prove as to
who are the Directors of the company, whether de factor or de jure, that the he
directed those Directors how to act in relation to the company or that he was one
of the persons who did so, that those Directors acted in accordance to those
directions and that they were accustomed so to act.19 However a person is not
deemed a shadow Director by reason only that the Directors acted on his advice
given under professional capacity. This is different from de facto Director
because he does not purpot to to act as Directors on the contrary he claim not to
be Director but hide behind those who are.20

In Re Hydrodam (Corby) Ltd.21 Where the question arose as to whether the two
Directors of a parent company could be regarded as shadow Directors of the
subsidiary company, it was held that in order for a someone to be a shadow
Director four things must be shown: (a) those who are the proper or de factor
Directors of the company (b) that the person directed those Directors as to how
to act in relation to the company, (c) that those Directors acted in accordance
with those directions and (d) that they were accustomed so to act. It was
therefore held that the parent company may have been a shadow Director of the
subsidiary, but the two Directors of the parent company can not be liable as
shadow Directors of a subsidiary simply because they took part in the board
meetings of the parent company. And if they acted in implementing board
decision with respect to the subsidiary, they were only acting as agents of the
parent company. It would have been different if they had acted individually with
respect to the subsidiary company.

b. Alternate Directors

18
Farrar J.H. and Hannigan, BM, Farrar’s Company Law, op cit at p. 337
19
‘accustomed to act’ implies a pattern of behaviour in which the board did not exercise any
discretion or judgement of its own but acted in accordance with the directions of others as a
matter of a regular practice over a period of time and as a regular course of conduct. See Unisoft
Group Ltd. (No. 3) 1 BCLC 609
20
Morse, G., Charlesworth Company Law, op cit., at p. 269
21
[1994] 2 BCLC 180

31
The article of association may provide for the appointment of alternate Directors.
Alternate Directors are person, who are nominated by a Director to act in their
absence. An alternate Director can only be appointed with the agreement of a
majority of the Directors and he is entitled generally to perform all the functions of
his appointer in his absence.22

c. De Facto Directors

A ´de facto Director´ is a person who has not been validly appointed or who is
disqualified but who in effect occupies the position of, and acts as if he was, a
Director. That is a person who assumes to act as a Director and who is held out
as a Director by the company and he claims and purports to be a Director though
he has never actually or validly been appointed as such.23 To establish that a
person was a defecto Director of a company it is necessary to prove that he
undertook functions in relation to that company which would properly be
discharged only by a Director. Such persons although they have not been validly
appointed, also come within the ambit of the definition of a Director under section
2 of the Companies Act, 2002 since they do occupy the position of Director
though not validly.

The courts also have long accepted that a person who has never been properly
appointed as a Director may nevertheless be regarded as being a Director for the
purposes of imposing some liability or restriction on him. In Re Richborough
Furniture Ltd., Lloyd J. was of the opinion that for someone to be made liable as
a de facto Director, the court would have to have clear evidence that he had
either been the sole person directing the affairs of the company or, if there were
others who were true Directors, that he was acting on an equal footing with the
others in directing the affairs of the company. If it is unclear whether the acts of
the person in question are referable to an assumed Directorship, or to some
other capacity such as a shareholder or, as here, a consultant, the person in
question must be entitled to the benefit of doubt. Also in Secretary of State for
Trade and Industry v. Tjolle [1998]1BCLC 333 Jacob J. said that ‘it may be
difficult to formulate a single test, and that it would not be sufficient to make a
person a de factor director simply on the basis that he was held out as a director,
or even used the title . That would, however, be a factor to be taken into account
and may require the person to rebut a presumption of directorship. What was
required was the evidence of activities which could only be discharged as a
director and or either that the person was the sole person directing the affairs of
the company, in the sense of taking major decisions on proper financial
information, …the right to participate in management decisions and not
necessarily equal power in coming to those decisions’

d. Executive Directors

22
Farrar J.H. and Hannigan, BM, Farrar’s Company Law, op cit at p. 338
23
See Re Hydrodam (Corby) Ltd. (1994) BCLC 180

32
These are essentially those Directors concerned with the actual management of
the company, i.e., they are involved in the day to day management of the
Company. As these individuals are involved in the management of the company
they have extensive management powers delegated to them by the articles and
may, in practice, have specific titles within the company, for example, managing
Director, finance Director, marketing Director etc.

e. Non- Executive Directors

Non- Executive Directors are those Directors who are not involved in the day to
day management of the company and are appointed from outside the company.
They are more commonly found in large companies and have advisory and
supervisory roles. The rationale behind appointing non- executive Directors is
that, as they are not involved in the day to day management of the company,
they can bring an independent voice and perspective to the Board.24

Relationship of Directors to the Company

An endeavour to cover the area of the law on the position of Directors to the
company i.e. their relationship with the company and shareholders is of
paramount importance because it is this relationship that shapes the Directors
duties and responsibilities vis a vis the company and shareholders. However as
long as anyone holds the post as a Director, it has not been easy to see clearly
and squarely what is the nature of his position with the company. The position of
Directors in a company, like the company itself evolved as a person in law, is
undefined; and as it is not so easy to define. So far there is no statutory provision
to define this relationship; it is the judiciary which has over a period of time
defined the relationship. As noted earlier a company as soon as it gets the
certificate of incorporation becomes juristic person which has its own legal entity
but no physical existence, hence can not act by itself, but only through its human
instruments referred to as Directors. The relationship the Directors have with
company and shareholders is difficult to categorically define because of the
multiple faces it takes. Different authors, jurisprudents, economists, justices have
given various definitions and expressions for this relationship, some of those are
as follows

24
It should be noted that there is not legal obligation for a company to appoint non- executive
directors. However, certain companies i. e companies listed on the Stock Exchange may be
required to comply with codes of corporate governance best practice which do require the
presence of non- executive directors on the board. It is also important to note that the
categorization as executive and non-executive not legal classifications but rather are distinctions
drawn under corporate governance best practice. Regardless of whether an individual is an
executive or non- executive director, they have exactly the same legal responsibilities.

33
In the case of Imperial Hydropathic Hotel Co. Blackpool v. Hampson,25 Bowen LJ
said that,

When persons who are Directors of a company are from time to time
spoken of as agents, trustees or managing partners of a company, it is
essential to recollect what such expressions are used not as exhaustive of
the powers or responsibilities of those persons but only as indicating
useful points of view from which they may for the moment and for the
particular purpose be considered [the point of view at which they seem for
the moment to be either cutting the circle or falling the category of the
suggested kind]. It is not meant that they belong to the category, but that it
is useful for the purpose of the moment to observe that they fall pro tanto
within the principle which govern that particular class

The above paragraph presupposes different relationship of Directors with the

company depending on the viewpoint at a particular time. As a result the
relationship of a Director to the company is sometimes defined as that of
principal and agent, a viewpoint that is useful when considering the companies
liabilities for its Directors and sometimes the Directors as fiduciaries for the
company, a view point that is useful when considering the duties of Directors to
the company. When the Directors are considered as agents of the principal, a
company they managed, the general principles of law of agency would govern
the relationship between Directors and the company. It follows therefore that,
position of the Directors vis a vis the company is that they are not only agents but
also trustees. That means the Directors should always act in the interest of the
principal, the company and discharge of their fiduciary responsibilities, and they
can not benefit at the cost of the company as trustees.

It is emphasized that ‘a Director is not a servant of any master. He can not be

described as servant of a company or any one’. He is in fact a Director or
controller of the company affairs, he is not a servant.’

Directors are seen as body to whom is delegated the duty of managing (the
general affairs of the company). A corporate body can only act through agents,
and of course it a duty of those agents so to act as best to promote the interests
of a corporation whose affairs they are conducting. Such agents have duties to
discharge of a fiduciary nature towards their principal. So by this the Directors
are recognized as agents hence his relation with a company described as an
ordinary case of principal and agent. Thus the general principles of the law of
principal and agent regulate in most respects, the relationship between the
company and its Directors. The House of Lords decision in Ferguson V. Wilson
(1866), 2 CH. APP. 77 gives more clarification to the issue. The facts of the case
were that F applied for and by resolution of the Board was allotted certain shares
in a railway company. At the time of the allotment all the shares had already been
allotted with the result that the company was unable to place F on the register as
25
[1882] 23 ch.D 1

34
the holder of shares in the company. F brought this action against W, as Director,
claiming, inter alia ,that W should transfer some of his own shares to F or pay
damages. The Court of Appeal in Chancery rejected F’s claim on the ground that
the Directors of a company acting in the normal course of their duties are agents
for their company and incur no personal liability. Cairns, L.J. insisted that they are
merely agents of a company. The company itself cannot act in its own person, for
it has no person; it can only act through Directors, and the case is, as regards
those Directors, merely the ordinary case of principal and agent. Wherever an
agent is liable those Directors would be liable; where the liability would attach to
the principal only, the liability is the liability of the company. This being a contract
alleged to be made by the company, I own that I have not been able to see how it
can be maintained that an agent can be brought into this court, upon a
proceeding which simplify alleges that his principle has violated a contract that he
has entered into. In that state of things, not the agent, but the principal, would be
the person liable.

Directors as such are not servants of the company, but rather managers in some
respects, may be said to be quasi-trustee or fiduciaries and as agents for the
company. Therefore as a result they owe fiduciary duties and certain duties of
care to the company i.e. members as a body. In the case of Allen v. Hyatt Pc.
(1866), 2 CH. APP. 77 company XYZ Co. Ltd. wanted to amalgamate with
another company, ABC co. Ltd. For that purpose they wanted positive response
from the majority of shareholders of XYZ Co. Ltd. as a result they induced the
shareholders of the company. By inducement they succeeded to get approval
and thereafter they made a contract with ABC Co. Ltd. By that contract, they
made huge profits. Some of the shareholders of XYZ Co. Ltd. knew about the
fraud made by the Directors. They sued the Directors to make the good the loss.
It was held that the Directors being the agents of the company they were held
liable in making good the loss sustained by the members.

In the case of Cook v. Deeks 1916) AC 554 it was held that Directors are
trustees of the company’s money and property in the sense that they must
account for all the company’s money and property over which they exercise
control. They have also to refund to the company any of its money or property
which they have improperly paid away or transferred. Directors are trustees of
the power entrusted to them in the sense that they must exercise their powers
honestly and in the interest of the company and shareholders and not in their
own interest. In Percival v. Wright (1920) 1 Ch.77, the directors of a company
had the power to issue the unissued shares of the company. The company was
in no need of further capital but the directors made fresh issue for themselves
and their supporters with a view to maintaining control of the company. It was
held that the allotment was invalid and void.) However closely looked at, the
Directors are not trustees in the real sense of the word because they are not
vested with the ownership of the company’s property. It is only as regards some
of their obligations to the company and certain powers that they are regarded as
trustees of the company.

35
Jessel MR in Forest of Dean Coal Mining Co., Re (1878) 10 Ch.D 450 observed
that:
“Directors have sometimes been called as trustee or commercial
trustees and sometimes they have been called managing partners;
it does not matter much what you call them so long as you
understand what their real position is; which is that they are really
commercial men managing a trade concern for the benefit of
themselves and of all the shareholders in it. They stand in a
fiduciary position towards the company in respect of their powers
and capital under control”.

Directors are neither managers nor employees of the company, but they as the
controllers partake the nature of managers to some extent individually while
being members of the collective Board that has the power to manage the
company overall, but their duties, entrusted or devolving, are assorted in their
nature as agents and fiduciaries, and each one of the Directors is responsible to
answer for his own duties depending on the facts and circumstances, while some
of their duties are of a fundamental character presenting difficulties in their
precise statement.
Thomas, J. in Selangor United Rubber Estate, Ltd. V. Cradock and Others [1968]
2 ALL E.R. 1073 used the following words in describing the position.
‘Directors as trustees of their companies’ funds, the first question of law
that arises is how far Directors are trustees of their companies’ funds. It is
clear and not disputed that they owe a fiduciary duty to the company to
apply its assets only for the purpose of the company and are therefore
liable for breach of that duty; but the question how far they are trustees
bears on the question how other defendants can be made liable as
constructive trustees as claimed. On occasion Directors have been said to
be trustees and on occasion not to be trustees. Like so many interminable
arguments in philosophy, economics and every day life, its resolution
depends largely on definition of terms in the case of “ trustees” and then
on the ambit of its proper application to Directors. Directors are clearly not
trustees identically with trustees of a will or marriage settlement. In
particular, so far as at present relevant, they have business manner, which
are not normally at any rate associated with trustees of a will or marriage
settlement. All their duties, powers and functions qua Directors are
fiduciary for and on behalf of the company. So property in their hands or
under their control is theirs for the company, i.e., for the company’s
purposes in accordance with their duties, powers and functions. However
much the company’s purposes and the Directors’ duties, powers and
functions may differ from the purposes of a strict settlement and the duties
powers and functions of its trustees, the Directors and such trustees have
this indisputably in common that the property in their hands or under their
control must be applied for the specified purpose of the company or the
settlement; and to apply it otherwise is to misapply it and is a breach of the

36
 obligation to apply it to those purposed for the company or the settlement
beneficiaries. So, even though the scope and operation of such obligation
differs in the case of Directors and strict settlement trustees, the nature of
the obligation with regard to property in their hands or under their control
is identical, namely to apply it to specified purpose for other beneficiaries.
This is to hold it on trust for the company or the settlement beneficiaries as
the case may be. That is what holding it on trust means. That is why a
misapplication of it is equally in each case a breach of trust. This is just
not treating as a breach of trust something which is not a breach of trust.
No ground has been suggested for treating it as a breach of trust except
that it is a breach of trust.’

Conclusively, on the question of Director’s position to the company one can say
that he stands as both quasi-trustee of the companies money and property and
agent of the company in the transactions which they enter on behalf of the
company partaking the duties of both to some extent recognized and enforced by
the Courts. ( Aberdeen Railway Co. v. Blakie Bros. (1854) 1 Macq. 461)

As far as the relationship with the shareholders is concerned, it is well settled that
the Directors are neither agents no trustees of the shareholders, but special
circumstances depending on facts of a particular circumstances may give rise to
that relationship. Examples of such particular circumstances can be seen in the
cases of Allen V Hyatt [1914] 30 TLR 444 and Briess v Wolley. [1954] AC 333 In
the former case the Director of a company made an undisclosed profit from
selling of the shares of the members of the company and was made liable to
them. In the second case managing Director of a company made a fraudulent
misrepresentation when arranging the sale of the shares of the members of the
company and members were held liable as principles to the purchasers for their
agents fraud. This point was emphasized in the case of Gramophone and
Typewriter Ltd v. Stanley.26 where Buckley LJ stated that Directors of a company
do not, when acting as such, act as agents of members of the company. And
even a Director who is an employee of a shareholder when acting as a Director
of the company.27 It follows therefore that a member of a company can no be
vicariously liable for the wrongs committed by a Director of a company on the
basis of being a principal being liable for the wrong of his agent.

Number of directors:
Every company must have at least two directors -s.186 ).

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

26
[1908] KB 89
27
Kuwait, Asia Bank Ec V National mutual life nominees Ltd [1991] IAC 187

37
 1) Must be of the age of majority according to the law to which he is subject.
Section 194(1) of the Companies Act 2002 provides: “subject to the
provisions of this section, no person shall be capable of being appointed a
director of a company which is subject to this section if at the time of
appointment he had not attained the age of twenty one or he has attained
the age of seventy”.
2) Must be of sound mind
3) Must not be disqualified by any law to which he/she is subject. E.g
Undischarged bankrupts – under Bankruptcy Ordinance
4) Must not be disqualified by an order of the court [s.197]
5) If the articles so require, the director must have share qualification. In
such cases, a person cannot be appointed as director unless he acquires
he acquires a certain minimum number of shares in a company (share
qualification). Such qualification shares may be acquired within two
months after his appointment or such shorter time as may be fixed by the
articles [s.191).
A person shall not be capable of being appointed director unless he signs and
deliver to the registrar for registration a consent in writing to act as such director
[s.190].

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

DUTIES AND RESPONSIBILITIES/LIABILIYIES OF DIRECTORS

As noted in preceding chapters, the Company Directors in Tanzania normally

have exclusive powers to manage the company’s business and exercise its
powers.28 This was the position in the former law and it is still true to the new Act.
Under s. 181 of the CA, 2002 it is provided that the Directors of the Company
have all the powers necessary for managing, and for directing and supervising
the management of, the business and affairs of the company. The law having so
sanctioned the granting of practically unlimited powers to the Board of Directors
the next issue should be to devise some legal means of controlling the exercise

28
under s36(1) of the CA, 2002 the powers of the board of directors to bind the company , or
authorize, shall be deemed to be free of any limitation under the companies Constitution in
dealing with third parties

38
of those extensive powers in order to prevent Directors from abusing their
managerial powers. Thus in Tanzania, the Directors are subjected under the new
regime to a body of duties, responsibilities and liabilities by statutes and
Common Law to make the Directors to govern the affairs of the company in a set
standard of the law favourable to all stakeholders.

Statutory Duties and Responsibilities of Company Directors

Under the Tanzanian company law, duties and responsibilities of Company

Directors can now conveniently be discussed under statutory law since most of
what used to be Common Law duties and responsibilities have been codified in
the new Companies Act, 2002.

In order to counterbalance the enormous powers of the Board of Directors a

number of duties are imposed on the Directors by the CA, 2002 and the breach
of such duties are highly sanctioned under the same law. Note that the Directors’
duties as a general rule are owed to the company (and company alone) and not
to any other relevant corporate stakeholders.29 Example emphasing this point
can be seen in the case30 where a Director of a company bought shares from a
member at In Percival v. Wright a price less than that for which the Director knew
that a third party had expressed interest in buying all of the shares in the
company. The latter proposal came to nothing, but the selling member sued the
Director for breach of fiduciary duty to the member in not disclosing the interest
expressed by the third party. Swinfen Eady J rejected the claim, holding that the
purchasing Director was under no obligation to disclose to the vendor
shareholders the negotiations which ultimately proved abortive. In deciding so he
based on the ground that a Director’s fiduciary duties are owed to the company
and not to individual members.

In another case of Selangor United Rubber Estate, Ltd. V. Cradock and Others
(supra) The action was brought by Selangor Ltd. against two of its Directors to
compel them to make good the £232,500 they had paid away out of the
company’s assets. Selangor Ltd. had an account with N. Bank Ltd. Acted for
Cradock who wished to gain control of Selangor Ltd. His offer was accepted by
79% of the shareholders of Selangor Ltd. At a cost of £195,000. Cradock had an
account with D. Bank Ltd. After the takeover, Cradock nominated the Directors
Selangor Ltd. And at his direction they transferred the company’s account with N.
Bank Ltd. to D. Bank Ltd. and further transferred £232,500 out of the company’s
then account with the N Bank Ltd. which endorsed the cheque to Cradock who
29
See ss. 183(2) and 185
30
[1902] 2 Ch 421

39
paid it into his account with the D. Bank Ltd. At Cradock’s request the D. Bank
Ltd. Paid £195,000 to W Bank, Ltd. Who used money to pay shareholders who
had sold out to Cradock.

In the above circuitous way the funds of Selangor Ltd had been transferred to
Cradock to enable him to pay for the shares he had brought in Selangor Ltd. In
the action against two nominee Directors of Selangor Ltd., The position of
Directors was considered. The court held that the duty of a Director is to the
company as a whole and not to the person who nominates him to the board. The
transfer of asset to W. Bank Ltd. was a breach of trust. As the Directors had not
directed their minds to the matter but had acted at the instance of Cradock they
were fixed with his knowledge and would not be excused. The Directors were
liable in equity as trustees to make good such part of the £232,500 as was
misapplied.

One could still argue that requiring the Directors to owe their duties to the
company itself is logical since it could hardly be otherwise. If the law were to
impose on the Directors in that capacity fiduciary and other duties in favour of
creditors and other third parties like individual members and employees, it would
place Directors in a position of intrinsic potential conflict, and at times, actual
conflict between the interests of such third parties and those of the company as a
whole.

The statutory duties and responsibilities of Directors include the following;

Duty to act in good faith and in the best interest of the company

Section 182(1)-(4) of the CA, 2002 provides that

(1) “…a Director of a company, when exercising powers or performing
duties must act honestly and in good faith and in what the Director
believes to be in the best interest of the company”
(2) A Director of a Company which is wholly owned subsidiary may,
when exercising powers or performing duties as a Director, if
expressly permitted to do so by the articles of the company, act in a
manner he believes is in the best interest of that company’s holding
company even though it may not be in the best interest of the of the
company
(3) A Director of a Company which is (but not wholly owned subsidiary)
may, when exercising powers or performing duties as a Director, if
expressly permitted to do so by the articles of the company and with
the prior agreement of the shareholders ( other than its holding
company), act in a manner he believes is in the best interest of that

40
 company’s holding company even though it may not be in the best
interest of the of the company
(4) A Director of a Company incorporated to carry out a joint venture
between the shareholders may, when exercising powers or
performing duties as a Director in connection with the carrying out of
the joint venture, if expressly permitted to do so by the articles of the
company, act in a manner he believes is in the best interest of that
company’s holding company even though it may not be in the best
interest of the of the company

The above provision codified a long standing Common Law duty of a Director
which required the Director to act bona fide in what they consider {and not what
the court may consider} is in the interest of the company.31 The provision adds
the ‘best interest’ to the former required standard of being in the ‘interest’ of the
company.

Duty to have regard to the Interest of Company’s Employees

In the CA, 2002 the matters to which the Director has to have regard in the
performance of his functions include the interest of the company’s employees.32 It
is further provided under subsection 2 of section 183 that this duty is owed to the
company and the company alone and is enforceable in the same way as any
other fiduciary duty owed to the company by its Directors.

Duty of Care, Skill and Diligence

The Director is declared under section 185 of the CA, 2002 to owe the company
a duty to exercise the care, skill and diligence which would be exercised in the
circumstances by a reasonable person having both (a) the knowledge and
experience that may be reasonably be expected of a person in the same position
as the Director, and (b) any special knowledge and experience which the Director
has.

It is worth noting that the preposition above introduces the objectivity element in
the standard of care required of a Director to the long standing Common Law
subjective test. That means the law no longer require the Director merely to act
with such care as may reasonably be expected from him, having regard to his
knowledge and skill, but rather to act by the care an ordinary reasonable person

31
Re smith and Fawcett Ltd (supra)
32
See s. 183(1) of the CA, 2002

41
might be expected to take in the same circumstances. However because the
subjectivity is also still maintained by the Act it is proper to say that our law
asserts the dual objective/subjective standard which suggests that the degree of
care which a Director of a company owes is the care that would be taken by a
reasonable diligent person having both the general knowledge, skill and
experience that may reasonably be expected of a person carrying out the same
functions as are carried out by that Director {the objective test} and the general
knowledge, skill and experience that that Director has {subjective test}.33

Duty to Exercise the Powers for Proper Purpose

This duty is provided for under s 184 of the CA, 2002 which requires the Director
act for proper purpose and not for any collateral purpose. This connotes
examining the Director’s purposes objectively while giving due credit to his
managerial judgements. In considering a similar preposition in the case of
Haward Smith Ltd v Ampol Petroleum Ltd34 the Privy Council expressed the view
that it was necessary for the court, when a particular exercise of power by the
Director was challenged to examine the substantial purpose for which it was
exercised in reaching the conclusion whether it was proper or not. This duty is
designed to ensure that the Directors do not act in a way which confers
unacceptable personal benefit on them or persons who are close to them. That
means, certain transactions which could be used by Directors for improper
purpose to confer personal benefits upon themselves, are invalidated by such
provision.

Duty of Disclosure and to avoid conflict of interest

CA 2002 comprises of rules imposing a duty on Directors not to place themselves

in a position where their duties to the company and their personal interests
conflict35 and make sure that they do not profit from their position by diverting
company opportunities to themselves.36 As a general rule, a person holding a
fiduciary position like that of the Directors shall not be allowed to enter into
engagements in which he has or can have interest conflicting or which may
possibly conflict with the interests of those whom he is bound to protect. So the
Directors should avoid actual or apparent conflict of interest with the company in
personal or professional relationship. Generally speaking, a conflict of interest
33
This is in line with the preposition in the recent case of Norman v. Theodore Goddard
[1991]BCLC 1028
34
[1974] AC 821
35
This applies equally where the conflict is between the duty, which a director owes to the
company, and the duty he owes to another eg employees of the company.
36
Under this duty it is not necessary to prove that there is an actual conflict of interest though ,
however there must be a real possibility of conflict and not just some theoretical or rhetorical
conflict.

42
occurs when Directors’ immediate family personal interest interferes or has a
potential to interfere materially with (a) interests or business of the company, (b)
the ability of the Director to carry out his or her duties and responsibilities. 37 The
Director should disclose to the Board any transaction or relationship that he
reasonably expects could give rise to an actual or apparent conflict of interest
with the company. This is done in recognition that in the existence of such
conflicts the law recognises that the Directors despite of his good intentions may
be swayed by his self-interest. The consequences of non-compliance with this
duty are stringent ranging from voidability of the contract arising there from at the
instance of the company and Directors being accountable for any profit made
directly or indirectly as a result of the transaction and indemnifying the company
for any loss or damage resulting from such transaction.38

Responsibilities/Liabilities of Directors under the Companies Act 2002 Statutory

grounds for lifting corporate veil

Introduction

The Companies Act 2002 also came with several responsibilities of Company
Directors upon failure to discharge their legal duties properly. The term
responsibility is usually used in a number of different senses. In this particular
work it is used in common moral and legal context to mean the liability for ones
own actions. One is responsible if one could have acted otherwise and is
therefore open to shed blame on or praise or liable to punishment.39 The Act
provides for both civil liabilities like where the Directors are held liable for the
debts of the company on different circumstances in the Act and criminal liabilities
where different penal sanctions are provided for. Thus careful consideration
should now be taken before taking the burden of Directorship because there is
rapid rising of accountability and civil and criminal exposure of Directors and
officers of company. Usually the Directors like any other officer of the company
can be liable irrespective of whether they were actually involved in the
contravention or even knew of the circumstances by which the contravention
occurred, although in most cases however there are statutory defences that may
be available to the Directors if they can demonstrate that they have satisfied the
relevant criteria for the defence in question.40

37
www.companydirectors.com visited on 13th April 2007
38
Note however that past experience shows that is very common for the companies to relax this
rule by making use of some provision in the Articles of Associations to allow the director to have
some conflicting interest in order to eliminate the need to present every contract in which the
directors are interested to the General meeting. The articles may comprehensively exclude the
non conflicting rule where the director has disclosed his interest .See Movitex Ltd. v Bulfied
[1988] BCLC 104 discussing the same issue
39
In politics and public administration for example the sense is usually different. It usually refers
to the duties associated with a particular office or institution.
40
The common defences include due diligence, inability to influence the contravening conduct or
reasonable steps defences

43
Directors’ Liabilities- Criminal

This section discusses the relevant provision of the Act that imposes personal
criminal liabilities for company misconduct upon the Directors. These personal
liabilities arise where the offences committed by the company are attributable to
an officer of the company (including the Directors) failing to take reasonable care
resulting into the act of omission. The Directors liabilities under this part include
both criminal penalties imposed on the Directors for acts and omissions of
themselves and the company and vicarious criminal liabilities which are usually
criminal penalties imposed on them as a result of acts and omissions by their
subordinate staff. The said Directors criminal liabilities include the following;

1 Liability for Improper use of ''Limited'' or ''Public Limited Company''

Section 34(1),(2) and (3) of the companies Act imposes personal liabilities to the
officers of the company for improper use of ''limited'' or ''public limited company''
the section provides that, if any person trades or carries on any business or
profession under a name or title of which ''limited'', or any contractions or
imitation of that word, is the last word, that person, unless duly incorporated with
limited liability, is guilty of an offence and a person who is not a public company is
guilty of an offence if he carries out any trade, profession or business under a
name which includes, as its last part, the words ''public limited company'' or any
contractions thereof.41 This forms another statutory ground for lifting corporate
veil to see who real persons behind the curtain are. For example in the case of
Mc Collin v. Gilpin42 Three Directors signed an agreement in the following form:
“Agreement between the T. Company on the one part, and W.M.[plaintiff] on the
other part. In consideration for the advance of £500 paid by the said W.M to the
said company, hereby agree to repay the said sum of £500 with interest in six
calendar months from this date hereof. And we do hereby assign to the said
W.M., as security for the said advance of £500, the machines and tools, as
invoiced to him 3rd June 1878…” The articles of association required the affixing
of the company’s seal and the signature of the secretary to such an agreement.
This was not done. The Directors were sued personally on the agreement. The
court held that the Directors had undertaken personal liability and were liable on
the agreement. Note that a Director who signs as agent for and on behalf of a
company but omits to use the word limited (if liability is in fact limited) incurs
personal liability as well.

2 Liability for Authorizing the Offer Document to be issued without written

Consent

41
These liabilities are also imposed on any officer of the public company which so uses a name
which may reasonably be expected to give the impression that it is a private company.
42
(1881) , 6 Q.B.D.516

44
A liability is also imposed against any person who had authorized the offer
document to be issued with the statement of the expert without his written
consent, or if at all, the consent was there then immediately after he withdrew his
consent. This is a joint liability between both the company and every person who
knowingly a party to the issue thereof and they shall be liable to a fine.43

3 Liability for none Registration of a Charge Created on Property Acquired

Also section 101 (1) and (2) of the companies Act, establishes the requirement
for the registration of the charges over the property acquired by the company.
This is in reference with the properties which the company acquired and
thereupon created charge over them. The registration has to be done whether
the charge was created within the jurisdiction or outside Tanzania. If the charge
was created within Tanzania a certified copy of the instrument, if any, by which
the charge was created or is evidenced shall be delivered to the Registrar for
Registration within forty-two days after the date on which the acquisition is
completed and if outside Tanzania, forty-two days after plus the days in which the
copy of the instrument could be in due course of post. Any failure on the side of
the company it shall attract a default fine by the company and every officers of
the company concerned.

4 Liability for Failure to Deliver for Registration the Particulars of any Charge
Created by the Company

Also section 100(3) imposes liability to the company and every officer or other
person who fails for a period of forty-two days, or such extended period as the
court may have ordered, to deliver to the Registrar for registration the particulars
of any charge created by the company, or of the issue of debentures of a series
requiring registration. Under the circumstances unless the registration has been
effected on the application of some other person, the company and every officer
or other person who is a party to the default shall be liable to a default fine.

5 Liability for Failure to Deliver Annual Returns

It is a requirement under section 128 (1) of the CA, 2002 for Every company to
deliver to the Registrar, successive annual returns containing the information
required under the provisions of the Act, dully signed by a Director or the
secretary of the company. The Directors are therefore made criminally liable
under s. 128 (3) of the CA 2002 for failure to deliver annual returns in accordance
with the requirements of the law. The section provides that if a company fails to
deliver an annual return in accordance with this Chapter within twenty eight days
of the return date, the company and every officer of the company who is in
43
See section 48 (2) of the Companies Act

45
default shall be liable to a fine and, in the case of a continued failure to deliver an
annual return, to a default fine. 44

6 Liability for Failure to Prepare and Present Proper Accounts

Under s. 154 the company is required to prepare and lay before the general
meeting the proper accounts like the balance sheet, cash flow statements giving
the true and fair view of the sources and uses of company funds during the
accounting period and complying with a given standards. It follows that if any
person, being a Director of a company, fails to take all reasonable steps to
secure compliance as respects any accounts laid before the company in general
meeting, he shall, in respect of each offence, be liable on conviction to
imprisonment or to a fine.45 However in any proceedings against a person in
respect of an offence under this section, it shall be a defence to prove that he
had reasonable ground to believe and did believe that a competent and reliable
person was charged with the duty of seeing that the said provisions or the said
other requirements, as the case may be, were complied with and was in a
position to discharge that duty and person shall not be sentenced to
imprisonment for any such offence unless, in the opinion of the court dealing with
the case, the offence was committed willfully.

7 Liability for Failure to Furnish Information during Investigation

and inspection

It is a duty under section 216(1) of the companies Act 2002 of all persons who
are or have been officers of the company to produce such books or to furnish
such information or explanation so far as lies within their power during the
exercise of registrar’s power to call for information under section 215 of the Act.
Failure, refusal or neglect to produce such books or to furnish any such
information or explanation renders him or her liable to a fine in respect of each
offence committed.

8 Liability for Destruction of Documents during Investigation

Under section 226(1) of the CA, 2002 any officer of a company who destroys,
mutilates, falsifies or is privy to the destruction, mutilation or falsification of a
document affecting or relating to the company's property or affairs, or makes or is
privy to the making of a false entry in such a document, is guilty of an offence,
unless he proves that he had no intention to conceal the state of affairs of the
company or defeat the law. Subsection two covers a criminal liability for any

44
For the purpose of this subsection, the expression ''officer'' shall include any person in
accordance with whose directions or instructions the directors of the company are accustomed to
act.
45
S.154(4) of the CA, 2002

46
officer who fraudulently either parts with, alters or makes an omission in any
document or is privy to fraudulent parting with, fraudulent altering or fraudulent
making of an omission in, any such document, is guilty of an offence and is liable
to imprisonment or a fine or both.46

9 Criminal Liability for Mis-statement in the offer Document

This is provided for under section 51(l) which is to the effect that where an offer
document issued which includes any untrue statement, any person who
authorised the issue of such offer document shall be liable on conviction to
imprisonment, or a fine, or both, unless he proves either that the statement was
immaterial or that he had reasonable ground to believe and did, up to the time of
the issue of the offer document, believe that the statement was true.47

10 Liability for wrongful commencement of Business

Every person, including the Director, who is responsible for the contravention of
the requirement not commencing a business or exercising any borrowing powers
without following the proper procedures under the relevant regulations in the
case of a public company having share capital has issued an offer document
inviting the public to subscribe for its shares. Any of such persons shall be liable
to a default fine.48

Directors’ Liabilities- Civil

This section dwells on the discussion on the civil liabilities of Company Directors
provisions in the Companies Act, 2002. These are sections which imposed civil
liabilities on Directors to compensate the company, shareholders, creditors or
others for losses incurred as a result of a breach of a duty by the company or the
Director as an agent of the company. Directors are usually liable whether or not
they were involved in the relevant contravention of the Act. And their liabilities are
usually towards both the company and the third parties. These liabilities cover
both contractual liabilities arising from the contracts concluded on behalf of the
company by the Director49 and tortuous liabilities (i.e. liabilities for damage or
injuries caused by willful or negligent or wrongful conduct not involving a
contractual claim). For example if the company X makes a defamatory statement
about a competitor company Y. if the necessary elements are present, company
Y can sue company X for defamation. The Director of company X may be liable
46
S226(3)
47
A person shall not be deemed for the purpose of this section to have authorised the issue of a
offer document by reason only of his having given the consent required by section 48 of the Act to
the inclusion therein of a statement purporting to be made by him as an expert. See s.51(2)
48
See s. 114 (1) and (2)
49
Usually directors will not be held personally liable for such contracts unless they were acting
without the authorization of the company

47
as joint tortfeasor, a person who instigates or assists in commission of a tort, if he
arranged for or helped the company to engage in the defamation. The Directors’
civil liabilities under the Act are as discussed hereunder.

Liability for Misfeasance

Section 382 of the Companies Act, 2002, though does not in itself introduce a
new cause of action against the Director, it is worth mentioning it in this respect
because it provides for a speedy remedy available against the Director and other
delinquent officers in liquidation process. The section provides that;
“if in the course of a winding up of a company it appears that a person who is or
has been an officer of the company … is or has been concerned, or has taken
part, in the promotion, formation or management of the company, has misapplied
or retained, or become accountable for, any money or other property of the
company, or been guilty of any misfeasance50 or breach of any fiduciary or other
duty in relation to the company… the court may, on the application of the official
receiver or the liquidator, or of any creditor or contributory, examine into the
conduct of the person and compel him-
(a) to repay, restore or account for the money or property or any part of it, with
interest at such rate as the court thinks just, or
(b) to contribute such sum to the company's assets by way of compensation in
respect of the misfeasance or breach of any fiduciary or other duty as the court
thinks just.51

Civil Liability for Mis-statement in the offer Document

Where an offer document invites persons to acquire shares in or debentures of a

company, all persons, including the company and every person who is a Director
of the company or who has authorized himself to be named and is named as a
Director of the company or a promoter52 of the company or any other person who
has authorised the issue of the offer document or any part thereof shall be liable
to pay compensation to all persons who acquire any shares or debentures in
reliance on the offer document for the loss or damage they may have sustained
by reason of any untrue statement included therein.53Note however that there are
50
In this context the term misfeasance means misconduct or willful misuse of powers. Note
however that misconduct which is not willful, does not amount to 'misfeasance'.
51 The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who as acted
as liquidator or administrator of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator or
administrator of the company
52
For the purposes this section, the expression ''promoter'' means a promoter who was a party to
the preparation of the offer document, or of the portion thereof containing the untrue statement,
but does not include any person by reason of his acting in a professional capacity for persons
engaged in procuring the formation of the company. See s. 50(7)
53
See s. 50(1) (a)-(e). However that where, under section 48, the consent of a person is required
to the issue of an offer document and he has given that consent, he shall not by reason of his
having given it be liable under this subsection as a person who has authorised the issue of the
offer document except in respect of an untrue statement purporting to be made by him as an
expert.

48
several circumstances where personal liabilities of such persons under this
section will be limited or waived. The circumstances include the following;

No personal liability ensures to any person under this section if at the time when
the offer document was delivered for registration he reasonably believed, having
made such enquiries (if any) as were reasonable, that the untrue statement was
true and not misleading or that the matter whose omission caused the loss was
properly omitted and he continued in that belief until the time when the shares or
debentures were acquired or that they were acquired before it was reasonably
practicable to bring a correction to the attention of persons likely to acquire the
shares or debentures in question or that before the same were acquired he had
taken all such steps as it was reasonable for him to have taken to secure that a
correction was immediately brought to the attention of those persons or the
shares or debentures were acquired after such a lapse of time that he ought in
the circumstances to be reasonably excused and, if the same are dealt in on a
stock exchange, that he continued in that belief until after the commencement of
dealings therein on that exchange.54

Moreover a person shall not incur any liability under this section for any loss
caused by a statement purporting to be made by or on the authority of another
person as an expert which is, and is stated to be, included in the offer document
with that other person's consent if at the time when the offer document was
delivered for registration he believed on reasonable grounds that the other
person was competent to make or authorize the statement and had consented to
its inclusion in the form and context in which it was included and he continued in
that belief until the time when the shares or debentures were acquired they were
acquired before it was reasonably practicable to bring the fact that the expert was
not competent or had not consented to the attention of persons likely to acquire
the shares or debentures in question or before the same were acquired he had
taken all such steps as it was reasonable for him to have taken to secure that the
fact was immediately brought to the attention of those persons or the shares or
debentures were acquired after such a lapse of time that he ought in the
circumstances to be reasonably excused and, if the same are dealt in on a stock
exchange, he continued in that belief until after the commencement of dealings
therein on that exchange.55

Furthermore, no liability if before the shares or debentures were acquired, a

correction or, where the statement was purported to be made by an expert, the
fact that the expert was not competent or had not consented had been published
in a manner calculated to bring it to the attention of persons likely to acquire the
shares or debentures in question or he took all such steps as it was reasonable
for him to take to secure such publication and reasonably believed that it had
taken place before the shares or debentures were acquired.56

54
S. 50(2) (a) –(d)
55
S. 50(3) (a) –(d)
56
S. 50(4)

49
A person shall also not incur any liability under this section for any loss resulting
from a statement made by a public official or contained in a public official
document which is included in the offer document if the statement was accurately
and fairly reproduced.57

Lastly there will not be a liability to the persons concerned if the person suffering
the loss acquired the shares or debentures in question with knowledge that the
statement was untrue.58

Liability for Fraudulent Trading

The CA 2002 also introduces a new liability for the Director in the form of a
remedy against delinquent Directors. This is provided for under s 383 of the CA
2002 which states that
“if in course of winding up a company it appears that any business has
been carried on with the intent to defraud creditors or for any fraudulent
purpose, the court may, on the application of the liquidator order that any
person who was knowingly party to the carrying of that business to make
such contributions, (if any) to the company’s assets as the court thinks
proper.
Among other things, this section requires proof of dishonest intent on the part of
the wrongdoer in order to succeed in the claim. It covers the situation where it is
vivid by implication that the company can not make any profit in continuing to
carry business.

Liability for Wrongful Trading

Regarding the difficulty in proving the necessary dishonest intent in fraudulent

trading as some cases may prove, The Companies Act also provides for the
liability for wrongful trading under s. 384. Under this section it suffices to hold
liable a person who was a Director of the company at the time when, (a) the
company has gone into insolvent liquidation (For the purpose of this section a
company goes into insolvent liquidation if it goes into liquidation at the time when
its assets are insufficient for the payment of its debts and other liabilities and
expenses of winding up)59 and (b) in the course of winding up a company it
appears that at sometime before the commencement of the winding up the
Director knew or ought to have known and conclude that there was no
reasonable prospect that the company would avoid going into insolvent
liquidation.60. The court may order any Director liable of the above to make
57
S. 50(5)
58
S. 50(6)
59
See s.184(6) of the CA, 2002
60
Although, from its wording, the section seems to have been designed to apply at the time of
insolvency liquidation the court decision in Norman v Theodore Goddard (supra) interpreting a
similar provision under the Insolvency Act of UK held it to be a statutory representation of the dual

50
contributions to the assets of the company as the court may think fit, upon the
application of the liquidator. However take note that under subsection 3 of the
same section the Director will not be declared liable if at the time he knew or
ought to have known that there was no reasonable prospect of avoiding insolvent
liquidation he took every reasonable steps with the view of minimising the
potential loss to the company creditors as he ought to have taken. For the
purpose of this section, the facts which the Director ought to know or ascertain,
the conclusions which he ought to reach and steps which he ought to take are
those which would be known or ascertained, or reached or taken, by a
reasonably diligent person exercising the duty of care owed to the company.61
Thus courts have to apply the dual test in determining the extent of Director’s
liability giving regard to general knowledge a reasonable person in the same
position may have and particular skill and experience of the Director in question.

Liability in respect of Reduced Shares

Section 72 create a civil liability on Directors and members in the case of a

reduction in capital that is not effected in accordance with ss 69-71of the CA
2002, including the case where a certificate is given by Directors under section
70 where the Directors did not have reasonable grounds to believe in its truth
toward any creditor of the company who is entitled to object to the proposed
reduction under section 71. Such creditor may make application to the court to
object to the reduction on the grounds that his position as creditor has been
materially prejudiced by the reduction and the court may make several orders as
it thinks fit including requiring the them to contribute to the payment of the debt or
claim of the creditor62 or contribute to the repayment of the sum by which the
share capital of the company was reduced as a result of the passing of the
special resolution.

Liability for Running the Company Unfairly and in a manner

Prejudicial to the Members

Section 233 of the CA, 2002 gives a room for the Director s to be held to task by
members in case it can be proved that they run the affairs of the company in the
a manner detrimental to the interest of the member. The section allows any
member of a company to make an application to the court by petition for an order
on the ground that the company's affairs are being or have been conducted in a
manner which is unfairly prejudicial to the interests of its members generally or of
some part of its members (including at least himself) or that any actual or
proposed act or omission of the company (including an act or omission on its

objective/subjective standard of care of the director’s duty of care and skill to cover all situations
61
under section 185 of the CA 2002
62
In the case of a member this shall be in an amount not exceeding the amount which he would
have been liable to contribute if the company had commenced to be wound up on the day before
the date of the passing of the special resolution and nothing in this section shall affect the rights
of the contributories among themselves

51
behalf) is or would be so prejudicial.63 If the court is satisfied that the petition is
well founded, it may make such interim or final order as it sees fit for giving relief
in respect of the matters complained of in the form of regulating the conduct of
the company's affairs in the future or requiring the company to refrain from doing
or continuing an act complained of by the petitioner or to do an act which the
petitioner has complained it has omitted to do or authorizing civil proceedings to
be brought in the name and on behalf of the company by such person or persons
and on such terms as the court may direct, providing for the purchase of the
shares of any members of the company by other members of the company or by
the company and, in the case of a purchase by the company, for the reduction
accordingly of the company's capital, or otherwise.64 This liability relaxes the
frigidity of derivative action dominant in the former regime.

Liability for Acting While Disqualified

The general principle of regarding a limited liability status as a privilege, which

must be exercised responsibly and not be abused, has now been sanctioned
when abused. In cases where this privilege is abused the courts are empowered
to prevent abusers from so doing in the future by disqualification orders. Under
section 197(1) of CA, 2002 the courts have extensive statutory powers to make
orders disqualifying persons on the grounds set out in various provisions of the
Act, from acting as Directors or acting in the management of the company. These
grounds include disqualification under the following circumstances

(a) if the person is convicted of the offence in connection with promotion,

formation or management of a company or
(b) for persistent breaches of company legislations requiring return,
account or other document to be filed or notice of any matter to be
delivered to the Registrar or

(c) in the course of winding up being guilty of any offence for which he is
liable( whether he has been convicted or not under s. 183 or being guilty
otherwise while an officer of the company of any fraud in relation to the
company or of any breach of his duty to the company or
(d) the court has made a declaration under ss 382,383, or 384 that such a
person is liable to make a contribution to a company’s assets or
(e) if the court is satisfied that a person is or has been a Director of a
company which has at any time become insolvent( whether while he was
a Director or subsequently), and that his conduct as a Director of that
company ( either alone or taken together with his conduct as a Director of
other company or companies) makes him unfit to be involved in the
management of companies

63
S. 233(1)
64
S. 233 (3)

52
The qualification orders under this provision is to the effect that the person
disqualified shall not, without the leave of the court, be a Director of or in any
way, whether directly or indirectly, be concerned or take part in the management
for such period as may be specified in the order. 65 The maximum period for
disqualification ranges from five to fifteen years depending on the ground of the
disqualification.66 The consequence of the disqualification order also varies
depending of ground of disqualification.

Further section 198 of the CA, 2002 creates a personal liable to the relevant
debts of the company to a person, if at any time in contravention of a
disqualification order he is involved in the management of the company or as a
person who is involved in the management of the company, he acts or is willing
to act on instructions given without the leave of the court by a person whom he
knows at that time to be the subject of a disqualification order or to be an
undischarged bankrupt. For the purposes of this section, a person is involved in
the management of a company if he is a Director of the company or if he is
concerned, whether directly or indirectly, or takes part, in the management of the
company.

Liability where Business is carried on with Fewer than two

Members

Section 26 provides that where the company carries on business in a period of

more than six months with its members falling below minimum required number,
two for that matter, every person who is a member of the company during the
time that it so carries on business after those six months and knows that it is
carrying on business with fewer than two members, shall be liable (jointly and
severally with the company) for the payment of the whole debts of the company
contracted during that time. Thus whoever, a Director inclusive, is acting in that
company will bear personal liability there upon and a corporate veil will not work
to protect him.

Liability for Insufficient Funds for Debt Settlement during

Winding up67

Another personal liability arises under section 268 of the Companies Act in the
event of a company being wound up and the assets of the company are not
sufficient to do away with the liabilities of the company, every present and past
member to contribute to the assets of the company to an amount sufficient for
payment of its debts and liabilities, and the expenses of the winding up, and for
the adjustment of the rights of the contributories among themselves. A past
member shall not be liable to contribute if he has ceased to be a member for one
65
Disqualification orders shall be made for a specified period beginning with the date of the order
66
The period not exceeding five years for grounds a, c, d, and e above and fifteen years for
ground b above. See the proviso to s 197 of the CA
67
This liability however covers the directors under their capacity as members, if any.

53
year or upwards before the commencement of the winding up and in respect of
any debt or liability of the company contracted after he ceased to be a member.

COMPANY MEETINGS

A company is an association of several persons. Decisions are made according

to the view of the majority. Various matters have to be discussed and decided
upon. These discussions take place at the various meetings, which take place
between members and between the directors. Needless to say, the importance of
meetings cannot be under-emphasized in case of companies. The CA contains
several provisions regarding meetings. These provisions have to be understood
and followed.

For a meeting, there must be at least 2 persons attending the meeting.

One member cannot constitute a company meeting even if he holds
proxies for other members.

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

types: -

I. Meetings of Members:

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

A. Annual General Meeting: [s.133 of CA]

Must be held by every type of company, public or private, limited by shares or by

guarantee, with or without share capital or unlimited company, once a year. Every
company must in each year hold an annual general meeting. Not more than 15
months must elapse between two annual general meetings. However, a company
may hold its first annual general meeting within 18 months from the date of its
incorporation. In such a case, it need not hold any annual general meeting in the
year of its incorporation as well as in the following year only.

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

54
The AGM must be held on a working day during business hours at the registered
office of the company or at some other place within the city, town or village in
which the registered office of the company is situated.

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

In case of default in holding an annual general meeting, the consequences are

provided under section 133(4) & (7)

Business to be transacted at Annual General Meeting: At every AGM, the

following matters must be discussed and decided. Since such matters are
discussed at every AGM, they are known as ordinary business. All other matters
and business to be discussed at the AGM are special business.

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

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

(b) Declaration of dividend

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

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

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

C. Extraordinary General Meeting [s.134]

Every general meeting (i.e. meeting of members of the company) other than the
annual general meeting or any adjournment thereof, is an extraordinary general
meeting. Such meeting is usually called by the Board of Directors for some
urgent business which cannot wait to be decided till the next AGM. Every
business transacted at such a meeting is special business. An explanatory
statement of the special business must also accompany the notice calling the
meeting. The notice must/ should also give the nature and extent of the interest
of the directors or manager in the special business, as also the extent of the
shareholding interest in the company of every such person. In case approval of

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any document has to be done by the members at the meeting, the notice must
also state that the document would be available for inspection at the Registered
Office of the company during the specified dates and timings.

The Articles of Association of a Company may contain provisions for convening

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

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

The members of a company have the right to require the calling of an

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

(a) Members of the company holding at the date of making the demand for
an EGM not less than one-tenth of paid-up capital of the company as at
the date of the deposit carries the right of voting in general meeting of
the company.
(b) If the company has no share capital, the members representing not less
than one-tenth of the total voting rights of all the members having at the
said date a right to vote at a general meeting.

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

D. Class Meeting

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

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meetings are held to pass resolution which will bind only the members of the
class concerned, and only members of that class can attend and vote.

Unless the articles of the company or a contract binding on the persons

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

II. Meetings of the Board of Directors

(a) Meeting of the Board of Directors

(b) Meeting of a Committee of the Board

III. Other Meetings

A. Meeting of debenture holders

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

B. Meeting of creditors

Sometimes, a company, either as a running concern or in the event of winding

up, has to make certain arrangements with its creditors. Meetings of creditors
may be called for this purpose. E.g. U/s 261 & 262, a company may enter into
arrangements with creditors with the sanction of the Court for reconstruction or
any arrangement with its creditors. The court, on application, may order the
holding of a creditors' meeting. If the scheme of arrangement is agreed to by
majority in number of holding debts to value of the three-fourth of the total value
of the debts, the court may sanction the scheme. A certified copy of the court's
order is then filed with the Registrar and it is binding on all the creditors and the
company only after it is filed with Registrar.

Similarly, in case of winding up of a company, a meeting of creditors and of

contributors is held to ascertain the total amount due by the company and also to
appoint a liquidator to wind up the affairs of the company.

Requisites of Valid Meetings:

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

(a) It must be properly convened. The persons calling the meeting

must be authorized to do so.
(b) Proper and adequate notice must have been given to all those
entitled to attend.
(c) The meeting must be legally constituted. There must be a
chairperson. The rules of quorum must be maintained and the
provisions of the CA and the articles must be complied with.
(d) The business at the meeting must be validly transacted. The
meeting must be conducted in accordance with the regulations
governing the meetings.

Notice of every meeting of company must be sent to all members entitled to

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

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

A notice convening an AGM must be accompanied by the annual accounts of the

company, the director’s report and the auditor’s report. The copies of these
documents could, however, be sent less than 21 days before of the date of the
meeting if agreed to by all members entitled to vote at the meeting.

Proxy

In case of a company having a share capital and in the case of any other
company, if the articles so authorize, any member of a company entitled to attend
and vote at a meeting of the company shall be entitled to appoint another person

58
(whether a member or not) as his proxy to attend and vote instead of himself.
Every notice calling a meeting of the company must contain a statement that a
member entitled to attend and vote is entitled to appoint one proxy in the case of
a private company and one or more proxies in the case of a public company and
that the proxy need not be member of the company.

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

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

The proxy form must be in writing and be signed by the member or his authorized
attorney duly authorized in writing or if the appointer is a company, the proxy
form must be under its seal or be signed by an officer or an attorney duly
authorized by it.

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

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

Quorum

Quorum refers to the minimum number of members who must be present at a

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

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

Voting and Demand for Poll

Generally, initially matters are decided at a general meeting by a show of hands.

If the majority of the hands raise their hands in favor of a particular resolution,
then unless a poll is demanded, it is taken as passed. Voting by a show of hands
operates on the principle of "One Member-One Vote". However, since the
fundamental voting principle in a company is "One Share-One Vote", if a poll is
demanded, voting takes place by a poll. Before or on declaration of the result of
the voting on any resolution on a show of hands, the chairman may order sua
moto (of his own motion) that a poll be taken. However, when a demand for poll
is made, he must order the poll be taken. The chairman may order a poll when a
resolution proposed by the Board is lost on the show of hands or if he is of the
opinion that the decision taken on the show of hands is likely to be reversed by
poll. When a poll is taken, the decision arrived by poll is final and the decision on
the show of hands has no effect.

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

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

(b) If no provision is made by the articles with respect to the right to

demand poll, by three members who hold not less than fifteen
percent of the paid up share capital of the company.

Kinds of Resolutions

Resolutions mean decisions taken at a meeting. A motion, with or without

amendments is put to vote at a meeting. Once the motion is passed, it becomes
a resolution. A valid resolution can be passed at a properly convened meeting
with the required quorum. There are broadly three types of resolutions: -

1. Ordinary Resolution: An ordinary resolution is one, which can be passed

by a simple majority. I.e. if the votes (including the casting vote, if any, of
the chairman), at a general meeting cast by members entitled to vote in its
favour are more than votes cast against it. Voting may be by way of a
show of hands or by a poll provided 14 days notice has been given for the
meeting.
2. Special Resolution (s. 143): A special resolution is one in regard to which
is passed by a 75 % majority only i.e. the number of votes cast in favour of
the resolution is at least three times the number of votes cast against it,

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 either by a show of hands or on a poll in person or by proxy. The intention
to propose a resolution as a special resolution must be specifically
mentioned in the notice of the general meeting. Special resolutions are
needed to decide on important matters of the company. Examples where
special resolutions are required are:

(a) To alter / change the name of the company.

(c) To alter the articles of association

(d) To reduce share capital.

3. Resolution requiring Special Notice (s. 144): There are certain matters
specified in the Companies Act, CA which may be discussed at a general
meeting only if a special notice is given regarding the proposal to discuss these
matters at a meeting. A special notice enables the members to be prepared on
the matter to be discussed and gives them time to indicate their views on the
resolution. In case special notice of resolution is required by the Companies
Ordinance or by the articles of a company, the intention to propose such a
resolution must be notified to the company at least 28 days before the meeting.
The company must within 21 days before the meeting give the notice of the
proposed resolution to its members. Notice of the resolution is required to be
given in the same way in which notice of a meeting is given, or if that is not
practicable, the company may give notice by advertisement in a newspaper
having an appropriate circulation or in any other manner allowed by the articles,
not less 7 days before the meeting.

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

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

than a retiring auditor.

(b) To resolve at an annual general meeting that a retiring auditor shall

not be reappointed.

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

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

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

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

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Registration of Resolutions and Agreements (s. 145)

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

(a) All special resolutions

(b) All resolutions of the board of directors of a company or

agreement executed by a company, relating to the appointment, re-
appointment or renewal of the appointment, or variation of the
terms of appointment, of a managing director

(c) All resolutions or agreements which have been agreed to by all

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

(d) Resolutions for voluntary winding up of a company

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