Company Law Full PDF

LAW 5112
Corporate Law and Governance

MBA – DCC, MAIN & MWANZA
8/31/2016 JULIUS COSMAS 1

Introduction
 A company is a group of persons
associated together for the attainment of
common end, social or economic or a
voluntary association of persons or
individuals formed for some common
purposes. See, Smith v Anderson
 See also the definition under the relevant

statute example the Company Act No. 12
of 2002 and Company Decree Cap 153
Definition Cont…
 See also the impact of the Business
law(Miscellaneous amendment) Act
 Here the law allows a one man company
and thus no issues of association any
more
◦ See section 18 which amends section 3 of
the Companies Act
 What then should be a definition of the
term company?
General characteristics of a Company:
 Perhaps the better way is understanding Co is by
looking at its features:
 Separate legal existence from its members
 Limited Liability
 Separate property
 Perpetual Succession
 Transferable shares
 Capacity to sue or be sued
 Separate Management

SEPARATE LEGAL EXISTENCE
 On incorporation under the law, a
company becomes a separate legal entity
as compared to its members.
 The company is different and distinct
from its members in law.
 It has its own name and its own seal, its
assets and liabilities are separate and
distinct from those of its members.

 It is capable of owning property, incurring
debt and borrowing money, having a bank
account, employing people, entering into
contracts and suing and being sued
separately.
 The legal personality or separate entity
was recognized in Oakes v Turquant (1867)
L.R. 2 H.L. 325,

 But the importance was firmly established
in Salomon v Salomon (1897) A.C 22.
 In this case, Salomon sold his boots
business to a newly formed company for
₤ 30000.
 His wife, one daughter and four sons took
up one share of ₤ 1 each.
 Salomon took 23000 shares of ₤ 1 each
and ₤ 10,000 debentures in the company.
 The debentures gave Salomon a charge
over the assets of the company as the
consideration of the transfer of business.
 Subsequently, when the company was
wound up, its assets were found to be
worth ₤ 6,000 and its liabilities amounted
to ₤ 17,000 of which ₤ 10000 was due to
Salomon (secured by debentures) and ₤
7000 due to unsecured creditors.

 The unsecured creditors claimed that
Salomon and the company were one and
the same person and that the company
was merely agent for Salomon and hence
they should be paid in priority to
Salomon.

 It was held that the company was, in the
eyes of law, a separate person
independent from Salomon and was not
his agent though initially the holder of all
shares of the company was also a secured
creditor, and was entitled to repayment in
priority to unsecured creditors.

 “The company is at law a different person
altogether from the subscribers to the
memorandum, and though it may be that
after incorporation the business is
precisely the same as it was before, and
the same persons are managers, and the
same hands receive the profits, the
company is not in law the agent of the
subscribers or trustee of them.

 Nor are subscribers liable, in any shape or
form except to the extent and in a
manner provided by the Act”

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

 The personal property of a shareholder
cannot be attached for the debts of the
company if he/she holds fully paid up
share.
 A company may be limited by shares or
by guarantee (s. 3(2) of the Companies
Act, 2002).

The importance of limited liability was
expressed in Senkin v Pharmaceutical
Society of GB (1921) 1 Ch. 392.
 Limited liability is the offspring of a
proved necessity that, men should be
entitled to engage in commercial pursuit
without involving the whole of their
fortune in that particular pursuit in which
they are engaged.

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

SEPARATE PROPERTY
 A company is a distinct legal entity.
 The company’s property is its own.
 A member cannot claim to be owner of
the company's property during the
existence of the company.
 A shareholder doesn’t even have insurable
interest in the property of the Company.
Macaura v Northern Ins. Co. (1925) AC 619
M
 Macaura was holder of nearly all shares of
a timber company.
 He was also a substantial creditor of the
company.
 He insured the Company’s timber in his
own name. The timber was destroyed by
fire.
 It was held that the insurance company
was not liable.
 The legal position is that Macaura has no
insurable interest on the company
property.
 Macaura could have insured his stake
 The percentage of shares he owned.
 The company could have insured the
whole Timber plantation.

TRANSFERABILITY OF SHARES
 S. 74 of the Companies Act states that
“the shares or any other interests of any
member in a company shall be
transferable in a manner provided by the
articles of the company.”
 Shares in a public company are freely
transferable, subject to certain conditions,
such that no shareholder is permanently
or necessarily wedded to a company.

 When a member transfers his shares to
another person, the transferee steps into
the shoes of the transferor and acquires
all the rights of the transferor in respect
of those shares.
 Section 27 of the Companies Act restricts
the right of the members of a private
company to transfer shares.
 Pre emption clauses

Why restrict?
 Family company/ closed corporation.
 The transfer to a stranger would be
undesirable unless the group decides as a
whole.
 To impose such restrictions the co will
always have a clause in the articles of
association.
 Lack of such a clause will bar the co from
refusing the share transfer.
Is not it interfering with the right to
own property?
 It is not prohibition but restriction? What
is the difference?
 Members must be given first priority
before offering to third parties.
 Rangaraj v Gopalakrishnan (1992) SC 453.

CAPACITY TO SUE AND BEING
SUED
 A company can sue or be sued in its own
name as distinct from its members.
 It may also inflict or suffer wrongs.
 It can in fact do or have done to it most
of the things which may be done by or to
a human being.

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

Companies and Partnerships
Compared
 Mode of formation and governing laws
 Legal personality
 Limitation of membership
 Free transferability of shares
 Separate management
 Presumption of agency
 Mode of termination

BASIS COMPANY PARTNERSHIP FIRM
LEGALITY Company is an artificial legal Partnership is not a legal

person. person.
PERPETUAL SUCCESSIO Company Partnership firm does not have
N has perpetual succession. perpetual succession.
REGISTRATION Company is created by For a partnership firm

registration registration is not compulsory.
under Companies Act. It is guided by law of Contract
Act.
NUMBER OF MEMBERS Private Limited Partnership firm shall have at

Company shall have at least least 2 members and
2 members and maximum 50 maximum 20 members and for
members. banking business, maximum 10
members.
LIABILITY In a private limited company, Liability of members is
liability of the members can unlimited in a partnership firm.
be limited by shares or by
guarantee.
AGENT A member is not an agent of Partner is an agent of firm and
company or of other members. other partners.
MANAGEMENT Ordinary members cannot take part Partners can take part
in management of a company. Only in management of a firm.
director members can take part in
management.
NO MINIMUM PAID
UP CAPITAL
DISTINCT ENTITY A company is an entity distinct from The property of a firm

its members. It may own property, is owned by the partners. It
make contracts, sue and be sued in can also sue and be sued in
its own name. the firm’s name and partners
can also be sued individually.
TRANSFER OF SHARES Shares of a private limited Partner can transfer his share
company can be transferred but the assignee does not
with ease. become a partner. He is only
entitled to share of Profits.
DISSOLUTION A single member cannot wind A partnership may be

up a company. dissolved by any partner at any
time.
BINDING BY ACT Member cannot bind company Partner can bind firm by his
by his act. act.
Corporate Personality & Corporate Veil
principle.
 Upon incorporation, a company is
generally considered to be a new legal
entity separate from its shareholders.
 It will, suffice to say, that if three persons

incorporate a company, the company will
become a fourth person separate and
different from these three persons
individually or collectively

VEIL OF INCORPORATION
 Separate legal personality of company
operates as a shield
 The screen separating the company from

its individual shareholders and directors is
commonly referred to as "the veil of
incorporation

Lifting of Corporate Veil
 As the company is a separate legal entity , is has
been provided with a veil, compared to that of
individuals who are managing the company.
 But if the court feels that such veil has to been

used for any wrongful purpose, the court lifts
the corporate veil and makes the individual
liable for such acts which they should not have
done or doing in the name of the company
Circumstances to lift the
corporate veil…
The corporate veil can be lifted either
under the
 Statutory provisions or
 Judicial interpretations
The statutory provisions are
Provided under the Companies
Act.
The other circumstances are decided
through Judicial interpretations, which
are based on facts of each case as per
the decisions of the court
Statutory circumstances for
lifting the corporate veil
 Reduction in membership- Less than
seven in public company and less than
two if it is a private company
 Mis-description of companies name-
While signing a contract if the
company’s name is not properly
described, then the corporate veil can
be lifted.
 Misrepresentation in the prospectus-
(Derry Vs Peek) In case of
misrepresentation, the promoters,
directors and every other person
responsible in this matter can be held
liable.
continued
 Fraudulent Conduct- In case the
company is carried on with an intent to
defraud the creditors, then the court
may lift the corporate veil.
 Holding and subsidiary companies- A

subsidiary has a distinct legal entity from
the holding company other than in a few
circumstances, so if otherwise shown,
the court may under the Act , lift the
corporate veil of the subsidiary
company.
Judicial interpretations by the court
are as follows:
 Protection of Revenue- When ever a company uses its
name for the purpose of tax evasion or to circumvent
tax obligations
 Prevention of fraud or Improper conduct- The

incorporation has been used for fraudulent purpose, like
defrauding the creditors, defeating the purpose of law
etc..
 Determination of the character of the company- Enemy

company or all the members being the citizens of the
enemy country. (Daimler Co. Ltd V. Continental Tyre &
Rubber Co. Ltd)
Other circumstances
 Where a company is used to avoid welfare
legislation- If a company is formed in order to
avoid the benefits to the workers like bonus, or
other statutory benefits..
Types of Companies
 On Basis of Ownership
 On basis of Liability
 On Basis of Control
 On basis of Establishment
 Foreign Companies see section 433 of
the Companies Act

On Basis of Ownership
private and public companies
 Private companies  Public companies

 Prohibited from allotment of  is a company which is not a
shares in public private company
 Does not need a certificate of
the commencement of  The general public is allowed
business to subscribe for membership
 Restricted right of the
members to transfer its shares  There must be a minimum of
as per section 27 two members. Section
 There must be a minimum of 3/Section 18 of the Proposed
two members. Section Bill on Business (Miscellaneous
3/Section 18 of the Proposed Amendment ) Act 2012
Bill on Business (Miscellaneous
Amendment ) Act 2012

continuation
 A private company is  It can not commence
exempted from the
business unless it
requirement to appoint complies with the
auditors in a relation to
provision of section 114
accounting period of the Co. Act.
 Exempted from issuing a  Free Transfer of shares

financial reports/ section 45.
statements

On basis of Liability
 A Company Limited by shares, In this case the
liability of members is limited to the amount of unpaid
up shares.
 A Company Limited by guarantee, A company

limited by guarantee is a registered company having the
liability of its members limited by its MEMART to such
amount as members may thereby undertake to pay if
necessary on liquidation of the company.

On Basis of Control: - Holding
Company and Subsidiary company
 When a company has control over
another company it is known as a holding
Company.
 Section 465/6 allows a statutory company

to be the sole member of a holding
company.
 The company so controlled is called a
subsidiary company

Conditions for a company to be a
subsidiary of another:
 That other company controls the
composition of its board of directors, or
 That other company holds more than half

in face value of its share capital.

On the basis of establishment: statutory,
registered, & foreign companies
 Statutory Companies:
 These are companies created by special
Act of the legislature
 These companies are owned by the

government and the main objectives of
these companies are to provide some
necessary services for the benefit of the
entire country
continuation
 Registered Companies:
 These are companies formed and
registered under the Companies Act.
 They come into operation only when,

they are registered under the Act and the
certificate of incorporation has been
issued by the registrar.

Foreign Companies
 This means companies incorporated in a

country outside Tanzania under the law of
that country and has established the place
of business in Tanzania section 433 Co.
Act

Promotion and formation of
Companies
 Promotion means the entire process by
which a company is brought into
existence.
 A person, who conceives the company

and invests the initial capital is known as a
promoter.

Continuation
 A promoter will enter into preliminary
contracts with venders
 Make arrangements for the preparation

advertisement, and
 Circulation of prospectus and placement

of capital

Continuation
 Read Erlanger v New Somberoro
Phosphate Co.
 This is the case that established the duties
of a promoter in the due course of
establishing a company
 There are three main duties that a

promoter have to adhere to, these are:

Duties of a promoter
 He must not make a secret profit must make a
full disclosure of any profit made
 He must avoid undue influence and fraudulent

acts
 He must not give the benefit of any negotiations

or contracts into which he enters in respects of
the Company. (not make unfair use of position)
 Example; he can not sell the property to the

Co. at a higher price than he gave for it.

Remedies available against promoter
on breach of the duty
 The company may rescind the contract
and recover the purchase price
 Promoter shall be accountable to the
company for profit he has made
 The Company may retain the property
and pay no more
 The company can sue the promoter for
breach of trust

Rewards of the promoter
 Payment of some remuneration
 He may make profit after he has disclosed

to the company
 May be given commission on shares sold
 The MEMART may provide for a fixed

sum to be paid to him

PRE INCORPORATION
CONTRACTS
 These refers to the contracts which were
entered into by the promoters before the
company comes into existence.
 Take note that, for a contract to be valid

there should be parties.
 These parties need to have that capacity

to contract as a matter of age and
incorporation incase of companies.
Continuation
 Before incorporation a company is not a
person
 Thus the contracts that are entered into

between the promoters are less related
to the company in strict legal terms
 Can promoters act as an agents of the

company to be formed?
Continuation
 For there to be an agent there need be a
principal.
 As long as a company before
incorporation is not a person then there
is nothing to be an agent of.
 Thus the contract entered into between

the promoters and third parties are
binding personally to the promoters as
per section 40 of the Companies Act
Solutions to personal liability to the
promoters
 Novation, promoters liability end when
the company once formed enters into
new contract on the same terms.
 Section 40 where the third parties will

agree that the promoters should not be
held liable.

Cont…
 The MEMART of the company can be
formed or drafted to include provisions
binding the directors to adopt the
contract

FORMATION OF COMPANIES IN
TANZANIA
 In Tanzania Companies are being formed under
the :
◦ Companies Act number 12 of 2002 see also
the
◦ Company Decree Cap 153 (Zanzibar)
◦ Business Names (Registration) Act Cap 213
◦ Business law(Miscellaneous amendment) Act

of 2012

Stages in forming a company
 Name o the Company see section 30
of the Companies Act
 Name clearance
 Submission of the following documents:
◦ The memorandum of the association duly
signed by the subscribers
◦ The articles of association if any, signed by the

subscribers

Continuation
 Statement which declares the particulars of the
directors; as per section 194 of the Act
 The form which declares the physical residential area of

the registered office
 Fill form number one (statutory declaration) in

pursuant to section 16(2) of Co. Act
 At last the certificate of incorporation will be issued

CORPORATE
CONSTITUTION
MEMORANDUM AND ARTICLES OF
ASSOCIATION OF A COMPANY
“MEMART”

Memorandum of Association and its
contents
 This refers to the charter of the company
and defines the reasons for its existence.
 It also regulates the external affairs of the

company in relation to the outsiders
 It also signify the readiness of the

members to be formed into the named
association “ a company”
Rationale for the
memorandum of Association
 It provides the basis of incorporation
 It determines the areas of incorporation

of the company
 It defines the relationship of the company

with the outsiders
 Provide rules regarding capital structure
of the Co.

Rationale cont...
 It is unalterable charter of the company,
although it can be altered under some
special circumstances.
 It provides rules basing on the liability of

its members and
 It defines the areas beyond which the

action of the company cannot go
Cont…
 Thus the prospective share holder shall
know the field in or the purposes for
which their money is going to be used by
the company and what risks they are
undertaking in making investment by
reading the memorandum of a company.

Cont…
 Also the outsider 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
company

Preparation of Memorandum
 The promoter must prepare the
memorandum of association of a
company in accordance with the
requirements of the law which relates to
the formats and contents of the
memorandum of association.
 What are these requirements?

Requirement
 Section 4(1) of the Companies Act,
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.
Cont..
 Opposite the signature of every
subscriber and attesting witness, there
shall be written in legible characters his
full names, his occupations and Postal
Address.
 Companies should not have similar names

Proposed Changes…
 The Business (Miscellaneous Amendment)
Act proposes for:
◦ Changes in language from English to Swahili
◦ See section 19 which amends section 4 of the

Companies Act

Contents of the Memorandum of
Association of a Public Company
 The memo for a Public company limited
with shares has about six clauses in it.
 The clauses contains the respective rules

which governs the company and tells why
its was formed.
 These Clauses are:

Clauses of the Memo…
 Name Clause
◦ See section 30 of the Companies Act
 Registered office clause of the
Companies Act
 Liability Clause
◦ See section 3/27 of the Companies Act
◦ Section 18 and 23 of the Business
Miscellaneous Amendment) Act 2012

Cont…
 The Capital clause of the company
◦ See sections 5/64 of the Companies Act
 The Object Clause

 Association Clause
◦ See section 4/5 of the Companies Act

Name Clause
 Each company must have a name.
 The name of a company is a symbol of the
company itself.
 It is also part and parcel of the assets of
the company as it creates good will from
the customers that have for so long being
dealing with it.
 Inland Revenue Commissioners V
Muller & Companys’ Margarine Ltd
[1901] AC 21 8/31/2016 JULIUS COSMAS 75
Similarity in Company's’ Names
 As a matter of law and practice no
company is allowed to have a similar
name with another company, that is to say
no company will be registered if already
there exists a company so named.
 Read:

Read the case
 The case of Society of Motor
Manufacturers and Traders Ltd v
Motor Manufacturer and traders
Mutual Insurance Company Ltd
[1925] 1 Ch 675
 The name of the company should not

mislead the public.
 It should not be unreasonable as well

Registered office clause of the
Companies Act
 The company law requires that every
company must have a registered office.
 The registered office of a company acts

as a home for the company.
 This provides for full address, location and a

physical residential home where the
headquarters of the company shall be situated.

Cont…
 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 legible. Section 112(1) (a) of
the Companies Act

Liability Clause
 Section 3 and 27(a,b,c) of the Co. Act
 Read as well section 18 of the Proposed
Bill on Business Laws
 This clause has to state whether the

liability of Co. is limited by shares or
guarantee.

The capital Clause
 The capital Clause of a company states the amount of
the 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

capital.

Alteration
 The power of a limited company to alter
its share capital is provided under section
64 of the Co. Act.
 Such powers may only be exercised by

the company in general meeting and that
must be authorized by the articles of
association

Object Clause
 This is the clause in the Memo which
states the range of activities of the
company.
 Traditionally a company would not be
expected and as such allowed to transact
beyond its objects.
 Thus this clause limits the range of acts of

the company.
The doctrine of Ultra-vires
 The Co. has the power to do all such
things which are:
◦ Authorized to be done by the Companies Act
◦ Essential to the attainment of its objects

specified in the memorandum.
◦ Reasonably and fair incidental to its objects.

Any thing else beyond that ultra vires the
Company.

What are the impacts of Ultra
vires?
 The Ultra-vires acts are void.
 They don’t bind the company nor the

third party can sue under them.
 The Directors are also held accountable

for ultra-vires Acts

Authoritative case laws
 Ashbury Rly Carriage and Iron Co. Ltd v
Riche. [1878] Lt 7HL653
 London Count Council v AG

[1] [AC 165]
 AG v Great English Railway Co. Ltd

Cont…
 AG v Great English Railway Co. L.t.d
 [1880] Ch D 449

Ways to circumvent ultra-vires
doctrine
 The Drafting of the Memorandum of the
company to allow directors of the
company to carry on any business
whatsoever they deem fit
 The other practice has also bee of the
use of independent object clauses
 Alteration of the object clause

Case law
 See Bell House Ltd v City Wall
Properties Ltd (1966) 2 All ER 674/
[1966] 2 QB 656
 Cotman v Brougham.[1]
[1] 1918 AC 514

Position in Tanzania
 Read section 7 of the Companies Act on
a general trading companies
 Read also section 35 on the Companies

Act not limited by the memorandum
 Section 36 on the person dealing with the

company in good faith
 Section 37 waver of the duty to inquire

Continuation
 Section 189 is in a way trying to
concretize on the fact that the acts of any
director shall remain valid regardless of
any defect in his appointment.
 The above section therefore is attempting

to add more strength on the side of the
outsider as still his rights will not fall
under the armpit of ultravires Doctrine

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.

ASSIGNMENT
 It is a great anomaly that the Companies
Act does not set the minimum capital
with which companies in Tanzania have to
be registered with. By comparing with
company law legislations of two countries
of your choice make a critical comment
on the above statement.
 Instructions:
◦ Type written work
◦ Font size 12 Times New Romans
◦ 1.5 Line space
The articles of Association
INTRODUCTION

Meaning
 These are the rules and regulations of a company
formed for the purposes of internal management.
 The articles regulate the manner in which the

Company's affairs will be managed.
 While the memorandum lays down the objects and

purposes for which the company is formed, the articles
lay down rules and regulations for the attainment of
these objects.

Cont…
 Section 2(2) of the Co. Act defines
'articles' to mean:
 “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 schedules
annexed to the Co. Act 2002.”
continuation
 In forming the articles of a company, care
must be taken to see that regulations
framed do not go beyond the power 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 thus be null and void.
continuation
 The company may adopt all or part of the
regulations contained in the Table A to be
its Articles of Association, section 11 of
the companies Act

Contents of Articles of Association
 Share capital, rights of share holders, variation of these
rights, payment of commissions, share certificates.
 Call on shares
 Transfer of shares
 Forfeiture of shares
 Conversion of shares into stock

 Alteration of capital
 etc

Effects of registration of Memo and
Articles of Association of a company
 The articles when registered are a
contract which binds the company and
the members as if signed and sealed by
each members.
 It constitute through the memorandum

and articles of the company, a contract
between each member and the company.
The legal implications can be analyzed as
here under. See section 18 of CA.
Members to the Company
 Each member is bound as if he actually
singed the memorandum and articles
 In the case of Hickman v Kent or
Rommey Marsh sheep Breeds'
Association
 The court decided that the action could
not continue in the high court. H was
contractually bound by the articles to
take the dispute to arbitration first.
A company to members
 The company is also bound to the
members in respect of their rights as
members.
 The company can therefore exercise its

rights against any other member, only in
accordance with the provisions in the
memorandum and articles of Association.

Members Inter se
 As between members themselves the
MEMART constitute a contract between
them and are also binding on each
member against the other or others.
 However, such a contract can be enforced

through the medium of the company. This
was elaborated in the case of Welton v
Suffery
Company to the outsiders
 The articles do not constitute any binding
contracts as between a company and an
outsider.
 This is based on a general rule of law that

a stranger to the contract can not acquire
any right whatsoever under such a
contract

To be read by the Students
MEMBERSHIP OF A
COMPANY

Membership meaning
 A member of a company means and
include those subscribers to the
memorandum of association of the
company.
 He who accepts to take the shares and
have his or her names registered
becomes a member of the company.

Minimum Number of members to
form a company:
 Section 3 of the Companies Act provides
that two persons shall form a company.
 Currently the on going amendments of

the Business laws calls for a one man
Company.
◦ Read section 18 of the Business
(Miscellaneous Amendment ) Act 2012
 What are the ways to become a member?
Ways to become a member of the
company
 By subscription to the memorandum of
association of the company.
 By director undertaking to pay for

qualification shares. See section 24(1) of
the Companies Act
 See section 191 of the Companies Act

Membership continuation
 By agreeing in writing to become a
member in any of the following ways:
◦ By application and allotment
◦ By allowing his name to be on the list of the

register of members or
◦ Holding himself out or allow to be held out as

a member

Membership Continuation
 By taking a transfer of shares
 By transmission of shares of the

companies Act.
 Section 24(2) of the Companies Act

Who can be a member?
 Generally any person who is competent
to enter into contract can become a
member of the company.
 The rules of contract apply in case a

minor would wish to become a member
of the company.
 What about a firm? Insolvent people?

A firm!
 A firm cannot be registered as a member.
This is because it is not a legal person.
 Instead each and every member will have

to be registered individually, or purchase
shares as joint shareholders instead of
purchasing the shares in the name of the
firm.

Insolvency
 An insolvent person may become a
 However the rights of such a person are

vested in a trustee in bankruptcy and thus
he is taken as a beneficiary of the shares.
 Unless the Articles of Association provide
to the contrary he will not cease to be a
Register of the members
 This is a list that contains the record of
the names of all the members of the
company.
 Each and every company is by law
required to keep a register of all its
members that contain the following:
◦ names, address, and
◦ the shares they have taken and if possible the
class of shares taken and
◦

Continuation
◦ the date in which each member became or

ceased to be a member.
◦ See sections 115-116, 451 of the Companies
Act.
 The register is and should be open to all

other members who would wish to see
or inspect it during all working days

Rights of the members in a
company
 Rights to vote,
 Rights to demand a poll,
 Rights to transfer of shares,
 Rights to participate to appoint a director,
auditors, and
 Rights to receive dividend when declared
 E.tc.

Cessation of membership of a
company
 By transfer of shares
 By forfeiture of his shares on nonpayment
of calls due
 By death
 By company selling shares in exercise of
its rights under the Articles of Association
( right to lien)

Cessation cont…
 By recession of contract of membership
on the ground of misrepresentation or
mistake
 By a company redeeming of the
redeemable shares
 By court or any other competent

authority attaching

CAPITAL AND
FINANCING OF A
COMPANY

Capital and Financing of A company
 In modern company law the term capital is used

to cover;
 Share capital-Funds subscribed by members

 Loan capital-funds provided by commercial
finance providers and investors holding
debentures or debenture stocks.
 All funds whether provided by members
creditors or retention of profits plus the assets
in which funds has been invested.

Share: What is it?
 The interests of a share holder in a
company
 The interest is what is owned and gives a
share holder certain rights as defined by
the articles.
 Thus a share is what is used by the
company in determining the rights in the
first place and in the second place the
liabilities of a member in the company

Terminologies applied in this topic
 Nominal authorized or Registered
Capital
 Is the sum mentioned in the capital clause
of Memorandum and articles of
Association of a company.
 It is a maximum amount which the
company raises by issuing shares and on
which the registration fee is paid.

Issued Capital
 This refers to the nominal value of shares

which are offered to the public for
subscription
 This is because the co. in most cases does
not issue all capital at once
 In all circumstance it can not exceed he
authorized capital

Subscribed capital
 This is the part of the issued capital which
has been subscribed or taken by
purchasers of the shares and allotted to
them.
 This may be less than issued capital and
can not exceed registered Capital.

Called up capital
 Is the part of the issued capital which
have been called upon the shares.
 The tendency is that the company does
not require the members to pay full for
their shares.
 Thus the amount required to be paid is
what is termed as the called up capital

Paid up capital
 Is the amount of called up shares capital
which is actually paid to the company by
the members.
 At the time when a member of a
company have failed to pay steps like
forfeiture or surrender of shares can be
done by the company and the party
respectively.

Transfer of shares:
 A member of a company is not wedded
to it.
 As such he /she can just sell or transfer all
her shares and move on freely.
 Take not that this is in Public Companies,
read section 27 and 45, and 74 of the
Companies Act
 In Private company transfer is a bit limited

Continuation
 The instrument of transfer is not
regarded as lawful unless it is signed and
stumped. See section 77 of the Act.
 Both the transferor and the transferee
must sign the transfer deed.
 The transfer there by needs be registered
in the company register of members.

Continuation
 The duty to register the transfer is upon
both the transferor and the same can be
done by the transferee. Section 79
 Upon registration the company shall issue
a certificate forth with. See section 80 of
the company

Forged Transfer
 This is a document of transfer which
bears a forged signature of the transferor.
 The procedure of registering a transfer is
that:
 The company inquires from the transferor
on its validity
 On approval the company proceeds
registering

Continuation
 Where the response to the inquiry notice
is unanswered in a reasonable time then
the company may also register the
transfer.
 Remember the registration can be
procured by either of the two side.
 Despite all these precautions yet a forged
transfer may be registered.

Legal impacts of a forged Transfer
 It’s a nullity, it does not pass title to the
other.
 Recall the rule that no one can give a
better title than what he has.
 Where the company has issued a
certificate and an innocent buyer has
relied on it and accepted the transfer, yet
he does not have title

continuation
 Where the company has been punt into
loss the company can proceed by the
person who procured the registration.
 See section 86 on impersonation and the
criminal suctions attached to it.
 The company however, has to
compensate the innocent person who
was misled by their certificate.

Restrictions on transfer of shares
 Read section 27 on pre-emption clauses
 Directors powers to refuse registration
especially during winding up of the
company.

Categories of shares in a company
 The categorization can lead into four

main classes of shares, these includes;
 Equity shares/ ordinary shares
 Preference shares
 Deferred or founders Shares
 Corporate shares

Equity shares/ ordinary shares
 Members holding them are said to have equity
in the company.
 Ordinary shares have a right to return of capital
and payment of dividend ranking after
preference shares,
 Ordinary shares claim the pool of surplus assets

in the solvent winding up after the return of
capital to all other shareholders.
 Ordinary shares usually carry one vote per
share

Preference shares
 It carries preferential rights in respects of
dividend at a fixed amount or at a fixed
rate.
 It also carries preferential rights in regard
to payment of capital on winding up or
otherwise

Deferred or founders Shares
 Are issued to the founders of the
company as a reward to heir services.
 They get a portion of the profit if the
dividend on ordinary shares exceeds a
certain fixed amount.
 Their rights are determined by the
memorandum or articles.

Corporate shares
 Are the shares created by a company for
issue to its employees.
 They are given to the managing staff and
employees of the company
 The company pays for them to the
employees as fully paid up shares
 The company’s trustee will look after
these shares in the event of an employee
leaving the company

Alteration of the capital clause section 64/61 of the
co Act
 Such powers may only be exercised by
the company in general meeting and that
must be authorized by the articles of
association.
 A company can alter its capital clause in
any of the following manners/ ways:
 a) Increase its share capital by new shares
 b) Consolidate and divide all or any of its
share

Increase of the share capital of the company
 Regarding the increase of the share

capital, the company whenever so wishes
is required to give a notice of the
increase to the registrar within 30 days
after the passing of the resolution
authorizing the increase see section 66(1)
of the Act
 The decree seem silent on this aspect

Debt financing of a corporation
 Debt capital is a common way of financing
business enterprises and for successful
companies,
 Debt capital represents the obligation of a
company to repay the loan made by the
debt holder.
 That is making payments of principal sum

and interest on a fixed schedule
Debentures
 The most usual form of borrowing by a
company is by issue of debentures
 The term debenture means; a document
which either creates a debt or
acknowledges it, or;
 an acknowledgment of debt and
obligation or covenant to pay. This
obligation is in most cases accompanied
by charges.
continuation
 Debentures are therefore, a form of
security which may be bought and sold in
such a way as shares.
 In order to give lenders some security
against non payment of their loans a
charge is often made against the assets of
the company.

continuation
 The debenture holders are regarded as

and are the creditors of the company and
not members

CHARGES ON THE ASSETS OF THE
COMPANY
 Whenever a company has power to
borrow, it has also powers to security for
the debt by a charge on all or any of its
properties.
 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.
Fixed charge
 Is a charge which is against a specific, clearly and
well defined property of the company.
 The property under charge is defined 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 cannot transfer the property so
charged before paying the creditor whose
interest is protected under it

Floating charge
◦ It is a charge on the classes of assets of the
company both now and future
◦ That class of assets is one which, in the
ordinary course of business of the company, is
changing from time to time.
◦ 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 business in ordinary way.

Consequences of a Floating Charge
 The company can;
 Deal with the property on which a floating charge is

created, till the charge crystallizes.
 Not withstanding the floating charge, create specific

mortgage of its property having priority over the
floating charge.
 Sell the whole of the undertaking if that is one of its

objects specified in the memorandum, in spite of the
floating charge on undertaking. See Re Foster v Borax
Co. [1901] 1 Ch 326

CRISTALIZATION OF A FLOATING
CHARGE
 When a charge holder takes some steps
to enforce his charge, a floating charge
becomes a fixed charge on the assets
covered by that charge.
 At this time the company can not dispose

off the cared assets without first paying
off the charge holder

When does a floating charge become fixed
 A floating charge will become fixed upon

the following conditions:
◦ Cessation of the business of the company.
◦ Upon the commencement of winding up of
the company.
◦ If a debenture holder, having become entitled
to realize the securities by the reasons of the
fact that the principal money has become
payable (due).

REGISTRATION OF CHARGES
 Every company must keep a register of
charges affecting its assets
 The registrar must contain short
description of the property charged, the
amount of the charge the name of the
person entitled to the charge
 See part iv of the companies Act for
details, especially section 96/97 and 100/
92 of Act & decree)

Duty to register
 It is the duty of the company to register
the charges.
 Read section 100 of the CA
 However the interested person may
register it on his own cost and claim for
compensation from the company
 Read section 102 on the content of the
charge register at the registrars office

Effects of Registration:
 It acts as a notice to the public at large
that the charge holder has an interest in
the charged property.
 Once a certificate of charge is issued by

the registrar, it is conclusive evidence that,
the document creating the charge is
properly registered.

CONSEQUENSES OF NON-
REGISTRATION
 A charge which is compulsory
registerable but which is not registered is
void
 See section 96 of CA
 Omission to register the particulars of

charge as required is punishable with fine.
 See section 101 (2) of the Companies Act

Memorandum of satisfaction
 Under section 104 of the companies act it
is provided that, the registrar may, on
evidence being given to his satisfaction
that the debt for which any registered
charge was given has been paid or
satisfied , may order that a memorandum
of satisfaction be entered on the register,
and shall if required furnish the company
with the copy there of

MANAGEMENT OF A COMPANY
DIRECTORS

Introduction
 A company is not a natural person so it
works through people called Directors.
 These are officers who constitute the
board of directors.
 A company therefore can not work on its
own although it is a person
 Thus it relies much to the natural person

for it to operate.
Question: Who is a director?
 The companies Act defines a Director to
mean,
 "Any person occupying the position of
director by whatever name called."
 Such a definition is not exhaustive, thus
does not provide a clear picture of who
directors are?
 See section 2 of the Act

continuation
 In Abadin Railway Co. v. Black Bros (1854)
stated that;
 Directors are a body to whom is delegated a duty

of managing general affairs of a Co.
 "A corporate body can only act through agents

and it of course the duty of those agents so to
act as best to promote the interest of
corporation whose affairs they are conducting…"


continuation
 In determining whether a person is a director
or not it does not depend on the name but on
the nature of the office has.
 That is the activities he performs and duties and
liabilities that binds such a person in relation to
the company.
 That he must have control, over direction,
conduct, management and superintendent of
the affairs of the Company.

Continuation
 According to Lord Denin, directors are
the directing mind of the company
 His lordship gave a clear position

regarding the directors of the company
as the directing mind of the company
since it is as such not a natural person.

Lord Denins’ position
 “A company may in many ways be likened
to a human body.
 It has a brain and a nerve centre which

controls what it does. It also has hands
which hold the tools and act in
accordance with directions from the
centre.

Continuation
 Some of the people in the company are
mere servants and agents who are
nothing more than the hands to do the
work and cannot be said to represent the
mind or will.
 Others are directors and managers who

represent the directing mind and will of
the company and control what it does.
Continuation
 The state of mind of these managers is
the state of mind of the company and is
treated by the law as such.”
 See Bolton (Engineering) Co Ltd v TJ

Graham & Co Ltd, HL, [1957] 1 QB 159.
At page 172

Minimum number of Directors
 For every company the minimum number of
directors in each and every company must be
two except for One man company.
 The law sets the minimum of two directors it
is advisable however that one of them must be
a natural person.
 See section 3 and 186 of the Company Act.
 See also section 25 of the Business
law(Miscellaneous Amendment )Act

QUALIFICATION OR DIRECTORS
 The provisions of the Act provide for the
qualifications that a director should
posses these qualifications include.
 Age; a director should be of age of
majority i.e. not below 21 years and
should not be of an age above 70 years.
 What did the rule intend to bring in the

aspect of company management?
Continuation
 The rule intends to fill in the lacuna that
was left with the Companies Ordinance.
 It also brings in the aspect of maturity in
decision making as it directs on the
minimum and maximum age limit.
 Of important to note is that the Act does

not prohibit having directors of lower age
than 21 but not than 18.
continuation
 It also allows a life time director in as
much as he was so appointed before the
Act came into force.
 Directors must also be of sound mind

 Directors must not be disqualified by any
other laws

Continuation
 Director must not be disqualified by any
other order of the court as per section
196 Companies' Act
 Directors must have share qualifications,
where the articles of Association of the
company so direct.
 See, section 142 (1) of Companies Act.

Types of Directors
 There are four types of directors in a
company:
◦ Shadow Director
◦ Alternate Directors
◦ De Facto Directors
◦ Executive Directors

Shadow Directors
 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).
 He is a person who is not a director but
on his influence to the directors, they rely
much

Continuation
 And implement his advice and they are
accustomed as such so to act.
 This should be distinguished from a
professional adviser who does his advice
openly and when required.
 A shadow director hides behind the
directors and does not claim to be a
director
 In Re Hydrodam (Corby) Ltd, [1994] 2
BCLC 180
Cont..
 Shadow directors are bound by the terms
of the companies Act in the same way as
it applies to the directors of the company
 Read:
 Bourne N. (1994) Business Law and
Practice, Cavendish Publishing Ltd
London, UK pp 113

Continuation
 The court stated that in order for
someone to be a shadow Director four
things must be shown:
◦ (a) there should be those who are the
proper or de factor Directors of the company
◦ (b) that the person directed those Directors
on how to act in relation to the company,
◦ (c) that those Directors acted in accordance
with those directions and

continuation
◦ (d) that they were accustomed so to act.
 As such this class of directors differ from
a de facto director in the sense that they
do not pose and claim to be as directors
 After they have given the advice they do
not go father to show as if they are
directors

Alternate Directors
 The articles of association may provide
for the appointment of alternate
Directors.
 They are persons, who are nominated by
Directors to act in their absence.

Cont….
 They can only be appointed with the
agreement of the majority of the
Directors and he is entitled generally to
perform all the functions of his appointer
in his absence.

De Facto Directors
 Is a person who has not been validly
appointed or who is disqualified but whom,
in effect, occupies the position of, and acts as
if he was a director. He 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

Continuation
 One need to undertake the functions that
are to be carried out by a director for
him to be referred as a de facto director.
 In Re Richborough Furniture Ltd,
Lloyd J. [1996] 1BCLC 507. stated his
opinion, also in Secretary of State for
Trade and Industry v. Tjolle [1998]1BCLC

Test for de facto Director
 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.

Continuation
 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.
 Read the following cases on De-Facto
Director and Shadow directors: NSW v
Drysdale [1978] 22 ALR 161, Mistnorm
P/L v Yasseen [1996] 14 ACLC 1387

Executive Directors
 Are directors concerned with the actual
management of the company,
 They are involved in the day to day
management of the Company.
 They are engaged by the company to
work on full time basis.
 Generally, he must have a contract with
the company that gives him the position
as such
Cont…
 He have extensive management powers
delegated to him by the articles and may,
in practice, have specific titles within the
company, for example, Managing Director
 Read:
◦ Bourne N. (1994) Business Law and
Practice, Cavendish Publishing Ltd London,
UK pp 113
◦ Dine Janet (5th Ed) (2005) Company Law,
Palgrave Macmillan Hampshire UK page 165

A managing director
 Is a director who by virtue of :
◦ an agreement with the company (employment

contract say for example) or
◦ of a resolution passed in the general meeting

or by its board of directors or
◦ by virtue of its memorandum or articles of

association,

Continuation
 Is entrusted with substantial powers of
management, which would not be otherwise
exercisable by him. It thus include a director
occupying the position of the managing director
regardless of the name called.

POSITION OF A DIRECTOR
 Question: What is the relationship
between the directors and the company?
 Directors as Agents or trustees of the
Company;
◦ a Company being an artificial person acts
through directors who are elected
representatives of shareholders.
◦ They are in eyes of law agents of a Company
for which they act on its behalf.

Continuation
◦ The law of Agency regulates their relationship.
 They are more than agents because they
have some independent powers.
 They are not bound to consult the
shareholders in most matters and the
articles of Association gave them power
to exercise such things without
necessarily consulting shareholders

Continuation:
 It is even much true currently where the
directors are not bound by any thing in
the Memorandum of association of the
company
◦ Eastern Railway Co. v Itein it was stated
that; (1872) LR & CH APP 149
◦ are mere trustees or agents of the Co; that
the trustees of Cos' money and property and
agent in the transaction they enter on behalf
of Co.
Trusteeship and directors
 They must account for all the Companies'
money and property which they exercise
control on.
 They are trustees of the power entrusted
into them in the sense that they must
exercise them honestly in the interest of
the Company and shareholders and not
on their own interest.

Fiduciary position
 Directors position is that of fiduciary in
nature.
 They stand to work for the benefit of the
other who is a company.
 As such they should not consider their
interest first but that of the company.
 In Re Forest Dean Coal mining Co.,
(1879) 10ChD 450

Continuation
 Directors have been called:
◦ trustees or commercial trustees and
◦ sometimes they have been called managing
partners,
◦ It is immaterial how they are called but the
role they play.
◦ They stand in a fiduciary position towards the
company in respect of their powers and
capital under their control.

DIRECTORS OF A COMPANY
DUTIES OF DIRECTORS

Introduction
 “We should remind ourselves that being a
company director is a wonderful thing for
the person who is a company director.
 But it is a position of great responsibility
which involves running the affairs of a
company for the benefit of other people.
 It is a heavy responsibility we should not
water down”. Godsmith-UK 2006
Hansards
continuation
 Directors duties have been spread out
over numerous statutes and case
decisions making it difficult for directors
to know when they may have breached
their duties to the company.
 The statutory duties of directors replace
those previously decided and set by case
law.

Continuation
 It is important that any director whether
of a big or small company is familiar and
complies with their duties.
 Ignorance is no defense and; the
consequences can be severe both for the
company and personally.
 As a director you must always act in the
best interests of the company.

Duties of Directors
 Duty of care and Skills: section 185
 Duty to act in good faith: section 182
 Duty to disclose interest: section. 209
 Duty in relation to employees:
section 183
 Duty to exercise Powers for proper
purposes: section 184
 Contractual Duty.

Duty of care and Skills:
 There are no minimum skill that a
director is expected by the law to
demonstrate
 They are expected to demonstrate the
reasonable care and skill of any other
director of his knowledge and skill would
have done.
 They are as such allowed to entrust their
duties to any other delegated individuals
Continuation
 Directors remain liable for the final decision.
◦ “ The duty does not prevent a director from
relying on the advice or work of others,
◦ but the final judgment must be his responsibility.
◦ He clearly cannot be expected to do everything
himself.
◦ in certain circumstances directors may be in
breach of duty if they fail to take appropriate
advice – for example, legal advice…” Goldsmith,

Duty to act in good Faith
 Directors have a duty to act bonafide and
in good faith in the interest of the
Company
 It is thus not in the interest of the
company if the act is aimed at benefiting
their own desires or rather the interest
of a third party instead of that of a
company. See an answer at; Keith Abott,
etal (2007) (8th Edition) Business law pg
429

Continuation
 As such the directors must promote the
successes of the Company.
 As a Director one must act in good faith
for the success of the company and
benefit of the shareholders having regard
to the likely consequences of any decision
long term. This will include considering
the interests of:
◦ employees, business relationships with
suppliers,

Continuation
-Customers and others,
 the impact on the community and environment,
 maintaining the reputation of the company for having high
standards of business conduct,
 acting fairly between members of the company and;
 subject to the legal requirements, to consider and act in
the interests of creditors.
 Read: People’s Department Stores Inc vs Wise [2004] 244
DLR (4th) 564

Duty to disclose interest.
See section.
 This is sometimes referred to as a non-
conflict rule, it is imposed duty upon a
director not to place himself in a position
where his duty to the company and his
personal interests conflicts.
◦ Avoidance of personal Profits:
◦ Disclosure of interests

Duty in relation to employees
 Directors are required to have regard to
the interest of the employees and the
members as well.
 This duty is enforceable like any other
duties director owe to the company.
 This may feature much during mergers
where caution need to be taken to
reduce loss of jobs by employees

Duty to exercise Powers for
proper purposes
 This is the duty that arises itself from the

roots of the fiduciary position of the
directors to the company. In the case of
Bristol &West Building Society v
Mothew (1998) Ch. 1

Continuation
 Millett L.J.: stated that,
 “A fiduciary is someone who has undertaken to act for
or on behalf of another in a particular matter in
circumstances which give rise to a relationship of trust
and confidence.
 A fiduciary must act in good faith,
◦ must not make profit out of his trust,
◦ he must not place himself in a position where his duty and his
interest conflict,

continuation
◦ he may not act for his own benefit or the benefit of a third
person without the informed consent of the principal.”
 Mills v Mills where Dixon J said:

"Directors of a company are fiduciary
agents, and a power conferred upon them
cannot be exercised in order to obtain
some private advantage or for any
purpose foreign to the power“

How to determine proper purposes
 It must be shown that the substantial
purpose of the directors was not
improper nor in breach of their duties as
directors.
 Honest or altruistic behaviour does not
prevent a finding of improper conduct.
Whether acts were performed for the
benefit of the company is objectively
determined

Continuation
 The courts must determine whether, but
for the improper or collateral purpose,
the directors' powers would not have
been exercised

Examples of improper conducts
 Exercising the Board's power to issue
shares with the substantial motive of
defeating the voting power of existing
shareholders by creating a new majority
 Failing to give proper full information in a
notice of a general meeting;
 Using company funds to seek their re-
election to the Board of directors;

Continuation
 Read the case of Permanent Building
Society v Wheeler [1994] 12 ACLC 674
 See section 184 of the Companies Act

Contractual Duty.
 In addition to the above duties, a director

should remember his/her contractual
duties under employment contract.
 Also beware of your rights and
responsibilities as both an employee and a
director

Liabilities of a director
 Liability of directors may either be
criminal or civil in nature depending on
the wrong or fault on the side of the
directors
 They may also be jointly or severally held
liable depending on the nature of the
wrong/offence committed

Criminal liabilities of the directors:
 Section 51 for several liability to any

officer of the company who issues an
offer statement with miss-statement,
 Section 70(3) several liability to directors
for issuing a certificate of solvency
without a reasonable ground to his
opinion,
 Liability for Corrupt activities see

Continuation
 Section 100(3) which holds the directors
and the company jointly liable for a
default in registering a charge or
debentures created under the assets of
the company.
 Section 383 and 384 on fraudulent trading
and Wrongful trading

Fraudulent trading
 The Companies Act imposes liability on
directors only for insolvent trading.
 As such the liquidators have a right ahead
of creditors to recover unpayable debts
from a director's breach of duty, this is
done by holding the directors personally
liable for the contribution in an attempt
to mend the debt

continuation
 One can bring an action basing on
grounds that:
◦ The person was a director at the time when
the Co incurs a debt;
◦ The Co is insolvent at the time, or becomes
insolvent by incurring the debt.....;
◦ At that time there are reasonable grounds for
suspecting that the Co is insolvent or would
become so insolvent;

continuation
◦ the director was aware at that time there are
grounds for suspecting the Co would become
insolvent;
◦ “a reasonable person in a like position” in a
Co’s circumstances would be so aware
The Directors shall be deemed to have
committed the offence if the following
grounds shall be proved:

Continuation
 He failed to prevent the company from
incurring the debt at a particular time; and
 At that time a person was a director of
the Co; and
 The company is insolvent at that time or
becomes insolvent;……..
 The persons’ failure to prevent the debt
was dishonest.

Possible defenses
 That the directors took reasonable
steps to prevent the incurring of the
debt.
 In determining whether a person took
reasonable steps regard shall be had to;
◦ Steps taken by a person to appoint an
administrator to the Company
◦ When the action was taken
◦ Results of the action.

Continuation
 That the director did not form part of
the decision of the company due to illness
possibly
 Defense based on reliance on another
person providing adequate information
about the solvency of the Company e.g
auditors etc

Civil Liability
 Whether personal liability for corporate
wrongs resulting in for example, death
may be imposed on directors or other
officers or controllers of the company
depends in each case on the nature of the
tort or wrong complained of.
 There is clear evidence of a reluctance to
impose personal liability on such persons
merely because they hold a position of
influence in the corporation.

Continuation
 Liability will only be imposed where a
director or controller has:
◦ authorized, Cape PLC v Lube
◦ directed or
◦ procured the commission of the tort (in
which case the corporation may be regarded
as their agent in the commission of the
wrong) or
◦ where they owed an independent duty of
care to the victim.
Continuation
 Liability may also be found where the
individual has breached any statutory
duties placed on holders of the office
which they occupy.
 See, Consultation Paper on Corporate
Killing, (2003) Ireland Law reform
Commission page 79
 See, for example, Fairline Shipping Co v
Adamson [1975] 1 QB 180.
COMPANY MANAGAEMENT
MEETINGS OF THE
COMPANY

Introduction
 A company is an association of several
persons.
 Decisions are made according to the view
of the majority.
 These dicissions take place at the various
meetings, which take place between
members and between the directors

Types of meetings in a company
 Generally, meetings in a company are of
the following types:
◦ Class meetings
◦ Meetings of members
◦ Meeting of the Board of directors
◦ Other meetings
 Meetings of the creditors

Class Meetings
 Are meeting 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 meeting, these members discuss
the pros and cons of the proposal and
vote accordingly.
continuation
 (See provisions on variations of
shareholder’s rights s. 73 of Companies
Act.
 Class meetings are held to pass resolution
which will bind only members of the class
concerned, and only members of that
class can attend and vote.
 Procedures for calling are the same as
AGM unless otherwise stated in Articles
of Association
Meetings of the Board of Directors:
◦ Meeting of the Board of Directors as and
when the Board so decides
◦ Meeting of a Committee of the Board
depending on the number of comettee that
may be established in a company

Meeting of creditors:
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 are called for
purposes of 261 & 262, a co. may enter
into:
◦ arrangements with creditors with the
sanction of the Court for reconstruction or
◦ any arrangement with its creditors.

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

Annual general meeting see section
133
 This is kind of meeting required to be
held by every company in each year.
 The company may however hold its 1st
AGM within 18 months after the date of
its incorporation and, no more that 15
months must elapse between two AGM.

Continuation
 The notice calling the meeting must state
the time, date and place of the meeting
must be mentioned in the notice.
 It 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.

Continuation
 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.
 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
Legal effects of not conducting the
Annual General Meeting
 In case of default in holding an annual
general meeting, the consequences are
provided under section 133(4) & (7).

Usually Business of an AGM
 Directors lay by the Co. annual accounts
and reports for the most recent
financial period.
 Auditors term of office ends at AGM, so
they must be re-appointed or new
auditors must be appointed.
 Declaration of dividends to be paid to the
shareholders
 Re-appointment of of new directors to
replace the retiring ones.
continuation
 A notice of not less than 21 days is
required 64 the AGM as per s. 135 of Co.
Act 2002.

EGM section 134 for Co. Act 2002
 Extraordinary general meeting is any
meeting which is not AGM. Such meeting
are called by board of directors for some
reasons

continuation
 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.

Who can call for EGM
 S. 134 (2) provides that the directors
must call an EGM if requisitioned by holds
of 10% of paid up capital of the co.
 Also the provision of section 137 of Act
the court can, on its own motion or on
application by any member who is entitled
to vote in any type of meeting in the Co;
order the holding of any type of such
meetings to be conducted (whether AGM
or EGM).
Convening meetings:
 In convening the meeting the following
must be taken in account.
 Notice of the meeting to be issued not
less than 21 days.
◦ Authority to call the meeting, that is the
meeting should be convened by required
authority that is directors.
◦ Thus, if a person without authority issued a
notice of meeting this void.

Conditions of a valid meeting:
◦ Must be properly convened
◦ Parties calling the meeting must be properly
authorised to do so
◦ There must be a proper and an adequate
notice
◦ The meeting must be legally constituted (i.e.
Chairperson & quorum)
◦ Business at the meeting must be validly
conducted in accordance with the regulations
governing the meeting.

Voting rights of the members of a
company
 The member of a company has a right to
vote for any motion posed in a meeting.
 The voting right is mainly exercised by
way of shares.
 The more number of shares one has the
more the voting rights a person has.
 However, voting may also be done by way
of show of hands.

Proxy s. 138 Co. Act 2002:
 A member may appoint another person
to attend and vote at the meeting on his
behalf.
 A member may appoint different proxies for the different shares
he holds in the Co.
 Also he can appoint different proxies in the sense that if one fails
then the other may do so.
◦ Is this the same to Company representative in meetings see
section 141 of the Companies Act

Under what conditions does a
proxy vote
 Conditions:
 Company be a Company having share
capital
 Not to appoint two proxies to attend or
one occasion.
 Proxy not to work/vote except on poll.

continuation
 However, a poll is allowed if a prescribed
no of members demand a poll as stated in
the MEMAT section 139(1)(b).
 A Co. cannot refuse a demand for a poll
made by:
◦ At least 5 members having the right to vote
◦ Any members representing one tenth or
more of the total voting rights

Revocation of a proxy
 A proxy can be revoked by a member at
any time and is automatically revoked by
death or insolvency of a member.
 A member may revoke his proxy by
himself before the proxy has voted, once
a proxy has exercised the right to vote, a
member can not retract his vote

Quorum:
 Means the minimum no of persons who
must be present for the meeting to be
valid.
 A meeting with invalid quorum is void
same as the decision there too.
 The articles of Association of a Co. shall
provide for a quorum without which a
meeting shall not constitute a quorum.
See section 136 of the companies Act
MAJORITY RULE IN
COMPANY LAW &
MINORITY
PROTECTION

Meaning of Majority Rule
 Majority rule is a principle that derives
itself from the fact that only the majority
of the votes in the company can
determine the fate of the company.
 That is; as long as the majority has passed
the resolution then it is immaterial that
few members of the company did not
vote for it

Continuation
 The court will not therefore intervene
the resolution passed by the majority
since by agreeing to be a member in such
a company, the shareholders agreed to
submit to the will of majority of the
members.
 Therefore the decision of the majority is
the decision of the company

CONTINUATION
 Majority rule has its root in the famous
case of Foss v Harbottle
 In this case the court ruled out as
follows:
◦ The wrong done to the company was one
which could be ratified by the majority of
members.
◦ The company was the proper plaintiff for
wrongs done to the company, and the
company can act only through its majority
shareholders. 8/31/2016 JULIUS COSMAS 253
Continuation
◦ The majority of members should be left to
decide whether to commence proceedings
against the directors.
Therefore, the court will not interfere with the
company as long as all its decisions are
covered under the articles and memorandum
of association of a company.

Continuation
In an Indian case Rajahmundry Electric
Supply Co v Nageshwara Rao the court
had the following to say:
◦ The court will not in general, intervene at
the instance of shareholders in matters of
internal administration, and will not interfere
with management of the company by its
directors so long as they are acting within the
powers conferred on them under the articles
of association.

Importance's of the rule
 That a company is a separate legal person
different from its members.
 The wrong done to the company should
therefore be pursued by the company
itself and no one else (Say its
shareholders).
 It also helps to limit the possibility of
multiplicity of suit

Minority shareholders Protection
 Minority shareholders refer to the
members of the company who hold less
than fifty percent of the shares in a
company in an ordinary resolution.
 This means therefore that these members
in a company may not determine the fate
of the company but the majority who can
ordinarily pass a resolution in their favour

Continuation
 With the growing trend of private
companies where the possibility of a lot
of shares being concentrated into the
hands of a single shareholder the rule that
the majority shall determine the fate of
the company may be misused to the
detriments of the minority.
 Thus the law needs to protect them
against this possible abuse by the majority

Minority protection in Tanzania.
 Minority shareholders are protected
through s. 233 – 234.
 Minority shareholders have the right to
institute derivative action on behalf of the
company if the affairs of the company are
being conducted in a manner which is
unfairly prejudicial to the interests of the
members in general or the minority in
particular
Instance of unfair prejudice
 Where the act complained of is ultra
vires or illegal;
 Where a shareholder's personal rights are
infringed;
 Where the act complained of requires
more than an ordinary resolution (e.g. a
special resolution)
 Where there is 'fraud on the minority'.

Continuation
 Winding up on the 'just and equitable'
ground.
 CA 2002, under section 233 under
Chapter ten of the Act - the statutory
remedy for 'unfairly prejudicial conduct'.
 Rules of conducting a meeting

WINDING UP OF
COMMPANIES
INTRODUCTION

Meaning of the term
 The term mean a process where by all
the assets of the company are realized
and used to pay off the liabilities of the
members
 It is a process that indicate the legal
procedures through which the company is
being brought to an end.

Modes of Winding up
 There are two modes of winding up of
the company see section 267 of the Act.
 The compulsory / court winding up
 Voluntary winding up
 The second mode of winding up is
comprised of two approaches that are:
 The members winding up and
 Creditors Winding up

Compulsory Winding up
 This is the winding up that takes place by
the order of the court to wind up has
been issued.
 A petition has to be filled to the High
Court as it is the only court that has
jurisdiction see section 275
 The court will only allow the petition
upon prove of the following grounds:
section 279
Grounds for winding up by the
court
 Where the co has passed a resolution to
have it wound up by the court.
 Where the co. does not commence
business within one year of its
incorporation or where it suspends
business for the whole year
 Where the number of its members fall
below two. See section 26
 Where the co. fails to pay its debts s 280

continuation
 Where the court is of the opinion that it
is just and equitable to wind up the
company.
 This ground is justified by the following
factors :
 -Where the whole objects of the
company was fraudulent. See Re Thomas
Edward Brinsmead & Sons [1897] 1 Ch.
406
continuation
 Where the substratum(foundation) of the
company is gone. E.g the co objects can
no longer be attained
 Where there has been mismanagement of

and oppression of minority by the
majority. See Re Diamond Fuel Co
(Winding up) (1879-80) LR 13 Ch.D 400

continuation
 Where there is a honest difference of
directors and the other directors
 Where there was a deadlock in the
management of the public company.
 If foreign co-whr winding up proceedings
have been commenced in the country of
incorporation

Who has the right to petition for he
winding up?
 The company
 Any Creditor of the company
 Any contributory: This means any person
liable to contribute to the assets of the
company in the event of its being wound
up and includes holders of its fully paid up
shares.
 However, a contributory shall not be
entitled to present a winding up petition
unless 8/31/2016 JULIUS COSMAS 270
Contributory powers to petition
 -Either the number of members of the
company fall below two
 -The shares in respect of which he is a
contributory or some of them either
were originally allotted to him and
registered in his name for at least six
months during 18 months before the
commencement of the winding up.

Powers of the court:
 The court may do any of the following in
hearing the petition: see section 282
 Dismiss with or without cost
 Adjourn the hearing conditionally
 Make an interim order that it thinks fit
 Make an order winding up the company

Commencement of Winding up
 The commencement of winding up by the
court section 286
 Is it the date for the passing of the
resolution?
 Is it the date for the petitioning of the
resolution?
 Is it the date when the court makes an
order?
 Why should one bother?
Consequences of winding up order
 The copy of winding up order shall be
forwarded to the registrar section287
 The register shall make a minute thereof
relating to the company
 The order shall act as a notice to
discharge all officers of the company and
employees of the company except where
the servant were under a fixed term and
it has not yet expired.
continuation
 As such the order shall act as a wrongful
termination of the contract.
 Read:
 Midland Countries Bank District v
Attwood (1905) 1Ch 357.
 The case states clearly that:
 Where a company has been wound up, no
suit or other legal proceedings shall be
commenced against the company except
by the leave of the court.
continuation
 An order for winding up order shall
operate in favor of all the creditors and
all the contributories of the company as
if it had been made on the joint petition
of the creditors and the contributories.

Liquidators
 For the purposes of conducting
proceedings of winding up of the
company
 The court may appoint a liquidator see
section 294
 This is a person who shall deal with the
disposing off and paying the liabilities of
the company out of the existing assets of
the company
Powers of the Liquidator
 The liquidator have the following powers:
section 301
 -To bring and defend any action on behalf
of the company
 To carry on any business of the company
so far as it is beneficial to the company
 To pay (any class) the creditors in full
 To make compromise or arrangements
with creditors or persons claiming to be
creditors and all other claims where by
Preference in paying debts section
367 of Co. Act
 In a winding up, the company’s
preferential debts will be paid in priority
to all other debts
The following shall be considered
preferential
i. All government taxes, local rates and
customs, and exercise duties
ii. All govt rents not more than one year
in arrears
iii. All wages
Voluntary Winding up
 This is the winding up processes that
don’t have any intervention by the court
of law.
 When the winding up is over then
relevant documents are filed to the court
for obtaining the order of dissolution.
 This may be done by the members or by
the creditors; see the provisions of
section 333 of the companies Act.
Grounds for voluntary winding up
 Expiry of the fixed period in the articles
of association of the company
 Where the company resolves by special
resolutions that it can not continue
business and its advisable to wind up.
 Where the company has passed a
resolution that it has to be wound up
voluntarily

Members voluntary winding up
 This is the winding up process done by the
members of the company.
 Here the members have to pass a special
resolution that allows a company to be
wound up.
 The resolution need be advertised in the
gazzete and news paper in not less than 14
days see section 334
 In the meeting the directors are expected to
issue a declaration of solvency. See section
338 of the Act

continuation
 This declaration indicates the financial
position of the company ability to pay its
debts
 The statement need be given in a period
of thirty days from the day of the
resolution as it need be registered to the
registrar of companies
 Also it has to indicate the assets and
liabilities of the company as such.
continuation
 As such this requirements attaches itself
into a heavy penalty where the directors
will fail to act with due diligence in issuing
the declaration
 any director of the company who will
unreasonably issue such a declaration
without having a reasonable grounds of
his opinion is to be fined and imprisoned.

Creditors winding up
 This is a form of voluntary winding up
 It takes place where the directors after
the general meeting has passed the
resolution to wind up voluntarily failed to
issue a declaration of solvency.
 See section 338 (4) of the companies Act

Procedures for creditors Voluntary
winding up
 Section 348 provides for the procedures
to have the meetings of the creditors a
next day immediate after the day of the
resolution to wind up the company
voluntarily
 The notice of the meeting need be issued
in the gazzet
 In the meeting the director shall declare
or give a statement of the position of the
company affairs
continuation
 In this meeting any resolution passed is as
equivalent to the resolution passed on
the day when the voluntary winding up
was passed.
 The creditors and the company have a
right to appoint the liquidator
 Where the creditors have appointed one
then the company shall not appoint any
more see section 349
Commencement of the Voluntary
Winding up
 The winding up in voluntary approach
commences at the time when the
resolution has been passed by the
members in the company see the
provision of section 286

Effects of Voluntary Winding up
 Company ceases to carry on its business
except so far as may be required for the
beneficial winding up thereof
 The board powers ceases on
appointment of a liquidator
 It does not necessarily operates as a
termination of the employment or
discharge of their employment

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LAW 5112

Corporate Law and Governance

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 See also the definition under the relevant

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LEGALITY Company is an artificial legal Partnership is not a legal

REGISTRATION Company is created by For a partnership firm

NUMBER OF MEMBERS Private Limited Partnership firm shall have at

DISTINCT ENTITY A company is an entity distinct from The property of a firm

DISSOLUTION A single member cannot wind A partnership may be

 It will, suffice to say, that if three persons

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 The screen separating the company from

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 But if the court feels that such veil has to been

 Holding and subsidiary companies- A

 Prevention of fraud or Improper conduct- The

 Determination of the character of the company- Enemy

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 Private companies  Public companies

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 Exempted from issuing a  Free Transfer of shares

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 A Company Limited by guarantee, A company

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 Section 465/6 allows a statutory company

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 That other company holds more than half

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 These companies are owned by the

 They come into operation only when,

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 This means companies incorporated in a

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 A person, who conceives the company

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 Make arrangements for the preparation

 Circulation of prospectus and placement

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 There are three main duties that a

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 He must avoid undue influence and fraudulent

 He must not give the benefit of any negotiations

 Example; he can not sell the property to the