Company Law in Uganda PDF

COMPANY LAW IN UGANDA
Tonny Okwenye
1 okwenye@lawyer.com
Quotes
“Company law is not static, and if consolidation were
to wait until all the measures in the pipeline at the
time were enacted it would be delayed almost
indefinitely.”- Lord Lucas, 1985.
“The most enlightened judicial policy is to let people

manage their own business in their own way.’’ Oliver
Wendell Holmes, 1911.
Contents
— General Introduction
— Definition of a company
— Characteristics of a company
— Differences between companies and other legal
entities
— Classifications of companies
— Formation of a company
— Memorandum of association
— Articles of association
…contents
— Company contracts
— Members
— Meetings and resolutions
GENERAL INTRODUCTION
• Company Law in Uganda is crafted from English
Common Law, the Doctrines of Equity and the
Indian Companies Act.
• Company law in Uganda is comprised in principal
and subsidiary legislation as well as decided cases.
• The Companies Act, Cap 110, Laws of Uganda was
amended by the Companies Act No.1 of 2012 which
commenced on 1st July 2013 under the Companies
Act, 2012 (Commencement) Instrument, 2013.
Incorporation
• The Companies Act defines a private and a public
company under sections 5 and 6 respectively.
• The Companies Act provides for the formation of
company namely: the reservation of name and statutory
forms under section 36 and 17 respectively.
• The format of the memorandum and articles of
association are provided for under sections 7 to 9 and 11
to 17 respectively.
• Section 19 provides for the registration, memorandum
and articles of association while section 21 states the
effect of registration of the articles and memorandum of
association.
Regulation
— The Act defines a member under section 47
— A regulatory framework for private and public
companies as regards the admission of members.
— Formation of company contracts is provided for
under section 50
— Sections 132-136 provide for the filing of annual
returns, while sections 137-142 provide for the
company meetings and proceedings.
— The company is also required to keep company
accounts, audit, inspection and also provide
remedies to the minority members
Winding up
— Section 268 provides that the company may by special
resolution resolve to be wound up voluntarily
— There must be notice of resolution for voluntary
winding up in the Gazette and newspaper of wide
circulation in the official language within 14 days
according to section 269
— Section 270 provides for the effect of voluntary winding
up, i.e., it ceases to carry on the business
— A company can also be wound up by court and the
official receiver and the liquidator all have functions
and duties in relation to the winding up
Schedule to the Companies Act
— The Act has 7 schedules
— The first schedule provides for the currency point
which is equivalent to twenty thousand shillings.
— The second schedule states the form for the
registration of a company it includes: tables A, B, C,
D, E, F.
— The third schedule stipulates the content and form
of annual return of a company having a share
capital, certificates and other documents
accompanying annual return documents
accompanying annual return.
…schedule to the Companies Act
— The forth schedule deals with accounts while the fifth
schedule is concerned with the matters to be expressly
stated in auditor’s reports, the profit and loss account.
— The sixth schedule encapsulates the form of statement
to be filed and published by insurance companies and
deposit, provident or benefit societies.
— The seventh schedule is concerned with the provisions
referred to in section 278 of the Companies Act.
DEFINITION OF A COMPANY
— A company is a group of persons carrying on
business with the view of making profits and
contributing to the betterment of society
(General definition).
— Section 2, Companies Act defines a company as a
company formed and registered under the Act,
or an existing company or a re-registered
company under the Act (Legal definition).
— The persons who contribute the money /capital
of the company are its members.
— Their contribution is the capital of the company.
…definition of a company
— A company is created according to the Companies
Act, and is born on the day of its incorporation
— Upon incorporation, it acquires a new identity
separate from its founders, promoters, shareholders
and directors.
— It can sue and be sued in its own name.
— Admission of new members is in accordance with
the companies’ articles and memorandum of
association
— Death or insanity of a member doesn’t affect the
continued existence of the company
CHARACTERISTICS OF A COMPANY
Upon incorporation, the company has the following
characteristics:
— A separate legal personality
— Perpetual succession
— Separate property
— Capacity to sue and be sued in its own name
— Common seal
— No racial or tribal attributes
Separate legal entity
— A company is at law separate and distinct from all its
members
Case: Salomon Vs Salomon and Co. Ltd (1897)
Salomon formed a limited company with his wife,
daughter and 4 sons each having a share. The members
subscribed to 7 shares in cash thus Salomon held
20,006 of the 20,007 shares. The company faced
difficulties after incorporation and was wound up.
Held - Lord Macnaghten - “The company is at law a
different person all together from the subscribers to
the memorandum”. The company in question had been
validly formed since the act merely required 7 members
holding at least one share each.
…separate legal entity
Lord Herschell - The company is ex-hypothesis a distinct
legal persona.
— The company legal personality is an official one which is
distinct from the natural personality.
— Possession of legal personality means that a company is
capable of enjoying rights and being subject to duties
separate from its members
Case: John Lubega Matovu Vs Mukwano Investment
Limited (2012)
— The applicant had sued the respondent company for
recovery of UGX 139,343, 041/= upon which a consent
judgment was entered .
…separate legal entity
— Applicant later discovered that the directors of the
respondent company had abandoned, altered or
changed the name of the respondent company. He
brought the suit for an order to lift the corporate
veil.
Held- H Obura, J, concept of corporate personality is
what distinguishes a company from other forms of
business associations. It means that a company has
a separate legal personality from its members and is
capable of enjoying rights and being subject to
duties separate from its members.
Employment by the company
— A share holder can also be an employee of the company
under the principle of separation.
Case: Lee Vs Lee’s Air Farming Limited (1960).
Facts: Lee was the controlling shareholder and director
in the respondent company. Lee was killed while
piloting a company aircraft in the course of aerial top
dressing. His wife claimed compensation under the
Worker’s Compensation Act.
Issue: Whether the deceased was a worker within the
meaning of the Worker’s Compensation Act?
Held - Lord Morris - The deceased was in a contractual
relationship with the company, the relationship was
…employment by the company
based on a consensus between the deceased, one legal person,
and the company is another legal entity.
— The deceased was a worker of the company and was entitled
to the compensation, the mere fact that someone is a director
of a company does not preclude or prevent him from
entering into a contract of service with the company.
Case: Fredrick Sentamu Vs UCB & Anor (1983)
— The Plaintiff negotiated a loan on the Company’s behalf from
the 2nd Defendant’s branch. The company defaulted and the
Plaintiff was arrested.
Held: A limited liability company is a separate legal entity from
its directors, shareholders and other members. Individual
members can not be sued by the company’s creditors.
Perpetual succession
— Means that a company continues to exist despite a change in
membership.
— Can only be terminated through the legal process of winding up
— Death, insolvency or insanity of the members doesn’t affect the
company’s legal existence.
Case: Micheal Oscar Kayemba Vs James Mulwana and 3 ors (1999)
Facts: The sole owner of the shares in the company died.
Held –Bossa J; On the authority of Salomon Vs Salomon, where a
company had only one paid up shareholder, it still remains in law a
corporation with independent existence. The company continues
to exist despite the death of its shareholder.
Separate Property
— Upon incorporation, a company can own
property in its own name
— A member of the company cannot own
company property and has no interest in the
company property.
Case: Macaura Vs Northern Assurance Co. (1925)
— The Appellant, a shareholder in the company,
took out fire insurance for timber that belonged
to the company. The timber was destroyed by a
fire, he asked the insurance company to
indemnify him for the loss.
…separate property
— Held-Baxter J, he could not be indemnified because the
assets did not belong to him, but the company.
— No shareholder has any right to any item or property
owned by the company because he has no legal or
equitable interest therein.
Case: International Limited Vs Mohammed Halid El.
Fatih (1994)
— Odoki JSC, held that the respondent couldn’t claim the
company’s property by an action in his own name.
Suits by or against the company
— A company is a legal person and can sue or be sued
in its own name.
— Suits against the company must be brought in the
company’s registered name.
— A suit by or against an incorrect company name is a
nullity.
Case: Quick Cargo Handling Services Limited Vs Iron
Steel Wares and 2 Ors (2003)
Facts: The plaintiff sued “Property Management
Services Ltd, instead of Properties Management
Limited
…suits by or against the company
Held - Kibuuka Musoke J: In Company law, upon
incorporation, a company is known only by its name
on the register of companies. The suit against a non
existing party was improper before court.
— The person representing the company must be
authorized by a resolution or powers of attorney,
otherwise his actions may not bind the company.
— Lack of the board resolution however doesn't
invalidate the proceedings.
Case: Construction Engineers and Building Limited
Vs New Vision and 3 ors (1994)
…suits by or against the company
— Where the defendants raised a preliminary point
that the suit was improper as the plaintiff had no
board resolution authorizing the institution of the
suit.
Held- Okullo J; A board resolution is merely evidence
that the company has authority to institute a suit
but lack of a board resolution does not necessarily
mean that the company directors have no authority
to institute the suit.
— An advocate who commences proceedings without
a resolution or acts on behalf of a non existing
company may be liable in costs personally.
… suits by or against the company
Case: British India General Insurance Co. Vs Dolotral Solank,
(1997)
— Facts: Counsel acted for a non existing company
Held: A company can only authorize the commencement of
legal proceedings in its name by way of a resolution. Since
there was no resolution yet counsel purportedly acted on the
company’s behalf, Counsel must be personally liable for costs.
— When judgment is entered against a company, the company’s
property is liable in execution of the decree.
— The property of the shareholders and individual directors can
only be attached when the corporate veil has been lifted
Common seal
— Every company must have a company seal i.e. an embossment
with the company name and postal address.
— Every document used by the company must have the
company seal and be signed by at least 2 directors.
— Documents requiring authentication by a company signed by
the director or secretary do not need to be sealed.
Case: Kintu Vs Kyotera Growers (1975)
— Court held that the power to possess, use and change a seal is
incidental to a corporation. In the absence of any special and
legally binding regulations to the contrary, the seal affixed to
the corporation deed bears a special emblem to indicate that
it’s the corporate seal.
Racial attributes
— A company has attributes similar to a human being but it
cant have racial attributes. It has no soul or feelings
Case: Katate Vs Nyakatura
Facts: The respondent sued the petitioner for
misappropriation of money which belonged to the Ankole
Africa society in which they were all shareholders. The
Complaint was made to the native court which made an
adverse decision against the petitioner.
Issue: Whether the company whose shareholders were all
Africans can be said to be an African within the meaning of
the native court ordinance.
Held: A company is a distinct legal entity that is abstract in
nature and incapable of having racial attributes. The suit
was in a wrong court, a company cant be sued in the native
court simply because it has native members
Transfer of shares
— Shares in a public company can easily be
transferred. Shares in a private company can be
transferred subject to the articles of association.
— A company can separate ownership and control
from shareholders, subscribers don’t have to be
involved in running of the business for example
banks.
— Concept of corporate personality protects
shareholders under the principle of limited
liability
Differences between companies and
other legal entities
— A company differs from other entities like
partnerships, associations, co-operative societies,
non-governmental organisations, unregistered
associations in many respects.
Company and partnership
— It is created upon registration — Is formed by agreement of the
in accordance with the partners of the partners.
Companies Act Registration is optional
— The membership is restricted
— For a private company, it is
one which limits the number to 2 or more persons and not
of its members to 100 not more than 20 for trade and
including the company's business. However
former and current employees professional partnerships
(S.5). Section 6 provides that a
company that is not a private have a maximum of 50
company under section under members.
section 5 is a public company. — The partnership has no
— It attains a separate legal separate legal existence, it’s
existence upon incorporation
the same as its partners.
— The property acquired
belongs to the company . — The property belongs to the
partners and not the
30 okwenye@lawyer.com partnership.
…company and partnership
— A member or director — The partner cannot
may enter into a contract enter into a contract
with the company with the firm
— The company debts are — The partners are
the company’s responsible for the
responsibility, and not partnership debts
for the shareholders
— The partner is an agent
— The shareholder is not an of the firm
agent of the company
— Liability in partnership is
— The liability of members unlimited except for the
is limited either by shares limited liability
or guarantee except for partnerships
31
unlimited companies
okwenye@lawyer.com
… company and partnership
— The shares in a public — The shares of the partnership
company are freely can only be transferred with
transferable the partners’ consent.
— Companies have perpetual
— Death, insanity, insolvency of
succession
a partner terminates the
partnership unless otherwise
agreed
— The company is managed
— The partnership is managed by
by a board of directors
elected by the shareholders all partners
— The company is formed — The major document is the
using the memorandum partnership deed or the
and articles of association partnership Act.
…company and a non governmental
organisation (NGO) or an unregistered
association company
— A company is created — It is formed by agreement of
the members. The registration
upon registration in is by the NGO Act as an NGO
accordance with the or community based
Companies’ Act organisation. Registration is
not mandatory for
associations however the
constitution may be registered
with the registrar of
— It attains a separate documents.
legal personality upon — The NGO becomes a separate
incorporation legal entity upon registration.
The association acquires no
separate existence from its
members upon registration.
…company and NGO
— The property belongs — The property belongs to
to the company the registered
association on the other
hand, unregistered
associations cannot own
property
— A member or director — Members of a registered
may enter into a association can enter
contract with the into a contract with the
company. association subject to the
constitution.
Company and co-operatives
Company Cooperatives
— Is created upon — Is created upon
registration in registration under the
accordance with the Cooperative Societies
Companies Act Act
— Membership for private — Membership is unlimited,
companies is 1-100, 1 to there should be at least
infinity for public 30 members
companies
— Acquires a separate legal — It becomes a separate
personality upon legal entity upon
35
incorporation registration
okwenye@lawyer.com
…company and cooperative
society
Company Cooperative Society
— The property belongs — The property belongs to
to the company the registered
cooperative society.
— Members of the
— A member or director registered cooperatives
may enter into a society can enter into a
contract with the contract with the
company association subject to
the bye laws
Conclusion
— A company is an association formed with the purpose
of making profit for its members or for the
community’s benefit.
— It acquires a separate legal existence upon
incorporation
— It has perpetual succession and can sue and be sued in
its name
— Companies are similar to other associations but are also
distinct in a number of ways.
Questions
— What is a company? Outline the contents of the
Companies Act
— Discuss the characteristics of a company
— Compare and contrast a company and other
business associations such as partnerships,
unregistered, associations and cooperatives
— A company is born on the day of its incorporation.
Discuss
CLASSIFICATION OF COMPANIES
Classification of companies is premised upon:
— Incorporation
— Liability of members
— Number of members
— Objectives
— Locality
— Control
Incorporation – statutory
companies
— These are incorporated by a special Act of
Parliament
— They don’t have the memorandum and articles of
association
— The Founding Act provides for the management,
control and financing of the corporation
— The company is a body corporate and can be sued in
its own name: for example, National Water and
Sewage Corporation established under the National
Water and Sewage Corporation Act, Cap 317
…incorporation – registered
companies
— These are formed and registered under the
Companies Act
— They are born on the day of incorporation
— They cease to exist when they are struck off the
register of Companies
— The Companies Act provides for the Registration,
Financing and winding up such companies.
Liability - shares
— Limited by shares
— Members’ liability is limited to nominal value of the
shares they hold according to section 4(2) (a)
Companies Act
— A shareholder who has fully paid up for his shares
has no liability
— A private or public company may be limited by
shares
…liability - guarantee
— Provided for under section 4 (2) (b) Companies Act
— Members of a company limited by guarantee will
contribute to the company assets the sum indicated
in the memorandum in the event of winding up
— This is called the guarantee amount and a member is
only liable to contribute in the event of winding up
Membership - private
— Defined under section 2 in relation to section 5 (1)
Companies Act
— section 5 (1) states that it’s a company by which its
articles restricts the right to transfer its shares and
other securities, its also a company which limits the
number of its members to 100, not including the
company’s former and current employees
— It also prohibits any invitation to the public to
subscribe for any of its shares or debentures`.
— Must have at least one director
— upon incorporation, it must commence business
…membership - public
— Section 6 states that a public company is one which is
not a private company under section 5
— A public company therefore has no limit on its
membership. The minimum is one (s.4(1)).
— The shares in the company are freely transferrable
— Must have at least two directors
— The company may invite members of the public to
subscribe for its shares
Objectives - profit
— Profit Companies
— The main intention of such companies is to make profits
for the benefit of the shareholders
— Profit oriented public and private companies can
engage in any activity found in the memorandum of
association.
— Engaging in an activity outside the memorandum of
association is an ultra vires act as stated in the case of
Ashbury Railway Carriage v Riche.
…objectives - non-profit
companies
— These are set up to benefit the society and the
community
— Directors, officers and members of such companies
don’t own the company or its assets
— The non profit company may engage in revenue
producing activities for the benefit of the company.
However, these activities must be for the sole
purpose of furthering the company’s objectives.
Locality
— Indigenous companies
— These are incorporated in Uganda and are regulated by the
Companies Act
— The business must be operated in accordance with the companies
articles and memorandum of association
— Foreign companies
— These are incorporated outside Uganda but are registered in Uganda
as foreign companies
— They are only required to register their incorporation documents,
they should not follow the incorporation process used by indigenous
companies
…locality
— The foreign company may hold land subject to
the Constitution, Land Act and other laws as if it
were an indigenous company (s.253).
— The registrar must be notified of all alterations in
the foreign companies' documents
— Foreign company accounts have to be filed with
the registrar
— The foreign company may appoint a person to
act as its agent for service of its documents
— A foreign company may be wound up in the
49
same way as an unregistered company.
okwenye@lawyer.com
Control
— Holding companies
— A holding company is one which has control over
another company
— Control is deemed to exist if the company controls
another company’s board of directors
— Where the company holds more than half of the
nominal value of the share capital
— Subsidiary companies
— This is a company in which another company controls
the board of directors
— Or one in which more than 50% of the shares are held
by another company.
Conclusion
— A company is an association formed with the
intention of making profit or using the profits made
for the betterment of society
— Classification of companies is based on
incorporation, liability of members, objectives
Questions
— What do you understand by statutory companies.
— What is the difference between a company limited
by guarantee and a company limited by shares
— How are foreign companies registered in Uganda
— Discuss the relationship between a subsidiary
company and a holding company
CORPORATE PERSONALITY
• A company becomes a legal person, separate from its
members upon incorporation.
• It can do all things, perform all acts except the
enjoyment of human rights which are inherent
• Case: R Vs Arnaud (1846)
• A registering authority refused to register a ship because
some of its owners were foreigners.
• Issue: Whether the company was foreign since some of
its members were foreign.
• Held: The registering company erred when it refused to
register the ship, the ship was owned by the British
Company and not by the members of the company
…corporate personality
• Case: Mukisa Foods Ltd Vs East African Development
(1994)
• The Plaintiff company was registered by Ugandan
citizens of Asians origin and had remained on the
register as a Ugandan company. The Uganda
development corporation took over management of the
company after the expulsion of the Asians.
• Issue: Whether the Plaintiff company was properly taken
over
• Held-Mukanza J; The Plaintiff company couldn’t be taken
over or nationalized by the government. It was a
separate legal entity from the Asian shareholders whose
shares could be taken over by government
— Case: Salomon Vs Salomon
— Lord Macnaghten -The company is at law a different person
altogether from the subscribers to the memorandum
— Lord Herschell- stated that the company is ex-hypothesis a
distinct legal persona
— The company is independent of the shareholders and acts
through its directors
— A shareholder has no right to the company property
— Case: Macaura Vs Northern Assurance Co. Ltd (1925)
— Lord Buckermaster stated inter alia that the position of a
shareholder must be independent of the extent of his share
interest. That no shareholder has any right to any to any item of
property owned by the company for he has no legal/equitable
interest therein
— The principle of corporate personality, or the veil
of incorporation protects the acts of directors
and shareholders
— Case: Nsangiranabo Erasmus t/a Nsangira
Auctineers and Court bailiffs Vs Associated
Properties Ltd (2008) where an application for
lifting the veil of incorporation was filed.
— Held-Awori Opio J; upon incorporation, a
company becomes a separate legal, entity from
its members who can’t be held liable for the
company’s debts
Lifting of the corporate veil
— Section 20 provides that lifting the corporate veil
means disregarding the corporate personality of a
company in order to apportion liability to a person
who carries out any act.
— Section 20 Companies Act provides for the High
Court powers to lift the corporate veil in case of tax
evasion, fraud or failure to have the statutory
number of members.
— Lifting the veil means that the separateness of the
legal entity is ignored by treating the members as if
the veil doesn’t exist. The corporate veil is then said
to be pierced, cracked or lifted.
Rationale for lifting the corporate veil
— The requirement of the law
— The need to protect third parties dealing with the
company
— Avoid the abuse of the concept of corporate personality
by people with fraudulent intent.
— Circumstances under which the corporate veil is lifted.
— Fraud, reduction in membership, company being used as
a sham/agent, mis-description, tax evasion
— Fraud is an act of dishonesty which may be attributed to
the directors
— Courts cannot condone fraud hence the lifting of the
corporate veil
…rationale for lifting the corporate veil
— Case: Re Darby (1911)
— Two probate undischarged bankrupts purported
to incorporate a company with a share capital of
30,000 pounds. They sold their own property
3,000 pounds to the company at 18,000 pounds.
They then invited the public to subscribe for
shares and the company went into liquidation
shortly after.
— Although the company was a separate distinct
person, the corporate veil would be lifted due to
fraud.
…rationale for lifting the corporate veil
— Case: Mugenyi and Co. Advocates Vs Attorney
General (1997)
— Court held that the veil of incorporation couldn’t
be pierced since there was no fraud or illegality
alleged in the pleadings against government.
— Fraudulent directors can be held liable for their
acts during winding up of the company
Using the company as a sham
— Veil may be lifted if its proved that the company was
used as a veil/ sham to avoid recognition.
— Case: Jones Vs Lipman (1962)
— Facts: The Defendant contracted to sell land to the
Plaintiff. He later changed his mind, formed a
company to which he transferred the land to a
company formed for that purpose alone, which he
alone owned and controlled. This was in order to
avoid an order of specific performance.
— Held: The corporate veil would be cracked as the
company was being used as a sham and device to
avoid recognition by the eyes of equity.
…using the company as a sham
— Case: Gilford Motor Co. Ltd Vs Horne (1933)
— Facts: The Defendant, a former employee of the
Plaintiff company made an agreement not to carry
out a business similar company and registered it in
his wife’s name.
— Held- Lord Hanworth; The Company was formed as
a device of a business the Plaintiff’s might object to,
thus the veil had to be lifted.
Company acts an agent or trustee
— The General rule is that a company is not an agent or
trustee of its members
— This was enunciated by in Salomon Vs Salomon
— The corporate veil will be lifted where the company
acts as an agent or trustee
Reduction of membership
— Provided for under Sections 20 and 49 Companies
Act
— Once membership (below 2 for public companies) is
below the statutory minimum of companies for 6
months.
— The veil of incorporation will be lifted after the
expiry of 6 months
Mis-description of the company
— The company is legally known by the names which
appear on the certificate of incorporation
— Where the company name isn't used, the directors
who used the fictitious name will be held liable.
— The corporate veil only protects those who use the
company’s legal name.
Holding and subsidiary companies-
Defined under section 161
— A holding company is one which controls, managers
and has majority shares in another company.
— A subsidiary company is formed by a holding
company which holds all its majority shares.
— The holding and subsidiary company are different at
law and exist independently.
— Case: Adams Vs Cape Industries PLC (1991)
— Held: The law recognizes the creation of subsidiary
companies which are considered as separate legal
entities from their parent companies.
…holding and subsidiary companies-
Defined under section 161
— They have all the rights and liabilities of separate
entities. However, the corporate veil of the subsidiary
company will be lifted when the holding company
appoints the officers of the subsidiary company.
— Case: Ishasha Mines Ltd Vs National Enterprises
Corporation (1994)
— Facts: The Plaintiff sued the Defendant, a parent
company of a subsidiary, Medime Dura Ltd.
— Held: A subsidiary company has a separate legal
existence and can be sued in its own capacity. However,
an action can instituted against the parent company if it
conducts its business through the subsidiary.
Investigation of affairs or ownership
— Section 174 provides for the inspector's powers to
lift the corporate veil to investigate the affairs of
the company.
— He may pierce the corporate veil of another
company which is part of the same group of
companies (S.175).
Revenue collection
— The corporate veil may be lifted for tax purposes or
to prevent tax evasion
— Directors and shareholders may be liable to pay tax
— This is also provided for under the Income Tax Act,
as amended. See offences by companies.
Corporate liability
— A company is liable under criminal and civil law (contract and
tort) for crimes committed through its agents
— Liability under the contract is established if the company
acted through its agents.
— Liability in tort arises under primary or vicarious liability
— Primary liability arises where the company is deemed to have
committed the offence.
— Vicarious liability arises where a company is liable for its
servant’s or agent’s acts
— The elements of the mens rea and actus reus have to be
proved under the criminal law. Does a company have a mind?
— The company has a “ directing mind” through its officers
…corporate liability
— Companies can only be liable for crimes where there is an
express provision in a statute making the company liable for
its officers’ acts.
— Where there is no requirements for mens rea or intention to
commit the crime.
— Case: Tesco Supermarkets Ltd vs Nattrass (1972)
— Lord Relds- a living person has a mind which can have
knowledge or intention to be negligent and has hands to carry
out his intentions . A corporation has none of these and must
act through living persons though not one or the same
person. Then the person who acts isn't speaking or acting for
the company, he is acting as the company and his mind is the
mind of the company.
…Corporate liability
— He is the embodiment of the company and hears and speaks
as the persona of the company. If it is a guilty mind then it’s
the guilt of the company. The actions of the
directors/secretary must be identified with the company
— The company may be liable for as long as the officer is in the
company’s employment.
— The company employee/ officer must act within the scope
of employment
— The directing mind and will of the company includes the
board of directors and those to whom the board delegates
its functions.
— Liability is attributed to officers with the directing mind and
will of the company.
— The commonly imposed sentence is a fine since a company
cannot be imprisoned.
Advantages of civil proceedings over
criminal proceedings in case of
proceedings against a company
— There are plenty of effective civil remedies available to
an aggrieved party in a suit against a company e.g
declarations, compensation/ damages, winding up,
injunctions. Criminal fines/penalties may be inadequate.
— Civil cases can be handled through alternative disputes
resolution mechanisms like mediation, conciliation and
arbitration. Criminal cases cannot be easily settled
except if the DPP withdraws.
— Civil cases are easier to prove, they only require proof
upon a balance of probabilities. Criminal cases require
proof beyond reasonable doubt.
Conclusion
— The principle of corporate personality means that
upon incorporation, a company acquires a new
identity separate from its shareholders.
— However, the veil of incorporation may be lifted in
fraudulent dealings, tax evasion, among others.
— The law goes behind the corporate personality to
individual members.
Questions
— What do you understand by the term ‘Corporate
personality’?
— Discuss the exceptions to the principle of corporate
personality.
— How is the veil of incorporation lifted?
— “ Fraud and fraud alone is the only ground for lifting
the corporate veil” Discuss
FORMATION OF A COMPANY
— Forming a company involves discovering a business
opportunity, finding the right people to steer the
business and soliciting funds.
— Involves registering/ incorporating the company.
— Promoters are involved in setting up the business,
they act in a fiduciary position and are entitled to
remuneration.
Definition of a promoter
— Not defined in the Companies Act
— Case: Whaley Bridge Calico Printing Co. Vs Green
(1880)
— W Browen stated that it’s a process of business
operations familiar to the commercial world by
which a company is brought into existence.
— Case: Twycross Vs Grant (1887)
— Justice Cockburn - defined a promoter as one who
undertakes to form a company with reference to a
given project, to set it going and who takes the
necessary steps to accomplish that purpose.
Definition of a promoter
— Promoters stand in a fiduciary position
— They create and mould the company
— He has a duty to act in good faith or with loyalty in
dealings affecting the company.
— Professional advisers like accountants, lawyers
aren’t promoters. These only act in a purely
administrative/ professional capacity.
Position of a promoter
— A promoter stands in a fiduciary relationship towards the
company
— A promoter must be honest and trustworthy while
performing his duties.
— Not allowed to make a secret profit or to derive profit from
the sale of his own property to the company unless he
discloses the material facts of the transaction.
— A promoter is not an agent/ trustee of the company
— This is because there is no company in existence before
incorporation.
— A person can not act on behalf of a non existing person or
entity
Duties of a promoter
— To arrange the preparation of the memorandum
and articles of association.
— To procure capital
— To prepare a prospectus and to obtain directors.
— Section 2 – defines a prospectus as prospectus,
notice, circular, advertisement or other
invitation offering to the public securities for
subscription or purchase.
…duties of a promoter
— It includes a prospectus relating to an offer of debt
securities to the public and in respect of any other
offer of securities to the public.
— Owes a fiduciary duty to the company and to act in
good faith
— Not to make secret profit
— To declare or disclose any interest or profit
Disclosure
— Promoters must disclose/ declare the whole profit.
— He must act in good faith and in full disclosure
— A promoter must disclose the nature and extent of
the contract in every transaction.
— The company may rescind the contract
Pre Incorporation contracts
— These are transactions entered into before a company
is incorporated.
— The rule in Salomon Vs Salomon presupposes that a
company can only enter into a contract upon
incorporation.
— Previously, a pre incorporation contract was void ab
initio and could not be ratified. Now, Section 54, such a
contract may be adopted by the company upon
incorporation.
— Section 54 states that a contract made on behalf of the
company before its formed has effect as one made
with the person purporting to act for the company.
…Pre Incorporation contracts
— Case: Kelner Vs Baxter (1866)
— Facts: The Plaintiff and Defendant were promoters of a
company called “ Gravesend Royal Alexander Co. Ltd” They
entered a contract to purchase a stock of wines and signed
“on behalf” of the company. The contract was later ratified by
the company upon incorporation.
— Held: The ratification was invalid since the company was non
existent at the time. Pre incorporation transaction are void ab
initio and cant be ratified
— They had signed on behalf of a non existent principal and
were therefore liable
— The test of intention of the parties is applied while dealing
with pre incorporation contracts.
…pre-incorporation contracts
— Case: Newborne Vs Sensolid (Great Britain) Ltd (1954)
— Facts: The Plaintiff entered a contract with the
Defendant company to supply tinned ham, the company
hadn't yet been incorporated. The contract wasn’t
executed for and on behalf of Newborne (London) Ltd.
— Held: Newborne wasn’t liable as he had qualified his
signature while signing the contract.
Effect of Section 54
— Though pre incorporation contracts are void ab
initio, the company can legally adopt them
through novation. Section 54(2) states that a
company may adopt a pre-incorporation
contract without the need for a novation.
— Once the company adopts it, the liability of the
promoter ceases (s.54(3)).
— Therefore, if the company adopts it, then the
promoter is not liable. However, if the company
does not adopt it, then the promoter is liable.
Registration of a company
— Reservation of name
— The promoter must first reserve the company name i.e.
ascertain if its available for registration.
— Reservation is for a period of 30 days, must not exceed 60
days.
— Section 36 (1) provides for the registrar’s powers to reserve
a name of a company.
— Section 36(2) prohibits the reservation and registration of
names which the registrar considers to be undesirable.
— The name reserved must have the name limited at the end.
— Section 41 provides for the power to dispense with limited
in the name of charitable organizations which promote art,
science charity and to prohibit the payment of dividends to
its members
Preparation of the necessary
documents
— The documents to be prepared or completed
include
— The memorandum and articles of association
— The statutory forms that is A1, A2, and Form 7
— Prospectus or statement in lieu of prospectus in
case of a public company.
— These documents must be filed with the registrar
upon payment of the prescribed fees according to
the Companies (Fees) Rules, 2005
Issuance of certificate
— The registrar will register the company and place its
name in the register of companies if he is satisfied
with the documents presented.
— A certificate incorporation is then issued as proof of
registration of the company.
— Upon registration, the company becomes separate
and distinct from its members
— The certificate of incorporation contains the number
of the company.
— The number is used to search for the company file at
the registry.
Conclusiveness of the certificate of
incorporation
— Section 22 provides that the certificate of
incorporation is conclusive evidence that all the
Act’s requirements with regard to registration have
been complied with.
— The certificate can only be cancelled through
winding up although the subscribers are minors.
…conclusiveness
— Case: Jubilee Cotton Mills Vs Lewis (1922)
— Where the required company documents were delivered
on 6th January. The registrar issued a certificate of
incorporation two days later and dated it 6th January
instead of 8th January shares were allotted to Lewis on
6th January
— Issue: Whether the allotment of shares was proper
— Held: The date on the certificate was the correct date of
incorporation, the certificate was conclusive evidence
that all the requirements had been complied with.
Conclusion
— A company, in formation, may act through the promoter
who must act honestly in the company’s best interests
— The requirements for the registration must be complied
with
— The certificate of incorporation issued is conclusive
evidence of incorporation
Questions
— How is a company formed and registered under the
Companies Act?
— Who is a promoter? What are his or her duties?
— Is a promoter of a proposed company liable for the
debts incurred before incorporation?
— What do you understand by the concept of “
conclusivity” under company law
MEMORANDUM OF ASSOCIATION
— Section 2 Companies Act provides that memorandum means
the memorandum of association of a company as originally
framed and altered from time to time.
— It is pre requisite to the formation of a company
— Contains the name of the company, objectives, capital
structure and the member’s liability.
— Major purpose is to regulate the affairs between the company
and the outsiders
— Company may carry out any activity permitted in the
memorandum
— An activity outside the memorandum can be carried out if the
members amend the object’s clause through a special
resolution.
Form of memorandum
— Format depends upon the liability and capital structure of a
company.
— The company name and objectives have no effect on the
format
— Section 17 provides for the statutory form of the
memorandum.
— Section 7 requires the memorandum of every company to be
printed in the English language. It contains the name, objects,
capital structure and liability of the members
— Section 8 states that it must be dated and signed by each
subscriber in the presence of at least one attesting witness.
— Section 19 provides for registration of the memorandum and
articles.
Name
— Its contained in paragraph 1 of the
memorandum of association.
— Must have limited as the last word in the name.
— All company documents like invoices, receipts,
cheques certificates, licenses and other
documents must contain the name.
— The company shouldn’t adopt a scandalous/
undesirable name according to section 36(2)
— Identical or resembling names aren't accepted.
Trademark law may be invoked.
…name
— Case: Ewing Vs Buttercup Margarine Co. (1917)
— Facts: Ewing carried out a wholesale and retail business called
Buttercup, a diary Company. The Defendant company was
formed to manufacture and sell margarine in wholesale.
Ewing applied for a restraint order on grounds that customers
would be confused due to use of the name “Buttercup”
— Held: The restraint order was granted.
— The company may dispense with the word ‘limited’ under
section 41, if the registrar is satisfied that the company is
formed for promoting commerce, art, science, religion,
charity.
— Company name to be affixed outside the registered office
engraved in legible characters on its seal.
— Directors will be personally liable for using un registered
name.
Alteration of name
— The name of the company can be changed by special
resolution according to section 40 of the Companies Act
— This has to be in writing to the Registrar who must give his
approval
— 14 days notice must be given to the Registrar
— The new name shall be entered, a change in the Uganda
gazette will also be notified
— The name is void if its not gazetted.
— Case: Fam International Ltd Vs Mohammed Halid El Fatih
(1993)
— Court held that failure to gazette and enter the change of
name were 2 irregularities which wouldn’t vitiate a change of
name that was properly made.
…Alteration of name
— Change of name doesn’t affect any right, obligations or
proceedings by or against the company.
— Once the company name is changed, the ownership of property in
its name should also be altered.
— Case: Appollo Hotel Corporation Ltd Vs Geofrey Oryema (2007)
— The name of the company Appollo Hotel was changed to Kampala
International Hotel and to Sheraton Hotel but the property name
was not changed.
— Held-Odoki JSC- Ownership of the company property is a
question of law. Regard must be given to the instrument
conferring ownership. Even when the hotel name was changed to
Kampala International Hotel, ownership of the Hotel still
remained with Appollo Hotel Corporation
Registered Office
— Usually located in paragraph 2 of the memorandum
— Section 115 stipulates that a company must have a
registered office and a registered postal address.
— Section 116 provides that the registrar should be
notified incase of a change in the registered office and
postal address
— The postal and physical address must be provided
within 14 days of its incorporation or from the date of
commencement of business.
Objects clause
— Paragraph 3 contains the objects clause
— Most vital clause in the memorandum which provides for
the activities the company will carry out.
— The activities must be lawful, the company must not act
outside the objects clause, else they will be ultra vires
acts
— There are 2 types of objects; main and auxiliary objects.
— Main objects are the key activities for which a company
is incorporated.
— There is no limit to these activities
— Auxiliary objects are incidental to the attainment of the
main objects They must be related to the main objects.
…Objects clause
— Case: Evans Vs Brumer, Mond and Co. Ltd (1921)
— The Objects clause stated that the company was
formed to carry on chemical manufacturing as its
primary object. The company passed a resolution
authorizing its directors to distribute money to such
universities and scientific institutions to further
scientific education and research.
— Issue: Whether the company’s acts were ultravires.
— Held: The decision wasn’t ultravires as there was need
to cultivate a class of men with a scientific attitude of
mind. This was vital for the company's continued
existence.
Alteration of the objects clause
— Section 10 provides for the made and extent to which
the objects of the company may be altered
— Section 9 places restrictions on the alteration of the
memorandum except in accordance with the express
provisions of the act.
— A company can only alter its objects to:
⁻ To conduct its business more economically or efficiently
⁻ To attain its main purpose by new or improved means
⁻ To enlarge/ change the local area of its operations
⁻ To carry on some business which under the existing
circumstances may conveniently or advantageously be
combined with the business of the company.
…Alteration of the objects clause
— To restrict or abandon any of the objects specified in
the memorandum
— To sell or dispose the whole or any part of the
undertaking.
— To amalgamate with any other company or body of
persons
— An alteration that doesn’t fall within the above
categories cannot be entertained.
Procedure
— A special resolution must be passed at the general meeting
— The resolution sanctioning the alteration must be registered.
— The amended memorandum of association must be delivered
to the registrar of companies within 35 days, 21 days for the
application and 14 days after the end of those 21 days from
the date of the resolution if no application for cancellation of
the alteration has been made to court
— Upon delivery and registration of the amended memorandum
of association, it supersedes the original memorandum and
takes effect from the date of registration.
Liability Clause
— Contains the liability of the members
— The memorandum of a company limited by shares or
by guarantee shall state that the liability is limited.
— Member’s liability is limited to unpaid shares, liability
is nil if the shares are fully paid up.
— Provided for under section 4 Companies Act
— For a company limited by guarantee, the liability
clause will state the specific amount every member
undertakes to contribute to the company assets in
the event of its being wound up.
Alteration of liability clause
— The company cannot alter the liability clause except
accordance with the Act.
— The liability of members cant be increased by
altering the memorandum unless the member
agrees to the alteration in writing.
— Section 230 provides that a limited liability company
may have directors with unlimited liability.
— A limited liability company may by special resolution
make the liability of its directors unlimited under
section231. However the alteration must be
permitted by the articles of association.
Capital clause
— It provides for the amount of share capital for the proposed
company.
— Government taxes and fees payable i.e. stamp duty and
registration fee depend on the amount of the authorized or
nominal capital of the company.
— Effect of the capital clause and the amount therein is that the
company cant issue more shares than are authorized by the
memorandum unless the nominal capital is increased. There is
no maximum or minimum amount of capital required for a
company to operate under the Act.
— Capital clause isn't included for a company with unlimited
liability or a company limited by guarantee without a share
capital.
Alteration of capital clause
— The amount of share capital of a company may be altered in a
number of ways;
— Alteration under section 71
— Provides that a company may alter its capital clause if
authorized by the articles of association by:
— Increasing its share capital by issuing new shares
— Consolidation and division of all or part of its share capital into
shares of larger amounts.
— Conversion of all or any of its fully paid up shares into stock or
reconversion of that stock into fully paid up shares.
— Sub division of the existing shares into shares of lower
denominations.
…Alteration of capital clause
— Cancellation of shares which have been taken up
and reduction of its capital accordingly.
— The procedure under section 71 is through an
ordinary resolution in a general meeting under
section 71(2)
— Under section 72, the registrar of companies must
be given notice of such alteration within 30 days
from the date of passing the resolution.
— Registrar will make the necessary changes in the
memorandum of association upon delivery of the of
the documents payments of the requisite fees.
Reduction of share capital under
section 76
— A company limited by shares or by guarantee with a
share capital may reduce its share capital if
authorized by its articles of association.
— This is by way of special resolution and is subject to
the confirmation of court.
— This is done in the following ways under section 76
extinguishing or reducing the liability on any of its
shares in respect of unpaid up share capital.
…Reduction of share capital under
section 76
— Cancellation of paid up capital which is lost or unrepresented
by available assets
— Paying off any paid up capital in excess of the company’s
wants
— Reduction of capital through a method approved by court.
— Section 76(2) states that the procedures is through a special
resolution for reducing share capital .
— Company has to apply to court for an order confirming the
reduction under section 77.
— The court considers the interests of the creditor and
shareholders.
— The certified copy of the order must be filed with the
registrar upon obtaining the court order.
Reserve liability under section 70
— Section 70 provides for the reserve liability of a

limited liability company.
— The uncalled capital or reserve share capital cannot
be called up except in winding up.
— Section 70 (2) states that the procedure is by a
special resolution passed at a general meeting.
— The resolution must be filed and registered with the
registrar of companies.
Variation of the shareholder's rights
under section 82
— This is provided under section 82
— Provides that a company may change the rights of any class of its share
holders.
— Procedure is that if the memorandum or articles of association don’t
prohibit the variation of the shareholder’s rights, a special resolution
shall be passed.
— The written consent of not less than ¾ of the issued shares must be
obtained.
— Shareholders who object to the variation may apply to court for a
cancellation of the variation within 30 days of passing the resolution.
— Court may disallow variation if it will prejudice the shareholder’s rights.
— If the variation is allowed, it will be delivered to the registrar within 30
days.
Re-organization of capital under section
207
— A company may re-organize its share capital by consolidating shares of
different classes or through division of shares into different classes.
— Re organisation may be between the company and its creditors or the
company and its members.
— Process is initiated by a proposal by the company, creditor or liquidator.
— Initiator applies to court for an order for a meeting of the creditors.
— The arrangement will be binding on all creditors if approved by ¾ of the
members
— A certified copy of the court order must be registered with the registrar
of companies
— It should be annexed to every copy of the memorandum of association.
Subscription clause
— It includes the name, address and occupation of each
subscriber to the memorandum of association.
— Section 7(4) (b) states that a subscriber to the
memorandum may not take less than a share.
— He must write opposite his/her name the number of
shares he/she takes according to section 7(4) (c).
— Section 8 states that the memorandum must be signed
by each subscriber in the presence of atleast one
attesting witness.
Alteration of the subscription clause
— No provision for the alteration of the subscription
clause in the companies Act.
— Subscribers are deemed to be members of the
company.
— The company is required to keep a register of
members under section 119
Conclusion
— The memorandum of association is an important
company document which contains the company
name, registered office, objectives, capital structure
and liability.
— It may be altered by the members however certain
provisions of the company act must be followed.
Questions
— What is memorandum of association?
— Outline the contents of a memorandum of association
of a private company.
— Can a memorandum of association be altered,, If so,
under what circumstances?
— What is the difference between the memorandum of
association of a;
⁻ Private company and that of a public company
⁻ Company limited by guarantee and a company limited
by shares.
ARTICLES OF ASSOCIATION
— Section 2 defines articles to mean the articles of association of
a company originally framed or as altered by special
resolution.
— It includes regulations contained in table A in the third
schedule to the Act
— It contains rules which govern the company’s internal affairs.
— It sets out the rules to be followed in attaining the company’s
objects.
— Articles are solely for the benefit of the directors and
shareholders.
— Sections 19 provides that the articles of association shall be
registered together with the memorandum of association.
Form and Content of the articles
— Section 13 provides that the articles of association may adopt
all or any of the regulations in Table A.
— The articles must be printed, divided into paragraphs and
numbered consecutively and signed by each subscriber to the
memorandum, attested by atleast one witness according to
section 15.
Contents
— The articles contain provisions relating to:
— Interpretation and adoption of table A in whole or in part.
— Allotment of shares including share capital , lien on shares,
call on shares, forfeiture of shares, issue of share certificates,
issue of share warrants, transfer of shares, transmission of
shares, alteration of share capital.
…Form and Content of the articles
— Borrowing powers
— General meeting, rules on conduct of meetings, voting
rights, notice of meetings
— Dividends and reserves, payment of interest out on
capital
— Accounts and audit
— Directors, appointment, their remuneration, secretary
appointment and vacation of office.
— Common seal
— Winding up
— Notices and mode of service
— Arbitration and dispute settlement.
Effect of the articles
— Section 21 provides that the articles bind the
members of the company upon registration.
— Case: Woods Vs Odessa Waterworks Co. (1899)
— Where Woods sought an injunction to restrain the
company from acting on a resolution passed which
proposed to pay no dividend but instead give
shareholders debentures bonds.
— Held-Stirling J; stated that the articles of association
constitute a contract not merely between the
shareholders and the company but between each
individual shareholder and every other.
…Effect of the articles
— The articles are binding on the company and its
members, however they don’t bind the company
to outsiders.
— Case: Brown Vs. La Trinidad (1887)
— Brown was to be appointed until 1888 as
provided in the articles but was removed earlier.
— Held: the articles do not constitute a contract
between company and an outsider , thus Brown
has no cause of action against the company.
Articles binding on members and
company
— Articles create a contract between the member and
the company
— A member of the company accepts the terms of the
contract by subscribing to the articles or by
purchasing shares in a company
— Ac company may sue its members for the
enforcement of the article or breach.
Alteration of articles
• The company may alter its articles of association
from timer to time.
• The alterations must however be in accordance with
the companies Act and the Memorandum of
Association.
• Section 16 provides that the articles should be
altered by a special resolution
• The altered articles will bind the members the same
way as the original articles.
Distinction between the articles and
memorandum of association
• Memorandum of association
• Every company must have its own memorandum at the
time of registration.
• It contains the name, address, share capital and liability
clause
• It is superior to the articles of association
• It defines the relationship between the company and the
outsiders
• Alteration of the memorandum is subject to approval of
or notice to the registrar and confirmation by court
• Non conformity with the memorandum is ultravires. The
company isn't bound and outsiders have no remedy
against it
While the articles of association
• A public company may adopt table , Articles aren't
required at the time of registration.
• Contains rules and regulation for the internal
management of the company.
• Articles are subordinate to the memorandum of
association.
• Articles define the relationship amongst members ,
between members and the company.
• Alteration is only by special resolution
• Non conformity with the articles of association is
irregular but can be ratified by members ,outsiders can
enforce a contract if they had no knowledge of
irregularity
Share holder’s agreement
• Agreement between shareholders of a company
• Can be made between all or some of the holders
• Enforceable as an ordinary contract and it only binds the
parties to it
• May be drawn up by members after incorporation especially
when share holders are few.
• They are prepared for the following reasons;
• They are private documents containing confidential
information. Articles of association are public documents .
• Certain provisions especially dispute settlement may not be
included in the articles of association.
• Shareholders agreements are easy to amend or change
• There are no formalities involved i.e. registration.
Contents of the shareholder
agreement
• Regulation on ownership, voting rights, restrictions
and minority protection.
• Control and management of shareholders, powers
of shareholders
• Provision relation to dispute settlement
• The articles of association prevail incase of conflict
between them and the shareholder’s agreement.
• Articles are binding on all members however the
shareholders agreement may be binding as an
ordinary contract between some members
according to section 21.
Conclusion
— Articles of association contain the company rules
and regulation
— These bind the company and its members but not
outsiders.
Questions
— What are Articles of Association?
— Outline the contents of the articles of association of
a private company.
— Discuss the circumstances under which the articles
of association may be altered.
— Distinguish between the Articles and Memorandum
0f Association.
COMPANY CONTRACTS
• A company may enter into, perform contracts and be liable
for breach of a contract.
• The company must act through an authorized person or
proper agent.
• An outsider isn't required to question the regularity of the
company's internal proceedings.
• The law protects those honestly deal with the company to a
limited extent.
• Section 10 Contracts Act 2010 defines a contract.
• It is a voluntary agreement made between parties having
capacity for lawful consideration with the intention to be
legally bound.
• The contract must be signed and sealed by the company’s
lawful attorney.
Agency under company law
• A shareholder isn't an agent for the company under company law.
• However a company, being an artificial person can only act through agents
• Directors can bind the company if they are acting within the memorandum
• Case: Tatu Naiga and Co. Emporium Vs. Bros Ltd (2002)
• The director of the company instructed counsel to obtain a certificate of
repossession of the premises.
• Held –Oder JSC: A director who is authorized to act on the company's
behalf ha powers to act on behalf of the board of directors unless the
contrary is shown. The directors had power to instruct Counsel
• Directors are the Company’s agents
• A third party can bind the company using the director in accordance with
the law of agency.
• Authority may be actual i.e. express authority given by the principal
• Ostensible authority arises due to a representation by the principle
Doctrine of ultra vires
• Ultravires means to act beyond powers
• Company powers are found in the objects clause of
the memorandum of association .
• Any act beyond the company’s powers is deemed to
be ultravires.
• Ultravires acts are incapable of ratification.
• The doctrine doesn't apply when an agent of the
company exceed his authority.
• Intravires is the opposite of ultravires.
…Doctrine of ultra vires
• Case: Ashbury Railway Carriage Co. Vs. Riche (1871)
• The objects clause of a company stated that it was
involved in supplying and selling materials required
to construct railways. It however entered a contract
for the construction of a railway. This was contrary
to the memorandum of association.
• Held: The contract was ultravires as it concerned a
matter not included in the memorandum of
association.
• The contract was completely void and capable of
ratification.
Effect of Ultravires transactions
— An ultravires contract be enforced by the company.
— Borrowing beyond the objects clause is called
ultravires borrowing.
— Some remedies namely tracing, injunction,
subrogation may be granted in respect of ultravires
transactions.
Exceptions to the ultravires doctrine
• Where the company has acquired property through
an ultravires investment. It will retain the property
rights.
• Through ratification of an act which is ultravires the
company but outside the directors authority .
• Validation by the shareholders’ consent of an act
which is intravires the company, but done
irregularly.
• Effects of the doctrine aren't invalid unless
expressly prohibited by the company's act.
• Alteration of the articles to validate on act which is
138 ultravires the articles of association.
okwenye@lawyer.com
Indoor management rule
• A person dealing with the company is not required to
inquire into the regularity of the company’s internal
proceedings.
• He must assume that the provisions in the articles of
association have been complied with.
• Known as the rule in turquand or the indoor
management doctrine.
• Case: Royal British Bank Vs Turquand (1856)
• The articles empowered the directors to borrow money
provided they were authorized by a resolution passed in
a company general meeting.
• Held: The company was liable albeit no resolution was
passed as the lender is not required to inquire into the
regularity of the company’s internal proceedings.
…Indoor management rule
• Case: Photofocus Vs Joseph Mulenga (1996)
• Where it was argued that the director had no
authority to borrow money without a resolution.
• Held-Kibuuka MusokeJ; The director has powers to
borrow money in the company’s name if not
prohibited by the articles of associated . The
company was liable for the loan as the bank isn't
required to inquire into the regularity of the
company procedures
Exceptions to the indoor management
— If the person dealing with the company was aware
of the irregularity
— Fraud of the company's officers
— Negligence of the person dealing with the company
— Non compliance with the articles of association even
after reading them.
Conclusion
— A company can enter into contracts, however the
transaction must be intravires the company’s
powers
— Ultravires transactions are null and void, subject to
certain exceptions.
— Persons dealing with the company’s proper agent.
Questions
— Can a company contract?
— Discuss the doctrine of ultravires under company
law
— What do you understand by the term “indoor
management?
— Examine the rule in Turquand’s case.
MEMBERS
— Section 47 companies act defines a member
— A member of the company appears on the register
of members provided under section 119.
— A person can become a member through
subscription, purchase, allotment, transmission or
by estoppel.
— One ceases to member upon transfer, forfeiture,
surrender, sale, allotment, winding up.
— Members must agree in writing to be entered in the
register of members with exception to the
subscribers to the memorandum.
…Member
— A person can become a member without being a shareholder
through;
— Companies limited by guarantee or unlimited companies have
members but not shareholders as they have no shares
— A deceased member continues to be a member although he is not
considered a member
— A transferor of shares is a member before his name is on the
register.
— Subscribers to the memorandum can be members before
allotment
— A person may become a shareholder without being a member due
to the delay of entering the name in the register of members.
— A minor cannot be a member of a company
— But a company can be a member of another company.
Modes of becoming a member
— By subscription to the memorandum under section
8 (1).
— By agreeing to purchase shares.
— By allotment.
— Through transfer. This must be in accordance with
the Articles of Association.
— Through transmission.
— By estoppel.
Register of members
— Every company must keep a register of members under
section 119. It must contain;
— The name, address and occupation of each member
— Shares held by each member if the company has its
share capital.
— Date on which each person was entered in the register.
— Date on which any person ceased to be a member.
— Amount of stock by each member, if shares were
converted to stock.
— The register of members must be located at the
company’s registered office/ branch.
Rights of members
— Right to obtain copies of company documents (articles
memorandum of association, resolutions, agreements).
— Right to a share certificate.
— Right to transfer shares.
— Right to seek redress when his/her name isn't registered.
— Right to inspect the register/minute.
— Right to demand a poll.
— Entitled to rescue notice of meetings.
— Entitled to participate in company proceedings,
appointment of auditors, directors, declaration of
dividends, passing special resolution for winding up
Liability of members
— Liability of members depends on the type of
company.
— Members are fully liable in an unlimited company.
— Liability of members is limited to the amount on
unpaid shares for a company limited by shares.
— Members of a company limited by guarantee are
liable to such a mount as they took to contribute in
the event of its being wound up.
Termination of membership
— A person ceases to be a member upon;
— Transfer of shares
— Forfeiture of shares on account of non payment
— Surrender of shares
— Sale of shares by the company or in executive of a
decree
— Allotment by the articles
— Death of a shareholder
— Redemption of redeemable shares
— Conversion of share certificate into share warrant
— Winding up of a company.
Conclusion
— Members of a company are persons who have
agreed to become members and whose names
appear on the register of members.
— Members are entitled to certain rights and are also
liable in the event of winding up, however the
liability depends on the type of company.
Questions
— Who is a member of a company?
— How does one become a member of a company?
— Discuss the rights and obligations of members of a
company.
— How is membership determined?
MEETINGS AND RESOLUTIONS
— A company meeting is a gathering of shareholders and other
officers to address issues relating to the company.
— A company should hold a general meeting subject to the
Articles of Association.
— The Companies Act also provides for statutory and extra
ordinary meetings plus the procedures for calling for,
conducting and adjourning meetings.
— Shareholders exercise their decision making rights through
shareholders' meetings.
— The decision of a properly constituted meeting of the
company bind the company and its members.
— Every company must hold meetings in order to discuss issues
relating to the company.
Meetings and Resolutions
— Case: Irene Kulabako Vs Malinga Ltd and 2 ors (2010)
— Bamwine J held that matters of managing a
company are better resolved in the company board
room where members normally express their wishes
as to how the company affairs ought to be run. This
is through voting for or against resolutions and the
decisions of the majority normally prevail.
— Case: Re Associated Colour Laboratories (1970)
Court held that a meeting may be held by telephone
or in different rooms with audio visual links between
them.
Types of meetings
— There are 3 types:
i. Statutory General Meeting
ii. Annual General Meeting
iii. Extraordinary General Meeting.
— Statutory general meeting. Section 2 provides that a Statutory
Meeting is defined under section 137 (1) Companies Act.
— Section 137(1) states a Company Limited by shares or by
guarantee and having a share capital must hold a Statutory
General Meeting.
— Must be held within 1 month but not later than 3 months
from the date the company commences business.
— The meeting is held only once.
…types of meetings
— It is intended to review the activities of the
promoters and directors during the formation or
incorporation stage.
— Section 137(2) requires the directors to forward a
statutory report to every member of the company
at least 14 days before the meeting is held.
— 21 days notice should be given before the meeting is
held.
Contents of the statutory report under
section 137 (4)
— Endorsement of atleast 2 directors of the company
— The names and particulars of directors, auditors of any,
secretary and other officers of the company.
— Total number of shares allotted (paid and unpaid)The total
amount of cash received in respect of the allotment.
— Abstract of receipts, payments, expenses of the company
made up to 7 days before the date of the statutory report.
— Particulars of any contract and modification of any contract to
be submitted to the meeting for approval.
— The details of arrears if any due to the directors , the
managing director or manager.
…Contents of the statutory report
under section 137 (4)
— Names, postal addresses and descriptions of the directors,
auditors, a managers and secretaries of the company if any.
— Certification by the auditors under section 137(5).The meeting
must be attended by all members of the company who can
discuss issues arising from the statutory report according to
section 137(8)
— Section 137(9) provides for adjournment from time to time if
notice is given to the members.
— The statutory report shall be submitted to the registrar under
section 137 (6)
— Section 137 (10) imposes a fine of twenty five currency points
incase of a default in complying with the section.
Annual general meeting
— It is the company’s most important meeting
— It is intended to provide information to the members regarding the
business.
— Section 138 Companies Act states that the annual general meeting
should be held each year.
— Section 138(1) provides that not more than 15 months shall elapse
between the date of one annual general meeting and the next
— The first general meeting shall be held within 18 months from the date
of incorporation though not necessarily in the year of incorporation
under section 138 (30
— A private company may hold an annual general meeting at the
requisition of a member under section 138(2)
— Directors have the responsibility of convening annual general meetings.
— The registrar, court may order the holding of a meeting upon the
application of a member, director or on its own motion.
…Annual general meeting
— Under section 138(8), default in holding the meeting under
138(1) and 138(3) attracts with a fine twenty five currency
points default in complying with section 138(4) attracts a fine
of 5 currency points.
— Notice of the meeting must be given to the members
— It must indicate the agenda, venue and time of the meeting.
— The annual general meeting may consider;
— Consideration of the directors and auditors' report
— Appointment of auditors and fixing their remuneration
— Consideration of company accounts
— Declaration of dividends
— Other issues arising from the day to day running of the
business.
Extra-ordinary meeting
— Refers to a meeting which isn’t the Annual General
Meeting
— Also referred to as the “Emergency General Meeting”
— Deals with issues cant be left pending until the annual
general meeting
— Section 138(1) states that a public company shall hold a
general meeting in addition to any other meetings.
— “Other meetings” means extra-ordinary meeting
— An extra general meeting may consider an alteration of
the memorandum of and articles of association.
Extra-ordinary meeting
— An increase or decrease in the company’s share
capital.
— Section 139 provides for convening of an extra
ordinary meeting on requisition of members not less
that one tenth of the paid up capital of a company.
— Section 139(2) states that the requisition must state
the objects of the meeting, be signed by the
requisionists and deposited at the company’s
registered office.
Conduct of the meeting
— The board of directors has power to convene the
company’s general meeting.
— However this must be in accordance with the
companies act or the articles of association.
Notice of the meeting
— Section of 140 provides for a notice of 21 days in writing
when calling for a meeting of the company.
— Section 141(a) provides that the notice of a company
meeting shall be served on every member of the
company in the manner under Table A.
— Notice must be served personally or sent to known
addresses of all the members.
— Electronic form and website may be used where a
member has agreed.
…Notice of the meeting
— Short notice may be given if all the members have
agreed.
— Notice must contain the date, venue, time and
agenda of the meeting.
— Must also contain a statement that a member is
entitled to attend and vote or appoint a proxy if the
articles provide for voting by proxy.
— Proceedings are void when notice is sent to the
wrong address or if its given to a person not entitled
to receive it.
…Notice of the meeting
— Case: Greenvine College Ltd
— The Applicant went to court for a declaration that all
resolution purportedly passed by the company on
the 15th August 2002 and 20th March 2003 were null
and void as the meetings weren't properly held.
— Held - Kiryabwire J; Every general meeting shall be
called by giving 21 days notice in writing and notice
has to be served or deemed to be served to such
person entitled to receive it.
Agenda
— This is integrated in the notice and circulated to the
members before the meeting.
— Any comments to the agenda must be
communicated to the secretary or directors in a
timely manner.
Attendances and Proxies
— Section 143 provides for proxies.
— A proxy is a person who is lawfully mandated to act for
another in meetings.
— He need not be a member of the company.
— He is entitled to vote and has the same right as the
member to speak at the meeting according to section
143(1)
— A proxy votes in accordance with his or her appointer's
instructions.
— A member cannot appoint more than one proxy to
attend on the same occasion under section 143(2) (b)
…Attendances and Proxies
— Section 143(2)( C) states that a proxy shall not be entitled to vote
except on a poll.
— A proxy cant be appointed incase of a company with no share
capital unless the articles of association say so.
— A proxy must be appointed in writing and in a prescribed form
— The proxy instrument of appointment must be clear and precise
— The document must be delivered to the company before the
meeting
— A Proxy can be of such revocation before he acts on those
instructions
— A revocation done after the meeting is nugatory
— Attendance and voting of the appointer revokes the proxy
— Death of the shareholder automatically revokes the proxy’s
authority.
Chairman
— Chairman is the chief authority and umpire of the
meeting.
— The articles of association provide for the
appointment of the chairman.
— Members can also elect one of them to be a
chairman on a show of hands.
— The board chairman presides as chairman at every
general meeting of the company.
Duties of the Chairman
— To act in the company’s interest.

— To ensure that the meeting is properly constituted.
— To ensure that the proceedings at the meeting are
properly conducted.
— Ensure that provisions of the companies Act and the
articles of association are properly observed.
— Ensure that no discussion is allowed except when there
is a specific motion before the meeting.
Powers of the Chairman
— To demand for a poll
— To decide points of order
— To expel unruly members
— To adjourn the meeting
— To sign and date proceedings of the meeting
— To vote and if the articles provide shall have a
casting vote
Voting
— This is by show of hands.
— Each member is entitled to only one vote irrespective
of share holding.
— The articles of association may however provide
another way of voting.
— Incase of a tie and the chairman has a casting vote, he is
free to vote.
— A proxy may vote only on a poll.
— A subsidiary company has no right top vote at the
meetings of a holding company.
Poll
— The chairman or the members may demand for a
poll when an issue is disputed or controversial
— Section 144 provides the right to demand for a poll
— The chairman of the meeting is empowered to
direct the mode of exercise of the poll
— Section 145 provides for voting on the poll
Quorum
— Quorum is the minimum number of members required to be
present so as to validly transact the business of the meeting
— No quorum, no meeting
— Case: Dharamsy Morajk and sons ltd Vs. Suman Naresh Kara
(1997)
— Karokoro Jsc-held that the participation of 2 or more persons in
the meeting of the director where the resolution not to transmit
shares was reached didn’t invalidate the director’s decision since
he alone formed the requisite quorum.
— Quorum is usually fixed by the articles of association
— Where its not fixed, its 3 for public companies and 2 for private
companies.
— A Meeting is resolved if the quorum is not realized within half an
hour from the date fixed.
Rules relating to quorum
• The proxy isn't to be counted for purposes of quorum
• Joint holders of shares are treated as one member for
purposes of a quorum.
• One member cant constitute a meeting except in class
meetings where one shareholder holds all the
preference shares.
• Where the registrar directs the calling of a general
meeting, he can direct that one member present who
shall constitute a valid meeting.
• A representative of a company is a member and
constitutes a quorum.
…Rules relating to quorum
• Case: Seremba Mark Vs Isanga Emmanuel (2006)
• Kiryabwire J, found that Greenville College Ltd had only
one recognized and fully paid up shareholder and that it
was impracticable to call a meeting of the company.
• The court exercised its discretion under section 135 (now
s.142) on court’s own motion to direct a meeting of the
company the quorum of which shall be one. The meeting
shall be called by the Registrar of Companies and at his
office at the company’s cost.
• Section 142 Companies Act now provides for the court’s
power to order a meeting.
Minutes
— These are the official written records of the proceedings of the
meetings of the directors or shareholders of a company.
— Section 152 provides for a record of minutes of all general
meetings and proceedings at meetings.
— Minutes which are confirmed and signed by the chairman can be
produced in court as evidence.
— Company minutes should:
— Be maintained or kept at the company’s registered office under
section 153.
— Be numbered consequently, dated and signed by the chairman or
director
— Contain a fair and correct summary of each meeting including the
names of the directors present.
— Not include defamatory or irrelevant matters.
Resolutions
• A resolution is a formal expression of a decision or
an extract of the minutes of a meeting.
• Can also be called the summary of the minutes.
• A resolution must be dated, signed by atleast two
directors or secretary and registered by the
Registrar of Companies within 30 days after its
passed.
• Section 147 provides for circulation of members’
resolution and related particulars.
Types of resolutions
— There are 3 types;
— Ordinary resolution
— Special resolution
— Resolution requiring special notice
Ordinary Resolution
— It requires a simple majority of the members present at a
general meeting.
— Total votes in favour must exceed the votes against the
resolution.
— Votes may be cast by show of hands or on a poll with notice
of the meeting given to the members.
…ordinary resolution
• All matters which the companies act states should be
done by special resolution are done by ordinary
resolution.
• Resolution to operate a bank account or a change of
signatories may be by ordinary board resolution.
• Upon its registration with the registrar of companies,
the bank cant refuse to act upon it.
• Case: Banex Ltd Vs Gold Trust Bank Ltd (1994)
• Platt JSC held that the re-organization of the company
was an internal matter and the Respondent bank should
have only looked at the resolution which had been duly
registered with the Registrar of companies.
Decision making in an ordinary
resolution
• Issue of shares at a discount
• Adoption of the statutory report
• Adoption of annual accounts
• Appointment of auditors and fixing their
remuneration
• Appointment of directors at the annual general
meeting.
• Variation in the number of directors of the company
• Declaration of dividends and issue of bonus
• Authorizing voluntary and affixing remuneration of
liquidators.
Special resolution
— Provided under section 148(1)
— It require atleast ¾ of the members present and
entitled to vote in a special resolution.
— Decision which require a special resolution relate to
the general conduct of the company with its
outsiders.
Decisions requiring special resolution
• Alteration of the memorandum regarding the registered
office and the objects clause
• Alteration of the name of the company
• Alteration of the articles of association
• Creation of reserve capital
• Reduction of capital
• Variation in the rights of holders of any class of shares
• Authorizing payment of interest out of share capital
• Declaration of investigation into the company affairs
• Authorizing voluntary winding up of the company
Resolution requiring special notice
• Provided under section 149
• Special notice is required under the law or articles of
association in some instances.
• Section 149(1) states that the resolution shall be
ineffective unless 21 days notice is given.
• Notice of the resolution is to be given at the same
time and manner as notice of the meeting.
• If its not practicable, notice shall be through in a
newspaper of wide circulation.
Decision requiring special notice
• Appointment as auditor of a person other than a
retiring auditor.
• Resolution at an annual general meeting providing
that a retiring auditor not be re-appointed Removal
of a director before expiry of his term.
• Appointment of another person as a director in
place of a director removed.
• Appointment as a director of a person other than
retiring director.
Conclusion
— Company meetings are essential to the day to day
running of the business.
— During the meetings, all matters arising are
recorded and minutes kept.
— Once minutes are recorded a resolution which
would be filed and registered with the registrar may
be extracted.
Questions
— What is a meeting of a company? Are meetings
necessary?
— Discuss the different types of company meetings
— How are company meetings conducted?
— What is a resolution?
— Discuss the different types of company resolutions
COMPANY OFFICERS
• These include directors, managers and the company
secretary.
• Directors are persons to whom the management of
the company is entrusted.
• Section 2 states that a director includes any person
occupying the position of director by whatever
name called and shall include a shadow director.
• A director may be another company.
Directors
• A director is similar to an agent, he can bind his
principal company by his acts without incurring
personal liability.
• Also like trustees as they owe fiduciary duties to the
company.
• However, they aren't true trustees as the legal title
of the company’s property is vested in the company
and not the directors.
• Directors aren't servants of the company unless
they have a separate contract of service with the
company.
Number of Directors
• Provided for under section 185
• Every public company must have at least two
directors and every private company at least one.
• Table 4 provides that for all companies, the number
is not less than two unless decided otherwise by
ordinary resolution.
• Section 187 provides that every company shall have
a secretary and a sole director shall not also be
secretary.
Methods of Appointment
First Directors
• A statement of the first directors and secretary must
be delivered during the company’s registration
process.
• Statement must contain their signed consent to act
in their relevant, capacity.
• Upon incorporation, they are deemed to have been
appointed as its first directors and secretary.
Subsequent Directors
— Usual method of appointment is by an ordinary
resolution in a general meeting.
— Retiring directors are eligible for re-election.
— Section 194 provides that the appointment of
directors must be voted on individually.
— Directors must be elected on their individual merits.
Casual Vacancies
• A casual vacancy is one which occurs between
general meetings e.g. due to the death or
resignation of a director.
• Table A empower the board to fill casual vacancies.
• And to appoint additional directors up to a
maximum specified in the company’s directors.
• A person appointed by the board holds office until
the next AGM.
• He will then be eligible for re-election.
• His appointment wont be considered in determining
who will retire by rotation.
Persons who may not be appointed
• is one who is not Undischarged bankrupt
• It’s a criminal offence for an undischarged bankrupt
to act as a director without permission under
section 200.
• When a disqualification order is made, a person may
not act as a liquidator, director, administrator,
receiver or manager without the courts permission.
• He is also not allowed to participate in the
promotion, formation or management of the
company
Disqualification by court
— A person disqualified by court because of his
conduct as a director is not yet eligible to manage
the company.
— This could be his conduct in isolation or taken
together with his conduct as a director of another
company.
Vacation of office
The office of the director may be vacated by:
• Death of the director
• Dissolution of the company
• Retirement of the company
• Retirement by rotation
• Table A states that at each AGM, one third of the
directors shall retire.
• Those who retire are those who have been longest
in office.
• Retiring directors are eligible for re-election.
Retirement under an age limit
— A director of a public company or a private company
must retire at the first AGM after reaching the age
of 70.
Removal
— A company can remove a director by ordinary
resolution despite anything in the articles of
association or the agreement by the directors.
— Special notice must be given of any resolution to
remove a director.
— On receipt of this notice, the company must send a
copy to the directors
Disqualification
• Section 199 provides for the disqualification of
directors.
• A person will be disqualified from acting as a
director for a period of 3 years if he/she fails to:
• Keep proper accounting records
• Prepare and file accounts
• Send returns to the registrar
• File tax returns and pay tax
• Allows a company to trade while insolvent .
Disqualification
Section 199 (2) states that a person disqualified as a
director shall not:
• Be a director of any company
• Act as director before the expiry of the
disqualification period
• Influence the running of the company through the
directors.
• Be involved in the formation of a new company.
• Act in a way that promotes a company.
Director’s remuneration
— Directors aren't entitled to a remuneration since
they aren't servants of the company.
— Table empowers the company to fix directors
remuneration.
— Directors vote remuneration to themselves once
fixed, remuneration is a debt and paid out of capital
if there is no profit.
Powers of directors
Relationship between the Board and the Company
• The extent of directors’ powers is defined by the
articles.
• Table A provides that the company shall be
managed by the directors who may exercise all the
power.
• If shareholders don’t approve the director's acts,
they must either remove them or alter the articles
to regulate their future conduct.
• Shareholders cant take over the functions of he
directors.
…Powers of directors
— Case: Scott Vs Scott (1943)
— The company in a general meeting resolved firstly to
pay dividends to shareholders and secondly that the
financial affairs of the company be investigated of
accounts.
— Held: The resolutions were invalid as they usurped
the powers the articles had vested in the directors.
Managing Director
— Table A states that the Directors may appoint
one of their members as managing directors on
terms as they think fit
— He has no settled functions. His powers and
duties and on his service agreement.
— Case: Caddies Vs. Holds Worth (1955).
— The Service Agreement of the Managing Director
of a holding T company provided that he should
perform the duties in relation to the business of
the holding company and its subsidiaries as
should be assigned to him by the board of the
holding company.
…Managing Director
— After policy disagreement the board directed him to confine
his attention to the business of one of the subsidiaries.
Held: This was not a breach of his service agreement even
though he had been deprived of the power the company
which was employing him.
— The managing director is not subject to retirement.
— His appointment as managing director ceased automatically
when he’s no longer the director.
Case: Southern Founders Vs Shirlaw (1940)
— Where it wasn’t a director’s contract contained an implied
condition that the company wouldn’t make it impossible for
him to act by removing him as a director when he was
removed, damages for breach of contract were therefore
payable.
Authorized Acts by Directors
(Authority of a person to bind the
company)
— A company may wish to avoid a contract on the
following grounds:
— It was made by a person who wasn’t a director but
who acted as such.
— It was made by the board but in excess of the
directors' collective authority.
— It was made by an individual director without the
required delegated authority
Powers of the directors to bind the
company
— A person dealing with the company in good faith, the power of the
board of directors to bind the company shall be free of any
limitation under the company’s constitution.
— The constitution is deemed to include any resolution of the
company, any agreement between members and the constitution
documents.
— A person dealing with the company with knowledge that the
transaction is beyond the director’s power is protected.
— Such knowledge doesn't amount to bad faith, however bad faith
exists if such a person assists the directors in the abuse of the
power or is party to fraud.
— To prevent the new provisions from being used as a vehicle for
fraud.
The rules of agency
— Under the normal rules of agency, where a person without
actual authority contracts on a company's behalf of the
other party can hold the company liable if he can show that:
— He was induced to make the contract by the agent being
represented as occupying position in the company.
— That the representation was made by persons with actual
authority to manage the company.
— That the contract was one which a person in a position
which the agent was occupying would usually have
authority to make.
…The rules of agency
— Case: Highland Agriculture and Exports Ltd Vs Praful R and 2 Ors (2012)
— Mr. Patel, one of the directors of the Defendant company signed
cheques for payments of UGX 75,000,000/= for the supply of cement by
the Defendant company.
— He also signed receipts acknowledging receipt of cement. The cheque
dishonoured and the Defendant company denied that Patel had the
authority to sign as director
— Held: Mr. Patel had authority to bind the Defendant company.
— The companies act removes the need to rely on the rules of the agency.
— It is sufficient for a document to be signed by the directors or a director
and the secretary provide its expressed to be executed by the company
Duties of directors
— Directors have the following common law duties;
— Section 198 provides for the duties of directors namely;
— To act in a manner that promotes the success of the company’s
business.
— To exercise a degree of full skill and care as a reasonable person would
do looking after their own business.
— To act in good faith in the interest of the company as a whole.
— Section 198 (c) then elucidates good faith as treating all shareholders
equally, avoiding conflicts of interests, declaring any conflicts of
interest, not making personal profits at the company’s expense, non
acceptance of benefits that will compromise him from third parties.
— Section 198(d) provides for the director’s duty to comply with the Act
and any other law.
Fiduciary Duties
— Directors have the same fiduciary duties as agents
or trustees.
— It is based on the principal of trust, honesty and
utmost good faith towards the company in their
dealings on the company’s behalf.
— The duties only apply to the director’s activities
without the company’s concurrence in the general
meeting.
— The directors may profits from their decision,
however they mustn't make a secret profit.
Fiduciary Duties
— Case: Oyester International Ltd Vs. Air Avide Services Ltd
(1995)
— Ntabgoba J, on the authority of Parker Vs. Lewis Boston
Deep Sea fishing company (1888) held that any secret
benefit obtained by a director by reason of his position or in
the course of company’s business whether it takes the form
of a commission or a qualification shares or a sum of cash or
any other sort of benefit renders the director accountable
to the company for the value of benefit
— Although the authority of directors to bind the company is
collective as a board, fiduciary duties are owed by each
director individually.
— Fiduciary duties are owed to the company but not to
individual shareholders.
Directors duties in relation to
employees
— Directors must have regard to the company’s
employees as well as the interest of the members.
— The duty is owed to the company and is enforceable
in the same way as any other duty owed to the
company by its directors.
— Directors must consider the interests of
shareholders and employees so as to discharge their
duties to the company as a whole.
The duty to act bonafide and for
the benefit of the company as a
whole.
— This means that the directors must consider the
interests of the present and future members of the
company.
— They must view the company as a going concern
and balance this long term view against the
interests of the present member.
The duty to use their power for the
purpose for which they were
conferred
— Directors who act dishonestly act in bad faith and to the
company’s detriment.
— A director who acts honestly in the company’s best interests
may still be liable if he uses his powers for the wrong
purposes.
— Case: Hogg Vs Camphorn (1967)
— In order to prevent a takeover bid they believed would be
for the company, the directors issued shares, carrying 10
votes each to trustees of an employee pension fund. The
shares were paid for by the trustees out of an interest free
loan from the company.
…The duty to use their power for
the purpose for which they were
conferred
— Held: Since the proper purposes of issuing
shares is to raise capital, issues made to forestall
a take over bid was a breach of the director’s
fiduciary duties however, the issue was within
the power of the company and could therefore
be ratified at a general meeting.
— The principles also apply to other powers vested
in the directors which don’t require the
company’s authority e.g. the power to make
calls, forfeit shares and register transfers.
The duty to retain freedom of action
• Directors cant validly contract with each other or
third parties on how to vote at future board
meetings.
• Although a lender insists that his representative sits
on the board of the borrowing company while
advancing a loan.
• In theory, such a director owes his duty to the board
and not the person responsible for their nomination.
The duty to avoid a conflict of duty and
interest.
• This is provided under section 198(c) (ii) and (iii).
• A director must not misuse corporate information or
opportunity.
Case: Industrial Development Consultants Vs Cooley
(1972)
• The Defendant, an architect, was employed by the
Plaintiff while negotiating a contract, he realized that
the contract wouldn’t be awarded to IDC (the Plaintiff).
He thus terminated his contract with the Plaintiff on
account of an alleged illness and obtained the
contracted with the gas board. The IDC claimed the
profit he had made.
…The duty to avoid a conflict of duty
and interest.
• The Defendant was in breach of his duty as director
and had to account the Plaintiff. It was immaterial
that the Plaintiff might have never obtained the
profit itself. What mattered was whether Cooley
made a profit and not whether the company
suffered a loss.
• A director must account for a profit although its not
made at the company’s expense.
• This principle stands although the other party
refuses to contract with the company and even if
the company was legally unable to acquire the
benefit in coercion.
…The duty to avoid a conflict of duty
and interest.
• Case: Oyster International Ltd Vs Air Guide Services
Ltd
• Court held that a director stands in a fiduciary
relationship to the company. He must account to
the company for any benefit that accrues to him
through his dealings with third parties in which he
deals with them purportedly on the company’s
behalf.
• A director must not compete with the company.
This amounts to a conflict of both personal and
company interest.
…The duty to avoid a conflict of
duty and interest.
— Case: Peso Silver Mines Vs. Cropper (1966)
— The board of Peso considered and rejected the chance
to purchase a number of prospecting claims near the
company’s property. Peso’s geologist then formed a
company and purchased the claims. Cropper who was a
director of Peso and a party to the original decision was
also a shareholder in the new company. Peso brought an
action to claim from cropper the profit he made on his
shares in the new company.
— Held: Cropper didn’t have to account, he had not been
concealed from peso’s board. There hadn't been a
misuse of corporate opportunity.
Duties of care and skill
— There is very little obligation on a director to display
any skill and diligence.
— This is in contrast to their duties of utmost faith and
loyalty. These duties were laid down in
— Re: City equitable fire insurance (1925)
Skill
— A director must exhibit the degree of skill
reasonably expected from a person of his
knowledge and experience.
— The standard is one of a reasonable man in financial
matters, the director is expected to be a qualified
accountant.
Diligence
— A director isn't bound to give continuous attention
to the company’s affairs.
— Directors aren't bound to attend all board meetings
but they should attend when reasonable to do so.
— The degree of diligence however varies on the facts
of the case.
Liability for others
— Directors are entitled to trust the company’s officers
to perform their duties properly.
— A director isn't liable for acts of co directors or other
officers unless he participates in the wrong.
The duty of the directors to the
company
— Gower, principle of modern company law states
that directors owe their duties to the company
but not individual shareholders or employers.
— The duty of directors to individual shareholders
— The duty arises where directors place
themselves as against shareholders individually.
— This is on of the established legal relationships
to which fiduciary duties are attached.
The duty of the directors to the
company
— Case: Percival Vs. Wright (1902)The directors purchased
shares from their members without revealing that
negotiations were ongoing for the sale of the company’s
undertaking at a favorite price.
— Held: The directors weren't in breach of duty through
their non disclosure
— Case: Coleman Vs. Myers (1977)
— Court held that a fiduciary duty of disclosure arose even
in the absence of agency in the case of a small family. A
company where there was a great disparity of
knowledge between the directors and the shareholders
and where the shareholders of a company had relied on
the directors for advice and information.
Duty to defacto and shadow
directors
— A shadow and defacto director were defined in Hydrodam
(corby) Ltd (1994)
— Court defined a defacto director as one who claims to and
purports to act as a director although not validly appointed
as such.
— A shadow director doesn’t claim or purport to act as a
director, he larks in the shadows, sheltering behind, others
who he claims are directors of the company to the exclusion
of himself.
— Case: Ultraframe (UK) Ltd Vs Fielding (2005)
— Lewison J held that directors owe no fiduciary duties to a
shadow director. A shadow director hasn’t undertaken to
act on the company’s behalf and hasn’t therefore put
himself in a fiduciary relationship with the company
Directors’ duties of skills, care and diligence
— These are coloration to the duties of loyalty and care
— Case: Re city Equitable Fire Insurance as (1925)
— Court held that a director need not exhibit a greater degree of
skill than may reasonably be expected from a person of his
knowledge and experience in the performance of his duties.
— The test applied here is an objective and not a subjective one.
— A director must exercise reasonable care, skill and diligence.
— This is the care, skill and diligence that would be exercised by
a reasonable diligent person.
— Directorship mustn't be regarded as a profession due to
imposition of an objective duty.
— It would be odd if all directors were to be considered as
professional.
Directors as fiduciaries
— It relates to the director’s duty to act in good faith.
— He also has to act as trustees for its agent the
company.
— Directors may also ensure that they don’t misuse
company property.
Duty to act with powers
— This duty deals with the principle of ultravires.
— The directors must act in accordance with the company’s
constitution and articles of association.
— Case: Howard Smith Ltd Vs. Ampol Petroleum Ltd (1886)
— Facts: Ampol a majority shareholder in a company called
millers made an offer to secure the shares it didn’t
already own in millers. However the directors of millers
instead preferred a take over offer from Howard smith,
which was impossible as Ampol held majority shares
…Duty to act with powers
— Held: The director’s acts were illegal as the only
proper purpose for which a share issue power could
be exercised was to raise capital when the company
needed it, which wasn’t the case in this case.
Duty to promote the success of the
company.
— This is provided for under section 198 (a).
— Its one of the core duties of directors. It’s a day to day basis
duty.
— It relates to acting in good faith in the company’s best
interests.
— Case: Brady Vs. Brady (1998)
— Nurse LJ held that though the interests of a company as an
artificial entity cannot be distinguished from the interests of
persons interested in it its desirable to maximize the
company's size, profitability, number of employees or any
other business objective for the company’s success.
…Duty to promote the success of
the company.
— The director, while promoting the company’s success
must consider the likely consequences of a decision in
the long term.
— He must also consider the interests of the company’s
employees, fostering business relationships.
— Directors have a duty of compliance to act in good faith
to promote the company’s success.
— Case: Re Smith and fawcett Ltd
— Lord Greene MR held that directors are required to act
bonafide in what they consider and not what a court
may consider is in the interests of the company.
Duty not to conflict with the company’s
interests (self dealing and competition)
— Directors must not place themselves in situations of conflict of their
personal interests with company interests.
— Good faith must not only be done but must manifestly be seen to be
doen.
— Directors are fiduciaries. They must not make biased decisions.
— Case: Abardeen Railway Vs. Blaikie (1854)
— Cranworth L.C- Court held that a corporate body can only act by
agents who have to promote its best interests. Such agents have a
fiduciary duty towards their principal. They aren't allowed to enter
into engagements in which they have a personal interest conflicting
with the interests of the company.
— The director is in breach of duty provided there is conflicts of
interest which isn't just fanciful.
— Self dealing is a requirement of disclosure to the board.
Relief from liability
— Court has the power to grant relief to an officer if an
action for breach of duty has been brought to him.
— This depends on whether the officer acted
reasonably in the circumstances.
— Neither the articles or any contract may indemnify
any officer for the consequences of negligence,
default, breach of duty or breach of trust.
The secretary
— Section 187 provides for a company secretary. A sole
director is prohibited from being a secretary.
— The secretary is appointed by the directors on such
terms as they think fit.
— The directors may also remove the secretary.
Qualifications
— These depend on the type of company or venture.
— Section 190 provides for the qualifications of company
secretaries.
— The directors must take all reasonable steps to ensure
that the secretary is a person who appears to them to
have the requisite knowledge and experience.
— For a public company, he must be an advocate of the
High Court, or is a member of the institute of chartered
public accountants in Uganda, the institute of chartered
secretaries and administrators.
Powers
— The secretary is the company’s chief administrative
officer.
— He has ostensible authority to make contracts on the
companies behalf like; hiring office staff, contracts for
the purchase of office equipment and hiring cars for
business purposes.
— However, a secretary doesn’t have authority to do the
following:
⁻ Borrow money on the company’s behalf
⁻ Issue a writ or lodge a defence in the company’s name.
⁻ Register a transfer of shares
⁻ Strike a name off the register of members
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Summon a general meeting on his own authority
⁻okwenye@lawyer.com
Duties
The secretary has the following duties:
— Ensure that the company's documentation is in
order. That the requisite returns are made to the
companies register
— Taking minutes in meetings
— Sending notices to members and countersigning
documents to which the company seal is affixed.
Auditors
— An auditor is a person appointed to audit or check
the company accounts
— The audit is a check on the activities of the directors
and the company officers.
— It gives confidence to shareholders that their
investments aren't being mismanaged or
misappropriated.
Appointment of auditors
— This is provided under section 167
— Every officer must appoint an auditor to hold office from the
conclusion of that general meeting until the conclusion of the
next annual general meeting.
— The registrar has powers to appoint an auditor where at an annual
general meeting, no auditors are appointed or re appointed.
— Section 169 provides the grounds who aren't eligible for
appointment as auditors namely; officer or servant of the
company, a person who is a partner or is in the employment of
the company’s officer or servant.
— A body corporate also cant be appointed as an auditor .
— A retiring auditor may be reappointed
— However, at any annual general meeting, a retiring auditor
however appointed will be deemed to be reappointed without
any resolution being passed.
Qualification of auditors
— A person or a firm shall not be qualified to be
appointed as an auditor of a company unless he is a
person registered as an associate Accountant.
— Or a firm each of whose partner is a member of the
Institute of Certified Public Accountants of Uganda
registered under the Accountants Act.
Duties of the auditor
— To audit the company accounts including its annual
balance sheet and profit and loss statement.
— Prepare a report showing if reports have been well
prepared and if they give a true and fair view of the
company’s accounts.
— Carry out investigations to determine if proper
accounting records have been kept and whether
they comply with the entries.
Position of the auditor
— A company auditor isn't an officer of the company as stated
under section 2 Companies Act.
— He is, however, an officer of the company for any tort, crime
or misfeasance he commits in the course of his duties.
— The auditor has to prepare an auditor's report to be
submitted to the general meeting for consideration.
— The auditor’s report had to be open to inspection by any
member.
— Auditors are entitled to remuneration for their services to the
company.
— The auditor’s remuneration has to be fixed by the person
appointing him.
SHAREHOLDER REMEDIES
— The general rule is the powers of the company rest
in the board of directors and the general meeting
— The 2 organs base on the majority rule when making
decisions
— The minority members must accept the decision of
the majority.
— The majority is the one with authority (board of
directors) while the minority have less authority
(other members or shareholders)
…Shareholder remedies
— The principle in Foss Vs Harborttle (1843) is that in case
something injurious is done to the company, the
company is the proper person to bring an action and not
a member of the company.
— Facts: The Plaintiff (an individual shareholder) brought a
suit against the directors of the company who had sold
their own land to the company at a higher value and
kept the proceed to themselves.
— Held: The Plaintiff who is a minority shareholder was
unsuccessful because the right person (Plaintiff) to bring
the action should have been the company itself and not
the individual shareholder or group of shareholders.
— Case: Salim Jamal and ors Vs. Uganda Oxygen Ltd and 2
ors (1997)
— Oder J cited Mor Vs. Wallersteinner (1975) and held that
it’s a fundamental principle of law that a company is a
legal person with a corporate personality separate and
distinct from its shareholders or directors and with its
own property rights and interests to which alone it is
entitled.
— If its defrauded by the wrong door, the company itself is
the one person to sue for the damages.
The effect of the rule in Foss Vs. Harborttle
— The following should be clearly noted to understand the rule in
Foss Vs. Harborttle.
— In case something injurious has been done to the company, the
company is the proper Plaintiff to bring an action and not the
individual shareholder.
— The majority shareholders mean those who have power over the
company.
— The majority does not mean those who are many in number
— The minority are those who have less authority in the company,
although they are more in number.
— The rule reduces unnecessary suit/actions against the company.
— Majority shareholders have the power to control the company in
issue of decision making.
Exceptions to the rule in Foss Vs
Harborttle
— However, the minority shareholders may bring an
action against the company in the following
instances.
— Where there is an ultra vires/illegal transaction by a
company.
— Case: Hutton Vs. West Cork Railway Co.
— Court held that the shareholder’s action against the
company was proper since the company was
involved in ultra vires transactions
…Exceptions to the rule in Foss Vs
Harborttle
— Where majority shareholders are using company
assets for their own self gratification.
— Case - Salim Jamal and ors vs Uganda oxygen and 2
ors (1997)
— Held that where a wrong has been done to a
company, the minority shareholders can bring an
action to stop its continuance or to recover the
company’s property, damages or compensation.
— Where there is a breach of the articles of
association.
…Exception to the rule in Foss Vs
Harborttle
— Case- Hickman vs. Kent (1915)
— Court held that upon registration of a company, the
articles of association create a contract between the
members and the company breach of which entitles
a member to a remedy.
Harborttle
— Where the individual member’s rights have been
threatened/ infringed.
Case - Misango vs Musigire
— The company’s management passed a resolution
that directly affected the plaintiff’s rights. He then
sued the company as an individual.
— Held - The plaintiff’s actions were legal due to the
personal injury made to him.
Harbottle
— Where the majority commits fraud, for example,
the making of secret profits by the directors.
Case- Salim Jamal vs Uganda Oxygen Ltd (1997)
— Oder J - held that minority shareholders could bring
in their own names against the company for the
director’s wrong doing provided it was always
impossible to get the company itself to sue them.
— Through Court intervention.
Harborttle
Case: Estemanco vs Greater London Council
— Court stated that the minority shareholder's right to
sue shouldn’t be taken away if his personal rights
have been affected.
— An action to wind up the company. This arises when
the company affairs have been conducted in an
oppressive manner.
— One must be a member of the company s as to
succeed.
— This must be an action of the last resort.
Harborttle
Case - Irene Kulabako vs Molinga ltd and 2 ors (2010)
— The petitioner brought the action on grounds that
the company affairs were being run in a manner
oppressive to her as a majority shareholder.
— Issue- whether the petitioner had been oppressed
by the majority shareholders and the company
affairs were being operated in a manner oppressive
to the petitioner.
Harborttle
— Bamwine J held- that the petitioners actions were
legal as she had been stamped into accepting a
payment of 10 Million shillings without valuing her
interests in the company. She had also been
threatened to be thrown out of the company due to
her stubbornness.
— Derivative action by the director/ shareholder. A
Director/shareholder may bring an action on the
company’s behalf instead of the minority
shareholder.
Harborttle
— Case- Smith vs. Croft
— Court held that a director or shareholder should give
reasons why a company shouldn’t bring an action
itself.
— Provide that he’s bringing an action on the
company’s behalf.
— Show that the action is for the company’s interest
and all remedies have failed.
SHARE CAPITAL
— A share is a unit of ownership that represents an
equal portion of a company’s capital.
— Section 2 defines a share as share in the share
capital of a company and includes stock except
where a distinction between stock and shares is
expressed or implied.
— It entitles the shareholder to an equal claim for the
company’s profits.
— The shareholder also has an equal obligation for
thee company’s debts and losses.
…Share capital
— A share is a physical or virtual document the
company issues and distributes to all its partners.
— Shares are bought and sold in the stock exchange
like the Uganda stock exchange, NSE, BSE.
— Ownership of shares in a company entitles the
shareholder to information about the company.
…Share capital
— The company has to announce all the results and
earning ratios to its partners who hold respective
stock.
— Shares normally have a nominal or per value.
— This is the shareholder’s limit to contribute to the
company on an insolvent liquidation.
— Companies raise capital for their business ventures
through debt or equity.
…Share capital
— Many companies have different classes f shares.
— Shares confer a number of rights on the
shareholder. Namely;
⁻ Voting rights
⁻ Rights to dividends
⁻ Rights to any return of capital
— The total number of shares issued in a company
represents its capital.
Types of Shares
— Ordinary Shares
— Preference Sharess
— Redeemable shares
— Deferred Shares
Preference Shares
— These give the holder preferential treatment when
annual dividends are distributed to share holders.
— They receive a fixed dividend.
— The shareholder has prior rights to his dividend
ahead of ordinary shareholders if the business is in
trouble.
— They are likely to be paid the per or nominal value of
shares ahead of ordinary shareholders if the
business is wound up.
Redeemable shares
— The company can buy them back at a future date.
— This date can be fixed or it can be a choice of the
business.
— A company can’t issue only redeemable shares.
Ordinary Shares
— These are the most common type of shares.
— They are standard shares with no special rights or
restrictions.
— They have a potential to give the highest financial
gains.
— They also carry the highest risk.
— These are the last paid if a company is wound.
Allotment of shares: Private
companies
— This is the process through which a potential
shareholder/subscriber is given the number of
shares he has successfully applied for.
— Private companies restrict the issuance of shares to
the public under Section 5 (1)(a).
— A private company must restrict the transferability
of its shares in its articles of association.
Public companies.
— Allotment is the process through which shares are
distributed to successful applicants.
— A company isn’t allowed to transfer the shares after
its first allotment unless the minimum subscription,
requirements have been satisfied.
— There must be enough working capital for the day
running of the business.
Share certificates and Warranties
— A share certificate is a document which shows one’s
ownership of shares in a company.
— Section 92 states that the share certificate shall be
prima facie evidence of the member to the shares.
— Section 91 provides for the issuance of share
certificates within 60 days after the allotment.
Consequences of default
— Section 91(3) imposes a fine of twenty five currency
points on the company and officers incase of
default.
— The aggrieved allottee can serve the company with
a note to give him his certificate.
Legal effects of share certificates.
— Section 92. It’s prima facie evidence of ownership of
shares.
— It estops the company from denying the grant of
the shares.
— It estops the company from denying the payment of
the shares as stated in the certificate.
Share warrant
— Can be issued in place of a share certificate.
— Section 2 defines a share warrant according to
section 95(2).
— Section 95 authorizes a company limited by shares
to issue a warrant in respect of fully paid up shares.
Advantages of a warrant over a
share certificate.
— A warrant is a share warrant that the bearer is the
owner of the shares indicated.
— A share certificate is prima facie evidence that the
holder is the owner of shares.
Capital and Dividends
— A dividend is a cash payment paid to the shareholders.
— These are paid on a quarterly basis.
— It’s a portion of corporate profits paid out to stockholders.
— The Corporations' profit can either be re-invested in the
business (retained earnings) or be distributed to
shareholders.
— Cash is distributed to shareholders through dividends or
share repurchases.
— The doctrine of maintenance of capital dictates that
dividends are paid out of share capital.
Importance of dividends
— Attractive returns. Companies that pay dividends
are usually historically stable.
— Less volatility- dividends help lessen the potential
fall of a company's stock price.
— Increased yield- dividends provide income
— Favourable tax treatment.
…Importance of dividends
— Case- Makidayo Oneka vs Wines and Spirits Ltd and Anor
(1974 )
— Court held that unless the articles and terms of issue of
shares confer a right upon a shareholder to compel a
company to pay a dividend, the directors have the discretion
to recommend to a general meeting that a dividend be
declared.
— A shareholder or a debenture holder can seek a court
injunction, restraining a company from declaring a dividend.
— The Companies Act states that dividends have to be paid out
of profits, but “what are profits?”
…Importance of Dividends.
— Case- Lee Neuchattel Asphalt Co (1889)
— A company was formed to work out a concession in
a mine. It proposed to pay a dividend out of the
profits on its reserve account. This as challenged by
a share holder on grounds that since the company's
assets weren’t equal to it’s share capital and the
mining concession was wasting asset, dividing
annual proceeds amounted to dividing the
company’s capital assets.
…Importance of Dividends.
— Court rejected the shareholders contention and held
that:
— There was nothing in the act to say how accounts
are kept, what is to be put into capital accounts,
income accounts and what’s to be left to the men of
business. Losses of capital need not to be made
good before the company declares a dividend.
…Importance of dividends
— This is called a declarational announcement date.
— Companies who effectively manage their cash flow
tend to sustain and grow their dividend payouts
over time.
— Dividends are normally declared at the company’s
general meeting.
— Shareholders however act on the director’s
recommendations. They shouldn’t exceed this.
Legal rules relating to dividends
— Dividends shouldn’t be paid if the company will
consequently be unable to pay its debts.
— Its permissible to pay dividends out of profits
without making up losses on fixed capital.
— Losses of previous years need not be made good
before payment of a dividend.
— Profits of previous years may be distributed by way
of dividend from a reserve fund.
…Legal rules relating to dividends
— A profit made on the sale of a company’s fixed
assets can be distributed to members by way of
dividend.
— Competent valuers permit a company to distribute a
surplus on it’s capital account which results from a
revaluation of the company’s assets made in good
faith.
Share floatation
— Shares created on the stock aren’t equal based on
the amount of capital issued.
Categories of Share Capital
— Authorized
— Restricted
— Nominal
— Paid up
— Issued Capital
— Unissued share capital
— All these have different attributes.
…Categories of share capital
— Investors need to know these terms so as to make
informed decisions.
— Share capital can be divided into nominal, paid-up,
reserve and issued capital.
— Authorized shares are the total number of shares of
stock authorized when the company was created.
— Only a vote by the shareholders can increase this
number of shares.
…Categories of share capital
— Nominal capital must exist first before a company is
registered.
— This is also called startup capital.
— This is usually shown in the company’s nominal
statement.
— The capital can be divided, depending on each
shareholder's contribution in a company limited by
shares.
Categories of share capital
— Companies limited by shares have paid-up capital.
— Paid-up capital arises when members pay for the
shares issued out by the company.
— Issued capital is the amount capital the company
issues out.
— Issued capital can also include nominal capital.
Raising of share capital
— This can be one of the most difficult tasks of a
company executive.
— It can be intimidating, energy draining and time
consuming.
— It can however also provide critical fuel for
continued creation when the learning curve is
gained.
Selling Common stock
— A company can rise capital by issuing common stock if
its in good financial health.
— Investment banks help companies issue stock
— They agree to buy new shares issued at a set price if
the public refuses to buy stock at a certain minimum
price.
— Investors are attracted to stock.
— The value of shares increases as investors expect the
corporate earnings to rise.
— Companies whose stock prices rise substantially often
split the shares.
Borrowing
— Government, local authorities, local development
agencies and the European union are the major sources
of grants and soft loans.
— Grants are normally made to facilitate the purchase of
assets, generation of jobs or training employees.
— Soft loans are normally subsidized by the third party.
— Companies can also raise short term capital by getting
loans from banks and lenders usually to finance
inventories.
Selling bonds
— A bond is a written promise to pay back a specific amount of
money at a certain date or dates in future.
— Bondholders receive interest payments at fixed rates on
specific dates.
— Holders can sell bonds to someone else before they are due.
— Bonds are advantageous due to the low interest rate which
is also considered as a tax deductible business expense.
— A company can also raise capital by issuing preferred stock.
— Buyers of this stock have special status incase the company
faces financial trouble.
Profits
— Companies can finance their operations by retaining
their earnings.
— There are varying techniques used.
— Electric, gas and other utilities corporations
— Pay out most of their profits as dividends to
shareholders.
— Others distribute 50% of earnings in dividends and keep
the rest for expansion and operation.
— However, small corporations re-invest their net income
in research, expansion.
Maintenance of Share Capital
— This doctrine of maintenance of share capital is
designed to protect the company’s creditor.
…Maintenance of share capital
Case: Re exchange Banking Co (1882)
— Jessel MR: stated that, the creditor gives credit to the
company on the faith of the representation that the
capital shall be applied for purposes o0f the business.
The creditor has a right to say that the corporation shall
keep its capital and not return it to the shareholders.
— A company is expected to be active, therefore the share
capital can’t be kept docile.
— The company must regulate the use of its share capital.
Outcomes of maintaining share
capital
— Dividends paid to shareholders may only be paid out
of a company’s profit.
— Capital invested by shareholder's can’t be returned
to them except when
— 1) capital can be returned to the shareholders under
the companies Act with Court’s approval.
— 2) The company is put into liquidation
— 3)The company redeems purchases its own shares.
Debentures
— A Debenture is a paper/ document indicating an
indebtedness of some kind of permanence of the
company.
— The debenture is an acknowledgement of a distinct
debt. Section 98 provides for a register of
debenture.
— Section 2 defines a debenture to include debenture,
stock, bonds and any other securities of a company
whether a charge on the company assets or not.
…Debentures
— A private company may create debenture stock
since its not allowed to raise money by borrowing
from the public.
— A debenture stock is a loan fund created by the
company.
— It can be divided among various creditors all who
hold a debenture stock certificate.
Differences between a debenture
and a debenture stock
Debenture.
— They rank according to the time of issue. The
debentures take priority over all other debentures
on repayment.
— The debenture is a document which acknowledge a
distinct debt.
…Differences between a
debenture and a debenture stock
Debenture stock.
— It is a fund each beneficiary ranks in paripassu with
others
— A debenture stock is created by a private company
as its not allowed to borrow from the public.
— A debenture stock is a loan fund created by the
company which is visible among various creditors.
Issuance of shares
— Shares can be issued at premium, nominal and discount
levels
— Section 66 provides for the issuance of shares at a premium
— Section 67 authorizes the company to issue shares at a
discount when
— The issue of shares at a discount has been authorized
passed in a general meeting with the sanction of court.
— The resolution must specify the maximum rate of the
discount at which the shares will be issued
…Issuance of shares
— Not less than one year must at the date of issue have
elapsed since the date on which the company was entitled
to commence business.
— The shares to be issued at a discount must be issued one
month after the date on which the issue is sanctioned by
court or within such extended time as the court may allow.
— A company which has agreed to issue shares at a discount
must apply to court for an order sanctioning the issue under
section 67 (2)
— Section 68 provides for the company’s power to issue
redeemable preference shares.
— Its however vital to issue a member with a share certificate.
Increase of issued capital
— The general rule is that the company’s issued capital shouldn’t be
increased unless the company’s ordinary business warrants such a
steps.
— Rationale is to maintain the capital fund upon which the creditors
rely for payment.
— Case: Flitcofts (1882)
— The directors had allowed debt to be credited in the company’s
accounts creating imaginary profits with the knowledge that
debts were bad.
— Held: The creditor ahs no other debtors other than the company .
He therefore has the right to insist that the company must keep
its capital and not return it to the shareholders.
— Dividends must therefore only be paid out of profits.
Transfer and transmission of shares
— Transfer of shares is a means of transferring the ownership rights
from one person to another.
— It is a voluntary act of the members.
— Transfer and transmission of shares is based on the type of the
company.
— Public companies can transfer shares among themselves and also
to members of the public
— Private companies are prohibited from transferring shares to the
public. The transferee should have proper instrument of transfer
,this has to be registered under section 85.
— Most companies regulate the procedure of transfer and
transmission through the articles of association
…Transfer and transmission of
shares
— Case: Re Smith Vs Fawcett Ltd (1942)
— The company’s articles of association gave the directors uncontrolled
discretion to refuse to register any transfer of shares. The company
had two directors and two shareholders, Smith and Fawcett. Fawcett
died and Smith and the new director refused to register a transfer of
his shares.
— Held: Lord Greene where articles confer on the directors a discretion
to refuse to register a transfer , they must exercise their powers
bonafide but subject to this qualification, they must be given
absolute discretion .
— Case: Simm Vs Anglo American Telegraph Co. (1879)
Court stated that a certificate issued due to registration of a forged
transfer means that no estoppel arises against the company in favour
of the person who submitted the transfer for registration.
Financial assistance
— It is unlawful for a company to assist anybody to
purchase its shares.
— Its like a donation. It reduces the share capital.
However, this isn't applicable where:-
— The company lends money as part of it's business.
— The company subscribes for its shares so as to help its
employees.
— Any security for a mortgage for a loan isn't recoverable
in such instances.
— The money lenders cant sue for the loan
Company repurchasing its own shares
— Case: Trevor Vs Whiteworth (1887)
— Facts: During winding up, a shareholder claimed the
balance of the principal for fully paid up shares he had
sold to the company before winding up.
— Held: It was ultravires for a company to purchase its own
shares albeit the memorandum gives authority to do so.
— The transaction is also objectionable on the following
grounds:
— The value of the remaining shares is curtailed if the
company paid more than the actual value of shares.
— The company is adversely affected if it repaid the
principal on the stock exchange.
— Repurchasing is different from forfeiture or surrender.
Lien on shares
— A lien is a right to retain possession of anything until a claim
is satisfied
— A company lien on a share means that a member wont be
allowed to transfer his shares until he pays the company
debt.
— Articles provide that the company shall a first lien on each
member’s shares for his debts and liabilities to the
company.
— The right of lien isn't inherent. It must be provided in the
articles.
— The company may have lien on fully paid up shares, dividend
payable on the shares, unpaid calls.
Surrender of shares
— Shares are surrendered when they are voluntarily given up.
— A company may authorize its directors to accept a surrender
of shares.
— The surrender is valid when the shareholder is willing to
surrender.
— The surrender should be done to relieve the company from
the formality of forfeiture.
— Surrender and forfeiture have the same effect.
— Only difference is that surrender is done with the
shareholder’s consent.
— Forfeiture is however done at the company’s instance.
Surrender of shares
— A surrender of shares will be void, if it amounts to a
purchase of shares by the company.
— Surrender will be void if its intended to relive a member of
his liabilities.
— Every surrender of shares involves a reduction of capital
which is unlawful except when sanctioned by leave of
court.
— A valid surrender of shares makes a person cease to be
liable for contribution as a past member if the company
wound up 12 months after his surrender.
— Validity surrender shares can be reissued in the same way as
forfeited shares
Forfeiture of shares
— A company can only forfeit shares if its articles provide for it.
— The directors may forfeit than shares of a shareholder who fails
to pay the amount due on any call if this is authorized by the
articles .
— Shares can only be forfeited for non payment of calls
— Its illegal to attempt to forfeit
— A person whose shares have been forfeited ceases to be a
member in respect of those shares
— The right to forfeit shares must be pursued with the greatest
exactness.
— The provisions of the must be strictly followed.
— Forfeiture must be by properly appointed directors at a meeting
with quorum
— Any irregularity in the process makes the forfeiture illegal.
Pre requisites of forfeiture
— The shareholder must be given notice requiring him to pay the
money due on call with interest.
— The notice must specify a date, not being earlier than the expiry
of 14 days from the date of service of notice on or before which
payment is to be made.
— It must also state the date on which the share will be liable for
forfeiture in event of non payment.
— There must be a proper board resolution.
— The power of forfeiture must be exercised bonafide and for the
company's benefit.
— Forfeited shares become company property
— It involves a reduction of company capital.
— The forfeited shares may be sold for any price they fetch even a
discount
Debenture and debenture stock
— Debentures are usually offered in issues under an indenture.
— An indenture is a document which sets out the terms of the exchange.
— A debenture is a bearer interest.
— Shows the company’s liability for a sum of money at a certain interest.
— A debenture is a document which either creates a debt or an
acknowledges it without collateral.
— It’s a medium or long term debt instrument companies use to borrow
money.
— Money raised through debentures becomes company capital and not
share capital
— Debenture holders can freely transfer their debenture stock to other
parties.
— However they cant vote during company general meetings
— Every company can convert its debentures into equity shares
— Convertible bonds have lower interest rates than non convertible
corporate bonds
— Debentures can be convertible or non convertible.
Fixed and floating charges
— Fixed and floating charges are used to secure the company’s
borrowing.
— Section 2 defines a charge as a form of security for payment of a
debt, performance of an obligation consisting of the creditor’s
right to receive payment out of some specific fund or out of the
proceeds of the realization of specific property including a
mortgage. Section 105 provides for the registration of charges
with the registrar.
— Section 106 imposes a duty on the company to register the
charges it creates.
— A floating charge is a type of security only available to companies.
— Its an equitable charge on the company’s present and future
assets
— It allows the company to borrow through it has no specific assets
Conclusion
— The raising of capital has a direct impact on the
value of shares due to the laws of demand and
supply.
— The doctrine of raising and maintaining capital is
essential to the management of a company.
— Share capital is vital for a company’s finances
— It promotes the capital maintenance doctrine by
securing the company’s distributable profits.
WINDING UP/ LIQUIDATION
— Winding up is the process through which the company
becomes non existent.
— Winding up is regulated by the Companies Act, 2012 and
the Insolvency Act, 2011.
— Winding up can voluntary or compulsory by the courts
of law
— It’s the process through which a company’s life is
extinguished and its benefit of its members and
creditors.
— A liquidator is appointed to control the company,
collect its assets, pay debts and distribute the surplus
among members according to their rights
…Winding up/ Liquidation
— The company has no asets or liabilities after winding
up
— Disssolution of the company occurs after winding
up.
— The company’s name is struck off the register upon
dissolution
— Liquidation is the normal means in which a
company’s existence is brought to an end.
— Only a limited company can be wound up.
Types of Winding up
— By court
— Voluntary
— Subject to the supervision of the court.
Voluntary winding up
— Provided for under section 268
— It may be done by way of special resolution
— Section 268(2) states that the voluntary winding up
commences at the time the resolution is passed.
— Section 269 stipulates the need for notice of resolution
for voluntary winding up.
— Section 270 states that the company will cease to carry
on business except as required for a beneficiary
winding up as the consequence of voluntary winding
up.
Circumstances for voluntary winding up
— When the period fixed for the duration of the company in its
articles has expired.
— When an event on which the company’s dissolution is premised
happens.
— When a company resolves by special resolution to be voluntarily
would up at a general meeting.
— Case: In the matter of an application for leave for voluntary
winding up by imperial investments finance ltd
— The company passed a special resolution to wind up voluntarily at
an extra ordinary general meeting and appointed a liquidator.
Notice of resolution to wind up voluntarily was given in the
gazette on 9th March 2007.However no notices of voluntary
winding up appeared in the monitor Newspaper of January 24th
2007.
…Circumstances for voluntary winding up
— The notices in the monitor stated that the company intended
to pass a resolution for winding up. They were advertised on
the 24th January 2007 long before the company passed the
resolution on 21st February 2007
— Held; The company’s existence therefore came to an end
voluntarily.
— A member or a creditor can both voluntarily wind up a
company
— This is done when the company has out grown its usefulness
and the members no longer intend to maintain its structure.
— Voluntary winding up occurs at a meeting of its members.
— A members’ voluntary winding up is when the company is
solvent when its wound up.
— This ensures that the company outstanding creditors are paid
in full
— It also protects the member’s interests
Creditors voluntary winding up
— Occurs when the company is insolvent and its directors
or shareholders decide to put it into liquidation.
— Case: ABC coupler and Engineering Ltd (1961)
— The creditor had a debt of 17,500 pounds with the
company and he petitioned for its winding up. There
were other creditors who were opposed to the
compulsory winding up order since the company had
many assets and extensive good will.
— Held: The creditor’s petition for winding up was denied.
Compulsory winding up
— Occurs when the court makes a winding up order on
the petition of an appropriate person like a creditor
or any contributory shareholder.
— Case: Irene Kulabako Vs. Moringa and Ors
— The Appellant sought court orders to wind up the
company because the majority shareholders had
caused her t sell off her shares without considering
the current market value of the shares
Instances of compulsory winding up
by the company
— If the company resolves to wind up through a special resolution.
— Default is made in holding a statutory meeting or delivering a
statutory report to the registrar.
— If the company doesn’t commence its business within a year from
the incorporation or suspends its business for a whole year
— If the number of shares are reduced than their required number.
— If a company is unable to pay its debts
— If its just and equitable for the company to be wound up
according to the tribunal
— If the company defaults in filing its balance sheet profit and loss
account with the registrar for 5 consecutive financial years.
Instances when the registrar may
petition for winding up
— A default is made in delivering a statutory report or holding
a statutory meaning.
— If the company doesn’t commence its business within one
year from its incorporation or it suspends its business for a
whole year.
— It appears to him from the company’s financial position as
disclosed in the company balance sheet , an auditor or
inspector’s report that the company is unable to pay its
debts.
— Where the number of members of the company fall before
the statutory minimum
— Its just and equitable that the company winds up.
Creditor’s winding up
— Its commenced by a special resolution of the members
— Shareholders meeting at which the resolution is passed
must be followed immediately by a creditor’s meeting.
— The creditors nominate a liquidator at this meeting
— The creditors may also appoint a liquidation committee
— No change in the company’s status quo is permitted
once the creditor’s winding up commences.
— Any transfer of shares made without the liquidator's
approval is void
— Directors must cease to act once a liquidator is
appointed.
— The liquidator may exercise all the powers of the
company required for winding up.
…Creditor’s winding up
— The liquidator must call a general meeting of the company and a
meeting of the creditor’s if the creditor’s winding up continues for
more than 12 months.
— The meeting should be held within 3 months of each anniversary of
the winding up.
— Liquidator to prepare an account of the winding up when the
company is finally wound up.
— The report must be laid before a company general meeting and a
meeting of the creditors.
— Must then make a return to the registrar of companies
— This has to be a companied by a copy of the accounts if it’s a public
company
— The company is deemed to be dissolved on the expiry of 3 months
from the date of registration of the liquidator’s return
— Unless court makes an order deferring the dissolution date
The winding up process
— Issuing a written demand for debt repayment to the
target company
— Presenting a winding up petition to the court and the
company
— Court hearing the petition
— Granting of the winding up order by court
— Meeting of creditors and other relevant parties
— Realization and distribution of company assets to the
creditors
— Release of duties for liquidator
— Dissolution of the company.
Role of the liquidator
— Must convert the members’ voluntary winding up (for a
solvent company) to a creditors’ voluntary winding up for
an insolvent company if they form the opinion
— To sell the company’s assets and distribute them among the
company creditors as divided .
— He must pay dividends to shareholders under a set of
priorities like; costs and expenses of the liquidation,
employee entitlements, non priority creditors, members
— A liquidator appointed by court may have his actions
restricted by the order appointing him.
—
…role of the liquidator
— The court can appoint an official receiver when the
company is winding up due to bankruptcy.
— The liquidator can apply to court for the release of
the duties once the following have been
accomplished; all the company assets have been
realized.
— Investigations relating to the winding up
proceedings are completed
— A final dividend has been paid to the creditors to
settle the debts.
Conclusion
— The right to apply for winding up is a creature of
statute not contract
— Winding up is affected by the facts and
circumstances of a particular case
— The machinery of winding up can not be used as a
pressure tactic
— It’s the stage where the company takes its last
breath.

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COMPANY LAW IN UGANDA

“The most enlightened judicial policy is to let people

— Section 70 provides for the reserve liability of a

— To act in the company’s interest.

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