UGANDA CHRISTIAN UNIVERSITY

MAIN CAMPUS/KAMPALA CAMPUS

DEPARTMENT OF MERCANTILE LAW

BACHELOR OF LAWS DEGREE

BUSINESS ASSOCIATIONS 1, LECTURE GUIDE NOTES1

COURSE UNIT: BUSINESS ASSOCIATIONS I

Volume II: Promoter, Pre-Incorporation Contracts, Novation & Memorandum of

Association and its alteration.

Date: September 2023

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Teaching Line-Up: Mr. Albert Collins Kyeyune, (Head of Subject-Main and KLA Campus), Mr. Emmanuel
Kashaija (Lecturer-Main Campus), Mr. Emmanuel Candia (Lecturer-KLA Campus), Miss. Lilian Nabirye-
KLA Campus, (Tutor), Miss. Prossy Basemera, (Tutor-KLA Campus), Miss. Juliet Candia (Tutor-Main
Campus).

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1.0 Promoter:

The Companies Act, 2012 does not define the term promoter but it is used to describe people
involved in setting up the company that is individuals who are involved in the processes of
formation up to incorporation excluding those providing legal, professional or administrative
services. One of the most well-known definition is that of Bowen J, in Whaley Bridge Calico
Printing Co v Green, 34 where he states that:

The term promoter is a term not of law, but of business, usefully summing up in a single word a
number of business operations particular to the commercial world by which a company is
generally brought into existence. At common law, the best definition is that by Chief Justice
Cockburn in the case of Twycross – v – Grant (1877) 2C.P.D. 469, Cockburn says “a promoter
is one who undertakes to form a company with reference to a given project and to set it going
and who takes the necessary steps to accomplish that purpose.”

The term is also used to cover any individual undertaking to become a director of a company to be
formed. Similarly, it covers anyone who negotiates preliminary agreements on behalf of a proposed
company. But those who act in a purely professional capacity e.g. advocates will not qualify as
promoters because they are simply performing their normal professional duties. But they can also
become promoters or find others who will. Whether a person is a promoter or not, therefore, is a
question of fact. The reason is that the word Promoter is not a term of law but of business summing
up in a single word the number of business associations familiar to the commercial world by which
a company is born.

It may therefore be said that the promoters of a company are those responsible for its formation.
They decide the scope of its business activities, they negotiate for the purchase of an existing
business if necessary, they instruct advocates to prepare the necessary documents, they secure the
services of directors, they provide registration fees and they carry out all other duties involved in
company formation. They also take responsibility in case of a company in respect of which a
prospectus is to be issued before incorporation and a report of those whose report must accompany
the prospectus. It is important to know whether one is a promoter or not and the point in time he
first became a promoter or when he ceased to be a promoter because the law regards a promoter as
having certain duties towards a company.

In short, the term ‘promoters’ can be defined as those persons who think of forming a company,
take necessary steps to accomplish that purpose and thus actually bring the company into
existence2.

2
Promoters of a company stand undoubtedly in a fiduciary position. They have in their hands the creation and
mouldings of the company. They have the power of defining how, when and what shape the company takes. A
promoter is a person who does the necessary preliminary work incidental to the formation of a company. It is a
term used for a person who undertakes, does and goes through all the necessary incidental preliminaries, keeping
in view the object, to bring into existence an incorporated company. Chronologically, the first persons who control
a company’s affairs are its promoters. It is they who conceive the idea of forming the company, with reference to
a given object and then to set it going. It is they, who take the necessary steps to incorporate the company, provide
it with share and loan capital and acquire the business or property which it is to manage. When these things have
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1.2 Duties of a promoter3:

His duty is to act bona fide towards the company. Though he may not strictly be an agent, or trustee
for a company, anyone who can be properly regarded as a promoter stands in a fiduciary
relationship vis-à-vis the company. This carries the duties of disclosure and proper accounting
particularly a promoter must not make any profit out of promotion without disclosing to the
company the nature and extent of such a Promotion. Failure to do so may lead to the recovery of
the profits by the company.

The question which arises is – Since the company is a separate legal entity from members, how is
this disclosure effected?

Erlanger v New Sombrero Phosphates Co. (1878) 3 A.C. 1218

The promoters of a company sold a lease to the company at twice the price paid for it without
disclosing this fact to the company. It was held that the promoters breached their duties and that
they should have disclosed this fact to the company’s board of directors.

Facts;

Frédéric Émile d'Erlanger was a Parisian banker. He bought the lease of the Anguilla island of
Sombrero for phosphate mining for £55,000. He then set up the New Sombrero Phosphate Co.
Eight days after incorporation; he sold the island to the company for £110,000 through a nominee...
The board, which was effectively Erlanger, ratified the sale of the lease. Erlanger, through
promotion and advertising, got many members of the public to invest in the company. After eight
months, the public investors found out the fact that Erlanger (and his syndicate) had bought the
island at half the price the company (now with their money) had paid for it. The New Sombrero
Phosphate Co sued for rescission based on non-disclosure, if they gave back the mine and an
account of profits, or for the difference.

Held;

The House of Lords unanimously held that promoters of a company stand in a fiduciary relationship
to investors, meaning they have a duty of disclosure. Further, they held, by majority that the
contract could be rescinded. As Lord Cairns said:

I do not say that the owner of property may not promote and form a joint stock company, and
then sell his property to it, but I do say that if he does, he is bound to take care that he sells it to
the company through the medium of a board of directors who can and do exercise an

been done, they hand over the control of the company to its directors who are often the promoters themselves,
under a different name.
3
Some of the duties are to raise capital or funds for the company, decide on company name, location of the
registered address of the company, choose the legal advisors, auditors etc., chose the bankers, prepare and
arrange the necessary documents for the formation of the company, prepare a prospectus in case of a public
company, obtain directors for the company, arrange the preparation of the memorandum and Articles of
Associations among others.
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independent and intelligent judgment on the transaction, and who are not left under the belief
that the property belongs, not to the promoter, but to some other person.

It was clearly stated by James LJ:

A promoter is ... in a fiduciary relation to the company which he promotes or causes to come into
existence. If that promoter has a property which he desires to sell to the company, it is quite open
to him to do so; but upon him, as upon any other person in a fiduciary position, it is incumbent
to make full and fair disclosure of his interest and position with respect to that property.

Again, in Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392. Lindley MR said:

The first principle is that in equity the promoters of a company stand in a fiduciary relation to it,
and to those persons whom they induce to become shareholders in it, and cannot bind the company
by any contract with themselves without fully and fairly disclosing to the company all material
facts which the company ought to know. Here, the necessary and sufficient disclosure will be to
those persons who are invited to become the shareholders. In Salomon v A Salomon and Co Ltd,
the lower courts had taken an adverse view of the sale of the business to the company at a gross
overvalue by Salomon, who was obviously the promoter, but, in the House of Lords, an argument
that the sale of the business to the company should be set aside on Erlanger principles was rejected,
since the full circumstances of the sale were known by all the shareholders. So, it appears that
there is no duty on a promoter to provide the company with an independent board but
disclosure must be to all shareholders.

Lagunas Nitrate Co v Lagunas Syndicate:

Two promoters who were also the only directors, subscribers and shareholders published a
prospectus inviting the public to take shares and sold their property to the company. This sale was
disclosed in the prospectus indicating that they had interest in the property. It was held that there
was no breach of fiduciary duty since there was adequate disclosure hence no rescission.

Since the decision in Salomon’s case it has never been doubted that a disclosure to the members
themselves will be equally effective. It would appear that disclosure must be made to the company
either by making it to an independent Board of Directors or to the existing and potential members.
If to the former the promoter’s duty to the company is duly discharged, thereafter, it is upon the
directors to disclose to the subscribers and if made to the members, it must appear in the Prospectus
and the Articles so that those who become members can have full information regarding it.

It was held in Gluckstein v. Barnes that promoters are bound to disclose all the profits they have
accumulated during the promotion of a company and the company may sue the promoters to
recover any secret profit that they may have obtained in the course of formation of the company.
In this case, Gluckstein and three others bought the Olympia exhibition premises in liquidation
proceedings for 140000 and then promoted a company Olympia ltd to which they sold the property
for 18,000. There were no independent directors. In a prospectus inviting applications for shares
and debentures 40,000 profit was disclosed but not a further 20,000 which they had made by buying
securities on the property at a discount and then enforcing them at their face value. The company
went into liquidation within four years and the liquidator claimed part of the secret profit. The
promoters were liable to refund.
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It was held that the company should have been informed of what was being done and consulted
whether they would have allowed this profit. That the duty to disclose is imposed by the plainest
dictates of common honesty as well as by well settled principles of common law. Since a promoter
owes his duty to a company, in the event of any non-disclosure, the primary remedy is for the
company to bring proceedings for either rescission of any contract with the promoter or recovery
of any profits from the promoter.

As regards Rescission, this must be exercised with keeping in normal principles of the contract.

1. The company should not have done anything to ratify the action;
2. There must be restitutio in intergram (restore the parties to their original position);

The public policy behind restrictions on a promoter is;

1) To protect the company from unfair dealings of insiders.

2) To protect innocent third parties like creditors.
3) To protect prospective shareholders.

1.2.1 Further duties of promoters are as follows:

a) To disclose the secret profit:

The promoter should not make any secret profit. If he has made any secret profit, it is his duty
to disclose all the money secretly obtained by way of profit. He is empowered to deduct the
reasonable expenses incurred by him.

b) To disclose all the material facts:

The promoter should disclose all the material facts. If a promoter contracts to sell the company
a property without making a full disclosure, and the property was acquired by him at a time
when he stood in a fiduciary position towards the company, the company may either repudiate
the sale or affirm the contract and recover the profit made out of it by the promoters.

c) The promoter must make good to the company what he has obtained as a trustee:
A promoters stands in fiduciary position towards the company. It is the duty of the promoter to
make good to the company what he has obtained as trustee and not what he may get at any
time.

d) Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement resulting him profit by the
promotion of the company.

e) Duty of promoter against the future allottees:

When it is said the promoters stand in a fiduciary position towards the company then it does
not mean that they stand in such relation only to the company or to the signatories of
memorandums of company and they will also stand in this relation to the future allottees of the
shares.

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1.2.2 Rights of Promoters:

a) Right of indemnity:

Where more than one person act as promoters of the company, one promoter can claim
against another promoter for the compensation and damages paid by him. Promoters are
severally and jointly liable for any untrue statement given in the prospectus and for the
secret profits.

b) Right to receive the legitimate preliminary expenses:

A promoter is entitled to receive the legitimate preliminary expenses which he has incurred
in the process of formation of the company such as cost of advertisement, fee of solicitor
and surveyors. The right to receive the preliminary expenses is not a contractual right. It
depends upon the discretion of the directors of the company. The claim for expenses should
be supported by vouchers or generally evidence.

c) Right to receive the remuneration4:

A promoter has no right against the company for his remuneration unless there is a contract
to that effect. In some cases, articles of the company provide for the directors paying a
specified amount to promoters for their services but this does not give the promoters any
contractual right to sue the company. This is simply an authority vested in the directors of
the company. However, the promoters are usually the directors, so that in practice the
promoters will receive their remuneration.

1.3 The fiduciary position of a promoter may be summed up as follows.

A. Not to make any profit at the expense of the company: The promoter must not make,
either directly or indirectly any profit at the expense of the company which he is
promoting. If any secret profit is made in notation of this rule, the company may on
discovering it compel him to account for and surrender it, such profit. If he sells to the
company, stock or shares of his own at prices in excess of their market value, he may
be liable in damages for the excess of the price received by him over the market value.

B. To give benefit of negotiation to the company: The promoter must, when once he has
begun to act in the promotion of the company, give to the company the benefit of any
negotiations or contracts into which he enters in respect of the company. Thus, where
he purchases some property for the company, he cannot rightfully sell that property to
the company at a price higher than he gave for it. If he does so, the company may on
discover it, rescind the contract and recover the purchase price. In Erlanger Vs New
Sombrero Phosphate Co. (1878) 3 A. C. 1218, a syndicate, of which E was the head,
purchased an island said to contain valuable minerals. E, as promoter, sold the island to
a company newly formed for the purpose of buying it. A contract was entered into
between X, a nominee of the syndicate, and the company for purchase at double the

4
Further details on remuneration are discussed under 1.4.
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 price actually paid by E. It was held that as there had been no disclosure by the
promoters, of the profit they were making, the company was entitled to rescind
the contract and to recover the purchase money from E and the other members of
the syndicate. When a promoter sells or wishes to sell his own property to the
company, he should either:

i. See that there is a Board of independent persons appointed as directors of the new
company or;
ii. Disclose his interest in the property to the intended members or to the public by
means of a prospectus. He must also make a full disclosure of profits he is making
in that deal.

C. To make a full disclosure of interest or profit:

If the promoter fails to make a full disclosure of all the relevant facts, including any
profit and his personal interest in a transaction with the company, the company may sue
him for damages for breach of his fiduciary duty and recover from him any secret profit.
It is important to note that it is not the profit by the promoter which the law forbids, but
the non-disclosure of it and if disclosure is made, the profit is permissible The
disclosure must be made to an independent Board of Directors. Where there is no
independent Board, disclosure must be made to the intended shareholders as a whole.
The measure of damages is the actual loss suffered by the company as a result of the
transaction in question. Thus, a person who is neither the agent nor the trustee of a
company, nor in a fiduciary relationship to the company can, when he buys he buys
property sell the same to the company at a profit without disclosing the same.

D. Not to make unfair use of position:

The promoter must not make an unfair or unreasonable use of his position and must
take care to avoid anything which has the appearance of undue influence or fraud.

1.4 Remuneration of promoters5:

A promoter is not entitled to any remuneration for services rendered for the company unless
there is a contract so enabling him. In the absence of such a contract, a promoter has no right
to even his preliminary expenses or even the refund of the registration fees for the company.
He is therefore under the mercy of the Directors. But before a company is formed, it cannot
enter into any contract and therefore a promoter has to spend his money with no guarantee that
he will be reimbursed. But in practice the articles will usually have provision authorizing
directors to pay the promoters. Although such provision does not amount to a contract, it
nevertheless constitutes adequate authority for directors to pay the promoter.
5
A promoter has no right against the company for his remuneration unless there is a contract to that effect. In
some cases, articles of the company provide for the directors paying a specified amount to promoters for their
services but this does not give the promoters any contractual right to sue the company. This is simply an authority
vested in the directors of the company. However, the promoters are usually the directors, so that in practice the
promoters will receive their remuneration.

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1.4.1 The remuneration may be paid in any of the following ways:

a) A commission may be paid to the promoter on the purchase price of the business or
property taken over by the company through him;
b) The promoters may be granted by the company a lump-sum amount;
c) The promoters may be given fully or partly paid shares in consideration of their
services rendered;
d) The promoter may be given a commission at a fixed rate on the shares sold;
e) The promoter may purchase the business or other property and sell the same to the
company at an inflated price. He must disclose this fact;
f) The promoters may take an option to subscribe within a fixed period for a certain
portion of the company’s unissued shares at par;
g) Whatever be the nature of remuneration, it must be disclosed in the prospectus if
paid within the preceding two years from the date of prospectus.

2.0 Pre- incorporation or preliminary contracts:

The promoters of a company usually enter into contracts to acquire some property or right for the
company which is yet to be incorporated. Such contracts are called pre-incorporation or preliminary
contracts. The promoters generally enter into such contracts as agents for the company about to be
formed. The legal position is that two consenting parties are necessary to a contract whereas the
company before incorporation is a non-entity. In Kelner Vs. Baxter (1866) LR 2, Kelner agreed
to sell a hotel to Baxter who was acting agent for a company which was about to be formed. It was
held that Baxter was personally liable on the contract as the company was not in existence at the
time of contracting and therefore, could not ratify the contract after its incorporation. The
promoter cannot, therefore act as agent for a company which has not yet come into existence.
As such the company is not liable for the act of the promoters done before its incorporation. A pre-
incorporation contract permitted to be made by a company which does not exist is a nullity. As
such the company, when it comes into existence can neither sue nor be sued on that contract.

Pre-incorporation Contracts at large are transactions which are entered into before the company
exists and where the company appears to be a party to the contract. It is a contract made before a
company’s existence by the promoters.

Until a company is formed, it is legally non-existent and therefore cannot enter into any contract
or even do any other acts in law. Once incorporated, it cannot be liable on any contract nor can it
be entitled under any contract purported to have made on its behalf before incorporation.
Ratification is not possible when the ostensible principle is non-existent in law when the contract
was entered into.
So, prima facie, at common law, a pre-incorporation contract is void and cannot be ratified as
ratification requires an existent principle.

This principle was established by the case of Kelner v Baxter.

Kelner v Baxter 1866
A group of company promoters for a new hotel business entered into a contract, purportedly on
behalf of the company which was not yet registered, to purchase wine. Once the company was

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registered, it ratified the contract. However, the wine was consumed before the money was paid,
and the company unfortunately went into liquidation. The promoters were sued. They argued that
their liability had passed to the company, and were not personally accountable.

Held;

A pre-incorporation contract is void ab initio and can’t be ratified. Ratification presupposes an

existent principle having capacity to contract at the time the contract was entered into. That
whoever professes to act on behalf of a nonexistent principle may be held personally liable. Erle
CJ ; where a contract is signed by one who professes to be signing “as agent,” but who has no
principal existing at the time, and the contract would be altogether inoperative unless binding upon
the person who signed it, he is bound thereby: and a stranger cannot by a subsequent ratification
relieve him from that responsibility. When the company came afterwards into existence it was a
totally new creature, having rights and obligations from that time, but no rights or obligations by
reason of anything which might have been done before.

Byles J; the true rule, however, is that persons who contract as agents are generally personally
responsible where there is no other person responsible as principal.

This case was considered and distinguished in Newborne v Sensolid (Great Britain) Ltd [1954] 1
QB 45: The plaintiff was the promoter and prospective director of a limited company, Leopold
Newborne (London) Ltd, which at the material time had not been registered. A contract for the
supply of goods to the defendants was signed: “Leopold Newborne (London), Ltd” and the
plaintiff’s name, “Leopold Newborne”, was written underneath. In an action for breach of the
contract brought by the plaintiff against the defendants, Held – The contract was made, not with
the plaintiff, whether as agent or as principal, but with a limited company which at the date of the
making of the contract was non-existent, and, therefore, it was a nullity and the plaintiff could not
adopt it or sue on it as his contract.

Per Lord Goddard CJ;

It seems to me a very long way from saying that every time a prospective company, not yet in
existence, purports to contract everybody who signs for the company makes himself personally
liable .This contract purports to be made by the company, not by Mr Newborne. He purports to be
selling, not his goods, but the company’s goods. The only person who has any contract here is the
company, and Mr Newborne’s signature is merely confirming the company’s signature. The
document is signed: “Yours faithfully, Leopold Newborne (London), Ltd”, and the signature
underneath is that of the person authorized to sign on behalf of the company. In this case in rejecting
Kelner v Baxter, court looked at the way in which the contract was signed, it was the company
which purported to make the contract and the promoter did not sign as agent or on behalf of the
company but only to authenticate the signature of the company. Remember in Klener v Baxter, the
promoters signed as “on behalf of the company”
However, Newbornes case still strengthened the position in Kelner that a pre-incorporation contract
cannot be enforced against the company.

The above case of Newborne was applied in Black v Smallwood. In this case, Black and others
contracted to sell land to the company known as Western Suburbs Holdings and the agreement was
signed by the defendants Robert Small and J Cooper as the directors. The two signed as directors
in the mistaken belief that the company had been incorporated. Court applied Newbornes case
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and held that Kelner v Baxter, is not an authority for the principle that an agent signing for a
non-existent principle is bound. That if a pre-incorporated contract objectively has an intention
to bind the company only then the promoter does not necessarily take the liability especially if
the promoter had not known the fact that the company had not been incorporated. The two cases
then modify the rule in Kelner on liability of a promoter on a pre-incorporation to this; whoever
professes to act as an agent of a non-existent company is personally liable on the contract, but
this depends on the intention of the promoter at the time of signing. However, all the three cases
support the proposition that a pre-incorporation contract is void and unenforceable. The
question then is how can a company be bound by a pre-incorporation contract? The only way a
company can be bound is to make a new contract between the company after incorporation and
the parties concerned. This is what is called in law a novation.

It was held in Motani v Thobani (1945) 2 EACA 37, that a sale agreement made before the
company was incorporated was not binding on it and could not subsequently be ratified by the
company. The company could only be liable if there were a new contract to which it was a party.
The question of concern is whether there is a new contract which is a question of fact depending
on each case.

In Price v. Kelsall (1957) E.A. 752

One of the issues in this case was whether or not a company could ratify a contract entered into on
its behalf before incorporation. The alleged contract was that the Respondent had undertaken to
sell some property to a company which was proposed to be formed between him and the Appellant.
In holding that a company cannot ratify such an agreement, the Eastern Africa Court of Appeal as
then constituted O’Connor President said as follows;

A company cannot ratify a contract purporting to be made by someone on its behalf before its
incorporation but there may be circumstances from which it may be inferred that the company after
its incorporation has made a new contract to the effect of the old agreement. The mere confirmation
and adoption by Directors of a contract made before the formation of the company by persons
purporting to act on behalf of the company creates no contractual relations whatsoever between the
company and the other party to the contract.”

In Re Northumberland Avenue Hotel Co Ltd (1886),.

A contract was made between W. and D., as the agent for an intended company, for the assignment
of a lease. The company, on its formation, entered on the land the subject of the lease and erected
buildings on it, but did not make any fresh agreement with respect to the lease. Held, the agreement
being made before the formation of the company, was not binding on the company, and the acts
of the company were not evidence of a fresh agreement between W. and the company. Even if
the company takes the benefit of a contract made before its incorporation, the contract is not
binding on the company. Justice Lopez; when the company came into existence, it could not
ratify that contract because the company was not in existence at the time the contract was made.
That the company might have entered into a new contract upon the same terms as the agreement
and this should not be inferred from the conduct and the transactions of the company when it
came into existence. In Howard v Patent Ivory Manufacturing Co (1888) 38 Ch 156; the court
noted that it has to be a fresh agreement even if it’s on the same terms.

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The above common law position in Baxter and the subsequent cases have been modified further by
S. 54 of the Companies Act 2012 which provides that; (1) A contract which purports to be
made on behalf of a company before the company is formed, has effect, as one made with the
person purporting to act for the company.

(2) A company may adopt a pre-incorporation contract with its formation and registration made
on its behalf without a need for novation.

(3) In all cases where the company adopts a pre-incorporation contract, the liability of the promoter
of that company shall cease.

The effect of the above section is that, a pre-incorporation contract is no longer void but
voidable as it can be adopted by the company without a need for a novation. However, the
section stresses that a promoter is personally liable on the pre-incorporation contract no
matter how he signs it unless the company adopts the contract and thereby his liability ceases.

The interpretation of this section was given by Lord Denning in Phonogram Ltd v Lane (1981)3
ALL ER 182. Where he stated that; The section means that in all cases where a person purports
to contract on behalf of the company not yet formed, then, whichever way he expresses his
signature, he himself is personally liable on the contract. That there has to be clear exclusion of
personal liability and this cannot be made by inferences from the way in which the contract was
signed. This section does not overrule the common law position, which is still good law where
the company fails to adopt the contract.

2.1 Summary of the Position of promoters as regards pre-incorporation contracts

a) Company not be bound by pre-incorporation contracts. A company, when it comes into

existence is not bound by a pre-incorporation contract even where it takes the benefit of the
contract entered into on its behalf. English Colonial Produce Co. Ltd Re (1906) 2 ch.
435: A solicitor prepared the Memorandum and Articles of Association of a company and
paid the necessary fees and other incidental expenses to obtain the registration of the
company. He did this on the instructions of certain persons who later become directors of
the company. It was held that the company was not liable to pay the solicitor’s costs
although it had taken the benefit of his work.

b) The company cannot enforce pre-incorporation contracts. A company cannot, after

incorporation enforce the contract made before its incorporation. The leading case on this
point is Natal Land Colonization Co. Ltd vs. Pauline Colliery Development Syndicate
Ltd AC 120. In this case the N company agreed with an agent of the P Syndicate. The
syndicate was registered and discovered a seam of coal. The company refused to grant the
lease. It was held that there was no binding contract between the company and the
syndicate.

c) Promoter personally liable. The promoters remain personally liable on a contract made
on behalf of a company not yet in existence. Such a contract is deemed to have been entered
into personally by the promoters and they are liable to pay damages for failure to perform
the promises made in the company’s name even though the contract expressly provides that
only companies shall be answerable for performance.
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 d) Where a contract is made on behalf of a company known to both the parties to be non-
existent, the contract is deemed to have been entered into personally by the promoters.
The company can, if it desires, enter into a new contract, after its incorporation with the
other party. The contract may be on the pre- incorporation contract made by the promoters.
But the adoption of the pre-incorporation contract made by the company will not create a
contract between the company and the other parties even though the adoption of the contract
is made as one of the objects of the company in its Memorandum or Articles.

2.2 What Novation of Contract means:

Novation of contract is defined in Scarf v Jardine [1882] 7 AC 3456 as, ‘being a contract in
existence, some new contract is substituted for it either between the same parties (for that might
be) or different parties, the consideration mutually being the discharge of the old contract’.

Novation is different from the Ratification; because in Novation, a new contract is made on the
same terms but this time between the company and the third party, whereas in Ratification, dates
back to the time of the act ratified, so that if the company ratifying, who is not in existence, cannot
itself have then performed the act in question its subsequent ratification of it is ineffective. In the
situation of Novation of Contract, the Company can replace the promoter from the pre-
incorporation contract. But one might say that such contract would not be called pre-incorporation
contract, but it should be called post-incorporation contract; because novation of contract result
into a new contract.

3.0 Memorandum and Articles of Association

3.1 Memorandum of Association.

The Memorandum of Association (MOA) is a legal document which is prepared in the formation
and registration process of a company. It is the charter of the company. It defines the company’s
relationship with its shareholders. It is the most important document of a company as it states the
objects of the company for which it is formed. It also contains the powers of the company within
which it can act. The business that a company carries on is made according to the Memorandum of
Association of the company. MoA helps the shareholders, creditors and any other person dealing
with the company to know the basic rights and powers of the company. Also, the contents of the
MoA help the prospective shareholders in taking the right decision while thinking of investing in
the company.

6
Lord Blackburn said: ‘The principle, I take it, running through all the cases as to what is an election is this, that
where a party in his own mind has thought that he would choose one of two remedies, even though he has written
it down on a memorandum or has indicated it in some other way, that alone will not bind him; but so soon as he
has not only determined to follow one of his remedies but has communicated it to the other side in such a way as
to lead the opposite party to believe that he has made that choice, he has completed his election and can go no
further; and whether he intended it or not, if he has done an unequivocal act – I mean an act which would be
justifiable if he had elected one way and would not be justifiable if he had elected the other way -the fact of his
having done that unequivocal act to the knowledge of the persons concerned is an election.’

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The Act now permits a company to have a general objects clause in its memorandum 7. The Act
provides that it is sufficient where the company is a commercial company for the memorandum to
state that the company’s object is to carry on any trade or business whatsoever and that the company
will have the power to do all such things as are incidental or conducive to the carrying on of any
trade or business by it. In practice, it will be acceptable for a company to have what is essentially
a one-page memorandum8.

This is a new development which essentially abolishes the operation of the ultra-vires doctrine. In
the past, as a result of the operation of the ultra-vires doctrine, it became the practice for companies
to increase the objects clause by adding to the principal objects a large number of objects just in
case they were needed.

Also, companies began to add a large number of powers to their objects clauses. There is a technical
difference between objects of a company and the powers given to it to implement those objects.
These powers are implied and a company has an implied power to do whatever is reasonably
incidental to the carrying on of its objects. However, because of the ultra-vires rule, and some
confusion as to which powers were implied and which had to be expressly stated, companies’
objects clauses contained a mixture of objects and powers. The Act additionally provides that the
validity of an act done by a company shall not be called into question on the ground of lack of
capacity by reason of anything contained in the companies’ memorandum. That being so, directors
may, under specific circumstances, still be liable in person for acts that are performed ultra vires.
Of great concern is what a general objects clause signifies for a company’s borrowing powers and
whether this power has to be expressly stated in the memorandum. Strictly speaking, the answer is
‘no’ because in law, the borrowing power of a commercial company is implied and considered
incidental to the carrying on of business. Nevertheless, a resolution of the company will still be
required for the power to be validly exercised.

Section 7(1) of the Companies Act, 2012, provides that the memorandum of every company shall
be printed in the English language and shall state the following particulars therein;

a) The name of the company, with “limited9” as the last word of the name in the case of
a company limited by shares or by guarantee;
b) That the registered office of the company is to be situated in Uganda; and
c) May also state the objects of the Company.

d) Liability of its members. The memorandum of a company limited by shares or by

guarantee must also state that the liability of its members is limited.
7
Section 7 (1) (c) of the Companies Act, 2012, states that the companies MOA may also state the objects of the
Company.
8
Section 7 (5) Notwithstanding subsection (1)(c), where the company’s memorandum states that the object of the
company is to carry on business as a general commercial company the memorandum shall state that— (a) the
object of the company is to carry on any trade or business whatsoever; and (b) the company has power to do all
such things as are incidental or conducive to the carrying on of any trade or business by it.
9
Stacy and company-Vs-Wallace 1912 Vol 106 LT 544, Lord Justice Scruton decided that ltd was an accepted
abbreviation for limited. However, where it is proved that an association about to be formed as a limited company
is to promote or commerce, art, religion, charity, science or any other useful object and intends to apply its profits
in the promotion of those objects and to prohibit the payment of its dividends to its members then under Sec 41 of
the companies Act, 2012, the minister may direct that the association may be registered as a company with limited
liability without adding the word limited to its name. The name of a company can also be changed.
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 e) Undertaking to contribute to the assets of the company. The memorandum of a
company limited by guarantee must also state that each member undertakes to contribute
to the assets of the company if it is being wound up while he or she is a member or within
one year after he or she ceases to be a member, for payment of the debts and liabilities of
the company contracted before he or she ceases to be a member and of the costs, charges
and expenses of winding up and for adjustment of the rights of the contributories among
themselves such amount as may be required, not exceeding a specified amount 10.

f) The amount of share capital. In case of a company having a share capital, the memorandum
must also, unless the company is an unlimited company, state the amount of share capital
with which the company proposes to be registered and the division of that share capital into
shares of a fixed amount. It is also a requirement that a subscriber of the memorandum may
not take less than one share and each subscriber shall write opposite his or her name the
number of shares he or she takes11.

The memorandum12 shall be dated and shall be signed by each subscriber in the presence of at
least one attesting witness who shall state his or her occupation and postal address. Opposite
the signature of every subscriber there shall be written in legible characters his or her full name,
occupation and postal address.

3.1.2 Alteration of Memorandum of Association:

A company may not alter the conditions contained in its memorandum except in the cases in the
mode and to the extent for which express provision is made in the Act13.

A company may by a special resolution14, alter its memorandum with respect to the objects of the
company, so far as may be required to enable it to:

a) Carry on its business more economically or more efficiently;

b) Attain its main purpose by new or improved means;
c) Enlarge or change the local area of its operations;
d) Carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company;
e) Restrict or abandon any of the objects specified in the memorandum;
f) Sell or dispose of the whole or any part of the undertaking of the company; or
g) Amalgamate with any other company or body of persons, except that if an application is
made to the registrar in accordance with this section for the alteration to be cancelled, it
shall not have effect except in so far as it is confirmed by the registrar.

A resolution to alter the memorandum may be passed by the holders of not less in aggregate
than fifteen percent in nominal value of the company’s issued share capital or any class of
them, if the company is not limited by shares, not less than fifteen percent of the company’s

10
See Section 7 (2) & (3) of the Companies Act, 2012.
11
See Section 7 (4) Ibid.
12
See Section 8 of the Companies Act, 2012.
13
See Section 9 of the Companies Act.
14
See Section 10 of the Companies Act, 2012.
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members; or by the holders of not less than fifteen percent of the company’s debentures entitling
the holders to object; except that an application shall not be made by any person who has consented
to or voted in favour of the alteration. A special resolution altering a company’s objects shall require
the same notice15 to the holders of any such debentures as to members of the company and in default
of any provisions regulating the giving of notice to any debenture holders, the provisions of the
company’s articles regulating the giving of notice to members shall apply. ) In the case of a
company which is, by virtue of a licence from the registrar exempt from the obligation to use the
word "limited16" as part of its name, a resolution altering the company’s objects shall also require
the same notice to the registrar as to members of the company.

Where a company passes a resolution altering its objects if no application for cancellation is made
to the registrar under this section, it shall, within fourteen days from the end of the period for
making the application deliver to the registrar a printed copy of its memorandum as altered; and if
the application for cancellation17 is made, the registrar shall stay registration of the resolution for
alteration until the application is heard and disposed of18.

3.2 Important doctrines arising from Memorandum of Association:

3.2.1 Doctrine of Ultra Virus:

Objects clause is contained in the memorandum of association and sets out the powers of the
directors in running the company. Traditionally, each power of the company had to be enumerated,
which resulted in detailed statements as to the powers of the company. Companies are now able to
use the phrase 'to carry on the business of a general commercial company' rather than use exhaustive
lists of enumerated powers.

3.2.2 Doctrine of constructive Notice:

The doctrines of constructive notice and indoor management are essentially rules of prudence
which facilitate business transactions between a company and an outsider. The former favours the
company in dealing with ordinary members of the public and provides that no outsider in dealing
with the company may claim that he was unaware of certain provisions in the memorandum or
articles of association. It seeks to estop such a person from ever pleading that he had not read these
documents as the presumption is always that all such persons in their dealings have read these
documents and understand their implications.

3.2.3 Doctrine of Indoor Management:

The doctrine of constructive notice thus greatly facilitates the business transactions from the
company’s point of view; it has an important exception, namely, the doctrine of indoor
management. Simply put, the doctrine of indoor management provides that an outsider is entitled
to rely on the presumption that all procedures have been followed on the part of the company and

15
See Section 10 (8).
16
See Section 10 (9).
17
An application for cancellation of the special resolution altering the memorandum may be made to the registrar
within 21 days from passing the resolution upon which the registrar may make an order cancelling the alteration
or confirming the alteration either wholly or in part.
18
See Section 10 (10 (a) & (b).
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the company cannot rely on any procedural irregularity after the deal with any outsider has been
concluded. The doctrine of indoor management is founded on practical reasons of convenience in
business relations.

END

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