*DISCLAIMER*
The
notes below are adapted from the Kenyatta University, UoN and Moi University Teaching module
and the students are adviced to take keen notice of the various legal
and judicial reforms that might have been ocassioned since the module
was adapted. the laws and statutes might also have changed or been
repealed and the students are to be wary and consult the various
statutes reffered to herein
Section 2 (1) of the
Companies Act Cap 486 Laws of Kenya states what company means as 'a company formed and registered under this
Act or an existing company. This is
a very vague definition, in the statute the word company is not a legal term
hence the vagueness of the definition.
The legal attributes of the word company will depend upon a particular
legal system.
In legal theory
company denotes an association of a number of persons for some common object or
objects in ordinary usage it is associated with economic purposes or gain. A company can be defined as an association of
several persons who contribute money or money’s worth into a common stock and
who employ it for some common purpose.
Our legal system provides for three types of associations namely
1.
Companies
2.
Partnerships.
3.
Upcoming is the cooperative society.
The law treats
companies in company law distinctly from partnerships in partnership law. Basically company law consists partly of
ordinary rules of Common law and equity and partly of statutory rules. The common law rules are embodied in cases. The statutory rules are to be found in the
Companies Act which is the current Cap 486 Laws of Kenya. It should denote that the Kenya Companies Act
is not a self contained Act of legal rules of company law because it was
borrowed from the English Companies Act of 1948 which was itself not a
codifying Act but rather a consolidating Act.
Exceptions to the
Rules are stated in the Act but not the rules themselves. Therefore fundamental
principles have to be extracted from study of numerous decided cases some of
which are irreconcilable. The true meaning
of company law can only be understood against the background of the common law.
FUNDAMENTAL CONCEPTS OF COMPANY LAW
There are two
fundamental legal concepts
1.
The concept of legal personality;
(corporate personality) by which a company is treated in law as a separate
entity from the members.
2.
The concept of limited liability;
Concept of legal personality
(i) A legal person is not always human, it can
be described as any person human or otherwise who has rights and duties at law;
whereas all human persons are legal persons not all legal persons are human
persons. The non-human legal persons are
called corporations. The word
corporation is derived from the Latin word Corpus
which inter alia also means body. A
corporation is therefore a legal person brought into existence by a process of
law and not by natural birth. Owing to
these artificial processes they are sometimes referred to as artificial persons
not fictitious persons.
LIMITED LIABILITY
Basically liability
means the extent to which a person can be made to account by law. He can be made to be accountable either for
the full amount of his debts or else pay towards that debt only to a certain
limit and not beyond it. In the context
of company law liability may be limited either by shares or by guarantee.
Under Section (2) (a)
of the Companies Act, in a company limited by shares the members liability to
contribute to the companies assets is limited to the amount if any paid on
their shares.
Under Section 4 (2)
(b) of the Companies Act in a company limited by guarantee the members
undertake to contribute a certain amount to the assets of the company in the
event of the company being wound up. Note that it is the members’ liability and
not the companies’ liability which is limited.
As long as there are adequate assets, the company is liable to pay all
its debts without any limitation of liability.
If the assets are not adequate, then the company can only be wound up as
a human being who fails to pay his debts.
Note that in England
the Insolvency Act has consolidated the relationships relating to …. That does not apply here.
Nearly all statutory
rules in the Companies Act are intended for one or two objects namely
1.
The protection of the company’s
creditors;
2.
The protection of the investors in this
instance being the members.
These underlie the
very foundation of company law.
FORMATION OF A LIMITED COMPANY
This is by
registration under the Companies Act
In order to
incorporate themselves into a company, those people wishing to trade through
the medium of a limited liability company must first prepare and register
certain documents. These are as follows
a.
Memorandum
of Association: this
is the document in which they express inter alia their desire to be formed into
a company with a specific name and objects.
The Memorandum of Association of a company is its primary document which
sets up its constitution and objects;
b.
Articles
of Association; whereas the memorandum of association of a
company sets out its objectives and constitution the articles of association
contain the rules and regulations by which its internal affairs are governed
dealing with such matters as shares, share capital, company’s meetings and
directors among others;
Both
the Memorandum and Articles of Associations must each be signed by seven
persons in the case of a public company or two persons if it is intended to
form a private company. These signatures
must be attested by a witness. If the
company has a share capital each subscriber to the share capital must write
opposite his name the number of shares he takes and he must not take less than
one share.
c.
Statement
of Nominal Capital – this is only required if the company
has a share capital. It simply states
that the company’s nominal capital shall be xxx amount of shillings. The fees
that one pays on registration will be determined by the share capital that the
company has stated. The higher the share capital, the more that the company
will pay in terms of stamp duty.
d.
Declaration
of Compliance: this
is a statutory declaration made either by the advocates engaged in the
formation of the company or by the person named in the articles as the director
or secretary to the effect that all the requirements of the companies Act have
been complied with. Where it is intended to register a public company, Section 184 (4) of the Companies Act also
requires the registration of a list of
persons who have agreed to become directors and Section 182 (1) requires the
written consents of the Directors.
These are the only
documents which must be registered in order to secure the incorporation of the
company. In practice however two other
documents which would be filed within a short time of incorporation are also
handed in at the same time. These are:
1.
Notice of the situation of the
Registered Office which under Section 108(1) of the statute should be filed
within 14 days of incorporation;
2.
Particulars of Directors and Secretary
which under Section 201 of the statute are normally required within 14 days of
the appointment of the directors and secretary.
The documents are
then lodged with the registrar of companies and if they are in order then they
are registered and the registrar thereupon grants a certificate of
incorporation and the company is thereby formed. Section 16(2) of the Act provides that from
the dates mentioned in a certificate of incorporation the subscribers to the
Memorandum of Association become a body corporate by the name mentioned in the
Memorandum capable of exercising all the functions of an incorporated company. It should be noted that the registered
company is the most important corporation.
STATUTORY CORPORATIONS
The difference
between a statutory corporation(or parastatal) and a company registered under
the companies Act is that a statutory corporation is created directly by an Act
of Parliament. The Companies Act does
not create any corporations at all. It
only lays down a procedure by which any two or more persons who so desire can
themselves create a corporation by complying with the rules for registration
which the Act prescribes.
TYPES OF REGISTERED COMPANIES
Before registering a
company the promoters must make up their minds as to which of the various types
of registered companies they wish to form.
1.
They must choose between a limited and
unlimited company; Section 4 (2) (c) of the Companies Act states that ‘a
company not having the liability of members limited in any way is termed as an
unlimited company. The disadvantage of
an unlimited company is that its members will be personally liable for the
company’s debts. It is unlikely that
promoters will wish to form an unlimited liability company if the company is
intended to trade. But if the company is
merely for holding land or other investments the absence of limited liability
would not matter.
2.
If they decide upon a limited company,
they must make up their minds whether it is to be limited by shares or by
guarantee. This will depend upon the
purpose for which it is formed. If it is
to be a non-profit concern, then a guarantee company is the most suitable, but
if it is intended to form a profit making company, then a company limited by
shares is preferable.
3.
They have to choose between a private
company and a public company. Section 30
of the Companies Act defines a private company as one which by its articles
restricts
(i)
the rights to transfer shares;
(ii)
restricts the number of its members to
fifty (50);
(iii)
prohibits the invitation of members of
the public to subscribe for any shares or debentures of the company.
A company which does not fall under this
definition is described as a public company.
In order to form a
public company, there must be at least seven (7) subscribers signing the
Memorandum of Association whereas only two (2) persons need to sign the
Memorandum of Association in the case of a private company.
ADVANTAGES OF INCORPORATION
A corporation is a
legal entity distinct from its members, capable of enjoying rights being
subject to duties which are not the same as those enjoyed or borne by the
members.
The full implications
of corporate personality were not fully understood till 1897 in the case of Salomon v. Salomon [1897] A C 22
Facts of the case
Salomon was a prosperous
lender/merchant. He sold his business to
Salomon and Co. Limited which he formed for the purpose at the price of £39,000
satisfied by £1000 in cash, £10,000 in debentures conferring a charge on the
company’s assets and £20,000 in fully paid up £1 shares. Salomon was both a creditor because he held a
debenture and also a shareholder because he held shares in the company. Seven shares were then subscribed for in cash
by Salomon, his wife and daughter and each of his 4 sons. Salomon therefore had 20,101 shares in the
company and each member of the family had 1 share as Salomon‘s nominees. Within one year of incorporation the company
ran into financial problems and consequently it was wound up. Its assets were not enough to satisfy the
debenture holder (Salomon) and having done so there was nothing left for the
unsecured creditors. The court of first
instance and the court of appeal held that the company was a mere sham an
alias, agents or nominees of Salomon and that Mr. Salomon should therefore
indemnify the company against its trade loss.
The House of Lords
unanimously reversed this decision. In
the words of Lord Halsbury “Either the limited company was a legal
entity or it was not. If it was, the
business belonged to it and not to Salomon.
If it was not, there was no person and no thing at all and it is impossible
to say at the same time that there is the company and there is not”
In the words of Lord
Mcnaghten “the company is at a law a
different person altogether from the subscribers and though it may be that
after incorporation the business is precisely the same as it was before, and
the same persons are managers, and the same hands receive the profits, the
company is not in law the agent of the subscribers or trustee for them nor are
the subscribers as members liable in any shape or form except to the extent and
manner prescribed by the Act. … in
order to form a company limited by shares the Act requires that a Memorandum of
Association should be signed by seven (7) persons who are each to take one
share at least. If those conditions are
satisfied, what can it matter, whether the signatories are relations or
strangers. There is nothing in the Act
requiring that the subscribers to the Memorandum should be independent or
unconnected or that they or anyone of them should take a substantial interest
in the undertaking or that they should have a mind and will of their own. When the Memorandum is duly signed and
registered though there be only seven (7) shares taken the subscribers are a
body corporate capable forthwith of exercising all the functions of an
incorporated company.
… The company attains maturity on its birth. There is no period of minority and no
interval of incapacity. A body corporate
thus made capable by statutes cannot lose its individuality by issuing the bulk
of its capital to one person whether he be a subscriber to the Memorandum or
not.”
There were several other
Law Lords who decided business in the House.
The significance of
the Salomon decision is threefold.
1.
The decision established the legality of
the so called one man company;
2.
It showed that incorporation was as
readily available to the small private partnership and sole traders as to the
large private company.
3.
It also revealed that it is possible for
a trader not merely to limit his liability to the money invested in his
enterprise but even to avoid any serious risk to that capital by subscribing
for debentures rather than shares.
Since
the decision in Salomon’s case the complete separation of the company and its
members has never been doubted.
Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619
The
Appellant owner of a timber estate assigned the whole of the timber to a
company known as Irish Canadian Sawmills Company Limited for a consideration of
£42,000. Payment was effected by the
allotment to the Appellant of 42,000 shares fully paid up in £1 shares in the
company. No other shares were ever issued.
The company proceeded with the cutting of the timber. In the course of these operations, the
Appellant lent the company some £19,000.
Apart from this the company’s debts were minimal. The Appellant then insured the timber against
fire by policies effected in his own name.
Then the timber was destroyed by fire.
The insurance company refused to pay any indemnity to the appellant on
the ground that he had no insurable interest in the timber at the time of
effecting the policy.
The
courts held that it was clear that the Appellant had no insurable interest in
the timber and though he owned almost all the shares in the company and the
company owed him a good deal of money, nevertheless, neither as creditor or
shareholder could he insure the company’s assets. So he lost the Company.
Lee v Lee’s Air Farming Ltd. (1961) A.C. 12
Lee’s
company was formed with capital of £3000 divided into 3000 £1 shares. Of these shares Mr. Lee held 2,999 and the
remaining one share was held by a third party as his nominee. In his capacity as controlling shareholder,
Lee voted himself as company director and Chief Pilot. In the course of his duty as a pilot he was
involved in a crash in which he died.
His widow brought an action for compensation under the Workman’s Compensation
Act and in this Act workman was defined as “A
person employed under a contract of service” so the issue was whether Mr. Lee was a
workman under the Act? The House of
Lords Held:
“that it was the logical consequence of the
decision in Salomon’s case that Lee and the company were two separate entities
capable of entering into contractual relations and the widow was therefore
entitled to compensation.”
Katate v Nyakatukura (1956) 7 U.L.R 47A
The
Respondent sued the Petitioner for the recovery of certain sums of money
allegedly due to the Ankore African Commercial Society Ltd in which the
petitioner was a Director and also the deputy chairman. The Respondent conceded that in filing the
action he was acting entirely on behalf of the society which was therefore the
proper Plaintiff. The action was filed
in the Central Native Court. Under the Relevant Native Court Ordinance the
Central Native Court
had jurisdiction in civil cases in which all parties were natives. The issue was whether the Ankore African
Commercial Society Ltd of whom all the shareholders were natives was also a
native.
The
court held that a limited liability company is a corporation and as such it has
existence which is distinct from that of the shareholders who own it. Being a distinct legal entity and abstract in
nature, it was not capable of having racial attributes.
ADVANTAGES OF INCORPORATION
1.
Limited Liability
– since a corporation is a separate person from the members, its members are
not liable for its debts. In the absence
of any provisions to the contrary the members are completely free from any
personal liability. In a company limited
by shares the members liability is limited to the amount unpaid on the shares
whereas in a company limited by guarantee the members liability is limited to
the amount they guaranteed to pay. The
relevant statutory provision is Section 213 of the Companies Act.
2.
Holding Property:
Corporate personality enables the property of the association to be
distinguishable from that of the members.
In an incorporated association, the property of the association is the
joint property of all the members although their rights therein may differ from
their rights to separate property because the joint property must be dealt with
according to the rules of the society and no individual member can claim any
particular asset to that property.
3.
Suing and Being Sued: As a legal person, a company can take
action in its own name to enforce its legal rights. Conversely it may be sued for breach of its
legal duties. The only restriction on a
company’s right to sue is that it must always be represented by a lawyer in all
its actions.
In
East Africa Roofing Co. Ltd v Pandit (1954) 27 KLR
86 here the Plaintiff a limited liability company filed a suit
against the defendant claiming certain sums of money. The defendant entered appearance and filed a
defence admitting liability but praying for payment by instalments. The company secretary set down the date on
the suit for hearing ex parte and without notice to the defendant. This was contrary to the rules because a
defence had been filed. On the hearing
day the suit was called in court but no appearance was made by either party and
the court therefore ordered the action to be dismissed. The company thereafter applied to have the
dismissal set aside. At the hearing of
that application, it was duly represented by an advocate. The only ground on which the company relied
was that it had intended all along to be represented at the hearing by its
manager and that the manager in fact went to the law courts but ended in the
wrong court. It was held that a
corporation such as a limited liability company cannot appear in person as a
legal entity without any visible person and having no physical existence it
cannot at common law appear by its agent but only by its lawyer. The Kenya Companies Act does not change this
common law rule so as to enable a limited company to appear in court by any of
its officers.
4.
PERPETUAL SUCCESSION As an artificial person, the company has neither
body mind or soul. It has been said that
a company is therefore invisible immortal and thus exists only intendment
consideration of the law. It can only
cease to exist by the same process of law which brought it into existence
otherwise, it is not subject to the death of the natural body. Even though the
members may come and go, the company continues to exist.
5.
TRANSFERABILITY OF SHARES Section 75 of the Companies Act states as
follows “ The Shares or any other
interests of a member in a company shall be moveable property transferable in
the manner provided by the Articles of Association of the Company.” In a company therefore shares are really
transferable and upon a transfer the assignee steps into the shoes of the
assignor as a member of the company with full rights as a member. Note however that this transferability only
relates to public companies and not private companies.
6.
BORROWING FACILITIES: in practice companies can raise their capital
by borrowing much more easily than the sole trader or partnership. This is enabled by the device of the
‘floating charge’ a floating charge has been defined as a charge which floats
like a cloud over all the assets from time to time falling within a certain
description but without preventing the company from disposing of these assets
in the ordinary course of its business until something happens to cause the
charge to become crystallised or fixed.
The ease with which this is done is facilitated by the Chattels Transfer
Act which exempts companies from compiling an inventory on the particulars of
such charges and also by the b ankruptcy
Act which exempts companies from the application of the reputed ownership
clause. As far as companies are
concerned the goods in the possession of
the company do not fall within the reputed ownership clause.
The
only disadvantages are three
(i)
Too many formalities required in the
formation of the company
(ii)
There is maximum publicity of the
company’s affairs;
(iii)
There is expense incurred in the
formation and in the management of a company.
In order to form a
company, certain documents must be prepared whereas no such documents need to
be prepared to establish business as a sole proprietor or partnership and
throughout its life a company is required to file such documents as balance
sheets and profits and loss accounts on dissolution of the company it is
required to follow a certain stipulated procedure which does not apply to sole
traders and partnerships.
IGNORING THE
CORPORATE ENTITY (LIFTING THE VEIL OF INCORPORATION)
Although Salomon’s
case finally established that a company is a separate and distinct entity from
the members, there are circumstances in which these principle of corporate
personality is itself disregarded. These
situations must however be regarded as exceptions because the Salomon decision
still obtains as the general principle
Although a company is
liable for its own debt which will be the logical consequence of the Salomon
rule, the members themselves are held liable which is therefore a departure
from principle. The rights of creditors
under this section are subject to certain limitations namely (under statutory provision)
(i)
REDUCTION IN THE NUMBER OF MEMBERS -
Section 33 refers to membership that has fallen below the statutory minimum in
a public company. The Act provides that
only those members who remain after the six month during which the company has
fallen below the provided minimum period can be sued; Even these members are
liable if they have knowledge of the fact and only in respect of debts contracted
after the expiration of the six months. Moreover the Section is worded in such
a way as to suggest that the remaining members will be liable only in respect
of liquidated contractual obligations.
(ii)
FRAUDULENT TRADING – the provisions of
Section 323 of the Companies Act come into operation here. It is provided that if in the course of the
winding up of the company it appears that any business has been carried on with
the intent to defraud the creditors, or for any fraudulent purpose, the courts
on the application of the official receiver, the liquidator or member may
declare that any persons who are knowingly parties to the fraud shall be
personally responsible without any limitation on liability for all or any of
the debts or other liabilities of the company to the extent that the court
might direct the liability. This Section
does not define the term fraud nor have the courts defined it. However, in Re
William C. Leitch Ltd (1932) 2 Ch.
71 the company was incorporated to acquire William’s business as a
furniture manufacturer. The directors of
the company were William and his wife and they appointed William as the
Managing Director at a Salary of £1000 per annum. Within the period of one month, the company
was debited with an amount which was £500 more than what was actually due to
William. By that time the company had
made a loss of £2500. Within 2 years of
formation, and while the company was still in financial problems, the directors
paid to themselves the dividends of £250.
By the end of the 3rd year since incorporation the company
was in such serious difficulties such that it could not pay debts as they fell
due. In spite of this William ordered
goods worth £6000 which became subject to a charge contained in a debenture
held by them. At the same time he
continued to repay himself a loan of £600 (six hundred pounds) which he had
lent to the company at the beginning of the 4th year the company
with the knowledge of William owed £6500 for goods supplied. In the winding up of the company the official
receiver applied for a declaration that in no circumstances William had carried
on the company’s business with intent to defraud and therefore should be held
responsible for the repayment of the company’s debts. It was held that since that company continued
to carry on business at a time when William knew that the company could not
comfortably pay its debts, then this was fraudulent trading within the meaning
of Section 323 and William should be responsible for repaying the debts. These are the words of Justice Maugham J. “if a company continues to carry on business
and to incur debts at a time when there is to the knowledge of the directors no
reasonable prospects of the creditors ever receiving payments of those debts,
it is in general a proper inference that the company is carrying on business
with intent to defraud.”
The test is both
subjective and objective. In the Case of
Re Patrick Lyon Ltd (1933) Ch. 786 on
facts which were similar to the Williams case, the same Judge Maugham J. said
as follows: “the words fraud and fraudulent purpose where they appear in the Section
in question are words which connote actual dishonesty involving according to
the current notions of fair trading among commercial men real moral blame. No
judge has ever been willing to define fraud and I am attempting no definition.”
The statutes are not
clear as to the meaning of fraud the question arises that once the money has
been recovered from the fraudulent director, is it to be laid as part of the
company’s general assets available to all creditors or should it go back to
those creditors who are actually defrauded.
In the case of Re
William Justice Eve J. stated that such money should form part of the company’s
general assets and should not be refunded to the defrauded creditors.
In the case of Re Cyona Distributors Ltd (1967) Ch. 889 the
Court of Appeal ruled that if the application under Section 323 is made by the
debtor then the money recovered should form part of the company’s general
assets but where the application is made by a creditor himself, then that
creditor is entitled to retain the money in the discharge of the debts due to
him.
HOLDING AND SUBSIDIARY COMPANIES
One of the most
important limitations imposed by the Companies Act on the recognition of the
separate personality of each individual company is in connection with
associated companies within the same group enterprise. In practice it is common for a company to
create an organisation of inter-related companies each of which is
theoretically a separate entity but in reality part of one concern represented
by the group as a whole. Such is
particularly the case when one company is the parent or holding company and the
rest are its subsidiaries.
Under Section 154 of
the Companies Act Cap 486 a company is deemed to be a subsidiary of another if
but only if
(a)
That other company either
(i)
is a member of it and controls the
composition of its board of directors or
(ii)
Holds more than half in nominal value of
its equity share capital or
(b) The first
mentioned company is a subsidiary of any company which is that other’s
subsidiary.
Under Section 150 (1)
where at the end of the financial year a company has subsidiaries, the accounts
dealing with the profit and loss of the company and subsidiaries should be laid
before the company in general meeting when the company’s own balance sheet and
profit and loss account are also laid.
This means that group accounts must be laid before the general
meeting.
The group accounts
should consist of a consolidated balance sheet for the company and subsidiary
and also of a consolidated profit and loss account dealing with the profit and
loss account of a company.
Section 151(2) – it
may be observed that the treatment of these accounts in a consolidated form
qualify an old rule that each company constitutes a separate legal entity. The statute here recognises enterprise entity
rather than corporate entity i.e. the veil of incorporation will be lifted so
that they will not be regarded as separate legal entities but will be treated
as a group.
MISDESCRIPTION OF COMPANIES
Under Section 109 of
the Companies Act it requires that a company’s name should appear whenever it
does business on its Seal and on all business documents. Under paragraph 4 of this Section, if an
officer of a company or any person who on its behalf signs or authorises to be
signed on behalf of the company any Bill of Exchange, Promissory Note, Cheque
or Order for Goods wherein the Company’s name is not mentioned as required by
the Section, such officer shall be liable to a fine and shall also be
personally made liable to the holder of a Bill of Exchange Promissory Notes,
Cheque or order for the goods for the amount thereof unless it is paid by the
company. The effect of this section is
that it makes a company’s officer incur personal liability even though they
might be contracting as the company’s agents.
Liability under this Section normally arises in connection with cheques
and company officers have been held liable where for instance the word limited
has been omitted or where the company has been described by a wrong name.
IGNORING THE CORPORATE ENTITY UNDER COMMON LAW
WHERE THERE IS AN
AGENCY RELATIONSHIP
Generally there is no
reason why a company may not be an agent of its share holders. The decision in Salomon’s case shows how
difficult it is to convince the courts that a company is an agent of its
members. In spite of this there have
been occasions in which the courts have held that registered companies were not
carrying on in their own right but rather were carrying on business as agents
of their holding companies. Reference
may be made to the case of
Smith
Stone & Knight v. Birmingham Corporation (1939) 4 All E.R. 116
In this case the
Plaintiffs were paper manufacturers in Birmingham City. In the same city there was a partnership
called Birmingham Waste Company. This partnership did business as merchants
and dealers in waste paper. The
plaintiffs bought the partnership as a going concern and the partnership
business became part of the company’s property. The plaintiffs then caused the
partnership to be registered as a company in the name of Birmingham Waste
Company Limited. Its subscribed capital
was 502 pounds divided into 502 shares.
The Plaintiff holding 497 shares in their own name and the remaining
shares being registered in the name of each of the Directors. Thereafter the Directors executed a
declaration of trust stating that their shares were held by them on trust for
the Plaintiff company. The new company
had its name placed upon the premises and on the note paper invoices etc. as
though it was still the old partnership carrying on business. There was no agreement of any sort between
the two companies and the business carried on by the new company was never
assigned to it. The manager was appointed
but there were no other staff. The books
and accounts of the new company were all kept by the plaintiff company and the
manager of this company did not know what was contained therein and had no
access to those books. There was no
doubt that the Plaintiff Company had complete control over the waste
company. There was no tenancy agreement
between them and the waste company never paid any rent. Apart from the name, it was as if the manager
was managing a department of the plaintiff company.
The Birmingham
Corporation compulsorily acquired the premises upon which the subsidiary
company was carrying on business and the Plaintiff company claimed compensation
for removal and disturbance. Birmingham
Corporation replied that the proper claimants were the subsidiary company and
not the holding company since the subsidiary company was a separate legal
entity.
If this contention
was correct the Birmingham Corporation would have escaped liability for paying
compensation by virtue of a local Act which empowered them to give tenants
notice to terminate the tenancy.
The court held that
occupation of the premises by a separate legal entity was not conclusive on a
question of a right to claim and as a subsidiary company it was not operating
on its own behalf but on behalf of the
parent company. The subsidiary company
was an agent. Lord Atkinson had the
following to say
“It is well settled that the mere fact that a man holds all the shares
in a company does not mean the business carried on by the company is his
business nor does it make the company his agent, for the carrying on of that
business. However, it is also well
settled that there maybe such an arrangement between the shareholders and the
company as will constitute the
company. The shareholders agents for the
purpose of carrying on the business and make the business that of the
shareholders. It seems to be a question
of fact in each case and the question is whether the subsidiary is carrying on
the business as the parents business or as its own. In other words who is really carrying on the
business.
His Lordship then stated
that in order to answer the question six points must be taken into
account.
1.
Are
the profits treated as the profits of the parent company?
2.
are
the persons conducting the business appointed by the parent company?
3.
Is
the parent company the head and brain of the trading venture?
4.
Does
the parent company govern the venture decide what should be done and what
capital should be embarked on in the venture?
5.
Does
the company make the profits by its skill and direction?
6.
Is
the company in effectual and constant control?
If the answers are in the affirmative, then the subsidiary
company is an agent of the parent company.
Reference may also be
made to the case of
RE F G FILMS LTD [1953] 1 W.L.R.
Here
a British company was formed with a capital of 100 pounds of which 90 pounds
was contributed by the president of an American Film Company. There were 3 directors, the American and 2
Britons. By arrangement between the two
companies, a film was shot in India
nominally by the British Company but all the finances and other facilities were
provided by the American Company. The
British Board of Trade refused to recognize the Film as having been made by a
British company and therefore refused to register it as a British film.
The court held that
insofar as the British company had acted at all it had done so as an agent or
nominee of the American company which was the true maker of the film.
Firestone
Tyre & Rubber Company v. Llewellin (1957) 1 W.L.R 464
Again in this case an
American company had an arrangement with its distributors on the European
continent whereby the distributors obtained the supplies from the English
manufacturers who were a wholly owned subsidiary of an American company. The English subsidiary credited the American
company with a price received after deducting costs and a certain
percentage. It was agreed that the
distributors will not obtain their supplies from anyone else. The issue was whether the subsidiary company
in Britain
was selling its own goods or whether it was selling goods of an American
company.
The court held that
the substance of the arrangement was that the American company traded in England
through the subsidiary as its agent and that the sales by their subsidiary,
were a means of furthering the American company’s European interests.
There have been cases
where Salomon’s case has been upheld that a company is a legal entity.
Ebbw Vale
UDC V. South Wales Traffic Authority (1951) 2 K.B 366
Lord Justice Cohen
L.J “Under
the ordinary rules of law, a parent company and a subsidiary company even when
a hundred percent subsidiary are distinct legal entities and in the absence of
an agency contract between the two companies,
one cannot be said to be an agent of the other.”
2. FRAUD &
IMPROPER CONDUCT
Where there is fraud
or improper conduct, the courts will immediately disregard the corporate entity
of the company. Examples are found in
those situations in which a company is formed for a fraudulent purpose or to
facilitate the evasion of legal obligations.
Re Bugle
Press Limited [1961] Ch.
270
This was based on
Section 210 of the Companies Act where an offer was made to purchase out a
company if 90% of shareholders agreed.
There were 3 shareholders in the company. A, B and C.
A held 45% of the
shares, B also held 45% of the shares and C held the remaining 10% of the
shares. A and B persuaded C to sell his shares to them but he declined. Consequently A and B formed a new company
call it AB Limited, which made an offer to ABC Limited to buy their shares in
the old company. A and B accepted the
offer, but C refused. A and B sought to
use provisions of Section 210 in order to acquire C’s shares compulsorily.
The court held that
this was a bare faced attempt to evade the fundamental principle of company law
which forbids the majority unless the articles provide to expropriate the
minority shareholders.
Lord Justice Cohen
said “the company was nothing but a legal
hut. Built round the majority shareholders and the whole scheme was nothing but
a hollow shallow.” All the minority
shareholder had to do was shout and the walls of Jericho came tumbling down.
Gilford
Motor Co. v. Horne (1933) Ch.
935
Here the Defendant
was a former employee of the plaintiff company and had covenanted not to
solicit the plaintiff’s customers. He formed a company to run a competing
business. The company did the
solicitation. The defendant argued that
he had not breached his agreement with the plaintiffs because the solicitation
was undertaken by a company which was a separate legal entity from him.
The court held that
the defendant’s company was a mere cloak or sham and that it was the defendant
himself through this device who was soliciting the plaintiff’s customers. An injunction was granted against the both
the defendant and the company not to solicit the plaintiff’s customers.
Jones v. Lipman (1912) 1 W.L.R.
832
This case the
Defendant entered into a contract for the sale of some property to the
plaintiff. Subsequently he refused to
convey the property to the plaintiff and formed a company for the purpose of
acquiring that property and actually transferred the property to the
company. In an action for specific
performance the Defendant argued that he could not convey the property to the
Plaintiff as it was already vested in a third party.
Justice Russell J.
observed as follows
“the Defendant company was merely a device and a sham a mask which he
holds before his face in an attempt to avoid recognition by the eye of equity”
GROUP ENTERPRISE
In exercise of their
original jurisdiction, the courts have displayed a tendency to ignore the
separate legal entities of various companies in a group. By so doing, the courts give regard to the
economic entity of the group as a whole.
Authority is the case
of
Holsworth & Co. v. Caddies
[1955]1W.L.R. 352
The Defendant Company
had employed Mr. Caddies as their Managing Director for 5 years. At the time of that contract the company had
two subsidiaries and Caddies was appointed Managing Director of one of those
subsidiaries. He fell out of favour with
the other Directors consequent upon which the board of directors stated that
Caddies should confine his attention to the affairs of the subsidiary company
only. He treated this as a breach of
contract and sued the company for damages.
It was held that since all the companies form but one group, there was
no breach of contract in directing Caddies to confine his attention to the
activities of the subsidiary company.
DETERMINATION OF A COMPANY’S RESIDENCE
De Beers
Consolidated Mines Ltd (1906) K.C. 455
Lord Lorenburn said
“in applying the conception of residence to a company, we ought to proceed as
nearly as possible on the analogy of an individual. A company cannot eat or sleep but it can keep
house or do business. A company resides
for purposes of Income Tax where its real business is carried on. The real business is carried on where the
central management and control actually abides.”
The courts also look
behind the façade of the company and its place of registration in order to
determine its residence.
THE DOCTRINE OF ULTRA VIRES
A Company which is
registered under the Company’s Act cannot effectively do anything beyond the
powers which are either expressly or by implication conferred upon in its
Memorandum of Association. Any purported
activity in excess of those powers will be ineffective even if agreed to by the
members unanimously. This is the
doctrine of ultra vires in company law.
The purpose of this
doctrine is said to be twofold
1.
It is said to be intended for the
protection of the investors who thereby know the objects in which their money
is to be applied. It is also said to be
intended for the protection of the creditors by ensuring that the Company’s
assets to which the creditors look for repayment of their debt are not wasted
in unauthorised activities. The doctrine
was first clearly articulated in 1875 in the case of Ashbury Railway Carriage v. Riche (1875) L.R. CH.L.) 653
In this case the
Company’s Memorandum of Association gave it powers in its objects clause
1.
To make sell or lend on hire railway
carriages and wagons.
2.
To carry on the business of mechanical
engineers and general contractors
3.
to purchase, lease work and sell mines,
minerals, land and realty.
The directors entered
into a contract to purchase a concession for constructing a railway in Belgium. The issue was whether this contract was valid
and if not whether it could be ratified by the shareholders.
The court held that
the contract was ultra vires the company and void so that not even the
subsequent consent of the whole body of shareholders could ratify it. Lord Cairns stated as follows:
“The words general contractors
referred to the words which went immediately before and indicated such a
contract as mechanical engineers make for the purpose of carrying on a business. This contract was entirely beyond the objects
in the Memorandum of Association. If so,
it was thereby placed beyond the powers of the company to make the contract. If so, it was not a question whether the
contract was ever ratified or not ratified.
If the contract was going at its beginning it was going because the
company could not make it and by purporting to ratify it the shareholders were
attempting to do the very thing which by the act of parliament they were
prohibited from doing.”
The courts construed
the object clause very strictly and failed to give any regard to that part of
the Objects clause which empowered the company to do business as general
contractors. This construction gave the
doctrine of ultra vires a rigidity which the times have not been able to
uphold. At the present day, the doctrine
is not as rigid as in Ashbury’s case and consequently it has been eroded.
The first inroad into
the doctrine was made five years later in the case of
Attorney
General V. Great Eastern Railway 1880) 5 A.C. 473
Lord Selbourne stated
as follows:
“the doctrine of
ultra vires as it was explained in Ashbury’s case should … but this doctrine
ought to be reasonably and not unreasonably understood and applied and whatever
may fairly be regarded as incidental to or consequential upon those things that
the legislature has authorised ought not to be held by judicial construction to
be ultra vires.”
An act of the company
therefore will be regarded as intra vires not only when it is expressly stated
in the object’s clause but also when it can be interpreted as reasonably
incidental to the specified objects. As
a result of this decision, there is now a considerable body of case law
deciding what powers will be implied in a case of particular types of enterprise
and what activities will be regarded as reasonably incidental to the act.
However businessmen
did not wish to leave matters for implication. They preferred to set up in the
Memorandum of Association not only the objects for which the company was establish
but also the ancillary powers which they thought the company would need. Furthermore instead of confining themselves
to the business which the company was initially intended to follow, they would
also include all other businesses which they might want the company to turn to
in the future. The original intention of
parliament was that the companies object should be set out in short paragraphs
in the Memorandum of Association. But
with a practice of setting out not only the present business but also any
business which the promoters would want the company to turn to, the result is
that a company’s object’s clause could contain about 30 or 40 different clauses
covering every conceivable business and all that incidental powers which might
be needed to accomplish them.
In practice therefore
the objects laws of practically every company does not share the simplicity
originally intended in favour of these practice it may be argued that the wider
the objects the greater is the security of the creditors since it will not be
easy for the company to enter into ultra vires transactions because every
possible act will probably be covered by some paragraph in the Objects clause.
Unfortunately this
does not ensure preservation of the Companies assets or any adequate control
over the director’s activities thus the original protection intended vanishes,
the highpoint of this development came in 1966 in the case of
Bell house v. City Wall Properties (1966) 2 Q.B 656
In this case the
Plaintiff Company’s business was requisitioned for vacant land and the erection
thereon of Housing Estates. Its objects
as set up in the Memorandum of Association contained the Clause authorizing the
company to “carry on any other trade or business whatsoever which can in the
opinion of the Board of Directors be advantageously carried on by the company
in connection with or as ancillary to any of the above businesses or a general
business of the company”.
In connection with
its various development skills the company’s managing director met an agent of
the Defendants who required some finance to the tune of about 1 million
pounds. The Plaintiff’s Managing
Director intimated to the Defendant’s agent that he knew of a source from which
the Defendant could obtain finance and accordingly referred them to a Swiss
syndicate of financiers. In this action
the Plaintiffs alleged that for that service, the Defendants had agreed to pay
a commission of 20,000 pounds and in the alternative they claimed 20,000 pounds
for breach of contract. The Defendants
argued that there was no contract between the parties. In the alternative they argued that even if
there was a contract such contract was in effect one whereby the Plaintiffs
undertook to act as money-brokers which activity was beyond the objects of the
plaintiff company and which was therefore ultra vires.
The issues were
1.
Whether the contracts were ultra vires
2.
Whether it was open to the defendant to
raise this point;
The court of first
instance decided that the company was ultra vires and it was open to the
defendant to raise the defence of ultra vires.
However a unanimous court of appeal reversed the decision and hailed
that the words stated must be given their natural meaning and the natural
meaning of those words was such that the company could carry on any business in
connection with or ancillary to its main business provided that the directors
thought that could be advantageous to the company.
Lord Justice Salomon
L.J stated as follows:
“It may be that the Directors take the
wrong view and infact the business in question cannot be carried on as they
believe but it matters not how mistaken they might be provided that they formed
their view honestly then the business is within the plaintiff’s company’s
objects and powers.”
ULTRA VIRES DOCTRINE
The courts have
introduced 2 methods of curbing the evasion of the ultra vires doctrine.
1.
The ejusdem
generis rule is also referred to as the main objects rule of
construction. Here a Memorandum of
Association expresses the objects of a company in a series of paragraphs and
one paragraph or the first 2 or 3 paragraphs appear to embody the main object
of the company all the other paragraphs are treated as merely ancillary to this
main object and as limited or controlled thereby. Business persons evaded this method by use of
the independent objects clause. The
objects clause will contain a paragraph to the effect that each of the preceding
sub-paragraphs shall be construed independently and shall not in any way be
limited by reference to any other sub-clause and that the objects set out in
each sub-clause shall be independent objects of the company. Reference may be made to the case of Cotman v. Brougham
[1918]A.C. 514
In
this case the objects clause of the company contained 30 sub-clauses. The first sub-clause authorised the company
to develop rubber plantations and the fourth clause empowered the company to
deal in any shares of any company. The
objects clause concluded with a declaration that each of the sub clauses was to
be construed independently as independent objects of the company. The company underwrote and had allotted to it
shares in an oil company. The question
that arose was whether this was intra vires the company’s objects. The court held that the effect of the
independent objects clause was to constitute each of the 30 objects of the
company as independent objects.
Therefore the dealing of shares in an oil company was within the objects
and thus intra vires. However the power
to borrow money cannot be construed as an independent object of the company in
spite of this decision.
Re Introductions (1962) W.L.R. 791
In
this case the company was formed to provide accommodation and services to those
overseas visitors going to a festival in Britain. The company did this during the first few
years of existence. Later the company
switched over to pig breeding as its sole business. While so engaged it borrowed money from a
bank on a security of debentures. The
bank was given a copy of the company’s Memorandum of Association and at the
material time knew that the company’s sole business was that of pig
breeding. The issue was, whether the
loan and debentures were valid in view of the fact one of the sub clauses
empowered the company to borrow money and the last sub clause was an
independent object clause.
The
court held that borrowing was a power and not an object. The power to borrow existed only for
furthering intra vires objects of the company and was not an object in
itself. Therefore
1.
The exercise of powers which will be
intra vires is exercised for the objects of the company and is ultra vires only
if used for the objects not covered by the company’s Memorandum of Association.
2.
Even an independent object clause cannot
convert what are in fact powers into objects.
2. LOSS OF
SUBSTRATUM
Where the main object
of a company has failed, a petitioner will be granted an order for the winding
up of a company. Such a petitioner must
however be a member or shareholder in the company.
The object of the
ultra vires rule is to make the members know how and to what their money is
being applied. This is the rationale of
members’ protection.
RE GERMAN
DATE COFFEE CO. (1882) 20 Ch.
169
In this case the
major object of the company was to acquire a German Patent for manufacturing
coffee from dates. The German patent was
never granted but the company acquired a Swedish Patent for the same
purpose. The company was solvent and the
majority of the members wished to continue in business. However, two of the shareholders petitioned
for winding up of the company on the grounds that the company’s object had
entirely failed.
The court held that
upon the failure to acquire the German patent, it was impossible to carry out
the objects for which the company was formed.
Therefore the sub stratum had disappeared and therefore it was just
inevitable that the company should be wound up.
Kay J. stated “where
a company is formed for a primary purpose, then although the Memorandum may
contain other general words which include the doing of other objects, those
general words must be read as being ancillary to that which the Memorandum
shows to be the main purpose and if the main purpose fails and fails
altogether, then the sub-stratum of the association fails.”
This substratum rule
is too narrow and cannot sufficiently uphold the ultra vires rule. Questions are, are members or shareholders
really protected? Do they know what the
objects are? The Directors may choose
any amongst the many.
Secondly a member has
to petition first and the court has to decide
John Beauforte (1953) Ch.d 131
A company was authorised by its
Memorandum of Association to carry on the business of costumiers, gown makers
and other activities ejusdem generis.
The company decided to undertake the business of making veneered panels
which was admittedly ultra vires and for this purpose, it constructed a factory
at Bristol. The company later went into compulsory
liquidation. Several proofs of debts
were lodged with the liquidator which he rejected on the ground that the
contracts which they related to were ultra vires.
Applications by way of Appeal were
lodged by the 3 creditors one of whom had actual knowledge that the veneer
business was ultra vires. The 3
creditors were a firm of builders who built the factory, a firm which supplied
the veneers to the company and a firm which had contractual debts with the
company.
The courts held dismissing the
applications that no judgment founded on an ultra vires contract could be
sustained unless it embodied a decision of the court on the issue of ultra
vires or a compromise on that issue. The
contracts being founded on an ultra vires transaction were void.
3. GRATUITOUS
GIFTS
Can a company validly
make a gift out of corporate property or asset?
The law is that a company has no power to make such payments unless the
particular payment is reasonably incidental to the carrying out of a company’s
business and is meant for the benefit and to promote the property of the
company.
This issue was first
decided in the case of
Hutton V West Cork Railway Co. (1893)
Ch.d
A company sold its assets and
continued in business only for the purpose of winding up. While it was awaiting winding up, a
resolution was passed in the company’s general meeting authorising the payments
of a gratuity to the directors and dismissed employees.
The court held that as the company
was no longer a going concern such a payment could not be reasonably incidental
to the business of the company and therefore the resolution was invalid. In the words of the Lord Justice Bowen said
“The law does not say that there are not to
be cakes and ale but there are to be no cakes and ale except such as are
required for the benefit of the company”
The question is, suppose there is a
clause in the Memorandum of Association that such payments shall be made, is
payment ultra vires? The authority that
dealt with this position was the case of
RE LEE BEHRENS & CO. [1932] 2 Ch. D
46
The object clause of
the company contained an express power to provide for the welfare of employees
and ex employees and also their widows, children and other dependants by the
grant of money as well as pensions.
Three years before the company was wound up, the Board of Directors decided
that the company should undertake to pay a pension to the widow of a former
managing director but after the winding up the liquidator rejected her claim to
the pension.
The court held that
the transaction whereby the company covenanted to pay the widow a pension was
not for the benefit of the company or reasonably incidental to its business and
was therefore ultra vires and hence null and void.
Justice Eve stated as
follows
Whether they reneged an express or implied power, all such
grants involved an expenditure of the company’s money and that money can only
be spent for purposes reasonably incidental
to the carrying on of the company’s business and the validity of such
grants can be tested by the answers to three questions:
(i)
Is
the transaction reasonably incidental to the carrying on of the company’s
business?
(ii)
Is
it a bona fide transaction?
(iii)
Is
it done for the benefit and to promote the prosperity of the company?
These questions must be answered in the affirmative. The question may be posed as to whether these
tests apply where there is an express power by the objects. This is one area where the courts are still
insistent that creditors’ security must be reserved.
Sometimes ultra vires
can be excluded by good and clever draftsmanship
Parke v.
Daily News [1962] 2 Ch.d 927
In this case the
company transferred the major portion of its assets and proposed to distribute
the purchase price to those employees who are going to become redundant after
reduction in the stock of the company of the company’s business. The company was not legally bound to make any
payments by way of compensation. One
shareholder claimed that the proposed payment was ultra vires.
The court held that
the proposed payment was motivated by a desire to treat the ex-employees
generously and was not taken in the interest of the company as it was going to
remain and that therefore it was ultra vires.
The Court observed as
follows “the defendants were prompted by
motives which however laudable and however enlightened from the point of view
of industrial relations were such as the law does not recognise as sufficient
justification. The essence of the matter
was that the Directors were proposing that a very large part of its assets
should be given to its employees in order to benefit those employees rather
than the company and that is an application of the company’s funds which the
law will not allow.”
Evans v.
Brunner Mound & Co. 1921 Ch.d 359
The company carried
on the business of chemical manufacturers.
Its object clause contained a power to do all such things as maybe
incidental or conducive to the attainment of its objects. The company distributed some money to some
universities and scientific institutions, which was meant to encourage
scientific education and research. The
company thereby hoped to create a reservoir of qualified scientists from which
the company could recruit its staff.
The court held that
even though the payment was not under an express power, it was reasonably
incidental to the company’s business and therefore valid.
This is one of the
few cases where payment was recognised as being valid.
THE RIGHTS OF THE COMPANY & 3RD PARTIES
UNDER ULTRA VIRES TRANSACTIONS:
These are remedies
Whether or not a
contract is ultra vires depends on the knowledge of the party’s dealing with
that company. Such is the case as
regards borrowing contracts. Consider
the case of
David
Payne & Co. (1904) 2 Ch.d 608
X was a director of
company B and at the same time had some interests in company A. He learnt that company B wished to borrow
some money which it intended to apply to unauthorised activities. He urged company A to lend the money on the
security of debentures. The issues were
(a) Whether the debentures were valid
security;
(b) Whether the knowledge of X as to the
intended application of the money could be imputed to the company.
The court held that X
was not company A’s agent for obtaining such information and therefore his
knowledge was not the company’s knowledge and consequently the debentures were
valid security.
This loophole however
will be applied very rarely because everybody is presumed to know the contents
of a company’s public documents. Where a
contract with that company is ultra vires, generally speaking the party dealing
with that company has no rights under the contract. The transaction being null and void cannot
confer rights on the 3rd party nor can it impose any obligation on
the company.
In many instances
however, property will be transferred under an ultra vires transaction. Such
transaction cannot vest rights in the transferee and cannot divest the
transferor of his rights.
1. At common law therefore, the first remedy
of a person who parts with property under an ultra vires transaction is that he
has a right to trace and recover that property from the company as long as he
can identify it.
This principle also
applies to money lent to the company on an ultra vires borrowing so long as the
money can be traced either in law or in equity.
The basis of this principle is that the company is deemed to hold the
money or the property as a trustee for the person from whom it was obtained.
Therefore, if the
money received is paid into a separate account, or is sufficiently earmarked
e.g by the purchase of some particular items, it can be followed and claimed by
the lender. Where tracing is impossible,
because the money has become mixed with other money, the lender is entitled in
equity to a charge on the mixed fund together with the other creditors
according to the respective amounts otherwise money obtained on ultra vires
transaction generally cannot be followed once it has been spent. But if such money has been spent by
discharging the company’s intra vires debts then the lender is entitled to rank
as a creditor to the extent to which the money has been so applied. Since the company’s liabilities are not
increased but in fact decreased, equity treats the borrowing as valid to the
extent of the legal application of such money.
2. The 3rd party has a personal
right against the directors or other agents with whom he has dealt. The rationale is that such directors or
other agents are treated as quasi trustees from which it follows that a 3rd
party is entitled to a claim against them for restitution.
TO WHAT EXTENT ARE MEMBERS PROTECTED BY THE ULTRA VIRES
DOCTRINE
The intra vires creditor
does not have the locus standi to prohibit ultra vires actions. Again there is the presumption of knowledge
of a company’s documents and activities.
In spite of the fact that the doctrine of ultra vires is over due for
reform, it has not undergone any reform in Kenya
unlike in the United Kingdom
where it has been severely eroded.
All the company can
do is to alter its objects under the power conferred by Section 8 of the
Companies Act Cap 486. The effect of
the Section is that a company may by special resolution alter the provisions in
its Memorandum with respect to the objects of the company.
Section 141
defines Special Resolution as a resolution which is passed by a majority of not
less than three quarters of those members voting at a company’s general meeting
either in person or by proxy and of which notice has been given of the
intention to propose it as a special resolution.
Within 30 days of the
date on which the resolution altering the objects is passed, an application for
the cancellation of the Resolution may be made to Court by or on behalf of the
holders who have not voted in favour of the Resolution, of not less than 15% of
the nominal value of the issued share capital of any class and if the company
does not have a share capital, the application can be made by at least 15% of
the members of the company.
If such an
application is made, the alteration will not be effective except to the extent
that it is confirmed by a court.
Normally a court has an absolute discretion to confer, reject or modify
the alteration.
Re Private
Boarding House Limited (1967) E.A. 143
In this case, it was
held that the registrar of companies is entitled to receive a notice of any
such application and to appear and be heard at the hearing of the Application
on the ground that such matters affect his record.
Under Section 8
(9) of the Companies Act Cap 486 if no application is made to the court,
within 30 days the alteration cannot subsequently be challenged. The effect of this provision is that as long
as an alteration is supported by more than 85% of the shareholders or so long
as no one applies to the court within 30 days of the resolution, companies have
complete freedom to alter their objects.
Note however, that
such alterations do not operate retrospectively. Their effect relates only to the future.
ARTICLES OF ASSOCIATION
A Company’s
constitution is composed of two documents namely the Memorandum of Association
and the Articles of Association. The
Articles of Association are the more important of the two documents in as much
as most court cases in Company Law deal with the interpretation of the
Articles.
Section 9 of the Companies Act provides
that a Company limited by guarantee or an unlimited company must register with
a Memorandum of Association Articles of Association describing regulations for
the company. A company limited by shares
may or may not register articles of Association. A Company’s Articles of Association may adopt
any of the provisions which are set out in Schedule 1 Table A of the Companies
Act Cap 486.
Table A is the model
form of Articles of Association of a Company Limited by Shares. It is divided into two parts designed for
public companies in part A and for private companies in part B (II) thus a
company has three options. It may either
(a)
Adopt Table A in full; or
(b)
Adopt Table A subject to modification or
(c)
Register its own set of Articles and
thereby exclude Table A altogether.
In the case of a
company limited by shares, if no articles are registered or if articles are
registered insofar as they do not modify or exclude Table A the regulations in
Table A automatically become the Company’s Articles of Association.
Section 12 of the Companies Act requires
that the Articles must be in the English language printed, divided into
paragraphs numbered consecutively dated and signed by each subscriber to the
Memorandum of Association in the presence of at least one attesting witness.
As between the
Memorandum and the Articles the Memorandum of Association is the dominant
instrument so that if there is any conflict between the provisions in the
Memorandum and those in the Articles the Memorandum provisions prevail. However if there is any ambiguity in the
Memorandum one may always refer to the Articles for clarification but this does
not apply to those provisions which the Companies Act requires to be set out in
the Memorandum as for instance the Objects of the Company.
Whereas the
Memorandum confers powers for the company, the Articles determine how such
powers should be exercised.
Articles regulate the
manner in which the Company’s affairs are to be managed. They deal with inter alia the issue of
shares, the alteration of share capital, general meetings, voting rights,
appointment of directors, powers of directors, payment of dividends, accounts,
winding up etc.
They further provide
a dividing line between the powers of share holders and those of the directors.
LEGAL EFFECTS OF THE ARTICLES OF ASSOCIATION
Under Section 22 of
the Companies Act it is provided that subject to the
provisions of the Act, when the Memorandum and Articles are registered, they
bind the company and the members as if they had been signed and sealed by each
member and contained covenants for the part of each member to observe all their
provisions. This Section has been
interpreted by the courts to mean that the Memorandum gives rise to a contract
between the Company and each Member.
Reference may be made
to the case of
Hickman v.
Kent (1950) 1 Ch. D
881
Here the Articles of
the Company provided that any dispute between any member and the company should
be referred to arbitration. A dispute
arose between Hickman and the company and instead of referring the same to arbitration,
he filed an action against the company.
The company applied for the action to be stayed pending reference to
arbitration in accordance with the company’s articles of association.
The court held that
the company was entitled to have the action stayed since the articles amount to
a contract between the company and the Plaintiff one of the terms of which was
to refer such matters to arbitration.
Justice Ashbury had
the following to say: “That the law was
clear and could be reduced to 3 propositions
1.
That
no Article can constitute a contract between the company and a third party;
2.
No
right merely purporting to be conferred by an article to any person whether a
member or not in a capacity other than that of a member for example solicitor,
promoter or director can be enforced against the company.
3.
Articles
regulating the right and obligation of the members generally as such do not
create rights and obligations between members and the company”.
Eley v.
Positive Government Security Life Association Co. (1876) Ex 88
In this case, the
company’s articles provided that Eley should become the company Solicitor and
should transact all legal affairs of the company for mutual fees and
charges. He bought shares in the company
and thereupon became a member and continued to act as the company’s solicitor
for some time. Ultimately the company
ceased to employ him. He filed an action
against the company alleging breach of contract.
The court held: that
the articles constitute a contract between the company and the members in their
capacity as members and as a solicitor Eley was therefore a third party to the
contract and could not enforce it. The
contract relates to members in their capacity as members and the company so its
only a contract between the company and members of that company and not in any other
capacity such as solicitor. But note
that there can be an intra member contract.
Wood v.
Odessa Waterworks Company [1880] 42 Ch. 636
Here the Plaintiff
who was a member of the company petitioned the court to stay the implementation
of a resolution not to pay dividends but issue debentures instead. Holding that a member was entitled to the
stay of the implementation of the Resolution Sterling J. had the following to
say: “the articles of association constitutes a contract not merely between
shareholders and the company but also between the individual shareholders and
every other.”
This case was
followed in
Rayfield
v. Hands (1960) Ch.d 1
Here the company’s
articles provided that every member who intends to transfer his shares shall
inform the directors who will take those shares between them equally at a fair
value. The Plaintiff called upon the directors to take his shares but they
refused. The issue was did the articles
give rise to a contract between the Plaintiff and the directors. In their capacity as directors they were not
bound.
The court here held
that the Articles related to the relationship between the Plaintiff as a member
and the Defendants not as directors but as members of the company. Therefore the Defendants were bound to buy
the Plaintiff shares in accordance with the relevant article.
ALTERATION OF ARTICLES
Section 13 of the
Companies Act gives the company power to alter the articles
by special resolution. This is a
statutory power and a company cannot deprive itself of its exercise. Reference
may be made to the case of
Andrews v.
Gas Meter Co. (1897) 1 Ch.
361
The issue herein was
whether a company which under its Memorandum and Articles had no power to issue
preference shares could alter its articles so as to authorise the issue of
preference shares by way of increased capital
The court held that
as long as the Constitution of a Company depends on the articles, it is clearly
alterable by special resolution under the powers conferred by the Act.
Therefore it was proper for the company to alter those articles and issue
preference shares. Any regulation or
article which purports to deprive the company of this power is therefore
invalid, on the ground that such an article or regulation will be contrary to
the statute. The only limitation on a
company’s power to alter articles is that the alteration must be made in good
faith and for the benefit of the company as a whole.
Allen v.
Gold Reefs of West Africa (1900) 1 Ch. 626
In this case the
company had a lien on all debts by members who had not truly paid up for their
shares. The Articles were altered to
extend the Company’s lien to those shares which were fully paid up.
The court held that
since the power to alter the Articles is statutory, the extension of the lien
to fully paid up shares was valid. These
were the words of Lindley L.J.
“Wide however as the language of Section 13 mainly the power conferred
by it must be exercised subject to the general principles of law and equity
which are applicable to all powers conferred on majorities and enabling them to
bind minorities. It must be exercised
not only in the manner required by law but also bona fide for the benefit of
the company as a whole.”
Further reference may
be made to the case of
Shuttleworth
v. Cox Brothers Ltd (1927) 2 KB 29
Here the Articles of
the Company provided that the Plaintiff and 4 others should be the first
directors of the company. Further each
one of them should hold office for life unless he should be disqualified on any
one of some six specified grounds, bankruptcy, insanity etc. The Plaintiff failed to account to the
company for certain money he had received on its behalf. Under a general meeting of the company a
special resolution was passed that the articles be altered by adding a seventh
ground for disqualification of a director which was a request in writing by his
co-directors that he should resign. Such
request was duly given to the Plaintiff and there was no evidence of bad faith
on the part of shareholders in altering the articles.
The Plaintiff sued
the company for breach of an alleged contract contained in their original
articles that he should be a permanent director and for a declaration that he
was still a director.
The court held that
the contract if any between the Plaintiff and the company contained in the
original articles in their original form was subject to the statutory power of
alteration and if the alteration was bona fide for the benefit of the company,
it was valid and there was no breach of contract. Lord Justice Bankes observed as follows
“In
this case, the contract derives its force and effect from the Articles
themselves which may be altered. It is
not an absolute contract but only a conditional contract.”
The question here is
who determines what is for the benefit of the company? Is it the shareholders or the Courts?
Scrutton L.J. had the
following to say
“to
adopt such a view that a court should decide will be to make the court the
manager of the affairs of innumerable companies instead of shareholders
themselves. It is not the business of
the court to manage the affairs of the company.
That is for the shareholders and the directors.”
Sidebottom
v. Kershaw Leese & C0.[1920]1 Ch. 154
Director controlled
share company had a minority shareholder who was interested in some competing
business. The company passed a special
resolution empowering the directors to require any shareholder who competed
with the company to transfer his shares at their fair value to nominees of the
directors. The Plaintiff was duly served
with such a notice to transfer his shares. He thereupon filed an action against
the company challenging the validity of that article.
The court held that
the company had a power to re-introduce into its articles anything that could
have been validly included in the original articles provided the alteration was
made in good faith and for the benefit of the company as a whole and since the
members considered it beneficial to the company to get rid of competitors, the
alteration was valid..
Contrast this case
with that of
Brown v. British Abrasive Wheel Co. (1990) 1 Ch.
290
Here a public company
was in urgent need of further capital which the majority of the members who
held 98% of the shares were willing to supply if they could buy out the
minority. They tried persuasion of the
minority to sell shares to them but the minority refused. They therefore proposed to pass a Special
Resolution adding to the Articles a clause whereby any shareholder was bound to
transfer his shares upon a request in writing of the holders of 98% of the
issued capital.
The court held that
this was an attempt to add a clause which will enable the majority to
expropriate the shares of the minority who had bought them when there was no
such power. Such an attempt was not for
the benefit of the company as a whole but for the majority. An injunction was therefore granted to
restrain the company from passing the proposed resolution.
EFFECT OF ALTERATION ON CONTRACT OF DIRECTORS
Sometimes the
Articles may be altered in such a way that the implementation of those articles
in the altered form would give rise to breach of an existing contract between
the company and a third party and particularly so as regards contracts between
companies and their directors.
A director may hold
office either
1.
Under the Articles without a service
contract;
2.
Under a contract of service which is
entirely independent of the articles; or
3.
Under a service contract which expressly
or by implication embodies the relevant provisions in the Articles.
Where a director
holds office under the Articles without a contract of service, then his
appointment is conditional on the footing that the articles may be altered at
any time in exercise of statutory power.
If however, a
director’s appointment is entirely independent of the articles then any
alterations which affects his contract with the company will constitute a
breach of contract for which the company will be liable in damages.
Southern
Foundries v. Shirlaw (1940) A.C. 701
The Plaintiff by a
written contract was appointed the company’s Managing Director for 10 years.
The agreement was not expressed to be subject to the Articles in any way. The Articles provided various grounds for the
removal of a director from office subject to the terms of any subsisting
agreement. The Articles further provided
that if the Managing Director ceased to be a director, he would ipso facto
cease to be Managing Director. The
Company’s Articles were subsequently changed to give the Directors power to
remove a fellow director from office by notice.
Such notice was given to the Plaintiff who thereupon filed an action
claiming damages from the company for breach of contract.
It was held that
since his appointment was not subject to the articles, he could only be removed
from office in accordance with the terms of his appointment and not by way of
alteration of the articles. Damages were
therefore payable.
Lord Atkins said “if a party enters into an arrangement which
can only take effect by the continuance of an existing state of circumstances
there is an implied undertaking on his part that he shall be done of his own
motion to put an end to that state of circumstances which alone the arrangement
can be operative.”
If a director is
appointed in very general terms and without limitation of time, then the
provisions in the Articles are deemed to be incorporated in the appointment and
in the absence of any provision in the articles to the contrary, the company
may dismiss him at any time and even without notice.
Read v. Astoria Garage (1952) 1
All.E.R 922
A Company’s Articles
provided that the appointment of a Managing Director shall be subject to
termination if he ceases for any reason to be a director or if the company in
general meeting resolved that his tenure of office as managing director be
terminated. The Plaintiff was appointed
as the company’s Managing Director 17 years later the directors decided to
relieve him of his duties as Managing Director.
The decision was subsequently ratified by the company in general
meeting. He claimed damages for wrongful
dismissal.
The court held that
on a true construction of the company’s articles the Plaintiff’s appointment
was immediately and automatically terminated on passing of the Resolution at
the general meeting since the company had expressly reserved to itself the
power to dismiss the Managing Director.
The question is, can
a company be restrained by injunction from altering its articles if the
alteration is likely to give rise to a breach of contract?
Part of the answer to
this question was given in the case of
British
Murac Syndicate Ltd v. Alperton Rubber Co. Ltd. 1950 2 Ch. 186
By an agreement
binding on the Defendant company it was provided that so long as the operative
syndicate should hold over 5000 shares in the Defendant’s company, the
Plaintiff’s syndicate should have the right of nominating two directors on the
Board of the Defendant Company. A clause
to the same effect was contained in Article 88 of the Defendant Company’s
Articles of Association.
Another Article
provided that the number of directors should not be less than 3 nor more than
7. The Plaintiff syndicate had recently nominated 2 persons as directors. The Defendant company objected to these two
persons as directors and refused to accept the nomination and a meeting of
shareholders was called for the purpose of passing a special resolution under
Section 13 of the Companies Act cancelling the article.
The court held that
the defendant company had no power to alter its articles of association for the
purpose of committing a breach of contract and that an injunction ought to be
granted to restrain the holding of the meeting for that purpose.
Punt v.
Symens & Co. 1903 2 Ch.d 506
This case had words
to the effect that the company cannot be restrained but this was overruled in
the case of
British
Equitable Assurance Co. v. Baily (1906) S.C. 35
Allen v.
Goldreef
In this case an
article was altered in such a way as to prejudice one shareholder. The article gave a lien on partly-paid shares
for debts of members. Zuccani owed money
in respect of unpaid calls on partly-paid shares but was the only holder of
fully paid shares as well. The court
held that it was for the benefit of the company to recover moneys due to it and
the alteration in its terms related to all holders of fully-paid shares. The fact that Zuccani was the only member of
that class at that moment did not invalidate it.
VARIATION OF CLASS RIGHTS
Although the
Companies Act recognises the existence of class of shareholders, it does not
define the term ‘class’ the best definition is found in the case of
Sovereign
Life Assurance Co. v. Dodd (1892) 2 QB 573
In that case Bowen
L.J. stated as follows: “The word Class is vague it must be confined
to those persons whose rights are not dissimilar as to make it impossible for
them to concert together with a view to their common interest.”
Under Article 4 of
Table A where the Share Capital is divided into different classes of
Shares, the rights attached to any class may be varied only with a consent in
writing of the holders of three quarters of the issued share of that class or
with assumption of a special resolution passed at a separate meeting of the
holders of the shares of that class.
However, under Section
25 (2) if the rights are contained in the Memorandum of Association and if
the Memorandum prohibits alteration of those rights, then class rights cannot
be varied.
THE COMPANIES ORGANS & OFFICERS
Since a company is an
artificial person, it can only act through an agency of a human person. For this purpose, a company has two primary
organs.
1.
The general Meeting;
2.
The Board of Directors.
The authority to
exercise a company’s powers is normally delegated not to the members nor
individual directors but only to the directors as a Board. The directors may however delegate powers to
an individual Managing Director.
Section 177 of the
Companies Act requires every public company to have at least
two directors and every private company at least one director. The Act does not provide for the means of
appointing Directors but in practice the Articles of Association provide for
initial appointments by subscribers to the Memorandum of Association and
thereafter to annual retirement of a certain number of directors and the
filling of vacancies at the annual general meeting.
Under Section 184
(1) of the Companies Act every appointment must be voted on individually
except in the case of private companies or unless the meeting unanimously
agrees to include two or more appointments in the same resolution. The appointment is usually effected by an
ordinary resolution. However, no matter how a director is appointed, under
Section 185 of the Companies Act he can always be removed from office by
an ordinary resolution in addition to any other means of removal which may be
embodied in the articles.
Unless the Articles
so provide Directors need not be members of a company, but if the articles
require a share qualification, then the shares must be taken up within two
months otherwise the office will be vacated.
Undischarged Bankrupts are not
allowed to act as directors without leave of the court. A director need not be a natural person. A company may be appointed a director of
another. The disqualifications of
directors are set out in article 88 of Table A. The division of powers between the general
meeting and the Board of Directors depends entirely on the construction of the
Articles of Association and generally where powers of management are vested in
the Board of Directors, the general meeting cannot interfere with the exercise
of those powers.
Automatic
Self-cleaning Filter Syndicate v. Cunningham (1906) A.C. 442
The company’s
articles provided that subject to such regulations as might be made by extra
ordinary resolution, the Management of the company’s affairs should be vested
in the Directors who might exercise all the powers of the company which were
not by statute or articles expressly required to be exercised by the company in
general meeting. In particular the articles gave the directors power to sell
and deal with any property of the company on such terms as they must deem
fit. At a general meeting of the
company, a Resolution was passed by a simple majority of the members for the
sale of the company’s assets on certain terms and instructing the directors to
carry the sale into effect. The
Directors were of the opinion that a sale on those terms was not of any benefit
to the company and therefore refused to carry it into effect. The issue was, whether the directors were
under an obligation to act in accordance with the directives.
The court held that
the Articles constituted a contract by which the members had agreed that the
Directors alone should manage the affairs of the company unless and until the
powers vested in the Directors was taken away by an alteration in the Articles
they could ignore the general meeting directives on matters of management. They were therefore entitled to refuse to
execute the sale.
The division of the power to manage the
company’s affairs is embodied in Article 80 of Table A which states that
the business of the company shall be managed by the directors who may exercise
all such powers of a company as are not by the Act or by these regulations
required to be exercised by the company in general meeting. Where this article is adopted as it is
invariably done in practice the general meeting cannot interfere with a
decision of the directors unless they are acting contrary to the provisions of
the Companies Act or the particular company’s articles of association.
Shaw &
Sons Ltd v. Shaw (1935) 2 KB 113
Here the Directors
were empowered to manage the company’s affairs.
They commenced an action for and on behalf of the company and in the
company’s name, in order to recover some money owed to the company. The general meeting thereafter passed a
resolution disapproving the commencement of the suit and instructing the
Directors to withdraw it
It was held that the
resolution of the general meeting was a nullity Greer L.J. stated
“A
company is an entity distinct from its shareholders and its directors. Some of its powers may be according to its
articles exercised by the Directors and certain other powers may be reserved
for shareholders in general meeting. If powers of management are vested in the
Directors, they and they alone can exercise these powers. The only way in which the general body of the
shareholders can control the exercise of the powers vested by the articles in
the directors is by altering the articles or if opportunity arises under the
articles by refusing to re-elect the directors or whose actions they
disapprove. They cannot themselves
reserve the powers which by themselves are vested in the Directors any more
than the directors can reserve to themselves the powers vested by the articles
in the general body of shareholders.”
To this there are two
exceptions
1.
in relation to litigation – here a
general meeting can institute proceedings on behalf of the company if the board
of directors refuses or neglects to do so.
2.
When there is a deadlock in the Board of
Directors as for instance in the case of
Barron v.
Porter (1914) 1 Ch.
895
The articles of
association vested the power to appoint additional directors in the Board of
Directors. There were only two directors
namely, Barron and Porter and the conduct of the company’s business was at a
standstill as Barron refused to attend any Board meeting with Porter.
The court held that
it was competent for the general meeting to appoint additional directors even
if the power to do so was by articles vested in the Board of Directors.
CORPORATES’ LIABILITIES FOR ACTS OF ITS ORGANS &
OFFICERS
There are certain
situations in which the law does not recognise vicarious liability but insists
on personal fault as a prelude to liability.
In such cases a company could never be liable if the courts applied
rigidly the rule that a company is an artificial person and therefore can only
act through the directors. In practice
and for certain purposes the courts have elected to treat the acts of certain
officers as those of the company itself.
This is sometimes referred to as THE
ORGANIC THEORY OF COMPANIES.
The theory sprung
from the case of
Lennard’s
Carrying Co. v. Asiatic Petroleum Co. Ltd.
(1950) A.C. 705
In this case a ship
and her cargo were lost owing to unseaworthiness. The owners of the ship were a limited
company. The managers of the company
were another limited company whose managing director a Mr. Lennard managed the
ship on behalf of the owners. He knew or
ought to have known of the Ship’s unseaworthiness but took no steps to prevent
the ship from going to sea. Under the
relevant shipping Act the owner of a sea going ship was not liable to make good
any loss or damage happening without his fault.
The issue was whether Lennard’s knowledge was also the company’s
knowledge that the ship was unseaworthy.
The court held that
Lennard was the Directing mind and will of the company his knowledge was the
knowledge of the company, his fault the fault of the company and since he knew
that the ship was unseaworthy, his fault was also the company’s fault and
therefore the company was liable. As per
Viscount Haldane
“My Lords a corporation is an
abstraction. It has no mind of its own
anymore than it has a body of its own. Its active and directing will must
consequently be sought in the person of somebody who for some purposes may be
called an agent but who is really the directing mind and will of the
corporation, the very ego and centre of the personality of the corporation.
Bolton Engineering Co. v. Graham
Here the Plaintiffs who were tenants in
certain business premises were entitled to a renewal of their tenancy unless
the landlords who were a limited company intended to occupy the premises
themselves for their business purposes.
The issue was whether the Defendant company had effectively formed this
intention. There had been no formal
general meeting or Board of Directors meeting held to consider the question but
the managing director’s clearly manifested the intention to occupy the premises
for the company’s business.
The court held that
the intention manifested by the Directors was the company’s intention and
therefore the tenants were not entitled to a renewal of the tenancy.
Denning L.J. as he then was stated as follows:
“a company may in many ways be likened
to a human being. It has a brain and nerve centre which
controls what it does. It also has hands
which hold the tools and act in accordance with the directions from the
centre. Some of the people in the
company are mere servants and agents who are nothing more than hands to do the
work and cannot be said to represent the mind and will of the company. Other are directors and managers who
represent the directing mind and will of the company and control what it
does. The state of mind of these
managers is the state of mind of the company and are treated by the law as
such. Whether their intention is the
company’s intention depends on the nature of the matter under consideration,
the relative position of the officer or agent and other relevant facts and
circumstances of the case.”
RULE IN TURQUAND’S CASE
Crossly connected
with this aspect is the so called rule in Turquand’s case:
This rule deals with
a company’s liability for acts of its officers.
The question as to whether or not the company is bound or not depends on
the normal agency principles. If a
company’s officer or a company’s organ does an act within the scope of its
authority, the company will be bound.
The problem which might arise is that even if the Act in question is
within the scope of the organs or officers authority, there might be some
irregularity in the action of the organ concerned and consequently in the
exercise of authority. For example, if a
particular act can only be valued if done by the Board of Directors or the
general meeting, the meeting might have been convened on improper notice or the
resolution may not have been properly carried.
In the case of the Directors, they may not have been properly appointed. In these circumstances can the company
disclaim an act which was so done by arguing that the meeting was irregular?
Must a third party dealing with the company always ascertain that the company’s
internal regulations have been complied with before holding the company liable?
The answer to this
question was given in the negative in the case of
The Royal
British Bank v. Turquand (1856) 6 E & B 327
Here under the
Company’s constitution the directors were given power to borrow on bond such
sums of money as from time to time by a general resolution be authorised to be
borrowed. Without any such resolution
having been passed, the directors borrowed a certain sum of money from the
Plaintiff’s bank. Upon the company’s
liquidation the bank sought to recover from the liquidator who argued that the
Bank was not bound to recover it as it was borrowed without authority from the
general meeting.
The court held that
even though no resolution had been passed, the company was nevertheless bound
by the act of the directors and therefore was bound to repay the money.
The words of Jarvis
C.J. were as follows:
“a
party dealing with a company is bound to read the company’s deed of settlement
(Memorandum of Association) but he is not bound to do more. In this case a third party reading a
company’s documents will find not a prohibition from borrowing but permission
to do so on certain conditions. Finding
that the authority might be made complete by resolution, he would have had a right
to infer the fact of a resolution authorising that which on the face of the
document appeared to be legitimately done.”
This is the rule in
Turquand’s Case which is often referred to as the rule as to indoor management.
This rule is based
not on logic but on business convenience.
1.
A third party dealing with a company has
no access to the company’s indoor activities;
2.
It would be very difficult to run
business if everyone who had dealings with the company had first to examine the
company’s internal operations before engaging in any business with the company;
3.
It would be very unfair to the company’s
creditors if the company could escape liability on the ground that its
officials acted irregularly.
But should the
company always be held liable for the act of any people purporting to act on
the company’s behalf? Suppose these persons are impostors, what happens?
In order to avoid
this some limitations have been imposed on the rule. Later cases have refined the rule to a point
where the position appears to that ordinary agency principles will always apply
Anybody dealing with
a company is deemed to have notice of the contents of the company’s public
documents. Therefore any act which is
contrary to those provisions will not bind the company unless it is
subsequently ratified by the company acting through its appropriate organ. The term public document is not defined in
the companies Act but so far as registered companies are concerned, the
expression is not restricted to the Memorandum and Articles but it also
includes some of those documents filed at the companies registry. These include special resolutions,
particulars of directors and secretary, charges etc. provided that everything appears to be
regular, so far as can be checked from the public documents, a third party
dealing with a company is entitled to assume that all internal regulations of
the company have been complied with unless he has knowledge to the contrary or
there are suspicious circumstances putting him on inquiry. Reference is made to the case of
Mahoney v.
East Holyford Mining Co. (1875) L.R. 7 HL 869
Here a mining company
was founded by W and his friends and relatives.
Subscriptions were obtained from applicants for shares. These monies were paid into the bank which
had been described in the prospectus as the company’s bank. The communication of the letter was sent to
the Bank by a person describing himself as the Company’s secretary to the
effect that in accordance with a resolution passed on that day, the bank was to
pay out cheques signed by either two of the three named directors whose
signatures were attached and countersigned by the Secretary. The bank thereafter honoured cheques so
signed. When the company’s funds were
almost exhausted, the company was
ordered to be wound up. It was then
discovered that no meeting of the Shareholders had been held, and no
appointment of Directors and Secretary met but that with his friends and
relatives, W had held themselves to be secretary and directors and had
appropriated the subscription money. The
issue was whether the Bank was liable to refund the money it had paid back to
the borrower.
The court held that
the bank was not liable to refund any money to the company as it had honoured
the company’s cheques in reliance on a letter received and in good faith.
Lord Hatherly stated
“When there are persons conducting the affairs of a company in a manner
which appears to be perfectly consonant with the articles of association, then
those dealing with them externally are not to be affected by any irregularities
which may take place in the internal management of the company.”
Directors will not
necessarily and for all purposes be insiders.
The test appears to be whether the acts done by them are so closely
related to their position as directors as to make it impossible for them not to
be treated as knowing the limitations on the powers of the officers of the
company with whom they have dealt.
Otherwise a third party dealing with a company through an officer who is
or is held out by the company as a particular type of officer e.g. a Managing
Director and who purports to exercise a power which that sort of officer will
usually have is entitled to hold the company liable for the officer’s acts even
though the officer has not been so appointed or is in fact exceeding his authority
as long as the third party does not know that the company’s officer has not
been so appointed or has no actual authority.
A third party
however, will not be protected if the circumstances are such as to put him on
inquiry. He will also lose protection if
the public documents make it clear that the officer has no actual authority or
could not have authority unless a resolution had been passed which requires
filing in the Companies Registry and no such resolution had been filed. These are normal agency principles.
Freeman
& Lockyer V Buckhurst
Park Properties (1964) 2
Q.B. 480
In this case Kapool
& Hoon formed a private company which purchased Buckhurst Park Estate. The Board of Directors consisted of Kapool,
Hoon and two others. The Articles of the
company contained a power to appoint a Managing Director but none was
appointed. Though never appointed as
such, Kapool acted as Managing Director.
In that capacity he engaged the Plaintiffs who were a firm of Architects
to do certain work for the company which was duly done. When the Plaintiff’s claimed remuneration,
according to the agreement, the company replied that it was not liable because
Kapool had no authority to engage them.
The Court held that
the act of engaging Architects was within the ordinary ambit of the authority
of a Managing Director of a property company and the Plaintiffs did not have to
inquire whether a person with whom they were dealing with was properly
appointed. It was sufficient for them
that under the Articles, the Board of Directors had the power to appoint him
and had in fact allowed him to act as Managing Director. Four conditions must however be fulfilled in
order to entitle a third party to enforce a contract entered to on behalf of
the company by a person who has no actual authority.
1.
It must be shown that there was a
representation that the agent had authority to enter into a contract of the
kind sought to be enforced;
2.
Such representation must be made by a
person or persons who had actual authority to manage the company’s business
either generally or in respect of those matters to which the contract relates;
3.
It must be shown that the contract was
induced by such representation;
4.
It must be shown that neither in its
Memorandum or under its Articles was the company deprived of the capacity
either to enter into a contract of the kind sought to be enforced or to
delegate authority to do so to the agent.
Emco
Plastica International vs Freeberne (1971) E.A. 432
Here by a resolution
of the company at a meeting of the Board of Directors, the Respondent was
appointed as the company’s secretary.
Nothing was decided at the meeting as regards his remuneration or other
terms of service. The terms of his
appointment were contained in a letter signed on behalf of the company by its
Managing Director which provided that the appointment was for a maximum period
of 5 years. The Managing Director dealt
with the day to day affairs of the company but had no express authority to
appoint a Secretary or to offer such unusually generous terms as contained in
the letter. After two years service the
company purported to dismiss the Respondent by five days notice. The Secretary sued for benefits under the
Contract. The Company contended that the
Managing Director had no authority from the Company to offer the terms of the
contract. There being no resolution of
the board to support it and nothing in the company’s articles conferring any
such powers on a Managing Director.
The court held that
as a chairman he performed the functions of the Managing Director with a full
knowledge of the Board of Directors and that a contract of service as the one
entered into with the Secretary was one which a person performing the duties of
a Managing Director would have power to enter into on behalf of the company. Therefore, the contract was genuine, valid
and enforceable. If however, the officer
is purporting to exercise some authority which that sort of officer would not
normally have, a third party will not be protected if the officer exceeds his
actual authority unless the company has held him out as having authority to act
in the matter and the third party has relied thereof i.e. unless the company is
estopped. However, a provision in the
Memorandum or Articles or other public document cannot create an estoppel
unless the third party knew of the provision and has relied on it. For this purpose, regulations at the
Companies Registry do not constitute notice because the doctrine of
constructive notice operates negatively and not positive. If a document purporting to be received by or
signed on behalf of the company is proved to be a forgery, it does not bind the
company. However, the company may be
estopped from claiming the document as a forgery if it has been put forward as
genuine by an officer acting within his usual or ostensible authority.
Look at
Rama Corp
v Proved Tin & General Investment (1952) 2 Q.B. 147
PROMOTERS
The Companies Act
does not define the term promoter but Section 45(5) says
“A promoter is a promoter who was a
party to the preparation of the prospectus. Apart from the fact that this
definition does not speak much, it nevertheless shows that the definition is
only given for the purposes of that section.
At common law the
best definition is that by Chief Justice Cockburn in the case of
Twyfords –
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 Promoter of 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.
DUTIES OF A PROMOTER
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-Ã -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 facts were as
follows
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. As Lord Cairns said
“the
owner of the property who promotes and forms that company to which he sells his
property is bound to take care that he sells it to the company through the
medium of a Board of Directors who can exercise an independent judgment on the
transaction and who are not left under belief that the property belongs not to
the promoters and not to another person.”
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.
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
1.
Either rescission of any contract with the promoter or
2.
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),
REMUNERATION OF PROMOTERS
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 authorising 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.
PRELIMINARY CONTRACTS BY 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.
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.”
However, acts may be
done by a company after its formation which give rise to an inference of a new
contract on the same terms as the old one.
The question whether
there is a new contract or contracts is always a question of facts which
depends on the circumstances of each individual case.
Mawagola
Farmers & Growers Ltd. V Kanyanja (1971) E.A. 272
Here, prior to the
incorporation of a company the promoters held public meetings at which members
of the public were asked to purchase shares in a proposed company. The Respondents paid for the shares both
before and after incorporation of the company but the company did not allot any
shares to them. Instead after incorporation,
it allotted shares to other people.
The Respondents filed
actions praying for orders that the shares they paid for be allotted to them
and the company’s registered members be rectified accordingly.
The Company argued
that as the Respondents had paid money for the purchase of their shares before
incorporation, their claim could only be directed against promoters because no
pre incorporation agreement could bind the company and the company could not
even after incorporation ratify or adopt any such contract.
Mustafa J.A. replied
as follows:
“in order that the company may be
bound by agreements entered into before incorporation, there must be a new
contract to the same effect as the old agreements. This contract may however be inferred from
the acts of the company when incorporated.”
The allotment of
shares to the Respondents after the incorporation was held to be sufficient
evidence of a new contract between the company and the Respondents. Therefore the Respondents were entitled to be
allotted the shares agreed upon.
If any preliminary
arrangements are made, these must therefore be left to mere gentlemen’s
agreements or otherwise the promoters might have to undertake personal
liability.
Although the
principle is clear, those engaged in the formation of companies often cause
contracts to be entered into on behalf of their proposed companies.
As to whether the
promoters will be personally liable on such contracts of nought might depend on
the terminology employed. In the case of
Kelner v.
Baxter (1886) L.R. 2 C.P. 174
In this case, A, B
and C entered into a contract with the Plaintiff to purchase goods “on behalf
of the proposed Gravesand Royal Alexandra Hotel Company” the goods were duly
supplied and consumed. Shortly after
incorporation the company in question collapsed and the Plaintiff sued A B and
C for the price of the goods supplied.
It was held that A B
and C were liable. Chief Justice Erne
stated as follows:
“where a contract is signed by one who
professes to be signing as agent but who has no principal existence at the
time, then the contract will hold together the inoperative unless binding
against the person who signed it. He is
bound thereby and a stranger cannot by subsequent ratification relieve him from
that responsibility. When the company
came afterwards into existence, it had rights and obligations from that time
but no rights or obligations by reason of anything which might have been done
before.”
Contrast this case
with the case of
Newborn v.
Sensolid (G.B Ltd) (1954) 1 Q.B. 45
Here a contract was
entered into between Leopold Newborn London Ltd and the Defendant for purchase
of goods by the latter. The defendant
subsequently refused to take delivery of the goods and an action was commenced
by Leopold Newborn Ltd.
It was discovered
that at the time the contract was entered into, the company had not been
incorporated. Leopold Newborn thereupon
sought personally to enforce the contract.
It was held that the
signature on the document was the company’s signature and as the company was
not in existence when the contract was signed, there never was a contract and
Mr. Newborn could not come forward and say that it was his contract. The fact was that he made a contract for a
company which did not exist.
PROSPECTUSES
Basically when the
public is asked to subscribe for shares or debentures in a company the
invitation involves the issue of documents which set out the advantages to
accrue from an investment in the company.
This document is called a prospectus and may be issued either by the
company itself or by a promoter. It is
only in the case of a public company that a prospectus may be issued.
A private company
must always raise its capital privately as required by Section 13 of the
Companies Act Cap 486.
Section 20 of the
Statute defines Prospectus as “any prospectus notice circular advertisement or
other invitation offering to the public for subscription or purchase of any
shares or debentures in the company.”
The word invitation
and offering in that definition are loosely used because when a company issues
a prospectus it does not offer to sell any shares but rather invites offers
from members of the public. A prospectus
is therefore not an offer but an invitation to treat.
The word prospectus
is thus a vague and uncertain term.
Whether an invitation is made to members of the public is always a
question of fact. The question “public”
is not restricted to a certain section of the public but includes any members of
the general public. Reference may be
made to the case of
Re South
of England Natural Gas Co. (1911) 1 Ch. 573
A newly formed
company issued 3000 copies of a document which offered for subscription shares
in a company and which was headed “for private circulation only”. These copies were then circulated to the
shareholders of a number of gas companies and the question arose Was this a
prospectus?
The court held that
this was an offer to the public and therefore constituted a prospectus.
CONTENTS OF A PROSPECTUS
The object of the
Companies Act is to compel a company to disclose in a prospectus all the
necessary information which will enable a potential investor in deciding
whether or not to subscribe for a company shares or debentures. Therefore Section 40 requires that every
Prospectus shall state the matter specified in Article 1 of the 3rd
Schedule to the Act and that it will also set out the report specified in Part
II of that Schedule. The provisions in
that Schedule are designed mainly to provide information about the following
matters:
1.
Who the directors are; and What benefits
they will get from the Directorship;
2.
In the case of a new company, what
profits are being made by the promoters;
3.
the amount of capital required by the
company to be subscribed, the amount actually received or to be received, the
precise nature of the consideration which is not paid in cash;
4.
In the case of an existing company, what
the company’s financial records has been in the past.
5.
the company’s obligations under any
contracts it has entered into;
6.
the voting and dividend rights of each
class of shares;
7.
If a Prospectus includes any statement
by an expert, then the expert must have given his written consent to the
inclusion of the statement and the prospectus must state that he has done so as
per Section 42 of the Companies Act.
Contravention of
these requirements renders the company and every person who was knowingly a
party to the issue of the prospectus to a fine not exceeding 10,000/-
Section 42
defines Expert as including “Engineer, Valuer, Accountant or any other person
whose profession gives authority to the statement made by him.”
In addition to these
requirements the prospectuses must also be dated and the date stated therein is
taken to be the date of publication of the prospectus. However, there are two instances when a
prospectus need not contain the matter set out in Schedule III namely
1.
When the prospectus is issued to
existing members or shareholders of the company;
2.
When the prospectus relates to shares or
debentures uniform with previously issued shares or debentures.
LIABILITY IN RESPECT OF PROSPECTUS
If a prospectus
contains untrue statements, the Companies Act prescribes both penalty at
Criminal Law and also Civil Liability for payment of damages. As concerns Criminal Liability, under Section
46 where a prospectus includes any untrue statement, any person who
authorised the issue of the prospectus is guilty of an offence and liable to
imprisonment of a term not exceeding two years or a fine not exceeding 10,000/-
or both such a fine and imprisonment unless he proves either that the statement
was immaterial or that he had reasonable grounds to believe and did up to the
time of issue of the prospectus that the statement was true.
A statement is deemed
to be untrue if it is misleading in the form and context in which it is
included.
R. v.
Kylsant (1932) 1 K.B. 442
In this case the
company had sustained continuous loses for over 6 years from 1921 to 1927. The company issued a prospectus which in all
material facts was correct. It further specified that the dividends being paid
were high. But these dividends were
being paid out of abnormal profits made after World War 1. Therefore the Prospectus was misleading in
its context.
CIVIL REMEDIES
There are two primary
remedies for those who subscribe for shares in a company as a result of a
misrepresentation in a prospectus
(a)
Damages;
(b)
Rescission of any resulting contract.
DAMAGES
Section 45
provides for compensation to all persons who subscribe for any shares or
debentures on the faith of the Prospectus for loss or damage they may have
sustained by reason of untrue statements included therein. If the statement is false to the knowledge of
those who made it, then this amounts to fraud and damages will be recoverable
from all those who made the statement intending it to be acted upon. Refer to the case of
Derry v. Peek
(1889) 14 A.C. 337
Herein a company had
power to construct tramways to be moved by animal power and with the consent of
the British Board of Trade by steam or mechanical power. The Directors issued a prospectus stating
that the company had power to use steam or mechanical power.
In reliance on this
misrepresentation, the Plaintiff bought shares in the company. Subsequently the Board of Trade refused to
give consent to the use of Steam or mechanical power and as a result the
company was wound up. The Plaintiff
brought an action for deceit alleging fraudulent misrepresentation.
The Court held that
the Defendants were not liable as they had made the incorrect statement in the
honest belief that it was true. Lord
Herschell said “the authorities establish two major propositions.
(i)
In order to sustain an action of Deceit,
there must be proof of fraud and nothing short of that will suffice;
(ii)
Fraud is proved when it is shown that a
false representation has been made either;
(a)
Knowingly or
(b)
Without belief in its truth; or
(c)
Recklessly not caring whether it be true
or false.
In order to succeed
in an action for damages for fraud the plaintiff must show that the
Misrepresentation was made to him or that he was one of a class of persons who
were intended to act upon it. The
ordinary purpose of a prospectus is to invite members of the public to become
allottees of shares in a company. Once
the shares have been allotted therefore the prospectus will have served its
purpose and thereafter it cannot be used as a ground for filing an action for
fraud in respect of shares bought at a later date from another source. Reference made to the case of
Peek v.
Gurney (1873) L.R. 377
The allotment of
shares in the company began on July 24th and was completed on 28th
July. In October, the Plaintiff bought
shares on the stock exchange. He
subsequently found that the prospectus issued in July contained some untrue
statements and therefore brought an action in respect thereof.
The issue was could
he sue?
The court held that
the Plaintiff could not base his action on the prospectus which was intended to
be addressed only to the original company subscribers to the company shares. The Directors of a company are not liable
after the full original allotment of shares for all the subsequent dealings
which may take place with regard to those shares on the stock exchange.
However, the rule in Peek v. Gurney will not apply where a prospectus
is intended to induce not only the original subscribers for the company shares
but also to influence the subsequent purchase of those shares
Andrews v.
Mockford (1896) 1 QB 372
Here the Plaintiff
alleged that the Defendant sent him a prospectus inviting him to buy shares in
the company which they knew would be a sham but the Plaintiff did not subscribe
for the shares. The prospectus
eventually produced a very scanty subscription and the Defendant caused a
telegram to be published in the local Newspaper to the effect that they had
struck a vain of Gold. And this they
alleged had confirmed the statistics in the prospectus.
The Plaintiff
immediately bought shares on this basis.
The company was wound up. The
question arose, Had the Prospectus served its purpose.
The court held that
the prospectus was intended to induce the Plaintiff both to subscribe for
shares initially and also to buy them in the Market thereafter. The telegram was part of the prospectus.
Lord Justice Smith
stated as follows
“there was proved against the
Defendant a continuous fraud on their part commencing with ascending of the
prospectus to the Plaintiff and culminating in the direct lie told in a
telegram which was intended by the defendant to operate upon the Plaintiff’s
mind and minds of others and did so operate to his prejudice and the advantage
of the Defendant. In this case the
function of the prospectus was not exhausted and a false telegram was brought
in to play by the Defendant to reflect back upon and countenance the false
statements in the prospectus.”
The purchaser of
shares induced to buy shares by the misstatement in the prospectus has an
action for damages in negligence. He has
also an action for negligent misstatement
under the Hedley Byrne & Co. v. Heller
& Partners (1974) A.C. 465 All
these actions are directed to the Directors personally.
RESCISSION
As against the
company a person induced to buy shares by a misrepresentation in the prospectus
may rescind the contract. On buying
shares ones contract is with a company itself.
The remedy is available only against the company. To be entitled to this remedy, it is not
necessary for the purchaser of the shares to show that the statement was
fraudulent or negligent. Even if the
misrepresentation was innocent, rescission lies. However, the rights to rescind is subject to
two limitations
1.
The allotee loses the right to rescind
if he shows any election to affirm the contract; e.g. by attending and voting at the company’s
meetings or by accepting dividends or by selling or attempting to sell the
shares.
2.
If the allotee does not rescind the
contract before the company is wound up, he loses the right to do so as from
the moment the winding up proceedings commenced. The rationale is the protection of the other
company’s creditors.
DIRECTORS DUTIES
First, three
preliminary observations
1.
Whereas the Directors’ authority to bind
the company depends on their acting collectively as a Board, their duties to
the company are owed by each Director individually. These duties are owed to the company and the
company alone and not to individual shareholders.
Percival
v. Wright (1902) 2 Ch.
421
Certain Shareholders
wrote to the Company’s Secretary asking if he knew anyone willing to buy their
shares. Negotiations took place and
eventually the company chairman and two other directors bought the Plaintiff
Shares at £12 10s per share. The
Plaintiff subsequently discovered that prior to and during their own
negotiations for sale, the Chairman and the Board of Directors had been
approached by 3rd Party with a view to the purchase of the entire
company’s assets at more than the price of 12 pounds 10 shillings per share.
The Plaintiff brought
an action to set aside the share sales on the ground that the directors owed
them a duty to disclose the negotiations with the 3rd Party.
It was held that the
Directors were not agents for the individual shareholders and did not owe them
any duty to disclose. Therefore the sale
was proper and could not be set aside.
However, if the Directors are authorised by the members to negotiate on
their behalf e.g. with a potential purchaser then the Directors will be in a
position of agents for such members and will owe them a duty accordingly.
Allen v.
Hyatt (1914) 30 T.L.R. 444
These duties except
where expressly stipulated in the Companies Act are not restricted to directors
alone but apply equally to any officials of the company who are authorised to
act as agents of the company and in particular to those acting in a managerial capacity. This is particularly so as regards fiduciary
duties.
DIRECTORS’ DUTIES PROPER
These fall into two
broad categories
1.
duties of care and skill in the conduct
of the company’s affairs; and
2.
Fiduciary duties of loyalty and good
faith.
DUTIES OF CARE & SKILL
Duties of care and
skill were summed up by Romer J. in the
case of
Re City
Equitable Fire Insurance Co. (1925) Ch. D 447
Here the Directors of
an insurance company left the management of the company’s affairs almost
entirely to the Managing Director. Owing
to the managing Director’s fraud, a large amount of the company’s funds
disappeared. Certain items appeared in
the balance sheet under the heading “loans at call or short notice and “Cash in
Bank or in Hand”. The Directors did not
inquire how these items were made up. If
they had inquired they would have found that the loans were chiefly to the
Managing Director himself and to the Company’s General Manager and the cash at
Bank or in hand included some £13,000 in the hands of a firm of stockbrokers at
which the managing director was a partner.
On the company’s
winding up, an investigation of its affairs disclosed a shortage in its funds
of more than £1.2 million incurred mainly due to the delinquent fraud of the
Managing Director for which he was convicted and sentenced. The other Directors
had all along acted in good faith and honestly but the liquidator sought to
make them liable for the damages.
It was held that the
Directors were negligent. Justice Romer
reduced the Directors duties of care and skill as follows
“A
Director need not exhibit in the performance of his duties a greater degree of
skill than may reasonably be expected from a person of his knowledge and
experience.”
This proposition
prescribes the standard of skill to be exhibited in actions undertaken by
directors. The test is partly objective
and also partly subjective because a reasonable man would be expected to have
the knowledge of a director with his experience. Refer to
Re
Brazilian Rubber & Plantations Estates Ltd. (1911) 1 Ch. 405
In this case a
company had five directors and one of them confessed that he was absolutely
ignorant of business. A second one was
75 years old and very deaf. A third one
said he only agreed to become a director because he saw one of his friends
names on the list of directors. The
other two were fairly able businessmen.
The directors caused a contract to be entered into between the company
and a certain syndicate for purchase by that company of some rubber plantation
in Brazil. The prospectus issued by the company
contained false statements about the acreage of the Plantation, the types of trees and so
forth. The information given therein was
given to the Directors by a person who had an original option to purchase that
property. He had never been to Brazil
and the data was based on his own imagination.
The Directors caused the company to purchase the property. The question arose, were they negligent in so
doing?
The court held that
their conduct did not amount to gross negligence. Neville J. had the following to say:
“It has been laid down that so long as
they act honestly, Directors cannot be made responsible in damages unless they
are guilty of gross negligence. A
Director’s duty requires him to act with such care as is reasonably expected
from his having regard to his knowledge and experience. He is not bound to bring any special
qualifications to his office. He may
undertake the Management of a Rubber Company in complete ignorance of anything
connected with Rubber without incurring responsibility for the mistakes which
may result from such ignorance. While if
he is acquainted with the Rubber business, he must give the company the
advantage of his knowledge when transacting the company’s business. He is not bound to take any definite part in
the conduct of the company’s business but insofar as he undertakes it he must
use reasonable care. Such reasonable
care must be measured by the care an ordinary man might be expected to take in
the same circumstances on his own behalf.”
3.
A director is not bound to give
continuous attention to the affairs of his company. His duties are of an intermittent nature to
be performed at periodical Board Meetings and at meetings of any committee of
the Board on which he is placed. He is
not bound to attend all such meetings though he ought to attend whenever in the
circumstances he is reasonably able to do so.
Refer to the case of
Re Denham
& Co. Ltd (1883) 2 Ch.
D 752
Here a company was
incorporated in 1873. Under the Articles
3 Directors were appointed namely, Denham, Taylor and Crook. A fourth Director was appointed later. The articles conferred on Denham supreme
control of the company’s affairs. He was
given power to override decisions of the general meeting and a Board of
Directors. He was responsible for
declaring dividends and he managed the company’s affairs entirely alone and
without consulting the other directors.
Between 1874 and 1877 a dividend of 15% per annum was recommended and
paid and the total amount paid was some £21,600. In 1880 the company went into liquidation and
an investigation revealed that the money paid as dividends had been paid not
out of profits but out of capital.
Thereafter Denham became bankrupt, Taylor
was dead and his estate was worthless and the third man was a man of
straw. The creditors directed their
claims against Crook who had property.
Crooks argued that since the formation of the company, he had never
attended Board Meetings and therefore could not be accountable for fraudulent
statements in the Company’s Balance Sheets.
He attended one meeting in 1876 where he formally put forth a Resolution
for the payment of a dividend for that year.
The Court held that a
Director is not bound to attend every Board meeting and that he is not liable
for misfeasance committed by his co-directors at Board meetings at which he was
never present.
Marquis Of
Butes (1892) 2 Ch.
100
Here the Director
never attended any Board meetings for 38 years.
It was held that he was not liable.
3. In respect of all duties which having
regard to all exigencies of business and articles of association may properly
be left to some other official. A
Director in the absence of grounds for suspicion will not be liable in trusting
that other official to perform that other duty honestly.
Dovey v.
Cory (1901) A.C. 477
A bank sustained
heavy losses by advances made improperly to customers. The irregular nature of advances was
concealed by means of fraudulent Balance Sheets which were the work of the
General Manager and the Chairman in assenting to the payment of dividends out
of capital and those advances on improper security were done on the advice of
the general manager and chairman.
The court held that
the reliance placed by the co-director on the general manager and chairman was
reasonable. He was not negligent and
therefore was not liable for not having discovered the fraud as he was not in
the absence of circumstances of suspicion bound to examine entries in the
Company’s Books to see that the Balance Sheet was correct.
It may be said that
the duties of care and skill appear to be negative duties. What about fiduciary duties?
FIDUCIARY DUTIES
Basically a
Director’s fiduciary duties are divisible into 4 sub categories
1.
The Directors must always act bona fide
in what they consider and not what the courts may consider to be in the best
interest of the company. In this
context, the term company means the present and future members of the company
on the basis that the company will be continued as a going concern thereby
balancing long-term view against short term interests of existing members.
2.
The directors must always exercise their
powers for the particular purpose for which they were conferred and not for
extraneous purposes even if the latter are considered to be in the best
interests of the company. For example
the Directors are invariably empowered to issue capital and this power should
be exercised for only raising more funds when the company requires it. Hence it will be a breach of the Directors’
duties to issue the company shares for the purpose of entrenching themselves in
the control of the company’s affairs.
Refer to the case of Punt v. Symons (1903) 2
Ch. 506 in this case the
directors issued shares with the object of creating a sufficient majority to
enable them to pass a special resolution depriving the other shareholders of
some special rights conferred upon them by the company’s articles. It was held that a power of a kind exercised
by the Directors in this case was a power which must be exercised for the benefit
of the company. Primarily this power is
given to them for the purpose of enabling them to raise capital for the
purposes of the company. Therefore a
limited issue of shares to persons who are obviously meant and intended to
secure the necessary statutory majority in a particular interest was not a fair
and bona fide exercise of the power.
Piercy v. Mills & Co. (1920) 1 Ch. 78
A
company had two directors. They fell out
of favour with the majority of the shareholders who were therefore threatened
with the election of 3 other directors to the Board. The directors issued shares with the object
of creating a sufficient majority to enable them to resist the election of the
3 additional directors whose election would have put the two directors in the minority
on the Board.
The
Court held that the Directors were not entitled to use their powers of issuing
shares merely for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company or even merely for
the purpose of defeating the wishes of the existing majority of
shareholders. The Plaintiff and his
friends held the majority of shares in the company and as long as that majority
remained, they were entitled to have their wishes prevail in accordance with a
company’s regulations. Therefore it was
not open to the directors for the purpose of converting a minority into a
majority and purely for the purpose of defeating the wishes of the existing
majority to issue the shares in dispute.
In
those circumstances where the directors have breached their duty to exercise
their powers for the proper purpose, the shareholders may forgive them by
ratifying their action
Hogg v. Cramphorn Ltd. (1967) Ch. 254
In
this case the company had two classes of shares, ordinary and preference
shares. Each share carried 1 vote. The power to issue the company shares was
vested in the Directors. They learnt
that a takeover bid was to be made to the Shareholders. In the Bona fide belief that the acquisition
of control by the prospective take over bidder will not be the interest of the
company or its staff. The Directors
decided to forestall this move. They
therefore attached 10 votes to each of the unissued preference shares and
allotted to a trust which was controlled by the Chairman of the Board of
Directors and one of his partners in the company’s audit department and an
employee of the company. To enable the
trustees to pay for the shares, the directors provided them with an interest
free loan out of the company’s reserve fund.
An
action challenged by the Plaintiff who was an associate of the prospective
take-over bidder and registered holder of 50 ordinary shares in the company was
started. After finding that it was
improper for the directors to attach such special voting rights, the Court
stood over the action in order to enable a general meeting to be held and to
debate whether or not to ratify the Director’s actions. The general meeting ratified the action.
Bamford v. Bamford (1969) 1 All ER. 969
There
were similar facts as in the former case but a meeting was held before
proceeding to court and that general meeting ratified the Director’s
action. The question also arose in this
case, could a decision of the general meeting cure the irregularity?
The
court held if the allotment was made in bad faith, it was voidable at the
instance of the company because it was a wrong done to the company and that
being so, the company which has the rights to recall the allotment has also the
right to approve it and forgive the breach of duty.
3.
They must not fetter their displeasure
to act for the company for example, the directors cannot contract either among
themselves or with third parties as to how they will vote at future Board
meetings. However, where they have
entered into a contract on behalf of the company they may validly agree to take
such further action at Board meetings as maybe necessary to carry out such a
contract.
FIDUCIARIES CONTINUED
4.
As fiduciaries the Directors must not
place themselves without consent of the company in a position in which there is
a conflict between their duties to the company and their personal
interests. Good faith must not only be
done but it must also manifestly be seen
to be done. The law will not allow the
fiduciary to place himself in a position where he will have his judgments to be
biased and then argue that he was not biased.
This principle applies particularly when a Director enters into a contract
with his company or where he makes any secret profit by being a Director. As far as contracts are concerned a contract
entered into by the Board on behalf of the company and another Director is
governed by the equitable principle which ordains that a fiduciary relationship
between the Director and his company vitiates such contracts. Such contract is therefore voidable at the
instance of the company. Reference may
be made to the case of
Aberdeen Railway v. Blaikie (1854) 1 Macc. 461
The Defendant company
entered into a contract to purchase a quantity of chairs from the Plaintiff
partnership. At the time that the
contract was entered into a Director of the company was also one of the
partners. The issue was, was the company
entitled to avoid the contract? The
court held that the company was entitled to avoid the contract. The Judge said that as a body corporate can
only act by agents and it is the duty of those agents so to act as best to
promote the interests of the corporation whose affairs they are
conducting. Such an agent has a duty of
a fiduciary nature to discharge towards his principal. It is a rule of universal application that no
one having such duties to discharge shall be allowed to enter into or can have
a personal interest conflicting or which may possibly conflict with the
interests of those whom he is bound to protect.
This principle is strictly applied no question is entertained as to the
fairness or unfairness of the contract so entered into. However, it is possible for such contract to
be given effect by the articles of association.
At their narrowest the Articles might provide that a Director who is
interested in a Company contract should disclose his interests and he will not
be counted to decide that a quorum is raised and his votes will also not be
counted on the issue. At their widest
the articles might allow the director to be counted at Board meeting.
In order to create a
balance between these two extremes and ensure that a minimum standard prevails
Section 200 was incorporated into the Companies Act. Under this Section it is the duty of a
director who is interested in any contract or proposed contract to disclose the
nature and extent of his interest to the Board of Directors when the contract
comes up for discussion. Failure to do
so renders the defaulting director liable to a fine not exceeding 2000
shillings. In addition the failure also brings in the equitable doctrine
whereby the contract becomes voidable at the option of the company and any
profit made by the director is recoverable by the company.
The shortcoming of
the Section is that the Director has to disclose to the Board of Directors and
not to the general meeting. It is not
sufficient for a Director to say that he is interested. He must specify the nature and extent of his
interests. If the company’s articles
take the form of Article 84 of Table ‘A’ then a Director who is so interested
is required to abstain from voting at the Board meeting and his vote will not
be taken in determining whether or not there is a quorum on the Board. Once the Director has complied with Section
200 and Article 84 then he can escape liability.
In respect of all
other profits which a Director may make are out of his position as a Director
the equitable principle which requires the Directors to account for any such
profits is vigorously enforced. This is
because the Courts have equated Directors to trustees and their duties have
also been equated to those of Trustees.
The question is, are they really trustees?
Selanger
United Rubber Estates v. Craddock (1968) 1 All E.R. 567
Re Forest
of Dean Coal Mining Company (1879) 10 Ch. D 450
In the latter case,
the directors of a company were seen to be trustees only in respect of the
company’s funds or property which was either in their hands or which came under
their control. But this does not
necessarily make directors trustees.
There are two basic differences between Directors as Trustees and
Ordinary Trustees.
(a)
The function of ordinary trustee is to
preserve the Trust Property but the role of a director is to explore possible
channels of investment for the benefit of the company and these necessitates
some elements of having to take a risk even at the expense of the company’s
property.
(b)
Whereas trust property is vested in the
Trustees, a company’s property is held by the company itself and is not vested
in the trust.
Nevertheless if the
directors make any secret profits out of their positions then the effect is
identical to that of ordinary trustees.
They must account for all such profits and refund the company.
Regal Hastings v. Gulliver
(1942) 1 All E.R. 378
Herein the company
owned a cinema and the directors decided to acquire two other cinemas with a
view to the sale of the entire undertaking as a going concern. Therefore they formed a subsidiary company to
invite the capital of 5000 pounds divided into 5000 shares of 1 pound
each. The owners of the two cinemas
offered the directors a lease but required personal guarantees from the
Directors for the payment of rent unless the capital of the subsidiary company
was fully paid up. The directors did not
wish to give personal guarantees. They
made arrangements whereby the holding company subscribed for 2000 shares and
the remaining shares were taken up by the directors and their friends. The holding company was unable to subscribe
for more than 2000 shares. Eventually
the company’s undertakings were sold by selling all the shares in the company
and subsidiary and on each share the Directors made a profit of slightly more
than two pounds. After ownership had
changed the new shareholders brought an action against the directors for the
recovery of profits made by them during the sale.
The court held that
the company as it was then constituted was entitled to recover the profits made
by the Directors. Lord Macmillan had the
following to say:
“The directors will be liable to
account if it can be shown that what they did is so related to the affairs of
the company that it can properly be said to have been done in the course of
their management and in utilisation of the opportunities and special knowledge
and what they did resulted in a profit to themselves.”
Phipps v.
Boardman (1966) 3 All E.R. 721
In this case Boardman
was a solicitor to the trust of the Phipps family. The trust held some shares in the company. Boardman and his colleagues were not
satisfied with the company’s accounts and therefore decided to attend the
company’s general meeting as representatives of the Trust. At the meeting they received information
pertaining to the company’s assets and their value. Upon receipt of the information, they decided
to buy shares in the company with a view to acquiring the controlling
interest. Their takeover bid was
successful and they acquired control.
Owing to the fact that Boardman was a man of extraordinary ability, the
company made progress and the profits realised by Boardman and his friends on
the one hand and the trusts on the other were quite extensive. One of the beneficiaries of the Trust brought
an action to recover the profits which were realised by Boardman and his
friends.
The court held that
in acquiring the shares in the company, Boardman and his friends made use of
information obtained on behalf of the trust and since it was the use of that
information which prompted them to acquire the shares, then the shares were
also acquired on behalf of the trust and thus the solicitors became
constructive trustees in respect of those shares and therefore liable to
account for the profits derived therefrom to the trust.
Peso
Silver mines v. Cropper (1966) 58 D.L.R. 1
The Defendant was the
company’s Managing Director. The Board
of Directors was approached by a prospector who offered to sell his claims to
the company. The company’s consulting
geologists advised that it was in order for the company to acquire the
claims. The directors decided that it
was inadvisable for the company to acquire the same mainly because of its
strained financial resources.
Subsequently at the suggestion of the geologists, some of the Directors
agreed to purchase the claims at the price at which they had been offered to
the company. Thereafter they formed a
company which took over the claims and a second company for developing the
resources. After the control of Peso
Silver Mines had changed the new directors brought an action against the
Defendant to account to the company for the shares held by them in the new
companies. But here the court held that
since the company could not have taken over the claims, there was no conflict
of interest between the Directors and the Company and therefore the Defendant
was not liable to account for the shares.
Directors may make
use of opportunities originally offered to the company and thereby make profits
provided that some 4 conditions are satisfied namely
1.
The opportunity must have been rejected
by the company;
2.
If the directors acted in connection
with that rejection, they must have acted bona fide in the best interests of
the company.
3.
The information about that opportunity
should not have been given to them confidentially on behalf of the company.
4.
Their subsequent use of that information
must not relate to them as directors but as any other ordinary person.
Industrial
Development Consultants v. Cooley (1972)
2 All E.R. 162
The Defendant who was
an architect was appointed the company’s Managing Director. The company’s business was to offer design
and construction services to industrial enterprises. One of the defendant’s duties was to obtain
new business for the company particularly from the gas companies where he had
worked before joining the Plaintiff.
While the Defendant was still so employed by the Plaintiff a
representative of one gas company came to seek his advice on some personal
matters. In the course of their
conversation the Defendant learnt that the gas company in question had various
projects all requiring design and construction services of the type offered by
the Plaintiff. Upon acquiring this
information and without disclosing it to the company, the Defendant feigned
illness as a result of which he was relieved by the company from his
duties. Thereafter, he joined the gas
company and got the contract to do the work.
Two years previously, the Plaintiff had unsuccessfully tried to obtain that
work. After the Defendant acquiring the
contract, the company sued him alleging that he obtained the information as a
fiduciary of the company and he should therefore account to the company for all
the remuneration fees and all dues obtained.
The court held that
until the Defendant left the Plaintiff, he stood in a fiduciary relationship to
them and by failing to disclose the information to the company, his conduct was
such as to put his personal interests as a potential contracting party to the
gas company in conflict with the existing and continuing duty as the
Plaintiff’s Managing Director.
Roskill J.
“It
is an overriding principle of equity that a man must not be allowed to put
himself in a position where his fiduciary duty and interest conflict. It was the defendant’s duty to disclose to
the plaintiff the information he had obtained from the Gas Board and he had to
account to them for the profits he made and will continue to make as a result
of allowing his interests and duty to conflict.
It makes no difference that a profit is one which the company itself
could not have obtained. The question
being not whether the company could have acquired it but whether the defendant
acquired it while acting for the company.”
CONTROLLING SHARE HOLDERS
By controlling share
holders is meant those who hold the majority of the voting rights in the
company. Such share holders can always
ensure control of the company’s business by virtue of their voting power to
ensure that the controlling shareholders do not use their voting power for
exclusively selfish ends, the Law requires that in exercise of their voting
power, these shareholders must not defraud a minority. For example by endeavouring directly or
indirectly to appropriate to themselves any money property or advantage which
either belong to the company or in which the minority shareholders are entitled
to participate.
Brown v.
British Abrasive Wheel Co. (1919) 1 Ch. 290
Menier v.
Hoopers Telegraphy Works (1874) L.R. Ch. A 350
In the latter case
the company brought action against its former Managing Director for a
declaration that the concessions for laying down a telegraph cable from Portugal to Brazil was held by that former
Director as a trustee for the company. While this action was still pending, the
Defendants who were the majority shareholders in the company approached that
former Managing Director with a view to striking a compromise. It was agreed between the parties that if
that director surrendered the concessions to the Defendants then the Defendants
would use their voting power to ensure that the action was discontinued. At a subsequent general meeting of the
company, by virtue of the defendant’s voting power, a resolution was passed
that the company should be wound up.
The court said that
the resolution was invalid since the defendants had used their voting power in
such a way as to appropriate to themselves the concessions which if the earlier action had succeeded should
have belonged to the whole body of shareholders and not merely to the majority. Lord Justice Mellish stated as follows:
“although the shareholders of the
company may vote as they please and for the purpose of their own interest, yet
the majority of the shareholders cannot sell the assets of the company itself
and give the consideration but must allow the minority to have their share of
any consideration which may come to them.”
Cook v.
Deeks (1916) 1 A.C. 554
The Toronto
Construction Company carried on business as Railway Construction
contractors. The Shares in the company
were held equally among Cook, G S Deeks and G M Deeks. And another party called Hinds. The company carried out several large
construction contracts for the Canadian Pacific Railway. When the two Deeks and Hinds learnt that a
new contract was coming up, they obtained this contract in their own names to
the exclusion of the company and then formed a new company to carry out the
work. At a general meeting of the
shareholders of Toronto Construction company a resolution was passed owing to
the two powers of Deeks and Mr. Hinds declaring that the company was not
interested in the new contract of the Canadian Pacific Railway. Cook brought an action and the court
held: that the benefit of the contract
belonged properly to the Company and therefore the Directors could not validly
use their voting power as shareholders to vest it in themselves.
ENFORCEMENT OF DIRECTORS DUTIES
As the company is a
distinct entity from the members and since directors owed their duties to the
company and not to individual shareholders, in the event of breach of those
duties any action for remedies should be brought by the company itself and not
by any individual shareholder. The
company and the company alone is the proper Plaintiff. This is generally referred to as the rule in Foss V. Harbottle (1843) 2 Hare 461
In this case the
Directors who were also the company’s promoters sold the company’s property at
an undisclosed profit. Two shareholders
brought action against them alleging that in so doing, that the directors had
breached their duties to the company. It
was held that if there was any breach of duty, it was a breach of duty owed to
the company and therefore the Plaintiffs had no locus standi for the company
was the proper plaintiff. This rule has
two practical advantages namely:
1.
Insistence on an action by the company
avoids multiplicity of actions;
2.
If the irregularity complained of is one
which could have been effectively ratified by the company in general meeting,
then it is pointless to commence any litigation except with the consent of the
general meeting.
However there are
four exceptions to this rule in which an individual member may bring action
against the directors namely:
(a)
Where it is complained that the company
through the directors is acting or proposing to act ultra vires;
(b)
Where the act complained of even though
not ultra vires, the company can effectively be done by a special resolution;
(c)
Where it is alleged that the personal
rights of the Plaintiff have been infringed and/or are about to be infringed;
(d)
Where those who control the company are
perpetuating the fraud on the minority;
The problem likely to
arise is that if the directors themselves are also controlling shareholders,
the rule in Foss v. Harbottle if strictly applied in exercise of their voting
powers, the Directors may easily block any attempt to bring an action against themselves. In such cases a shareholder will be allowed
to bring an action in his own name against the directors even if the wrong
complained of has been done to the company.
Such an action is called a derivative action.
In order to be
entitled to commence a Derivative Action, it must be shown that
1.
The wrong complained of was such as to
involve a fraud on the minority which is not ratifiable by the company in
general meeting;
2.
It must be shown that the wrong doers
hold the controlling interests
3.
The company must be joined as a nominal
defendant;
4.
The action must be brought in a
representative capacity on behalf of the plaintiff and all other shareholders
except the Defendant.
The question is are
these exceptions effective?
There are situations
where the rule does not apply.
Another remedy
against directors for breach is found in Section 324 of the statute which
provides as follows:
“If in the course of the winding up of
the company it appears that any person who has taken part in the formation or
promotion of the company or any past or present director has misapplied or
retained any money or property of the company, or been guilty of any breach of
trust in relation to the company on the application of the liquidator, a
creditor or member or a court may compel such person to restore the money or
property to the company or to pay damages instead.”
This section is
designed to deal with actual breaches of trust which come to light in the
winding up proceedings or during the winding up proceedings but winding up
itself may be used as a means of ending a course of oppression by those
formally in control. Among the grounds
for the winding up is one which is particularly appropriate for such
circumstances.
Under Section 219 (f)
of the Companies Act the court may order a company to be wound up if it is of
the opinion that it is “just unequitable” the courts have so ordered when
satisfied that it is essential to protect the members or any of them from
oppression in particular they have done so when the conduct of those in control
suggests that they are trying to make intolerable the position of the minority
so as to be able to acquire the shares held by the minority on terms favourable
only to the majority. But a member cannot
petition under this section if the company is insolvent. If the company is solvent to wind it up,
contrary to the majority wishes will only be granted where a very strong case
against the majority is established.
Winding up a company
merely to end oppression appears rather awkward as it may not be of any benefit
to the petitioners themselves. Owing to
these shortcomings, Section 211 was incorporated into the Companies Act as an
alternative remedy for the minority of the shareholders. Section 211 provides that any member who
complains that the affairs of a company are being conducted in a manner
oppressive to some part of the members including himself may petition the court
which if satisfied that the facts will justify a winding up order but that this
will unduly prejudice that part of the members, may make such order as it
thinks fit. Such an order may regulate
the conduct of the company’s affairs in the future or may order the purchase of
member shares by others or by the Company itself. This remedy is available only to the
members. An oppressed director or
creditor cannot obtain any remedy under Section 211 of the Companies Act for
this is expressly restricted to oppression of the members even if a director or
creditor also happens to be a member.
Elder V.
Elder & Watson (1952) AC 49
The two Plaintiffs
were the company director and secretary and factory manager respectfully. As this was a small family concern, serious
differences arose between the plaintiffs and the beneficial owners of the undertaking. Consequently the Plaintiff brought action
under Section 211 alleging oppression.
It was held that if there was any oppression of the Plaintiffs, it
related to them as directors and the remedy under Section 211 is only available
to members. The suit was dismissed.
WHAT IS OPPRESSION
This term has been
defined to mean something burdensome, harsh or wrongful.
Scottish
Cooperative Wholesale Society v. Meyer (1959) AC 324
Here the Society
wished to enter into the retail business.
For this purpose a subsidiary company was formed in which the two
Respondents and 3 Nominees of the Society were the directors. The society had majority shareholders and the
Respondents were the minority. The
Company required 3 things namely;
1.
Sources of supplies of raw material;
2.
A licence from a regulatory organisation
called cotton control
3.
Weaving Mills.
The Respondents
provided the first two but weaving Mills belonged to the society. For several years, the business prospered
because of mainly the knowhow provided by the Respondent. The company paid large dividends and
accumulated substantial results. Due to
the prosperity, the society decided to acquire more shares and through its
nominee directors offered to buy some of the shares of the Respondent at their
nominal value which was one pound per share but their worth was actually 6
pounds per share. When the Respondents
declined to sell their shares to the society, the society threatened to cause
the liquidation of the company. About 5
years later, Cotton control was abolished which meant that the society would
obtain the raw materials and weave cloth without a licence. It accordingly started to do the same and
also started starving the subsidiary by refusing to manufacture for it except
for an economic crisis. As all the other
Mills were fully occupied, the subsidiary company was being starved to death
and when it was nearly dead the Respondent brought the petition claiming that
the affairs of the company were being conducted in an oppressive manner.
It was held that by
subordinating the interests of the company to those of the society, the nominee
directors of the society had thereby conducted the affairs of the company in a
manner oppressive to the other shareholders.
The fact that they were perhaps guilty of inaction was irrelevant. The affairs of the company can be conducted
oppressively by the Directors doing nothing to protect its interests when they
ought to do so.
Re
Hammer(1959) 1 WL.R. 6
In this case Mr.
Hammer senior was a Philatelist (stamp collector) dealer and incorporated
business in 1947 forming a company with two types of ordinary shares class A
shares which were entitled to a residue of profit and Class B Shares carrying
all the votes. He gave out the shares to
his two sons and at the time of the petition each son held 4000 Class A shares
and the father owned 1000 shares. Of the
Class B Shares, the father and his wife held nearly 800 to the 100 held by each
son. Under the Company’s articles of
association, the father and two sons were appointed directors for life and the
father was further appointed chairman of the Board with a casting vote. The father assumed powers he did not possess
ignored decisions of the Board and even in court, during the hearing asserted
that he had full power to do as he pleased while he had voting control. He dismissed employees using his casting vote
to co-opt self directors, he prohibited board meetings, engaged detectives to
watch the staff and secured payment of his wife’s expenses out of the company’s
funds. He negotiated sales and vetoed
leases all contrary to the decisions and wishes of the other directors.
The sons filed an
action claiming that the father had run the affairs of the company in a manner
oppressive to them. The father was 88
years.
The court held that
by assuming powers which he did not possess and exercising them against the
wishes of those who had the major beneficial interests, Mr. Hammer senior had
conducted the company’s affairs in an oppressive manner.
These two cases are
among the few where an application under Section 211 has succeeded. This is because section 211 has been
subjected to a very restrictive meaning.
To succeed under Section 211, one must establish a case of oppression.
There is no clear
definition of the term and therefore it is not easy to tell when a company’s
affairs are being conducted oppressively.
For example in the case of Re Five Minute Car Wash Ltd (1966) 1 W.L.R. 745
The petitioner
alleged oppression on grounds that the company’s Managing Director was
extremely incompetent. The court ruled that
even though the allegation suggested that the Managing Director was unwise
inefficient and careless in the performance of his duties, this did not mean
that he had at any time acted unscrupulously, unfairly or with any lack of
probity towards the petitioner or to other members of the company. Therefore his conduct was not oppressive.
1.
The conduct which is complained of must
relate to the affairs of the company and must also relate to the petitioner in
his capacity as a member. Personal
representatives cannot petition nor can trustees in bankruptcy petition.
2.
the wording of the section suggests that
there must be a continuous cause of conduct and not merely isolated acts of
impropriety.
3.
The conduct must be such as to make it
just and equitable to wind up the company.
In other words, the members must be entitled to a winding up order.
Re Bella
Dor Sick Ltd (1965) 1 All E.R. 667
In a small family
concern, there developed two factions among shareholders. Owing to these personal differences the
petitioner filed a petition under Section 211 complaining inter alia that the
distribution of profits had not been fairly made. That he had been excluded from the Board of
Directors and that the affairs of the company were being conducted irregularly.
In particular, he alleged that the company had failed to repay its debts to
another company in which he had some interests.
It was held that the
petitioner had not made a case of oppression and the petition must be
dismissed.
Three reasons were
given
(a)
This petition had been brought for the
collateral purpose of enforcing repayment of debts to some third party;
(b)
The conduct complained of and
particularly the removal of the petitioner from the Board related to him as a
director not as a member;
(c)
That the circumstances were not such as
to justify a winding up order at the instance of the petitioner because the
company was insolvent and therefore the shareholders had no tangible interests.
It is an unfortunate
mistake to link up Section 211 with winding up.
The courts are construing the Section very restrictively. Section 211 has therefore failed to live up
to expectations. It is no real remedy.
RAISING AND MAINTENANCE OF CAPITAL
The basis of the
whole concept or a company’s capital was explained by Jessel M.R. in the Flitcrafts
Case 1882 21 Ch. D 519 in this case
for several years the directors had been in the habit of laying before the
meeting of shareholders reports and balance sheets which were substantially
untrue inasmuch as they included among other assets as good debts a number of
debts which they knew to be bad. They
thus made it appear that the business had produced profits whereas in fact it
had produced none. Acting on these
reports, the meetings declared dividends which the directors paid. It was held here that since the directors
knew that the business had not made any profit, they were liable to refund to
the company the monies paid by way of dividends.
Jessel M.R said as
follows “when a person advances money to a company, his debtor is that
artificial entity called the corporation which has no property except the
assets of the business. The creditor
therefore gives credit to that capital or those assets. He gives credit to the company on the faith
of the implied representation that the capital shall be applied only for the
purposes of the business and he has therefore a right to say that the
corporation shall keep its capital and shall not return it to the
shareholders.”
The capital fund is
therefore seen as a substitute for unlimited liability of the members. Courts have developed 3 basic principles for
ensuring that the company’s represented capital is actually what it is and for
the distribution of that capital.
1.
Once the value of the company’s shares
has been stated it cannot subsequently be changed the problem which arises in
this respect is that shares may be issued for non-monetary consideration. For instance for services or property in such
cases the company’s valuation of the consideration is generally accepted as
conclusive. If the property has been
over valued, provided the valuation has been arrived at bona fide, the courts
will not question the adequacy of the consideration but if it appears on the
face of the transaction that the value of the property is less than that of the
shares, then the court will set aside that transaction. For this reason the shares in a company must
be given a definite value. The law tries
to ensure that the company initially receives assets at least equivalent to the
nominal value of the paper capital.
Refer to Section 5 of the Companies Act.
Unfortunately if in the insistence that shares do have a definite fixed
value is not an adequate safeguard because there is no legal minimum as to what
the nominal value of the shares should be.
2.
The Rule in Trevor v. Whitworth
[1887] 12 A.C 449 Under this rule a
company is not allowed to purchase its own shares even if there is an express
power to do so in its Memorandum of Association as this would amount in a
reduction of its capital. This principle
is now supplemented by Section 56 of the Companies Act which prohibits any
direct or indirect provision of any form of assistance in the purchase of the
company shares. However, there are 3
exceptions to this broad prohibition.
a.
where the lending of money is part of
the ordinary business of the company;
b.
Where the company sets a trust fund for
enabling the trustees to purchase or subscribe for the company shares to be
held or for the benefit of the employees of the company until where the company
gives a loan to its employee other than directors to enable them to purchase
shares in the company.
3. Payment of Dividends: In order to ensure that the company’s
capital is not refunded to the shareholders under the guise of dividends, the
basic principle is that dividends should not be paid otherwise than out of
profits. Refer to Article 116 of Table A
of the Companies Act. The legal problem
in this respect has been the lack of an adequate definition of what constitutes
profits. To avoid the problem of
definition the courts have formulated certain rules for the payment of
dividends. These are as follows
(i) Before a
company can declare dividends, it must be solvent. Dividends will not be paid if this will
result in the company’s inability to pay its debts as and when they fall due;
(ii)
If the value of the company’s fixed
assets has fallen thereby causing a loss in the value of those assets, the
company does not need to make good that loss before treating revenue profits as
available for dividends. It is not
legally essential to make provision for depreciation in the fixed assets. However Losses of circulating assets in the
current accounting period must be made good before a dividend can be
declared. The realised profits on the
sale of fixed assets may be treated as profit available for distribution as a
dividend. Unrealised profits on
evaluation of the company’s assets may also be distributed by way of
dividends. Refer to Dimbula Valley
(Ceylon) Tea Co. V. Laurie [1961] Ch. D 353
Losses on circulating assets made in previous accounting periods need
not be made good. The dividend can be
declared provided that there is a profit on the current year’s trading. Each accounting period is treated in
isolation and once a loss has been sustained in one trading year, then it need
not be made good from the profits over subsequent trading periods. Undistributed profits of past years still
remain profit which can be distributed in future years until they are
capitalised by using them to pay a bonus issue.
CORPORATE SECURITIES
Basically securities
is a collective description of the various forms of investment which one can
buy for sale at the stock exchange. A
company can issue two primary classes of securities. These are shares and debentures. The basic distinction between a share and a
debenture is that a share constitutes the holder. A member of the company whereas a debenture
holder is a creditor of a company and not a member of it.
The best definition
of the term share is that given by Farwell J. in the case of Borlands
Trustee v. Steel [1901] Ch. D 279 stated “ a share is the interest of a member
in a company measured by a sum of money for the purpose of liability in the
first place and of interest in the second and also consisting of a series of
mutual covenants entered into by all the shareholders among themselves in
accordance with Section 22 of the Companies Act.”
The contract
contained in the Articles of Association is one of the original incidents of a
share. A share is therefore not a sum of
money but an abstract interest measured by a sum of money and made up of
various rights contained in a contract of membership.
In contrast a
debenture means a document which either creates or acknowledges a debt and any
document which fulfils either of these conditions is called a debenture. A debenture may take any of 3 forms
1.
It may take the form of a single
acknowledgment under seal or the debts;
2.
It may take the form of an instrument
acknowledging the debt and charging the company’s property with repayment; or
3.
It may take the form of an instrument
acknowledging the debt charging the company’s property with repayment and
further restricting the company from creating any other charge in priority over
the charge created by the debenture.
The indebtedness
acknowledged by a debenture is normally but not necessarily secured by charge
over the company’s property. Such charge
could either be a specific charge or a floating charge. Both were defined by Lord Mcnaghten in the
case of Illingsworth v. Houlsworth [1904] A.C. 355 AT 358
He stated
“ a specific charge is one
that without more fastens on ascertained and definite property or property
capable of being ascertained and
defined. A floating charge on the other
hand is ambulatory and shifting in its nature, hovering over and so to speak
floating with the property which it is intended to affect until some event
occurs or some act is done which causes it to settle and fasten on the subject
of the charge within its reach or grasp.”
A floating charge has
3 basic characteristics.
1.
It must be a charge on a class of a
company’s assets both present and
future;
2.
That class must be one which in the
ordinary cause of business of the company keeps changing from time to time;
3.
By the charge it must be contemplated
that until future step is taken by or on behalf of those interested, the
company may carry on its business in the ordinary way as far as concerns the
particular class of the assets charged.
CRYSTALISATION
A floating charge
will crystallise under the following
(a)
Where the company defaults in the
payment of any portion of the principal or interest thereon, when such portion
or interest is due and payable. In that
event however, the debenture holders rights will not crystallise automatically. After the expiry of the agreed period for
repayment, the debenture still remained a floating security until the holders
take some step to enforce that security and thereby prevent the company from
dealing with its property;
(b)
Upon the appointment of a receiver in
the course of a company’s winding up;
(c)
Upon commencement of recovery
proceedings against the company;
(d)
If an event occurs upon which by the
terms for the debenture the lender’s security is to attach specifically to the
company’s assets.
Section 96 of the
Companies Act requires every Charge created by a company and conferring
security on the company’s property to be registered within 42 days. Under this
Section what must be registered are the particulars of the charge and the
instrument creating it. Failure to
register renders the charge void as against the liquidator or any creditor of
the company.
Under Section 99 of
the Companies Act the registrar is under a duty to issue a certificate of the
registration of a charge and once issued, that certificate is conclusive
evidence that all the requirements as to registration have been complied with.
Re C.L. Nye [1970] 3
AER 1061
National Provincial
& Union Bank V. Charmley [1824] 1 KB 431
SHARES
In a company with a
share capital it is obvious that the company must issue some shares and the
initial presumption of the law is that all the shares so issued confer equal
rights and impose equal liabilities.
Normally a shareholder’s right in a company will fall under 3 heads.
1.
Payment of dividends;
2.
Refund of Capital on winding up;
3.
Attendance and voting at company’s
general meetings.
Unless there is
indication to the contract all the shares will confer the same rights under
those heads. In practice companies issue
shares which confer on the holders some preference over the others in respect
of either payment of dividends or capital or both. This is the method by which classes of shares
are created i.e. by giving some of the shareholders preference over others.
In practice therefore
most companies with classes of shares will have ordinary shares and preference
shares. The preference shares being
those that enjoy some preference with reference to voting rights, refund of
capital or payment of dividends.
There are certain
rules that courts use to interpret or construe on shares.
(a)
Basically all shares rank equally and
therefore if some shares are to have any priority over the others, there must
be provision to this effect in the regulations under which these shares were
issued. Refer to the case of Birch V.
Cropper (1889) 14 AC 525 here the company was in voluntary winding up. The company discharged all its liabilities
and some money remained for distribution to the members. The Articles being silent on the issue, the
question was on what principle should the surplus be distributed among the
preference and ordinary shareholders?
The ordinary shareholders argued that they were entitled to all the
surplus. Alternatively the division
ought to be made according to the capital subscribed and not the amount paid on
the shares. It was held that once the
capital has been returned to the shareholders, they thereafter become equal and
therefore the distribution of the surplus assets should be made equally between
the ordinary and preference shareholders.
(b)
However if the shares are expressly
divided into separate classes thereby rebutting the presumed equality, it is a
question of construction in each case what the rights of each class are. Hence if nothing is expressly said about the
rights of one class in respect of either dividends, return of capital or
attendance and voting at meetings, then that class has the same rights in that
respect as the other shareholders. The
fact that a preference is given in respect of any of these matters does not
imply that any right to preference in some other respect is given e.g. a
preference as to dividends will not apply a preference as to capital i.e. the
shares enjoy only such preference as may be expressly conferred upon them.
(c)
If however, any rights in respect of any
of these matters are expressly stated, the statement is presumed to be
exhaustive so far as that matter is concerned.
For instance the preference dividend is presumed to be non-participating
in regard to other dividends. Refer to Re
Isle of Thanet Electricity Supply Co. (1950) Ch. 1951 where Justice Wynn
Parry stated “the effect of the authorities as now in force is to establish two
principles. First that in construing an
article which deals with the rights to share all profits, that is dividend rights
and rights to shares in the company’s property in liquidation, the same
principle is applicable and secondly that principle is that where the articles
sets out the rights attached to a class of shares to participate in profits
while the company is a going concern or to share in the property of a company
in liquidation, prima facie the rights so set out are in each case exhaustive.”
(d)
Where a preferential dividend is
provided for it is presumed to be cumulative for instance if no preferential
dividend is declared the arrears of dividend are carried forward and must be
paid before any dividend is paid on the other shares. But these presumption may be rebutted by
words tending to show that the shares are not intended to be cumulative or
words indicating that the preferential dividend is only to be paid out of the
profits of each year i.e. if the company sustains any financial loss during any
year, there will be no dividend for that year.
Even then preferential dividends are payable only if and when
declared. Therefore arrears of
cumulative dividends are not payable on winding up unless the dividend has been
declared. Thix presumption could be
rebutted by any indication to the contrary.
WINDING UP
Section 212 of the
Companies Act provides that a company may be wound up as follows
1.
Voluntarily;
2.
Order of the Court;
3.
By supervision of the Court.
The circumstances
under which the company may be voluntarily wound up are outlined in Section 217
of the Companies Act. Here a company may
be wound up
a.
When the period fixed for its duration
by the articles expires or the event occurs on the occurrence of which the
articles provide that the company is to be dissolved and thus a company passes
a resolution in general meeting that it should be wound up voluntarily;
b.
If it resolves by special resolution
that it should be wound up voluntarily;
c.
If the company resolves by special
resolution that it cannot by reason of its liabilities continue its business
and that it be advisable that it be wound up.
Basically the second
circumstance is the most important because in practice at least the first
circumstance does not arise and in the 3rd circumstance the
creditors themselves will resolve that the company be wound up.
In any winding up
those in need of protection are the creditors and the minority
shareholders. Where it is proposed to
wind up a company voluntarily Section 276 of the Companies Act requires the
directors to make a declaration to the effect that they have made a full
inquiry in to the affairs of the company and having so done have found the
company will be able to pay its debts in full within such period not exceeding
one year after the commencement of the winding up as may be specified in the
declaration. Such declaration suffices
as a guarantee for the repayment of the creditors. If the directors are unable to make the
declaration, then the creditors will take charge or the winding up proceedings
in which case they may appoint a liquidator.
WINDING UP BY THE COURT
Winding up after an
order to that effect by the court is the most common method of winding up
companies.
Section 218 of the
Companies Act gives the High Court jurisdiction to wind up any company
registered in Kenya. The circumstances under which a company may
be wound up by a court order are spelt out in Section 219 of the Companies Act.
These cover
situations in which
1.
the company has by special resolution
resolved that it be wound up by court;
2.
Where default is made by the company in
delivering to the registrar the statutory report or on holding the statutory meeting;
3.
When the company does not commence
business within one year of incorporation or suspends its business for more
than one year;
4.
Where the number of members is reduced
in the case of a private company below 2 or in the case of a public company
below 7;
5.
Where the company is unable to pay its
debts;
6.
Where the court is of the opinion that
it is just and equitable to wind up the company;
7.
In the case of a company registered
outside Kenya
and carrying on business, the court will order the company to be wound up if
winding up proceedings have been instituted against the company in the country
where it is incorporated or in any other country where it has established
business.
Under Section 221 of
the Companies Act an Application for winding up by an order of the court may be
presented either by a creditor or a contributory. However a contributory cannot make the
application unless his name has appeared on the register of members at least 6
months before the date of the application and in any event he can only petition
where the number of members has fallen below the statutory minimum.
In practice the
creditors will petition for a compulsory winding up where the company is unable
to pay its debts. The company’s
inability to pay its debts under Section 220 is deemed in the following
circumstances
1.
If a creditor to whom the company is
indebted in a sum exceeding 1000 shillings demands payment from the company and
3 weeks elapse before the company has paid that sum or secured it to the
reasonable satisfaction of a creditor;
2.
If execution issued on a judgment
against the company is returned unsatisfied;
3.
If it is proved by any other method that
a company is unable to pay its debts.
Before a creditor can
petition it must be shown as a preliminary issue that he is in fact a creditor
or a company creditor. This is a
condition precedent to petitioning and the insolvency of the company is a
condition precedent to a winding up order.
PETITION BY A CONTRIBUTOR
Section 221 of the
Companies Act speaks not of members but of contributories.
Section 214 defines
the term contributory as follows “every person liable to contribute to the
assets of the company in the event of its being wound up”. The persons falling under this category are
defined in section 213 of the Companies Act and include both present and past
members. A past member however, is not
liable to contribute if he ceased to be a member one year or more before the
commencement of the winding up and he is not liable to contribute for any debt
or liability contracted after he ceased to be a member. Even then he is not liable to contribute
unless it appears to the court that the existing members are unable to satisfy
the contributions required.
The most important
limitation on liability of contributories is found in Section 213 (1) (d) of
the Companies Act. Under that clause no
contribution shall be required from any member exceeding the amount unpaid on
their shares in respect of which he is liable as a present or past member.
The petitioning
contributor must establish that on winding up there will be prima facie a
surplus for distribution among the members i.e. he must establish a tangible
interest. If therefore the company’s
affairs have been so managed that there would be no assets available for
distribution among the members then a shareholder has no locus standi and will
not be allowed to petition for winding up.
Another possible
limitation is that stated under Section 22(2) of the Act. Here the court has a discretion not to grant
the winding up order where it is of the opinion that an alternative remedy is
available to the petitioners and that they are acting unreasonably in seeking
to have the company wound up instead of pursuing that other remedy.
WINDING UP ON JUST AND EQUITABLE GROUNDS
It is now established
that the just and equitable clause in Section 219 of the Act confers upon the
court an independent ground of jurisdiction to make an order for the compulsory
winding up of the company. The courts
have exercised their powers under this clause in the following circumstances:
1.
In order to bring to an end a cause of
conduct by the majority of the members which constitutes operation on the
minority;
2.
The courts have also exercised this
power where the substratum of the company has disappeared;
3.
The courts have applied the partnership
analogy to the small private companies particularly those of a kind which makes
an analogy with partnerships appropriate.
In case of domestic
private companies, there is normally an understanding between the members that if
not all of them, then the majority of them will participate in the management
of the company’s affairs. Such members
impose mutual trust and confidence in one another just as in the case of
partnerships.
Also usual in such
companies is the restriction of the transfer of a member’s shares without the
consent of all the other members.
If any of these
principles were violated in a partnership, the courts will readily order the
partnership to be dissolved. In the case
of a small private company, the courts have also held that such companies are
run on the same principles as partnerships and therefore if the company was run
on such principles it is just and equitable to wind it up where a partnership
would have been dissolved in similar circumstances.
RE YENIDGE
TOBACCO CO. LTD [1916] 2 Ch.
426
Here W and R who
traded separately as Tobacco and Cigarette manufacturers agreed to amalgamate
their business. In order to do so, they
formed a private company in which they were the only shareholders and the only
directors. Under the Articles both W and
R had equal voting powers. Differences
arose between them resulting in a complete deadlock in the management of the
company. The issue was whether it was
just and equitable to wind up the company.
Lord Justice Warrington stated as follows
“It is true that these two
people are carrying on business by means of the machinery of the limited
company but in substance they are partners.
The litigation in substance is an action for dissolution of the partnership
and we should be unduly bound by matters of form if we treated the relations
between them as other than that of partners or the litigation as other than an
action brought by one for the dissolution of the partnership against the
other.”
The Model Retreading Co. [1962] E.A. 57
Here the petitioner
who was a shareholder in a small private company petitioned for winding up
mainly on the ground that this was just and equitable. The Affidavits sworn by the petitioner and
his co-shareholders disclosed that there had been bitter and unresolved
quarrelling between the parties going to the root of the companies business but
none of these stated that the company’s affairs had reached a deadlock. It was however conceded by all the parties
that as a result of the quarrelling the petitioner had been prevented from
participating in the management of the company’s affairs.
The issue was it just
and equitable to wind up the company?
Sir Ralph Winndham C.J. said as
follows:
“in these circumstances the principle
which must be applied is that laid down in re-Yenidge Tobacco namely that in
the case of a small private company which is in fact more in the nature of a
partnership a winding up on the just and equitable clause will be ordered in
such circumstances as those in which an order for dissolution of the
partnership would be made. In that case
the shareholders were two and they had quarrelled irretrievably. In the present case, if this were a
partnership an order for its dissolution ought to be made at the instance of one
of the quarrelling partners. The
material point is not which party is in the right but the very existence of the
quarrel which has made it impossible for the company to be ran in the manner in
which it was designed to be ran or for the parties disputes to be resolved in
any other way than by winding up.
Mitha Mohamed V.
Mitha Ibrahim [1967] EA 575
4.
Finally the just and equitable clause
will also be applied where there is justifiable loss of confidence in the
manner in which the company’s affairs are being conducted Continuous Cause of
Conduct
CONSEQUENCES OF A WINDING UP ORDER
Once a company goes
into liquidation, all that remains to be done is to collect the company’s
assets, pay its debts and distribute the balance to the members.
Under Section 224 of
the Companies Act, in a winding up by the Court, any dealing with the company’s
property after the commencement of the winding up is void except with the
permission of the court.
The purpose is to
freeze the corporate business in order to ensure that the company’s assets are
not wasted. Once the company has gone
into liquidation, the directors become functus officio.
Thereafter a
liquidator is appointed whose duty is to collect the assets, pay the debts and
distribute the surplus if any. In so doing,
he must always have regard to the interests of the creditors.
The powers of the
liquidator are set out in Section 241 of the companies Act.
The notes were of value to me i gladly appreciate
ReplyDeleteOffshore Investments Africa
ReplyDeleteGet professional offshore company formation and migration services from GIA. Build an offshore corporation with guaranteed bank accounts, offshore formation, business permits ...
Notes has useful details of company law . Board of Directors' authority. The board of
ReplyDeletedirectors in company law is a company's top administrative body. Section 179 of the 2013 Companies Act states.
To register and incorporate a company in the UK, submit requisite documents, including Memorandum and Articles of Association, to Companies House. Choose a unique company name, appoint directors, and specify share capital. Pay the registration fee and adhere to legal obligations, maintaining accurate records. Upon approval, receive a Certificate of Incorporation, officially establishing the company as a legal entity. Comply with ongoing filing and reporting requirements to ensure continuous legal standing and adherence to UK business regulations for a successful and compliant company registration process. Please find more on this link register a business.
ReplyDeleteNice Post thanks for sharing with us.
ReplyDeleteDelight in our collection of adorable dolls, meticulously handcrafted in Spain by a skilled human team. Each doll is a masterpiece, carefully crafted with attention to detail. Our dolls' outfits are inspired by the latest trends in children's fashion, boasting unparalleled quality and adding a special touch to every design. Perfect for playtime, these cute dolls become cherished companions and contribute to the development of boys and girls alike. Shop now for Spanish Dolls online in Ireland and bring a touch of Spanish flair to your child's world! Check out the collection at https://cottonplanet.ie/collections/spanish-dolls