Company Law Muk

MAKERERE UNIVERSITY
COLLEGE OF EDUCATION AND EXTERNAL STUDIES

SCHOOL OF OPEN AND DISTANCE LEARNING/SCHOOL OF BUSINESS
DEPARTMENT OF OPEN AND DISTANCE LEARNING
BACHELOR OF COMMERCE (EXTERNAL)

BLENDED STUDY MATERIALS
COURSE: COMPANY LAW
COURSE CODE: COX 3118
BY:
GRACE FLAVIA LAMUNO BIRUNGI
©Copyright: Department of Open and Distance Learning, Makerere University. All rights reserved.
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TOPIC ONE
COMPANY LAW
At the end of this chapter the student will be able to:

1. Understand what the meaning of a company;
2. Understand the concept of a Company as a separate legal entity;
3. Analyze and Evaluate the different types of companies and their characteristics; and
4. Evaluate and analyze the distinction between private and public companies.
COMPANY LAW
Company law is governed by the Companies Act 2012 and Table A.
Definition of a Company
The word “company” has no strict legal meaning. In legal theory the word implies an
association of a number of people for some common object or objects.
Under the Companies Act 2012, the word “company” means a company formed and registered
under this Act or an existing company.
A Company or Corporation is also defined as an artificial legal entity separate and distinct
from its members or shareholders.
This legal personality is an artificial one, which is distinguishable from natural personality.
The possession of a legal personality implies that a company is capable of enjoying rights and
being subject to duties, separately from its members.
The Company as a Separate Legal Entity

The fundamental attribute of corporate personality from which all other consequences flow is
that the corporation is a separate legal entity distinct from its members. Hence it’s capable of
enjoying rights and being subject to duties which are not the same as those enjoyed or borne
by its members. In other words it has a legal personality and it is often described as an
artificial person in contrast with a human being-a natural person.
This principle was first distinctly articulated in the British House of Lords Judgment in the
case of Salomon Vs. Salomon & company limited (1897) In this case, for 30 years, Salomon
carried on business as a sole trader of boots and shoes. In 1892, he converted the business
into a Limited Company by forming Salomon & Company Limited at the request of his sons
who worked in the business as his employees. The company consisted of Salomon, his wife
and five children as members. Salomon was the Managing Director. Salomon held 20,001 of
the 20,007 issued shares. The remaining 6 shares were each held by a member of his family.
Immediately after incorporation, the company experienced difficulties and a year later was
wound up. It had sufficient assets to satisfy the debentures but nothing for the unsecured
creditors. The company almost immediately run into difficulties and only a year later the then
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holder of the debenture appointed a receiver and the company went into liquidation. Its
assets were enough to discharge the debenture but nothing was left for the unsecured
creditors. In these circumstances the creditors sued Salomon and the Court of Appeal held
that the whole transaction was contrary to the true intent of the companies Act and that the
company was a mere sham, and an alias, agent, trustee and nominee for Salomon who
remained the real proprietor of the business. As such he was liable to indemnify the company
against its trading debts.
But the House of Lords unanimously reversed this decision. They held that the company had
been validly formed hence the business belonged to the company and not to Salomon, and
Salomon was its agent and not it the agent of Salomon.
In the words of Lord Halsbury L.C;

“Either the company was a legal entity or not. If it was, the business belonged to it and not to
Salomon. If it was not, there was no person and nothing to be an agent at all; and it is
impossible to say at the same time that there is a company and there is not.”
Or, as Lord Macnaghten put it:

“The company is at law a different person 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 in the manner provided by the Act.”
The importance of Salomon’s case is that the highest court in the land recognized the
necessary consequences of the distinction between a company and its members as separate
persons. On the facts of the case Salomon’s sale of the business to the company, owned by him
alone, made no change in the commercial position – effectively it was still his business. Yet by
separating its legal ownership from himself he could become a creditor with priority rights
(against other creditors of the business) over the assets. Since the Salomon case the
separation between the company and its members has been complete.
The principle of corporate personality has been applied in other cases, for instance in Lee Vs.
Lee’s Air Farming Ltd. (1960) 3 All E.R.420 Lee formed a company of which he held 2999
shares and his wife (the plaintiff) held one. Lee was sole “governing director” and chief pilot in
the company’s business of aerial crop-spraying in New Zealand. He was killed in a crash while
flying for the company. His wife sued the company for compensation since if her claim against
the company was valid the company could in turn recover the amount from the government
insurance scheme. It was argued by the company that on the fact that Lee had taken a
decision, as a director, to employ himself (as pilot) he could not claim as an employee against
the company.
It was held by the Court that Lee and his company were distinct (separate) legal entities
which had entered into contractual relationships under which Lee as chief pilot became a
servant of the company. In his capacity as governing director he could, on behalf of the
company, give himself orders in his other capacity as pilot and hence the relationship
between himself, as pilot, and the company was that of servant (employee) and master
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(employer). The court further said that the contract by which the company employed Lee was
valid and so his widow could recover compensation for his estate on the basis that he was an
employee killed while in the course of his employment. In effect the magic of corporate
personality enabled him to be master and servant at the same time and to get all the
advantages of both- and of limited liability.
In the case of Macaura Vs. Northern Assurance Co. Ltd (1925) A.C.619, the plaintiff, a
landowner, sold the timber on his estate to a company of which he was the sole owner and
major creditor. Before the sale to the company, he had insured the timber which lay on his
land in his own name. He did not transfer the insurance policy to the company name. Two
weeks later almost all the timber was destroyed by fire. He claimed for the loss under his
private policy. But the insurers denied liability on the grounds that he personally did not have,
as insurance law requires, an insurable interest in the timber.
It was held that the claim must fail since it was the company which owned the timber; the
plaintiff merely owning the shares in the company, the timber was not effectively covered by
his insurance policy.
TYPES OF COMPANIES
i) Registered companies
Registration under the Companies Act is the normal method of incorporating a commercial
concern. It is also available for non-commercial concerns such as charities, NGO, Clubs or
research institutions which may need corporate status as a convenient method of, for
example, owning property. This is the typical and most important type of company today and
shall be the one that we shall be concerned with.
ii) Statutory companies

A special Act of Parliament may be used to create a statutory company. In the past when
public utilities such as railways, water and electricity undertakings, telecommunications &
posts and provident funds and other sectors of the economy were exclusively run by
governments, statutory companies were set up under several Acts of Parliaments. Examples
of these were UEB, UP&TC, NSSF, NH&CC etc. Most of these statutory corporations have since
been privatized.
iii) Chartered companies

This relates to companies granted a Royal Charter in England by the Crown under the Royal
Prerogative or special powers. The charter normally confers corporate personality. Examples
of these are the Colleges of Oxford and Cambridge.
iv) Corporation sole

All the types of corporate bodies described above are classified as corporations aggregate.
This distinguishes them from some offices (such as the traditional rulers) which exist
separately from the individual who for the time being holds the office. This latter category is
called a corporation sole since only one person fills the office at one time e.g. Kabaka,
Archbishop.
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v) Holding and Subsidiary Companies
Section 161 (1) provides that for the purpose of this Act, a company shall, subject to
subsection (1), be taken to be a subsidiary of another 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.
subsection (2) provides that for the purposes of subsection (1) the composition of a
company’s board of directors shall be taken to be controlled by another company only if, that
other company by the exercise of some power exercisable by it without the consent or
concurrence of any other person, can appoint or remove the holders of all or a majority of the
directorships.
The subsidiary- Holding company relationship is of much commercial importance since large
business enterprises find it convenient to operate through a structure of a holding or `parent'
company and subsidiaries, which are wholly or less partly owned. Subsidiary status may have
been acquired by purchase or takeovers. Example is MTN Uganda is a subsidiary of MTN
South Africa, Stanbic Bank Uganda is a subsidiary of Standard Bank South Africa.
REGISTERED COMPANIES
Section 4 provides for Registered Companies
Under the Companies Act, provision is made for different types of registered Companies,
which can be lawfully formed in Uganda.
Section 4 (1) provides that any one or more persons may for a lawful purpose, form a
company, by subscribing their names to a memorandum of association and otherwise
complying with the requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability. The different types of registered companies that
may be formed include;
 Companies Limited by Shares section 4 (2) (a)

A company having the liability of its members limited by the memorandum to the amount, if
any, unpaid on the shares respectively held by them in this Act is referred to as “a company
limited by shares”. A company limited by shares has the liability of its members limited by
the company’s memorandum to the amount, unpaid on the shares held by those members.
Thus, where members hold shares which they have completely paid for they have no fear that
upon liquidation they will be held personally liable for the debts of the firm.
 Companies Limited by Guarantee section 4 (2) (b)

A company having the liability of its members limited by the memorandum to the amount that
the members undertake in the memorandum to contribute to the assets of the company if it is
being wound up, in this Act is referred to as “a company limited by guarantee”. A company
limited by shares has the liability of its members limited by the company’s memorandum to
the amount, unpaid on the shares held by those members. Thus, where members hold shares
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which they have completely paid for they have no fear that upon liquidation they will be held
personally liable for the debts of the firm.
 Unlimited Companies section 4 (2) (c)

A company not having any limit on the liability of its members in this Act is referred to as “an
unlimited company”. Unlimited companies are those companies where there is no limit on
the liability of their members. In the event of an unlimited company being wound up in
circumstances where its liabilities exceed its assets, in other words where it is insolvent, the
liquidator will go to the members asking a contribution to make good the deficit.
 Public or Private section 4 (2) (d)

Companies may be private or public.
Private Companies provided for under section 5

The Companies Act defines a private company under section 5 as;
 A Company, which by its articles restricts the rights to transfer shares of the
company.
 One that limits the number of its members to 100 excluding past and present
employees of the company who are shareholders.
 One that prohibits any invitations to the public to subscribe for any shares or
debentures of the company (investments in the company).
Where a private Company does not comply with these requirements, it loses exemptions and
privileges conferred on a private company. This failure can only be remedied upon showing
court that it was caused by accident or inadvertence or some other sufficient cause.
Public Companies provided for under section 6

Section 6 provides for the meaning of a public company and it is defined as a company which
is not a private company as defined under section 5.
Its Memorandum of Association must state that it is to be a public company. Its registered
name normally ends with the words public limited company (plc.). A Company, which has
obtained registration as a public company, in its original certificate of incorporation or
subsequent certificate of incorporation issued by the registrar must state that it is a public
company.
 Single member company section 4

Any one or more persons may for a lawful purpose form a company with or without limited
liability.
Distinction between Private and Public Companies

Statutory rules differentiate between private companies and public companies in a number of
respects and these differences are the mean of a reflection of the larger size of public
companies. The differences are illustrated in the table below.
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No. Private Companies Public Companies
1. maximum is 100 No maximum.
2. It restricts transfer of shares. There is free transfer of shares.
3. No Prospectus required Prospectus required
It prohibits invitation to the public to Can issue a prospectus calling upon the public
4.
subscribe to the shares. to subscribe to the shares.
The minimum number of Directors is
5. The minimum number of Directors is two (2).
one (1)
Can commence business immediately Cannot immediately commence business after
6. after the issue of a certificate of obtaining a certificate of registration. It must
registration. have obtained in addition, a certificate of
trading.
7. Quorum at meetings 2 members Quorum at meetings 3 members
Activity
Discuss the different types of registered companies.
Solution
The question is testing the student’s understanding of the different types of companies that
can be registered as provided under the Companies Act. The student is expected to define
what a company is and further discuss the different types of companies provided for under
the Companies Act.
Test Questions
1. Discuss the concept of legal personality as used in company law
2. Discuss the different types of companies that exist
3. Discuss the difference between limited and unlimited companies
4. Discuss the differences between a private company and a public company
5. Discuss the principle as laid out in the case of Salomon Vs Salomon
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TOPIC TWO
PROMOTION OF A COMPANY
At the end of this Chapter, the student will be able to:
1. Understand the Meaning of Promotion;
2. Understand the different functions undertaken by a promoter;
3. Evaluate and analyze the various duties performed of a promoter;
4. Evaluate and apply the different remedies incase of breach of duty by the Promoter;
5. Understand the remuneration of a promoter;
6. Evaluate and analyze the meaning of Pre-Incorporation contracts;
7. Analyze the Rights of a promoter.
PROMOTION OF A COMPANY
Meaning of Promotion
A business cannot come into existence unless someone thinks of the idea and attempts to
translate it into business. The process of conceiving and translating the business opportunity
is what is called promotion.
Definition of a Promoter
A promoter is defined in Twycross Vs Grant (1877) as “any person who undertakes to form
a company, or who, with regard to a proposed newly formed company, undertakes part in
raising capital for it. A person is prima facie a promoter of the company, if he has taken part
in setting a company formed with reference to a given object.”
Thus a promoter is someone whose profession it is to take part in setting up a company. A

typical example would be a village grocer who converts his business into a limited company.
He of course is in no sense a professional company promoter but he would be the promoter of
his little company and the difference between him and a professional promoter is basically
one of degree rather than of kind. Both create or help to create the company. The only
difference is that the grocer is less likely than the professional to abuse his position since he
will probably continue to be the majority shareholder in his company whereas the promoter if
a shareholder at all, will intend to offload his holdings on to others as soon as possible.
Thus the expression “promoter” covers a wide range of persons. Both the professional
promoter and the village grocer are promoters to the fullest extent, in that each undertakes to
form the company with reference to a specific object and to set it going and takes the
necessary steps to accomplish that purpose. Thus, a person may be a promoter though he has
taken a comparatively minor part in the promoting proceedings. However those who act in
their professional capacity such as solicitors and accountants will not be classified as
promoters because they undertake their normal professional duties.
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Therefore, who constitutes a promoter in any case is therefore a question of fact.
Duties of a Promoter
1. Disclosure and Accountability:
A promoter stands in a fiduciary relationship to the company and consequently owes it
certain fiduciary duties i.e. duties of disclosure and accounting and this implies that they must
not make any secret profit out of the promotion without disclosing it to the company. This
was illustrated in the case of Erlanger Vs New Sombrero Co Ltd (1978) 3AC 1218.
Members in a syndicate bought the lease of an island containing a phosphate mine at £55,000.
The members of the syndicate then promoted a company and appointed themselves its
directors. They sold the lease to the company for £110,000. This was unfortunately not
revealed in the prospectus inviting the public to subscribe for its shares but was subsequently
discovered. The company instituted an action to recover profits from the promoters who in
turn argued that they had made a disclosure of their profits to a board of directors.
Nevertheless, the BOD was:

i. Appointed by the promoters themselves,
ii. The first director could not attend meetings because of his state in life (ill health)
iii. The second director was not present when the profits of the promoters were
approved.
iv. The third director was one of the promoters themselves.
v. The fourth and fifth directors were ignorant of the subject matter.
The issue was whether there was a disclosure. It was held that the company was entitled to
rescind the contract. That the promoters must repay the purchase price and the company in
turn must convene the lease to the promoters so as to restore the status quo (original
position)
A promoter cannot escape liability by disclosing to a few friends who constitute the initial
members of the company especially if their intention is to float the company to the public and
hoodwink shareholders. This was illustrated in the case of GLUCKSTEIN Vs BARNES (1900)
AC 240 Lord Harlsbury stated that: “it is too absurd to suggest that a disclosure to the parties
to this transaction is a disclosure to the company.”
Mode of Disclosure
Thus a disclosure must be made to the company either by making it to
 an entirely independent board of directors or to
 the existing and potential members as a whole.
If the first method is employed the promoter will be under no further liability to the company
although the directors will be liable to the shareholders if the information has not been
passed on in the invitation to subscribe (prospectus) and if the promoter is a party to the
invitation to subscribe he too will be liable. If the second method is employed, the veil of
incorporation will be ignored.
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Disclosure must be made in the Prospectus or in the Articles of Association so that those who
are or become members have full information regarding the promoters’ transactions.
A partial or incomplete disclosure will not do, the disclosure must be full or explicit.
2. Duty of skill and care:

In the process of promotion, a promoter must carry out his work with great care and skill and
due diligence expected of a reasonable man.
3. Duty to act in the best interests of the company.

Consequently, a promoter may do anyone or more of the following activities:
Solicit capital
4. Prepare a prospectus
5. Solicit directors for the company
6. Arrange the preparation of the Memorandum and Articles of Association
7. Obtain premises
8. Obtain whatever equipment is necessary for the running of the business
Remedies for Breach of Duty

 A promoter can be made to account for any secret profit made.
 Damages for misrepresentation where the promoter has made an actual
misrepresentation and cannot prove that he had reasonable ground to believe and did
believe up to the time the contract was made the facts represented were true.
 Damages for failure to disclose
 Rescission: Since the promoter owes a duty of disclosure to the company, the primary
remedy against him in the event of breach is for the company to bring proceedings of
rescission (termination) of any contract with him.
 Damages for negligence in allowing the company to purchase property at an excessive
price since they are to act with skill and care.
Remuneration of a Promoter
Promoters do not possess an automatic right to receive remuneration from the company for
their services from the company unless there is a valid contract enabling him to do so
between him and the company. Without such a contract, he is not even entitled to recover his
preliminary expenses. This is so because until a company is formed, it cannot enter into a
valid contract and the promoter has to expend the money without any guarantee that he will
be repaid.
However, in practice, the company’s articles may allow directors to pay preliminary expenses
from the company’s funds.
However, the promoter will not be content merely to recover his expenses and if he is a
professional promoter, he will expect to be handsomely remunerated. In the case of Touche
Vs Metropolitan Railway Warehousing Company (1871) LR 6 CH.APP 671 Lord Hatherly
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said: “the services of a promoter are very peculiar, great skill, energy and ingenuity may be
employed in constructing a plan and in bringing it out to the best advantages.”
Hence, it is perfectly proper for the promoter to be rewarded provided he fully discloses to
the company the rewards which he obtains. The remuneration must be fully disclosed not
only by the promoter to the company but also by the company in the prospectus.
Pre-Incorporation Contracts
In promoting a company, promoters usually enter into contracts with third parties and when
they do so, they purport to do so on behalf of the unincorporated company. Such contracts
are not binding on the company because it is not yet in existence and consequently have no
capacity to contract.
Pre-incorporation contracts are provided for under section 54 of the Companies Act 2012.
Subsection (1) provides that a contract which purports to be made on behalf of a company
before the company is formed, has effect, as one made with the person purporting to act for
the company. This was illustrated in the case of Kelner Vs. Baxter (1866) the defendants
entered into a contract with the plaintiff to buy goods, “on behalf of the proposed Gravesand
Royal Alexandra Hotel Company”. The goods were supplied and consumed in the business.
Shortly after incorporation, the company collapsed and the plaintiff sued he promoters on the
contract for the price of the goods. Held: It was held that the defendants were personally
liable on the contract.
Similarly in the case of English & Colonial Produce Company Ltd (1906) 2 Ch. 435 Where
persons who afterwards become directors of the company instructed solicitors to prepare the
memorandum and articles of association so that the company might be formed but on
formation the company failed to pay the solicitors’ charges and denied that it was liable to do
so. It was held that although the company had taken benefit of the contract, it did not impose
on it any liability to pay since the contract was made before the company was formed.
In the Ugandan case of Central Masaka Coffee Co. V. Masaka Farmers and Producers Ltd
(1991) ULSLR 220 it was held that a company lacked the capacity to conclude an agreement
for lease of a coffee processing factory made five days before its incorporation.
Novation
This is the process of entering into a new contract by the company on similar terms is
referred to as novation. Usually an agreement is entered into by the promoter which provides
that the personal liability of the promoter will cease when the company in the process of
formation is incorporated and enters into an agreement in similar terms with the company.
Section 54 (2) provides that a company may adopt a pre-incorporation contract with its
formation and registration made on its behalf without a need for novation.
In the case of Howard V Patent Ivory Manufacturing Co. 1888 Where J under a pre-
incorporation contract agreed to sell property to a company but after the company had been
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formed the terms of the payment were modified with J accepting part of the purchase price in
debentures instead of cash as had been originally agreed upon. It was held that the re-
negotiation of the payment terms were sufficient evidence of a new offer and acceptance by
which the company entered into a new contract after incorporation.
Subsection (3) provides that in all cases where the company adopts a pre-incorporation
contract, the liability of the promoter of that company shall cease.
Rights of the Promoter

After incorporation it is in order for a promoter to enter into a contract with the company to
recover his expenses and to collect a fee for work done however because of his fiduciary
relationship they must be full disclosure to the company or its potential directors and utmost
good faith in his dealings.
Activity
Discuss the various duties Promoters owe towards the company.
Solution
A student should be able to define who a promoter is then go ahead to state that promoters
owe various duties to the company which. The student should further discuss the various
duties in detail clearly showing what the duty involves.
Test Questions
1. Discuss the duties of promoters and the remedies available to the company for their
breach
2. Discuss the liability of a company in regard to Pre-Incorporation contracts
3. Discuss the promoter’s duty of disclosure towards the company
4. In May 2014, John, Peter and James incorporated a company called ASANTE Co. Ltd
with the major objective of dealing in stationary and printing services. The company
was duly incorporated on 2nd May 2014. But some few days before that, John entered
into a contract with ZION LOGISTICS Ltd, a leading company in provision of stationary
and printing services on behalf of the company whereby ASANTE Co. Ltd was to be
supplied with stationary on credit by ZION LOGISTICS Ltd at the cost of UGX
5,000,000=. ZION LOGISTICS Ltd supplied the stationary but to date the company has
not paid them and they have approached you for some legal advice. Advise them
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TOPIC THREE
FORMATION OF A COMPANY
At the end of this Chapter the student should be able to:

1. Understand the meaning of Formation in respect to Companies;
2. Understand the process through which a company is formed;
3. Understand and examine the different documents required for formation of
companies;
4. Examine the need and legal requirements for a company name;
5. Examine and analyze the importance and content of the Memorandum of Association;
6. Examine and analyze the importance and content of the Articles of Association;
7. Examine and analyze the importance and content of the Statement of Nominal Capital;
8. Examine and analyze the importance and content of the Statutory declaration of
compliance; and
9. Analyze the term registration and its legal implication in respect to companies.
FORMATION OF A COMPANY
Meaning of Formation
Formation means the process of registering a company with the Registrar of Companies and
obtaining a certificate of incorporation.
Documents Required for Formation

Type of Company
The promoters will have to make up their minds which of the many types of registered
company they wish to form because this will affect the content of the documents required.
First they must choose between a limited and an unlimited company, second between a public
or private company and third between a company limited by shares or by guarantee.
Documents
In order to effect the registration of companies, the following documents must be submitted
to the Registrar:
 Reservation of name
 Memorandum of Association
 Articles of Association
 A statement of nominal capital
 A statutory declaration of compliance.
If the company is a public company, the following additional documents are required to be
registered:
 A statement with the names and particulars of directors and secretary.
 Prospectus or statement in lieu of prospectus.
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Name of the Company
Reservation of name and prohibition of undesirable names.
Section 36 (1) provides that the registrar may, on written application, reserve a name
pending registration of company or a change of name by an existing company, any such
reservation shall remain in force for thirty days or such longer period, not exceeding sixty
days as the registrar may, for special reasons, allow and during that period no other company
is entitled to be registered with that name.
Requirements to be taken into account when reserving a name

The name must not be undesirable
Subsection (2) provides that no name shall be reserved and no company shall be registered
by a name, which in the opinion of the registrar is undesirable.
Application for reservation

Once a name has been decided upon, the promoters write to the Registrar inquiring whether
the proposed name is available for registration and if the reply is favorable, the promoters are
safe in preparing documents using that name.
To guard against the possibility of a negative reply from the Registrar, promoters must have
in mind one or more suitable alternatives.
Once a company has secured reservation of a particular name it secures a virtual monopoly of
corporate activity under that name.
Where the Registrar refuses to register a name without good reason, an application for an
order of mandamus can be filed in the High Court.
Name having the word “limited”

Subsection (3) provides that upon registration, a limited liability company shall add the
initials “LTD” or the word “Limited” at the end of its name.
Power to require a company to abandon misleading name

Section 37 (1) provides that where in the registrars’ opinion the name by which a company is
registered gives a misleading indication of the nature of its activities as to be likely to cause
harm to the public, the registrar may direct it to change its name.
Subsection (2) provides that the direction shall, if not duly made the subject of an application
to the court under subsection (3), be complied with within six weeks from the date of the
direction or such longer period as the registrar may think fit to allow.
Subsection (3) provides that the company may, within a period of twenty one days from the
date of the direction, apply to the court to set it aside and the court may set the direction aside
or confirm it and, if it confirms the direction, shall specify a period within which it must be
complied with.
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Default in complying with the provisions above
Subsection (4) provides that where a company makes default in complying with a direction
under this section, it is liable to a fine of twenty five currency points and, for continued
contravention, to a daily default fine of five currency points.
Effect of change of name

Subsection (5) provides that where a company changes its name under this section, the
registrar shall enter the new name on the register in place of the former name and shall issue
a certificate of incorporation altered to meet the circumstances of the case and the change of
name has effect from the date on which the altered certificate is issued.
Subsection (6) provides that a change of name by a company under this section does not
affect any of the rights or obligations of the company or render defective any legal
proceedings by or against it and any legal proceedings that might have been continued or
commenced against it by its former name may be continued or commenced against it by its
new name.
Prohibition on trading under misleading name.

Section 38 (1) provides that a person who is not a public company commits an offence if he
or she carries on any trade, profession or business under a name which includes as its last
part, the words “public limited liability company”.
Subsection (2) provides that a public company commits an offence if in circumstances in

which the fact that it is a public company is likely to be material to any person, it uses a name
which may reasonably be expected to give the impression that it is a private company.
Subsection (3) provides that a company or officer of a company who contravenes subsection
(1) or (2) is liable to a fine not exceeding one thousand currency points or imprisonment not
exceeding two years or both and, for continued contravention, to a daily default fine not
exceeding twenty thousand currency points.
Prohibition of improper use of “limited”.

Section 39 provides that a person shall not trade or carry on business under a name or title of
which “limited” or any contraction or imitation of that word is the last word, unless duly
incorporated with limited liability.
Change of name.
Grounds under which a company may change its name
 By passing a special resolution
Section 40 (1) provides that a company may by special resolution and with the approval of
the registrar signified in writing change its name.
 Having a name similar to one already in existence

Section 40 (2) provides that where, through inadvertence or otherwise, a company on its
first registration or on its registration by a new name is registered by a name which, in the
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opinion of the registrar, is too similar to the name by which a company in existence is
previously registered, the first-mentioned company may change its name with the consent of
the registrar and, if the registrar so directs within six months after it is registered by that
name, shall change it within six weeks from the date of the direction or such longer period as
the registrar may allow. In the case of Overseas Trading Company Vs. Lale Cycle Company
Limited, the Registrar refused to register a company with the name Lale as a trade mark
because the respondent opposed it for reasons that it was phonetically identical to another
word Raleigh which was already in existence.
Subsection (3) provides that where a company defaults in complying with a direction under
this subsection, it is liable to a fine of five currency points or a fine of five currency points for
every day on which the offence continues.
Procedure for change of name

Subsection (4) provides that where a company changes its name under this section, it shall,
within fourteen days, give to the registrar notice of the change of name and the registrar shall
enter the new name on the register in place of the former name, and shall issue to the
company a certificate of change of name and notify the change of name in the Gazette and in a
newspaper of wide circulation.
Subsection (5) provides that a change of name by a company under this section shall not
affect any rights or obligations of the company or render defective any legal proceedings by or
against the company, and any legal proceedings that might have been continued or
commenced against it by its former name may be continued or commenced against it by its
new name.
Power to dispense with “Ltd” or “Limited” in the name of charitable organisations and
other companies.
Section 41 (1) provides that where it is proved to the satisfaction of the registrar that—
(a) an association about to be formed as a limited liability company is to be formed for
promoting commerce, art, science, religion, charity or any other useful object; and
(b) the association intends to apply its profits, if any, or other income in promoting its objects,
and to prohibit the payment of any dividend to its members; the registrar may by licence
direct that the association may be registered as a company with limited liability, without the
addition of the word “limited” to its name, and the association may be registered accordingly
and shall, on registration, enjoy all the privileges and, subject to the provisions of this section,
be subject to all the obligations of a limited liability company.
Subsection (2) provides that where it is proved to the satisfaction of the registrar that—
(a) the objects of a company registered under this Act as a limited liability company are
restricted to those specified in subsection (1) and to objects incidental or conducive to them;
and
(b) that by its constitution the company is required to apply its profits, if any, or other income
in promoting its objects and is prohibited from paying any dividend to its members, the
registrar may by licence authorise the company to make by special resolution a change in its
name including or consisting of the omission of the word “limited”, and sections 40(4) and (5)
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shall apply to a change of name under this subsection as they apply to a change of name under
that section.
Grant of licence
Subsection (3) provides that a licence by the registrar under this section may be granted on
such conditions and subject to such regulations as the registrar thinks fit, and those
conditions and regulations shall be binding on the company to which the licence is granted,
and where the grant is under subsection (1) shall, if the registrar so directs, be inserted in the
memorandum and articles or in one of those documents.
Subsection (4) provides that a body to which a licence is granted under this section shall be
excepted from the provisions of this Act relating to the use of the word “limited” as any part of
its name, the publishing of its name and the sending of lists of members to the registrar.
Memorandum of Association section 7

The Memorandum of Association of a company, which is required to be registered for
purposes of incorporation, is regarded as the company’s most important document in the
sense that it determines the powers of the company.
Consequently, a company may only engage in activities and exercise powers, which have been
conferred upon it expressly by the memorandum or by implication there from.
Contents of the Memorandum

The Memorandum of Association of a company limited by shares must state the following:
 The name of the company with “Limited” as the last word in the case of a company limited
by shares or by guarantee.
 The registered office of the company is situated in Uganda.
 May state the objects of the company.
 A statement as to the liability of the members.
 A statement to the nature of the company (Whether private or public).
 The amount of share capital and division thereof into shares of a fixed amount.
a) Name of the Company section 7 (1) (a)

The name of the company must be clearly stated with the word limited at the last word of the
name.
Publication of name by company.
Section 117 (1) provides that Every company—
(a) shall paint or affix, and keep painted or affixed, its name on the outside of every office or
place in which its business is carried on in a conspicuous position in legible letters;
(b) shall have its name engraved in legible letters on its seal which shall take the form of
embossed metal die; and
(c) shall have its name mentioned in legible letters in all business letters of the company and
in all notices and other official publications of the company and in all bills of exchange,
promissory notes, endorsements, checks and order for money or goods purporting to be
signed by or on behalf of the company and in all bills of parcels, invoices, receipts and letters
of credit of the company.
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Subsection (2) provides that where a company does not paint or affix its name in the manner
provided under subsection (1)(a), the company and every officer of the company who is in
default is liable to a fine not exceeding twenty five currency points and if a company does not
keep its name painted or affixed in the manner provided under subsection (1)(a), the
company and every officer of the company who is in default is liable to a default fine of twenty
five currency points.
Default
Subsection (3) provides that where a company fails to comply with subsection (1)(b) or (c),
the company shall be liable to a fine not exceeding five hundred currency points.
Subsection (4) provides that where an officer of a company or any person on its behalf—
(a) uses or authorises the use of any seal purporting to be a seal of the company on which its
name is not engraved as required by subsection (1)(b) or which is not in the form of an
embossed metal die;
(b) issues or authorises the issue of any business letter of the company or a notice or other
official publication of the company or signs or authorises to be signed on behalf of the
company a bill of exchange, promissory note, endorsement, cheque or order for money or
goods in which its name is not mentioned in a manner described in subsection (1)(c); or
(c) issues or authorises the issue of any bill of parcels, invoice receipt or letter of credit of the
company in which its name is not mentioned in the manner described in subsection (1)(c), he
or she is liable to a fine not exceeding twenty percent of the bill of exchange, promissory note,
cheque or order for money or goods for the amount of the instrument in question unless it is
duly paid by the company.
b) Registered office section 7 (1) (b

The memorandum must state that the registered office is situated in Uganda. However, the
actual address must be communicated to the Registrar of Companies within 14 days of the
date of incorporation or from the date it commences business.
Section 115 (1) provides that a company shall, as from the day on which it commences to
carry on business or as from the fourteenth day after the date of its incorporation, whichever
is the earlier, have a registered office and a registered postal address to which all
communications and notices may be addressed.
Subsection (2) provides that where a company fails to comply with subsection (1), the
registrar may give notice to the company giving it reasonable time in which to comply.
Subsection (3) provides that the notice under subsection (2) may be given by publication in
the Gazette or in a newspaper of wide circulation or both.
Subsection (4) provides that where after due notice under subsection (2), the Company
continues to be in default in relation to subsection (1), the registrar may deregister the
Company.
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Default in complying with the above provisions
Subsection (5) provides that notwithstanding anything in this section, where there is default
in complying with this section, the company and every officer of the company who is in
default is liable to a default fine of twenty five currency points.
Notification of the situation of the registered office, the registered postal address and of
any change in them.
Section 116 (1) provides that notice of the situation of the registered office and the
registered postal address, and of any change in them shall be given within fourteen days after
the date of incorporation of the company or of the change as the case may be, to the registrar,
who shall record the change.
Subsection (2) provides that the inclusion in the annual return of the company, of a
statement as to the situation of its registered office or as to its registered postal address shall
not be taken to satisfy the obligations imposed by this section.

Subsection (3) provides that where there is default in complying with this section, the
c) The objects clause section 7 (1) (c)

A company may or may not state the objects. The Objects clause sets out the principle
activities the company has been incorporated to pursue as well as the powers the company
will have in order to enable it achieve its activities. The objects must be lawful and should
include all the activities which the company is likely to pursue. The objects or powers of the
company as laid down in the memorandum or implied there from determine what the
company can do. Thus the objects clause consists of Activities (objectives) that the company
can legally pursue and Powers that the company can carry out to achieve its objectives.
d) Statement as to the liability of members section 7 (2) and (3)

The memorandum of a company limited by shares or by guarantee should indicate that the
liability of members is limited. With respect to a company limited shares, the liability of a
member is the amount, if any, unpaid on his shares. With regard to the liability of a member
of a company limited by guarantee, this is limited to the amount he undertook to contribute to
the assets of the company in the event of winding up.
A company may also be registered with unlimited liability. In such a situation, the members
hereof act as guarantors in respect of the company’s obligations. While a creditor of such a
company has no right of action against the members themselves, his action being against the
company in turn looks to the members to discharge its debts by providing the necessary
funds.
e) Share capital clause section 7 (4)

The memorandum requires that a company having a share capital must state the amount of
share capital with which the company is to be registered and that such capital is divisible into
shares of a fixed amount. Under section 7 (4) (b), a subscriber of the memorandum may not
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take less than one share. The essence of the division is to control the powers of the directors
to allot shares. The law does not prescribe the value but they are usually small amounts to
encourage people to hold as many shares as possible.
The amount of capital with which a company is to be registered and the amount into which it
is to be divided are matters to be decided upon by the promoters and will be determined by
the needs of the company and finance available.
The division of capital into shares is also important because under the law shares cannot be
issued at a discount.
The Memorandum of association under section 7 (1) states that they must be printed in the
English language, divided into paragraphs, numbered consecutively and under section 8 (1)
they must be signed by each subscriber to the memorandum in the presence of at least one
witness who must attest the signature. Each subscriber to the memorandum must state his or
her names, address, occupation and descriptions of the subscribers thereof and
Alteration of the Memorandum of Association

A company may not alter the provision in its memorandum except in the cases in the mode
and to the extent for which expression provision is made in the Act (Sec.9.)
Under section 10 (1) it provides that a company may by special resolution alter its
memorandum with respect to the objects of the company to enable it:
(a) To carry on its business more economically or more efficiently.
(b) To attain any of its objects by new or improved means.
(c) To enlarge or change the local area of its operations.
(d) To carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company.
(e) To restrict or abandon any of the objects specified in the memorandum.
(f) To sell or dispose off the whole or any part of the undertaking of the company.
(g) To amalgamate with any other companies or body of persons as long as the objects of
the other company are intra vires the objects of the company.
Procedure of alteration
Under section 10 (2) a resolution may be passed by the holders of not less in aggregate than
15% in nominal value of the company’s issued share capital or any class of them if the
company is not limited by shares, not less than 15% of the company’s members or by the
holders of not less than 15% of the company’s entitling the holders to object except that an
alteration shall not be made by any person who has consented to or voted in favour of the
alteration.
Under section 10 (10) (a) and (b) where a company passes a resolution altering its objects
and no application for cancellation is made to the Registrar under this section, it shall within
14 days from the end of the period for making the application deliver to the registrar a
printed copy of its memorandum as altered, where the application for cancellation is made,
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the registrar shall stay the registration of the resolution for alteration until the application is
heard and disposed of.
Articles of Association section 11

The Articles of Association contains regulations for managing the internal affairs of the
company i.e. the business of the company. They are applied and interpreted subject to the
memorandum of association in that they cannot confer wider powers on the company than
those stipulated in the memorandum. Thus, where there is a conflict or divergence between
the memorandum and articles, the provisions of the memorandum must prevail.
Contents of the Articles

Section 12 (1) in the case of an unlimited company, the articles must state the number if
members with which the company proposes to be registered and if the company has a share
capital, the amount of share capital with which the company proposes to be registered.
Section 12 (2) in the case of a company limited by guarantee the articles must state the
number of members with which the company proposes to be registered.
Section 12 (3) where an unlimited company or a company limited by guarantee has

increased the number of its members beyond the registered number, it shall within 14 days
after the increase was resolved on or took place, give to the registrar notice of the increase
and the registrar shall record the increase. In case of default the company and officer shall be
liable to a default fine of 25 currency points Section 12 (4).
Contents of the Articles of Association

 Quorum at meetings and types
 Right to receive notice and to attend and vote
 Appointment and powers of directors
 Rights attached to different classes of shares
 The number of directors and their rotation, appointment of a company secretary and
duties, appointment of auditors
 Number of members with which it proposes to be registered in case it is an unlimited
company section 12 (1).
 Transfer of shares.
Adoption and application of Table A.

Section 13 (1) provides that Articles of association may adopt all or any of the regulations
contained in Table A. The Companies Act contains a standard form of articles which applies to
companies limited by shares but other types of companies are free to adopt them with the
necessary modifications under.
The advantage of statutory model articles (Table A) are:-

 That legal drafting of special articles is reduced to a minimum since even special
articles usually incorporate much of the text of the model.
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 There is flexibility since any company can adopt the model selectively or with
modifications and include in its articles special articles adapted to its needs.
Every company except that limited by shares must have its own articles of association. In
practice, public companies have their own articles. Companies limited by shares may also
have their own articles but if they don't register them, Table A automatically applies. These
must also be signed and their signatures attested by the subscribers.
Subsection (2) provides that in the case of a company limited by shares and registered after
the commencement of this Act, if articles are not registered or, if articles are registered in so
far as the articles do not exclude or modify the regulations contained in Table A, those
regulations shall, so far as applicable, be the regulations of the company in the same manner
and to the same extent as if they were contained in the duly registered articles.
Under Section 15 the Articles must be printed in the English language, divided into
paragraphs, numbered consecutively, signed by each subscriber to the memorandum in the
presence of at least one witness who must attest the signature.
Alteration of the Articles section 16

It is provided that subject to the provisions of the Act and to the conditions contained in its
memorandum, a company may by special resolution alter or add to its articles.
Registration of memorandum and articles.

Section 19 (1) provides that the memorandum and the articles, if any, shall be delivered to
the registrar and he or she shall retain and register them and shall assign a registration
number to each company so registered.
Section 19 (2) provides that a company shall indicate its registration number on all its official
documents.
Adoption of and application of Table F - Section 14

Under Section 14 (1) a public company shall at the time of registration of its articles adopt
and incorporate into its articles the provisions of the code of corporate governance contained
in Table F.
Under Section 14 (2) a private company may at the time of registration of its articles adopt
and incorporate into its articles the provisions of the code of corporate governance contained
in Table F.
Where a company adopts all or part of Table F, a printed copy shall be annexed to the articles
of association under Section 14 (3).
Where a company has adopted the code of corporate governance it shall file annually a
statement of compliance with the registrar and the Capital Markets Authority, under Section
14 (4) failure of which the company shall be liable to pay a fine of 50 currency points Section
14 (5).
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Statement of Nominal Capital
This is a simple document, which is basically intended to show the capital with which a
company is registered i.e. the startup capital the company actually has. This statement of
nominal capital does not have to be in any particular currency.
The statement is intended to convey to the public the seriousness of the venture. However, to
avoid stamp duty, most companies are registered with minimal share capital moreover
Companies can alter the amount of capital by a special resolution. Thus it is not an
appropriate guide to the financial soundness of the company.
Statutory Declaration of Compliance section 22(2)

Section 22 (2) provides that a statutory declaration by an advocate engaged in the formation
of the company or by a person named in the articles as a director or secretary of the company,
of compliance with all or any of the requirements referred to in subsection (1) shall be
produced to the registrar and the registrar may accept the declaration as sufficient evidence
of compliance.
The statutory declaration is sworn by a by a legal practitioner, promoter or by a person

named in the articles as directors or secretary of company indicating that all requirements
have been complied with in the formation of the company.
Statement of the Registered Office of the Company

This is a form that is filled out and it is referred to as Form 9. The form requires the company
to provide a statement of the address of the intended registered office of the company and it is
signed by subscribers to the Memorandum of Association, director of company secretary and
it must be delivered to the registrar to obtain incorporation. This address becomes the
registered office of the company on incorporation.
Refer to section 7 (1) (b) and Section 115 as discussed above under contents of the
Memorandum of Association.
Particulars of Directors and Company Secretary

This is a form that is filled out and it is referred to as Form 7. A statement signed by
subscribers of the Memorandum of Association setting out the names of the subscribers and
the secretary of the company and containing the information in respects thereof or thereto
required to be contained in respect of directors and secretaries together with the consent of
those people who have consented to act in those capacities must be sent to the registrar of
companies on incorporation.
Registration Form
Attach one passport photo of the subscribers and signature of subscriber
Additional documents for a public company

If the company is a public company, the following additional documents are required to be
registered: Prospectus or statement in lieu of prospectus.
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Registration of prospectus.
Section 60 provides that a prospectus shall not be issued by or on behalf of a company or in
relation to an intended company unless, on or before the date of its publication—
(a) the Capital Markets Authority has approved the company’s prospectus in accordance with
the Capital Markets Authority Act; and
(b) there has been delivered to the registrar for registration a copy of the prospectus signed
by every person who is named in it as a director or proposed director of the company or by
his or her agent authorized in writing.
Registration/issuance of a Certificate of Incorporation

This is provided for under SECTION 22 (1)
Section 22 (1) provides that a certificate of incorporation given by the registrar in respect of
any association shall be conclusive evidence that all the requirements of this Act in respect of
registration and of matters precedent and incidental to registration have been complied with
and that the association is a company authorized to be registered and duly registered under
this Act.
This is a certification that a company has been recognized as a legal person and accordingly
registered. After it has been issued, a private company can commence business.
Effect of registration and the role of Registrar

If the Registrar is satisfied that the documents are in order and that stamp duties and fees
have been paid, he enters the name of the company in the register of companies and issues a
certificate of incorporation. The issue of the certificate of incorporation is conclusive
evidence that all registration requirements have been complied with and that the association
is a company authorized to be registered and is duly registered under the Act section 22.
In the case of Jubilee Cotton Mills Ltd V Lewis (1924) A.C.958 the certificate was dated 6th
January 1920 but it was not signed and issued until 8th January. On the 6th of January the
directors allotted shares and debentures. The allottee later refused to pay the amount due on
the shares arguing that the company did not exist on the date of issue. It was held that the
company was deemed to have come into existence on the 6th of January 1920. Therefore, the
allotment was valid and the allottee must pay for the securities allotted to him.
The basic role of registrars is to ensure that business entities are not formed without proper
documents, ensure compliance with the law in the process of registration and thereafter.
Where the registrar is not satisfied with the documentation, he/she can decline to register the
business/company.
However, the Registrar may refuse to register a company whose objects are unlawful. In the
case of R. V Registrar of Companies Exparte More (1931) 2 K. B. 197 the Registrar’s
refused to register to sell tickets in a lottery because the lottery was illegal in England.
However, where he declines without a reasonable excuse, an order of Mandamus can be

obtained from the High Court compelling him/her to perform the duty.
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Activity
Discuss the essential requirements that must be fulfilled before a Private Company comes into
existence.
Solution
The student should be able define a company and go on to define a private company. The
student should also go on to define the meaning of formation and then give a step by step
analysis of how the company is formed clearly stating the various documents that are
submitted for registration.
Test Questions
1. Jane, Joan and Joy are three friends who would like to form a company to carry on
the business of pest control and cleaning services. They have approached you.
Advise them on the best type of company they can form.
2. Discuss the different formalities that must be satisfied before a name can be
reserved by the registrar of companies
3. Critically analyze the different contents found within the Memorandum of
Association.
TOPIC FOUR
MEMORANDUM AND ARTICLES OF ASSOCIATION

1. Analyze the effect of registration of the memorandum and Articles of Association;
2. Understand the meaning of extrinsic contracts as applied in company law; and
3. Examine and analyze the Interpretation of the memorandum and Articles of
Association.
THE CONTRACTUAL EFFECT OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION

S.21 (1) of the Companies Act provides that subject to the provisions of this Act, the
memorandum and articles shall when registered bind the company and the members thereof
to the same extent as if they respectively had been signed and sealed by each member and
contain the warranty on the part of each member to observe all the provisions of the
memorandum and articles.
Thus, registration gives a legal effect i.e. the company is now bound by the provisions of the
memorandum and articles in other words a contract is created between the company and the
members of the company. A member need not have signed the document but once they
become members then they are deemed to have signed the contract and therefore they have
to observe all the provisions of the memorandum and articles i.e. it’s the memorandum and
articles that form the terms of the contract. The memorandum and articles form three
contracts and these are:
a) Contract between the company and each member
b) Contract between members interse (members themselves)
c) Contract between the company and each member in his/her capacity as member
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The memorandum and articles constitute a contract between the company and each
member
The memorandum and articles of association are enforceable by a member against the
company and other members as illustrated by the case of Wood V Odessa Waterworks Co.
(1889) 42 ChD 636. In this case the articles empowered the directors with the approval of
the general meeting to declare “a dividend to be paid to the members”. The directors
recommended that instead of paying a dividend, members should be given debenture bonds
bearing interest paid at par, by annual drawings, extending over 30 years. The
recommendation was approved by the company in general meeting by an ordinary resolution.
Wood, a shareholder successfully sought an injunction restraining the company from acting
on the resolution on the grounds that it breached the articles. Stirling J. stated in this case that
“the articles of association constitute a contract not merely between the shareholders and the
company but between each individual shareholder and every other…”
The question in this case was whether it is within the power of the majority of the
shareholders to insist against the will of a minority that profits which have been earned shall
be divided, not by the payment of cash, but by the use of debenture bonds. The articles of the
company provided that the directors may, with the sanction of a general meeting, declare
dividends to be paid to the shareholders. Prima facie this means to be paid in cash. The
debenture bonds that the company was proposing to pay are not payments in cash but
amount to agreements or promises to pay. They are a debt of the company payable at some
uncertain future period which amounts to breach of the contract between the company and
the members.
Secondly, the contract under S.21 (1) is between the members interse (members
themselves)
Thus, a direct action between members is possible where one of the members breaches the
contract in the memorandum and articles. This was illustrated in the case of A. O. Obikoya
Vs Ezewa & Ors (1964) 2 ALL NLR 133 the applicant and respondents were the permanent
directors of a limited liability company by virtues of Article 28 of their company articles.
Article 32 of their Act provided that a permanent director shall not vote for the removal from
office of another permanent director. In breach of both articles 28 & 32, the respondents
purported to alter article 28 by a special resolution and inserted article 86 of Table A which
voted for the removal of the applicant from office as director of the company and the
applicant sued for damages against the respondents personally and for breach of the contract
in article 32 and for an injunction to restrain the respondents from further preventing the
applicant from acting as director of the company. Held that when the 3 members of the
company who are also the 3 permanent directors agreed by virtue of article 32 not to vote for
the removal of each other from office, they were agreeing between themselves as members in
which capacity they exercised their voting rights not to vote. A contract did exist between
them and the applicant was within his right to sue because the respondents were in breach of
articles 28 & 32.
Thirdly, S.21 (1) creates a contract a contract between the company and the members
only in their capacity as member and not in some other special capacity
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If therefore an article provides that someone shall be the company’s solicitor, he cannot rely
on that as a contract to enforce his right to be the solicitor, even if he is in fact also a member,
for the article concerns him in his capacity as an outsider not as member. Nor will a provision
that disputes between the company and its members must be referred to arbitration avail a
person whose dispute is between the company and himself as a director, even though he
happens also to be a member.
This was illustrated in the case of Hickman Vs Kent (1915) 1 CH 881 the defendant sheep-
breeders association was a non-profit making company incorporated in 1895. Under Article
49 of its articles of association, any disputes between the association and its members should
be referred to arbitration. The plaintiff brought this action in court in breach of article 49,
claiming an injunction to restrain the association from expelling him from membership,
damages for refusing to register his sheep, and a declaration that he was entitled to have his
sheep registered. The court granted the association a stay of proceedings on the ground that
article 49 was binding as between the company and its members under the Companies Act.
Ashbury J stated that: “ an outsider to whom rights purport to be given by the articles in his
capacity as such outsider, whether he is or subsequently becomes a member, can not sue on
those articles treating them as contracts between himself and the company to enforce those
rights…No right merely purporting to be given by an article to a person whether a members
or not, in a capacity other than that of a member as for instance as solicitor, promoter,
director, can be enforced against the company…”
In Beattie V E. & Beattie Ltd (1938) Ch 708, in proceedings brought against a director, who
was also a member of the company, alleging breach of duty, the director sought to rely on a
clause in the articles of association obliging all disputes between the company and a member
to be referred to arbitration. The court held that the director was not entitled to rely on the
article because it did not constitute a contract between the company and the defendant
director in his capacity as director.
Thus, if an article provides that someone should be the company’s director or solicitor he
cannot rely on the article as giving him a right to be the company’s director or solicitor even if
he is a member. This is because the article concerns him only in his capacity as an outsider
(i.e., director or solicitor), not as member.
Exception to the above contract

However, in the case of Quin & Axtens Ltd V Salmon (1909) AC 442 the House of Lords was
prepared to give effect to the articles of association even though this had the effect of
enforcing rights given to certain members in their capacity as directors. In this case the
articles of the company provided that the business of the company was to be managed by the
directors “subject to such regulations (being not inconsistent with the provisions of the
articles) as may be prescribed by the company in general meeting”. The articles also provided
that no resolution of the directors on certain important matters would be valid if either of two
named managing directors voted against the resolution. The plaintiff one of the two managing
directors, voted against such a resolution to acquire and let premises but the company
purported to ratify the resolution by a simple majority. He therefore successfully brought an
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action against the company and the directors involved for an injunction restraining them from
acting on the resolution. It was held that the resolution was inconsistent with the provisions
of the articles.
In summary, the following should be noted:

 No article can constitute a contract between the company and a third party.
 No right merely purporting to be given by an article to a person, whether a member or not,
in a capacity other than that of a member, can be enforced against the company.
 That articles regulating the rights and obligations of the members generally as such do
create rights and obligations between them and the company respectively.
Extrinsic Contracts
Contracts outside the memorandum and articles are sometimes called extrinsic contracts.
Where there is an extrinsic contract between the company and a director (such as for
employment), an article may be expressly or impliedly incorporated into the extrinsic
contract. In this event any rights given by the articles can be enforced under the contract
without relying on Section 21 of the Companies Act.
In the case of Re New British Iron Co., ex parte Beckwith (1898) 1 Ch 324 a director had
served the company without any express agreement for remuneration. However the articles
of association provided that the remuneration of the board shall be an annual sum of GBP
1,000. The director claimed arrears of fees during the winding up of the company and it was
held that he would succeed because the service contract incorporated the articles by
implication.
However, where a contract has incorporated provisions of a company’s articles it must

contemplate that the articles can be altered in the usual way provided that such alteration
does not have a retrospective effect. In the case of Swabey V Port Darwin Mining Co. (1889)
1 Meg 385 the companies articles provided that the directors were to be paid at a rate of GBP
200 per annum. Later the company passed a special resolution altering the articles so that the
directors were entitled to receive GBP 5 per month retrospectively from the 31st of December
1887. The plaintiff who was a director claimed fees at the old rate which had accrued prior to
the alteration. It was held that the director would be entitled to their salary at the rate
originally stated in the articles up to the time the articles were altered.
INTERPRETATION OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION

There are different rules that have been put in place regarding the interpretation of the
Memorandum and Articles of Association which can be discussed as follows:
a) Memorandum of Association is superior to the Articles of Association

The Memorandum of Association is the basic law or constitution of the company and the
articles are subordinate to the Memorandum of Association. If follows therefore like light
follows darkness, that if there is a conflict, the Memorandum of Association prevails.
The articles are void to the extent of the inconsistency or conflict. In Guinness Vs Lion
Corporation Of Island Ltd (1822) 22 CH.D.349, the Memorandum of Association stated that
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its object was the development of land in an island and the activities incidental thereto. The
court held the provision in its articles void by which part of the capital was to be used as a
guarantee fund for the payment of dividends on its preference shares. The intention of the
Memorandum of Association was that the whole of its capital should be employed in achieving
its objectives of land development and establishing a guarantee fund was inconsistent with it.
b) Memorandum and Articles of Association may be read together to clear any

ambiguity
If there is no conflict, the Memorandum of Association and articles must be read together and
any ambiguity or uncertainty in either can be removed by the other e.g. in Re South Durham
Brewery Co Ltd, (1885) 31ch. D 261, the Memorandum of Association was silent as to
whether the companies’ shares were to be all one class or might be of difficult classes. It was
held that a power given by articles to issue shares of different classes resolved the uncertainty
and enabled the company to do so.
Also, in the case of Rainford Vs-James Kett & Blackman Co.Ltd (1905) 2ch.147,the
Memorandum of Association of the trading company allowed it to do things incidental to its
objects. It was held that the provisions in the articles empowering the company to lend money
merely exemplified the general words of the Memorandum of Association and the company
was therefore entitled to lend money to its employees.
In Repyle Works (1891) 1 Ch.173, the Memorandum of Association empowered the

company to borrow on security of its assets or credit while the articles provided that it might
mortgage its uncalled capital. It was held that the articles merely made specific the general
words of the Memorandum of Association and so the company did have the power to
mortgage its uncalled capital.
Though the Memorandum of Association and articles can only be read together to remove
ambiguity or uncertainty, the articles will not be resorted to, to assist in the interpretation of
the Memorandum of Association or the clause that is required in law to be in the
Memorandum of Association.
Activity
Discuss the contractual effect that is created by the registration of the Memorandum and
Articles of Association
Solution
The student will be expected to discuss the memorandum and articles and then clearly
highlight the different types of contracts that arise from the documents.
Test Questions
1. Discuss the different rules as applied in the interpretation of the Memorandum
and Articles of Association
2. Discuss the extrinsic contract as used in company law.
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TOPIC FIVE
CONSEQUENCES OF INCORPORATION
At the end of this Chapter the student will be able to:

1. Evaluate the advantages that arise from incorporation of a company; and
2. Evaluate the disadvantages that arise from incorporation of a company.
CONSEQUENCES OF INCORPORATION
Advantages that Arise from Incorporation of a Company
The fundamental attribute of corporate personality which is as a result of incorporation and
from which all other consequences flow is that the corporation is a legal entity distinct from
its members. This was illustrated in the case of Salomon Vs Salomon & Co (1897) AC 22.
Since the Salomon case, the complete separation of the company and its members has never
been doubted. It is from this fundamental attribute of separate personality that most of the
particular advantages of incorporation spring and these are:
1. Liability:
The company being a distinct legal “persona” is liable for its debts and obligations. The
company is liable without limit for its own debts. The liability of the members or shareholders
of the company is limited to the amount remaining unpaid on the shares. For instance, where
a shareholder has been allotted 100 shares at UGX 100= each and he pays UGX 5, 000= to the
company, at the time of winding up the company, if the shares remain not fully paid for, he
will be required to pay UGX 5, 000=.
In the case of a guarantee company, each member is liable to contribute a specific amount to
the assets of the company and their liability is limited to the amount they have guaranteed to
contribute.
It follows that the company’s creditors can only sue the company and not the shareholders.
If the company has unlimited liability, the members liability to contribute is unlimited and
their personal property can be looked at to discharge the company creditors.
2. Property:
An incorporated company is able to own property separately from its members. Thus, the
members cannot directly interfere with the company property. Thus, one of the advantages of
incorporation (corporate personality) is that it enables the property of the company to be
clearly distinguished from that of the members. In the case of Macaura Vs North Assurance
Co (1925) AC 619 the company was dealing in timber and the majority shareholder took out
an insurance policy in his own name regarding the timber. The timber was destroyed by fire
and the insurance company refused to pay arguing that he had no insurable interest at the
time of the policy. The shareholder argued that he was the substantial owner of the company
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and so the beneficial owner of the property, thus he had an insurable interest. Court disagreed
and held that a shareholder even if he owns all the shares has no interest in the property of
the company.
Thus corporate personality is clearly distinguished from the members’ property and members
have no direct proprietary right in the company’s property but merely to their shares. A
change in membership causes a transfer in shares but the company’s property remains
untouched.
3. Legal Proceedings:
As a legal person, a company can take action to enforce its legal rights or be sued for breach of
its duties. However, the action for or against the company should be instituted in the
company’s registered name.
4. Perpetual Succession:
One of the advantages of incorporation is that the company will not be susceptible to “the
thousand natural shocks that flesh is subject to.” It (the company) cannot become
incapacitated by illness, mental or physical. This is not to say that the death or incapacity of its
human members may not cause the company considerable embarrassment obviously this will
occur if all the directors are imprisoned. But the vicissitudes of the flesh have no direct effect
on the company. The death of a member leaves the company unmoved, members may come
and go but the company can go on forever. Changes in membership arising from the
bankruptcy or death do not affect the company’s existence. The life of a company can only be
ended either by winding up, striking off the register of company’s or through amalgamation
and reconstruction as provided by the Companies Act. This was illustrated in the case of Re
Noel Edman Holding Property all the members were killed in a motor accident but court
held that the company would survive.
Thus, this perpetual succession gives the certainty required in the commercial world even
when ownership of shares changes there is no effect on the performance of the company and
no disruption in the company business.
5. Transfer of Shares:
A share constitutes an item of property, which is freely transferable, except in the case of
private companies. With an incorporated company freedom to transfer both legally and
practically can be readily attained. The company can be incorporated with its liability limited
by shares and these shares constitute items of property which are freely transferable in the
absence of express provision to the contrary and in such a way that the transferor drops out
and the transferee steps into his shoes.
In private companies, there is a restriction on the transfer of shares and this is essential and is
in any event desirable if such a company is to retain its character of an incorporated private
company.
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6. Borrowing:
A company can borrow money and provide security in the form of a floating charge. A floating
charge is a charge that floats like a cloud over the whole assets of the company from time to
time but without preventing the mortgagor (company) from disposing of these assets in the
usual course of business until something occurs to cause the charge to become crystallized or
fixed. This type of charge is particularly suitable when a business has no fixed assets such as
land but carries a large and valuable stock in trade.
Disadvantages that Arise from Incorporation of a Company
Apart from the advantages mentioned above which arise from incorporation, there are certain
disadvantages of incorporation and these are:
 Formalities have to be followed,
 Loss of privacy,
 The exercise is too expensive.
Activity
Discuss the different consequences that arise from the incorporation of a company
Solution
The student should be able to define what a company and discuss briefly what is required in
the formation of companies and then discuss the attendant consequences that result from the
company’s formation. The student should be able to discuss the positive and negative
consequences.
Test Questions
1. Discuss the advantages and disadvantages that arise upon incorporation
2. Analyze the concept of corporate personality as used in company law
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TOPIC SIX
LIFTING THE VEIL OF INCORPORATION

1. Understand the meaning of “veil of incorporation”; and
2. Analyze the circumstances under which the veil of incorporation may be lifted.
The Meaning of the Veil of Incorporation

The veil of incorporation means merely that a company is to be distinguished as a separate
person from its members.
Lifting the Veil of Incorporation

In such a situation, the law looks at the people behind the company rather than the
corporation.
It has been observed in Dunlop Nigerian Industries Ltd Vs. Forward Nigerian Enterprises
Ltd & Farore, that in particular circumstances; e.g. where the device of incorporation is used
for some illegal or improper purpose, the court may disregard the principle. That a company
is an independent legal entity and “lift the veil” of corporate identity so that if it is proved that
a person used a company he controls for an improper transaction he may be made personally
liable to a third party.
The effect of so doing is either:

 To identify the company with other persons, that is its members or directors, or
 To treat a group of companies as a single commercial entity.
There is no consistent principle applied in making these exceptions, each of which has been
learnt separately, but their general purpose is
 To enforce the rules of company law;

 To prevent fraud or evasion of legal obligations by the use of companies; or
 To recognize that in economic reality the enterprise is the group and not the
individual companies within it.
There are two circumstances under which the veil of incorporation may be lifted
 Under statute
 Under Case law
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Lifting the veil under statute
It has always been recognized that the legislature can forge “a sledgehammer capable of
cracking open the corporate shell” as was observed by Delvin J in Bank voor Handel en
Scheepvaart N.V. Vs. Slatford (1953) 1.Q.B.248 at 278).
Section 20 provides that the High Court may, where a company or its directors are involved in
acts including tax evasion, fraud or where, save for a single member company, the
membership of a company falls below the statutory minimum, lift the corporate veil.
The legislature has lifted the veil in the following circumstances:
1. Where the number of members is below legal minimum

Section 49 provides that if a company other than a private company limited by shares or by
guarantee carries on business for more than 6 months after its membership has fallen below
two members every member during the time the business is carried on after the six months
and who knows that the company is carrying on business with only one member is liable
jointly and severally for the company’s debts incurred during that time.
2. Where the company is not mentioned in the Bill of Exchange

An officer of the company is personally liable if he signs a bill of exchange, cheque, etc. on
behalf of the company without mentioning the company’s name on it in legible (clear)
characters or without express or implied authority to do so. Under section 56 it is provided
that a bill of exchange or promissory note shall be taken to have been made, accepted or
endorsed on behalf of a company if made, accepted or endorsed in the name of or by or on
behalf or on account of, the company by any person acting under its authority, express or
implied.
In the case of Penrose Vs Martyr (1958) E.B.& E. an officer of a company was held
personally liable when the word limited was omitted from the name.
In Durham Fancy Goods Ltd Vs Micheal Jackson (Fancy Stores) Ltd (1968) 2 Q.B. 839 it
was decided that an officer of a company can be held personally liable when the company is
described by a wrong name.
When a company’s name is given wrongly on a cheque or other financial instrument, a

creditor can proceed against the officer responsible personally.
The position in England has since changed. In the 1993 case of Jenice Ltd and Others Vs Dan
Mr. Dan was a director of a company called “Primekeen Ltd”. The bank incorrectly printed the
company’s cheques in the name of “Primkeen Ltd”. Mr. Dan signed several of these. They were
dishonoured and returned by the several plaintiffs including Jenice. Primekeen Ltd then went
into creditors’ winding up and the various plaintiffs sued Mr. Dan as personally liable on the
cheques because of the misdescription of the company’s name.
Mr. Dan was not liable because the purpose of the section was to ensure that outsiders knew
that they were dealing with a limited liability company. There was no doubt that in this case
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outsiders knew that they were dealing with a limited liability company, so no mischief had
been done.
3. Holding and Subsidiary Companies

Where companies are in relationship of holding and subsidiary companies, group accounts
should be presented before the holding company in general meeting. In this regard, the
holding and subsidiary companies are regarded as one for accounting purposes, and the
separate nature of the subsidiary company is ignored.
4. Reckless or Fraudulent Trading

If during the winding up a company, it appears that any business of the company has been
conducted recklessly or fraudulently, those responsible for such business may be held liable
without limitation of liability for any of the company’s debts or liabilities.
5. Land Act
Under the Land Act, non-Ugandans are restricted from acquiring land in Uganda.
Consequently, if the purchaser is a company, the veil has to be lifted to determine the
nationality of the company.
6. Taxation
Under the Income Tax Act, the veil of incorporation may be lifted to ascertain where the
control and management of the company is exercised in order to determine whether it is a
Ugandan company for income tax purposes.
Under the Income Tax Act a company may be identified with those who control it, to
determine its residence for tax. The Revenue is the only outside creditor in whose favor the
Salomon rule has been substantially mitigated.
Lifting the veil under case law

Even without the aid of a legislative sledgehammer the courts also have sometimes been
prepared to have a crack at the corporate veil. Sometimes the courts may also ignore the
distinction between a company and its members and managers if the latter use that
distinction to evade their legal obligations.
1. Where the company acts as agent of the shareholders

Where the shareholders of a company use the company as an agent, they will be liable for the
debts of the company.
The courts are also prepared in certain circumstances to regard a company as an agent of its
controlling shareholders but when the controlling shareholder is an individual they are
unwilling to do this unless there is fraud or improper conduct or unless an agency
relationship can be establish on normal agency principles of principle and agent. Where,
however, the controlling shareholder is another company they are less reluctant.
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2. Where there has been fraud or improper conduct
The veil of incorporation may also be lifted where the corporate personality is used as a mask
for fraud or illegality.
Thus in Gilford Motor Company Vs. Horne the defendant was plaintiff’s former employee.
He agreed not to solicit its customers when he left the employment. He then formed a
company, which solicited the customers. Both the company and defendant were held liable
for breach of covenant not to solicit.
3. Determination of residence
The courts also look behind the façade of the company and its place of registration in order to
determine its residence. For this purpose the test laid down has long been the place of its
central control. Normally this place will be where the board of directors functions or the place
of business of the managing director especially if he holds a controlling interest or that of the
parent company.
In Unit Construction Co. Ltd Vs Bullock (1960) A. C. 351 H.L Three companies wholly
owned by a UK company, were registered in Kenya. Although the companies’ constitutions
required board meetings to be held in Kenya, all three were in fact managed entirely by the
holding company in the UK. It was held that for tax purposes the three the companies were
resident in the United Kingdom. The Kenyan connection was a sham, the question being not
where they ought to have been managed, but where they were managed. It was irrelevant that
for the purposes of Kenyan law the companies might also be resident in Kenya.
Residence is important mainly in connection with taxation, but it may also govern enemy
status or the subjection of a company to the jurisdiction of Ugandan or foreign courts.
In Daimler Co. Ltd Vs Continental Tyre and Rubber Co. (1916) 2 A.C 307 H.L it was
indicated that a company could have an “enemy character”. This is so if its agents or persons
in de facto control of its affairs are resident in an enemy country or are taking instructions or
acting under the control of enemies. To determine the enemy character of a company the
court looks behind the artificial persona – the corporation – and takes account of and is
guided by the natural persons.
4. Trusts
Attempts to use trust, rather than agency as a tool for piercing the corporate shall have been
fewer and less successful. Nevertheless there are cases where the courts have been prepared
to recognize that a subsidiary company held all its property in trust for its parent company.
In Littlewoods Stores Vs I.R.C (1969) 1 W.L.R. 1241 C.A. the court relied on trust doctrines
to ignore the effect of the corporate entity principle in a tax case involving a holding company
and it’s wholly -owned subsidiary where the former had provided the whole of the purchase
price for property that had been purchased by the latter.
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5. Ratification of corporate acts
The law insists that a company will be bound only by resolution of its organs, the board of
directors or the members in general meeting, or by duly authorized acts of its agents, which
its members individually or collectively are not. Nevertheless in a number of cases questions
have arisen whether something less formal than a resolution duly passed at a properly
convened meeting of the members can be regarded as equivalent to a resolution of the
members in general meeting. The courts have come to recognize that individual assents given
separately by all members entitled to vote are equivalent to the assent of a meeting. It is now
recognized that a company is bound in a matter intra vires by the unanimous agreement of its
members even when not arrived at in a formal meeting. If the directors or the members
resolve to do any act that is ultra vires the company or if they act beyond their powers then
they risk being held personally liable.
In conclusion, the courts regard themselves as precluded by the Salomon’s case from treating
a company as an “alias, agent, trustee or nominee” of its members. However they are prepared
to recognize that a company is an alias of its members when corporate personality is being
blatantly used as a cloak for fraud or improper conduct.
Activity
Once a Company comes into existence it assumes liability for its own actions and never can a
member or shareholder be liable for the acts of the Company. Discuss.
Solution
The student is expected to define what a company is and state the fact that upon
incorporation of a company, it acquires a corporate personality and this personality makes
that company liable for its actions. The student is then expected to discuss the meaning of the
veil of incorporation and its rationale and to discuss the different circumstances under which
the veil may be lifted i.e. under statute law and under case law.
Test Questions
1. The doctrine of corporate personality is not always a guaranteed defence.
2. Once a company has been formed, it becomes liable for its debts and obligations.
3. Never under any circumstances can the members or officers be held liable for the
acts of the company. Discuss
4. As soon as the case of Salomon Vs Salomon & Co Ltd (1896) AC 22 was designed
certain, problems arose there from that needed quick solution. The judges over the
years have introduced the concept of lifting the veil to solve the said problems.
Discuss.
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TOPIC SEVEN
MANAGEMENT OF A COMPANY
At the end of this Chapter, the student will be expected to:

1. Understand the different organs that are responsible for the management;
2. Analyze and Evaluate the role of members in the management of companies; and
3. Understand the procedures regarding meeting
ORGANS RESPONSIBLE FOR MANAGEMENT OF A COMPANY

The control and management of a co is distributed among its principal officers and these
include the auditors, accountants, Board of Directors, Managing director (if any) and any
other officers of a company. There are basically two organs responsible for the management
of a company. These are: -
 The Members through company meetings and
 The Board of Directors.
MANAGEMENT OF THE COMPANY BY THE MEMBERS AND COMPANY MEETINGS

The Members have an opportunity of influencing the company's management through the
company's meetings. There are 4 types of meetings through which the shareholders can
participate in the affairs of a company.
1. Statutory meeting and statutory report.

These are provided for under Section 137 of the Companies Act which requires A company
limited by shares and every company limited by guarantee and having a share capital shall,
within a period of not less than one month nor more than three months from the date at
which the company is entitled to commence business, hold a general meeting of the members
of the company which shall be called “the statutory meeting”.. The section has 3 basic
elements.
 It is a requirement for all companies limited by shares and limited by guarantee
 The meeting is held once in the company's life and never again
 It must be held within one month from the date of the company’s commencement of
business and not before three months elapse after such commencement.
A statutory report must be sent to the members before the meeting is held. This must be 14
days before the date the meeting is to be held according to Section 137(2) by the directors of
the Company.
Subsection (3) provides that Subject to subsection (2), if the statutory report is forwarded
later than is required by that subsection, it shall, notwithstanding that fact, be taken to have
been duly forwarded if it is so agreed by all the members entitled to attend and vote at the
meeting.
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Contents of the statutory report
According to section 137 (4) the statutory report shall be certified by not less than two
directors of the company and shall state—
(a) the total number of shares allotted, distinguishing shares allotted as fully or partly paid up
or otherwise than in cash and stating in the case of shares partly paid up, the extent to which
they are so paid up and in either case the consideration for which they have been allotted;
(b) the total amount of cash received by the company in respect of all shares allotted,
distinguished as described in paragraph (a);
(c) an abstract of the receipts of the company and of the payments made out of them, up to a
date within seven days before the date of the report, exhibiting under the distinctive headings
the receipts of the company from shares and debentures and other sources, the payments
made on them and particulars concerning the balance remaining in hand and an account or
estimate of the preliminary expenses of the company;
(d) the names, postal addresses and descriptions of the directors, auditors, if any, managers, if
any and secretary of the company; and
(e) the particulars of any contract the modification of which is to be submitted to the meeting
for its approval, together with the particulars of the modification or proposed modification.
Subsection 7 provides that the directors shall cause a list showing the names and postal
addresses of the members of the company and the number of shares held by them
respectively, to be produced at the commencement of the meeting and to remain open and
accessible to any member of the company during the continuance of the meeting.
What is discussed in the meeting?

Under subsection 8, the members of the company present at the meeting are free to discuss
any matter relating to the formation of the company or arising out of the statutory report,
whether previous notice has been given or not but no resolution of which notice has not been
given in accordance with the articles may be passed.
Adjournment of the meeting

Under subsection (9) the meeting may adjourn from time to time and at any adjourned
meeting any resolution of which notice has been given in accordance with the articles, either
before or subsequently to the former meeting, may be passed and the adjourned meeting shall
have the same powers as an original meeting.
Default in complying with provisions relating to statutory meeting

Under subsection (10) where there is a default in complying with this section, every director
of the company who knowingly and willfully commits a default or in the case of default by the
company, every officer of the company who is in default is liable to a fine of twenty five
currency points.
Under subsection (11) it is provided that this section does not apply to a private company
but applies to a company which was a private company before becoming a public
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2. Annual general meeting.
This is a meeting that is held once every year.
Who holds this meeting?

Section 138 (1) provides that a Public company shall in each year hold a general meeting in
addition to any other meetings in that year and shall specify the meeting as general meeting in
the notices calling it and not more than fifteen months shall elapse between the date of one
annual general meeting of a company and that of the next.
Subsection (2) provides that a private company may at the requisition of a member hold an
annual general meeting.
When is the meeting held?

The meeting is held once in a year and a year means twelve calendar months and not more
than fifteen months shall elapse between the date of one annual general meeting of a
company and that of the next.
Subsection 3 provides that subject to subsection (1), if a company holds its first annual
general meeting within eighteen months after its incorporation, it need not hold it in the year
of its incorporation or in the following year.
What is discussed in the meeting?

The object of this meeting is to give members an opportunity to meet and participate in the
decision making process of the company at least once a year. This meeting is technically
referred to as an ordinary meeting; the resolutions thereof are ordinary resolutions. This is
the most important meeting of the company and concerns a number of issues e.g. to consider
accounts, balance sheets, reports of directors and auditors, consideration of dividends,
appointment of directors etc.
Default in holding this meeting

Further Section 138 (4) provides that where default is made in holding a meeting of the
company in accordance with subsection (2), the registrar may, on the application of any
member of the company, call or direct the calling of a general meeting of the company and
give such ancillary or consequential directions as the registrar thinks expedient including
directions modifying or supplementing in relation to the calling, holding and conducting of the
meeting, the operation of the company’s articles.
Under subsection (8) where default is made in holding a meeting of the company in
accordance with subsection (1) or in complying with any directions of the registrar under
subsection (3), the company and every officer of the company who is in default are liable to a
default fine of twenty five currency points and if default is made in complying with subsection
(4), the company and every officer of the company who is in default are liable to a default fine
of five currency points.
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3. Extra-Ordinary general meeting on requisition.
Where there are some burning issues that may not hold on to the next annual general
meeting, then an extra ordinary general meeting may be held. The directors may whenever
they think fit convene an extra ordinary general meeting but in default may be convened on
requisition.
Section 139 (1) provides that that the directors of a company, notwithstanding anything in
its articles, shall, on the requisition of the members holding not less than one tenth of the paid
up capital of the company as at the date of the deposit carries the right of voting at general
meetings of the company or in the case of a company not having a share capital, members of
the company representing not less than one tenth of the total voting rights of all the members
having that date a right to vote at general meetings of the company, shall proceed duly to
convene an extraordinary general meeting of the company.
Under subsection (2) the requisition must state the objects of the meeting and must be
signed by the requisitionists and deposited at the registered office of the company and may
consist of several documents in like form each signed by one or more requisitionists.
Under subsection (3) it is provides that where the directors do not within twenty one days
after the deposit of the requisition under subsection (2) held the meeting attended by
members representing more than one half of the total voting rights at a general meeting then
after the expiration of three months after the date of deposit of the requisition the meeting
shall not be held.
Under subsection (4) a meeting convened under this section shall be convened in the same
manner as nearly as possible as that in which meetings are to be convened by the directors.
Under subsection (5) any reasonable expenses incurred by the requisionists by reason of the
failure of the directors duly to convene a meeting shall be repaid to the requisitionists by the
company and any sum regard shall be retained by the company out of any sums due or to
become due from the company by way of fees or other remuneration, in respect of their
services to the directors who are in default.
Under subsection (6) for the purposes of this section, the directors shall, in the case of a
meeting at which a resolution is to be proposed as a special resolution, be taken not to have
duly convened the meeting if they do not give the notice required by section 149.
All meetings other than the AGM are referred to as extra- ordinary meetings. The resolutions
passed at an extra-ordinary meeting are referred to as special resolutions
4. General meeting convened under Court Orders section 142
The section provides that under section 142 (1) that if, for any reason it is impracticable to
call a meeting in any manner in which the meeting may be called or conduct the meeting as
per the Articles, the court may on its own motion or application by a director or member
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entitled to attend and vote at the meeting order that a meeting be called, held and conducted
in such manner as the court thinks fit.
Subsection (2) provides that where an order is made under this section the court may give
such ancillary or consequential directions as it thinks expedient and it is declared that the
directions that may be given under this subsection include a direction that one member of the
company present in person or by proxy shall be taken to constitute a meeting.
Subsection (3) provides that a meeting called, held and conducted in accordance with an
order under subsection (1) shall for all purposes be taken to be a meeting of the company
duly called, held and conducted.
If for any reason it is impractical to call a meeting the court may order that a meeting be
called, held and conducted in such a manner as the court thinks fit.
The courts have used this discretion and power to prevent majority shareholders or persons
in control oppressing the minority or where individual shareholders use the quorum
provisions under the articles as a tool to delay or defeat meetings.
However, it must be noted that this jurisdiction and discretion only applies whenever as a
practical matter the desired meeting can be conducted and only if it is impractical to hold it in
the first place.
In the case of Re Sombrero Ltd (1958) Ch.900, one member was allowed by court to
constitute a meeting. The court observed that in determining whether it is impracticable to
call and convene, the court must examine the circumstances of each particular case and ask
itself whether as a practical matter the desired meeting can be called, convened and or
conducted. In this case, two directors who were also shareholders absented themselves to
defeat the quorum of a meeting which was meant to pass a resolution removing them from
office. The court pointed out that this application was proper since the applicant (the majority
shareholder) had a statutory right to remove directors
In the case of Re Air Rep.International Ltd (Companies Cause No 3 of 1984), there were
only 2 shareholders and one complained that his co-shareholder had never stepped into the
company's premises for the previous two years. The court asked him to make an application
requesting to be allowed to convene a general meeting, which he dully did and it was granted.
How can a person i.e. shareholder, convince the court that it has been impractical to convene
such a meeting?
 By showing that the directors have bought up the shares.
 By showing that the directors are the only members of the company.
PROCEDURE, ATTENDANCE AND QUORUM AT MEETINGS

Every company's meeting must be convened by a notice given to all those who are entitled to
attend and vote 21 days before the general meeting.
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Section 141 gives the General provisions as to meetings and votes. It provides that; the
following provisions shall have effect in so far as the articles of the company do not make
other provision for the purpose—
(a) notice of the meeting of a company shall be served on every member of the company in the
manner in which notices are required to be served by Table A and for the purpose of this
paragraph, the expression "Table A" means that Table as for the time being in force;
(b) two or more members holding not less than one tenth of the issued share capital or, if the
company has not a share capital, not less than five per cent in number of the members of the
company may call a meeting;
(c) in the case of a private company two members, and in the case of any other company three
members, personally present shall form a quorum;
(d) any member elected by the members present at a meeting may be chairperson of the
meeting;
(e) in the case of a company originally having a share capital, every member shall have one
vote in respect of each share or each twenty currency points of stock held by him or her and
in any other case every member shall have one vote.
NOTICES
Form and Duration of Notice
Section 140 (1) and (2) of the Companies Act and Article 50 (1) of Table A provides that a
general meeting must be called by not less than 21 days written notice.
Exception
Section 140 (4) (a) and Article 50 (3) of Table A provides that all members entitled to
attend and vote must consent and agree to a shorter notice. A meeting convened by consent of
all members shall be deemed to have been duly called and convened. The bottom line under
this section generally is adequate notice must be given. In the case of RE ARCE DUFF & CO
LTD (1960) 1 WLR 1014 it was held that the resolutions passed at a meeting where shorter
notice than 21 days was given must be qualified and a note put that a resolution was passed.
In re-engineering works ltd (1920) 1 ch 466 the court held that it is incompetent for all the
shareholders to waive the requirements as regards to notice of meetings.
Service of Notice
Section 141 (a) provides that notice of the meeting of a company shall be served on every
member of the company.
Accordingly, if notice is not given to every person entitled to notice, the meeting is invalid and
any resolution passed thereof will be void and of no legal effect. In the case of YOUNG Vs
LADIES IMPERIAL CLUB LTD (1920) 2 KB 523 the Committee of a club met and passed a
resolution expelling another member from the club but that member was not summoned or
invited for the meeting since she had previously informed the chairman that she would not be
in position to attend. This omission invalidated the meeting.
Omission to give notice
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Most AOA provide for situations where notice was not given, where there was accidental
omission or general non receipt of notice. In such a situation, the meeting shall be valid and
the resolutions passed thereof valid resolutions.
Article 51 of Table A provides that accidental omission to give notice or non-receipt of notice
shall not invalidate the proceedings of a meeting.
The onus of proof is on the person claiming that the meeting is valid to show that the omission
was accidental and not deliberate. In RE WEST CANADIAN COLLIERIES [1962] CH 370 it
was held that the omission to give notice of a meeting to a few members because the plate of
the these members was inadvertently kept out of the machine when the envelopes were being
addressed was held to be accidental omission within the meaning of A.51
However, in MUSSELWHITE Vs MUSSELWHITE & SONS LTD (1962) CH 964 the omission
to give notice of a general meeting to the unpaid vendors of shares but who were on the
register of members and who the directors believed were no longer members was declared an
error of law and not an accidental omission.
Content of Notice
Article 50 (2) of Table A provides that the notice must disclose the place, day, hour of the
meeting and in case of special business, the general nature of that business.
If any shareholder is absent from the meeting whose notice had not fully disclosed the agenda,
he can seek a court order to declare such a meeting null and void. This is because the
shareholder has a legal right to get notified duly or clearly of an incumbent general meeting.
However, directors have no legal right to attend general meetings but can only do so as
administrators and therefore, matters discussed cannot be invalidated by any director.
In the case of HENDERSON Vs BANK OF AUSTRO ASIA [1890] 45 CH 330 the court held that
notice must be sufficiently full and specific to enable the shareholders receiving it to decide
whether to attend or not.
The effect of this section is the preclusion of general circulars which do not give a fair warning
of what is likely to transpire. However, if a meeting goes beyond what is specified in the
agenda but is within the limits of any other business then that meeting is valid and the
resolutions thereof.
However, if a meeting goes beyond what is specified in the agenda (notice) but it is still within
the limits of any other business then that meeting is valid and the resolutions thereof.
In CHOPPINGTON [1944] 1 ALLER 462 the notice had the business as to elect directors. The
chairman refused a motion to fill up the vacant posts of the directors. The court held that the
refusal was wrong since the notice specified the general nature of business as election of
directors.
In BAILLIE Vs ORIENTAL TELEPHONE [1915] 1 CL 503 a resolution was declared not

binding since the notice was insufficient.
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QUORUM
No business is to be transacted at the general meeting unless a quorum of members is
present. Technically speaking, quorum refers to an effective quorum i.e. members qualified to
take part in and decide upon questions before the meeting. In addition, if the articles require
the quorum of members to be present, without any additions or qualifications, then the word
present means present in person.
Section 141 (c) in the case of a private company two members, and in the case of any other
company three members, personally present shall form a quorum;.
The word meeting prima facie means the coming together of more than one person.
Accordingly, one person can’t constitute a meeting even where he attends in more than one
capacity or holds proxies for other persons.
Effect of Lack of quorum

Article 54 (1) of Table A provides that if for a meeting requisitioned by members the
quorum is not present within half an hour, the meeting shall stand adjourned to the same day
in the next week, same time and place or such other day and such other time and place as the
directors may determine.
Article 54 (2) of Table A provides if at the adjourned meeting the quorum is not present,
within half an hour from the time appointed for the meeting, the members present shall form
a quorum.
Appointment of Chairperson
Section 141 (d) provides that any member elected by the members present at a meeting may
be chairperson of the meeting. A person elected as a chairperson has the responsibility of
presiding over meetings of the company. The CA or Table A does not provide for the
qualifications of the chairperson hence the general meeting has the power to appoint any
person as a chairperson.
Article 55 (1) of Table A provides that the chairperson of the board of directors shall preside
at every general meeting of the company.
Article 55 (2) of Table A provides that if there is no chairperson or if he or she is not present
within fifteen minutes of the time appointed for the meeting or is unwilling to act, the
directors present shall elect one of their members to be appointed chairperson of the meeting.
Article 56 of Table A provides that if no director is willing to act as chairperson or if no

director is present within fifteen minutes after the time appointed for holding the meeting,
the members present shall choose one of their member to be chairperson of the meeting.
There are specific attributes but no legal requirements e.g. you must appoint a person who is
honest and fair in his her dealings, reputable character, beyond reproach etc.
Under the law, a chairperson has the following duties:
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- To preserve order,
- To preside over meetings and ensure that the proceedings are regulry
conducted
- To take care that the sense of the meeting is properly ascertained
- To decide important questions and whether a proxy is valid, time keeoing, alw
and order, has to be impartial and handle issues of adjournment
- Regulation of speakers
Conduct of meetings
It should be noted that subject to the provisions in the AOA and CA the way in which the
business at the meeting is conducted is decided by the meeting itself and this is the principle
in the case of CARUTH Vs ICI LTD [1931] AC 707 at 761
In BYING Vs LONDON LIFE ASS, the court held that a meeting could be held in more than one
room provided all the rooms are connected with audio and visual links so that the people in
the rooms can see and hear what is going on in other rooms and that due steps must be taken
to direct members who are unable to get into the main meeting room.
Voting at a company meeting

The essence of voting is clear in company matters. However, as general rule, a shareholder
has the right to vote and to vote how he/she wishes. However, there are instances where the
court may nullify a members voting if it was not bonafide and or in the interest of the
company.
Methods of Voting
 By show of hands
Article 58 (1) of Table A provides that at any general meeting, a resolution put in a meeting
shall be decided by show of hands. Under the vote on a show of hands, each member is
entitled to vote in person and has one vote i.e. one man one vote and no proxies.
No member shall vote at any meeting either in person or by proxy unless he/she is paid up for
at least a share.
A director who is also a shareholder can vote on any question even if he has a personal
interest but he must declare that interest.
Article 60 of Table A provides that where the votes are equal, the chairperson shall have a
casting vote.
 By Poll
This is the voting on the strength of the shareholding. The public policy behind voting by poll
is that voting on a show of hands may first of all not reflect the wishes of the company since
the proxy votes are not counted. However, a member has a right to demand for a poll and it’s
a statutory right under S. 144 CA any provision contained in the AOA shall be void in so far as
it excludes the right to demand for a poll.
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Article 58 (1) provides that a poll may be demanded but by the following people;
 Chairperson
 Atleast three members present in person or by proxy
 By any member or members present in person or by proxy and representing not less than
one tenth of the total voting rights or all members havng the right to vote at the meeting,
or
 By any member or members holding shares in the company conferring a right to vote at
the meeting being shares on which an aggregate sum has been paid up equal to not less
than one tenth of the total sum paid up on all the shares conferring the right
Article 58 (3) provides that a demand for a poll may be withdrawn.
Section 144 (1) provides that a provision in a company’s articles is void in so far as it would
have the effect—
(a) of excluding the right to demand a poll at a general meeting on any question other than the
election of the chairperson of the meeting or the adjournment of the meeting; or
(b) of making ineffective a demand for a poll on the question which is made—
(i) by not less than five members having the right to vote at the meeting;
(ii) by a member or members representing not less than one tenth of the total voting rights of
all the members having the right to vote at the meeting; or
(iii) by a member or members holding shares in the company conferring a right to vote at the
meeting, being shares on which an aggregate sum has been paid up equal to not less than one
tenth of the total sum paid up on all shares conferring that right.
Subsection (2) provides that the instrument appointing a proxy to vote at a meeting of a
company shall be taken also to confer authority to demand or join in demanding a poll and for
the purposes of subsection (1) a demand by a person as proxy for a member shall be the same
as a demand by the member.
 By Proxy
Section 143 (1) provides that a member of a company entitled to attend and vote at a
meeting of the company is entitled to appoint another person whether a member or not as his
or her proxy to attend and vote instead of him or her and a proxy appointed to attend and
vote instead of a member of a private company shall also have the same right as the member
to speak at the meeting.
Subsection (2) provides that Subject to subsection (1), unless the articles otherwise
provide—
(a) that subsection shall not apply in the case of a company not having a share capital;
(b) member of a private company shall not be entitled to appoint more than one proxy to
attend on the same occasion; and
(c) a proxy shall not be entitled to vote except on a poll.
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Who can appoint a proxy and who can be appointed a proxy
Subsection (3) provides that every notice calling a meeting of a company having a share
capital, shall state clearly that a member entitled to attend and vote is entitled to appoint a
proxy or, where that is allowed, one or more proxies to attend and vote instead of him or her
and that a proxy need not also be a member.

Subsection (4) provides that where there is default in complying with subsection (2) in
respect of any meeting, every officer of the company who is in default is liable to a default fine
of twenty five currency points.
Subsection (5) provides that a provision in a company’s articles is void in so far as it would
have the effect of requiring the instrument appointing a proxy or any other document
necessary to show the validity of or otherwise relating to the appointment of a proxy or any
other document necessary to show the validity of or otherwise relating to the appointment of
a proxy, to be received by the company or any other person more than forty eight hours
before a meeting or adjourned meeting in order that the appointment may be effective at the
meeting.
Subsection (6) provides that where for the purpose of any meeting of a company, invitations
to appoint as proxy a person or one of a number of persons specified in the invitations are
issued at the company’s expense to only some of the members entitled to be sent a notice of
the meeting and to vote by proxy, every officer of the company who knowingly and willfully
authorises or permits their issue is liable to a default fine of twenty five currency points.
Subsection (7) provides that Subject to subsection (5), an officer shall not be liable under
that subsection by reason only of the issue to a member at his or her request in writing of a
form of appointment naming the proxy or of a list of persons willing to act as proxy if the form
or list is available on request in writing to every member entitled to vote at the meeting by
proxy.
Subsection (8) provides that this section does apply to meetings of any class of members of a
company as it applies to general meetings of the company.
A proxy in Company law is a document which authorises somebody to attend a meeting on

behalf of a shareholder. That appointment may or may not be a shareholder of the company.
 Voting Agreements
This is where shareholders enter into an arrangement to vote in a particular person or not to
vote against a particular person. In such a situation where a person has entered into an
agreement, his right to vote contrary to the agreement is curtailed. The public policy behind
voting agreements is that courts should not interfere with the freedom of competent parties
to make their own contract. Unlike ordinary contracts, a voting agreement does not bind
successors in title.
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MINUTES
Section 152 (1) of the Companies Act provides that every company shall cause minutes of
every proceedings of all meetings to be kept in books for that purpose. Under subsection (2) it
provides that the minutes must be signed by the chairperson of that meeting or the next
meeting at which they are passed. Why? Because minutes are evidence of proceedings but
unless specifically specified in the articles the minutes are not conclusive evidence of what
transpired. Thus if a resolution was passed and was not captured in the minutes, extrinsic
evidence can be adduced. In the case of RE FIRE PROOF DOORS [1916] 2 CH 142 it was held
that where the articles expressly provide that minutes duly signed shall be conclusive
evidence without further proof, extrinsic evidence cannot be called to contradict the minutes
except in the event of fraud.
Subsection (3) provides that where minutes have been made in accordance with the
proceedings at any general meeting of the company or meeting of directors then, until the
contrary is proved, the meeting shall be taken to have been duly held and convened and all
proceedings had to have been duly had and all appointments of directors or liquidators shall
be taken to be valid.
Subsection (4) provides that where a company fails to comply with subsection (1), the
Under section 153, books containing minutes shall be kept at the registered office of the
company and shall be open to inspection of any member without charge. Inspections may be
restricted to not less than 2 hours a day. A member may be furnished with a copy of the
minutes within 14 days from the date of request of the minutes. Under subsection 4 where
any inspection required under this section is refused or if any copy required under this
section is not sent within the proper time, the company and every officer of the company who
is in default is liable in respect of each offence to a fine of twenty five currency points and in
case of a continuing default, to a further fine of five currency points in respect of each day the
default continues.
Under subsection (5) In the case of a refusal or default referred to in subsection (4), the court
may, by order compel an immediate inspection of the books in respect of all proceedings of
general meetings or direct that the copies required shall be sent to the persons requiring
them.
Resolutions:
The Companies Act provides for three types of resolutions at meetings, namely, ordinary,
extra-ordinary and special.
An ordinary resolution is not defined by the Act but it is a resolution passed by a simple
majority of those voting. It is employed with respect to matters, which do not require an
extraordinary or special resolution under the articles or the Act like resolutions of the AGM.
An extra-ordinary resolution is not defined by the Act and is passed by a three quarters
majority at a general meeting of which notice specifying the intention to propose the
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resolution as an extraordinary resolution is required for specific matters relating to winding
up, although the articles may require one in other cases such as the modification of class
rights at class meetings.
A special resolution
Section 148 (1) provides that a resolution shall be a special resolution when it has been
passed by a majority of not less than three fourths of such members as, being entitled so to do,
vote in person or, where proxies are allowed, by proxy, at a general meeting of which notice
specifying the intention to propose the resolution as a special resolution has been duly given.
Subsection (2) provides that Subject to subsection (1), if it is agreed by a majority in number
of the members having the right to attend and vote at a meeting referred to in subsection (1),
being a majority together holding not less than ninety five per cent in nominal value of the
shares giving that right or in the case of a company not having a share capital, together
representing not less than ninety five percent of the total voting rights at that meeting of all
the members, a resolution may be proposed and passed as a special resolution at a meeting of
which less than twenty one days’ notice has been given.
Subsection (3) provides that at any meeting at which a special resolution is submitted to be
passed, a declaration of the chairperson that the resolution is carried shall, unless a poll is
demanded, be conclusive evidence of the fact without proof of the number or proportion of
the votes recorded in favour of or against the resolution.
Subsection (4) provides that in computing the majority on a poll demanded on the question
that a special resolution be passed, reference shall be had to the number of votes cast for and
against the resolution.
Subsection (5) provides that for the purposes of this section, notice of a meeting shall be
taken to be duly given and the meeting to be duly held when the notice is given and the
meeting held in the manner provided by this Act or the articles.
Activity: Discuss the various meetings through which members are able to participate in the
management of meetings.
Solution: This question is testing the students’ ability to analyze the different meetings that
members can hold as a way of managing the company’s affairs. The student will be expected
to define who a member is and further discuss the different meetings that members call.
Test Questions
1. The shareholders have an opportunity of influencing the company's management
through the company's meetings. Discuss the different meetings through which
shareholders participate in management of companies.
2. Discuss the concept of notice in company meetings
3. Discuss the different resolutions that may be passed at a meeting
4. Discuss the different methods of voting that are available during meetings.
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TOPIC EIGHT
MANAGEMENT OF A COMPANY THROUGH THE BOARD OF DIRECTORS

1. Understand the meaning of a director and the different types of directors;
2. Understand the procedure of appointment of directors;
3. Understand and analyze the role of nominee and alternate directors;
4. Understand the qualifications and disqualifications to the position of director;
5. Understand the procedure for removal of directors;
6. Analyze and Evaluate the role of Directors in the management of companies; and
7. Understand the procedures regarding meetings of directors
Management of the Company through Board of Directors

There is no definition of a director whether in the Act or by case law. Nevertheless, S.2 of the
Act states that a director includes any person occupying the position of a director by whatever
name called and shall include a shadow director
Categories of directors
i) defacto director
ii) dejure director
 Defacto directors
These operate or act as directors. A defacto director assumes the office of a director and is
held out as a director by the company. There must be proof or evidence that the person
undertook the functions of the director and discharged those functions and the company was
aware. R Vs CAMPS (1962) EA.403. Camps never kept proper books of accounts, never held
AGM’s and was an unqualified director of a company contrary to S.142. Court held that where
the acquisition of a share qualification is not a condition precedent in the appointment of a
director, he may be appointed and act before he qualifies and his acts as a director are valid if
done before he is bound by law to acquire his qualification share. The East Africa Court
further held that as a matter of law (dejure), he was not a director but as a matter of fact
(defacto), he was a director.
 Executive and Non-Executive Directors

Executive directors are directors appointed to manage the day to day affairs of the company
e.g. the Executive Director of PPDA, while Non- Executive directors are not involved in the day
to day management of the company.
 Shadow directors:
Includes any person occupying the position of director by whatever name called and shall
include a shadow director. Shadow directors operate behind the scenes.
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Appointment of Directors
Directors are appointed by a company in a general meeting in conformity with the Articles of
Association. The AOA do usually contain an article on appointment of directors and how to fill
vacant posts of directors. It must be noted that appointment of directors is normally at the
AGM. Unless the Articles empower the board to appoint or co-opt directors, the inherent
power to appoint directors is in the general meeting.
Once directors are appointed, the registrar of companies must be notified. The company fills
in a form called Company Form No 7 which indicates the particulars of the directors.
Number of directors
Section 185 provides that every company other than a private company, registered after the
commencement of this Act shall have at least two directors, and every company registered
before that date other than a private company and every private company shall have at least
one director.
Prohibition of certain persons being sole director or secretary

Section 188 provides that a company shall not—
(a) have as secretary to the company, a corporation the sole director of which is a sole
director of the company; or
(b) have as sole director of the company a corporation the sole director of which is secretary
to the company.
Section 189 provides that a provision requiring or authorising a thing to be done by or to a

director and the secretary shall not be satisfied by its being done by or to the same person
acting both as director and as or in place of, the secretary.
Minimum age for appointment of directors and retirement of directors over the age
limit.
Section 196 provides that a person shall not be capable of being appointed a director of a
company if at the time of appointment he or she has not attained the age of eighteen years.
Section 197 (1) provides that a person who is appointed or to his or her knowledge
proposed to be appointed director of a company at a time before he or she has attained the
age of eighteen years shall give notice of his or her age to the company.

Subsection (2) provides that a person who—
(a) fails to give notice of his or her age as required by this section; or
(b) acts as director under any appointment which is invalid by reason of his or her age,
commits an offence and is on conviction liable to a fine not exceeding ten currency points for
every day during which the failure continues or during which he or she continues to act as
described in this subsection.
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Nominee director of a single member company.
Section 186 (1) provides that a single member shall nominate two individuals, one of whom
shall become nominee director in case of death of the single member and the other shall
become alternate nominee director to work as nominee director in case of non-availability of
the nominee director.
Duties of the nominee director

Subsection (2) provides that the nominee director shall—
(a) manage the affairs of the company in case of death of the single member until the transfer
of shares to legal heirs of the single member;
(b) inform the registrar of the death of the single member, provide particulars of the legal
heirs and in case of any impediment report the circumstances seeking directions within
fifteen days after the death of the single member;
(c) transfer the shares to the legal heirs of the single member; and
(d) call the general meeting of the members to elect directors.
Role of the Registrar

Subsection (3) provides that in case of any impediment due to transfer of shares, or election
of directors or any other circumstances, the registrar shall call, or direct the calling of the
meeting of legal heirs, in exercise of the powers conferred by section 138 in such manner as
he or she deems fit and give such directions with regard to election of directors and making
alteration in the articles, if any, and such ancillary and consequential directions as he or she
thinks expedient in relation to calling, holding and conducting of the meeting.
Qualifications of Directors
Section 192 requires that before a person can be appointed a director of a company with
share capital, he must have:
 signed and delivered for registration his consent to act as a director.
 He or she has;
I. Signed the memorandum for a number of shares not less than his or her
qualification, if any;
II. taken from the company and paid or agreed to pay for his or her
qualification shares, if any
III. signed and delivered to the registrar for registration an undertaking in
writing to take from the company and pay for his or her qualification shares,
if any; or
IV. made and delivered to the registrar for registration a statutory declaration
to the effect that a number of shares, not less than his or her qualification, if
any, are registered in his or her name.
subsection (4) provides that on the application for registration of the memorandum and
articles of a company, the applicant shall deliver to the registrar a list of the persons who have
consented to be directors of the company and, if the list contains the name of any person who
has not consented, the applicant commits an offence and is liable on conviction to a fine not
exceeding five hundred currency points.
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Exclusion of this requirement
Subsection (5) provides that this section does not apply to—
(a) company not having a share capital;
(b) a private company;
(c) a company which was a private company before becoming a public company; or
(d) a prospectus issued by or on behalf of a company after the expiration of one year from the
date on which the company was entitled to commence business.
Duration within which to acquire Share qualifications of directors

Section 193 (1) provides that Without prejudice to the restrictions imposed by section 192, it
shall be the duty of every director who is by the articles of the company required to hold a
specified share qualification and who is not already qualified, to obtain his or her qualification
within two months after his or her appointment or such shorter time as may be fixed by the
articles.
Default in acquiring qualification shares

Section 193 (3) provides that the office of director of a company shall be vacated if the
director does not within such shorter time as may be fixed by the articles, obtain his or her
qualification or if after the expiration of that period or shorter time he or she ceases at any
time to hold his or her qualification.
Subsection (4) provides that a person vacating office under this section shall be incapable of
being re-appointed director of the company until he or she has obtained his or her
qualification.
Subsection (5) provides that where after the expiration of the period or shorter time any
unqualified person acts as a director of the company, he or she commits an offence and is
liable on conviction to a fine not exceeding fifty currency points for every day between the
expiration of the period or shorter time or the day on which he or she ceased to be qualified
as the case may be and the last day on which it is proved that he or she acted as a director.
Disqualification of directors.
Section 199 (1) provides that a person shall be disqualified from acting as a director for a
period of three years if he or she fails to—
(a) keep proper accounting records;
(b) prepare and file accounts;
(c) send returns to registrar;
(d) file tax returns and pay tax; or
(r) allows a company to trade while insolvent
(2) A person disqualified as a director shall not—
(a) be a director of any company;
(b) act as a director before the expiry of the disqualification period;
(c) influence the running of a company through the directors;
(d) be involved in the formation of a new company;
(e) act in a way that promotes a company;
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Article 88 of Table A provides for disqualification of directors under the following grounds;
(a) ceases to be a director by virtue of section 195 of the Act (section 195 provides for
removal of directors), or
(b) becomes bankrupt or
(c) becomes prohibited from being a director by reason or any order made under section 201
of the Act (section 201 is discussed below) or
(d) becomes of unsound mind
(e) resigns his/her office by notice in writing to the company or
(f) is for more than six months absent without permission of the directors from meetings of
the directors during that period
Provisions as to undischarged bankrupts acting as directors.

Section 200 (1) provides that where a person who has been declared bankrupt or insolvent
by a competent court in Uganda or elsewhere and has not received his or her discharge acts as
director of or directly or indirectly takes part in or is concerned in the management of, any
company except with the leave of the court, he or she commits an offence and is liable on
conviction to imprisonment not exceeding two years or to a fine not exceeding one thousand
and twenty currency points or both.
Subsection (2) provides that the leave of the court for the purposes of this section shall not
be given unless notice of intention to apply for it has been served on the official receiver and it
shall be the duty of the official receiver, if he or she is of opinion that it is contrary to the
public interest that the application should be granted, to attend on the hearing of and opposed
the granting of the application.
Subsection (3) provides that in this section—

“company” includes an unregistered company and a company incorporated outside Uganda
which has an established place of business within Uganda; and
“official receiver” means the official receiver within the meaning of the Insolvency Act, 2011.
Power to restrain fraudulent persons from managing companies.

Section 201 (1) provides that where—
(a) a person is convicted of any offence in connection with the promotion, formation or
management of a company; or
(b) in the course of winding up a company it appears that a person—
(i) has committed an offence for which he or she is liable whether he or she has been
convicted or not under this Act; or
(ii) has otherwise committed, while an officer of the company, any fraud in relation to the
company or of any breach of his or her duty to the company, the court may make an order
that that person shall not without the leave of the court, be a director of or in any way
whether directly or indirectly, be concerned or take part in the management of the company
for a period not exceeding five years as may be specified in the order.
Procedure for grant of the Order

Subsection (2) provides that a person intending to apply for the making of an order under
this section by the court having jurisdiction to wind up a company shall give not less than ten
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days’ notice of his or her intention to the person against whom the order is sought and on the
hearing of the application the last mentioned person may appear and himself or herself give
evidence or call witnesses.
Subsection (3) provides that an application for the making of an order under this section by
the court having jurisdiction to wind up a company may be made by the official receiver or by
the liquidator of the company or by a person who is or has been a member or creditor of the
company and on the hearing of any application for an order under this section by the official
receiver or the liquidator or of any application for leave under this section by a person against
whom an order has been made on the application of the official receiver or the liquidator, the
official receiver or liquidator shall appear and call the attention of the court to any matters
which seem to him or her to be relevant and may himself or herself give evidence or call
witnesses.
Subsection (4) provides that an order may be made by virtue of subsection (1)(b)(ii)
notwithstanding that the person concerned may be criminally liable in respect of the matters
on the ground of which the order is to be made.
Default in complying with the Order

Subsection (5) provides that where any person acts in contravention of an order made under
this section, he or she commits an offence and is liable on conviction to imprisonment not
exceeding one year or to a fine not exceeding one hundred currency points or both.
Subsection (6) provides that for the purposes of subsection (1)—

(a) “the court” in relation to the making of an order against any person by virtue of subsection
(1)(a) of that subsection, includes the court before which he or she is convicted as well as any
court having jurisdiction to wind up the company and in relation to the granting of leave
means any court having jurisdiction to wind up the company in respect of which leave is
sought;
(b) “officer” includes any person in accordance with whose direction or instructions the
directors of the company.
Dismissal/Removal of Directors
The CA has laid down procedures to be followed when dismissing a director. Before a director
is dismissed/removed he must be given a special notice for the purpose. It is not an ordinary
letter; reasons for the dismissal must be given.
Section 195 (1) and Article 96 (1) of Table A provides that a company may by ordinary
resolution remove a director before the expiration of his or her period of office,
notwithstanding anything in its articles or in any agreement between the company and the
director but this subsection shall not in the case of a private company authorise the removal
of a director holding office for life at the commencement of this Act whether or not subject to
retirement under an age-limited by virtue of the articles or otherwise.
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Procedure for removal of director
Subsection (2) provides that Special notice shall be required of any resolution to remove a
director under this section or to appoint somebody instead of a director so removed at the
meeting at which he or she is removed.
In BUGERERE GROWERS Vs SEBADDUKA, the court pointed out that the effect of the
provision with regard to special notice is very important and as long as special notice has
been made it does not matter whether the company convenes the extra-ordinary general
meeting within one week.
Subsection (3) provides that on receipt of notice of an intended resolution to remove a

director under this section the company shall send a copy of the notice to the director
concerned and the director whether or not he or she is a member of the company shall be
entitled to be heard on the resolution at the meeting.
Subsection (4) provides that where notice is given of an intended resolution to remove a
director under this section and the director concerned makes with respect to it
representations in writing to the company in respect of the intended resolution and requests
their notification to members of the company, the company shall as soon as practicable—
(a) in any notice of the resolution given to members of the company state the fact of the
representation having been made; and
(b) send a copy of the representations to every member of the company to whom notice of the
meeting is sent whether before or after receipt of the representations by the company.
Subsection (5) provides that where a copy of the representations is not sent as required by
subsection (3) because it was received too late or because of the company’s default, the
director may without prejudice to his or her right to be heard orally require that the
representations shall be read out at the meeting, except that copies of the representations
need not be sent out and the representation need not be read out at the meeting if, on the
application either of the company or of any other person who claims to be aggrieved, the
court is satisfied that the rights conferred by this section are being abused to secure needless
publicity for defamatory matter.
Subsection (6) provides that the court may in the circumstances described in subsection (5)
order the company’s costs on an application under this section to be paid in whole or in part
by the director, notwithstanding that he or she is not a party to the application.
Subsection (7) and Article 97 (1) of Table A provides that a vacancy created by the removal
of a director under this section, if not filled at the meeting at which the director is removed,
may be filled as a casual vacancy.
Subsection (8) and Article 97 (3) of Table A provides that a person appointed director in
place of a person removed under this section shall be treated, for the purpose of determining
the time at which he or she or any other director is to retire as if he or she had become
director on the day on which the person in whose place he or she is appointed was last
appointed a director.
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Subsection (9) provides that this section does not deprive a person removed under this
section of compensation or damages payable to him or her in respect of the termination of his
or her appointment as director or of any appointment terminating with that as director or as
derogating from any power to remove a director which may exist apart from this section.
Section 191 provides that the acts of a director or manager shall be valid notwithstanding
any defect that may afterwards be discovered in his or her appointment or qualification.
Remuneration of Directors
It is the law that directors have no right of payment for their services while performing their
functions thus a director has no automatic right to remuneration and as it was emphasized in
Re George Newman & Co. (1895) 1 ch.674, the directors have no right to be paid for their
services and cannot pay themselves or each other or make presents to themselves out of the
company's assets unless authorised so to do by the instrument which regulates the company
or by the shareholders at a properly convened meeting.
Legal holding of the holding in the above case

i) Directors have no automatic right to remuneration/ to be paid
ii) Payment can only be made if there is a provision within the Articles or where there
is a resolution of a company meeting
Proceedings of BOD
The rule is that directors must act collectively and any director who is prevented from
carrying out his duties can seek an injunction from court to restrain his co-directors.
Article 98 (1) of Table A provides that the directors may meet together for the dispatch of
business, adjourn and otherwise regulate their meetings as they think fit.
However, there is no legal requirement that in the discharge of their duties, directors must
meet formally. The mode of meeting is said to have been agreed upon as implied by Barrow
Vs Porter (1914) 1 ch.895. In this case, the company had only 2 directors who developed
personal differences to the extent that they could no longer meet. One director, staying in
town wanted to carry out a transaction. He waited for the other village director at the railway
station and told him about an incumbent meeting which the other one never agreed with. The
town director met alone and elaborated on many issues and purported to have resolved
together with the director in the village. The Court held any of those resolutions that the town
director purported to pass invalid because the directors never agreed on the mode of the
meeting.
Voting
Article 98 (2) of Table A provides that decisions shall be arrived at by a majority of the
votes.
Article 98 (3) of Table A provides that where there is an inequality of votes, the chairperson
shall have a second or casting vote.
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Who calls for the meeting?
Article 98 (4) of Table A provides that a director or secretary at the requisition of a director
shall at any time summon a meeting of the directors.
Notice of meeting
Article 98 (5) of Table A provides that it is not necessary to give notice of a meeting of
directors to any director who is for the time being absent from Uganda.
Quroum
Article 99 of Table A provides that the quorum for the transaction of the business of the
directors may be fixed by the directors and if not fixed the quorum is two.
In-case of vacancy
Article 100 of Table A provides that the continuing directors may act notwithstanding any
vacancy in their body, but, if and so long as their number is reduced below the number fixed
by or under the regulations of the company as the necessary quorum of directors, the
continuing directors or director may act for the purpose of increasing the number of directors
to that number or of summoning a general meeting of the company but for no other purpose.
Chairperson
Article 101 of Table A provides that the directors may elect a chairperson of their meetings
and determine the period for which he or she is to hold office, but of no chairperson is elected,
or if at any meeting the chairperson is not present within five minutes after the time
appointed for holding the meeting, the directors present may choose one of their number to
be a chairperson of the meeting.
Delegation of powers and duties

Directors have no right to delegate unless authorized by the Articles of Association. Article
102 (1) of Table A provides that directors may delegate any of their powers to committees
consisting of such member or members of their body as they think fit.
Article 102 (1) of Table A provides that a committee formed under sub regulation (1) shall,
in the exercise of the powers delegated conform to any regulations that may be imposed on it
by the directors.
Managing Director
Article 107 (1) of Table A provides that the directors may from time to time appoint one or
more of their fellow directors to the office of the managing director for such period and on
such terms as they think fit, and subject to the terms of any agreement entered into in any
particular case, may revoke the appointment.
Article 107 (2) of Table A provides that a director appointed under subsection (1) shall not
while holding office be subject to retirement by rotation or be taken into account in
determining the rotation of retirement of directors, but his or her appointment shall be
automatically determined if he or she ceases from any cause to be a director.
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Article 108 of Table A provides that a managing director shall receive such remuneration
whether by way of salary, commission or participation in profits or partly in one way and
partly in another as the directors may determine.
Article 109 of Table A provides that the directors may entrust to and confer upon a
managing director any of the powers exercisable by them upon such terms and conditions
and with such restrictions as they may think fit, and either collaterally with or to the exclusion
of their powers and may from time to time revoke, withdraw alter or vary all or any of those
powers.
Resolution of directors
Article 106 of Table A provides that a resolution in writing, signed by all the directors for the
time being entitled to receive notice of a meeting of directors is valid and effectual as if it had
been passed at a meeting duly convened and held.
Rotation
Further, good corporate governance provides for rotation of directors and most AOA do
provide for rotation. Rotation is the process where directors retire to give other members a
chance to participate in the management of the company.
Article 89 of Table A provides that at the first annual general meeting of the company all the
directors shall retire from office and at the annual general meeting in every subsequent year
one third of the directors for the time being or if their number is not three or a multiple of
three then the number to one third shall retire from office.
Procedure regarding rotation

Article 90 of Table A provides that the directors to retire in every year shall be those who
have been longest in office since their last election but as between persons who became
directors on the same day those to retire shall unless they otherwise agree among themselves
be determined by lot.
Article 91 of Table A provides that a retiring director shall be eligible for re-election.
Conflict Between Directors and Shareholders

As between shareholders and directors, the issue of who has the final say in the management
of the company will depend on the articles of association. Where the company adopts Article
80 of Table A, the Articles provide that the business of the company shall be managed by the
Board of Directors i.e. shareholders cannot interfere in such management unless they are
specifically empowered by the articles on such issue.
THE DUTIES OF DIRECTORS

Common law developed duties and concepts which vested upon directors with specific
responsibilities. These responsibilities revolve around the directors’ role in the management
of the assets of the company on behalf of the other shareholders.
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In addition, the responsibilities also took into account the fact that the company was
recognized as a separate entity from its members. Accordingly, directors were viewed as
agents of the shareholders and as such, they also became trustees for the shareholders.
In light of the aforesaid, the board of directors was seen as fiduciaries and as such, principles
of agency and the law of trust had to be applied to directors. A fiduciary is a person in a
position of confidence or trust. He has a duty of loyalty and must act in good faith in the
interest of a person who depends on the fiduciary to act on his/her behalf. A fiduciary must
also act with care on behalf of the person(s) for whom he is a fiduciary.
There are other corresponding duties that developed in corporate law and these duties
constitute further duties of directors but they all rotate around the view of consideration that
a director is a fiduciary.
As far as directors are concerned, they have two duties to discharge in respect of a company.
1. The duty of skill and care
2. The duty of good faith
Duty of Skill and Care

There is no criteria for measuring the standard of duty of skill and care expected of a director
and consequently this will depend on the circumstances of each case. Nevertheless, courts
have tried to set some guidelines as to what these duties entail. In Re City Equitable Fire
Insurance Co. Ltd, the directors left the company's management to the Managing Director
and as a result, a number of the company's assets disappeared and a number of misleading
items were entered into the books.
While holding the directors liable for breach of duty of skill and care, the court laid down two
criteria against which the standard of duty of a director must be judged.
 It pointed out that we have to look at the nature of a company's business. Where such a
company is a small concern, the standard of duty expected of a director is not as high
as in a big company.
 The mode in which the company's work is distributed among various officers has to be
determined e.g. directors of operations, finance, etc. Where the company's operations
are divided among many directors duty of skill and care is higher than otherwise.
The Common law standard of care is a lenient standard and at times it is impossible to find a
party liable for this breach of duty of care. In RE CARDIKK SAVINGS BANK [1892] 2 CH 100,
Mr Bute had become a director at the age of 6. He did not attend meetings until he was 27.
Financial difficulties occurred at the Caddik savings bank and the liquidator sought for
compensation from Bute for the imprudent decisions that led to the downfall of the bank. The
court held that Bute was not liable for his failure to attend the company meetings. It further
held that directors are not responsible for fraud perpetuated in the company and that the
degree of care required of a director is that which is expected to be taken in the particular
circumstances and also taking into account the particular directors abilities.
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In RE-BRAZILIAN RUBBER PLANTATIONS [1920] a director who was 75 years old and deaf
was required to exercise the degree of care that might be expected of someone who was 75
years old and deaf. In the same case, the degree of care required of a person who proclaimed
to be ignorant of business was the degree of care that would be expected of person who was
ignorant of business. Accordingly, in this case, these two directors were not held responsible
for the fraud in the company.
The duty of good faith

In determining whether or not a director or any other officer has breached his duty of good
faith to the company, we must always remember that the officer stands in a fiduciary
relationship to his company. Whenever a party has an upper hand in any relationship e.g. a
Lawyer -client, doctor-patient, teacher-pupil, trustee-beneficiary, etc in any commercial
transaction, we term this party's position as a fiduciary position and any cheating by this
party can be upheld in courts of law.
The duty of good faith is divided into a number of components.

 Use of directors’ powers.
As agents of the company, directors are supposed to act within the scope of their authority
and must exercise the power vested upon them for a proper purpose. They must identify the
purpose for which the power was given and must use that power for that specific purpose.
If the power was exercised by the directors for a proper purpose the court could proceed to
the next step of analysing whether the exercise for this power was done in good faith and in
the best interest of the company and this analysis has been referred to as the proper analysis
test.
This is the basic principle and is illustrated in the case of HOGG V CRAMPTON LTD (1962)
Ch. 64 in which the directors honestly feared that the plaintiff who was the majority
shareholder would take over the company and that this was not in the best interests of the
company. The directors created a share fund in favour of the workers but only the directors
could vote in respect of those shares. Using that voting power, they defeated a take over bid
by the majority shareholder i.e. plaintiff. It was held that the directors were liable for having
utilised their powers for an improper purpose, which according to the court they wanted to
defeat the majority shareholder. The decision was left for the general meeting, which re-
endorsed the director’s results, and so Hogg never achieved his objectives.
In HOWARD SMITH Vs AMPOL PETROLEUM LTD [1974] 2 WLR 689 the Court instead of
looking out for a specific purpose or set of purposes, it asked whether the purpose for which
the power was exercised would fit within any of the purposes for which the power was likely
to have been given. This duty manifests itself in a number of ways;
- the duty of care does not require or directors are not obliged to give continuous
attention to the companies’ affairs but if directors have information that
requires further investigation but fail to do so, that is a breach of that duty of
care. Thus the standard of care is for a director to be responsible and not
passive
- directors act collectively as a board in the supervision of the company.
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However, they are not a homogeneous group and their conduct is not to be
governed by a single objective standard and the courts have taken into account
personal knowledge and background of the directors individually and severally
eg directors with superior qualifications or those with experienced business
background cannot stand in the same position as any other director
 Dealing with the company's properties.

Directors have a duty to protect the company's properties and not to expend them anyhow. If
they do so, they are liable to make good the loss. In the case of Re George Newman (Supra)
the term company's property is widely defined to include contracts to which the company is
entitled even if the company has lost no funds at all.
In Cooks Vs Deeks (1916) AC 554 Deeks as a director entered into a contract for himself
rather than the company and cooks co-director sued. It was held that Deeks had breached the
duty of good faith and he paid the proceeds to the company i.e. the profits. The court tried to
draw a distinction in this way i.e. where the company's property belongs to the company both
at law and equity, then the directors cannot appropriate such property. Also where the
property belongs to the company at law but not at equity, again the directors cannot
appropriate such property. A contract entered into by the director is his by law but not by
equity if the company was dealing in such contracts.
 Avoid Conflict of interest/Making Secret Profits out of the Company.

A director must never use his position to make any profits at the expense of the company. The
rule in the case of Aberdeen Rail Co Vs Blaike Bros (1843) AER "R" 249; It was stated that
since a director is in a fiduciary relationship, he is not allowed to enter into any transaction in
which he has a personal interest if to do so will result into a conflict with the interest of the
company. The facts of the case are that AR had a contract to purchase chairs from Blaike Bros
which was a partnership. One of the partners of Blaike bros was a director of AR Co ltd. The
contract required the delivery of 4,100 tons of chairs over a couple of years. AR Co ltd
accepted delivery of about 2,700 tons of chairs but then refused to take delivery of other
chairs. Blaike Bros sought for specific performance or damages in lieu thereof. One of the
defences by AR Co ltd was that the contract was voidable since there was a conflict of interest.
The court held that AR Co ltd could avoid the contract and noted further that the co acts
through its agents and that its agents have a duty not to have their interests and the interests
of their principal conflict. That the rule is strict rule and there can be no question of fairness.
Accordingly in this case, the contract was voidable notwithstanding the fact that Blaike was
just one of the 16 directors and all the other directors voted in favour of the contract.
This rule in Blaike's case has been slightly modified since it was never regarded fair. S 200
and article 84 of Table A modify the rule, to allow a director make profit out of the transaction
provided he has disclosed his interest to the Board. In the case of Hely Hutchinson (Supra), it
was said that where the director has not disclosed his interest in the contract, this does not
make the contract void but voidable.
Article 84 (1) of Table A provides that a director who is in any way whether directly or
indirectly interested in a contract or proposed contract with the company shall declare the
nature of his or her interest at a meeting of the directors.
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 Insider trading.
This is where a well-positioned officer in the company uses sensitive and important
information about that company to his benefit. This is more common in deals concerning
securities and capital markets. In the case of Purcival Vs Wright (1902) I Ch. 421. The
directors of the company bought shares from X whose value stood at £ 12 per share on the
open market. The directors did not disclose to him that negotiations were being conducted for
the sale of the company's shares at a higher price than they were paying X. X sued to have the
sale set aside. It was held that the sale was binding as the directors were under no obligations
to disclose the negotiations to X. That the directors duty of good faith is owed to the company
and rather than individual shareholders and so they failed.
Duties of directors under the Companies Act

Section 198 provides for the duties of the directors shall include the following—
(a) act in a manner that promotes the success of the business of the company;
(b) exercise a degree of skill and care as a reasonable person would do looking after their own
business;
(c) act in good faith in the interests of the company as a whole, and this shall include—
(i) treating all shareholders equally;
(ii) avoiding conflicts of interest;
(iii) declaring any conflicts of interest;
(iv) not making personal profits at the company's expense;
(v) not accepting benefits that will compromise him or her from third parties; and
(d) ensure compliance with this Act and any other law.
Disclosure of Conflict of Interest

Section 218 (1) provides that subject to this section, a director of a company who is in any
way, directly or indirectly, interested in a contract or proposed contract with the company
shall declare the nature of his or her interest at a meeting of the directors of the company.
Subsection (2) provides that in the case of a proposed contract the declaration required by
this section to be made by a director shall be made at the meeting of the directors at which the
question of entering into the contract is first taken into consideration or if the director was
not at the date of that meeting interested in the proposed contract, at the next meeting of the
directors held after he or she became so interested and in a case where the director becomes
interested in a contract after it is made, the declaration shall be made at the first meeting of
the directors held after the director becomes so interested.
Subsection (3) provides that for purposes of this section, a general notice given to the
directors of a company by a director to the effect that he or she is a member of a specified
company or firm or acts for the company in a specified capacity and is to be regarded as
interested in any contract which may, after the date of the notice, be made with that company
or firm or with himself or herself in that specified capacity shall be taken to be a sufficient
declaration of interest in relation to any contract so made but the notice shall not be of effect
unless either it is given at a meeting of the directors or the director takes reasonable steps to
secure that it is brought up and read at the next meeting of the directors after it is given.
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Subsection (4) provides that a director who fails to comply with the above provisions is
liable to a fine not exceeding two hundred currency points.
Subsection (5) provides that nothing in this section shall be taken to prejudice the operation
of any rule of law restricting directors of a company from having any interest in contract with
the company.
Register of directors and secretaries.

Section 228 (1) provides that company shall keep at its registered office a register of its
directors and secretaries.
Contents of the Register

Subsection (2) provides that the register of directors and secretaries shall contain the
following particulars with respect to each director—
(a) in the case of an individual, his or her present first name and surname, his or her
residential and postal address, his or her nationality and, if that nationality is not his or her
nationality of origin, his or her business occupation, if any, particulars of all other
directorships held by him or her in the case of a company subject to section 197, the date of
his or her birth; and
(b) in the case of a corporation, its corporate name and registered or principal office and
postal address.
Subsection (3) provides that Notwithstanding subsection (2), it is not necessary for the
register to contain particulars of directorships held by a director in companies of which the
company is the wholly-owned subsidiary or which is the wholly-owned subsidiary or which
are the wholly-owned subsidiaries either of the company or of another company of which the
company is the wholly-owned subsidiary and for the purposes of this subsection—
(a) "company" includes any body corporate incorporated in Uganda; and
(b) a body corporate shall be taken to be the wholly-owned subsidiary of another if it has no
members except that other and that other’s wholly-owned subsidiary and its or their
nominees.
Contents of the register with regard to the secretary

Subsection (4) provides that the register shall contain the following particulars with respect
to the secretary or, where there are joint secretaries, with respect to each of them—
(a) in the case of an individual, his or her present first name and surname, any former first
name and surname and his or her usual residential and postal address; and
(b) in the case of a corporation, its corporate name and registered office, except where all the
partners in a firm are joint secretaries, the name and principal office of the firm may be stated
instead of those particulars.
Subsection (5) provides that the company shall, within the periods respectively mentioned in
subsection (6), send to the registrar a return in the prescribed form containing the particulars
specified in the register and a notification in the prescribed form of any change among its
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directors or in its secretary or in any of the particulars contained in the register, specifying
the date of the change.
Subsection (6) provides that the periods referred to in subsection (5) are the following—
(a) the period within which the return is to be sent shall be fourteen days from the
appointment of the first directors of the company; and
(b) the period within which the notification of change is to be sent shall be fourteen days from
the happening of the change.
Subsection (7) provides that the register to be kept under this section shall, during business
hours be open to the inspection of any member of the company without charge and of any
other person on payment of one currency point or a less sum as the company may prescribe,
for each inspection.
Subsection (8) provides that a company may impose reasonable restrictions by its articles or
in general meeting on inspection under subsection (7) but the restriction shall not be such as
to reduce the period of inspection to less that two hours in each day.
Subsection (9) provides that where any inspection required under this section is refused or
where there is default in complying with subsection (1), (2), (3), (4) or (6) the company and
every officer of the company who is in default is liable to a default fine of twenty five currency
points.
Subsection (10) provides that in the case of a refusal, the court may, by order compel an
immediate inspection of the register.
Subsection (11) provides that for the purposes of this section—

(a) person in accordance with whose directions or instructions the directors of a company are
accustomed to act shall be taken to be a director and officer of the company;
(b) "first name" includes a forename;
(c) "surname" in the case of a peer or person usually known by a title different from his or her
surname, means that title; and
(d) "former first name" and "former surname" do not include—
(i) in the case of any person, a former first name or surname where that name or surname
was changed or disused before the person bearing the name attained the age of eighteen
years or has been changed or disused for a period of not less than twenty years; or
(ii) in the case of a married woman the name or surname by which she was known previous
to the marriage.
Activity
Benita, Graham and Grant have been appointed directors in Standard Chartered Bank. They
wish to acquaint themselves with the different duties they owe to the bank and what would
happen in the event of breach. Discuss.
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Solution
This question is testing the students ability to analyze the different duties owed by directors
to the company they manage. The student will be expected to define who a director is and
further discuss the different duties that directors owe to a company. The student is also
expected to discuss the different remedies that are available to the company in case the
directors are in breach of their duties.
Test Questions
1. Discuss the qualifications and disqualifications in regard to directors
2. Discuss the right of directors to receive a remuneration
3. Discuss the different types of directors
4. Discuss the various grounds under which a director may be disqualified
5. Discuss the procedure that has to be followed before directors can be removed
from office
6. A company has no mind of its own. It operates through its agents called directors.
The directors are placed in such a position of trust that the law imposes certain
duties on them. Discuss
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TOPIC NINE
THE COMPANY SECRETARY
1. Understand and evaluate the role of the company secretary in regard to companies; and
2. Analyze the duties that the company secretary owes a company.
THE COMPANY SECRETARY

A company secretary is not defined under the Companies Act.
Appointment
Article 110 (1) of Table A provides that the secretary shall be appointed by the directors on
such terms and conditions as they may think fit.
Article 110 (2) of Table A provides that a secretary appointed under subregulation (1) may
be removed by the directors.
Qualifications of company secretaries.

These are provided for under section 190 of the Companies Act.
(1) It is the duty of the directors of a public company to take all reasonable steps to ensure
that the secretary, or each joint secretary of the company is a person who appears to them to
have the requisite knowledge and experience to discharge the functions of secretary of the
company and who—
(a) is an advocate of the High Court;
(b) is a person who, by virtue of his or her holding or having held any other position or his or
her being a member of any other body, appears to the directors to be capable of discharging
those functions;
(c) is a member of or is qualified to be a member of any of the bodies specified in subsection
(2).
(2) The bodies referred to in subsection (1)(c) are—
(a) the Institute of Chartered Public Accountants in Uganda; or
(b) the Institute of Chartered Secretaries and Administrators.
Article 111 of Table A provides that a person shall not be appointed or hold office as
secretary who is;
(a) The sole director of the company
(b) A corporation the sole director of which is the sole director of the company
(c) The sole director or a corporation which is the sole director of the company
Duties and Authority of Company Secretary

There is no clear-cut definition for the secretary's duties but these will depend on the
company in question. Nevertheless, a company's secretary is a very important person or
officer of the company who can legally bind the company in its transactions.
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In Panorama Development (Guildford Ltd) Vs Fe Fideli's Furnishings Fabrics Ltd (1971)
3WLR 12, the company's secretary ordered self drive cars using a different companies
letterheads and when the cars arrived, he diverted them to his personal use. When the
defendant company was sued for the price of the cars, it raised a defence that it was not
bound because the secretary who made the order was an insignificant person in a company
(depending on earlier conception of the secretary). The court of appeal rejected the defence
and pointed out that the secretary is an important company officer with in-exhaustive
powers, duties and responsibilities who can make representations on behalf of the company
and can enter into contracts in the day to day running of the company's business.
Consequently, because of his position in the company, the secretary can be held liable not only
to his company but also to the shareholders in civil suits.
Generally the Company Secretary will need to fulfil the following duties;
1. Board Meetings
Facilitating the smooth operation of the company’s formal decision making and reporting
machinery; organising board and board committees meetings (e.g. audit, remuneration,
nomination committees etc.); formulating meeting agendas with the chairman and/or the
chief executive and advising management on content and organisation of memoranda or
presentations for the meeting; collecting, organising and distributing such information,
documents or other papers required for the meeting; ensuring that all meetings are minuted
and that the minute books are maintained with certified copies of the minutes and that all
board committees are properly constituted and provided with clear terms of reference.
2. General Meetings
Ensuring that an annual general meeting is held in accordance with the requirements of the
Companies Act and the companies’ Articles of Association; obtaining internal and external
agreement to all documentation for circulation to shareholders; preparing and issuing notices
of meetings, and distributing proxy forms; trying to prepare directors for any shareholder
questions and helping them create briefing materials; overseeing the preparations for
security arrangements. At meetings, ensuring that proxy forms are correctly processed and
that the voting is carried out accurately; co-ordinating the administration and minuting of
meetings.
3. Memorandum & Articles of Association

Ensuring that the company complies with its Memorandum and Articles of Association and,
drafting and incorporating amendments in accordance with correct procedures.
4. Statutory Registers
Maintaining the following statutory registers:
 members
 company charges
 directors and secretary
 directors’ interests in shares and debentures
 interests in voting shares (substantial holdings & those notified in pursuance of a s.212
notice)
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 debenture holders (if applicable).
5. Statutory Returns
Filing information with the Registrar of Companies to report certain changes regarding the
company or to comply with requirements for periodic filing. Of particular importance in this
regard are:
 annual returns
 report & accounts
 amended Memorandum & Articles of Association
 returns of allotments
 notices of appointment, removal & resignation of directors and the secretary
 notices of removal or resignation of the auditors
 change of registered office
 resolutions in accordance with The Companies Act.
6. Report & Accounts

Co-coordinating the publication and distribution of the company’s annual report and accounts
and interim statements, in consultation with the company’s internal and external advisers, in
particular, when preparing the directors’ report.
7. Share Registration
Maintaining the company’s register of members; dealing with transfers and other matters
affecting share-holdings; dealing with queries and requests from shareholders.
8. Shareholder Communications
Communicating with the shareholders (e.g. through circulars); arranging payment of
dividends and interest; issuing documentation regarding rights issues and capitalisation
issues; maintaining good general shareholder relations; maintaining good relations with
institutional shareholders and their investment committees.
9. Shareholder Monitoring
Monitoring movements on the register of members to identify any apparent ‘stakebuilding’ in
the company’s shares by potential take-over bidders; making appropriate inquiries of
members as to beneficial ownership of holdings.
10. Share and Capital Issues and Restructuring
Implementing properly authorised changes in the structure of the company’s share and loan
capital; devising, implementing and administering directors’ and employees’ share
participation schemes.
11. Acquisitions, Disposals & Mergers

Participating as a key member of the company team established to implement corporate
acquisitions, disposals and mergers; protecting the company’s interests by ensuring the
effectiveness of all documentation; ensuring that due diligence disclosures enable proper
commercial evaluation prior to completion of a transaction; ensuring that the correct
authority is in place to allow timely execution of documentation.
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12. Corporate Governance
Continually reviewing developments in corporate governance; facilitating the proper
induction of directors into their role; advising and assisting the directors with respect to their
duties and responsibilities, in particular compliance with company law and, if applicable,
Stock Exchange requirements; counseling them when preparing presentations and
memoranda
13. Non-Executive Directors
Acting as a channel of communication and information for non-executive directors.
14. Company Seal

Ensuring the safe custody and proper use of any company seals.
15. Registered Office

Establishing and administering the registered office; attending to the receipt, co-ordination
and distribution of official correspondence received by the company, sent to its registered
office; ensuring the provision of facilities for the public inspection of company documents.
16. Company Identity

Ensuring that all business letters, notices and other official publications of the company show
the name of the company and any other information as required by the statutes and that
company name plates are displayed in a conspicuous place.
17. Subsidiary Companies

Ensuring that procedures are in place for the correct administration of subsidiary companies
and that correct information is given to the holding company; maintaining a record of the
group’s structure.
18. General Compliance

Monitoring and laying in place procedures which allow for compliance with relevant
regulatory and legal requirements, particularly under the Companies Acts including legal
requirements on retention of documents; retaining the minimum set of records required for
commercial reasons; ensuring that procedures are in place to allow adequate historical
archive to be maintained.
Institution of Suits
Although the Secretary is the officer mainly charged with the duty to institute suits on behalf
of the company as it was held in the earlier judicial view in the decision in Bugerere Coffee
Growers Ltd. V Zukuberi Kikuya and Another [1970] EA 147. These have been held as no
longer good law by the Court of Appeal of Uganda in the case of M/s Tatu Naiga &
Emporium V Uverjee Brothers (U) Ltd (C.A-U), citing United Assurance Co. Ltd V
Attorney General, Civil Appeal No. 1/1986 which overturned those earlier decisions. Any
authorised director can give the necessary authority to institute a suit in the name of the
company.
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Activity
Discuss the different roles of the Company Secretary
Solution
The student is expected to define who a company secretary is and then go ahead and state the
different functions that are performed by the company secretary.
Test Questions
1. A company secretary is an insignificant officer of a company. Discuss
2. Examine the grounds for qualification and disqualification of the company
secretary
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TOPIC TEN
THE AUDITORS OF A COMPANY

At the end of this Chapter the student will be expected to:
1. Understand and evaluate the role of auditors in regard to companies; and
2. Analyze the duties that the auditor owes a company.
3. Analyze the grounds for appointment for and remuneration of auditors;
4. Analyze the grounds and procedure for removal of auditors;
5. Analyze the grounds for the disqualification of auditors
THE AUDITORS OF A COMPANY

The provisions of the Accountants Statute stipulate that a person is not qualified to act as an
auditor unless he is a member of the institute of registered accountants or he is registered as
an associate accountant. It is therefore important that this be read together with what is
contained hereunder for a proper understanding.
Appointment and remuneration of auditors.

Section 167 (1) provides that every company shall at each annual general meeting appoint
an auditor to hold office from the conclusion of that annual general meeting, until the
conclusion of the next, annual general meeting.
Procedure for appointment

Subsection (2) provides that notwithstanding subsection (1), at any annual general meeting
a retiring auditor, however appointed, shall be taken to be reappointed without any
resolution being passed unless—
(a) he or she is not qualified for reappointment;
(b) a resolution has been passed at that meeting appointing somebody instead of him or her
or providing expressly that he or she shall not be re-appointed; or
(c) he or she has given the company notice in writing of his or her unwillingness to be
reappointed.
Requirement for Notice

Subsection (3) provides that where notice is given of an intended resolution to appoint a
person in place of a retiring auditor and by reason of the death, incapacity or disqualification
of that person, the resolution cannot be proceeded with, the retiring auditor shall not be taken
to be automatically reappointed by virtue of subsection (2).
Power of registrar to appoint auditor

Subsection (4) provides that where at an annual general meeting no auditors are appointed
or re-appointed, the registrar may appoint a person to fill the vacancy.
Subsection (5) provides that the company shall, within one week of the registrar’s power
under subsection (4) becoming exercisable, give the registrar notice of that fact.
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Default in compliance with the above provision
Subsection (6) provides that where a company fails to give notice as required by subsection
(5), the company and every officer of the company who is in default is liable to a default fine
Appointment of first auditors

Subsection (7) provides that subject to this section the first auditors of a company may be
appointed by the directors at any time before the first annual general meeting and the
auditors appointed shall hold office until the conclusion of that meeting.
Removal of auditors
Subsection (8) provides that subject to subsection (7)—
(a) the company may at a general meeting remove any auditors appointed under subsection
(7) and appoint in their place any other persons who have been nominated for appointment
by any member of the company and of whose nomination notice has been given to the
members of the company not less than fourteen days before the date of the meeting; and
(b) if the directors fail to exercise their powers under this subsection, the company in general
meeting may appoint the first auditors and upon the appointment the powers of the directors
shall cease.
Subsection (9) provides that the directors may fill any casual vacancy in the office of auditor
but while any such vacancy continues, the surveying or continuing auditors, if any, may act.
Remuneration of auditors
Subsection (10) provides that the remuneration of the auditors of a company—
(a) in the case of an auditor appointed by the directors or by the registrar may be fixed by the
directors or by the registrar as the case may be; or
(b) subject to paragraph (a), shall be fixed by the company in a general meeting or in such
manner as the company in a general meeting may determine.
Subsection (11) provides that for the purposes of subsection (8), any sums paid by the
company in respect of the auditors’ expenses shall be taken to be included in the expression
“remuneration.”
Provisions as to resolution relating to appointment and removal of auditors.

Section 168 (1) provides that Special notice shall be required for a resolution at a company’s
annual general meeting appointing a person as auditor other than a retiring auditor or
providing expressly that a retiring auditor shall not be re-appointed.
Subsection (2) provides that on receipt of notice of an intended resolution under subsection
(1) the company shall forthwith send a copy of the notice to the retiring auditor, if any.
Subsection (3) provides that where notice is given of an intended resolution under
subsection (2) and the retiring auditor makes with respect to the intended resolution
representations in writing to the company and requests that the representation be notified to
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the members of the company, the company shall, unless the representations are received by it
too late for it to do so—
(a) in any notice of the resolution given to members of the company, state that the
representations have been made; and
(b) send a copy of the representations to every member of the company to whom notice of the
meeting is sent whether before or after receipt of the representations by the company, and if a
copy of the representations is not sent as required by this paragraph because it is received too
late or because company has declared, the auditor may without prejudice to his or her right to
be heard orally require that the representations shall be read out at the meeting.
Subsection (4) provides that subject to subsection (3), copies of the representations need not
be sent out and the representations need not be read out at the meeting if, on the application
either of the company or of any other person who claims to be aggrieved, the court is satisfied
that the rights conferred by this section are being abused to secure needless publicity for
defamatory matter and the court may order the company’s costs on an application under this
section to be paid in whole or in part by the auditor, notwithstanding that he or she is not a
party to the application.
Subsection (5) provides that subsection (3) shall apply to a resolution to remove the first
auditors by virtue of section 167(8) as it applies in relation to a resolution that a retiring
auditor shall not be reappointed.
Disqualifications for appointment as auditor.

Section 169 (1) provides that a person or firm shall not be qualified for appointment as an
auditor of a company unless he or she or in the case of a firm, every partner in the firm is a
member of—
(a) one or more of the professional bodies specified in the Accountants Act; or
(b) the Institute of Certified Public Accountants of Uganda established under the Accountants
Act, or is a person registered as an associate accountant under the Accountants Act.
Subsection (2) provides that none of the following persons shall be qualified for appointment
as auditor of a company—
(a) an officer or servant of the company;
(b) a person who is a partner of or in the employment of an officer or servant of the company;
or
(c) a body corporate;
Subsection (3) provides that subsection (2)(b) shall not apply in the case of a private
company.
Subsection (4) provides that references in subsection (2) to an officer or servant shall be
construed as not including references to an auditor.
Subsection (5) provides that a person shall also not be qualified for appointment as auditor
of a company if he or she is, by virtue of subsection (2), disqualified for appointment as
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auditor of any other body corporate which is that company’s subsidiary or holding company
or would be so disqualified if the body corporate were a company.
Subsection (6) provides that where a person who is not qualified to act is appointed as
auditor of a company that person and the company and every officer in default is liable to a
default fine of twenty five currency points.
Auditors’ report and right of access to books and to attend and be heard at general
meetings.
Section 170 (1) provides that the auditors shall make a report to the members on the
accounts examined by them and on every balance sheet, every profit and loss account and all
group accounts laid before the company in a general meeting during their tenure of office and
the report shall contain statements as to the matters mentioned in the Sixth Schedule to this
Act.
Subsection (2) provides that the auditors’ report shall be read before the company in general
meeting and shall be open to inspection by any member.
Subsection (3) provides that every auditor of a company has a right of access at all times to
the books and accounts and vouchers of the company and is entitled to require from the
officers of the company such information and explanation as he or she thinks necessary for
the performance of the duties of the auditors.
Right to receive notice for meeting

Subsection (4) provides that the auditors of a company are entitled to attend any general
meeting of the company and to receive all notices of and other communications relating to
any general meeting which any member of the company is entitled to receive and to be heard
at any general meeting which they attend on any part of the business of the meeting which
concerns them as auditors.
Duties:
Basically, an auditor is to investigate and examine the company's accounts. His report is to be
read at the company's general meeting and an auditor has a right to attend all such relevant
general meetings. The standard of duty has been set by the court in Re London And General
Bank Case that an auditor must be honest and must exercise reasonable care and skill in
what he certifies.
It was further stated in the case that an auditor is not bound to do more than exercise
reasonable care and skill in making inquiries and investigations even in the case of suspicion.
It is the duty of an auditor to bring to bear on the work he has to perform that skill, care
and caution a cautious auditor would use. In the case of Formento (Steeling Area) Vs
Selsdon Fountain Pen Co Ltd (1958)1 ALLER where Lord Denning stated that an auditor is
not to be confined to checking vouchers and adding or subtracting figures but he must take
care that errors are not made and that he should approach his duty suspecting that someone
may have made a mistake and that a check must be taken to ensure that none has been made.
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That he is not to be written off as a professional "added-up subtractor". That his vital task is to
take care that errors of omission or commission or down right untruths are not done.
In the case of Hedley Byrne & Co Ltd Vs Hellen Partners Ltd (1964) AC 465 it was stated
that an auditor will not be liable to a third party if he has made a disclaimer to his work.
This disclaimer does not apply in case of the company and for shareholders and criminal
liability is covered in the sections laid above.
In the case of Roberts Vs Hopwood (1925) AC 578 and in Re Ridsell (1914) CH. 59, it was
stated that where an auditor does not have sufficient legal knowledge to deal with a matter as
accountants do, he is entitled to take legal advice. In the case of BEVAN VS WEBB (19010)
2 Ch. 59, it was held that "permission to a man to do an act which he cannot do effectually
without the help of an agent carries with it the right to employ an agent”. According to S.328, an
auditor is an officer of the company. His duty is to ascertain and state the true financial
position of the company at the time of audit but not to care about declaring dividends.
In the case of Re Kingston, it was stated that he is a watchdog but not a blood-bound but if
there is anything calculated to excite suspicion, he should probe it to the bottom but he does
not guarantee the discovery of all fraud.
Nevertheless, an auditor will not be made liable for not tracking out ingenious and carefully
laid schemes of fraud, when there is nothing to arouse suspicion, and when those frauds are
perpetuated by tried servants of the company who are undetected for years by the directors.
In the case of Thomas Gerald And Sons Ltd (1968) Ch.455 has expressly presented the
current provision in contemporary company structures. It was held that circumstances had
changed since Re Kingston and the auditor is now a blood-bound. That auditors of the
company owe a statutory duty to make the members a report containing certain statements.
Activity
Discuss the different duties that auditors owe a company
Solution
The student is expected to know and explain who an auditor is and then discuss the different
duties that auditors owe to the company e.g. investigating the company’s accounts etc
Test Questions
1. Discuss the different ways in which an auditor may be appointed
2. Analyze the duties owed by an auditor to a company
3. Discuss the grounds and procedure for removal of auditors
4. Discuss the qualification and disqualifications for auditors
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TOPIC ELEVEN
LIABILITY OF A COMPANY FOR THE ACTS OF ITS OFFICERS

1. Understand ability of a company to acquire liability;
2. Understand the extent of a company’s liability for the acts of its officers;
3. Evaluate the liability of a company on a corporate contract;
4. Analyze the concept of “authority” and the doctrine of “holding out”.
LIABILITY OF A COMPANY FOR THE ACTS OF ITS OFFICERS

Liability may be criminal or civil. A company being an artificial person commits crimes and
civil wrongs and its mind has to be thought to be the directing will of the officer involved in
the wrong committed. Officers may be thought of as the BOD, accountants, and as was
enunciated in the case of SMITHFIELD BUTCHERY CO.V REP.(1939) 23 KLR 81, wrongful
acts committed by the subordinate staff of the company would not attach liability to a
company. Here, it is the law of agency that is appropriately applied. Since it is the principal
and agent that dominate the law of agency, the company is the principal and the officer is the
agent. When an agent in the course of agency commits a wrong, the aggrieved party has two
options i.e. sue the agent, or sue the principal
In determining whether a company is liable for the acts of its officers, one has to consider two
issues:
i) whether the company has the authority to enter into the transaction
ii) whether the officer was authorised to enter into the transaction
Whether the officer was authorised to enter into the transaction

In determining whether the company is liable for the acts of its officers, the court has to
ascertain whether the officer was the directing mind and will of the company.
Under common law, a company is liable for the acts of its officers but the company’s liability is
based on the principle of attribution (transferability from the officer to the company)
A company is akin to a human body and the individuals behind these transactions are the
ones who bind the company in its transactions. In LEONARD’s case, the company owned a
ship. Leonard was the active director in the company but he also took over an active role in
the management of the ship. The ship was un-seaworthy to carry oil. It later caught fire and
the cargo was destroyed. Under S.502 of the Merchant Shipping Act, the ship-owner was not
liable for any loss or damage happening without his fault. The company relied on this
provision and argued that the loss arose not from its fault but from the fault of the Leonard.
The issue was whether the company was liable in the circumstances and whether Leonard’s
fault could be attributed to the company. The HOL held that Leonard’s default was attributed
to the company and hence it could not rely on this provision. Lord Viscount said that the
company is an abstraction i) it has no mind of its own ii) its acting and directing will must be
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sought in the person of somebody who for some purposes may be called an agent iii) but who
is really the directing mind and will of the company the very ego and the personality of the
company.
How do you ascertain whether an officer had or constituted the directing mind and will of the
company (whether the person had the authority to act?)?
This will depend on the circumstances of each particular case. In HL BOTON & JJGRAHAM
[1957] 1 ALLER 624, a corporate landlord was sued for intending through its MD to occupy
premises for its own use. There was an argument that there was no meeting of the board of
directors to express the landlord’s intention and that therefore the landlord of the company
can not say that it had the necessary intention. Lord Denning held that a company may in
many ways be like 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 that some of the people in the company like directors and managers do represent the
directing mind and will of a company and control what it does.
In TESCO SUPERMARKETS Vs NATTRASS [1972] AC 153 the case involved a large

supermarket. It had an advert displayed on the window with a particular item on sale. When
the reduced price items had all been sold, the shop assistant put out on display the same items
but marked them at normal price which was higher than that on sale. It was not reported to
the store manager and the advert remained on the window. The HOL held that the directing
mind can be employees to whom managerial powers have been delegated but it should be
noted that it is only those managers who are entrusted with significant degree of freedom
from supervision of high authority who are so regarded.
The public policy consideration for this directing mind and will concept is that a company
must be treated as a natural person for purposes of acts done in its course of business so it
must take precaution and exercise due diligence, default of which the fault of the human
beings/natural persons performing the functions of the company is attributed to the
company.
If control is by more than one person whose intention should be looked at in determining the
mind of the company, in such a situation e.g. in a bank where you have aggregate knowledge
or different people in control of one transaction, it is a fallacy to say that the state of mind to
be attributed to the company must always be the state of mind of one particular officer. In
BRAMBLES HOLDINGS Vs CAREY [1976] the responsibility for ensuring that the company
complied with legislation was delegated to the following officers in the company – the
company’s main driver, the heavy trucks supervisor and the operations manager. The
company was charged with offences related to overloading. The offences occurred when the
main driver was on sick leave and replaced by another who had not been properly instructed
by the operations manager. The company argued that this was an honest and reasonable
mistake since the heavy trucks supervisor honestly believed that the vehicles were correctly
loaded. The other side argued that the operations manager knew or ought to have known that
proper loading instructions had not been given to the drivers. Whose knowledge and belief
could be attributed to the company to hold it liable? The court considered the knowledge of
the operations manager and heavy truck manager and held that in the circumstances, the
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operations manager was the directing mind and will of the company. The court further
observed that it is a fallacy to say that any state of mind to be attributed to a corporation must
always be the state of mind of one particular officer alone and that the corporation can never
know or believe more than one man knows and believes.
CORPORATE CONTRACTS
Whether the company has the authority to enter into the transaction
These are of two types:
i) direct contract
ii) Indirect contract
Indirect Contract
In a direct contract, there are two questions to consider:
a) whether the company authorised entry into the contract
b) whether the company authorised execution of the contract
For the first question, one looks at the memorandum if the transaction is intravires and for
the second question one looks at any form of authorisation.
For direct contracts, one looks at whether the agent has authority to bind the company.
Authority
Actual authority is where the company has agreed that an officer or agent can act on behalf of
the company and this can be established from the AOA, the company’s resolutions in the
board or general meetings.
Apparent or ostensible authority does not require a company conferring upon the officer or
agent authority. The officer binds the company because the agent appears to have the
required authority. Accordingly, an officer or agent may have apparent authority even if
he/she does not have actual authority.
For actual authority, a company gives consent to the officer or agent to act for the company
and it can be express or implied. There are four sources of express actual authority:
1) companies Act especially with matters to do with directors powers like allotment of
shares, declaration of dividends etc.
2) The companies AOA when the board collectively executes such powers via a resolution
3) Where the directors delegate authority which they are authorised to delegate
4) Any instrument by the company expressly authorising or appointing a person to act on
his behalf even if it’s just a letter of appointment.
All in all express authority is the actual authority of an agent created by a principal whether
orally, by deed or in writing. The scope of the agents’ actual authority is determined from the
principal’s oral statement or the interpretation of the deed or writing.
The MD has implied actual authority to do all things that fall within the usual scope of that
office. However it should be noted that the usual scope of the MDs powers will depend on
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what is customary or usual for an MD in a similar company carrying on a similar business e.g.
MD has authority to supervise junior executives or to enter into a contract for the provision of
services for the company but the MD has no implied actual authority (usual authority) to sell
the company’s undertaking or to sell the company’s main business.
For the chairperson, he has implied actual authority to chair meetings of the board and to use
a casting vote to break the deadlock but unless he had delegated powers, he does not have
sufficient implied authority to bind the company in contracts.
Directors: In general a director who is not the MD does not have sufficient implied authority
to bind the company to a contract unless a director has delegated powers. Directors act
collectively as aboard so a single director has no power to bind the company.
Company secretary: Has implied actual authority to discharge administrative matters,

signing contracts relating to administrative matters like employment of officers so in a way,
he is a chief administrative officer but he has no sufficient implied authority to bind the
company to the contract. In PANORAMA’S case, it was held that the company secretary has
extensive duties and responsibilities and is no longer a mere clerk
Apparent Authority
It is based and established on the principle of agency by estoppel. The company is precluded
from denying that the agent lacked authority e.g.
a) if a company permits an agent to carry out acts beyond the scope of the agents express
or implied authority
b) if the company permits the agent to occupy a particular position e.g. a defacto MD
c) where the agent holds no position but the company permits the agent to act as if
he/she has the necessary authority to act. This is what is technically referred to as
holding out or a representation.
A company just like an individual can represent by words or conduct to an outsider that
another person has authority. If the outsider acts on this representation and transacts
business with the apparent agent on the faith of it then the company will be estopped from
denying the representation. For the company to be bound by this principle of holding out,
there are common law requirements which must be satisfied. In the case of FREEMAN &
LOCKYER, the court stated four conditions;
1) There must be a representation (by word or conduct to an outsider that the person had
authority)
2) The representation must be by a person or officer or body with actual authority
3) The person making the representation must have intended it to be relied upon and it must
be shown that the representation was in fact relied upon
4) The transaction must be intravires
Exceptions where a person cannot claim ostensible authority or holding out

An outsider cannot claim that an agent had ostensible authority where the outsider had
knowledge of the persons who are vested with the actual authority and that there was no
actual authority given to the agent.
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An outsider cannot argue for ostensible authority if a reasonable person in the outsiders’
position had doubts as to whether the agent had the authority to enter into the transaction.
Activity
Examine the extent of the ability of the officers of the company to make the company liable for
their actions
Solution
The student will be expected to discuss who directors are and go further to discuss the
circumstances under which the company will be made liable for their actions. The student is
expected to critically analyze the issues of the company’s authority to enter into the
transaction and the issue of the officer having authority to enter into the transaction
Test Questions
1. Discuss the principle of attribution as applied under liability of a company for the
acts of its officers.
2. Discuss concept of “authority” and the doctrine of “holding out”
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TOPIC TWELVE
COMPANY MEMBERSHIP
At the end of this Chapter, the student will be able to:

1. Understand the concept of membership in a company;
2. Understand the concept of shares,
3. Understand the different ways of becoming a shareholder
4. Understand the various ways of ceasing to be a shareholder;
5. Understand the rights and duties of shareholders;
6. Examine the different types/classes of shares;
7. Analyze the right to transfer and procedure for transfer of shares;
8. Understand the nature of consideration used for payment of shares;
9. Understand the concept of share warrants and their advantages;
10. Analyze the concept of transmission of shares;
11. Analyze the importance of filing annual returns;
12. Evaluate and analyze the process of allotment of shares;
13. Understand the meaning of call on shares, forfeiture and surrender of shares and
14. Evaluate the importance of the share certificate and its effect.
SHARES AND COMPANY MEMBERSHIP
Definition of member.
Section 47 (1) provides that the subscribers to the memorandum of a company shall be taken
to have agreed to become members of the company, and on its registration shall be entered as
members in its register of members.
Subsection (2) provides that a person who agrees to become a member of a company, and
whose name is entered in its register of members shall be a member of the company.
In MAWOGOLA COFFEE FACTORY VS. KAYANJA, it was held that to be a member of a

company, there must have been a valid allotment of shares to the person and his name
entered on the register. It was further observed that a certificate of allotment of shares is the
best evidence but in its absence, the register of members shall suffice.
THE REGISTER OF MEMBERS

Duty to keep a register
Every company is under a duty to maintain a register of members in which it entered their
names, addresses and descriptions.
Section 119 (1) provides that a company shall keep a register of its members.
Contents of the register

Section 119 (1) further provides for the register to include the following particulars;
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(a) the names and postal addresses of the members and in the case of a company having a
share capital a statement of shares held by each member, distinguishing each share by its
number if the share has a number and of the amount paid or agreed to be considered as paid
on the shares of each member;
(b) the date on which each person was entered in the register as a member; and
(c) the date on which any person ceased to be a member, except that where the company has
converted any of its shares into stock the register shall show the amount and class of stock
held by each member instead of the amount of shares and the particulars relating to shares
specified in paragraph (a).
Where is the register kept?

The register has to be kept at the registered office of the company. However, if the
maintenance of the register is done at another office of the company (other than the
registered office) or is done on behalf of the company by some other person, it may be kept
where the work is done, provided that this is not outside Uganda. In addition, a company
should give to the Registrar of Companies notice of where the register is kept. except where
this is done at its registered office.
Section 119 (2) provides that the register of members shall be kept at the registered office of
the company; except that—
(a) if the work of making it up is done at another office of the company, it may be kept at that
other office; and
(b) if the company arranges with some other person for the making up of a register to be
understood on behalf of the company by that other person, it may be kept at the office of that
person at which the work is done but it shall not be kept at a place outside Uganda.
Notice to be given to Registrar of where the register is kept

Subsection (3) provides that a company shall send notice to the registrar of the place where
its register of members is kept and of any change of place.
Subsection (4) provides that a company shall send notice under this section where the
register has, at all times since it came into existence or in the case of a register in existence at
the commencement of this Act, at all times since the commencement of this Act been kept at
the registered office of the company.
Subsection (5) provides that in the case of a company which does not have a share capital
but has more than one class of members, there shall be entered in the register, with the names
and addresses of the members, the class to which each member belongs.

Subsection (6) provides that where a company defaults in complying with subsection (1) or
makes default for fourteen days in complying with subsection (5), the company and every
officer of the company who is in default is liable to a daily default fine of twenty five currency
points.
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Inspection of the Register
Section 122 (1) provides that except when the register of members is closed under this Act,
the register and index of the names, of the members of a company shall, during business
hours be open to inspection of any member without charge and of any other person on
payment of one currency point or such less sum as the company may prescribe, for each
inspection.
Subsection (2) provides that the company may in a general meeting impose reasonable
restrictions on inspection under subsection(1) but the restrictions shall not be such as to
reduce the period of inspection to less than two hours in each day.
Right of member to access register

Subsection (3) provides that a member or other person may require a copy of the register or
of any part of it, on payment of one currency point or such less sum as the company may
prescribe.
Subsection (4) provides that the company shall cause any copy required under subsection
(3) by any person to be sent to that person within a period of fourteen days commencing on
the day next after the day on which the requirement is received by the company.
Default in compliance
Subsection (5) provides that Where an inspection required under this section is refused or if
a copy required under this section is not sent within the period specified in subsection (4), the
company and every officer of the company who is in default is liable in respect of each offence
to a fine not exceeding twenty five currency points and further to a default fine of five
currency points in respect of each day of which the default continues.
Subsection (6) provides that in the case of a refusal or default referred to in subsection (5),
the court may, by order compel an immediate inspection of the register and index or direct
that the copies required shall be sent to the person requiring them.
SHARES.
A share is defined in section 2 to mean a share in the share capital of a company and includes
stock except where a distinction between stock and shares is expressed.
A share has been defined as a bundle of rights. In the case of SPARLING Vs CASEY [1988] the
SC of Canada held that a share is not an isolated piece of property but a bundle of inter related
rights and liabilities. That a share is not an entity independent on its own but its possession
and exchange is governed by a statutory provisions and it is those provisions that make up its
constituent elements. The provisions define the very rights and liabilities that constitute the
shares existence. The court concludes by saying that a share and a shareholder are concepts
which are inseparable from the comprehensive bundle of rights and liabilities created by the
Act.
A share has also been defined in Borland Trustee V Steel Bros & Co. Ltd as “… the interest of
a shareholder in the company measured by a sum of money for the purpose of liability in the
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first place and of interest in the second, but also consisting of a series of mutual covenants
entered into by all the shareholders interest…”
The holding of a share thereof carries with it certain property rights and liabilities in the
company.
Rights
 Right to vote.
 Right to share in the profits (receive dividends when declared)
 Right to a share in the proceeds upon dissolution
 Right to attend meetings and participate in management by taking resolutions
Obligations.
• Pay for the shares.
• Attend meetings
• Contribute to the liabilities of the company where the liability of the company is
unlimited.
Specific terms
Nominal Share Capital:

Is the amount of money the company’s memorandum entitles the company to raise. It is also
referred to as authorized share capital. It comprises of issued share capital and unissued
share capital. It also comprises of paid up capital and unpaid capital. It is also comprised of
called up capital or capital on hold and uncalled capital.
Reserve Capital:
This is uncalled capital which the company resolves only to call upon liquidation or where
there is a financial crisis/need.
• Classes of Shares
Shares as noted above are bundles of rights. These rights and the consequent bundles of
rights can only be defined by the creation of classes in the shares. Accordingly, the company
can create several different bundles of rights and these separate bundles of rights are referred
to as classes.
The CA allows for the creation of different classes of shares with different rights and
restrictions. Whereas there are more than one class of shares the different rights and
restrictions must be set out in the AOA but where there is just one class of shares, you do not
have to specify the rights and restrictions related to the shares in question.
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However, it must be noted that as a general rule, if there is just one class of shares, common
law presupposes that the three basic rights are attached to these shares namely:
- The right to vote on company matters e.g. voting in respect of appointment of directors,
increment of share capital, amendment of MOA and AOA
- The right to receive dividends when declared by the BOD
- The right to a share in the proceeds upon dissolution.
BECOMING A SHAREHOLDER.
Who can be a shareholder?

• Infants:
A minor can be a member of the company except where the articles of association prevent
this.
If he is a member, he is subject to the general contractual rights and liabilities of a minor. This
means that if he has bought shares, he can repudiate the contract at any time before he
reaches 18 years of age or within a reasonable time thereafter. A minor thus can become a
shareholder but he incurs no liability until he obtains the majority age and fails to repudiate
the contract within a reasonable time.
• Personal Representative.
A person representative of a deceased shareholder can be registered as a member. This is
subject though to the directors’ right to refuse registration.
• Trustee in Bankruptcy.
A bankrupt shareholder remains a member. However, votes as directed by his trustee in
bankruptcy.
• Another Company.
Another company can become a member of a company, be appointing a representative
thereon. However, a company cannot buy its own shares, as this is likely to lead to reduction
in its registered capital.
There are various ways in which a person can become a company member and these include
the following:
Ways of becoming a member

1. By subscribing to the memorandum and articles of association;
2. Through allotment and payment for the shares allotted;
3. By buying from an existing member of the company;
4. By transmission after the death of a shareholder (eg to an executor or an administrator of
the estate of the deceased shareholder);
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5. By gift.
Cessation of membership
A shareholder loses company membership on the occurrence of the following events or under
the following circumstances:
1. Being struck from the list of members;
2. By the company redeeming redeemable shares;
3. By death;
4. On the winding up or liquidation of the company;
5. On voluntarily transferring or giving shares to another person;
6. For a director of a public company, failure to pay for qualification shares within two
months of incorporation;
7. On forfeiture for failure to answer a call on unpaid shares;
8. Take-over bids where the shares of the existing members are bought off by the company
taking over.
TYPES OF SHARES
Shares may be issued with special rights relating to payment of dividend, voting, return of
capital, etc. as the company may decide (Article 2 of Table A). However, it is normal to divide
shares into three main classes:-
 Ordinary shares
 Deferred (founders) shares
 Preference shares.
 Redeemable preference shares
Ordinary Shares.
Ordinary shares comprise the residuary class of shares in which it is vested everything after
the special rights of other classes, if any, have been satisfied.
They bear the main financial risk of the business in the event of the company failing and the
greater reward, if it is successful. They have three main rights ie right to vote on matters
requiring shareholders voting, right to receive dividends when declared on a prorate basis
and subject to the rights of other shareholders and the right to the prorate share of the
surplus proceeds on dissolution, ordinary shareholders are presumed to be equal in all
respects unless indicated otherwise in the AOA.
Deferred (Founders) Shares

These shares are entitled to a fixed dividend relative to the profits available to the company
following the declaration of dividends on the preference and ordinary shares.
Preference Shares.
These shares are referred to as preference or preferred because they typically have a
preference over other shares with respect to some right and usually this preference is in
respect to dividends or share in the surplus proceeds. Thus these shares confer on the holder
some preference over other classes in respect either of dividend or of repayment of capital or
both. With preference shares, the amount of the share is indicated in the company’s articles
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and it is this specific amount that will constitute the basis for computing the dividend i.e. a
shareholder has a subordinate right to the dividends or to the proceeds. In accounts they are
referred to as subordinate loans.
Redeemable preference shares.

These are preference shares which may be bought out by the company in exception to the
general rule relating to the maintenance of a company’s capital that a company must not buy
its own shares. This is referred to as redeeming shares. This allows for the company to do
some refinancing at a future time at a predetermined price for the re-purchase of these
shares. The predetermined price is usually set at an amount above the nominal value of the
share. However, there are certain conditions attached to a company’s redemption of its
shares.
• The shares must be fully paid up.

• The redemption must be out of the company’s profits or fresh issue of shares done for
purposes of redemption.
Variation of Class rights.

Shares may be issued with certain rights. Variation considers the circumstances and mode by
which such rights may be altered. Where the class rights are defined in the company’s
memorandum of association, they can only be varied if the memorandum provides a method
of alteration. Alternatively, provision for variation may be made in the articles.
PAYMENT FOR SHARES.

Normally, shares are paid for in cash. However, they may also be paid for in kind.
Issue of Shares at a Discount:

The law does not allow the issue of shares at a discount. The full nominal value of the shares
must be paid because otherwise the capital yardstick of the company would be misleading.
Power to issue shares at a discount.

Section 67 (1) provides that subject to this section, a company may issue at a discount shares
in the company of a class already issued, except that—
(a) the issue of the shares at a discount must be authorised by resolution passed in a general
meeting of the company and must be sanctioned by the court;
(b) the resolution must specify the maximum rate of the discount at which the shares are to
be issued;
(c) not less than one year must at the date of the issue have elapsed since the date on which
the company was entitled to commence business; and
(d) the shares to be issued at a discount must be issued within one month after the date on
which the issue is sanctioned by the court or within such extended time as the court may
allow.
Subsection (2) provides that where a company has passed a resolution authorising the issue
of shares at a discount, it may apply to the court for an order approving the issue and upon
such application the court, if having regard to all the circumstances of the case, thinks it
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proper so to do, may make an order approving the issue on such terms and conditions as the
court thinks fit.
The position with regard to shares may be contrasted with that in respect of debentures,
which may be issued at a discount provided that they are not rapidly converted into shares.
ISSUE OF SHARES AT A PREMIUM.

The issue of shares above their nominal value is permissible. However, the amount of the
premium thereby realized, whether in cash or otherwise must be transferred to a share
premium account in the company’s balance sheet.
Application of premiums received on issue of shares.

Section 66 (1) provides that where a company issues shares at a premium, whether for cash
or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares
shall be transferred to an account, to be called “the share premium account”, and the
provisions of this Act relating to the reduction of the share capital of a company shall, except
as provided in this section, apply as if the share premium account were paid-up share capital
of the company.
Subsection (2) provides that the share premium account may, notwithstanding anything in
subsection (1), be applied by the company in paying up un-issued shares of the company to be
issued to members of the company as fully paid bonus shares in writing off—
(a) the preliminary expenses of the company;
(b) the expenses of, or the commission paid or discount allowed on, any issue of shares or
debentures of the company; or
(c) in providing for the premium payable on redemption of any redeemable preference shares
or of any debentures of the company.
Subsection (3) provides that where a company has before the commencement of this Act
issued any shares at a premium, this section shall apply as if the share had been issued after
the commencement of this Act.
Subsection (4) provides that any part of the premium which has been applied as referred to
in subsection (3) that it does not at the commencement of this Act form an identifiable part of
the company’s reserves within the meaning of the Fifth Schedule to this Act shall be
disregarded in determining the sum to be included in the share premium account.
ALLOTMENT OF SHARES
This is the process through which the company distributes the shares to successful applicants
i.e. is the process through which a potential shareholders or subscriber is given the number of
shares which he has successfully applied for.
Private companies under S.5 restrict the issue of new shares by requiring that:-
o A private company is not entitled to invite the public to subscribe to any of its
securities.
o A private company must in its Articles of Association contain a clause restricting the
right of transferability of its securities as far as its shares are concerned.
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Such clauses are called pre-emptive clauses. Lack of such a pre-emptive clause automatically
makes the company a public ltd company.
Return as to allotment.
Section 61 (1) provides that whenever a private company limited by shares or a company
limited by guarantee and having a share capital makes any allotment of its shares, the
company shall, within sixty days thereafter, deliver to the registrar for registration—
(a) a return of the allotments, stating the number and nominal amount of the shares
comprised in the allotment, the names, addresses and descriptions of the allottees and the
amount if any, paid or due and payable on each share; and
(b) in the case of shares allotted as fully or partly paid up otherwise than in cash, a contract in
writing constituting the title of the allottee to the allotment together with any contract of sale
or for services or other consideration in respect of which that allotment was made such
contract being duly stamped and a return stating the number and nominal amount of shares
so allotted, the extent to which they are to be treated as paid up and the consideration for
which they have been allotted.
Subsection (2) provides that where a contract under subsection (1) is not reduced into
writing, the company shall, within sixty days after the allotment deliver, to the registrar for
registration the prescribed particulars of the contract stamped with the same stamp duty as
would have been payable if the contract had been reduced into writing and those particulars
shall be deemed to be an instrument within the meaning of the Stamps Act and the registrar
may, as a condition of filing the particulars, require that the duty payable on it be adjudicated
under section 36 of that Act.
Subsection (3) provides that where default is made in complying with this section, every
officer of the company who is in default is liable to a fine of twenty five currency points and an
additional fine of five currency points for every day during which the default continues.
ALLOTMENT PROPER
The company upon application may make an allotment of shares to the applicant. The
application, in line with ordinary contractual principles is only an offer to the applicant, which
may or may not be accepted by the company. Directors normally make the allotment of
shares at a meeting of the board intended for that purpose. As a general rule the responsibility
for allotment of shares lies with the BOD.
In the discharge of this responsibility, the directors must act bonafide and in the interests of
the company, otherwise they will be in breach of their duty of good faith.
An allottee becomes a member of the company when his name is entered on the register of
members.
SHARE CERTIFICATES
Duties of a company with respect to issue of certificates.
Section 91 (1) provides that a company shall, within sixty days after the allotment of any of
its shares, debentures or debenture stock and within two months after the date on which a
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transfer of the shares, debentures or debenture stock is lodged with the company, complete
and have ready
for delivery the certificates of all shares, the debentures and the certificates of all debenture
stock allotted or transferred, unless the conditions of issue of the shares, debentures or
debenture stock otherwise provide.
Subsection (2) provide that for the purposes of subsection (1), "transfer" means a transfer
duly stamped and otherwise valid and does not include a transfer which the company is for
any reason entitled to refuse to register and does not register.
Effect of default
Subsection (3) provides that if default is made in complying with this section, the company
and every officer of the company who is in default is liable to a default fine of twenty five
currency points.
Subsection (4) provides that if a company on which a notice has been served requiring the
company to make good any default in complying with subsection (1), fails to make good the
default within ten days after the service of the notice, the registrar may, on the application of
the person entitled to have the certificates or the debentures delivered to him or her, make an
order directing the company and any officer of the company to make good the default within
the time specified in the order.
Subsection (5) provides that the order may provide that all costs of and incidental to the
application shall be borne by the company or by any officer of the company responsible for
the default.
Certificate to be evidence of title.

A share certificate with a company seal is prima facie evidence that the owner has title to the
shares. Prima facie evidence is evidence, which cannot be rebutted (challenged). In the case of
Kulubya Vs UTC (1988), here the judge held that absence of the company's seal in the share
certificate in itself does not negate ownership of the shares.
Section 92 provides that a certificate, under the common seal of the company or any other
title evidencing securities under this Act or any other law specifying any shares held by any
member shall be prima facie evidence of title of the member to the shares.
Legal Effects of the Share Certificate and Estoppel.

The certificate operates as an estoppel against the company in two instances:
1. It estops the company from denying that the person to whom it is granted was at the date
of the issue of the certificate the registered owner of the shares issued and that shareholder is
entitled to the shares mentioned in the certificate.
2. It estops the company from denying that the company shares are paid up as indicated in
the certificate.
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It is prima facie evidence that the holder is the owner of the shares. Therefore if a third party
detrimentally alters his position on the basis of that certificate, he cannot be defeated by the
company's denial of the certificate unless it was forged.
SHARE WARRANTS
If the Articles of Association authorise, a company may instead of issuing a share certificate,
issue a share warrant in respect of any fully paid shares.
Issue and effect of share warrants to bearer.

Section 95 (1) provides that a company limited by shares, if authorised by its articles, may,
with respect to any fully paid up shares, issue under its common seal a warrant stating that
the bearer of the warrant is entitled to the shares specified in it and may provide, by coupons
or otherwise, for payment of the future dividends on the shares included in the warrant.
Subsection (2) provides that a warrant described in subsection (1) is, in this Act referred to
as a “share warrant”.
Subsection (3) provides that a share warrant shall entitle its bearer to the shares specified in
it, and the shares may be transferred by delivery of the warrant.
Penalty for impersonation of shareholder.

Section 96 provides that if a person falsely and deceitfully impersonates an owner of any
share or interest in any company, or of any share warrant or coupon, issued under this Act,
and obtains or endeavours to obtain any such share or interest or share warrant or coupon, or
receives or endeavours to receive any money due to the owner, as if the offender were the
true and lawful owner, he or she commits an offence and is liable on conviction to
imprisonment not exceeding seven years.
Offences in connection with share warrants.

Section 97 (1) provides that if a person—
(a) with intent to defraud, forges or alters or offers, utters, disposes of or puts off, knowing it
to be forged or altered, any share warrant or coupon or any document purporting to be a
share warrant or coupon, issued under this Act; or
(b) by means of any such forged or altered share warrant, coupon or document, purporting to
be a share warrant, demands or endeavours to obtain or receive any share or interest in any
company under this Act or to receive any dividend or money payable in respect of it, knowing
the warrant, coupon or document to be forged or altered, he or she commits an offence and is
liable on conviction to imprisonment not exceeding five years.
Subsection (2) provides that if a person without lawful authority or excuse, proof of which
shall lie on him or her—
(a) engraves or makes on any plate, wood, stone or other material any share warrant or
coupon purporting to be—a share warrant or coupon issued or made by any particular
company under this Act;
(ii) a blank share warrant or coupon so issued or made;
(iii) a part of such a share warrant or coupon; or
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(b) uses any such plate, wood, stone or other material for the making or printing of any such
share warrant or coupon or of any such blank share warrant or coupon or any part of it
respectively; or
(c) knowingly has in his or her custody or possession any such plate, wood, stone or other
material,
he or she commits an offence and is liable on conviction to imprisonment not exceeding five
years.
There are two advantages of a warrant over share certificate:

o A Warrant is a share warranty that the bearer is the owner of shares indicated while
the share certificate is prima facie evidence that the holder is the owner of shares. A
company can’t deny that the bearer of a warrant is the owner which makes it more
important.
o A purchaser of a share warrant takes the shares concerned free of equities, if he is a
bonafide purchaser, while for a purchaser of a certificate must first be registered as
shareholder before he can become a Legal owner of those shares. When a purchaser of
a warrant physically holds the same, he will defeat all warranties.
TRANSFER/TRANSMISSION OF SHARES
Generally speaking, the proprietor of shares has the right to transfer or deal with his/her
shares as he/she wishes. Public limited companies can transfer shares, while private limited
companies place restrictions on the transfer of their shares and provide for rights of pre-
emption i.e. that the shares should be offered to existing members of the company for sale.
Directors are given absolute discretion to refuse registration of any transfer of shares. In RE
SIMTH & FAWCETT [1942] CH 306 the case involved a widow who sought to be registered
as a proprietor on transmission. The court observed that the test is whether the transfer is in
the best interest of the company and that the directors had the power to reject or refuse a
transfer though it is a general rule for a shareholder to transfer his/her shares.
A legal representative or a beneficiary of the estate has no automatic right to be a member of a

company. Table A provides that until the legal representative is registered, he/she cannot
enjoy or exercise any right conferred upon members including the right to attend meetings.
Transmission of Shares
This is a form of transfer of shares by operation of law arising either from the death or
bankruptcy of the shareholder.
Article 29 (1) of Table A provides that in the case of the death of a member, the survivor or
survivors where the deceased was a joint holder, and the personal representatives of the
deceased where he or she was a sole holder, shall be the only persons recognized by the
company as having any title to his or her interest in the shares.
Article 30 of Table A provides that any person becoming entitled to a share in consequence
of the death or bankruptcy of a member may, upon such evidence being produced as may
from time to time properly be required by the directors and subject to these regulations, elect
either to be registered himself or herself as holder of the share or to have some person
nominated by him or her registered as the transferee of the shares but the directors shall, in
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either case have the same right to decline or suspend registration as they would have had in
the case of a transfer of the share by that member before his or her death or bankruptcy.
Article 31 (1) of Table A provides that where the person entitled under subregulation 30
elects to be registered himself or herself he or she shall deliver or send to the company a
notice in writing signed by him or her stating that he or she so elects.
Article 32 (1) of Table A provides that provides that where a person becomes entitled to a
share by reason of death or bankruptcy of the holder that person is entitled to the same
dividends and other advantages to which he or she would be entitled if he or she were
registered holder of the share except that he or she shall not before being registered as
member in respect of the share be entitled in respect of it to exercise any right conferred by
membership in relation to meetings of the company.
FORM OF TRANSFER
Nature of shares.
Section 83 provides that the shares or other interest of any member in a company shall be
movable property transferable in the manner provided by the articles of the company.
Transfer not to be registered except on production of instrument of transfer.

Section 85 (1) provides that notwithstanding anything in the articles of a company, it is not
lawful for the company to register a transfer of shares in or debentures of the company unless
a proper instrument of transfer has been delivered to the company.
Subsection (2) provides that nothing in this section shall prejudice any power of the
company to register as shareholder or debenture-holder any person to whom the right to any
shares in or debentures of the company has been transmitted by operation of the law.
Article 22 of Table A provides that the instrument of transfer f any share shall be executed
by or on behalf of the transferor and transferee and the transfer shall be taken to remain a
holder of the share until the name of the transferee is entered in the register of members in
respect of the share.
PROCEDURE FOR TRANSFER

Article 23 of Table A provides that any member may transfer all or any of his or her shares
by instrument in writing in any usual or common form or any other form which the directors
may approve.
• Sale of all shares on a share certificate.
If the transfer involves the sale of all the shares, which are mentioned in share certificate, the
seller is required to hand to the buyer the instrument of transfer as well as the share
certificate. The company will in turn send the buyer a new certificate.
• Sale of only part of shares on a certificate
If the seller is only selling some of his shares, which are mentioned, in a single certificate, the
procedure of certificate must be compiled with. The company will in turn send a new
certificate to the buyer.
• The duties of seller and buyer.
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The seller must hand over to the buyer a valid instrument of transfer and relevant share
certificate.
In return the buyer must pay the price for the shares.
Registration of a transfer at request of the transferor.

Section 88 provides that on the application of the transferor of any share or interest in a
company, the company shall enter in its register of members the name of the transferee in the
same manner and subject to the same conditions as if the application for the entry were made
by the transferee.
Notice of refusal to register a transfer.

Article 24 of Table A provides that the directors may decline to register the transfer of a
share not being a fully paid share to a person of whom they do not approve and they may also
decline to register the transfer of a share on which the company has a lien.
Section 89 (1) provides that where a company refuses to register a transfer of any shares or
debentures, the company shall, within sixty days after the date on which the transfer was
lodged with the company, send to the transferee notice of the refusal.
Subsection (2) provides that where default is made in complying with this section, the
Certification of a transfer.
Section 90 (1) provides that the certification by a company of any instrument of transfer of
shares in or debentures of the company shall be taken as a representation by the company to
any person acting on the faith of the certification that there have been produced to the
company, such documents as on the face of them show a prima facie title to the shares or
debentures in the transferor named in the instrument of transfer but not as a representation
that the transferor has any title to the shares or debentures.
Subsection (2) provides that where a person acts on the faith of a false certification by a
company made negligently, the company shall be under the same liability to him or her as if
the certification had been made fraudulently.
Subsection (3) provides that for the purposes of this section—
(a) an instrument of transfer shall be taken to be certified if it bears the words “certificate
lodged” or words to the like effect;
(b) the certification of an instrument of transfer shall be taken to be made by a company if—
(i) the person issuing the instrument is a person authorised to issue certificated instruments
of transfer on the company’s behalf; and
(ii) the certification is signed by a person authorised to certificate transfers on the company’s
behalf or by any officer or servant either of the company or of a body corporate so authorised;
(c) a certification shall be taken to be signed by a person if—
(i) it purports to be authenticated by his or her signature or initials whether handwritten or
not; and
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(ii) it is not shown that the signature or initials was or were placed there by himself or herself
or by any person authorised to use the signature or initials for the purpose of certificating
transfers on the company’s behalf.
PRIORITIES.
Where there are competing claims to the shares and one of the claimants is on the register, he
will have priority over the shares unless he had notice of the prior equitable claim.
THE COMPANY LIEN

This is usually regulated by the company’s Articles, which give the company a lien on the
shares of a member, who has not fully paid for them. The lien is basically an interest and it
covers the amount unpaid on the shares.
FORGED TRANSFER.
These are null and void in that they do not affect the real owner. Consequently, a person who
lodges a transfer for registration impliedly warrants that it is genuine. If it is not, he is liable
to indemnify the company from liability.
MORTGAGE OF SHARES
Shares can be mortgaged to raise capital. There are two types of mortgages:
• Legal mortgages
• Equitable mortgages.
A legal mortgage is one where upon borrowing money, a borrower executes a transfer of his
shares, by way of mortgage, to the lender. The transfer is registered with the registrar of
companies and the company. The instrument of transfer indicates the terms of the mortgage
and also provides for re-transfer when the loan has been repaid. The lender is entitled to
payment of dividends on the shares and to vote at the company’s general meetings.
Should the mortgagor default in repaying the loan, the mortgagee may sell the shares without
recourse to the court, since he is the legal owner thereof.
An equitable mortgage is where the borrower deposits his share certificate with the lender as
a security. If the borrower defaults, the lender can apply to court for the sale of shares.
The usual practice is for the borrower to deposit the relevant certificate plus a blank transfer
signed by him, with the lender. If the borrower defaults, the lender has an implied power to
sell the shares.
CALLS ON SHARES
It is common for the articles to give the director’s power to make calls on members regarding
sums of money that remain unpaid on their shares. The call must be made in accordance with
the articles; otherwise it will be regarded as null and void.
Article 15 (1) of Table A provides that the directors may from time to time make calls upon
the members in respect of it, all or any monies unpaid on their shares, whether on account of
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the nominal value of the shares or by way of premium and not by the conditions of allotment
of the shares made payable at fixed times.
Article 15 (2) of Table A provides that a call shall not exceed one fourth of the nominal value
of the share or be payable less than one month from the date fixed for the payment of the last
preceding call.
Article 15 (1) of Table A provides that each member shall subject to receiving at least 14
days’ notice specifying the time and place of payment pay to the company at the time and
place specified the amount called on his or her shares.
Article 15 (4) of Table A provides that a call may be revoked or postponed as the directors
may determine.
FORFEITURE AND SURRENDER OF SHARES

Forfeiture and surrender of shares are effective ways of reductions of capital without the
court’s consent although the shares can be reissued.
The directors have power to forfeit the shares of members if so authorized by the articles.
The power is only exercisable in respect of non-payment of a call or an installment. In any
other event, the forfeiture will be a reduction of capital contrary to the Company’s Act.
Article 33 of Table A provides that where a member fails to answer any call or installment of
a call on the day appointed for payment of the call, the directors may, at any time after that
when any part of the call or installment remains unpaid, serve a notice on him or her
requiring payment of so much of the call or installment as is unpaid together with any interest
which may have accrued.
Article 34 of Table A provides that the notice shall name a further day not earlier than the
expiration of fourteen days from the date of service of the notice on or before which the
payment required by the notice is to be made and shall state that if the payment is not made
at or before the time appointed the shares in respect of which the call was made will be liable
to be forfeited.
Article 35 of Table A provides that where the notice is not complied with any share in
respect of which the notice has been made shall be forfeited by resolution of the directors to
that effect.
Article 36 of Table A provides that Upon the forfeiture of shares, they may be sold or
otherwise disposed off in a manner decided upon by the directors.
Forfeiture effectively vests the ownership of the shares into the company, which may sell or
reissue them. The buyer thereof, if any becomes liable for future calls, while the forfeiting
shareholder ceases to be a member in respect of the forfeited shares Article 37 of Table A
provides that, however, he remains liable in respect of liabilities on such shares, which were
incurred before the date of forfeiture. Essentially, forfeiture is in nature of a penalty.
ANNUAL RETURN
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Every company must deliver an annual return to the registrar of companies within 42 days
after the holding of an annual general meeting. Essentially, details relating to members and
their shareholding, change of directors and company secretary must be supplied.
Annual return to be made by a company having a share capital.

Section 132 (1) provides that a company having a share capital shall, once at least in every
year, make a return containing with respect to the registered office of the company, registers
of members and debenture holders, shares and debentures indebtedness, past and present
members and directors and secretary, the matters specified in Part I of the Fourth Schedule to
this Act and the return shall be in the form and shall be made up to the date set out in Part II
of that Schedule or as near to it as circumstances admit.
Default in filing annual returns

Subsection (4) provides that where a company fails to comply with this section, the company
currency points.
Subsection (5) provides that for the purposes of Part I of the Fourth Schedule to this Act,
"director" and "officer" include any person in accordance with whose directions or
instructions the directors of the company are accustomed to act.
Annual return to be made by a company not having a share capital.

Section 133 (1) provides that a company not having a share capital shall at least once in
every calendar year make a return stating—
(a) the situation of the registered office of the company and the registered postal address of
that office;
(b) in a case in which the register of members is under this Act, kept elsewhere than at the
registered office, the address of the place where it is kept;
(c) in a case in which any register of holders of debentures of a company or any duplicate of
the register or part of the register is, under this Act, kept in Uganda, elsewhere than at the
registered office of the company, the address of the place where it is kept;
(d) all such particulars with respect to the persons who at date of the return are the directors
of the company and any person who at that date is secretary of the company as are by this Act
required to be contained with respect to directors and the secretary in the register of
directors and secretaries of a company; and
(e) to what extent the company has complied with the principles of good corporate
governance contained in Table F.
Subsection (2) provides that subject to subsection (1), a company need not make a return
under that subsection either in the year of its incorporation or, if it is not required by section
140 to hold an annual general meeting during the following year, in that year.
Default in filing annual returns

currency points.
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Subsection (4) provides that for the purposes of this section, “officer” and “director” include
a person in accordance with whose directions or instructions the directors of the company are
accustomed to act.
Time for completion of the annual return.

Section 134 (1) provides that the annual return shall be completed within forty two days
after the annual general meeting for the year, whether or not that meeting is the first or only
ordinary general meeting, or the first or only general meeting of the company in the year and
the company shall within that period forward to the registrar a copy signed both by a director
and by the secretary of the company.
Default in filing returns in time

currency points.
Subsection (3) provides that for the purposes of subsection (2), "officer" includes any person
in accordance with whose directions or instructions the directors of the company are
accustomed to act.
Dormant companies
Subsection (4) provides that where a company is dormant, the directors shall notify the
registrar within fifteen working days from the date of the resolution for dormancy and the
company shall be exempted from filing returns for 12 months; that is the grace period.
Subsection (5) provides that if after expiry of five years from date specified in subsection (1),
the company has not filed any annual returns, the registrar shall require the company file a
statement of solvency and show cause why a company should not be struck off the register.
Subsection (6) provides that where the company does not show cause why it should not be
struck off the register in accordance with subsection(5), the registrar and publish in the
gazette and newspaper of wide national circulation a notice of the striking-off of that
company the registrar.
Documents to be annexed to the annual return.

Section 135 (1) provides that there shall be annexed to the annual return—
(a) a copy, certified both by a director and by the secretary of the company to be a true copy,
of every balance sheet laid before the company in general meeting during the period to which
the return relates (including every document required by law to be annexed to the balance
sheet); and
(b) a copy, certified as provided in paragraph (a), of the report of the auditors on and of the
report of the directors accompanying, each such balance sheet, and where any such balance
sheet or document required by law to be annexed is in a foreign language, there shall be
annexed to that balance sheet a translation in the English language of the balance sheet or
document certified in the prescribed manner to be a correct translation.
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Subsection (2) provides that where any such balance sheet or document required by law to
be annexed to it did not comply with the requirements of the law as in force at the date of the
audit with respect to the form of balance sheets or documents as the case may be, there shall
be made such additions to and corrections in the copy as would have been required to be
made in the balance sheet or document in order to make it comply with the requirements and
the fact that the copy has been so amended shall be stated on it.
Default in compliance with the section

currency points.
Subsection (4) provides that for the purposes of subsection (3), "officer "includes a person in
accordance with whose directions or instructions the directors of the company are
accustomed to act.
Subsection (5) provides that Subsection (1) does not apply to a private company unless at
least one shareholder is a public company.
Certificates to be sent by a private company with the annual return.

Section 136 provides that the annual return required by section 134 shall, in the case of a
private company be endorsed with or accompanied by a certificate signed both by a director
and by the secretary of the company that the company has not, since the date of the
incorporation of the company, issued any invitation to the public to subscribe for any shares
or debentures of the company and, where the annual return discloses the fact that the number
of members of the company exceeds one hundred also a certificate so signed that the excess
consists wholly of persons who under section 5 are not to be included in reckoning the
number of one hundred.
Activity
Discuss the different ways in which a person may cease to be a shareholder in a company
Solution
The student is expected to discuss who a shareholder is and also discuss the different people
who have capacity to become shareholders in a company then also discuss the different ways
in which members can cease to be shareholders in a company
Test Questions
1. Examine the different classes of share that are available for issue by a company
2. Discuss the difference between forfeiture and surrender of shares
3. Discuss the process of allotment and the consequences incase of improper allotment
4. Examine the differences between a share tock and share warrant
5. Discuss the process of transfer/transmission of shares
6. Discuss the importance and effect of the certificate of incorporation
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TOPIC THIRTEEN
COMPANY FINANCE

1. Understand the concept of capital as applied in companies;
2. Analyze the different types of capital a company may have;
3. Evaluate the different ways in which a company can raise capital; and
4. Evaluate and analyze the need for maintenance of capital.
COMPANY FINANCE
Definition of Capital
Capital is the wealth or assets. Technically, it refers to the net worth of the business i.e. the
amount of property that has been invested in a business.
Types of Capital
 Share capital is contributed by members. In Re Air Inn Safaris Ltd, it was said that
share capital does not include loans by the members to the company. Share capital
entitles a dividend as a return to that member.
 Credit (loan) Capital is that returnable portion of capital that entitles interest to the
creditor.
 Nominal Capital: this is the authorized maximum amount of share capital that can
be realized. This is the amount with which a limited company is registered. At
registration, a company is required to state the nominal capital, which is divisible
into shares of a fixed amount. This amount remains constant until it is increased or
reduced. If the capital is not enough, the company may alter it by a special
resolution if articles allow.
 Issued capital is the nominal value of shares availed for subscription and has been
allotted. This is a portion of the nominal capital, which has been issued out to the
shareholders. Usually, only part of the nominal capital is issued, leaving the
company to issue further shares normally at a premium.
 Capital at call is issued capital not yet paid for.
 Called up capital is the portion of issued capital that the company has requested for
settlement from the holder of shares that have not been fully paid for who is
entitled to all benefits as if the shares were fully paid provided the articles of
association allow. This is the amount, which has been issued by the company and
actually paid for by the shareholders. For instance if the issued capital is worth
Shs.10,000 and Shs.50 have been paid up capital will be Shs.5,000 leaving uncalled
capital of Shs.5,000.the company may later resolve to make a call of Shs.50 on each
share.
 Reserve Capital (S.70 (1)) is a portion of the issued capital which is at call but is not
to be called up except in the event of winding up that company. It is issued only by
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a company limited by shares or by guarantee. A company, by special resolution
decides that any part of its share capital, which has not been called up, shall not be
called up except in the event of its winding up. Such capital is known as reserve
capital and as such it cannot be mortgaged.
Raising Capital
Ordinarily when an idea of forming a company has been conceived, ways and methods of
raising capital to make the company run must be sought. The different ways a copany can
raise capital are:
1. By floating shares for sale

2. By borrowing
3. By ploughing back the profits.
Due to limited funds available to shareholders for purposes of running large companies with
heavy capital involvement, it is normal to resort to the public, through invitation to subscribe
for shares or debentures in the company as a means of raising additional funds. This applies
basically to public companies. There are a number of mechanisms by which this is issue of
shares is effected;
Methods of Issue
1. Rights issue:
2. Placings (private)
3. Offers for sale
4. Direct offers e.g. by issuing prospects
5. Offer by tender.
 Placings
These take place in the issuing house. A company issues securities, placing them in the issuing
house for purposes of the latter selling them to its clients. The issuing house (may purchase
securities and place them with clients) or may not place them with the clients. When it
purchases the securities, then it ceases to be an agent of the company.
 Offers by Tender
This is a new innovation in the developed world by which the company will make a tender to
the public for the purchase of its shares. All the shares that have been tendered are sold to the
highest bidder.
 Bonus issue
A listed company may capitalize part of its reserves by making a bonus issue to the existing
shareholders, and no cash will be paid to such issues. For instance, if a corporation declares a
1 for 5 bonus issue, that means for every 5 shares held, an existing shareholder will receive 1
share for free.
Like the rights issue, the bonus issue method is an internal affair of the company concerned.
Under this method, instead of the company paying to shareholders a dividend it may have
declared, it holds on to those funds by issuing shares to the shareholders.
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 Rights issue/script issue
A corporation may make a rights issue to its ordinary shareholders. Existing shareholders will
be given the rights to buy a new share at a price lower than that listed in the stock exchange.
The company invites its own shareholders to subscribe for new shares or debentures. As an
incentive, such securities are sold at a lower price than what they would normally obtain in
the new market. But the existing shareholders will subscribe to the new issues only when the
past performance and future prospects of the company are good.
 Offer for sale

This method involves a corporation selling a new issue of share to an issuing house, and the
issuing house will bear the risks of selling shares to other investors.
The company concerned issues its securities in an issuing house and the latter sells them to
the public at a higher price. This method has a number of advantages to this company:
1. The company is not responsible for unsuccessful issue to the public.

2. It is the issuing house which bears the responsibility for the prospectus.
3. Unlike the method of placings, the company does not pay anything since the issuing
house pays itself a commission, the difference of the price at which the sells and the price
which he bought.
 Private placings
This method involves an issue of new shares to financial institutions and large private clients
rather than making an invitation to the general public to subscribe to shares.
 Direct issue
This involves a corporation making an invitation to the general public to subscribe or
purchase its shares. For instance, a listed company made a public issue of 1,000,000 New
Ordinary Shares of $1 each at an issue price of $1.20 per ordinary share payable in full on
application.
The company itself deals with the public without an intervention of the issuing house. This
method is cumbersome for a number of reasons.
- The company has to use a prospectus i.e. legal liability are conferred upon a
company.
- The company bears a risk of unsuccessful issue.
- Although it may protect itself against unsuccessful issue by underwriting such
issue, the underwriters have to be paid a commission for that issue.
Usually the Articles of Association provides that the commission must not exceed 10% of the
price at which the shares are issued and that there must be authority from the articles to pay
that commission. This means that a company cannot transact with underwriters who demand
more than 10% of the price. If the articles authorise more than 10% the company cannot
exceed such figure. And finally such payment must be disclosed in the prospectus.
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Underwriting.
Upon the formation of a company, the promoter, where appropriate, ensures that the share
offered to the public are underwritten. However, where an existing company is desirous of
raising capital, it is the directors’ duty to ensure that new shares are underwritten. The aim of
underwriting is to ensure that the issue of shares is successful. Underwriting is a form of
insurance against possible poor reception of the issue by the public. (an underwriting
agreement means an agreement entered into before the shares are brought before the public,
that in the event of the public, not taking the whole of them or the number mentioned in the
agreement, the underwriter will, for an agreed commission, take an allotment of such part of
the shares as the public has not applied for.) Like all forms of insurance, the promoters must
make full disclosure (duty of good faith, otherwise the contract can be rescinded.
Underwriting commissions are different from brokerage i.e. sums payable to a share broker
who agreed to place shares and not to take the shares.
The Prospectus
According to S.2, a prospectus means a prospectus, notice, circular, advertisement or other
invitation offering to the public for subscription or purchase and includes;
(a) A prospectus relating to an offer of debt securities to the public;
(b) A prospectus in respect of any other securities to the public. The definition in S.2 is
very vague and consequently the courts have come up with some guidelines to be
employed in determining whether an invitation amounts to a prospectus or not. There
must be voluntary delivery.
Firstly, according to Nash Vs Lynd (1929) AC 158, for a document to amount to a prospectus,
not only must it be delivered but also there must be some publicity with the aim of inducing
subscription e.g. if a thief stole the document and publicized the issue of shares which the
public purport to buy, the document does not amount to a prospectus.
Secondly for a document to amount to a prospectus, it must be issued to the public.
Then what amounts to the Public?

The section seems to indicate that a public means a public whether selected by members or
debenture holders of the company concerned or as clients of the person issuing the
prospectus or in any other manner. In Re Govt Stocks & other Securities investment Co.
Ltd Vs Christopher (1956) 1 WLR 237 a company issued a circular in which it offered to
acquire shares in another company in return for its own shares. The question was did that
circular amount to a prospectus. The court held that where an offer is acceptable only by the
shareholders of a company, such an offer is deemed not to be to the public unless the shares
are to be issued under renounceable letters or terms.
Renounceable letters are contracts of allotment of shares under which the allotees can pass
those shares to third parties. Where the shares have been issued at non-renounceable terms,
the allottee cannot sell them to a third party.
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Secondly, the invitation must be one inviting the public to subscribe or purchase the
securities. The terms subscribe or purchase means taking or agreeing to take securities for
cash.
Legal Aspects of A Prospectus

 A prospectus must be issued by or on behalf or in relation to a company or an intended
company.
 It must be dated;
 It must be delivered to the registrar for registration;
 If it contains a statement by an expert, that expert’s written consent must accompany the
prospectus
If these requirements are contravened, the company and any office responsible for that
prospectus are liable to a fine per each day the default continues.
Contained in the prospectus are the following:-

• The number of founders or management
• The nominal share capital
• Types of shares and the interest of the holders thereof in the company’s property and
profits.
• The share qualification of directors.
• Names, description and addresses of directors.
• Particulars of contracts relating to property acquired and liabilities of the company.
• The names and addresses of the auditors.
Liability for Defective Prospectus

Under common law an aggrieved subscriber can institute an action for deceit or
misrepresentation which entitles him to damages or rescission of a contract or allotment.
However, there are a number of limitations to these remedies.
Limitations to damages for misrepresentation

The court may deny the action or dismiss it as disclosing no cause of action unless:-
i. The plaintiff's complaints must be against a misrepresentation of fact and not of
merely an opinion e.g. if we say, I hope to become an accountant" as opposed to "as I am going
to become an accountant".
ii. That misstatement or misrepresentation must be true if a prospectus omits stating
what it should have mentioned, then a company cannot be sued e.g. we are going to import
maize from Uganda without mentioning the part of Uganda and bearing in mind that some
parts of Uganda are insecure. However, if a statement mentions articulately the area, then it
can be sued.
Limitations for rescissions

1. The plaintiff must indicate his intention of rescinding the contract i.e. immediately i.e.
he must not do anything which amounts to an affirmation of the contracts. If he applies for
shares on the basis of a defective prospectus, he must immediately return them on acquisition
of this knowledge e.g. attending meeting, setting shares to third party, receiving dividends etc.
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2. He must take steps to rescind the contract of allotment before winding up proceedings
have commenced. The rationale is to safeguard the interests of creditors since such a
shareholder would avoid his liability or even fall among the directors to that company.
However, there are 2 exceptions:
Statement In Lieu Of a Prospectus

Where a company doesn’t issue a prospectus and it is a public ltd company or if it issues one
and doesn’t proceed to allot the shares/debentures, then such a company must deliver to the
registrar of companies a document known as a statement in lieu of a prospectus.
DEBENTURES AND BORROWING (LOAN CAPITAL)

Authority to Borrow:
Article 79 (1) of Table A provides that the directors may exercise all the powers of the
company to borrow money and to mortgage or charge its undertaking, property and uncalled
capital, or nay part of it and to issue debentures, debenture stock and other securities but the
money borrowed or secured shall not at any time without the previous approval of the
company in general meeting exceed the nominal amount of the share capital of the company
but the lender or other person dealing with the company shall not be concerned to see or
inquire whether the limit is observed.
Article 79 (1) of Table A provides that a debt incurred or security given in excess of the limit
referred to in sub regulation (1) is not invalid or ineffectual except in the case of express
notice to the lender or the recipient of the security at the time when the debt was incurred or
security given that the limit imposed by sub regulation (1) had been or was as a result
exceeded.
In practice, the power to borrow money is provided for in the articles with an indication that
the directors may borrow money up to a certain limit. The excess over that limit requires the
sanction of the general meeting. Once it is established that the company has power to borrow
money; then there is an implied power to charge its property for purposes of securing the
repayment of the money borrowed.
Corporate borrowing may be by line of credit or overdraft or a long term bank loan. Loans are
contractual agreements and a loan obtained from a bank by a company will be based on a
contract between a company and a bank. Accordingly, there must be a written document
evidencing the loan e.g. a loan agreement and the terms of these agreements vary depending
on the nature of the loan whether it’s a term loan or an overdraft.
Thus the financial institution must take into account the fact that it is dealing with an entity
which is a legal fiction and it is presumed to have constructive notice of the contents of the
MOA and AOA. Therefore banks usually have terms that are intended to provide some
protection for the bank and also to create a framework for the recovery of this loan. For
instance, the bank may require that the company should provide security i.e. a collateral
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(security) over certain assets of the company and if the company fails to pay the bank then the
bank can seize the assets of the security applies. These are technically referred to as default
clauses,
In the corporate context, financial institutions will require the execution of a document called
a debenture which provides terms and conditions of the debt. Debentures are subject to the
contractual terms and depending on the nature of the debenture executed. But generally,
debentures will include terms such as the control of any other debt in the company, interest
to be paid on the principal, and in the case of default, the right to seize the assets of the
company and the right to appoint receivers or managers or board of directors.
DEBENTURES.
A debenture is defined under section 2 to include debenture stock, bonds and any other
securities of a company whether constituting a charge on the assets of the company or not.
A debenture is also defined as a document acknowledging the indebtedness of the company,
which is normally, but not necessarily secured by a charge over property. The debenture is an
acknowledgement of a distinct debt. Consequently, a company may raise money by way of
borrowing from the public and in return issue debentures. Incidentally a private company is
not allowed to raise money by borrowing from the public (Section 5).
Where the debenture is not secured, the document will be referred to as a naked debenture or
unsecured loan stock.
The document will also ordinarily contains a promise to repay the principal sum borrowed on
a given date with interest at specified intervals.
Instead of a company raising capital by borrowing and issuing debenture the company may
decide to create a debenture stock. A debenture stock may be a defined as a loan fund which is
created by the company and it’s divisible among various creditors who each holds a
debenture stock certificate.
Provisions as to registers of debenture holders.

Section 98 (1) provides that a company which, issues a series of debentures shall keep at the
registered office of the company a register of holders of the debentures.
Subsection (3) provides that a company shall give notice to the registrar of the place where
the register and any duplicate is kept and of any change in that place.
Rights of debenture holders and shareholders to inspect the register of debenture

holders and to have copies of a trust deed.
Section 99 (1) provides that a register of holders of debentures of a company shall, except
when duly closed be open to the inspection of the registered holders of the debentures or any
holder of any shares in the company without fee and to any other person, on payment of a fee
of half a currency point or such less sum as may be prescribed by the company.
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Subsection (2) provides that the company may, in a general meeting, impose reasonable
restrictions on inspection under subsection (1) but the restrictions shall not be such as to
reduce the period of inspection to less than two hours in each day.
Subsection (3) provides that every registered holder of debentures and every holder of
shares in a company may require a copy of the register of the holders of debentures of the
company or any part of it on payment of a reasonable fee prescribed by the company for
every hundred words required to be copied.
Subsection (4) provides that a copy of any trust deed for securing any issue of debentures
shall be forwarded to every holder of any such debentures at his or her request on payment in
the case of a printed trust deed of the sum of a reasonable fee prescribed by the company or,
where the trust deed has not been printed, on payment of a reasonable fee prescribed by the
company for every hundred words required to be copied.

Subsection (5) provides that if inspection is refused or a copy is refused or not forwarded,
the company and every officer of the company who is in default is liable to a default fine of
twenty five currency points and further fine of five currency points for each day the default
continues.
Subsection (6) provides that where a company is in default under this section, the registrar
may by order compel an immediate inspection of the register or direct that the copies
required shall be sent to the person requiring them.
Subsection (8) provides that a person aggrieved by a decision of the registrar under this
section may appeal to court.
Liability of trustees for debenture holders.

Section 100 (1) provides that subject to this section, any provision contained in a trust deed
for securing an issue of debentures or in any contract with the holders of debentures secured
by a trust deed is void in so far as it would have the effect of exempting a trustee under the
trust deed from or indemnifying him or her against liability for breach of trust where he or
she fails to show the degree of care and diligence required of him or her as trustee, having
regard to the provisions of the trust deed conferring on him or her any powers, authorities or
discretion.
Differences between a debenture and debenture stock

 As a general rule, debentures rank according to the time of issue. The first debenture
takes priority over all other debentures on repayment. On the other hand, since a
debenture stock is a fund, each beneficiary ranks in pari passu (equally) with others
(no priorities).
 Easy transferability - The debenture covers a district debt which is indivisible and
therefore must be transferred as a whole in case the present holder wishes to get
money from it. On the other hand a debenture stockholder can always sub-divide his
holdings and transfer the same to a person of his choice.
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THE TRUST DEED
The trust deed contains the company’s covenant to repay with interest the money borrowed.
It will specifically charge the company’s property and indicate when the charge becomes
enforceable. This is usually done where the company defaults in the payment of interest. The
deed also provides powers to deal with the charged property and to appoint a receiver to
enforce the security.
PAYMENT OF DEBENTURE HOLDERS

Debenture holders are not members of the company. Their interest can be paid out of the
company’s capital. In contrast dividends on shares can only be paid out of profits. Again in
contradiction with shares, debentures can be issued at a discount since they are not part of
the company’s capital. In the same way, a company can buy its own debentures, whereas it
cannot buy its own shares. Debentures are convertible into shares.
PRIORITY.
Where debentures are issued in pari passu and there are insufficient assets to pay all the
debenture-holders in full, the available amount would be distributed in proportions to the
amount owing to each of them. Where they do not rank pari passu, they will be paid
according to the date of issue.
Classes:
(a) Registered Debentures:
These are payable to registered holders. They indicate the amount secured and interest
thereof are payable to the person named therein or the registered holder.
(b) Bearer Debentures:
These are payable to the bearer for the time being. This type of debenture is negotiable. It
can be transferred by mere delivery.
Remedies for Debenture Holder:
1.Can exercise this power to sale or prove his claim to the liquidator.
2. Where the debenture is not registered, the holder has to prove his debt in an ordinary suit.
CHARGES:
A charge is defined in section 2 to mean a form of security for the payment of a debt or
performance of an obligation consisting of the right of a creditor to receive payment out of
some specific fund or out of the proceeds of the realization of specific property and includes a
mortgage.
Thus, a charge is an interest or encumbrance on the assets of the company. It is a type of
security given by a company when it borrows money.
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Creditors may be secured or unsecured.
Such collateral assets attached to secured creditors are sometimes referred to as charges. A
secured creditor may have his security or charge in form of a fixed charge or a floating charge.
Fixed Charge:
A fixed charge is attributed to a creditor entitled to a particular asset as security while a
floating charge relates to a creditor who is entitled to any of the company's assets that have
no fixed charge at all. This is a mortgage of defined property and the company cannot deal
with it without the mortgagees consent. It is advantageous over the floating charge because
you cannot deal with the property without the consent of the mortgagee/debenture holder.
Floating Charge.
A floating charge is that form of charge or security which covers assets (current assets) of the
same generic name but which assets are indeterminable at any given time since the borrower
has to use them during his day to day business to the extent of disposing them and replacing
them with others. This affects the company’s property, which is constantly changing its
advantage over a fixed charge is that the company can continue dealing with the property
until the charge crystallizes. It was defined in Illingworth V Houldsworth (1904) as
ambulatory and shifting in nature ….the property it is intended to affect until some event
occurs or some act is done which causes it to settle ….
A floating charge crystallizes (becomes fixed) the moment there is default to repay by the
company and notice has been given to the company for default.
Registration of Charges:
Section 105 (1) provides that subject to this Part, every charge created by a company
registered in Uganda and being a charge to which this section applies is, so far as any security
on the company’s property or undertaking is conferred by it, is void against the liquidator and
any creditor of the company, unless the prescribed particulars of the charge, together with the
instrument, if any, by which the charge is created or evidenced are delivered to or received by
the registrar for registration in a manner required by this Act within forty two days after the
date of its creation.
Subsection (2) provides that subsection (1) shall apply without prejudice to any contract or
obligation for repayment of the money secured by the charge and when a charge becomes
void under this section the money secured by the charge shall immediately become payable.
Subsection (3) provides that this section applies to the following charges—
(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge created or evidenced by an instrument which, if executed by an individual, would
require registration as a bill of sale;
(d) a charge on immovable property, wherever situated or any interest in it;
(e) a charge on book debts of the company;
(f) a floating charge on the undertaking or property of the company;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship; and
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(i) a charge on goodwill, on a patent or a licence under a patent, on a trade mark or on a
copyright or a licence under a copyright.
Charges created outside Uganda

Subsection (4) provides that in the case of a charge created outside Uganda comprising
property situated outside Uganda, the delivery to and the receipt by the registrar of a copy
verified in the prescribed manner of the instrument by which the charge is created or
evidenced shall have the same effect for the purposes of this section as the delivery and
receipt of the instrument itself and forty two days after the date on which the instrument or
copy could in due course of post and if dispatched with due diligence, have been received in
Uganda shall be substituted for forty two days after the date of the creation of the charge as
the time within which the particulars and instrument or copy are to be delivered to the
registrar.
Subsection (5) provides that the instrument creating or purporting to create the charge may
be sent for registration under this section notwithstanding that further proceedings may be
necessary to make the charge valid or effectual.
Subsection (12) provides that for the purposes of this Part a charge shall be taken to be
created in the case of an instrument creating a charge, on the date of the execution of the
charge by or on behalf of the company, and in the case of a charge created by deposit of title
deeds on the date of the deposit of the title deeds.
Duty of a company to register charges created by the company.

Section 106 (1) provides that it shall be the duty of a company to send to the registrar for
registration the particulars of every charge created by the company and of the issues of
debentures of a series, requiring registration under section 105, but registration of any such
charge may be effected on the application of any person interested in the charge.
Subsection (2) provides that where registration is effected on the application of some person
other than the company, that person is entitled to recover from the company the amount of
any fees properly paid by him or her to the registrar on registration.
Default in registering a charge

Subsection (3) provides that if a company fails for forty two days or such extended period as
the registrar may order to send to the registrar for registration the particulars of any charge
created by the company or of the issues of debentures of a series, requiring registration, then
unless the registration has been effected on the application of some other person, the
company and every officer or other person who is a party to the default is liable to a default
fine of fifty currency points.
Subsection (4) provides that for the purpose of subsection (3)—

(a) in the case of a mortgage the forty two days referred to in that subsection shall be taken to
run from the time of filing the mortgage instrument with the registrar of titles;
(b) in the case of a debenture, the time shall run from the date of execution of the debenture.
Certificate of registration of a charge.

Section 108 (1) provides that the registrar shall issue a certificate signed by him or her of the
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registration of the charge registered under this Part and within any period allowed under this
Part, stating the amount secured by the charge.
Subsection (2) provides that the certificate shall be conclusive evidence that the
requirements of this Part as to registration have been compiled with.
Endorsement of certificate of registration on debentures.

Section 109 (1) provides that the company shall cause a copy of every certificate of
registration given under section 108 to be endorsed on every debenture or certificate of
debenture stock which is issued by the company and the payment of which is secured by the
registered charge.
Default in endorsing
Subsection (3) provides that where a person knowingly and willfully authorises or permits
the delivery of any debenture or certificate of debenture stock which under this section is
required to have endorsed on it a copy of a certificate of registration without the copy being
endorsed upon it, he or she shall without prejudice to any other liability, is liable to a fine of
twenty five currency points.
Entries of satisfaction and release of property from charge.

Section 110 provides that the registrar on evidence being given to his or her satisfaction
with respect to any registered charge—
(a) that the debt for which the charge was given has been paid or satisfied in whole or in part;
or
(b) that part of the property or undertaking charged has been released from the charge or has
ceased to form part of the company’s property or undertaking, may enter on the register a
memorandum of satisfaction in whole or in part, or of the fact that part of the property or
undertaking has been released from the charge or has ceased to form part of the company’s
property or undertaking, as the case may be, and where he or she enters a memorandum of
satisfaction in whole he or she shall, if required, furnish the company with a copy of the
memorandum of satisfaction.
Extension of time to register charges.

Section 111 (1) provides that the registrar, on being satisfied that the omission to register
a charge within the time required by this Act or that the omission or misstatement of any
particular with respect to any such charge or in a memorandum of satisfaction was accidental,
or due to inadvertence or to some other sufficient cause or is not of a nature to prejudice the
position of creditors or shareholders of the company or that on other grounds it is just and
equitable to grant relief, may, on the application of the company or any person interested and
on such terms and conditions as seem to the registrar just and expedient, order that the time
for registration shall be extended or as the case may be, that the omission or misstatement
shall be rectified.
Default in compliance with the above provision
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Subsection (2) provides that where a person defaults in complying with the requirements of
this section, he or she is liable to a default fine not exceeding ten currency points for each day
of which the default continues.
PLOUGHING BACK PROFITS:

A company can decide to raise capital by ploughing back profits without declaring any
dividends or proposing a dividend and instead of paying it out, employ a bonus issue.
OTHER WAYS OF RAISING CAPITAL

FAMILY AND FRIENDS:
When your own funding is not an option, there is another great way to raise capital – friends
and relatives. Your family and friends could be approached to chip in, but even if they do have
the financial resources, it usually won’t be long before you exhaust your options here.
Though it may seem shameful to ask them for capital, it seems to be quite a popular option
because according to a survey it is the option of choice for 30% of entrepreneurs who are
looking for ways to raise capital. If you decide to go this way for funding, you must have your
attorney draw up a business contract because though you approach people you know for
funds in an informal, non-business way, business is best done transparent, telling them how
their investment will profit and ensuring that you will keep up your part of the agreement is
the most professional way to do business.
EMPLOYEES:
You could invite your employees to participate in your business success and growth through
an employee share ownership plan which would provide you with some capital to fund
expansion, and release your equity.
GOVERNMENT GRANTS:
Funding may be available to assist in the growth of your business, particularly for innovative
projects, but these are rare, often difficult to access and can be laden with restrictions
inhibiting your entrepreneurial flare.
INVESTORS:
Attracting investors or venture capitalists (sometimes described by some as ‘vulture’
capitalists) is another useful option but can be difficult to organise and place you under a lot
of pressure to perform in a very short space of time. Most will not consider investing in your
company unless you can tick all boxes on a detailed list of criteria including a clearly defined
and formalised exit strategy.
PERSONAL CAPITAL
When you have money of your own, why look at external sources? But before you opt for this,
make sure you have a good talk with subject matter experts, look into the long-term
consequences, and decide which form of equity fund is the best way for raising capital via
equity. You could have savings, mutual funds, life insurance or credit cards (the last being the
most risky funding option), so when you use the funds for your business venture you will
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need to understand which of the options have scope of bringing in better returns on
investment.
ANGEL INVESTORS
Private investors are those who are interested in making money with their capital through
non-traditional markets. These “angels” could be anyone – someone you know, your banker,
your attorney, like-minded individuals, or an individuals who for the love of business, seek
out new opportunities to invest in return for equity ownership. These people can give you
ways to raise capital, guidance for start-ups, improve your ideas and mould your business, but
they usually demand high returns for their investments.
MAINTENANCE OF CAPITAL
As a general rule, a company's capital must not be increased or reduced unless the company's
ordinary business warrants such as step. One of the reasons for this rule is the need to
maintain that capital fund to which creditors rely for payment when extending capital
facilities to that company.
Rules regarding maintenance of capital
1. Dividends are to be paid out of profits
Article 116 of Table A provides that dividends must be paid only out of profits. A dividend is
essentially a share of the company’s declared profit relative to a member’s shareholding. The
company’s articles of association usually regulate the payment of dividends. The basic rule is
that dividends should not be paid out of capital. Dividends are normally declared at the
company’s general meeting. Directors have the discretion to declare dividends.
DIVIDENDS
Article 114 of Table A provides that dividends may be declared in a general meeting
Dividends are any return paid/given to a shareholder on his investment/shareholding in that
company. Unless the articles state otherwise, a shareholder receives dividends on his shares.
In Makidayo Oneka Vs Wines And Spirits (U) Ltd And Another (1974) HB.2, the principle
was laid that unless the articles and terms of the issue of shares confer a right upon a
shareholder to compel a company to pay a dividend, it is the discretion of the directors to
recommend to a general meeting that a dividend be declared.
Furthermore, where a company has an article equivalent to Article 114 of Table A provides
that, if the directors have recommended a certain sum for dividend, the general meeting has
no discretion to increase that sum. However, a shareholder or a debenture holder can seek a
court injunction to restrain a company from declaring a dividend. The Companies Act is not
helpful as to when dividends should be declared. The nearest is Article 116 of Table A
provides that, where dividends are to be paid out of profits. Then, the question is what are
profits?
In the case of Lee Vs Neuchattel Asphalt Co (1889) 41 CH.D.1, a company had been formed
for the purposes of acquiring and working out a concession in a mine. The company proposed
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to pay a dividend out of the profits shown on the reserve account. A shareholder challenged
this on the ground that the company's assets weren't equal to its share capital and that since
the mining concession was a wasting asset, dividing annual proceeds amounted to dividing
the company's capital assets. The shareholders contention was rejected and dividends were
paid.
There is nothing at all in the Act about how dividends are to be paid nor how profits are to be
recommended. The legal rules relating to the payment of dividends are as follows:-
a) Dividends should not be paid if this would lead to the company being unable to pay its
debts when they fall due.
b) It is permissible to pay dividends out of profits without making up for losses on fixed
capital. Thus, in Bond Vs Barrow Hematite Steel Co (1902) Ch. 353, the court held
that while as a general rule where a company may declare a dividend without paying
regard to the loss of fixed capital, if such a step is challenged, the company has a
burden of justifying such action.
c) Dividends should only be paid after making good the loss of circulating capital during
the year.
d) Losses of previous years, however, great need not be made good before payment of
dividend. Moreover in Ammonia Soda Co Vs Chamberlain (1918) 1ch.266, it was
held that a company may declare a dividend without having made good the loss of the
previous years. In the case, a declaration of a dividend was challenged on the ground
that for about 3 years, the company had made losses so that the profits made in the 4th
year could not be considered profits for a declaration of a dividend without making
good the loss of the previous years. However, the court pointed out that in declaring a
dividend in such circumstances, directors must act honestly and reasonably taking into
account the previous years.
e) Profit of previous years may be distributed by way of dividend from a reserve fund.
f) A profit, which has been made on the sale of the company’s fixed assets, can be
distributed to members by way of dividends. Finally as a general rule and according to
Dimbula Valley (Ceylon) Tea Co.Ltd V Lawrie (1961) Ch. 353, A realized profit on
the sale of a company’s assets can be treated as a profit available for a dividend
provided the company's liabilities are less than the value of its fixed assets and
circulating assets. Moreover, if the articles allow it, an unrealised increase in value of
the company's assets made on revaluation and in good faith by competent valuers and
where such revaluation is not likely to fluctuate in the short run, may be distributed as
a company dividend or be used to pay a bonus issue. However, the court says " I do not
say that in many cases, such a course of action would be a wise commercial practice
but for myself, I see no ground for saying that it is illegal."
g) Losses of capital need not be made good before the company declares a dividend. It is
not generally essential to make any provisions for depreciation so long as fictitious
accounts have not been evoked.
N.B. Once a dividend has been declared, it becomes a shareholder's property (it is a debt from
the company) and he can consequently sue for it. Dividends are usually paid in cash though
they can be paid in other form of property. A company may recycle the profits instead of
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declaring dividends. Subject to the AOA the powers to declare dividends is vested in the
directors as part of the directors’ powers to manage the company under Article 80 Table A.
However, in exercising this power, the directors must do so in the best interest of the
company and not in a way that is oppressive to one or more shareholders. In DOGE Vs FORD
MOTOR CO the motor co had amassed substantial profits in a financial year. Henry Ford
refused to declare a dividend so that the company could use the funds to expand the plant. He
argued that he acyed in the best interest of the company and the best interest of the company
was making profits for the company and not individuals. The court held that the refusal to pay
the dividend was oppressive to the other shareholders.
Why is the power to declare dividends vested in directors?

- to avoid conflict of interest
- checks and balances
- they are not doing so as individuals but as an organ
2. company’s issued capital should not be increased

As a general rule, a company's issued capital must not be increased unless the company's
ordinary business warrants such as step. One of the reasons for this rule is the need to
maintain that capital fund to which creditors rely for payment when extending capital
facilities to that company.
3. Payment of interest out of the company's capital.

According to S.75 (1) provides that where any shares of a company are issued for the
purpose of raising money to defray the expenses of the construction of any works or buildings
or the provision of any plant which cannot be made profitable for a lengthened period, the
company may pay interest on so much of that share capital as is for the time being paid up for
the period and subject to the conditions and restrictions in this section mentioned, and may
charge the sum so paid by way of interest to capital as part of the cost of construction of the
work or building or the provision of plant.
Subsection (2) provides that Subsection (1) is subject to the following—

(a) payment shall not be made unless it is authorised by the articles or by special resolution;
(b) the payment whether authorised by the articles or by special resolution shall not be made
without the previous approval of the registrar;
(c) before approving the payment the registrar may, at the expense of the company, appoint a
person to inquire and report to him or her as to the circumstances of the case and may, before
making the appointment, require the company to give security for the payment of the costs of
the inquiry;
(d) the payment shall be made only for period determined by the registrar, and that period
shall not extend beyond the close of the half-year next after the half-year during which the
works or buildings have been actually completed or the plant provided;
(e) the rate of interest shall not exceed five per cent per year or such other rate as the
Minister may for the time being by regulations prescribe; and
(f) the payment of the interest shall not operate as a reduction of the amount paid up on the
shares in respect of which it is paid.
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4. Company's resolution to reduce its capital.
According to S.76, (1), subject to confirmation by the court, a company limited by shares or a
company limited by guarantee and having a share capital may, if authorised by its articles, by
special resolution reduce its share capital in any way, and, in particular, without prejudice to
the generality of the foregoing power, may—
(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid
up;
(b) with or without extinguishing or reducing liability on any of its shares, cancel any paid up
share capital which is lost or un-represented by available assets; or
(c) with or without extinguishing or reducing liability on any of its shares, pay off any paid up
share capital which is in excess of the requirement of the company, and may, if and so far as is
necessary, alter its memorandum by reducing the amount of its share capital and of its shares
accordingly.
Subsection (2) provides that a special resolution under this section is in this Act referred to
as “resolution for reducing share capital”. In Re Moorgate Mercantile Holdings Ltd (1980),
AER.40, there was a proposal by the company to reduce its capital on the ground that the paid
up capital had been lost. It was held that in exercising its jurisdiction to confirm a reduction of
capital on such ground, the court should require evidence of laws and provisions for
safeguarding creditors especially where the loss is less than the amount to be reduced.
Moreover such a company may be required to add to its name "and reduced".
4. Under S.247 (the oppression section).

This is another case in which the company may be allowed to reduce its share capital. One of
the orders a court may make under the section is that the oppressed shareholder be bought
out of the company.
5. Consideration for Shares.

The rule in Ooregum case: In Ooregum Gold Mining Co. of India Y Roper (1892) AC 125,
the directors sought to issue shares at a discount. It was held that shares are not to be issued
at a discount and whoever takes shares in return for cash must pay the full nominal value of
those shares.
6. Company Repurchasing its own shares.

In the case of Trevor Vs Whiteworth (1887) 12 AC 409, during the winding up of the
company, a shareholder claimed the balance of the principal for fully paid up shares which he
had sold to the company before winding up. It was held that it is ultra vires for a company to
purchase its own shares even if the memorandum gives express authority to do so.
Repurchasing is different from either forfeiture or surrender of shares. In repurchasing, a
condition may be made that after a specified period of calling shares to be repurchased, and
they don't comply, then the shares may be forfeited or surrendered.
Section 68 (1) provides that subject to this section, a company limited by shares may, if
authorised, by its articles, issue preference shares which are or at the option of the company
are to be liable, to be redeemed.
Subsection (2) provides that subsection (1) is subject to the following—
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(a) shares shall not be redeemed except out of profits of the company which would otherwise
be available for dividend or out of the proceeds of a fresh issue of shares made for the
purposes of the redemption;
7. Financial Assistance:
According to Section 63, it is unlawful for a company to assist anybody to purchase its shares
because it’s like a donation. It has the effect of reducing the share capital. However, this is not
applicable where:-
i. The company lends money as part of its business.
ii. The company under its scheme of helping its employees other than directors
subscribes for shares in that company. It can provide money for such purpose.
Contravention of section 63
If Section 63 is contravened, it is provided under subsection (4) that the company commits
an offence and is liable to a fine not exceeding one thousand currency points.
Subsection (5) provides that where a company commits an offence under subsection (4),
every officer of the company who contributes to the default commits an offence and is liable
on conviction to imprisonment not exceeding two years or a fine not exceeding two hundred
currency points or both.
Such a transaction is unlawful and any money advanced is unrecoverable. In Selangor United
Rubber Estates Ltd Vs Cradock (No.3) (1968) 1 WLR 155 Creditors instructed the
company to advance money to Selangor Company Ltd in effect buying them out. It instructed
Selangor to advance loans to Woodstock Co. He instructed the bank to pay an equivalent of
the advance made by the Contanglo Co to that company. Then the Cradocks instructed
Woodstock to repay the loan to the bank. At the end of it, he had control over Selangor and
there was no unpaid creditor. It was held that the transaction was unlawful because it
amounted to financial assistance.
NB. Any security a company may mortgage for a loan to finance certain persons to purchase
the company's shares is not recoverable at all. The lenders of the money can’t sue for the loan,
it is irrelevant that the lenders did not know the purposes for which the loan was held.
REDUCTION IN CAPITAL.
A Company has no powers to reduce its capital except in accordance with the Act. This is
necessary in order to ensure that creditors have reliable funds for satisfying their claim by
preventing undue depletion thereof by the company.
Under Section 76, the reduction of capital must be authorized by the Company’s Articles.
There are three specific instances of reduction provided for under the Act:
(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid
up;
(b) with or without extinguishing or reducing liability on any of its shares, cancel any paid up
share capital which is lost or un-represented by available assets; or
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(c) with or without extinguishing or reducing liability on any of its shares, pay off any paid up
share capital which is in excess of the requirement of the company, and may, if and so far as is
necessary, alter its memorandum by reducing the amount of its share capital and of its shares
accordingly.
Activity
Examine the different ways in which a company can raise capital
Solution
The student is required to define what capital and then discuss the available ways through
which a company can raise capital e.g. floating shares and under this the student is expected
to discuss the different ways a company can float its shares to the public.
Test Questions
1. Discuss the different types of capital that a company may hold
2. Discuss the concept and importance of underwriting as applied in company law
3. Examine the need for companies to maintain capital and the different rules
regarding maintenance of capital
4. Analyze the circumstances under which a company can reduce its capital
5. Examine the difference between the prospectus and the statement in lieu of the
prospectus
6. (a) Discuss the various methods of issue of shares clearly pointing out the
advantages and disadvantages of each
(b) Which of these methods would you recommend to the managers of Uganda’s
Stock Exchange if they sought your professional opinion
7. What is the legal importance of share certificate?
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CHAPTER FOURTEEN
ENFORCEMENT OF MEMBERS RIGHTS
At the end of this Chapter, the student will be able to generally understand the position of
members in a company and the remedies available to an aggrieved shareholder and the
Procedure and specifically the student will be able to:
1. Understand the concept of the majority versus minority rule;
2. Examine the proper plaintiff; and
3. Evaluate the exceptions under which the proper plaintiff principle will not apply or
circumstances through which members can enforce their rights.
THE POSITION OF MEMBERS IN A COMPANY (REMEDIES AVAILABLE FOR AN AGGRIVED

SHAREHOLDER AND THE PROCEDURE)
Remedies available to minority shareholders by the majority who are alleged to be

oppressive, unfair or prejudicial.
The recent trend is that management is now vested in the board of directors (Article 80 of
Table A) or the shareholders in a general meeting.
To what extent do the minority shareholders have control over the conduct of their fellow
shareholders?
In the process of managing corporate affairs, the minority shareholders are bound to be
aggrieved by omissions or commissions of their fellow shareholders or decisions taken or
made in the company.
According to Sealy, all powers of the company rest with one or the other of the two organs ie
shareholders in the general meeting or the board of directors. That in taking decisions, the
two organs base on the majority rule i.e. the decisions of the general meeting is the decision of
the majority – 51% of the votes or shares are what constitutes the majority.
In addition, power lies with the majority and the minority must in principle, accept the
decisions of the majority. They must acknowledge that this power enjoyed by the majority is a
fact of business life and it is also democratic. That if the minority want to bring about change,
and then it is open for them to seek for change through the normal democratic processes
which are:
- lobbying
- persuasion
- publicity
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The issue then is whether the members have a right of suing the directors who are managing
the company. It has generally been held that the courts cannot entertain such a suit, because
the wrong has been done to the company. Thus where a wrong has been committed to the
company, the proper plaintiff to sue for the wrong is the company and not any shareholder.
This is what is referred to as the proper plaintiff principle.
The proper plaintiff principle is derived from the case of FOSS Vs HARBOTTLE. In this case,
the plaintiffs instituted a suit or brought an action against the directors of a company who had
sold their own land to the company at an overpriced value. The court held that even if this
allegation was true, if something injurious has been done to the company, the proper plaintiff
to sue is the company and not the individual or a group of shareholders.
This raises what is commonly referred to as the proper plaintiff principle. If a company is
injured or aggrieved by an omission or commission of a group of shareholders, it is the
company to complain and not the shareholders.
The wisdom of FOSS Vs HARBOTTLE can only be appreciated or derives its history from the
case of CARLEN Vs DRURU [1812] 1 B& B where the court observed that “this court is not to
be required on every occasion to take the management of every play house and brew house in
the kingdom” In other words, court should not interfere unnecessarily with the matters of the
boardroom.
In MACDOUGAL Vs GARDENER [1875] 1 CH 13, the court observed that the court would be
overwhelmed with cases if every dispute about the internal management of the company had
to be brought to court. This decision establishes the true rationale of FOSS Vs HARBOTTLE.
The rationale of FOSS Vs HARBOTTLE is:

a) to prevent or limit unnecessary suits and futile actions
b) to protect the company from unnecessary suits
c) to protect the principle of corporate personality
THE JUDICIAL ANALYSIS OF THE RULE

The rule in FOSS Vs HARBOTTLE consists of two complimentary arguments/ principles:
a) the right of the majority to bar a minority action whenever they might lawfully ratify
an alleged misconduct
b) the exclusive right of the company to sue upon a corporate course of action as a person
(SLAOMON Vs SALOMON) and this is referred to as the proper plaintiff principle
In a single statement, these two grounds or arguments form the basis of the case in FOSS Vs
HARBOTTLE. It has been contended that the will of the majority vis a vis the minority is to be
identified with that of the company. Accordingly, the company is prima-facie the proper
plaintiff in actions concerning its affairs.
It must be noted that the case in FOSS Vs HARBOTTLE did not distinguish between a
corporate wrong and a personal wrong.
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Enforcement of the Member's Rights/(Exceptions to the rule in Foss vs Harbottle)
We are here concerned with the avenues through which members can enforce their rights e.g.
payment of declared dividends, removal of incompetent directors, etc. He can do this under
statute law or under common law, depending on whether it is personal or derivative actions.
A. Enforcement under Common Law

The following are circumstances under which an individual shareholder is allowed to sue on
his behalf notwithstanding the fact that the wrong was committed against the company.
 Infringement of personal rights of the member: The infringement of personal rights is
considered as the most important exception. Where and once the rights of a personal
shareholder have been infringed or threatened, the aggrieved shareholder can bring a
personal action notwithstanding the fact that the company is aggrieved as well. This action
relates to constitutional rights of a shareholder. It is limited to constitutional rights of a
shareholder ie the basic rights under the Companies Act e.g. the right to vote. If the wrong
being complained of amounts to an infringement of the personal rights of a shareholder,
he can petition under a personal action notwithstanding that the company had been
wronged. In Misango Vs Musigire (1966) E.A. 390, a general meeting purported to alter
Articles of Association to the detriment of the plaintiff. Nine (9) shareholders attended
that meeting and voted in favour of the resolution. Sir Udo Udoma C.J, held that the action
could be determined in so far as what was complained of infringed on the rights of the
plaintiff.
 Illegal/ultra vires transactions: Where the act being complained of is illegal or ultra
vires, any aggrieved shareholder can proceed to court notwithstanding the rule in Foss. Vs
Harbottle e.g. in Mawanda's case, it was held that contravention of S.7,8,13 & 14 of the Act
is an ultra vires act and any aggrieved shareholder could sue on it. In HUTTON Vs
WESTCOKE, the company entered into an agreement which would lead to its winding up
by selling its major assets. After the sale, the shareholders passed a resolution to effect
compensation to the company’s employees and remuneration to its directors. A personal
action was brought since this was ultravires. The court held that the plaintiff’s action was
in order although the payment was to affect the company primarily.
 Fraud on the minority shareholder; This has been descried as the true exception to the
rule in FOSS Vs HARBOTTLE. This exception includes two components:
a) There must be a fraudulent act being carried out in the company
b) Those committing the act are the people in control either as majority shareholders or
board of directors.
What constitutes control may include defacto as well as dejure control. Control is defined
in PRUDENTIAL ASSURANCE where court concluded that it is necessary to prove that the
breach/fraud was committed by the people in control.
In North West Transport Company Vs Beatty (1887) AC 589 a director of a company in

which he was the majority shareholder used his votes in favour of a contract to buy his
own shop. Shareholders sued so that the resolution could be set aside. The court held that
every shareholder has a right to vote on any question even if he has a personal interest,
which is opposed to the interests of the company. However, there are a number of
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instances when the right of voting can be restricted and this is when the “majority” are
said to have committed a "fraud" on the "minority".
According to the case of Borland Vs Earle (1902) AC 83, fraud does not mean deceit,
rather it means an abuse of power as well as acts of a fraudulent nature e.g. when the
majority are attempting to appropriate themselves money, property or advantages
belonging to the company, the minority shareholders are entitled to participate.
Consequently, the courts have held that where there is:-
o expropriation of the company's properties
o release of director's duty of good faith
o expropriation of members' property.
Then courts will interfere with a member's right of voting since such voting amounts to
fraud on the minority.
In DANIELS Vs DANIELS [1978] CH 406, at page 414, Justice Templeton held that the
negligence or breach of duty which resulted in loss of the company did amount to fraud to
the minority.
 Expropriation of member’s property such as declared dividends; Majority
shareholders must not use their powers to expropriate the shares of minority
shareholders. If they do so, that will amount to a fraud and the transaction will be set
aside. In Brown Vs British Wheel Co (1979) 1 ch 290, the majority shareholders wanted
to buy the minority shareholders out and the court held that the action was not bonafide
to the company as a whole.
 Breach of Articles of Association: If a breach of articles takes place, any aggrieved
shareholder can proceed to court notwithstanding that the company itself may have been
prejudiced. In Edwards Vs Hallowell, the trade union and its executive committee
members were sued for having used union dues by a resolution of a simple majority and
contrary to the articles of association. It was held that a breach of the articles by a
company or any other shareholder can be challenged by any member without the
restrictive effect of the rule in Foss vs. Harbottle.
 Interests of justice: Courts are ready to entertain any action of a shareholder which falls
outside the above exceptions if it is in the interests of justice e.g. in Daniel's case, a
shareholder complained that the majority shareholders who were also directors
negligently sold a company's plot of land to one of the directors at a price of £ 120,000.
The issue before the court was whether this suit should be maintained in light of the rule
in Foss Vs Harbottle since there was no allegation of fraud. It was held that the
shareholders could maintain the suit. The judge said that it is one thing to put up foolish
directors but it is another thing to put up directors who are so foolish to enter such a
transaction.
 Release of directors' duties of good faith
A general meeting cannot authorize directors to breach their duty of good faith nor can it
ratify any such breach. Once it does so, that will amount to a fraud on the minority and the
transaction in issue will be set aside. But the general meeting can legally release the
Director of the duty of skill and care.
 Expropriation of the company's property
This can be illustrated by the case of Munier V Hoopers Telegraphic Works (1874)L.R,
9 Ch.1) APP 350, two company's A ltd and B ltd existed. A ltd was the majority
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shareholder in B ltd. B ltd received a contract to construct a telegraphic line. A ltd
appropriated the contract to itself and immediately resolved to wind up B ltd. Minority
shareholders in B ltd sued. It was held that the defendant company as a majority
shareholder had benefited from the contract, which was the property of its subsidiary. The
minority shareholders were entitled to participate in the benefits of the contract which the
defendant company had misappropriated. However, winding up had already taken place
and there was no alternative remedy.
 A Derivative Action
This is an action which a shareholder who cannot proceed under common law because of the
rule in Foss Vs Harbottle or under statute can take a complaint to court for the wrongs
committed in his company. The plaintiff is not suing on his behalf but on behalf of the
company. However there are some conditions that a shareholder must satisfy before a
derivative action can be entertained.
1. The plaintiff must have "clean hands" i.e. not to have connived with other members or the
directors. He who comes to equity must do so with clean hands; and
2. It must be proved impracticable for the company to sue by itself. For example, where the
other shareholders are also the directors committing the wrongs complained of against
the company.
3. The action must allege fraud on the minority.
4. The plaintiff is not suing on his own behalf or on behalf of the others but rather on behalf
of the company
 A Representative Action
This is a hybrid of the two actions above. In all the above actions, the plaintiff must have clean
hands.
In a representative action, one person represents the rest in pursuit of a common cause.
B. STATUTORY LAW
Section 247 provides for Alternative remedy to winding up in cases of oppression.
Subsection (1) provides that a member of a company who complains that the affairs of the
company are being conducted in a manner oppressive to some part of the members including
himself or herself or in a case falling within section 178(5) may make a complaint to the
registrar by petition for an order under this section.
Role of the Registrar

Subsection (2) provides that where on any petition under subsection (1) the registrar is of
the opinion—
(a) that the company’s affairs are being conducted as referred to in subsection (1); and
(b) that to wind up the company would unfairly prejudice that part of the members but
otherwise the facts would justify the petitioning for a winding up order on the ground that it
was just and equitable that the company should be wound up, the registrar may, with a view
to bringing to an end the matters complained of, make such order as he or she thinks fit
whether for regulating the conduct of the company’s affairs in future or for the purchase of
the shares of any members of the company by other members of the company or by the
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company and in the case of a purchase by the company, for the reduction accordingly of the
company or by the company’s capital, or otherwise.
Effect of the Orders made

Subsection (3) provides that where an order under this section makes any alteration in or
addition to any company’s memorandum or articles, then, notwithstanding anything in this
Act but subject to the provisions of the order, the company concerned shall not have power
without the leave of the court to make any further alteration in or addition to the
memorandum or articles inconsistent with the provisions of the order; but, subject to this
subsection, the alterations or addition made by the order shall be of the same effect as if duly
made by resolution of the company and the provisions of this Act shall apply to the
memorandum or articles as so altered or added to accordingly.
Registration of Order
Subsection (4) provides that a certified copy of an order under this section altering or adding
to or giving leave to alter a company’s memorandum or articles shall, within fourteen days
after the making of the order, be delivered by the company to the registrar for registration.
Default in complying with the above

Subsection (5) provides that where a company makes default in complying with subsection
(4), the company and every officer of the company who is in default is liable to a default fine
Protection of members against prejudicial conduct.

section 248 (1) provides that a member of a company may apply to the court by petition for
an order under this Part on the ground that the company’s affairs are being or have been
conducted in a manner which is unfairly prejudicial to the interests of its members generally
or of some part of its members including at least himself or herself or that any actual or
proposed act or omission of the company including an act or omission on its behalf is or
would be so prejudicial.
Application of this section

Subsection (2) provides that the provisions of this Part apply to a person who is not a
member of a company but to whom shares in the company have been transferred or
transmitted by operation of law as those provisions apply to a member of the company and
references to a member or members are to be construed accordingly.
Order on application of the registrar.

section 249 (1) provides that where in the case of any company—
(a) the registrar has received a report under section 177; and
(b) it appears to him or her that the company’s affairs are being or have been conducted in a
manner which is unfairly prejudicial to the interests of its members generally or of some part
of its members or that any actual or proposed act or omission of the company including an act
or omission on its behalf is or would be so prejudicial, the registrar may personally in
addition to or instead of presenting a petition for the winding up of the company, apply to the
court by petition for an order under this Part.
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Subsection (2) provides that in this section and so far as applicable for its purposes in
section 250 "company" means anybody corporate which is liable to be wound up under this
Act.
Provisions as to petitions and orders under this Part.

Section 250 (1) provides that where the court is satisfied that a petition under this Part is
well founded, it may make such order as it thinks fit for giving relief in respect of the matters
complained of.
Subsection (2) provides that without prejudice to the general effect of subsection (1), the
court’s order may—
(a) regulate the conduct of the company’s affairs in the future;
(b) require the company to refrain from doing or continuing an act complained of by the
petitioner or to do an act which the petitioner has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by
such person or persons and on such terms as the court may direct;
(d) provide for the purchase of the shares of any members of the company by other members
or by the company itself and in the case of a purchase by the company itself, the reduction of
the company’s capital accordingly.
Subsection (3) provides that where an order under this Part requires the company not to
make any or any specified alteration in the memorandum or articles, the company does not
then have power without leave of the court to make any such alteration in breach of that
requirement.
Subsection (4) provides that any alteration in the company’s memorandum or articles made
by virtue of an order under this Part is of the same effect as if duly made by resolution of the
company and the provisions of this Act apply to the memorandum or articles as so altered
accordingly.

Subsection (5) provides that an office copy of an order under this Part altering or giving
leave to alter a company’s memorandum or articles shall, within fourteen days after the
making of the order or such longer period as the court may allow, be delivered by the
company to the registrar for registration and if a company makes default in complying with
this subsection, the company and every officer of it who is in default is liable to a default fine
and, for continued contravention, to a daily default fine of five currency points in respect of
each day the default continues.
Inspections and Investigations:

These can be initiated either by the registrar or the members themselves.
a) Members: There are 2 instances when members can initiate an inspection or
investigation:
 Under Section173 of the Act, either 200 members or members holding at least 10% of the
shares in a company with share capital or at least 10% of the members in a company
without share capital may make an application to court for the appointment of competent
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inspectors for the investigations. However, the applicants may be required to pay a
deposit of 1000 currency points before the investigations commence. They must also
prove that they are not malicious.
b) Registrar: under section 174, the registrar—

(a) shall appoint one or more competent inspectors to investigate the affairs of a company
and to report thereon in such manner as the registrar directs, if the company by special
resolution declares that its affairs ought to be investigated by an inspector appointed by the
registrar; and
(b) may appoint one or more competent inspectors to investigate the affairs of a company, if it
appears to the registrar that there are circumstances suggesting—
(i) that the company’s business is being conducted with intent to defraud its creditors or the
creditors of any other person or otherwise for a fraudulent or unlawful purpose or in a
manner oppressive of any part of its members or that it was formed for any fraudulent or
unlawful purpose;
(ii) that persons concerned with its formation or the management of its affairs have in
connection with formation or management been guilty of fraud, misfeasance or other
misconduct towards it or towards the company or towards its members;
(iii) that its members have not been given all the information with respect to its affairs which
they might reasonably expect; or
(iv) that it is desirable to do so.
Inspector’s report
Section 177 provides for the Inspector’s report and states that;
Subsection (1) provides that an inspector may and if directed by the registrar, shall make
interim reports to the registrar and on the conclusion of the investigation shall make a final
report to the registrar.
Subsection (2) provides that any report under subsection (1) shall be written and if the
registrar directs printed.
Subsection (3) provides that the registrar shall—
(a) forward a copy of report made by an inspector to the company;
(b) if the registrar thinks fit, forward a copy of the report on request and on payment of the
prescribed fee to any other person who is a member of the company or of any other body
corporate dealt with in the report by virtue of section 173 or whose interests as a creditor of
the company or any such other body corporate as referred to in section 175 as appears to the
registrar to be affected; or
(c) where any inspector is appointed under section 184, furnish, at the request of the
applicants for the investigation a copy to them, and may also cause the report to be printed
and published.
Under section 180 it is provided that the Inspector’s report to be evidence, it states that
a copy of any report of any inspector appointed under sections 173 and 174, authenticated by
the seal of the company whose affairs he or she has investigated shall be admissible in any
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legal proceedings as evidence of the opinion of the inspector in relation to any matter
contained in the report.
Activity
Once a wrong has been done to a company, the proper plaintiff to bring the suit before court is
the company itself. Discuss
Solution
The student should be able to understand what the proper plaintiff principle is and should
discuss the rule as stated in the case of Foss Versus Harbottle. The student should further
discuss the exceptions under which the rule may be set aside.
Test Questions
1. “A derivative action should not be utilized as a means of side stepping the rule in
Foss. V Harbottle” strongly asserted a BBA 11 student in a heated class discussion.
Elaborate the statement in quotes.
2. Discuss the rule in Foss Vs Harbottle and the circumstances under which the rule
will not apply
3. Discuss the view that the rule in Foss Vs Harbottle was designed to oppress the
minority shareholders
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CHAPTER FIFTEEN
DISSOLUTION OF COMPANIES

1. Understand the different ways in which the life of a company can come to an end;
2. Examine the procedures that are required during the winding up of a company; and
3. Examine and analyze the role of the liquidator in winding up.
DISSOLUTION OF COMPANIES
A company’s life can be ended in any of the following ways: Mergers, Takeovers,
Reconstructions, Schemes of arrangement and Winding up.
Merger
A merger (also called an amalgamation) is a transaction whereby two or more companies are
combined in some way in united ownership. Example Hewlett pacquard and Compaq merged
to form Hewlett pacquardcompaq
Take-over
The simplest method is a takeover whereby Company A acquires the issued share capital of
Company B so that they form a single group. Example is Bank of Africa which took over Allied
bank, Barclays Bank took over Nile Bank etc
Arrangements and reconstructions.

Power to compromise with creditors and members.
Section 234 (1) provides that where a compromise or arrangement is proposed between a
company and its creditors or any class of them or between the company and its members or
any class of them, the court may, on the application of the company or of any creditor or
member of the company or where the case of a company being wound up, of the liquidator
order a meeting of the creditors or class of creditors or of the members of the company or
class of members as the case may be, to be summoned in such manner as the court directs.
Subsection (2) provides that where the majority in number representing three-fourths in
value of the creditors or class of creditors or members or class of members as the case may
be, present and voting either in person or by proxy at the meeting, agree to any compromise
or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding
on all the creditors or the class of creditors or on the members or class of members as the case
may be and also on the company or in the case of a company in the course of being wound up,
on the liquidator and contributories of the company.
Subsection (3) provides that an order made under subsection (2) shall have no effect until a
certified copy of the order has been delivered to the registrar for registration and a copy of
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the order shall be annexed to every copy of the memorandum of the company issued after the
order has been made or in the case of a company not having a memorandum, of every copy so
issued of the instrument constituting or defining the constitution of the company.
Subsection (4) provides that where a company defaults in complying with subsection (3), the
company and every officer of the company who is in default is liable to a fine not exceeding
ten currency points for each copy in respect of which default is made.
Subsection (5) provides that in this section and section 235, "company" means any company
liable to be wound up under this Act and "arrangement" includes a reorganisation of the share
capital of the company by the consolidation of shares of different classes or by the division of
shares into shares of different classes by both or by both methods.
Information as to compromise with creditors and members.

Section 235 (1) provides that where a meeting of creditors or any class of creditors or of
members or any class of members is summoned under section 234, there shall—
(a) with every notice summoning the meeting which is sent to a creditor or members, be sent
also a statement explaining the effect of the compromise or arrangement and in particular
stating any material interests of the directors of the company whether as directors or as
members or as creditors of the company or other and the effect on them of the compromise or
arrangement in so far as it is different from the effect on the similar interests of other
persons; and
(b) in every notice summoning the meeting which is given by advertisement, be included
either the statement referred to in paragraph (a) or a notification of the place at which and
the manner in which creditors or members entitled to attend the meeting may obtain copies
of the statement.
Subsection (2) provides that where the compromise or arrangement affects the rights of
debenture-holders of the company, the statement referred to in subsection (1) shall give
similar explanation as respects the trustees of any deed for securing the issue of the
debentures as it is required to give as respects the company’s directors.
Subsection (3) provides that where a notice given by advertisement includes a notification
that copies of a statement explaining the effect of the compromise or arrangement proposed
can be obtained by creditors or members entitled to attend the meeting, every such creditor
or member shall, on making application in the manner indicated by the notice, be furnished
by the company free of charge with a copy of the statement.
Subsection (4) provides that where a company defaults in complying with any requirement
of this section, the company and every officer of the company who is in default is liable to a
fine not exceeding one thousand currency points and for the purposes any liquidator of the
company and any trustee of deed for securing the issue of debentures of the company.
Subsection (5) provides that a person is not liable under subsection (4) if that person shows
that the default was due to the refusal of any other person, being a director or trustee for
debenture-holders, to supply the necessary particulars as to his or her interests.
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Subsection (6) provides that a director of the company and any trustee for debenture
holders of the company shall give notice to the company of such matters relating to himself or
herself as may be necessary for the purposes of this section.
Subsection (7) provides that a person who makes default in complying with subsection (6) is
liable to a fine not exceeding one hundred currency points.
Provisions for facilitating reconstruction and amalgamation of companies.

Section 236 (1) provides that where an application is made to the court under section 234
for the sanctioning of a compromise or arrangement proposed between a company and the
persons mentioned in that section and it is shown to the court that the compromise or
arrangement has been proposed for the purposes of or in connection with a scheme for the
reconstruction of any company or the amalgamation of any two or more companies and that
under the scheme the whole or any part of the undertaking or the property of any company
concerned in the scheme in this section referred to as "a transferor company" is to be
transferred to another company in this section referred to as "the transferee company", the
court may by the order sanctioning the compromise or arrangement or by any subsequent
order, make provision for all or any of the following matters—
(a) the transfer to the transferee company of the whole or any part of the undertaking and of
the property or liabilities of any transferor company;
(b) the allotting or appropriation by the transferee company of any shares, debentures,
policies or other similar interests in that company which under the compromise or
arrangement are to be allotted or appropriated by that company to or for any person;
(c) the continuation by or against the transferee company of any legal proceedings pending by
or against any transferor company;
(d) the dissolution without winding up, of any transferor company;
(e) the provision to be made for any persons who, within such time and in such manner as the
court directs, dissent from the compromise or arrangement;
(f) such incidental, consequential and supplemental matters as are necessary to secure that
the reconstruction or amalgamation shall be fully and effectively carried out.
Subsection (2) provides that where an order under this section provides for the transfer of
property or liabilities, that property shall, by virtue of the order, be transferred to and vest in
and those liabilities shall, by virtue of the order, be transferred to and become the liabilities of
the transferee company, freed from any charge which is by virtue of the compromise or
arrangement to cease to have effect.
Subsection (3) provides that where an order is made under this section, every company in
relation to which the order is made shall cause a certified copy of the order to be delivered to
the registrar for registration within seven days after the making of the order.
Subsection (4) provides that where there is default in complying with subsection (3), the
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Subsection (5) provides that in this section—
“company” does not include any company other than a company within the meaning of this
Act, not withstanding section 234(5);
“liabilities” includes duties; and
“property” includes rights and powers of every description.
Amalgamations.
Section 237 provides that subject to any restrictions in their respective incorporation
documents and to sections 238, 239, 240 and 241, two or more companies may amalgamate
and continue as one company which may be one of the amalgamating companies or may be a
new company.
Authorisation of amalgamation.
Section 238 provides that each company which proposes to amalgamate must authorise in
the manner set out in section 241—
(a) an amalgamation proposal which complies with section 239; and
(b) the proposed incorporation documents of the amalgamated company which complies with
section 240.
Amalgamation proposal.
Section 239 (1) provides that an amalgamation proposal for authorisation under section 240
must set out the terms of the amalgamation and in particular—
(a) the manner in which shares of each amalgamating company are to be converted into
shares of the amalgamated company;
(b) if any shares of an amalgamating company are not to be converted into shares of the
amalgamated company, the consideration what the holders of those shares are to receive
instead of shares of the amalgamated company;
(c) any payment to be made to any shareholder or director of an amalgamating company,
other than a payment of the kind described in paragraph (b); and
(d) details of any arrangements necessary to perfect the amalgamation and to provide for the
subsequent management and operation of the amalgamating company.
Subsection (2) provides that an amalgamation proposal may specify the date on which the
amalgamation is intended to become effective.
Subsection (3) provides that where shares of one of the amalgamating companies are held by
or on behalf of another of the amalgamating companies, the amalgamation proposal must
provide for the cancellation of those shares when the amalgamation becomes effective
without any payment in respect of those shares and no provision may be made in the
proposal for the conversion of those shares into shares of the amalgamated company.
Incorporation document of amalgamated company.

Section 240 (1) provides that the incorporation document for authorisation under section
238 must be in the prescribed form and must in particular state—
(a) the name of the amalgamated company;
(b) the share structure of the amalgamated company, specifying—
(i) the number of shares of the amalgamated company; and
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(ii) the rights, privileges, limitations and conditions attached to each such share or class of
share and its transferability, if different from fundamental rights attached to shares;
(c) the full names, postal and residential addresses of each director of the amalgamated
company;
(d) in the case of a public company or a private company with a secretary, the full name,
postal and residential address of the secretary of the amalgamated company;
(e) the registered office of the amalgamated company;
(f) the place where the amalgamated company’s records are to be kept if not the registered
office; and
(g) the amalgamated company’s accounting reference date.
Subsection (2) provides that the incorporation document may also contain—
(a) any restriction on the amalgamated company’s capacity and powers; and
(b) any provision permitted by this Act or otherwise relating to the internal management of
the amalgamated company.
Subsection (3) provides that if the proposed amalgamated company is to be the same as one
of the amalgamating companies, the incorporation document for authorisation may comprise
the incorporation document of that amalgamating company and proposed notice of change of
the incorporation document.
Manner of authorising amalgamation.

Section 241 (1) provides that the directors of each amalgamating company must resolve that
in their opinion—
(a) the amalgamation is in the best interests of the shareholders of the company; and
(b) the amalgamated company will be solvent immediately after the time at which the
amalgamation is to become effective.
Subsection (2) provides that the directors voting in favour of a resolution required by
subsection (1) must sign a certificate that in their opinion, the conditions set out in subsection
(1) are satisfied.
Subsection (3) provides that the directors of each amalgamating company must send to each
shareholder of that company not less than twenty working days before the amalgamation is to
take effect—
(a) a copy of the amalgamation proposal;
(b) a copy of the proposed incorporation document which complies with section 240;
(c) copies of the certificates given by each set of directors under subsection (2) and a
statement of any material interests of the directors whether in that capacity or otherwise; and
(d) any further information and explanation necessary to enable a reasonable shareholder to
understand the nature and implications for the company and its shareholders of the proposed
amalgamation.
Subsection (4) provides that the amalgamation must be authorised—

(a) by the shareholders of each amalgamating company by special resolution; and
(b) by any class of an amalgamating company, where any provision in the amalgamation
proposal would if contained in an alteration to that company’s incorporation document or
otherwise proposed in relation to that company, require the authorisation of that class.
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Registration of amalgamation.
Section 242 (1) provides that after an amalgamation has been authorised under section 241,
the following documents must, within ten working days after the resolution passed under this
Act for the purpose be delivered, duly completed, to the registrar in relation to the
amalgamated company—
(a) its incorporation document or if the amalgamated company is the same as one of the
amalgamating companies, notice of change of incorporation document; and
(b) consents in the prescribed form signed by each of the persons named as director or
secretary in the incorporation document or in the notice of change of incorporation document
as the case may be; and
(c) certificates required by section 243.
Subsection (2) provides that Subsection (1)(a) does not apply to any part of the amalgamated
company’s incorporation document relating to the internal management of the company.
Certificates on amalgamation.
Section 243 (1) provides that the registrar must send to the company or person from whom
the documents required under section 242 were received—
(a) if the amalgamated company is the same as one of the amalgamating companies, a
certificate of amalgamation in the prescribed form, together with an amended certificate of
incorporation if necessary; or
(b) if the amalgamated company is a new company, a certificate of amalgamation in the
prescribed form together with a certificate of incorporation in the prescribed form.
Subsection (2) provides that where an amalgamation proposal specifies a date on which the
amalgamation is intended to become effective and that date is the same as or later than the
date on which the registrar receives the documents required under section 242, the certificate
of amalgamation and any certificate of incorporation issued by the registrar must be
expressed to have effect on that date.
Subsection (3) provides that on the date shown in a certificate of amalgamation—

(a) the amalgamation becomes effective;
(b) the registrar must remove the amalgamating companies other than the amalgamated
company from the register;
(c) the amalgamated company succeeds to all the property, rights and privileges of each of the
amalgamating companies;
(d) the amalgamated company succeeds to all the liabilities of each of the amalgamating
companies;
(e) proceedings pending by or against any amalgamating company may be continued by or
against the amalgamated company;
(f) any conviction, ruling order or judgment in favour of or against an amalgamating company
may be enforced by or against the amalgamated company; and
(g) the shares and rights of the shareholders in the amalgamating companies are converted
into the shares and rights provided for in the incorporation document of the amalgamated
company.
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Creditors’ rights on amalgamation.
Section 244 provides that where immediately after the time when an amalgamation
becomes effective, an amalgamated company becomes insolvent, any creditor of any of the
amalgamating companies may recover any loss he or she has suffered by reason of the
amalgamation—
(a) if no certificate was given by the directors of that amalgamating company at the time the
amalgamation was approved; or
(b) if the certificate was given and if there were no reasonable grounds for the opinion that
the amalgamated company would be solvency from the directors who signed the certificate.
Powers of court in relation to amalgamations.

Section 245 (1) provides that notwithstanding anything in this Act or in the incorporation
document of any company, where it is not practicable to effect an amalgamation in
accordance with the procedures set out in this Act or the incorporation document of the
amalgamating companies, those
companies may apply to the court for approval of an amalgamation and the court may
approve the proposal on such terms and subject to such conditions as it thinks fit.
Subsection (2) provides that within ten working days after an order is made by the court
under subsection (1), the directors of each amalgamating company must deliver a copy of the
order to the registrar who must take such steps if any as the order may specify.
Liquidation or Winding Up
Winding up basically means liquidation of a company.
It’s a process by which the company’s life is brought an end and its property
managed for the benefit of its creditors and members.
It involves an operation of putting to an end the transactions of the company,

realising the assets and discharging its liabilities.
There are two types of winding up.
 Voluntary winding up:

This is provided for under PART IX of the Companies Act
Voluntary winding up of company under section 268 (1) occurs when a company may by
special resolution resolve to be wound up voluntarily.
Subsection (2) provides that a voluntary winding up of a company shall be taken to
commence at the time of the passing of the resolution under subsection (1).
Notice of resolution for voluntary winding up.

Section 269 (1) provides that where a company passes a resolution for voluntary winding up,
it shall, within fourteen days after passing the resolution, give notice of the resolution in the
Gazette and in a newspaper with a wide national circulation in the official language.
Subsection (2) provides that the resolution for voluntary winding up shall be registered with
the registrar and a copy sent to the official receiver within seven days from the date of passing
the resolution.
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Subsection (3) provides that where default is made in complying with this section, the
company and every officer of the company who is in default shall be liable to a default fine and
for the purposes of this subsection the liquidator of the company shall be taken to be an
officer of the company.
Consequences of voluntary winding up.

Effect of voluntary winding up on the business and status of a company.
Section 270 (1) provides that a company shall, from the commencement of voluntary
liquidation, cease to carry on business, except so far as may be required for the beneficial
winding up of the company.
Subsection (2) provides that subject to subsection (1), the corporate status and powers of
the company shall, notwithstanding anything to the contrary in its articles, continue until it is
dissolved.
Declaration of solvency
Statutory declaration of solvency in case of a proposal for voluntary winding up.
Section 271 (1) provides that where it is proposed to wind up a company voluntarily, the
directors of the company or, in the case of a company having more than two directors, the
majority of the directors, may, at a meeting of the directors make a declaration in the
prescribed form to the effect that they have made a full inquiry into the affairs of the company
and that, having done so, they have formed the opinion that the company will be able to pay
its debts in full within a period not exceeding twelve months from the commencement of the
liquidation as may be specified in the declaration.
Subsection (2) provides that a declaration made under subsection (1) shall have no effect for
the purposes of this Act unless—
(a) it is made within thirty days before the date of the passing of the resolution for winding up
the company and is delivered to the registrar with a copy to the official receiver for
registration before that date; and
(b) it includes a statement of the company’s assets and liabilities as at the latest practicable
date before the making of the declaration.
Subsection (3) provides that a director of a company who makes a declaration under this
section, without reasonable grounds for the opinion that the company will be able to pay its
debts in full within the period specified in the declaration commits an offence and shall be
liable on conviction to imprisonment not exceeding twelve months or to a fine not exceeding
twenty four currency points or both.
Subsection (4) provides that where the company is wound up in accordance with a
resolution passed within the period of thirty days after the making of the declaration, but its
debts are not paid or provided for in full within the period stated in the declaration, it shall be
presumed until the contrary is shown that the director did not have reasonable grounds for
his or her opinion.
Application of Insolvency Act, 2011 to voluntary winding up of a company.

Section 272 provides that where a company passes a resolution for the voluntary winding
up of the company in accordance with this Act, the provisions of the Insolvency Act, 2011
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relating to liquidation shall, with the necessary modifications apply to the voluntary winding
up of the company.
Compulsory winding up/ Winding up by court

This is provided for under Part IV of the Insolvency Act, 2011
Winding up by court is also known as compulsory winding up. Compulsory
winding can be effected under the following circumstances:
Modes of liquidation.
Section 57 provides that the liquidation of a company may be—
a. by the court;
b. voluntary; or
c. subject to the supervision of the court.
Voluntary liquidation.
Voluntary liquidation provided for under section 58
Subsection (1) provides that a company may be liquidated voluntarily if the company
resolves by special resolution, that it cannot by reason of its liabilities continue its business
and that it is advisable to liquidate.
Subsection (2) provides that Voluntary liquidation shall be taken to commence at the time of
passing the resolution for voluntary liquidation.
Notice of resolution for voluntary liquidation.

Section 59 (1) provides that where a company passes a resolution for voluntary liquidation,
it shall, within fourteen days after passing the resolution, give notice of the resolution in the
Gazette and in a newspaper in the official language with a wide national circulation.
Section 59 (2) provides that the resolution for voluntary liquidation shall be registered with
the registrar and a copy sent to the official receiver within seven days from the date of passing
the resolution.
Section 59 (3) provides that where default is made in complying with this section, the
company and every officer of the company who is in default shall be liable to a default fine and
for the purposes of this subsection the liquidator of the company shall be taken to be an
officer of the company.
Consequences of voluntary liquidation: Effect of voluntary liquidation on the business

and status of a company.
 Company ceases to carry on business
Section 60 (1) provides that a company shall, from the commencement of voluntary
liquidation, cease to carry on business, except so far as may be required for the beneficial
liquidation of the company.
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 Corporate status and powers to continue until dissolved
Section 60 (2) provides that subject to subsection (1), the corporate status and powers of the
company shall, notwithstanding anything to the contrary in its articles, continue until it is
dissolved.
 Transfers or alterations after commencement of voluntary liquidation are void.

Section 61 provides that any transfer of shares, not being a transfer made to or with the
sanction of the liquidator and any alteration in the status of the members of the company,
made after the commencement of a voluntary liquidation, is void.
Creditors’ voluntary liquidation.
Section 69 provides for Meeting of creditors.
Section 69 (1) provides that for the creditors’ voluntary liquidation, the company shall—
a. cause a meeting of the creditors of the company to be summoned on the same day as
the meeting for the resolution for liquidation is to be proposed or on the following day;
and
b. send to the creditors, notices for the meeting of the creditors of the company, together
with the notices for the meeting for proposing the resolution for liquidation.
Section 69 (2) provides that the notice for the meeting of the creditors shall be advertised
once in the Gazette and in the official language in a newspaper of wide circulation in Uganda.
Section 69 (3) provides that the directors of the company shall—
a. appoint one of them to preside at the meeting; and

b. present a full statement of the position of the company’s affairs and a list of the
creditors of the company and the estimated amount of their claims, to the meeting of
the creditors.
Section 69 (3) provides that the director appointed to preside at the meeting of the creditors
shall attend and preside over the meeting.
Section 69 (3) provides that the where the meeting of the company at which the resolution for
voluntary liquidation is to be proposed is adjourned and the resolution is passed at an
adjourned meeting, any resolution passed at the meeting of the creditors held under
subsection (1), shall have effect as if it has been passed immediately after the passing of the
resolution for liquidating the company.
Section 69 (3) provides that the where default is made—
a. by the company contrary to subsections (1) and (2);

b. by the directors contrary to subsection (3); or
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c. by any director of the company contrary to subsection (4),
the company, directors or director, shall be liable to a fine not exceeding fifty currency points,
and, in the case of default by the company, every officer of the company who is in default shall
be liable to a similar penalty.
Appointment of liquidator – section 70
Section 70 (1) provides that the creditors and the company at their respective meetings
under section 69, may nominate a person to be liquidator for the purpose of liquidating the
affairs and distributing the assets of the company, and if the creditors and the company
nominate different persons, the person nominated by the creditors shall be the liquidator,
and if the creditors do not nominate any person, the person nominated by the company shall
be the liquidator.
Section 70 (2) provides that where different persons are nominated by the company and the
directors, any director, member or creditor of the company may, within seven days after the
nomination by the creditors, apply to court for an order—
a. directing that the person nominated as liquidator by the company shall be liquidator
instead of or jointly with the person nominated by the creditors; or
b. appointing another person to be liquidator instead of the person appointed by the
creditors.
Appointment of committee of inspection – section 71

Section 71 (1) provides that the creditors at the creditors’ meeting or at any subsequent
meeting may appoint not more than five persons to be members of a committee of inspection.
Section 71 (2) provides that here the creditors meeting appoints a committee of inspection,
the company may, at the meeting at which the resolution for voluntary liquidation is passed
or at a subsequent time in a general meeting, appoint a number of persons as the company
thinks fit, to act as members of the committee, but the majority of the members of the
committee shall be persons appointed by the creditors.
Section 71 (3) provides that the creditors may by resolution declare that all or any of the
persons appointed by the company ought not to be members of the committee of inspection,
and, if the creditors so resolve, the persons mentioned in the resolution shall not unless the
court otherwise directs, be qualified to act as members of the committee.
Section 71 (4) provides that on the application of the creditors, the court may appoint any
other person to act as a member of the committee in place of a person mentioned in the
resolution.
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Proceedings of committee of inspection – section 72
a. the committee shall meet at least once a month and the liquidator or any member of
the committee may call a meeting of the committee as and when he or she considers
necessary;
b. the committee shall act by a majority of its members present at a meeting;
c. a member of the committee may resign by notice in writing signed by him or her and
delivered to the liquidator;
d. where a member of the committee appointed by the creditors or contributories,
becomes bankrupt, compounds, arranges with his or her creditors or is absent from
five consecutive meetings of the committee without the leave of the other members
who also represent the creditors or contributories as the case may be, his or her office
shall immediately become vacant;
e. a member of the committee may be removed by an ordinary resolution at a meeting of
creditors or contributories, for which fifteen days’ notice stating the object of the
meeting is given;
f. where there is a vacancy in the committee, the liquidator shall immediately call a
meeting of creditors or of contributories, to fill the vacancy and the meeting may, by
resolution, reappoint the same person or appoint another creditor or contributory to
fill the vacancy unless the liquidator, having regard to the position in liquidation, is of
the opinion that it is not necessary to fill the vacancy, in which case he or she may
apply to the court for an order that the vacancy shall not be filled or shall be filled
under the circumstances specified in the order; and
g. where there is a vacancy, the remaining members of the committee, if not less than
two, may continue to act as the
Final meeting and dissolution – section 77
Section 77 (1) provides that as soon as the company is fully liquidated, the liquidator shall—
a. prepare an account of the liquidation, showing how the liquidation was conducted and
how the property of the company was disposed of; and
b. call a general meeting of the company and a meeting of the creditors of the company,
to present the account and to give any required explanation.
Section 77 (2) provides that if the liquidator fails to call a general meeting of the company or a
meeting of the creditors as required by this section, he or she commits an offence and is liable
on conviction to a fine not exceeding fifteen currency points.
Section 77 (3) provides that the meetings under subsection (1) shall be called by a notice in
the Gazette and in a newspaper of wide circulation in Uganda, specifying the time, place and
the objects of the meetings, and shall be published at least thirty days before the meetings.
Section 77 (4) provides that within fourteen days after the meeting or if the meetings are not
held on the same day, after the date of the later meeting, the liquidator shall—
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a. send a copy of the account to the registrar; and
b. make a return of holding the meetings and of the dates of the meetings to the registrar,
and if the copy of the account is not sent or the returns of the meetings are not made in
accordance with this subsection, the liquidator shall be liable to a fine not exceeding five
currency points for every day for which the default continues.
Members’ and creditors’ voluntary liquidation.
Members’ and creditors voluntary liquidation – section 78
Sections 79 to 86, apply to both members’ and creditors’ voluntary liquidation.
Distribution of the property of a company.
Section 79 provides that subject to the provisions of this Act on preferential payments, the
assets of a company shall, on its liquidation, be applied in satisfaction of its liabilities
simultaneously and equally, and, subject to that application, shall unless the articles of
association otherwise provide, be distributed among the members according to their rights
and interests in the company.
Powers and duties of a liquidator in voluntary liquidation – section 80
Section 80 (1) provides that the liquidator in a voluntary liquidation may—
a. exercise any of the powers given to the liquidator in a liquidation by the court, under
this Act;
b. exercise the power of the court under this Act, of settling a list of contributories and
the list of contributories shall be prima facie evidence of the liability of the persons
named in the list as contributories;
c. exercise the power of the court of making calls on shares or any other matter;
d. summon general meetings of the company for the purpose of obtaining the sanction of
the company by special resolution or for any other purpose as he or she may think fit.
Section 80 (2) provides that the liquidator shall pay the debts of the company and shall adjust
the rights of the contributories among themselves.
Section 80 (3) provides that where several liquidators are appointed, any power given by this
Act may be exercised by one or more of the liquidators as may be determined at the time of
their appointment, or, in default of such determination, by any number of liquidators of not
less than two.
Section 80 (4) provides for Power of court to appoint and remove liquidator in voluntary
liquidation.
1. The court may appoint a liquidator in any case where there is no liquidator acting.
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2. The court may, where cause is shown, remove a liquidator and appoint another
liquidator.
Notice by liquidator of his or her appointment – section 82
1. The liquidator shall, within fourteen days after his or her appointment, publish in the
Gazette and deliver to the registrar for registration, a notice with a copy to the official
receiver of his or her
2. Costs of voluntary liquidation.
Costs of liquidation
Section 85 provides that all costs, charges and expenses properly incurred in the liquidation,
including the remuneration of the liquidator, shall be payable out of the assets of the company
in priority to all other claims.
Liquidation subject to supervision by court.
Section 87 provides that where a company passes a resolution for voluntary liquidation, the
court may make an order that the voluntary liquidation shall continue, subject to the
supervision of court and with the liberty for the creditors, contributories or other interested
persons, to apply to court and generally on such terms and conditions as the court may think
just.
Effect of application for liquidation subject to supervision.
Section 88 provides that an application for the continuance of a voluntary liquidation subject
to the supervision of the court shall, for the purpose of giving jurisdiction to the court over
actions, be taken to be a petition for
Effect of supervision order – section 90
Section 90 (1) provides that where an order is made for liquidation subject to supervision, the
liquidator may, subject to any restrictions imposed by the court, exercise all his or her powers
without the sanction or intervention of the court, in the same manner as if the company were
being liquidated voluntarily.
Section 90 (2) Where the order for liquidation subject to supervision is made in relation to a
creditors’ voluntary liquidation in which a committee of inspection has been appointed, the
order shall be taken to be an order for liquidation by the court for the purpose of section
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Liquidation by court.
Jurisdiction – section 91
The jurisdiction in liquidation matters shall be exercised by the High Court.
Section 92 (1) provides for the Circumstances in which the court may appoint liquidator and
the court may appoint a liquidator on the application of—
(a) the company;

(b) a director of the company;
(c) a shareholder of the company;
(d) a creditor of the company;
(e) a contributory; or
(f) the official receiver.
Commencement of liquidation by court.
Section 93 (1) provides that where, before the presentation of a petition for the liquidation of
a company by the court, a resolution is passed by the company for voluntary liquidation, the
liquidation of the company shall be deemed to commence when the resolution is passed and
unless the court, on proof of fraud or mistake, thinks fit and directs, all proceedings of the
voluntary liquidation shall be taken to be valid.
Section 93 (2) provides that in all other cases, liquidation of a company by the court shall be
taken to commence at the time of presentation of the petition for liquidation.
Provisional liquidator.
Section 94 (1) provides that the order made under section 92 shall appoint the official
receiver or any insolvency practitioner the court considers fit as provisional liquidator of the
company, for the preservation of the value of the assets owned or managed by the company.
Section 94 (2) provides that the provisional liquidator shall, have the powers to sell or
dispose of any perishable and any other goods, the value of which is likely to diminish if they
are not disposed of, unless court limits the powers or places conditions on the exercise of the
powers.
Notice of liquidation – section 95
The provisional liquidator shall, within fourteen days after the commencement of the
liquidation—
a. give public notice of the date of commencement of the liquidation; and
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b. call a shareholders’ meeting.
Notice of appointment and of liquidation – section 96
Section 96 (1) provides that the liquidator shall, within five working days after his or her
appointment—
a. give notice in the Gazette and a newspaper of wide circulation of—
i. the date of commencement of the liquidation;

ii. the liquidator’s full name;
iii. the liquidator’s physical office address and daytime telephone number; and
b. deliver to the official receiver a copy of the notice.
Section 96 (2) provides that a liquidator shall give notice of the liquidation—
a. on every invoice, order for goods or business letter issued by or on behalf of the
company on which the company’s name appears stating after the company’s name the
words “in liquidation”; and
b. otherwise, when entering into any transaction or issuing any document by or on behalf
of the company.
Section 96 (3) Failure to comply with subsection (2) does not affect the validity of a document
issued by or on behalf of the company.
Section 96 (4) A liquidator who does not comply with subsection (2) commits an offence and
is liable on conviction to a fine not exceeding one hundred currency points.
Effect of liquidation - section 97
1. At the commencement of liquidation—
a. the liquidator shall take custody and control of the company’s property;
b. the officers of the company shall remain in office but cease to have any powers,
functions or duties other than those required or permitted to be exercised by this Act;
c. proceedings, execution or other legal process shall not be commenced or continued
and distress shall not be levied against the company or its property;
d. shares of the company shall not be transferred or other alteration made in the rights or
liabilities of any shareholder and a shareholder shall not exercise any power under the
company’s memorandum and articles of association or the Companies Act; and
e. the memorandum and articles of association of the company shall not be altered,
except that the liquidator may change the company’s registered office or registered
postal
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Fundamental duties of a liquidator – section 99
Section 99 (1) provides that the fundamental duties of a liquidator are to take, in a reasonable
and expeditious manner, all steps necessary to—
a. collect;
b. realize as advantageously as reasonably possible; and
c. distribute,
the assets or the proceeds of the assets of the company in accordance with this Part and Part
VIII.
Section 99 (2) provides that the duties in subsection (1) are without prejudice to the
liquidator’s power in section 139 to appoint a provisional administrator where the liquidator
is of the view that the appointment is likely to result in a more advantageous realisation of the
company’s assets than would be effected in a liquidation.
General duties of liquidator – section 100
Without prejudice to section 99, a liquidator shall have all the other functions and duties
specified in this Act and shall in particular—
a. take custody and control of all the company’s assets;

b. register his or her interest in all land and other assets belonging to the company
notwithstanding any interest other;
c. keep company money separate from other money held by or under the control of the
liquidator;
d. keep, in accordance with generally accepted accounting procedures and standards, full
accounts and other records of all receipts, expenditure and other transactions relating
to the liquidation, and retain the accounts and records of the liquidation and of the
company for not less than six years after the liquidation ends; and
e. permit those accounts and records and the accounts and records of the company, to be
inspected by—
i. any committee of inspection unless the liquidator believes on reasonable grounds that
inspection would be prejudicial to the liquidation; or
ii. where the court so orders, any creditor or shareholder. General provisions relating to
liquidation.
General powers of liquidator – section 101
A liquidator shall have all the powers necessary to carry out the functions and duties of
liquidator under this Act and may delegate the powers to his or her appointed agent.
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Liquidator’s preliminary report – section 102
Section 102 (1) provides that before the expiry of forty working days after the
commencement of the liquidation or during a longer period as the court may allow, a
liquidator shall prepare a preliminary report showing—
a. the state of the company’s affairs, proposals for conducting the liquidation and the
estimated date of its completion; and
b. the right of any creditor or shareholder to require the liquidator to call a creditors’
meeting under section 69,
and shall make the report available at his or her address for inspection by every known
creditor, shareholder or contributory.
Section 102 (2) provides that the liquidator shall publish the notice given under subsection
(1) in the official language in a newspaper of wide circulation in Uganda and shall send a copy
of the report to the registrar.
Liquidator’s interim reports – section 103
Section 103 (1) provides that a liquidator shall, within twenty working days after the end of
every six months during the liquidation, make an interim report and give public notice of the
conduct of the liquidation during the preceding six months period and the liquidator’s further
proposals for the completion of the liquidation.
Section 103 (2) provides that the liquidator shall make the report available at his or her
address for inspection by every known creditor, shareholder or contributory.
Section 103 (3) provides that the liquidator shall publish the notice given under subsection
(1) in the official language in a newspaper of wide circulation in Uganda and shall send a copy
of the report to the registrar and the official receiver.
Liquidator’s final report- section 104
Section 104 (1) provides that before completion of the liquidation, a liquidator shall, give
public notice of—
a. the final report, final accounts and statement referred to in section 114; and
b. the grounds on which a creditor or shareholder may object to the removal of the
company from the register under the Companies Act.
Section 104 (2) provides that the liquidator shall make the report available at his or her
address for inspection upon payment of a prescribed fee, by every known creditor,
shareholder or contributory.
Page | 146
Section 104 (3) provides that the liquidator shall publish the notice given under section (1) in
the official language in a newspaper of wide circulation in Uganda and shall send a copy of the
report to the registrar and the official receiver.
Completion of liquidation – section 114
The liquidation of a company shall be complete when the liquidator delivers to the official
receiver a final report and final accounts of the liquidation and a statement indicating that—
a. all known assets have been disclaimed, realised or distributed;

b. all proceeds of realisation have been distributed; and
c. in the opinion of the liquidator, the company should be removed from the register.
Grounds for compulsory winding up
1. Where the company is unable to pay its debts – section 3
Subject to subsection (2) and unless the contrary is proved, a debtor is presumed to be unable
to pay the debtor’s debts if—
 the debtor has failed to comply with a statutory demand;
 the execution issued against the debtor in respect of a judgment debt has been
returned unsatisfied in whole or in part; or
 all or substantially all the property of the debtor is in the possession or control of a
receiver or some other person enforcing a charge over that property.
On a petition to the court for the liquidation of a company or bankruptcy order, evidence of
failure to comply with a statutory demand by the creditor, shall not be admissible as evidence
of inability to pay debts unless the application is made within 30 working days after the last
date for compliance with the demand.
Priority of Settlement of debts

1. Preferential debts.
Section 12 (1) provides that Subject to section 11, and subsection (2), the liquidator or trustee
shall apply the assets to the preferential debts listed in subsections (4), (5) and (6), which
debts shall be paid in priority to other debts.
Subsection (2) provides that Preferential debts shall so far as the assets are insufficient to
meet them, have priority over the claims of secured creditors in respect of assets—
a. which are subject to a security interest; and

b. become subject to that security interest by reason of its application to certain existing
assets of the grantor and those of its future assets which were after-acquired property
or proceeds, and shall be paid accordingly out of those assets.
Subsection (3) provides that preferential debts are as listed in subsections (4), (5) and (6) and
shall be paid in the order of priority in which they are listed.
Page | 147
Priority of payment
Subsection (4) provides that first to be paid shall be—
a. remuneration and expenses properly incurred by the liquidator or trustee;

b. any receiver’s or provisional administrator’ s indemnity under sections 159 or 187 and
any remuneration and expenses properly incurred by any receiver, liquidator,
provisional liquidator administrator, proposed supervisor or supervisor; and
c. the reasonable costs of any person who petitioned court for a liquidation or
bankruptcy order, including the reasonable costs of any person appearing on the
petition whose costs are allowed by the court.
Subsection (5) provides that after making the payments listed in subsection (4), next to be
paid shall be—
a. all wages or basic salary, wholly earned or earned in part by way of commission for
four months;
b. all amounts due in respect of any compensation or liability for compensation under the
Worker’s Compensation Act, accrued before the commencement of the liquidation or
bankruptcy, not exceeding the prescribed amount;
c. all amounts that are preferential debts under section 33 or 105.
Subsection (6) provides that after paying the sums referred to in subsection (5), the liquidator
shall then pay—
a. the amount of any tax withheld and not paid over to the Uganda Revenue Authority for
twelve months prior to the commencement of insolvency; and
b. contributions payable under the National Social Security Fund Act.
Subsection (7) provides that this section shall apply notwithstanding any other law.
2. Non-preferential debts
Section 13 provides that after paying preferential debts in accordance with section 12, the
liquidator or trustee shall apply the assets in satisfaction of all other claims.
The claims referred to in subsection (1) shall rank equally among themselves and shall be
paid in full unless the assets are insufficient to meet them, in which case they abate in equal
proportions.
Where before the commencement of a liquidation or bankruptcy, a creditor agrees to accept a

lower priority in respect of a debt than that which the creditor would otherwise have under
this section, nothing in this section shall prevent the agreement from having effect according
to its terms.
Page | 148
Where there is a surplus after making the payments referred to in section 13—
a. in the case of a bankruptcy, the trustee in bankruptcy shall pay the surplus to the
bankrupt; and
b. in the case of a liquidation, the liquidator shall distribute the company’s surplus assets
in accordance with the memorandum and articles of association of the company and
the Companies Act.
Final meeting and dissolution.
Section 67 (1) provides that subject to section 68, as soon as the company is fully liquidated,
the liquidator shall—
a) prepare an account of the liquidation, showing how the liquidation was

conducted and how the property of the company was disposed of; and
b) call a general meeting of the company to present the account and to give any
required explanation.
Section 67 (2) provides that the meeting under subsection (1) (b) shall be called by a notice in
the Gazette and in a newspaper of wide circulation in Uganda, specifying the time, place and
the object of the meeting, published at least thirty days before the meeting.
Section 67 (3) provides that within fourteen days after the meeting, the liquidator shall—
a. send a copy of the account to the registrar; and

b. make a return of the meeting and of its date to the registrar,
and if the copy of the account is not sent or the return of the meeting is not made in
accordance with this subsection, the liquidator shall be liable to a fine not exceeding five
currency points for every day during which the default continues.
Section 67 (4) provides that where there is no quorum at the meeting, this subsection shall
be taken to have been complied with if the liquidator, in lieu of the return of the meeting,
makes a return that the meeting was duly summoned but that no quorum was realised.
Section 67 (5) provides that the registrar shall, on receiving the account and the returns in
subsections (3) or (4), register them.
Section 67 (6) provides that upon the expiration of three months from the date of
registration of the return, the company shall be taken to be dissolved unless the court, on the
application of the liquidator or any other person who appears to the court to have an interest
in the company, makes an order deferring the date on which the dissolution of the company is
to take effect, for such time as the court may considers fit.
Page | 149
Section 67 (7) provides that the person on whose application an order of the court under
subsection (6) is made, shall deliver to the registrar, with a copy to the official receiver ,a
certified copy of the order for registration within seven days after the making of the order.
Section 67 (7) provides that a person who contravenes subsection (7) shall be liable to a fine
not exceeding five currency points for every day that the person is in contravention.
Activity
Discuss the circumstances under which a company may be wound up by court
Solution
The student should be able to define what winding up. The student should further discuss
what it means to wind up a company by court then go further and discuss the grounds under
which a company can be wound up by court
Test Questions
1. “Any company that is registered under the Companies’ Act can be wound up with
the intervention of the members or creditors for various reasons” Discuss
2. Once a company has been formed then it acquires perpetual succession and the life
of the company can never under any circumstances come to an end. Discuss
3. Discuss the difference between a merger and take over
4. Discuss the powers and duties owed by a liquidator to a company undergoing
winding up
Page | 150
CHAPTER SIXTEEN
OTHER FORMS OF BUSINESS ASSOCIATIONS

1. Understand the different forms of business associations which include Sole
Proprietors, Partnerships, Clubs and Societies, Co-operative Societies and Unit
Trust;
2. Evaluate the advantages and disadvantages of the different business associations;
and
3. Analyze the importance of having different business associations.
OTHER FORMS OF BUSINESS ASSOCIATIONS
In order to understand the concept of legal personality, it is necessary to compare registered

companies with other forms of business organizations particularly the sole trader,
partnerships, clubs and societies, cooperative societies, unit trusts etc
Sole Trader
A sole trader owns and runs a business, contributes the capital to start the enterprise, runs it
with or without employees, and earns the profit or is fully responsible for the loss of the
venture. The business does not have its own legal personality. Any one making a legal
contract with a sole trader does so with the trader as an individual
Advantages of being a sole trader

 No formal procedure required to set up the business.
 A sole trader is independent and accountable only to himself. He does not have to consult
anybody about business decisions.
 Personal supervision of the business can ensure its effectiveness and close conduct with
customers/clients may enhance commercial flexibility.
 All the profits of the business belong to the sole trader.
Disadvantages
 Unlimited liability means that if the business gets into debt a personal trader’s personal
wealth can be lost.
 Expansion of the business is only possible if the profits are ploughed back into the
business.
 Since the business depends on an individual it means long working hours and difficulty if
the individual is indisposed or incapacitated.
 The death of the proprietor normally results in the death of the business.
 The individual may lack technical skills to effectively manage the business.
Page | 151
 Disadvantages associated with small size, lack of diversification, absence of economies of
scale, problems of raising finance etc.
Partnerships
Under section 2(1) of the Partnership Act a partnership is the relation which subsists between
persons carrying on a business in common with a view of profit.
Advantages
 Two or more persons can provide more capital than a sole trader.
 Responsibilities are shared between the partners.
 Partners contribute a wider range of skills and experience to the business.
 The affairs of the business are private and no one except the partners has any right to
inspect the accounts.
Disadvantages
 No separate legal entity.
 Unlimited liability for the debts of the business.
 Change of partners is a termination of the old firm and the beginning of a new one.
 Partners cannot provide security by a floating charge on goods.
 There is no distinction between the property of the partners and that of the partnership.
 Some independence is lost since decisions must be made jointly.
Clubs and Societies

These are unincorporated associations which are subject to no statutory regulation. Their
constitution depends entirely on the ordinary law of contract with the members expressly or
impliedly agreeing to be bound by the constitution. In the eyes of the law a club has no
existence apart from its members, but since a distinction has to be made between club
property and the separate property of the members, the club property is normally vested in
trustees to be held by them in trust for the club. This form is normally adopted by
organizations involved in religious, educational, literary, scientific, social or charitable works
for instance YMCA, YWCA, Churches etc).
Co-operative Societies
This is any society that has as its object the promotion of the economic interests of its
members in accordance with cooperative principles. Cooperative societies are registered with
or without limited liability. Upon registration the cooperative society becomes a corporate
body with perpetual succession and a common seal with power to hold movable and
immovable property of every description, to enter into contracts, to institute and defend suits
and other legal proceedings and to do all things necessary for the purpose of its constitution.
To be registered a society must have at least 30 members.
Unit Trusts
A “unit” means a right or interest whether described as a unit, as a subunit or otherwise,
which may be acquired under a scheme and “a unit trust scheme” is any arrangement made
Page | 152
for the purpose or having the effect of providing for persons having funds available for
investment, facilities for the participation by them, as beneficiaries under a trust, in profit or
income arising from the acquisition, holding, management or disposal of any property.
In essence the managers of the trust purchase a block of various investments and vest them in
trustees, to be held on the terms of a trust deed. This divides the beneficial interest in the
trust fund into a large number of shares or units. The trustees hold the units on trust for the
managers who then sell them to the public at a price based on their market value plus a small
service charge to cover expenses and a profit for the managers.
The managers have power from time to time to increase the number of units by vesting
additional securities in the trustees. The managers also provide a market for unit holders by
buying back and reselling units. In practice the trust deed is for a fixed period at the end of
which the underlying investments are realized and the unit holders repaid unless they elect to
continue the trust.
Activity
Discuss the advantages and disadvantages of sole traders
Solution
The student is expected to know what sole trader is and the characteristics of such a business
association. The student should then be able o discuss the advantages and disadvantages of
such a business association.
Test Questions
1. Discuss the different forms of business organizations and the legal implications of
conducting business as such
2. Discuss the difference between a co-operative society and a club
3. Discuss the advantages and disadvantages of forming a Partnership
4. Discuss what is meant by unit trusts
Page | 153
REFERENCES
1. Ashton Cross, Liability of Corporations for the Torts of their Servants (1950) 10 Cambridge.
L.J 419
2. Bakibinga, Company Law in Uganda
3. Baxt R, Pre-Incorporation Contracts and Liability of Promoters (1975) vol.49 No.11, Aug L.J.
635
4. Cartoon, Compensatory Payments to Directors for Loss of Office, “The Golden Handshake",
(1978) 94 L.Q.R 497
5. Companies Act 2012
6. Davies, Alteration of the Objects Clause and the Ultra Vires Doctrine (1974) 99 LQR 79.
7. GoodHart, Corporate Liability in Tort and Doctrine of Ultra Vires (1925) Cambridge L.J 350
8. Gower L.C. B., The Principles of Modern Company Law, Stevens and Sons, third Edition
(1969)
9. Gross J.H., Pre-Incorporation Contracts (1971) 87 LQR 367
10. Haden T, Company Law and Capitalism, Winfield and Nicolson (1972).
11. Katende J.W., “Company Law in East Africa, Present and Future”, (1969) 2 EALR 135
12. Katende, The Law of Business Associations in East and Central Africa, EALB, (1976)
13. Keeler; Contractual Action against Unincorporated Bodies,(1971) 34 MLR 615.
14. Lenin V. I, Imperialism, The Highest Stage of Capitalism, Peking (1975) also in Lenin, Selected
Works, Progress Publishers, Moscow (1975) vol.1, also in Lenin; Collected Works, Vol. 22.
15. Mackenzie; The Legal Status of the Unborn Company (1973) 5 N.2.V.L.R. 211
16. Musisi James, Company Law in East Africa
Page | 154
17. Pennington's company law
18. Prentince, A Director’s Access to Corporate Books of Accounts (1978) 94 L.Q.R 184
19. Radin, “The Endless Problem of Corporate Personality” (1932) 32 Col. R. Rev. 643.
20. Samuels, Lifting the Veil (1964) J.B.L 107.
21. Schimittoff, Is a Minority Right? (1974) J.B.L 53
22. Schimittoff, The Wholly Owned and Controlled Subsidiary (1978) J.B.L. 218
23. Seally L.S; Cases and Materials in Company Law, C.U.P (1971)
24. Shannon H.A., The Coming of General Limited Liability, in E.M,. Carus-Wilson Essays in
Economic History, London (1954) p.358
25. Sullivian, The Relationship Between the Board of Directors and the General Meeting in
Limited Companies, (1977) 1977) 93 L.Q.R 569.
26. The Investment Code Statute 1/1991
27. Warren, Torts by Corporations in Ultra vires Undertakings (1925) 2 Cambridge. L.J 180,
28. Wedderburn K., Corporate Personality and Social Responsibility: The Problem of Quasi
Corporations, (1965) 28 MLR 62.
29. Welsh, The Liability of Corporations 62 L.Q.R 345
30. Winn; The Criminal Responsibility of Corporations (1929) 3 Cambridge. L.J. 398
31. Wolff, On the Nature of Legal Persons (1938) 54 LQR. 494
Page | 155

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MAKERERE UNIVERSITY

COLLEGE OF EDUCATION AND EXTERNAL STUDIES

BACHELOR OF COMMERCE (EXTERNAL)

COURSE: COMPANY LAW

COURSE CODE: COX 3118

At the end of this chapter the student will be able to:

The Company as a Separate Legal Entity

In the words of Lord Halsbury L.C;

Or, as Lord Macnaghten put it:

ii) Statutory companies

iii) Chartered companies

iv) Corporation sole

 Companies Limited by Shares section 4 (2) (a)

 Companies Limited by Guarantee section 4 (2) (b)

 Unlimited Companies section 4 (2) (c)

 Public or Private section 4 (2) (d)

Private Companies provided for under section 5

Public Companies provided for under section 6

 Single member company section 4

Distinction between Private and Public Companies

1. maximum is 100 No maximum.

2. It restricts transfer of shares. There is free transfer of shares.

3. No Prospectus required Prospectus required

Thus a promoter is someone whose profession it is to take part in setting up a company. A

Nevertheless, the BOD was:

2. Duty of skill and care:

3. Duty to act in the best interests of the company.

Remedies for Breach of Duty

Rights of the Promoter

At the end of this Chapter the student should be able to:

Documents Required for Formation

Requirements to be taken into account when reserving a name

Application for reservation

Name having the word “limited”

Power to require a company to abandon misleading name

Effect of change of name

Prohibition on trading under misleading name.

Subsection (2) provides that a public company commits an offence if in circumstances in

Prohibition of improper use of “limited”.

 Having a name similar to one already in existence

Procedure for change of name

Memorandum of Association section 7

Contents of the Memorandum

a) Name of the Company section 7 (1) (a)

b) Registered office section 7 (1) (b

Default in complying with the above provisions

c) The objects clause section 7 (1) (c)

d) Statement as to the liability of members section 7 (2) and (3)

e) Share capital clause section 7 (4)

Alteration of the Memorandum of Association

Articles of Association section 11

Contents of the Articles

Section 12 (3) where an unlimited company or a company limited by guarantee has

Contents of the Articles of Association

Adoption and application of Table A.

The advantage of statutory model articles (Table A) are:-

Alteration of the Articles section 16

Registration of memorandum and articles.

Adoption of and application of Table F - Section 14

Statutory Declaration of Compliance section 22(2)