Up-close to UCU-LLB 3- Business Associations I law notes

UGANDA CHRISTIAN UNIVERSITY

MAIN CAMPUS/KAMPALA CAMPUS

DEPARTMENT OF MERCANTILE LAW

BACHELOR OF LAWS DEGREE

BUSINESS ASSOCIATIONS 1, LECTURE GUIDE NOTES

COURSE UNIT: BUSINESS ASSOCIATIONS I

Volume I, Historical Development of the Law of Business Associations, What is a

company, Features of a Company, Types of Companies, Distinctions from other
business organisations, other business organisations, formation, procedures and
registration of a Company, membership of a Company & Corporate |Personality.

1.0 Historical Overview of the Law of Business Associations.

The historical development of business associations in Uganda has evolved over the years,
influenced by a combination of indigenous economic practices, colonial legacies, and
contemporary economic reforms. Here is an overview of the historical development of
business associations in Uganda:

(i) Pre-Colonial and Indigenous Practices:

Before colonial rule, various indigenous economic systems existed in Uganda. These systems
were often community-based and centred around subsistence farming, livestock herding, and
small-scale trade. Indigenous societies had their own informal trade networks and
associations, often based on family or clan ties, for purposes like mutual support and resource
sharing.

(ii) Colonial Era (Late 19th and Early 20th Centuries):

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Up-close to UCU-LLB 3- Business Associations I law notes

During the late 19th century, Uganda came under British colonial rule. The British introduced
cash-crop agriculture, which significantly altered the economic landscape. Plantations for
crops like coffee and cotton were established. The colonial administration implemented
policies that influenced trade and business practices. For example, they introduced wage
labour and taxation. In the 19th Century, specially many Countries enacted Partnership Acts
that codified rules governing partnerships and made it easier for individuals to form business
associations with limited liability.

(iii)Post-Independence Period (1960s and 1970s):

Uganda gained independence from British colonial rule in 1962. After independence, the
government introduced various economic policies, including nationalization and state-led
economic planning. During this period, there was limited room for private business
associations as the government-controlled key sectors of the economy.

(iv) Economic Reforms and Liberalization (1980s Onward):

In the 1980s, Uganda underwent significant political and economic changes, including the
overthrow of President Milton Obote by Yoweri Museveni's National Resistance Army
(NRA). Museveni's government initiated economic reforms in the late 1980s and early 1990s,
moving away from a centrally planned economy toward market-oriented policies. This shift
allowed for the growth of private-sector businesses and associations.

(v) Formation of Business Associations:

As Uganda embraced economic liberalization, various business associations and chambers of

commerce emerged. These organizations played a pivotal role in representing the interests of
businesses and advocating for a conducive business environment. The Uganda National
Chamber of Commerce and Industry (UNCCI), established in 1933 but revitalized in the
1990s, is one of the prominent business associations in Uganda. It promotes trade and
investment and provides support to businesses.

(vi) Legal Framework:

The legal framework governing business associations and commerce in Uganda has evolved
to accommodate changing economic conditions. Laws related to company registration,
taxation, and business regulations have been amended to encourage private sector growth.

(vii) Contemporary Landscape:

In recent years, Uganda has seen an increase in various forms of business associations,
including industry-specific associations, trade unions, and agricultural cooperatives. The
business environment in Uganda continues to evolve, influenced by domestic and
international factors. Entrepreneurship, innovation, and foreign investment are playing
increasingly significant roles in the country's economic development.

1.1Definition of a company:

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“The most enlightened judicial policy is to let people manage their own way”. Oliver
Wendell Holmes, 1911.

The concept of “company” or incorporation in business is not new but was dealt with, the
4th century BC itself during the “Arthashastra” days. Its shape was revamped over a period of
time according to the needs of business dynamics. Company form of business has certain
district advantages over other forms of businesses like sole proprietorship/Partnership etc.
including features such as limited, perpetual succession.

The word “company” is derived from the Latin word ‘Com’ which means with or together
and ‘pany’ means bread. It is originally referred to an association of persons who took their
meals together. In the leisurely past, merchants took advantage of the festive gatherings to
discuss business matters. Nowadays, business matters have become more complicated and
cannot be discussed at festive gatherings. In popular parlance, a company denotes an
association of like-minded persons formed for the purpose of carrying on some business or
undertaking. A company is a corporate body and a legal person having status and personality
distinct and separate from the members constituting it.

“Company” in common usage refers to a voluntary association of individuals formed for the
purpose of attaining a common social or economic end. Strictly speaking, the term
“Company” has no technical or legal meaning. In the common law, a company is a juristic
personality or legal person separate from its members. Thus, it exists only in the
contemplation of law.

In other words, a company is an artificial or legal person created and devised by the laws for
a variety of purposes such as promotion of charity, art, research, religion, commerce or
business. The company, just like a natural person possesses similar rights and owes similar
obligations, but has neither a mind nor a body of its own.

The interpretation Section 2 of the Companies Act, No. 1 of 2012 defines a company to mean
a company formed and registered under this Act or an existing company or a re-registered
company under this Act. “Existing company” under the same section means a company
formed and registered before the coming into force of this Act.

A company is a "corporation" - an artificial person created by law. A human being is a

"natural" person. A company is a "legal" person. A company thus has legal rights and
obligations in the same way that a natural person does.

A company is created according to the Companies Act and is born on the day of its
incorporation. Upon incorporation, it acquires a new identity separate from its founders,
promoters, shareholders and directors. It can sue or be sued in its own name. On admission of
new members, is in accordance with the companies’ memorandum and articles of association.
Note that the death or insanity of a member doesn’t affect the continued existence of the
company.

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1.1.1 Characteristics Of A Company1:

The main characteristics of a company are:

1. Incorporated association. A company is created when it is registered under the

Companies Act. It comes into being from the date mentioned in the certificate of
incorporation. Section 3 of the Companies Act, No. 1 of 2012 is to the effect that there
shall be kept by the registrar a record called “the Register of Companies” where all the
matters prescribed by this Act shall be entered. Section 4 (1) of the Companies Act, 1 of
2012 is to the effect 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.

2. Artificial legal person. A company is an artificial person. Negatively speaking, it is not a

natural person. It exists in the eyes of the law and cannot act on its own. It has to act
through a board of directors elected by shareholders. It was rightly pointed out in Bates V
Standard Land Co. (1911) that: “The board of directors are the brains and the only
brains of the company, which is the body and the company can and does act only
through them”.

But for many purposes, a company is a legal person like a natural person. It has the
right to acquire and dispose of property, to enter into contracts2 with third parties in its
own name, and can sue and be sued in its own name. However, it is not a citizen as an
individual and cannot enjoy the rights under the Constitution of the land3. It should be
noted that though a company does not possess fundamental rights, it is a person in the
eyes of the law. It can enter into contracts with its Directors, its members, and
outsiders.

3. Separate Legal Entity4: A company has a legal distinct entity and is independent of its
members. The creditors of the company can recover their money only from the company
and the property of the company. They cannot sue individual members. Similarly, the
company is not in any way liable for the individual debts of its members. The property of
the company is to be used for the benefit of the company and not for the personal benefit
of the shareholders. On the same grounds, a member cannot claim any ownership rights in
the assets of the company either individually or jointly during the existence of the
company or in its winding up. At the same time, the members of the company can enter
into contracts with the company in the same manner as any other individual can. A
separate legal entity of the company is also recognized by the Income Tax Act. Where a

1
Students should also understand that when a company is born it assumes a status that gives it the
description under this subject.
2
See Section 50 of the Companies Act, No.1 of 2012.
3
The Constitution of the Republic of Uganda, 1995.
4
See the case of In the case of John Lubega Matovu vs. Mukwano Investment Ltd Misc. Application No.
156 of 2012, the High Court (Commercial Division). Hon. Justice Obura.

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company is required to pay income tax on its profits and when these profits are
distributed to shareholders in the form of dividends, the shareholders have to pay income
tax on their dividends of income. This proves that a company that a company and its
shareholders are two separate entities.

The principle of a separate legal entity was explained and emphasized in the famous case
of Salomon v Salomon & Co. Ltd [1897] AC 22.

The facts of the case are as follows:

Mr. Salomon, the owner of a very prosperous shoe business, sold his business for the sum of
$ 39,000 to Salomon and Co. Ltd. which consisted of Salomon himself, his wife, his daughter
and his four sons. The purchase consideration was paid by the company by allotment of &
20,000 shares and $ 10,000 debentures and the balance in cash to Mr. Salomon. The
debentures carried a floating charge on the assets of the company. One share of $ 1 each was
subscribed by the remaining six members of his family. Salomon and his two sons became
the directors of this company. Salomon was the Managing Director. After a short duration,
the company went into liquidation. At that time the statement of affairs’ was like this: Assets
:$ 6000, liabilities; Salomon as debenture (6) holder $ 10,000 and unsecured creditors $
7,000. Thus its assets were running short of its liabilities b $11,000 The unsecured creditors
claimed a priority over the debenture holder on the ground that the company and Salomon
were one and the same person.

But the House of Lords held that the existence of a company is quite independent and
distinct from its members and that the assets of the company must be utilized in payment of
the debentures first in priority to unsecured creditors. Salomon’s case established beyond
reasonable doubt that in law a registered company is an entity distinct from its members,
even if the person holds all the shares in the company. There is no difference in principle
between a company consisting of only two shareholders and a company consisting of two
hundred members. In each case the company is a separate legal entity5.

5
The principle established in Salomon’s case has also been applied in the following cases to wit: Lee V. Lee’s
Air forming Ltd. (1961) A.C. 12 of the 3000 shares in Lee’s Air Forming Ltd., Lee held 2999 shares. He voted
himself the managing Director and also became Chief Pilot of the company on a salary. He died in an air crash
while working for the company. His wife was granted compensation for the husband in the course of
employment. Court held that Lee was a separate person from the company he formed, and compensation was
due to the widow. Thus, the rule of corporate personality enabled Lee to be the master and servant at the same
time. The principle of separate legal entity of a company has been, in fact recognized much earlier than in
Salomon’s case. In Re Kondoi Tea Co Ltd. (1886 ILR 13 Cal 43), (7) it was held by Calcutta High Court that a
company was a separate person, a separate body altogether from its Shareholders. In Re. Sheffield etc. Society -
22 OBD 470), it has been held that a corporation is a legal person, just as much in individual but with no
physical existence. The characteristic of separate corporate personality of a company was also emphasized by
Chief Justice Marshall of USA when he defined a company “as a person, artificial, invisible, intangible and
existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the
charter of its creation confers upon it either expressly or as accident to its very existence”. [Trustees of
Darmouth College v Woodward (1819) 17 US 518).

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4. Perpetual Existence. A company is a stable form of business organization. Its life does
not depend upon the death, insolvency or retirement of any or all shareholder (s) or
director (s). Law creates it and law alone can dissolve it. Members may come and go but
the company can go on forever. The company may be compared with a flowing river
where the water keeps on changing continuously; still, the identity of the river remains
the same. Thus, a company has a perpetual existence, irrespective of changes in its
membership6.

5. Common Seal7. As was pointed out earlier, a company being an artificial person has
nobody similar to natural persons and as such it cannot sign documents for itself. It acts
through natural persons who are called its directors. But having a legal personality, it can
be bound by only those documents which bear its signature. Therefore, the law has
provided for the use of a common seal, with the name of the company engraved on it, as a
substitute for its signature. Any document bearing the common seal of the company will
be legally binding on the company. A company may have its own regulations in its
Articles of Association for the manner of affixing the common seal to a document. If the
Articles are silent, the provisions of Table A (the model set of articles appended to the
Companies Act) will apply. As per Article 113 of Table-A the seal of the company shall
not be affixed to any instrument except by the authority of a resolution of the Board or a
Committee of the Board authorized by it on that behalf, and except in the presence of at
least two directors and of the secretary or such other person as the Board may appoint for
the purpose, and those two directors and the secretary or other person aforesaid shall sign
every instrument to which the seal of the company is so affixed in their presence.

6. Limited Liability8: A company may be a company limited by shares or a company

limited by guarantee. For a company limited by shares, the liability of members is limited
to the unpaid value of the shares. For example, if the face value of a share in a company is
Ugx.10, 000/= and a member has already paid Ugx. 7000/= per share, he can be called
upon to pay not more than Ugx. 3000 per share during the lifetime of the company. In a
company limited by guarantee the liability of members is limited to such amount as the
member may undertake to contribute to the assets of the company in the event of its being
wound up.

7. Transferable Shares. In a public company, the shares are freely transferable. The right to
transfer shares is a statutory right and it cannot be taken away by a provision in the
articles. However, the articles shall prescribe the manner in which such transfer of shares
will be made and it may also contain bona fide and reasonable restrictions on the right of
members to transfer their shares. But absolute restrictions on the rights of members to

6
See: Michael Oscar Kayemba v. James Mulwana and 3 Ors. HCCS. 749/9)7, where Justice Bossa, relaying
on the case of Salomon Versus salmon held that, where a company had only one paid u shareholder it still
remains in aw a corporation with independent existence. The company continues to exist despite the
death of its shareholders.
7
See Kintu Versus Kyotera Coffee Growers (1976) HCB 336.
8
See Section 4 (2) (a) and (b) of the Companies Act, No. 1 of 2012.

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transfer their shares shall be ultra vires. However, in the case of a private company, the
articles shall restrict the right of a member to transfer their shares in companies with its
statutory definition. In order to make the right to transfer shares and securities9 more
effective, the shareholder can apply to the court in case of refusal by the company to
register a transfer of shares.

8. Separate Property10: As a company is a legal person distinct from its members, it is

capable of owning, enjoying and disposing of property in its own name. Although its
capital and assets are contributed by its shareholders, they are not the private and joint
owners of its property. The company is the real person in which all its property is vested
and by which it is controlled, managed and disposed of.

9. Delegated Management: A joint stock company is an autonomous, self-governing and

self-controlling organization. Since it has a large number of members, all of them cannot
take part in the management of the affairs of the company. Actual control and
management is, therefore, delegated by the shareholders to their elected representatives,
know as directors. They look after the day-to-day working of the company. Moreover,
since shareholders, by majority of votes, decide the general policy of the company, the
management of the company is carried on democratic lines. Majority decision and
centralized management compulsorily bring about unity of action.

1.2 Types of Companies:

Section 4 (1) of the Companies Act, 2012 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.

Under subsection (2) the company may be:

(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. This is referred to as
“a company limited by shares”.

(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. This is to as “a company limited by
guarantee”. This company may be a private or public company. Note that it is the
members’ liability and not the companies’ liability which is limited. As long as there

9
See Section 5 (a) of the Companies Act, No. 1 of 2012.
10
See Macaura v Northern Assurance Co Ltd [1925] AC 619, The House of Lords held that in order to have
an insurable interest in property a person must have a legal or equitable interest in that property. The claim
failed as “the corporator even if he holds all the shares is not the corporation… neither he nor any creditor of
the company has any property legal or equitable in the assets of the corporation.” (per Lord Wrenbury, at pg
633).

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are adequate assets, the company is liable to pay all its debts without any limitation of
liability. If the assets are not adequate, then the company can only be wound up as a
human being who fails to pay his debts. Nearly all statutory rules in the Companies
Act are intended for one or two objects namely;

i i. The protection of the company’s creditors;

ii ii. The protection of the investors in this instance being the members.

(c) A company not having any limit on the liability11 of its members. This is referred to
as “an unlimited company”.

(d) Private or public. A “private company” is defined under section 5 of the Act to
mean a company which by its articles; restricts the right to transfer its shares and
other securities; limits the number of its members to one hundred, not including
persons who are employed by the company and persons who, have been formerly
employed by the company; and prohibits any invitation to the public to subscribe for
any shares or debentures of the company.

(e) Where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this section, be treated as a single member12.

(f) A public company. A company which is not a private company under section 5 is a
public company. It is clear that in character a public company is the opposite of a
private company.

(g) A foreign company: This is a company which is incorporated in another country. If

such a company wishes to carry out business in Uganda, it must be registered.
To register a foreign company, the following documents are required:
Certified copies of the Memorandum of Articles of Association/Charter/ Constitution
and Certificate from the country of origin duly witnessed. The person interested in
registering a foreign company is also required to file the following forms to wit;

i. Form 24 – Particulars of Directors and Secretary;

ii. Form 13 – Statement of all subsisting charges;
iii. Form 25 – List of Names and Address of Persons Resident in Uganda
authorized to accept service on behalf of the company;
iv. Form 26 – Address and Principle Office of Company.
v. Form for the beneficial owner.

11
The term limited liability means the fact that the liabilities of the shareholders are limited to the extent of the
value of shares held by them or the amount guaranteed by them. Thus, their personal or private property cannot
be attached for debts of the company. This advantage attracts many people to invest their savings in the
company.
12
See Section 5 (c) of the Companies Act.

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(h) Single-member Company. A single-member company is a private company limited

by shares or by guarantee, which is incorporated with one member, or whose
membership is reduced to one person. Paul L. Davies, in the book Gower and Davies’
Principles of Modern Company Law, traces the concept of a single member company
to as far back as the nineteenth century in the case of Salomon v Salomon [1897] A.C.
22 when he states; “……….. Whilst the decision of the House of Lords at the end of
the nineteenth (19th) century in Salomon v Salomon in effect allowed the
incorporation of a company with a single member, the other six being bare nominees
for the seventh”.

Besides, Under the Act, a single-member company is obliged to nominate two

individuals, one of whom shall become the nominee director in case of death of the
single member and the other shall become the alternate nominee director to work as
nominee director in case of non-availability of the nominee director.

(i) Other types of companies: Statutory companies by the Acts of Parliament and do
not go through the process of incorporation as stipulated under the Companies Act
e.g. National water and sewage corporation. A corporation sole consists of one
human member at a time being the holder of an office. They are mostly created by
Acts of parliament but may also be created by the Constitution.

(j) Holding & Subsidiary Company: When a company holds ‘majority of shares’ i.e.
more than 50% of the equity shares of another company, the former is called holding
company or parent company and the latter is called subsidiary company.
EXAMPLE: Christel Ltd is a company incorporated under the Companies Act, 2012
having a share capital of 2m Uganda Shillings divided into 100 shares of Ugx.
20,000.= each. Out of the total shares, 80 shares are held by KAC Ltd, another
company. In this case, KAC Ltd is a holding company and Christel Ltd is a subsidiary
company.

1.3 Differences Between A Company And A Partnership.

Company Partnerships
• It is created upon registration in • Is formed by agreement of the partners of
accordance with the Companies Act. the partners. Registration is optional
unless the Partnership falls within the
meaning of Section 4 of the Partnership
Act, 2010 which requires that for a
partnership which uses a name other than
the surnames of the partners then
registration is mandatory under the
Business Registration Act.
• A private company, limits the number of • The membership is restricted to 2 or more

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its members to 100 not including the persons and not more than 20 for trade
company's former and current employees and business. However, professional
(S.5). Section 6 provides that a company partnerships have a maximum of 50
that is not a private company under members.
section under section 5 is a public
company.
• One person can form a company. I.e. the • The minimum number is two.
single-member company.
• It attains a separate legal existence upon • The partnership has no separate legal
incorporation existence; it’s the same as its partners,
applying the law of agency.
• The property acquired belongs to the • Property belongs to the partners.
company.
• A member or director may enter into a • The partner cannot enter into a contract
contract with the company. with the firm.

• The company debts are the company’s • The partners are responsible for the
responsibility, and not for the • Partnership debts.
shareholder.

• The shareholder is not an agent of the • The partner is an agent of the firm.
company.
• The liability of members is limited • Liability in partnership is unlimited
either by shares or guarantee except for except for the limited liability
unlimited companies. partnerships.

• The shares in a public company are • The shares of the partnership can only be
freely transferable. transferred with the partners’ consent.
• Companies have perpetual Succession. • Death, insanity, or insolvency of a partner
terminates the partnership unless
otherwise
agreed.
• The partnership is managed by all
partners.
• The company is managed by a board of
directors elected by the shareholders.
The company is formed using the The major document is the partnership deed
memorandum and articles of association. or the Partnership Act.

Company NGOs.
• A company is created upon • It is formed by agreement of the
registration in accordance with the members by the NGO Act or

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Companies Act. community-based organization.

Registration is not mandatory for an
association, however, the Constitution
of the association may be registered
with the registrar of documents
• It attains a separate legal personality • The NGo becomes a separate legal
upon incorporation. entity upon registration. The
association acquires no separate
existence from its members upon
registration.
• The property belongs to the • The property belongs to the registered
Company. association on the other hand.
However, unregistered associations
cannot own property.
• A member or director may enter into • Members of a registered association
a contract with the Company. can enter into a contract with the
association subject to their
Constitution.
o Company Cooperatives
• Is created upon registration in • Is created upon registration under the
accordance with the Companies Act. Cooperative Societies Act.
• Membership for private companies is • Membership is unlimited. There
1 to 100, 1 to infinity for a public should, however, be at least 30
company. members.
• Acquires a separate legal personality • It becomes a separate legal entity
upon incorporation. upon registration.

• The property belongs to the • The property belongs to the registered

Company. Cooperatives society.

• A member or director may enter into • Members of the registered

a contract with the company. cooperatives society can enter into
contracts with the association subject
to their byes law in place.

1.4 Other business organisations:

1.4.1 Partnership:
Section 2(1) of the Partnership Act, 2010, defines a partnership as a relationship which
subsists between or among persons, not exceeding twenty in number, who carry on a business
in common with a view to making a profit. Where a partnership is formed for the purpose of
carrying on a profession, the number of professionals, which constitute the partnership shall

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not exceed fifty13. The relationship between or among members of any company or
association which is registered as a company under the Companies Act or any other Act
relating to the registration of joint stock companies; or formed or incorporated by or in
pursuance of any other written law, is not a partnership within the meaning of this Act14.

In short, a partnership is a relation between two or more persons who carry on a business
enterprise in which the profits and losses are shared proportionately.

1.4.2 Joint Venture Company:

It refers to an association of two or more individuals or companies engaged in a solitary
business enterprise for profit without actual partnership or incorporation. It is a contractual
business undertaking between two or more parties. It is similar to a partnership business, with
one key difference: a partnership generally involves an ongoing, long-term business
relationship, whereas a joint venture is based on a single business transaction. Individuals or
companies choose to enter joint ventures in order to share strengths, minimize risks, and
increase competitive advantages in the marketplace. For example, a high-technology firm
may contract with a manufacturer to bring its idea for a product to market; the former
provides the know-how, the latter the means.

1.4.3 Co-operative Society:

A cooperative society is a means for forming a legal entity to conduct business. It means a
voluntary association of persons who conduct business together to promote their common
economic interests. It works on the principle of self-help as well as mutual help. The main
objective is to provide support to the members. Nobody joins a cooperative society to earn
profit. People come forward as a group, pool their individual resources, utilize them in the
best possible manner, and derive some common benefit from it.

1.4.4 Sole Trading Business & Sole Trader:

A sole trading business is a business which is wholly owned and run by a single person who
receives all profits and has unlimited liability for all losses and debts. The single person who
owns and runs such a business is called a ‘sole proprietor’ or ‘sole trader’. It is to be noted
that to set up a sole trading business, no legal filing requirements or fees and no professional
advice is needed. One just literally goes into business on one’s own and the law will
recognize it as having legal form.

1.4.5 Government Company.

A Company of which not less than 51% of the paid-up capital is held by the Central
Government or by State Government or Government singly or jointly is known as a
Government Company. It includes a company subsidiary to a government company. The

13
See Section 2 (2) Partnership Act, Cap. 2010.
14
See Section 2 (3) (a) & (b) of the Partnership Act.

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share capital of a government company may be wholly or partly owned by the government,
but it would not make it the agent of the Government.

1. Formation of a Registered Company:

A company may either be a statutory, chartered or registered company 15. The latter, formed
under the Companies Act is the commonest. This is by registration under the Companies
Act. In order to form a registered company, the promoters have to choose between a limited
and unlimited company. The disadvantage with an unlimited company is that members will
ultimately be personally liable for its debts and for this reason, they are likely to be wary of it
if it intends to trade.

A limited company on the other hand distinguishes ownership from management enabling
expertise and stopping the tendency of saying “This is my company, I can do whatever I
want.” If the promoters decide upon limited liability, then they have to decide on whether to
be limited by shares or guarantee. This is determined by the purpose which the company is
to perform. A guarantee company is more suitable for a non-profit making company. The
question is whether the company should have a share capital does not arise for a company
limited by shares or guarantees.

If the company is unlimited it may or may not have its capital divided into shares depending
on its purpose. If it is intended to make and distribute profits, a share capital is more
appropriate. S. 4 (1) of the Companies Act provides that;

Any one or more persons may for a lawful purpose, form a company, by subscribing their
names to a memorandum of association otherwise complying with the requirements of this
Act in respect of registration, form an incorporated company, with or without limited
liability.

Further, the promoters have to choose between a public company and a private company.
These fulfil different economic purposes. The former to raise capital from the public to run
the corporate enterprise and the latter to confer a separate legal personality on the business of
a single trader or a partnership.

The incorporators may have the ultimate ambition of going public but rarely will they be in a
position to do so immediately. If however, they are, then the company will have to be limited
by shares. The memorandum of association will have to state that it is to be a public company
and special requirements as to its registration will have to be complied with. Another
company will be a private company. A private company is defined by S.5 (1) (a), (b) and (c)
of the Companies Act to mean;

15
The Companies Act uses existing and/or a registered company.

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A “private company” means a company which by its articles restricts the right to transfer its
shares and other securities; and limits the number of its members to one hundred, not
including persons who are employed by the company and persons who, have been formerly
employed by the company and prohibits any invitation to the public to subscribe for any
shares or debentures of the company.
In addition where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this section, be treated as a single member16.

In order to incorporate themselves into a company, those people wishing to trade through the
medium of a limited liability company must first prepare and register certain documents. As
already mentioned above the desired company could either be a limited company either by
shares or guarantee, an unlimited company, a public company and a private company 17. The
documents that must be registered are as follows;

a) Memorandum of Association. This is the document in which they express inter alia
their desire to be formed into a company with a specific name and objects. The
Memorandum of Association of a company is its primary document which sets up its
constitution and objects.

b) Articles of Association. Whereas the memorandum of association of a company sets

out its objectives and constitution, the articles of association contain the rules and
regulations by which its internal affairs are governed dealing with such matters as
shares, share capital, company’s meetings and directors among others. The
requirements regarding the memorandum of association are provided for under S. 7 of
the Companies Act. Section7 (1) of the Companies provides that the memorandum of
every company shall be printed in the English language and shall state;

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

It is important to note that the memorandum of a company limited by shares or by guarantee

must also state that the liability of its members is limited. The memorandum of a company
limited by guarantee must also state that each member undertakes to contribute to the assets
of the company if it is being wound up while he or she is a member or within one year after
he or she ceases to be a member, for payment of the debts and liabilities of the company
contracted before he or she ceases to be a member and of the costs, charges and expenses of
winding up and for adjustment of the rights of the contributories among themselves such
amount as may be required, not exceeding a specified amount18.

16
See Section 5(3) of the Companies Act, 2012.
17
See section 5 & 6 of the Companies Act, 2012.
18
See Section 7 (2) & (3) of the Companies Act, 2012.

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In the case of a company having a share capital19, the memorandum must also, unless the
company is an unlimited company, state as follows;

(i) The amount of share capital with which the company proposes to be registered
and the division of that share capital into shares of a fixed amount;
(ii) A subscriber of the memorandum may not take less than one share; and (iii)
each subscriber shall write opposite his or her name the number of shares he or
she takes.
Note that where the company’s memorandum states that the object of the company is to carry
on business as a general commercial company the memorandum shall state that; the object of
the company is to carry on any trade or business whatsoever; and the company has power
to do all such things as are incidental or conducive to the carrying on of any trade or
business by it20.

As provided for under section 8 of the Act, the memorandum shall be dated and shall be
signed by each subscriber in the presence of at least one attesting witness who shall state
his or her occupation and postal address. Opposite the signature of every subscriber there
shall be written in legible characters his or her full name, occupation and postal address.

The Companies Act puts restrictions on the amendment of the memorandum. This is
provided for under S.9 which states that a company may not alter the conditions contained
in its memorandum except in the cases in the mode and to the extent for which express
provision is made in the companies Act. The mode for alteration of the Company’s objects is
provided for under S. 10 of the Companies Act, which states that; a company that has
included in its memorandum its objects, may, by special resolution, alter its memorandum
with respect to the objects of the company. But this must be for the benefit of the company to
carry out business more economically and efficiently. The same applies to Articles of
association under Section 11 and which can also be altered by a special resolution under
Section. 16 of the Act. However, it’s not mandatory to register the articles of association.

2.1 Registration:
Section 18 (1) of the Act provides that a company shall be registered by filling in the
particulars contained in the registration form in the second schedule to the Act. 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.
Once the company is registered it shall indicate its registration number on all its official
documents21. Under Section 18 (3) of the Act, on registration of the company, the registrar
shall issue a certificate signed by him or her that the company is incorporated and in the case
of a limited liability company, that the company is limited. The certificate issued by the
registrar is under Section 22 of the Act taken to be conclusive evidence that all the

19
See Section 7 (4) & (5).
20
See Section 7 (5) (a) & (b) of the Act.
21
See Section 19 (1) & (2) of the Companies Act, 2012.

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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 the Act. Therefore it is upon registration that the
company is born and can commence business.

2.2 Summary of procedure and necessary forms for registering a company in Uganda.
2.2.1. Local Company.

To Register a Local Company limited by Shares, one needs to Reserve the name22 to be
used and then file the following documents with the Registrar of Companies:
a) Companies Registration Form (s.18);
b) Memorandum and Articles of Association (if any) See section 7 & 8 of the Act.
c) Other Company forms include; A1 – Statement of Nominal Capital.

To register a Local company limited by guarantee, one needs to reserve the name to be
used and then file the following documents with the Registrar of Companies:

(i) Company Registration Form (s.18);

(ii) Memorandum and Articles of Association;

When one has secured all the documents ready as above he or she is required to, pick up
assessment forms from the URSB office or do self- self-assessment over the URSB website
(online) and pay registration fees and stamp duty. Upon registration, the Registrar will issue a
certificate of incorporation which could be possible within two working days.

After the company has been registered, the following forms must be filed (Company
Returns).

1. Company Form 20 – Particulars of Directors and Secretaries (Within 14 days).

2. Company Form 18 – Notice of Situation of Registered Office & Postal Address (within
14 days).
3. Company Form 10 – Return of allotment (within 60 days).
4. Form of Annual Return for a company limited by shares (to be filed once every year).
5. Company Form 1- Notice of beneficial owner form under Company Reg. 3 (2), 7(2).

2.2.2 Membership:

This is provided for under S. 47 of the Act which 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. A

22
See Section 36 of the Companies Act, 2012.

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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. This raises a pertinent question who
is a member of a company? This means that a member is one who subscribes to the
memorandum of association, or one who is later admitted after incorporation. If a person is
not entered on the register yet he or she is a member, the remedy is provided for under S. 125
whereby the court has the power to rectify the register and payment by the company of any
damages sustained by any party aggrieved. The case of Mathew Rukikaire Versus Incafex
Ltd, Supreme Court, Civil Appeal No. 03 of 2015 23 is highly rich on who is a member of a
company.

2. Corporate Personality:

The subscribers to the memorandum of association together with such other persons become
members of a body corporate by the name included in the certificate of incorporation; they
constitute a company. This in a way establishes the legal personality of a company where the
individuals cease to enforce their rights or obligations as individuals and now act collectively
as a body corporate. The natural persons behind this corporation are now referred to by the
name indicated in the certificate of incorporation. The law creates an artificial person which
is a juridical entity with the ability to have legal rights and incur legal liabilities.

A corporation, therefore, is a legal entity distinct from its members, capable of enjoying
rights being subject to duties which are not the same as those enjoyed or borne by the
members. The full implications of corporate personality were not fully understood till
1897 in the case of Salomon v. Salomon [1897] A C 22:

2.1 Facts of the case:

Salomon was a prosperous leather merchant who specialized in manufacturing leather boots.
For many years he ran his business as a sole trader. By 1892 his sons had become interested
in taking part in the business. Salomon decided to incorporate his business as a limited
liability company Salomon and Co Ltd and he then sold his business to the new company. At
the time the legal requirement was that at least seven persons subscribe as members of a
company and these were Salomon, his wife, daughter and four sons. He had sold his business
to the company at the price of £39,000 satisfied by £9000 in cash, £10,000 in debentures
conferring a charge on the company’s assets and £20,000 in fully paid up £1 shares. Salomon
was both a creditor because he held a debenture and also a shareholder because he held shares
in the company. The company share capital was £40,000 divided into 40,000 shares of £1
each. Seven shares were then subscribed for in cash by Salomon, his wife and daughter and
each of his 4 sons. Salomon therefore had 20,001 shares in the company and each member of
the family had 1 share as Salomon‘s nominees.

The company appointed directors with Mr. Salomon and his two sons as directors and they
were in charge of managing the overall control with Salomon. Immediately after the transfer

23
Students should be implored to read this decision in its entirety.

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of the business to the company, there was a depression in the boot industry and the
government failed to honour obligations to the company in time and the profitability of the
company began to decline. Mr. Salomon and his wife advanced money to the company to
salvage it from the financial crisis but it failed to recover. He cancelled his debentures and the
company entered into another agreement creating debentures with Mr. Broderip who became
a secured creditor of the company. It still failed to recover and Mr Broderip appointed a
receiver under the debentures. Thereafter, the company went into liquidation and a liquidator
was appointed to realise cash and pay creditors of the company. Mr Broderip and Salomon
raised their claims as secured creditors but the sale of the company assets could not
sufficiently cover all the creditors. The liquidator then rejected the claims of Broderip and
Salomon arguing that they were fraudulent and invalid.

At the trial court, the claims of Broderip were settled but rejected the claims of Salomon and
held.; That the company was a mere sham an alias, agent or nominee of Salomon and was
actually Salomon in another form; That Mr. Salomon should therefore indemnify the
company against its trade loss as the company was his agent. The basis of the trial court
was that; Salomon had control over the company by owning 20001 shares as a majority
shareholder; that the rest of the shareholders did not pay for their shares as they were paid
by Salomon and hence were mere nominees.; that the same business conducted by
Salomon as sole trader was the same; that people running the business was Salomon as the
manager who determined the price that was paid to him; that Salomon issued debentures
when he was an insider to make him a secured creditor.

Mr. Salomon then appealed;

The Court of Appeal unanimously agreed that the trader should be made liable but they
concentrated their judgments on the ground that the use to which the Companies Act had
been put was improper. That the formation of the company and the issue of debentures to Mr
Salomon was a mere scheme to enable him to carry on business in the name of the company
with limited liability contrary to the true intent and meaning of the Companies Act and
further to enable him to obtain a preference over other creditors of the company by securing a
charge on the assets of the company by means of debentures.

The tenor of the Court of Appeal decision is encapsulated in the judgment of Lopes LJ, who
first lamented that;

It would be lamentable if a scheme like this could not be defeated; if we were to permit it to
succeed, we should be authorizing a perversion of the Companies Act; we should be giving
vitality to that which is a myth and a fiction. The transaction is a device to apply the
machinery of the Companies At to a state of things never contemplated by the Act. it never
was intended that the company be constituted of one substantial person and six mere
dummies, the nominees of that person without any real interest in the company.

He then stated that;

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The Act contemplated the incorporation of seven independent bona fide members, who had
a mind and will of their own and were not the mere puppets of an individual who, adopting
the machinery of the Act, carried on his old business in the same way as before, when he
was a sole trader. To legalise such a transaction would be a scandal.
The public policy behind the Court of Appeal decision was to protect innocent parties who
transact business with the company against the fraudulent or unfair transactions of
insiders.

Lindley LJ while agreeing that there was a company, treated it as a trustee improperly
brought into existence by Salomon to enable him to do what the statute prohibits.
His liability rests on the purpose for which he formed the company, on the way he formed it,
and on the use which he made of it. The company was a device to enable him to carry out
business with limited liability and issue debentures to himself in order to defeat the claims of
those who have been incautious enough to trade with the company without perceiving the
trap which he has laid for them…Mr, Salomon’s scheme is a device to defraud creditors.

…the so-called sale of the business to the company was a mere sham and could be set aside
in the interests of its creditors.

The Court of Appeal went on to suggest that, rather than an agent, the company was a
trustee holding business on trust for Salomon the beneficiary. That the rest of the family
members were mere dummies and the company was a trustee of Mr. Salomon who was a
beneficiary and as such Salomon had to indemnify the trustee, the company.

On appeal to the House of Lords;

The House of Lords unanimously reversed the Court of Appeal and held that;

Upon incorporation, a company is at law a different person altogether from the subscribers to
the memorandum of association. Even if it is the same business as precisely before and the
same persons are the managers and the same hands receive the profits, the company is not in
law the agent of the subscribers or trustees for them. That the subscribers as members are not
liable in any shape or form except as provided by the Act. There is nothing in the Act that
provides that the subscribers must be independent and not related as long as the requirements
of incorporation are complied with.

In the words of Lord Halsbury “Either the limited company was a legal entity or it was not.
If it was, the business belonged to it and not to Salomon. If it was not, there was no person
and nothing at all and it is impossible to say at the same time that there is a company and
there is not” page 31

In the words of Lord Mcnaghten

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“the company is at a law a different person altogether from the subscribers and though it
may be that after incorporation the business is precisely the same as it was before, and the
same persons are managers, and the same hands receive the profits, the company is not in
law the agent of the subscribers or trustee for them nor are the subscribers as members liable
in any shape or form except to the extent and manner prescribed by the Act … in order to
form a company limited by shares the Act requires that seven (7) persons who are each to
take one share at least should sign a Memorandum of Association. If those conditions are
satisfied, what can it matter, whether the signatories are relations or strangers? There is
nothing in the Act requiring that the subscribers to the Memorandum should be independent
or unconnected or that they or anyone of them should take a substantial interest in the
undertaking or that they should have a mind and will of their own. When the Memorandum is
duly signed and registered though there be only seven (7) shares taken the subscribers are a
body corporate capable forthwith of exercising all the functions of an incorporated company.
… The company attains maturity on its birth. There is no period of minority and no interval
of incapacity. A body corporate thus made capable by statutes cannot lose its individuality by
issuing the bulk of its capital to one person whether he be a subscriber to the Memorandum
or not.” (page 51)

Lord Halsbury;

It seems to me impossible to dispute that once the company is legally incorporated it must be
treated like any other independent person with its rights and liabilities appropriate to itself,
and that the motives of those who took part in the promotion of the company are absolutely
irrelevant in discussing what those rights and liabilities are. (page 30)

Lord Herschell further noted on page 43 that;

In a popular sense, a company may in every case be said to carry on business for and on
behalf of its shareholders; but this certainly does not in point of law constitute the relation of
principal and agent between them or render the shareholders liable to indemnify the
company against the debts which it incurs.

Lord Davey on page 56 notes;

I observe, in passing, that nothing turns upon there being only one person interested. The
argument would have been just as good if there had been six members holding the bulk of the
shares and one member with a very small interest, say one share. I am at a loss to see how in
either view taken in the Courts below the conclusion follows from the premises, or in what
way the company became an agent or trustee for the appellant, except in the sense in which
every company may loosely and inaccurately be said to be an agent for earning profits for its
members, or a trustee of its profits for the members amongst whom they are to be divided.
There was certainly no express trust for the appellant, and an implied or constructive trust
can only be raised by virtue of some equity…Nor do I think it legitimate to inquire whether

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the interest of any member is substantial when the Act has declared that no member need
hold more than one share, and has not prescribed any minimum amount of a share.

Lord Macnaghten gave the purpose of limited liability;

Among the principal reasons which induce persons to form private companies, as is stated
very clearly by Mr. Palmer in his treatise on the subject, are the desire to avoid the risk of
bankruptcy, and the increased facility afforded for borrowing money. By means of a private
company, as Mr. Palmer observes, a trade can be carried on with limited liability, and
without exposing the persons interested in it in the event of failure to the harsh provisions of
the bankruptcy law. A company, too, can raise money on debentures, which an ordinary
trader cannot do. Any member of a company, acting in good faith, is as much entitled to take
and hold the company's debentures as any outside creditor. Every creditor is entitled to get
and hold the best security the law allows him to take.
The above passage by Lord Macnaghten states the public policy behind the decision that is;
to encourage business, protect people from the risk of business, promotion of trade
(capitalism) and the concept of constructive notice as creditors should make inquiries.

Lord Watson stated the need for inquiries on page 40;

The unpaid creditors of the company, whose unfortunate position has been attributed to the
fraud of the appellant, if they had thought fit to avail themselves of the means of protecting
their interests that the Act provides, could have informed themselves of the terms of purchase
by the company, of the issue of debentures to the appellant, and of the amount of shares held
by each member. In my opinion, the statute casts upon them the duty of making inquiries in
regard to these matters. Whatever may be the moral duty of a limited company and its
shareholders, when the trade of the company is not thriving, the law does not lay any
obligation upon them to warn those members of the public who deal with them on credit that
they run the risk of not being paid. One of the learned judges asserts, and I see no reason to
question the accuracy of his statement, that creditors never think of examining the register of
debentures. But the apathy of a creditor cannot justify an imputation of fraud against a
limited company or its members, who have provided all the means of information which the
Act of 1862 requires; and, in my opinion, a creditor who will not take the trouble to use the
means which the statute provides for enabling him to protect himself must bear the
consequences of his own negligence.

The significance of the Salomon decision is threefold.

The decision established the legality of the so-called one-man company; It showed that
incorporation was as readily available to the small private partnership and sole traders as to
the large private company. It also revealed that it is possible for a trader not merely to limit
his liability to the money invested in his enterprise but even to avoid any serious risk to that
capital by subscribing for debentures rather than shares. Since the decision in Salomon’s
case, the complete separation of the company and its members has never been doubted.
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This was further fortified in the case of Lee v Lee’s Air Farming Ltd. (1961) A.C. 12
Lee’s company was formed with a capital of £3000 divided into 3000 £1 shares. Of these
shares, Mr. Lee held 2,999 and the remaining one share was held by a third party as his
nominee. In his capacity as controlling shareholder, Lee voted himself as a company director
and Chief Pilot. In the course of his duty as a pilot, he was involved in a crash in which he
died. His widow brought an action for compensation under the Workman’s Compensation
Act and in this Act workman was defined as “A person employed under a contract of
service” so the issue was whether Mr. Lee was a workman under the Act and whether there
was a master-servant relationship?

The House of Lords Held:

“ ... That it was the logical consequence of the decision in Salomon’s case that Lee and the
company were two separate entities capable of entering into contractual relations and the
widow was therefore entitled to compensation.”

That it is well established that the mere fact that someone is a director of a company is no
impediment to his entering into a contract to serve the company. The company and the
deceased were separate legal entities, The company had the right to decide what contracts for
aerial top dressing it would enter into. The deceased was the agent of the company in making
the necessary decisions. The deceased was a worker and his position as a sole governing
director did not make it impossible for him to be the servant of the company in the capacity
of a chief pilot.

In his words, Lord Morris stated;

A man acting in one capacity can give orders to himself in another capacity, and also a man
acting in one capacity can make a contract with himself in another capacity;

There have been a number of other cases decided invoking the decision in Salomon v
Salomon. These cases highlight the consequences of corporate personality.

2.2 Consequences or attributes of corporate personality.

1. The company is a legal entity, distinct from its members hence capable of enjoying rights
and incurs liabilities. See Salomon v Salomon. To import the words of Lord Halsbury;

Once the company is legally incorporated it must be treated like any other independent
person with its rights and liabilities appropriate to itself, and the motives of those who took
part in the promotion of the company are absolutely irrelevant in discussing what those
rights and liabilities are. (page 30)

2. A company can enter into a contract with one of its own; Lee v Lee
3. Company property belongs to the company and not its members;
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Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619

The Appellant owner of a timber estate assigned the whole of the timber to a company known
as Irish Canadian Saw Mills Company Limited for a consideration of £42,000. The payment
was effected by the allotment to the Appellant of 42,000 shares fully paid up in £1 shares in
the company. No other shares were ever issued. The company proceeded with the cutting of
the timber. In the course of these operations, the Appellant lent the company some £19,000.
Apart from this the company’s debts were minimal. The Appellant then insured the timber
against fire by policies affected in his own name. Then the timber was destroyed by fire. The
insurance company refused to pay any indemnity to the appellant on the ground that he had
no insurable interest in the timber at the time of affecting the policy.

The courts held that it was clear that the Appellant had no insurable interest in the timber
and though he owned almost all the shares in the company and the company owed him a
good deal of money, nevertheless, neither as creditor or shareholder could he insure the
company’s assets. That when Macaura sold the property to the company he ceased to enjoy
any legal or equitable interest in it. The property was wholly and completely owned by the
company.

Lord Buckmaster;
No shareholder has any right to any item of property owned by the company for he has no
legal or equitable interest therein. If his contention were right, it would follow that any person
would be at liberty to insure the furniture of his debtor and no such claim has ever been
recognized by the courts.

However, courts have been of the view that a person can have an insurable interest in the
property of the company if such a person is the only shareholder and creditor of the company,
and in such cases, Macaura should not be followed. This was held in the case below;

Kosmopoulos v Constitution Insurance Co of Canada (1987) 1 SCR 2

Mr. Kosmopoulos had a leather goods company for which he was the sole shareholder and
director. His lease for the company office was under his own name from when he originally
ran the business as a sole proprietor. The insurance on the office, however, was in his own
name. His insurance agency knew that he was under the lease and himself but carried on
business as a corporation. A fire in a neighbouring lot damaged his office; however, the
insurance company refused to cover his damages. At trial, the judge held that Mr
Kosmopoulos could not recover damages as the owner for the assets of the business as they
were owned by the company and not him, but that he could recover as insured because of his
insurable interest in the building. This ruling was upheld on appeal, with the court noting that
as companies could, thanks to recent laws, have a sole shareholder, Macaura could be
restricted to cases involving multiple shareholders.

On appeal to the House of Lords, The issue before the Court was whether the assets of Mr
Kosmopoulos, as a shareholder, were covered by the insurance.
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The Court upheld the ruling of the lower courts.

First of all, the Court decided that this was not a situation where they should "lift the
corporate veil". That the corporate veil should not be lifted here even though theoretically
could be lifted to do justice. Those who have chosen the benefits of incorporation must bear
the corresponding burdens and if the veil is to be lifted it should only be done in the interests
of third parties who would otherwise suffer as a result of the choice. Macaura should not be
followed if an insured can demonstrate some relation to or concern in the subject of insurance
which relation or concern by the happening of perils injured against may be so affected as to
produce a damage detriment or prejudice to the person insuring. (factual expectancy test).
However, the court found that the owner, as insured, held an insurable interest in the assets—
that is, he had enough of a link to the assets to validly insure them.

Lord Mclntyre J;

The Macaura rule should not be accepted to compel a holding that a sole shareholder and sole
director of a company could not have an insurable interest in the assets of the company.
Modern company law now permits the creation of companies with one shareholder. The
identity then between the company and that sole shareholder and director is such that an
insurable interest in the company’s assets may be found in the sole shareholder. The above
case means that Macaura could be restricted only to cases involving multiple shareholders
and creditors. A company may acquire property in its own name and is capable of possessing
property. Hindu Dispensary, Zanzibar v NA Patwa and Sons [1958] 1 EA 74. The
Zanzibar Rent Restriction Board, having found that a flat owned by the respondents had
remained unoccupied for more than one month without good cause, allocated the flat to the
appellant under s. 7 (1) (l) (i) of the Rent Restriction Decree, 1953, The flat was allocated to
the appellant for the purpose of housing a doctor to be employed by the appellant in its
business. The respondents appealed to the High Court which allowed the appeal on the
ground that a body corporate could not be a “suitable tenant” under the Rent Restriction
Decree. On a second appeal, it was contended that since the Decree applies to both business
premises and dwelling houses the flat though intended to be occupied as a dwelling was qua
the appellant “business premises”; and that a body corporate could be a “suitable tenant” of
business premises under s. 7 (1) (l) (i) of the Decree.

Held;
i. Since the Rent Restriction Decree also applied to business premises a trading
company could be a “suitable tenant” of premises for the purposes of its business.
ii. The suit premises, though intended to be occupied as a dwelling house were qua the
Dispensary “business premises”.
Per Curiam– “A company can have possession of business premises by its servants or agents.
In fact that is the only way it can have physical possession.” As an artificial person, a
company has no racial attributes;

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Katate v Nyakatukura (1956) 7 U.L.R 47A :

The Respondent sued the Petitioner for the recovery of certain sums of money allegedly due
to the Ankole African Commercial Society Ltd in which the Petitioner was a Director and
also the Deputy Chairman. The Respondent conceded that in filing the action he was acting
entirely on behalf of the society, which was therefore the proper Plaintiff. The action was
filed in the Central Native Court. Under the Relevant Native Court Ordinance the Central
Native Court had jurisdiction in civil cases in which all parties were natives. The issue was
whether the Ankole African Commercial Society Ltd of whom all the shareholders were
natives was also a native.

The court held that a limited liability company is a corporation and as such it has an existence
that is distinct from that of the shareholders who own it. Being a distinct legal entity and
abstract in nature, it was not capable of having racial attributes. Therefore the court had no
jurisdiction to hear the case.

Kajubi v Kayanja [1967] 1 EA 301:

The respondent, claiming to act under a power of attorney, in his own name sued the
appellant in the Buganda Principal Court for “misappropriation of Shs. 8,650/- of the K.B.
Coffee Growers Co. Ltd.” By the appellant. It was clear from the proceedings that the real
plaintiff was the limited company itself. The appellant objected to the jurisdiction of the
Principal Court, but that court, after inspecting the “power of attorney”, and having
summoned the members of the limited company before it (presumably to satisfy itself that
they were all Africans), gave judgment for the respondent. On appeal the appellant contended
that the jurisdiction of the Principal Court being restricted to disputes between “Africans”, it
could not try a case in which a limited liability company was the real plaintiff, such a
company not being an “African” within the meaning of the Buganda Courts Ordinance, s. 2.

Held
The Principal Court had no jurisdiction to entertain a suit by a limited company, which is not
an “African” within the meaning of the Buganda Courts Ordinance,

However, a company is a person for purposes of consent;

National and Grindlays Bank & Co v Kentiles & Co [1966] 1 EA 17: The appellant bank
advanced money to the respondent company on the security of the company’s land in the
highlands. Such transaction required consent of the relevant authorities but none was
obtained. When the company went into liquidation, its liquidator rejected the claim of the
bank as a secured creditor of the company on the ground that failure to obtain the required
consent made the mortgage void. The bank contended that the company was not a person
eligible to give consent. Whether a company is a person capable of giving consent?
Held –
The proper construction of the word “person” in s. 7 of The Land Control Ordinance as
amended included a company so that the absence of any consent under that Ordinance and
the Crown Lands Ordinance invalidated the purported grant of the legal mortgage;
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6. Limited Liability – since a corporation is a separate person from the members, its
members are not liable for its debts;

In the absence of any provisions to the contrary, the members are completely free from any
personal liability. In a company limited by shares, the member's liability is limited to the
amount unpaid on the shares whereas in a company limited by guarantee the member's
liability is limited to the amount they guaranteed to pay.

Sentamu v UCB (1983) HCB 59

The plaintiff was the managing director of a company and was commissioned by the
company to negotiate a loan with the defendant's bank. The bank later caused the arrest of the
plaintiff in order to recover repayment of the loan. Whether individuals were liable for the
company’s debts.

Held
A limited liability company is a separate legal entity from its directors, shareholders and
other members. Individual members of the company are not liable for the company’s debts.
Even as managing director, the plaintiff could not be personally liable for the debts of his
company.

Suing and Being Sued: As a legal person, a company can take action in its own name to
enforce its legal rights. Conversely, it may be sued for breach of its legal duties. The only
restriction on a company’s right to sue is that a lawyer in all its actions must always represent
it. Wani v Uganda Timber and Joiners LTD HCCS CS no. 98 of 1972. The plaintiff
applied for a warrant of arrest to be issued against the managing director of the defendant
company in order that he may be called upon to show cause why he should not furnish
security for his company’s appearance at the hearing of the suit where the company was a
defendant. This was because the managing director was Asian and Asians had been expelled
from Uganda.

Held;
A managing director is not the company and cannot be sued personally. If there is a case
against the company, then the company is the right person to be sued not its managing
director. In this case, the defendant in the suit was Uganda Timbers Ltd and not the managing
director.
7. Perpetual succession. As an artificial person, the company has no body, mind or
soul. It has been said that a company is therefore invisible and immortal and thus
exists only through intendment consideration of the law.

It can only cease to exist by the same process of law that brought it into existence otherwise;
it is not subject to the death of the natural body. Even though the members may come and go,
the company continues to exist.

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8. Transferability of shares Section 83 of the Companies Act states as follows “The Shares or
any other interests of a member in a company shall be moveable property transferable in the
manner provided by the Articles of Association of the Company.”

In a company therefore shares are really transferable and upon a transfer the assignee steps
into the shoes of the assignor as a member of the company with full rights as a member. Note
however that this transferability only relates to public companies and not private companies.
The above 8 features or attributes or consequences of the corporate personality of a company
can be equated to the advantages of having corporate personality and is the reason most
people prefer incorporation of a company rather than engaging into partnerships.

2.3 Ignoring The Corporate Entity (Lifting The Veil Of Incorporation)

Although Salomon’s case finally established that a company is a separate and distinct entity
from its members, there are circumstances in which this principle of corporate personality is
itself disregarded. These situations must however be regarded as exceptions because the
Salomon decision still obtains as the general principle
Although a company is liable for its own debt which will be the logical consequence of the
Salomon rule, the members themselves are held liable which is therefore a departure from
principle. The rights of creditors under this section are subject to certain limitations namely
(under statutory provision). According to Gower, the concept of separate personality and
limited liability does not protect the unpaid workman and the little man and as such the strict
application of the doctrine is unfair.
The consequences of incorporation are supplemented or curtailed by the principle of lifting
the veil of incorporation. The strict application of separate legal personality is ignored in
exceptional circumstances and there are rules supplementing or curtailing this doctrine.

1. Fraud & Improper Conduct:

Where there is fraud or improper conduct, the courts will immediately disregard the corporate
entity of the company. Examples are found in those situations in which a company is formed
for a fraudulent purpose or to facilitate the evasion of legal obligations. Re Bugle Press
Limited [1961] Ch. 270 This was based on Section 210 of the Companies Act where an offer
was made to purchase out a company if 90% of shareholders agreed. There were 3
shareholders in the company. A, B and C.

A held 45% of the shares, B also held 45% of the shares and C held the remaining 10% of the
shares. A and B persuaded C to sell his shares to them but he declined. Consequently, A and
B formed a new company called AB Limited, which made an offer to ABC Limited to buy
their shares in the old company. A and B accepted the offer, but C refused. A and B sought to
use provisions of Section 210 in order to acquire C’s shares compulsorily.
The court held that this was a bare-faced attempt to evade the fundamental principle of
company law which forbids the majority unless the articles provide to expropriate the
minority shareholders.

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Lord Justice Cohen said “The company was nothing but a legal hut. Built around the
majority shareholders and the whole scheme was nothing but a hollow shallow.” All the
minority shareholder had to do was shout and the walls of Jericho came tumbling down.

Gilford Motor Co. v. Horne (1933) Ch. 935:

Here the Defendant was a former employee of the plaintiff company and had covenanted not
to solicit the plaintiff’s customers. He formed a company to run a competing business. The
company did the solicitation. The defendant was neither a member nor its director. The
defendant argued that he had not breached his agreement with the plaintiffs because the
solicitation was undertaken by a company which was a separate legal entity from him.

The court held that the defendant’s company was a mere cloak or sham and that it was the
defendant himself through this device who was soliciting the plaintiff’s customers. An
injunction was granted against both the defendant and the company not to solicit the
plaintiff’s customers.

That “the defendant company is a creature of the defendant, a device and a sham, a mask
which he holds before his face in an attempt to avoid recognition by the eye of equity.”
Jones v. Lipman (1912) 1 W.L.R. 832: In this case the Defendant entered into a contract for
the sale of some property to the plaintiff. Subsequently, he refused to convey the property to
the plaintiff and formed a company for the purpose of acquiring that property and actually
transferred the property to the company. In an action for specific performance the Defendant
argued that he could not convey the property to the Plaintiff as it was already vested in a third
party.

Justice Russell J. observed as follows:

“the Defendant company was merely a device and a sham a mask which he holds before
his face in an attempt to avoid recognition by the eye of equity”

Russell J granted an order for specific performance against both L and A Co to convey the
land to J for two reasons both of which amount to lifting the veil, in the accepted sense. First,
because L, by his absolute ownership and control of A Co, could cause the contract to be
completed, the equitable remedy could be granted against him. Secondly, the order could be
made against the company because it was a creation of L and a device and a sham, a mask
which he holds before his face in an attempt to avoid recognition by the eye of equity. These
two cases show that the courts will refuse to allow a person to hide behind the veil of the
company and remain anonymous or deny that they have any connection with the company.

Another case where the court would not allow individuals to use a company as cover for
improper activities is Re Darby ex p Brougham. (1911) 1 KB 95 Here, D & G, two
fraudulent persons whose names were well known in the City, formed a company of which
they were the sole directors and controllers. This company acquired a licence to exploit a
quarry and then a new company was formed, to which the licence was sold at a grossly
inflated sum. The second company’s debentures were then offered for sale to the public and,
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when the subscription money was received, the debt to the first company was paid. The
prospectus issued to the public stated only that the first company was the promoter.
It was held that, in reality, D & G were the promoters and, as they received the whole of the
fraudulently obtained secret profit, the liquidator of the second company could pursue D & G
to account for the profit. The first company was a creature of the defendants meant to avoid
the eyes of equity from identifying the directors.

2. The Company as Agent or Nominee:

Generally, there is no reason why a company may not be an agent of its shareholders. The
decision in Salomon’s case shows how difficult it is to convince the courts that a company is
an agent of its members. In spite of this, there have been occasions in which the courts have
held that registered companies were not carrying on in their own right but rather were
carrying on business as agents of their holding companies. Reference may be made to the
case of Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116,
where it was held that the parent company which owned property which was compulsorily
acquired by Birmingham Corporation could claim compensation for removal and disturbance,
even though it was a subsidiary company which occupied the property and carried on
business there. This was because the subsidiary was operating on the property, not on its own
behalf, but on behalf of the parent company. After asking a number of questions concerning
the degree of control and receipts of profits from the business by the parent company,
Atkinson J concluded:

if ever one company can be said to be the agent or employee, or tool or simulacrum of
another I think the [subsidiary company] was in this case a legal entity because that is all it
was. ... I am satisfied that the business belonged to the claimants, they were ... the real
occupiers of the premises.

Along similar lines is the decision in Re FG (Films) Ltd, 1953] 1 WLR 483. where Vaisey J
held that an English company with no significant assets or employees of its own was merely
an agent or nominee for its American parent company. Therefore, any film nominally made
in its name could not be a ‘British’ film and, therefore, was not entitled to the advantages
provided by the Cinematograph Films Acts 1938:

The cases of fraud show that there must be a wrongdoer in control of the company using it as
a device to facilitate the wrong. Control is both direct (as in Jones v Lipman) and indirect
(Gilford’s case). Where there are no controlled shareholders, the veil cannot be lifted because
the company is a separate legal entity and the company cannot be identified with the
wrongdoer. In other words, the presence of a genuine third party in a separate legal entity is
recognized. However, where the company is set up for purposes of evasion of a transaction in
issue, the court may look at the motive behind its incorporation. The focus is on the dishonest
use of the company for an evasive purpose.
END.

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