NKUMBA UNIVERSITY

SCHOOL OF LAW AND INSTITUTE OF CRIMINAL JUSTICE

COURSE WORK
COURSE: Bachelor of Laws (LLB)
ACADEMIC YEAR: Year 3, Semester 1
COURSE UNIT: Company & partnerships Law
LECTURER: Mr.Isaac Lubogo
STUDENT NUMBER: 2200100635
STUDENTS INDEX NO.: 2022/AUG/LLB/B230747/DAY
DATE OF SUBMISSION: 25th Oct..2024.
 MUK 2019 CAMPANY LAW.

SECTION A

QUEATION. 1, “A company is a separate and distinct legal entity from its

shareholders/members and must be treated as such at all material times”. Discuss this statement
highlighting the public policy and circumstances where the courts have departed from this
position.

Section 2 of the Company Act cap 1061 defines a company as on formed and registered
under this Act or an existing company. The types of companies include the Registered
companies which are registered under the Act, Statutory companies which are created by a
special Act or Parliament, the Chartered companies which are granted by a Royal Charter in
England, the Corporation Sole in which one person fills the office at a time and the Holding
and Subsidiary companies under section 1562 of the Company Act cap.106

One of the characteristics of a company include a separate legal entity and distinct from its
members or the shareholders. This principle was clearly brought out in the case of Salomon v
Salomon & Co Ltd3 (1897). In this case, Aaron Salomon carried on a sole trading business as a
leather merchant. His sons wanted to be partners, thus in 1892, Salomon formed a limited
company with 20,007 shares, of which he held 20,001 shares with his wife and five children each
holding one share. He then sold the business to his newly-formed company for £39,000, paid in
£10,000 worth of debentures, £20,000 in £1 shares and £9,000 cash. He also paid off all the
creditors of the sole trading business in full. As such, he was the majority shareholder as well as
a secured debenture that had a charge over all the company’s assets. The company then went into
financial difficulties and Salomon sold his debentures to one Edmund Broderip for £5,000. The
company failed and upon liquidation, there was not enough money to pay Broderip and as such,
Broderip challenged the validity of the transaction to convert the business into a company and
sought to make Salomon personally liable for the company’s debts, alleging that the company
was but a “sham”, an agent for Salomon.

1
Company Act cap.106
2
Company Act cap.106
3
1897 AC 22
 The Court of Appeal held that Salomon was liable to indemnify the company against its
trading debts, and he appealed to the House of Lords.
The Lords unanimously reversed that decision and held that the company was validly formed
according to the Joint Stock Companies Act 1844, thus limiting Salomon’s personal liability as
he was held to be only an agent of the company, not the company his agent.

Lord Macnagten
“The company is at 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 in the manner provided by the Act.”

On the other hand, common law courts can always deviate from the principle that a company
is a separate and distinct legal entity from its shareholders and can have the exclusive jurisdiction
of lifting the veil at any time they want to examine the operating mechanism behind the
company.

Lifting the veil means that a court disregards the existence of the corporation because the
owners failed to keep one or more corporate requirements and formalities. It also merely means
that a company is to be distinguished as a separate person from its members 4. In Atlas Maritime
Company SA v Avalon Maritime Ltd,5 It was stated that “to pierce the corporate veil is an
expression that I would reserve for treating the rights and liabilities or activities of a company as
the rights or liabilities or activities of its shareholders. To lift the veil or look behind it therefore
should mean to have regard to the shareholding in a company for some legal purpose.”

And as per the case of Dunlop Nigerian Industries Ltd Vs Forward Nigerian Enterprises
Ltd & Farore, it was seen that in particular circumstance; for instance, where the device of
incorporation is used for some illegal or improper purpose, court may disregard the principle.
That a company is an independent legal entity and “lift a veil” of corporate identity so that if it is

4
According to company law notes by Doctoris Isaac Lubogo C.
5
(No. 1) [1991] 4 ALLER 769.
proved that a person used a company he controls for an improper transaction he may be made
personally liable to a third party.

Section 186 states 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 company, the membership of a
company falls below the statutory minimum, lift the corporate veil. In this case, a company veil
may be lifted if members continue to act as members after reduction of the membership below
the statutory minimum. This justification behind the membership requirement is to protect the
creditors of the company from dealing with a company which no longer complies with the law
and prevent its members from hiding behind the veil of incorporation.

That section still provides for lifting the veil of incorporation where the company business has
been operated fraudulently. In Re: Maimgstone, Court observed that a company secretary who
was also the financial advisor of the company was a party to the fraud happening in the business
just because he omitted to give advice to the company.

Section 156 and 157 of the Company Act cap.106 also provides that where accents of a
holding company are in issue, the veil of incorporation may be lifted. E.g. if at the end of the
financial year, the holding company fails to present its accounts with those of the subsidiary, an
order may be sought that the accounts be presented together with those of the subsidiary unless
such a holding company is a wholly owned subsidiary of a body corporate of a company
incorporated outside Uganda.

In Barrow v CSR Ltd where a court found out that the parent company was responsible for
the actions of the subsidiary in relation to an employee, it didn’t hesitate to lift the veil. Court
held that “whether one defines all of the above in terms of agency and in my view it is, or
control or whether one says that there was a proximity between CSR and the employees of ABA,
or whether one talks in terms of lifting the corporate veil, the effect is, in my respective
submission, the same.”

In conclusion, the act of piercing the corporate veil until now remains only an exceptional act
by courts of law. Courts are however most prepared to respect a corporate legal personality and

6
Of the company Act.cap.106
separate from its shareholders, having its own rights and duties and can sue and be sued in its
own name.

QUESTION. 2 The common law position regarding the ultra-vires rule has been varied by
section 51 of the companies Act, that it is almost a moot. Discuss:

A company which is registered under the company Act can’t effectively do anything beyond
the powers which are either expressly or by implication conferred upon in its memo of
association. Any purported activity in excess of those powers will be ineffective even if agreed to
by the members and shareholders of the company. That’s the doctrine of ultra vires in company
law.

The purpose of this doctrine include to protect the investors who know the objects in which
their money is to be applied and also to protect the creditors by ensuring that the company’s
assets to which the creditors look for repayment of their debts are not wasted in unauthorized
activities.

The doctrine was first brought out in the case of Ashbury Railway Carriage V Riche7 where
the company’s memorandum of association in the object clause gave the company powers to
make sell or lend or hire railway carriages and wagon, to carry on the business of mechanical
engineers and general contractors and to purchase, lease work and sell mines, minerals, land and
realty. The company directors entered into a contract to purchase a concession for constructing a
railway in Belgium. The issue was whether this contract was valid and if not, whether it could be
ratified by the shareholders. Court held that the contract was ultra vires the company so that not
even the subsequent consent of the whole body of shareholders could ratify it.

In the case of Bell house V City Wall Properties 8, in the court of appeal, it was held that the
words stated in the memo of association must be given their natural meaning and that the natural
meaning of those words was such that the company could carry on any business in connection
with or ancillary to its main business provided that the directors thought that could be
advantageous to the company. In that case, courts introduced methods of curbing the evasion of
the ultra vires doctrine and these include;

7
(1875) L.R. (H.L) 653
8
(1966)2 QB.656
 The ejusdem generis rule, this is the main object’s rule of construction. Here the company’s
memo of association expresses the objects of a company in a series of paragraphs and one
paragraph or the first 2 paragraphs appear to embody the main object of the company and all the
other paragraphs are treated as merely ancillary to this main object and as limited or controlled
thereby. In Re Introductions9, it was held that borrowing was a power and not an object in
itself.

The loss of Substratum, in this case, where the main object of a company has failed, a
petitioner will be granted an order for winding up of a company. Such a petitioner must be a
member or shareholder in the company. In Re; German Date Coffee Company10, the main
object of the company was to acquire a German Patent for manufacturing coffee for dates. The
German patent was never granted and the company acquired a Swedish patent for the same
purpose. The company was solvent and majority of the members wished to continue in business.
However, 2 of the shareholders petitioned for the company’s wind up on grounds that the
company’s object had entirely failed. Court held that upon failure to acquire the German patent,
it was impossible to carry out the objects for which the company was formed and therefore the
substratum had disappeared and it was just inevitable that the company should wound up.

Gratuitous gifts, the law is that a company has no power to make such payments unless the
particular payment is reasonably incidental to the carrying out of a company’s business and is
meant for the benefit and to promote the property of the company. In Hutton v West Cork
Railway Company11, a company sold its assets and continued in business only for the purpose
of winding up. While it was waiting on winding up, a resolution was passed in the company’s
general meeting authorizing the payment of a gratuity to the directors and dismissed employees.
Court held that the company was no longer a going concern and such a payment couldn’t be
reasonably incidental to the business of the company and therefore that resolution was invalid.

State laws in almost every jurisdiction have sharply reduced the importance of the ultra vires
doctrine, for example section 3.04 (a)12 of the Revised Model Business Corporation Act 2017
drafted in 1984, states that “the validity of the corporate action may not be challenged on the
9
(1962) W.L.R 791
10
(1882) 20 Ch. 169
11
(1893) Ch. d
12
Revised Model Business Corporation Act.2017
grounds that the corporation lacked power to act.” In the case of a private business entity, the act
of an employee who is not authorized to act on the entity’s behalf may bind the entity
contractually if such an employee would normally be expected to have that authority. Where it’s
a government entity however, to prevent a contract from being voided as ultra vires, it’s
necessary to prove that the employee actually had authority to act where a government employee
exceeds her authority the government entity may seek to rescind the contract based on an ultra
vires claim.

(1) However, section 5113 provides that, the validity of an act done by a company shall not
be called into question on the ground of lack of capacity by reason of anything contained
in the company’s memorandum
(2) . A member of a company may bring proceedings to restrain the doing of an act which
but for subsection (1) of section 51 of the company Act cap.106 would be beyond the
company’s capacity; but no such proceedings shall lie in respect of an act to be done in
fulfillment of a legal obligation arising from a previous act of the company.

(3) The directors shall observe any limitations on their powers contained in the company’s
memorandum, and any action by the directors which but for subsection (1) of section 51
of the Company Act would be beyond the company’s capacity may only be ratified by
the company by special resolution.

(4) A resolution ratifying the action under subsection (3) of section 51 of the company Act
shall not affect any liability incurred by the directors or any other person and relief from
the liability must be agreed to separately by special resolution.
From the above section, a company is precluded from relying on the ultra vires doctrine to
deny validity of any contract irrespective of what the circumstances might be. However, the
section doesn’t necessarily wipe out the ultra vires doctrine and in subsection 2 of the section, it
allows members of a company to take preventive measures to restrain the company from
engaging into would be ultra vires transactions. This sub clause is premised on the very essence
of the doctrine aimed at the protection of both the subscribers as well as the people who may deal
with the company. However, courts have developed certain principles in the interest of justice to
13
Company Act.cap106.
protect such lenders. Even in a case of ultra vires borrowing the lender may be allowed by the
courts the reliefs which include injunctions, tracing and subrogation.
There are however some exceptions to this doctrine and these include;
Section 51(3) act. Cap 106 provides for an act which is intra vires the company but outside
the authority of the directors, may be ratified by the shareholders in proper form
An act which is intra vires in the company but done in an irregular manner may be validated by
the consent of all the shareholders. However, the law doesn’t require that the consent of the
shareholders should be obtained at the same place and in the same meeting.
If the company has acquired any property through an investment, which is ultra vires, the
company’s rights over such property shall still be secured. While applying the doctrine of ultra
vires the effects which are incidental or consequential to the act shall not be invalid unless they
are expressly prohibited by the Company Act.
There are certain acts under the company law which though not expressly stated in the memo,
is deemed impliedly within the authority of the company and therefore they are not deemed ultra
vires. E.g. a business company can raise its capital by borrowing.
If an act of the company is ultra vires the articles of association, the company can alter its
articles in order to validate the Act.
In Eley Vs The Positive Government Security Life Assurance Company Limited14, it was
held that the articles of association were a matter between the shareholders inter se or the
shareholders and the directors and didn’t create any contract between the plaintiff and the
company and the articles are either a stipulation which would bind the members or else a
mandate to the directors and the shareholders and not between them and the plaintiff.
Also in Shuttle worth Vs Cox Brothers and Company (Maidenhead), Limited and
others15, it was held that the contract if any between the plaintiff and the company contained in
the articles in their original form was subject to the statutory power of alteration and if the
alteration was bonafide for the benefits of the company, it was valid and there was no breach of
the contract, there was no ground for saying that the alteration couldn’t reasonably be considered
by consideration for the benefit of the company. There being no evidence of bad faith, there was
no ground for questioning the decision of the shareholders that the alteration was for the benefit
of the company and the plaintiff was not entitled to the relief claimed.
14
(1875-76) L.R.1 Ex. D 88
15
[1927]2 KB. 9
QUESTION.3. Section 21 (1) of the companies Act creates a statutory contract imposing
responsibilities and liabilities which are peculiar and unique. With the help of decided cases
discuss this statement and also show the enforcement of the said provision.

Section 21(1)16 Co.Act.cap106 provides that the memorandum and articles of association of a
company shall when registered binds the company and all the members to the same extent as if
they respectively had been signed and sealed by each member and contained a warranty on the
part of each member to observe the provisions thereof.

This section on the face of it introduces the notion of contract by use of the words “shall bind
the company and members thereof.”
The memorandum of association is a document in which they express inter alia their desire to
be formed into a company with a specific name and sets up its constitution and objects.
In Beattie Vs Beattie Ltd,17 courts observed that the section had been the subject of
considerable controversy in the past and will remain a controversy in the future. This controversy
emerges from the wording of the subsection, as a general rule of the law of contract, under the
doctrine of privity; a non-party can’t be a part to an action based on a contract or be responsible
on a contract. So no part is party to any written which he hasn’t signed. A member needn’t have
signed a document but once they become members, they are deemed to have signed a contract
and therefore they have to observe all the provisions of the memorandum and articles of
association because it forms terms of the contract.
The memorandum and articles of association form 3 contracts and these are as explained below;
A contract between the company and each member, this is as illustrated in the case of Wood Vs
Odessa Waterworks Company,18. The question in this case was whether it’s 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 the general meeting
declare dividends to be paid to the shareholders. This means to be paid in cash. The debenture

16
Company Act,cap.106
17
[1938] CH 708 at 721
18
(1889) 42 CHD 636.
bonds that the company was proposing to pay are not payments in cash but amount to agreement
or promise 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.
A contract between members themselves (inter se), a direct action between members is
possible where one of the members breaches the contract in the memorandum and articles of
association. In Obi Koya Vs Ezewa and others,19 it was held that when the 3 members of the
company who are also 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 and
32.
A contract between the company and the members only in their capacity as members and not
in some other capacity. In Beattie Vs E and Beattie Ltd,20 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 a member and a
company to be referred to arbitration. Court held that the director was not entitled to rely on the
article because it did not constitute a contract between a company and 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 articles as giving him the right to be the company’s director or
solicitor even if he is a member. This is because the articles concern him only in his capacity as
an outsider not a member.
However, in the case of Quin and 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 the general meeting.” The articles also provided that no resolution
of the directors on certain important would be valid if either of the 2 named managing directors
voted against the resolution to acquire and let premises but the company purported to ratify the
resolution by a simple majority. He therefore successfully brought an action against the company
19
(1964)2 ALL NLR 132.
20
(1938) Ch. 708.
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.
Also contracts outside the memorandum and articles of association are also called extrinsic
contracts. In cases of an extrinsic contract between the company and a director [such as
employment], an article may be expressly or impliedly incorporated into the extrinsic contract. In
this case any rights given by the articles can be enforced under the contract without relying on
section 2121 of the Company Act. In Re New British Iron Co, exparte Beckwith,22 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 1000.
The directors claimed arrears of fees during the winding up of the company and it was held that
he would succeed because the service contract incorporated to 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 doesn’t
have a retrospective effect. In Swabey v Port Darwin Mining Company,23 the company’s
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 retrospective from the 31 st of December 1887. The plaintiff who was a
director claimed fees 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.
The interpretation of the memorandum and articles of association include;
The memorandum of association is superior to the articles because it’s the basic law or
constitution of the company and the articles are subordinate to the memorandum. The articles are
void to the extent of the inconsistency or conflict. In Guinness v Lion Corporation of Island
Ltd,24 court held that 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 memo and articles of association may be read together to clear any ambiguity. In Re
South Durham Brewery Company Limited,25 (1885)31 Ch. D 261, it was held that a power
21
of the Company Act, cap.106.
22
(1898) 1 Ch 324,
23
(1889) 1 Meg 385,
24
(1822)22 Ch.d 349
25
(1885)31 Ch. D 261
given by articles to issue shares of different classes resolved the uncertainty and enabled the
company to do so.
Also in Repyle Works26 [1891] 1 ch.173, the memo of association empowered the company
to borrow on security of its assets or credit while 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.
In conclusion, though the memo of association and the articles can only be read together to
remove 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 memo of
association.

QUESTION.4“where a contract/transaction is entered into on behalf of the company not yet

formed, the company will not be bound by that contract and neither can it enforce it” Discuss
this statement showing the current status of the law on such contracts.

Such contracts are referred to as pre incorporation contracts and are provided for under section
52 of the Company Act, 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. 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.”

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.

Duties of a promoter include full disclosure and accountability, Erlanger Vs New Sombrero
Co Ltd27 (1978) 3AC 1218. 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

26
[1891] 1 ch.173
27
(1978) 3AC 1218
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 BARNES28 (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.” Other duties include duty of skill and care, duty to act in the best
interests of the company, solicit capital, prepare a prospectus, solicit directors for the company,
arrange the preparation of the Memorandum and Articles of Association, obtain premises and
obtain whatever equipment is necessary for the running of the business.

Section 5229 of the Companies Act 2012 provides for pre incorporated contract, 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 the promoters on the contract for the
price of the goods. It was held that the defendants were personally liable on the contract.

Also in the case of English & Colonial Produce Company Ltd30 (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.

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

28
(1900) AC 240
29
Of the Company Act.cap 106
30
(1906) 2 Ch. 435
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 Touché Vs
Metropolitan Railway Warehousing Company,31 Lord Hatherly 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.

Where a company has been formed, the promoter can enter into a contract with the
incorporated company through the process of novation. Novation 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 52 (2)32 provides that a company may adopt a pre-incorporation contract with its
formation and registration made on its behalf without a need for novation.

31
(1871) LR 6 CH. APP 671
32
Of the company Act.cap 106.
 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
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 renegotiation
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)33 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.

SECTION B

QUESTION.5.

PART (i)

Formation of a company means the process of registering a company with the registrar of
companies and obtaining a certificate of incorporation.

Documents required for registration of a company include the reservation of a name, the
memorandum of association, the articles of association, the statement of nominal capital and a
statutory declaration of compliance.

Section 34(1) of the company Act cap.106 provides that the registrar may on written
application reserve a name pending registration of a company or a change of name by an existing
company, and such reservation shall remain in force for 30 days or such longer period not

33
Of Section 54 of the Company’s Act, 2012.
exceeding 60 days as the registrar may for special reasons allow and during that period no other
company is entitled to be registered with that name.

Section 35(1) of the company Act, cap 106 provides that where in the registrar’s 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.

In this case, the company that the students intend to register (People Power LTD) has a similar
name to an already existing company and the name is misleading depending on the nature of the
activities the company is intending to work on. Therefore, from the sections explained above, the
company will not be registered. The students may opt to change their company’s name to a new
one as its provided for in section 35(5) of the Company Act cap.106.

PART (ii)

Section 113(1) co. act.cap 106 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.

Section 116 (1) co.act.cap 106. 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.

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.

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.

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.

Therefore, the students should make it a point to disclose their company’s registered office to
the public, its share capital and names of the subscribers.

PART (iii)

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.

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 sec.9 of the Act.cap.106. 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: To carry on its business more economically or
more efficiently, to attain any of its objects by new or improved means, to enlarge or change the
local area of its operations, to carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the company, to restrict or
abandon any of the objects specified in the memorandum, to sell or dispose of the whole or any
part of the undertaking of the company and 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.

PART (iv)
 A company secretary is provided for under sec 10 (1) of Table F34 where the directors of the
company shall appoint the company secretary on terms and conditions as they may think fit and
under (2) provides that a secretary appointed under sub regulation (1) provides that a secretary
appointed under sub regulation (1) may be removed by the directors and upon the duties of the
secretary, he or she is to ensure that the company complies with its memorandum and Articles of
Association, drafting and incorporating amendments in accordance with correct procedures35.

Therefore, in relation the question it’s a duty of the secretary to incorporate a provision in a
memorandum giving rights and privileges for subscribers to dispose, appropriate and have
exclusive use of company property without any restrictions or hindrances. And also to put
provisions authorizing payment to subscribers claim for all costs incurred in the meeting, hotel
expenses before the company was registered in the memorandum.

PART (v)

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.

The Companies Act cap106 defines a private company under section 4 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).

Clearly, the students can’t register a private company limited by shares because it doesn’t fall
under the above description and has more than 100 members so I advise them to register a public
company that has no maximum limit and allows transfer of shares to the public. Section 5 of the
company Act cap.106 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 4. Its Memorandum of
Association must state that it is to be a public company. Its registered name normally ends with

34
ARTICLES OF ASSOCIATION.( co. act cap.106)
35
D.J BAKIBINGA company law in Uganda, fountain publishers
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.

QUESTION.6

Brief facts

FEELINGS LTD is a private limited company dealing in wedding memorabilia. Shareholders

are Nabila who is the majority shareholder and managing director, Jamila, Hannah and Imran.
They all fully paid their shares. Without consent of the other shareholders, Nabila sold the
company plant to her husband Okello, he paid 100million cash and was issued a receipt.
However, Nabila deposited the money on her personal fixed deposit account. When Imran
complained about it, Nabila removed her name from the company’s registrar and vowed to expel
all big headed shareholders. A pastor intervened a meeting with the shareholders. The company
has promised 20m as a loan from DFCU Bank to Hannah for her son’s graduation. Nabila
instructed the general manager to pay 5m to board members as weekly bonus with the exception
of Imran. Imran has written to the General Manager demanding entitlement. Hannah is silent in
all the matters because she signed a contract never to vote contrary to Nabila’s wishes.

Issues raised

1.Whether Nabila has a right to sell off the company plant without consent of the other
shareholders and deposit the money on her personal fixed account.

2.Whether it was legal to remove Imran’s name from the company’s registrar

3.Whether the promise made by the other shareholders to Hannah of 20m is valid under company
law

Law applicable

The Company Act cap.106

Resolution of the issues raised.

Issue 1. Whether Nabila has a right to sell off the company plant without consent of the other
shareholders and deposit the money on her personal fixed account.

Under the Companies Act cap.106, Section 2 the word “company” means a company formed
and registered under this Act.

A Company or Corporation is also defined as an artificial legal entity separate and distinct
from its members or shareholders. This principle was brought out in Salomon v Salomon &
company limited (1897) 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. The company was a separate entity even though Nabila was the biggest shareholder; it
made no change in the commercial position. She couldn’t sell off the incorporated business since
before communicating and having consent from other shareholders. The Salomon case the
separation between the company and its members has been complete.

Issue 2. Whether it was legal to remove Imran’s name from the company’s registrar

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 favor 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. 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 i.e. 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.

Removing Imran’s name was illegal and he could sue because his rights were infringed.

Issue 3; whether the promise made by the other shareholders to Hannah of 20m is valid under
company law

The law is that a company has no power to make such payments unless the particular payment
is reasonably incidental to the carrying out of a company’s business and is meant for the benefit
and to promote the property of the company. In Hutton Vs West Cork Railway Company.
(1893) Ch.d, a company sold its assets and continued in business only for the purpose of winding
up. While it was waiting on winding up, a resolution was passed in the company’s general
meeting authorizing the payment of a gratuity to the directors and dismissed employees. Court
held that the company was no longer a going concern and such a payment couldn’t be reasonably
incidental to the business of the company and therefore that resolution was invalid.

Therefore, the promise made to Hannah was invalid because it was not helpful to the
company. So it could not be enforced.

SECTION C.

QUESTION.7.

Brief facts,

Agaba and Musoke celebrated 50 years of distinguished legal service in Uganda. And sadly
Musoke is the only one alive of the two and retired from the firm in 2010 due to age. For over
the 50 years the firm has trained lawyers who started their own law firms and others were
working with other various institutions in Uganda and over the world.

PART A

Firstly, in defining a company, under section 2 of the company Act cap.106 means a
company formed and registered under the Act or an already existing company. However, a
company or corporation is also defined as an artificial legal entity separate and distinct from its
members or shareholders. Thus in advising the parties as to the concept of a company as a legal
separate entity, the law provides the fundamental attribute of corporate personality from which
all other consequences and liabilities arises to the discretion that the corporation is a separate
legal entity distinct from its members and that makes it free to enjoy rights and being subjected
to duties which must be distinct from those of its members.

This implies that upon the company’s liability, it can be sued or sue in its legal presence and
name and this legal personality is often described as an artificial person in contrast with human
being a natural person. The principle was first held in the famous already discussed case of
Salomon Vs Salomon and Company limited, 36 where under the case facts Salomon carried on a
sole business as a sole trader of boots and shoes for 30 years and later on in 1892, he converted
the business into a limited company which they named Salomon & company limited at the
request of his sons who were working as employees in the business. The company consisted of
his wife, and their five children and Salomon as the managing director held the highest
percentage of shares that is 20001 out of the 20007 shares. That implied that the remaining 6
shares were held by the rest of the family menders each holding one respectively of the
remaining 6. In winding up the company had nothing for the unsecured creditors even though
they had sufficient assets to discharge off the debentures, the creditors sued Salomon and the
House of Lords held reversed the first decision and held that the business belonged to the
company and not Salomon and Salomon was its Agent thus he wasn’t liable to pay, thus
payments who be paid by the company its self.

This argument and decision was upheld in many more various cases like Lee Vs Lee’s Air
Farming Ltd37 and many more cases and such advantages of incorporation are to the
fundamental attribute of corporate personality which is as a result of incorporation which helps
to put a company under liability for its damages and breach and in instances its members are
excluded from such liabilities,

Thus putting into consideration that argument in relation to the facts at hand and in advising
the parties if URA goes on to seek their tax through the sale of a building that belongs to one of
the partner which the frim occupies will be an invalid decision by virtue of the fact that they will

36
(1897) AC 22
37
(1960) 3 AA E.R.420.
be infringing on the members rights instead of such an incorporated firm or company facing its
liabilities, thus in advise URA as by law is not entitled to recover its money through a sale of the
building which the firm occupies which belongs to the partner, it would be at their detriment and
thus an invalid sale.

On advising Uganda Revenue Authority (URA) it can only make a valid sale of the building in
instances where the partner involved in such an offending Act in the names of the company there
maybe lifting of the veil and he or she may be held liable personally for his or her Acts as under
Section 18 of the Company Act cap.106 where the high court is given powers to lift a veil, the
High Court may where a company or its directors are involved in acts including tax evasion,
fraud or where, save for a single company, the membership of a company falls below the
statutory minimum, lift the corporate veil.

In this case, a company veil may be lifted if members continue to act as members after
reduction of the membership below the statutory minimum. This justification behind the
membership requirement is to protect the creditors of the company from dealing with a company
which no longer complies with the law and prevent its members from hiding behind the veil of
incorporation, as it was in the case of Re: Maimgstone, Court observed that a company
secretary who was also the financial advisor of the company was a party to the fraud happening
in the business just because he omitted to give advice to the company.

PART B.

Thus in advising the parties, directors are appointed by a company in a general meeting in
conformity with the Article of association which usually contain the appointment of directors
and how to fill vacant posts of directors and the appointment is only done in annual general
meetings unless where the Articles empowers the board to appoint or co-opt, the inherent power
to appoint directors is in the general meeting and the company fills in a form called company
form 7 which indicates the particulars of directors. And under section 438, private companies are
provided for and upon directorship under section 181 of the company Act cap.106 for a
registered company other than a private company shall have at least 2 directors. However, for a
private company it should at least have a minimum of 1 director. However, relating the facts at

38
Company Act.cap 106
hand on ways of one becoming a member to the company is by subscribing to the memorandum
and articles of association, through allotment and payment for the shares allotted, by buying from
an existing member of the company, by transmission after the death of a shareholder (for
instance to an executor or an administration of estate of the deceased shareholder) and lastly one
can become a member through gift.

Thus referring to the question in advise, Agaba’s eldest son can become a member through
transmission after death of a shareholder who was the father since there was cessation of
Agaba’s membership by death thus the son can become a partner, however directors are given
absolute discretion to refuse registration of any transfer of shares. In Re smith & Fawcett39 the
case involved a widow who sought to be registered as a proprietor or transmission. Court
observed that the test is whether the transfer is in the best interest of the company and that the
directors had power to reject or refuse a transfer though it is a general rule for a shareholder to
transfer his or her shares.

Article 29(1) of Table A provides that in the case of 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 person recognized by the company as having
any title to his or her interest in the shares.

And further in complaint upon the settlement of the accounts, its duty of the Company
Auditors under section 166(1) of the company Act cap.106 to make a report to the members on
accounts examined by them and on every balance sheet, every profit and loss accounts and all
group accounts laid before the company in the general meeting during their tenure of office,

subsection 2, provides that’s the Auditors report shall be read before the company in a general
meeting and shall be open for inspection by any member and per the duties of the Auditor, he is
positioned to investigate and examine the company’s accounts. In Re London and General
Bank case, it was held that the Auditor must be honest and must exercise reasonable care and
skill in what he certifies.

39
[1942 CH 306.
 It is also a duty of the Auditor to bring to bear on the work he has to perform that skill, acre
and caution as it was in the case of Formento (steeling Area) Vs Selsdon fountain pen Co Ltd 40
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 that a check must be taken
to ensure that none has been made. However, in the case of Hedley Bryne & Co Ltd Vs Heller
partners Ltd41 it was stated that an auditor will not be liable to third party if he has made a
disclaimer to his work and such disclaimer does not apply in case of the company and for
shareholders and criminal liability.

PART C.

This is called a proper plaintiff principle, and under the enforcement of members rights, the
question will stand as 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 holders
are bound to be aggrieved by omission or commission of their fellow holders or decisions taken
or made in the company. And there are available remedies to minority shareholders by the
majority who are alleged to be oppressive, unfair or prejudicial.

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. And if the minority want to bring about change,
and then it is open for them to seek for change through the normal democratic process of say
lobbying, persuasion and publicity.

The principle of proper plaintiff was derived from the case the case of Foss Vs Harbottle, in
this case, the plaintiff instituted a suit against the directors of a company who had sold their own
land to the company at an overpriced value. Court held that even if this allegation was true, if
something injurious has been done to the company, the proper plaintiff to sue or make any action
is the company and not individual or a group of shareholders.

40
(1958) 1 ALLER
41
(1964) AC 465.
 In Carlen Vs Druru,42 court observed that “it was not required on every occasion to take the
management of every play house and brew house in the kingdom” which implied that court
should not interfere unnecessarily with the matters of the boardroom. And in Macdougal Vs
Gardener43 court observed that 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 the FOSS Vs HARBOTTLE. It has to be 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 action concerning its affairs, however the enforcement of the
member’s rights concerned with avenues through which members can enforce through which
members can enforce their rights e.g. removal of incompetent directors upon others, is through
enforcement under common law e.g. the infringement on personal rights of the member is
considered as the most important exception. Where and once the rights of a personal member
have been infringed or threatened, the aggrieved member can bring a personal action
notwithstanding the fact that company is aggrieved as well. In Misango Vs Musigire,44 a general
meeting purported to alter Articles of association to the detriment of the plaintiff, 9 shareholders
attended that meeting and voted for the resolution. Sir Udo Udoma CJ held that the action could
be determined in so far as what was complained as of infringement on the rights of the plaintiff.

PART D.

Still the argument has to be in relation to a company standing as a legal personality from
which all other consequences flow is that the corporation is a separate legal entity distinct from
its members, hence its capable of enjoying rights and being subject to duties which are not the
same as those enjoyed or borne by its members therefore the Musoke is not held liable of the
company’s mistakes and he is not entitled to payments of the VAT to URA. That is the
company’s responsibility. As it was held in the famous case of Salomon Vs Salomon &
company Limited,45

It was also the aspect in the case of 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
42
[1812] 1 B&B
43
[1875] 1 CH13.
44
(1966) E.A.390
45
(1897) AC 22.
was the sole governing director and a chief pilot in the company’s business of aerial crops
spraying in Newzealand, he was killed in the crush 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. Court held that lee and his company were
distinct legal entities which had entered into contractual relationships under which lee as a chief
pilot became a servant of the company.

So in conclusion to advice musoke’s wife, muskoe is not liable to pay to the URA upon the
company’s liabilities because they are two distinct legal personalities thus not liable for the
default of the company to URA.

END