business association, Lecture notes of Business Finance

Download business association and more Lecture notes Business Finance in PDF only on Docsity! COMPANY LAW IN UGANDA Tonny Okwenye @ okwenye@lawyer.com \S W Quotes “Company law is not static, and if consolidation were to wait until all the measures in the pipeline at the time were enacted it would be delayed almost indefinitely.”- Lord Lucas, 1985. “The most enlightened judicial policy is to let people manage their own business in their own way.” Oliver Wendell Holmes, 1911. okwenye@lawyer.com GENERAL INTRODUCTION Company Law in Uganda is crafted from English Common Law, the Doctrines of Equity and the Indian Companies Act. Company law in Uganda is comprised in principal and subsidiary legislation as well as decided cases. The Companies Act, Cap 110, Laws of Uganda was amended by the Companies Act No.1 of 2012 which commenced on 1° July 2013 under the Companies Act, 2012 (Commencement) Instrument, 2013. oe okwenye@lawyer.com Incorporation The Companies Act defines a private and a_ public company under sections 5 and 6 respectively. The Companies Act provides for the formation of company namely: the reservation of name and statutory forms under section 36 and 17 respectively. The format of the memorandum and articles of association are provided for under sections 7 to 9 and 11 to 17 respectively. Section 19 provides for the registration, memorandum and articles of association while section 21 states the effect of registration of the articles and memorandum of association. 6 okwenye@lawyer.com Regulation e The Act defines a member under section 47 e A regulatory framework for private and_ public companies as regards the admission of members. e Formation of company contracts is provided for under section 50 e Sections 132-136 provide for the filing of annual returns, while sections 137-142 provide for the company meetings and proceedings. e The company is also required to keep company accounts, audit, inspection and also provide remedies to the minority members okwenye@lawyer.com ... schedule to the Companies Act e The forth schedule deals with accounts while the fifth schedule is concerned with the matters to be expressly stated in auditor’s reports, the profit and loss account. e The sixth schedule encapsulates the form of statement to be filed and published by insurance companies and deposit, provident or benefit societies. e The seventh schedule is concerned with the provisions referred to in section 278 of the Companies Act. © okwenye@lawyer.com DEFINITION OF A COMPANY e A company is a group of persons carrying on business with the view of making profits and contributing to the betterment of society (General definition). e Section 2, Companies Act defines a company as a company formed and registered under the Act, or an existing company or a re-registered company under the Act (Legal definition). e The persons who contribute the money /capital of the company are its members. e Their contribution is the capital of the company. okwenye@lawyer.com ... definition of a company e A company is created according to the Companies Act, and is born on the day of its incorporation e Upon incorporation, it acquires a new identity separate from its founders, promoters, shareholders and directors. e It can sue and be sued in its own name. e Admission of new members is in accordance with the companies’ articles and memorandum of association e Death or insanity of a member doesn’t affect the continued existence of the company 6 okwenye@lawyer.com ... Separate legal entity Lord Herschell - The company is ex-hypothesis a distinct legal persona. e The company legal personality is an official one which is distinct from the natural personality. e Possession of legal personality means that a company is capable of enjoying rights and being subject to duties separate from its members Case: John Lubega Matovu Vs Mukwano Investment Limited (2012) e The applicant had sued the respondent company for recovery of UGX 139,343, 041/= upon which a consent judgment was entered . 6 okwenye@lawyer.com ... Separate legal entity e Applicant later discovered that the directors of the respondent company had abandoned, altered or changed the name of the respondent company. He brought the suit for an order to lift the corporate veil. Held- H Obura, J, concept of corporate personality is what distinguishes a company from other forms of business associations. It means that a company has a separate legal personality from its members and is capable of enjoying rights and being subject to duties separate from its members. © okwenye@lawyer.com Employment by the company e Ashare holder can also be an employee of the company under the principle of separation. Case: Lee Vs Lee’s Air Farming Limited (1960). Facts: Lee was the controlling shareholder and director in the respondent company. Lee was killed while piloting a company aircraft in the course of aerial top dressing. His wife claimed compensation under the Worker’s Compensation Act. Issue: Whether the deceased was a worker within the meaning of the Worker’s Compensation Act? Held - Lord Morris - The deceased was in a contractual relationship with the company, the relationship was @ okwenye@lawyer.com Separate Property e Upon incorporation, a company can own property in its own name eA member of the company cannot own company property and has no interest in the company property. Case: Macaura Vs Northern Assurance Co. (1925) e The Appellant, a shareholder in the company, took out fire insurance for timber that belonged to the company. The timber was destroyed by a fire, he asked the insurance company to indemnify him for the loss. okwenye@lawyer.com ... Separate property e Held-Baxter J, he could not be indemnified because the assets did not belong to him, but the company. e No shareholder has any right to any item or property owned by the company because he has no legal or equitable interest therein. Case: International Limited Vs Mohammed Halid El. Fatih (1994) e Odoki JSC, held that the respondent couldn’t claim the company’s property by an action in his own name. C2] okwenye@lawyer.com Suits by or against the company e A company is a legal person and can sue or be sued in its own name. e Suits against the company must be brought in the company’s registered name. e A suit by or against an incorrect company name is a nullity. Case: Quick Cargo Handling Services Limited Vs Iron Steel Wares and 2 Ors (2003) Facts: The plaintiff sued “Property Management Services Ltd, instead of Properties Management Limited okwenye@lawyer.com (— >) ... suits by or against the company Case: British India General Insurance Co. Vs Dolotral Solank, (1997) e Facts: Counsel acted for a non existing company Held: A company can only authorize the commencement of legal proceedings in its name by way of a resolution. Since there was no resolution yet counsel purportedly acted on the company’s behalf, Counsel must be personally liable for costs. e When judgment is entered against a company, the company’s property is liable in execution of the decree. e The property of the shareholders and individual directors can only be attached when the corporate veil has been lifted okwenye@lawyer.com © J Common seal Every company must have a company seal i.e. an embossment with the company name and postal address. Every document used by the company must have the company seal and be signed by at least 2 directors. Documents requiring authentication by a company signed by the director or secretary do not need to be sealed. Case: Kintu Vs Kyotera Growers (1975) Court held that the power to possess, use and change a Seal is incidental to a corporation. In the absence of any special and legally binding regulations to the contrary, the seal affixed to the corporation deed bears a special emblem to indicate that it’s the corporate seal. okwenye@lawyer.com (~ Racial attributes e A company has attributes similar to a human being but it cant have racial attributes. It has no soul or feelings Case: Katate Vs Nyakatura Facts: The respondent sued the _ petitioner for misappropriation of money which belonged to the Ankole Africa society in which they were all shareholders. The Complaint was made to the native court which made an adverse decision against the petitioner. Issue: Whether the company whose shareholders were all Africans can be said to be an African within the meaning of the native court ordinance. Held: A company is a distinct legal entity that is abstract in nature and incapable of having racial attributes. The suit was in a wrong court, a company cant be sued in the native court simply because it has native members oe okwenye@lawyer.com Company and partnership e It is created upon registration in accordance with’ the Companies Act For a private company, it is one which limits the number of its members to 100 not including the company's former and current employees (S.5). Section 6 provides that a company that is not a private company under section under section 5 is a public company. It attains a separate legal existence upon incorporation The property acquired belongs to the company . 6 okwenye@lawyer.com Is formed by agreement of the partners of the partners. Registration is optional The membership is restricted to 2 or more persons and not more than 20 for trade and business. However professional partnerships have a maximum of 50 members. The partnership has no separate legal existence, it’s the same as its partners. The property belongs to the partners and not the partnership. e A member or director may enter into a contract with the company e The company debts are the company’s responsibility, and not for the shareholders e The shareholder is not an agent of the company e The liability of members is limited either by shares or guarantee except for C=) oxiilimited.companies ... Company and partnership e The partner cannot enter into a contract with the firm The partners are responsible for the partnership debts The partner is an agent of the firm Liability in partnership is unlimited except for the limited liability partnerships ... Company and partnership e The shares in a public — ¢ The shares of the partnership company are freely can only be transferred with transferable the partners’ consent. ¢ Companies have perpetual succession e Death, insanity, insolvency of a partner terminates the partnership unless otherwise agreed e The company is managed by a board of directors e The partnership is managed by elected by the shareholders all partners e The company is formed e The major document is the using the memorandum partnership deed or the and articles of association partnership Act. 6 okwenye@lawyer.com Company and co-operatives Company els created upon registration in accordance with the Companies Act Membership for private companies is 1-100, 1 to infinity for public companies Acquires a separate legal personality upon incorporation okwenye@lawyer.com Cooperatives Is created upon registration under the Cooperative Societies Act Membership is unlimited, there should be at least 30 members It becomes a separate legal entity upon registration ... Company and cooperative society Company e The property belongs to the company e Amember or director may enter into a contract with the company okwenye@lawyer.com Cooperative Society e The property belongs to the registered cooperative society. Members of the registered cooperatives society can enter into a contract with the association subject to the bye laws Conclusion e A company is an association formed with the purpose of making profit for its members or for the community’s benefit. elt acquires a separate legal existence upon incorporation e It has perpetual succession and can sue and be sued in its name e Companies are similar to other associations but are also distinct in a number of ways. oe okwenye@lawyer.com Incorporation — statutory companies e These are incorporated by a special Act of Parliament e They don’t have the memorandum and articles of association e The Founding Act provides for the management, control and financing of the corporation e The company is a body corporate and can be sued in its own name: for example, National Water and Sewage Corporation established under the National Water and Sewage Corporation Act, Cap 317 okwenye@lawyer.com ... INCorporation — registered companies e These are formed and registered under the Companies Act e They are born on the day of incorporation e They cease to exist when they are struck off the register of Companies e The Companies Act provides for the Registration, Financing and winding up such companies. Oo okwenye@lawyer.com Liability - shares e Limited by shares e Members’ liability is limited to nominal value of the shares they hold according to section 4(2) (a) Companies Act e Ashareholder who has fully paid up for his shares has no liability e Aprivate or public company may be limited by shares okwenye@lawyer.com ... membership - public e Section 6 states that a public company is one which is not a private company under section 5 e Apublic company therefore has no limit on its membership. The minimum is one (s.4(1)). e The shares in the company are freely transferrable e Must have at least two directors e The company may invite members of the public to subscribe for its shares 6 okwenye@lawyer.com - Objectives - profit e Profit Companies e The main intention of such companies is to make profits for the benefit of the shareholders e Profit oriented public and private companies can engage in any activity found in the memorandum of association. e Engaging in an activity outside the memorandum of association is an ultra vires act as stated in the case of Ashbury Railway Carriage v Riche. 6 okwenye@lawyer.com r ... objectives - non-profit companies e These are set up to benefit the society and the community e Directors, officers and members of such companies don’t own the company or its assets e The non profit company may engage in revenue producing activities for the benefit of the company. However, these activities must be for the sole purpose of furthering the company’s objectives. okwenye@lawyer.com Control e Holding companies e A holding company is one which has control over another company e Control is deemed to exist if the company controls another company’s board of directors e Where the company holds more than half of the nominal value of the share capital e Subsidiary companies e This is a company in which another company controls the board of directors e Or one in which more than 50% of the shares are held by another company. 6 okwenye@lawyer.com Conclusion e Acompany is an association formed with the intention of making profit or using the profits made for the betterment of society e Classification of companies is based on incorporation, liability of members, objectives okwenye@lawyer.com Questions e What do you understand by statutory companies. e What is the difference between a company limited by guarantee and a company limited by shares e How are foreign companies registered in Uganda e Discuss the relationship between a subsidiary company and a holding company okwenye@lawyer.com ... corporate personality e Case: Salomon Vs Salomon e Lord Macnaghten -The company is at law a different person altogether from the subscribers to the memorandum e Lord Herschell- stated that the company is ex-hypothesis a distinct legal persona e The company is independent of the shareholders and acts through its directors e Ashareholder has no right to the company property e Case: Macaura Vs Northern Assurance Co. Ltd (1925) e Lord Buckermaster stated inter alia that the position of a shareholder must be independent of the extent of his share interest. That no shareholder has any right to any to any item of property owned by the company for he has no legal/equitable interest therein 6 okwenye@lawyer.com ... corporate personality e The principle of corporate personality, or the veil of incorporation protects the acts of directors and shareholders e Case: Nsangiranabo Erasmus t/a Nsangira Auctineers and Court bailiffs Vs Associated Properties Ltd (2008) where an application for lifting the veil of incorporation was filed. e Held-Awori Opio J; upon incorporation, a company becomes a separate legal, entity from its members who can’t be held liable for the company’s debts okwenye@lawyer.com Lifting of the corporate veil e Section 20 provides that lifting the corporate veil means disregarding the corporate personality of a company in order to apportion liability to a person who carries out any act. e Section 20 Companies Act provides for the High Court powers to lift the corporate veil in case of tax evasion, fraud or failure to have the statutory number of members. e Lifting the veil means that the separateness of the legal entity is ignored by treating the members as if the veil doesn’t exist. The corporate veil is then said to be pierced, cracked or lifted. okwenye@lawyer.com ... rationale for lifting the corporate veil e Case: Mugenyi and Co. Advocates Vs Attorney General (1997) e Court held that the veil of incorporation couldn’t be pierced since there was no fraud or illegality alleged in the pleadings against government. e Fraudulent directors can be held liable for their acts during winding up of the company © okwenye@lawyer.com Using the company as a sham e Veil may be lifted if its proved that the company was used as a veil/ sham to avoid recognition. ° Case: Jones Vs Lipman (1962) e Facts: The Defendant contracted to sell land to the Plaintiff. He later changed his mind, formed a company to which he transferred the land to a company formed for that purpose alone, which he alone owned and controlled. This was in order to avoid an order of specific performance. e Held: The corporate veil would be cracked as the company was being used as a sham and _ device to avoid recognition by the eyes of equity. okwenye@lawyer.com ... using the company as a sham e Case: Gilford Motor Co. Ltd Vs Horne (1933) e Facts: The Defendant, a former employee of the Plaintiff company made an agreement not to carry out a business similar company and registered it in his wife’s name. e Held- Lord Hanworth; The Company was formed as a device of a business the Plaintiff’s might object to, thus the veil had to be lifted. © okwenye@lawyer.com Mis-description of the company e The company is legally known by the names which appear on the certificate of incorporation e Where the company name isn't used, the directors who used the fictitious name will be held liable. e The corporate veil only protects those who use the company’s legal name. okwenye@lawyer.com Holding and subsidiary companies- ) Defined under section 161 e A holding company is one which controls, managers and has majority shares in another company. e A subsidiary company is formed by a _ holding company which holds all its majority shares. e The holding and subsidiary company are different at law and exist independently. e Case: Adams Vs Cape Industries PLC (1991) e Held: The law recognizes the creation of subsidiary companies which are considered as separate legal entities from their parent companies. okwenye@lawyer.com ) r . holding and subsidiary companies- Defined under section 161 They have all the rights and liabilities of separate entities. However, the corporate veil of the subsidiary company will be lifted when the holding company appoints the officers of the subsidiary company. Case: Ishasha Mines Ltd Vs National Enterprises Corporation (1994) Facts: The Plaintiff sued the Defendant, a parent company of a subsidiary, Medime Dura Ltd. Held: A subsidiary company has a separate legal existence and can be sued in its own capacity. However, an action can instituted against the parent company if it conducts its business through the subsidiary. okwenye@lawyer.com S Corporate liability e A company is liable under criminal and civil law (contract and tort) for crimes committed through its agents e Liability under the contract is established if the company acted through its agents. e Liability in tort arises under primary or vicarious liability e Primary liability arises where the company is deemed to have committed the offence. e Vicarious liability arises where a company is liable for its servant’s or agent’s acts e The elements of the mens rea and actus reus have to be proved under the criminal law. Does a company have a mind? e The company has a “ directing mind” through its officers okwenye@lawyer.com ... corporate liability ¢ Companies can only be liable for crimes where there is an express provision in a statute making the company liable for its officers’ acts. e Where there is no requirements for mens rea or intention to commit the crime. e Case: Tesco Supermarkets Ltd vs Nattrass (1972) e Lord Relds- a living person has a mind which can have knowledge or intention to be negligent and has hands to carry out his intentions . A corporation has none of these and must act through living persons though not one or the same person. Then the person who acts isn't speaking or acting for the company, he is acting as the company and his mind is the mind of the company. eo okwenye@lawyer.com (.. . Corporate liability He is the embodiment of the company and hears and speaks as the persona of the company. If it is a guilty mind then it’s the guilt of the company. The actions of the directors/secretary must be identified with the company The company may be liable for as long as the officer is in the company’s employment. The company employee/ officer must act within the scope of employment The directing mind and will of the company includes the board of directors and those to whom the board delegates its functions. Liability is attributed to officers with the directing mind and will of the company. The commonly imposed sentence is a fine since a company cannot be imprisoned. okwenye@lawyer.com Questions e What do you understand by the term ‘Corporate personality”? e Discuss the exceptions to the principle of corporate personality. e How is the veil of incorporation lifted? e “Fraud and fraud alone is the only ground for lifting the corporate veil” Discuss okwenye@lawyer.com FORMATION OF A COMPANY e Forming a company involves discovering a business opportunity, finding the right people to steer the business and soliciting funds. e Involves registering/ incorporating the company. e Promoters are involved in setting up the business, they act in a fiduciary position and are entitled to remuneration. okwenye@lawyer.com Definition of a promoter e Not defined in the Companies Act e Case: Whaley Bridge Calico Printing Co. Vs Green (1880) e W Browen stated that it’s a process of business operations familiar to the commercial world by which a company is brought into existence. e Case: Twycross Vs Grant (1887) e Justice Cockburn - defined a promoter as one who undertakes to form acompany with reference toa given project, to set it going and who takes the necessary steps to accomplish that purpose. okwenye@lawyer.com Duties of a promoter e To arrange the preparation of the memorandum and articles of association. e To procure capital e To prepare a prospectus and to obtain directors. e Section 2 - defines a prospectus as prospectus, notice, circular, advertisement or other invitation offering to the public securities for subscription or purchase. okwenye@lawyer.com ... duties of a promoter e Itincludes a prospectus relating to an offer of debt securities to the public and in respect of any other offer of securities to the public. e Owes a fiduciary duty to the company and to act in good faith e Not to make secret profit e To declare or disclose any interest or profit oe okwenye@lawyer.com Disclosure e Promoters must disclose/ declare the whole profit. e He must act in good faith and in full disclosure e Apromoter must disclose the nature and extent of the contract in every transaction. e The company may rescind the contract okwenye@lawyer.com ... pre-incorporation contracts e Case: Newborne Vs Sensolid (Great Britain) Ltd (1954) e Facts: The Plaintiff entered a contract with the Defendant company to supply tinned ham, the company hadn't yet been incorporated. The contract wasn’t executed for and on behalf of Newborne (London) Ltd. e Held: Newborne wasn’t liable as he had qualified his signature while signing the contract. 6 okwenye@lawyer.com Effect of Section 54 e Though pre incorporation contracts are void ab initio, the company can legally adopt them through novation. Section 54(2) states that a company may adopt a_ pre-incorporation contract without the need for a novation. e Once the company adopts it, the liability of the promoter ceases (s.54(3)). e Therefore, if the company adopts it, then the promoter is not liable. However, if the company does not adopt it, then the promoter is liable. okwenye@lawyer.com (— Registration of a company e Reservation of name e The promoter must first reserve the company name i.e. ascertain if its available for registration. e Reservation is for a period of 30 days, must not exceed 60 days. e Section 36 (1) provides for the registrar’s powers to reserve a name of a company. e Section 36(2) prohibits the reservation and registration of names which the registrar considers to be undesirable. e The name reserved must have the name limited at the end. e Section 41 provides for the power to dispense with limited in the name of charitable organizations which promote art, science charity and to prohibit the payment of dividends to its members 6 okwenye@lawyer.com Conclusiveness of the certificate of incorporation e Section 22 provides that the certificate of incorporation is conclusive evidence that all the Act’s requirements with regard to registration have been complied with. e The certificate can only be cancelled through winding up although the subscribers are minors. okwenye@lawyer.com S ... conclusiveness e Case: Jubilee Cotton Mills Vs Lewis (1922) e Where the required company documents were delivered on 6 January. The registrar issued a certificate of incorporation two days later and dated it 6t* January instead of 8‘ January shares were allotted to Lewis on 6 January e Issue: Whether the allotment of shares was proper e Held: The date on the certificate was the correct date of incorporation, the certificate was conclusive evidence that all the requirements had been complied with. 6 okwenye@lawyer.com Conclusion e A company, in formation, may act through the promoter who must act honestly in the company’s best interests e The requirements for the registration must be complied with e The certificate of incorporation issued is conclusive evidence of incorporation 6 okwenye@lawyer.com Form of memorandum Format depends upon the liability and capital structure of a company. The company name and objectives have no effect on the format Section 17 provides for the statutory form of the memorandum. Section 7 requires the memorandum of every company to be printed in the English language. It contains the name, objects, capital structure and liability of the members Section 8 states that it must be dated and signed by each subscriber in the presence of at least one attesting witness. Section 19 provides for registration of the memorandum and articles. okwenye@lawyer.com Name e Its contained in paragraph 1 of the memorandum of association. e Must have limited as the last word in the name. e All company documents like invoices, receipts, cheques certificates, licenses and other documents must contain the name. e The company shouldn’t adopt a scandalous/ undesirable name according to section 36(2) e Identical or resembling names aren't accepted. Trademark law may be invoked. okwenye@lawyer.com --e- Name e Case: Ewing Vs Buttercup Margarine Co. (1917) e Facts: Ewing carried out a wholesale and retail business called Buttercup, a diary Company. The Defendant company was formed to manufacture and sell margarine in wholesale. Ewing applied for a restraint order on grounds that customers would be confused due to use of the name “Buttercup” e Held: The restraint order was granted. e The company may dispense with the word ‘limited’ under section 41, if the registrar is satisfied that the company is formed for promoting commerce, art, science, religion, charity. ¢ Company name to be affixed outside the registered office engraved in legible characters on its seal. e Directors will be personally liable for using un registered name. okwenye@lawyer.com