THE LAW OF BUSINESS ASSOCIATIONS 1

Section 1 of the Companies 2012 states what company means as a company formed
and registered under this Act or an existing company or a re-registered company
under this Act. This is a very vague definition, in the statute the word company is not
a legal term hence the vagueness of the definition. The legal attributes of the word
company will depend upon a particular legal system.

In legal theory company denotes an association of a number of persons for some

common object or objects. In ordinary usage it is associated with economic purposes
or gain. A company can be defined as an association of several persons who
contribute money or money’s worth into a common stock and who employ it for some
common purpose.

Differences between companies and other legal entities

A company differs from other entities like partnerships, associations, co-operative

societies, nongovernmental organisations, unregistered associations in many respects.

Company and partnerships.

The law treats companies in company law distinctly from partnerships in partnership
law.

Company
Partnerships
. It is created upon registration Is formed by agreement of the partners of
in accordance with the the partners.
Companies Act Registration is optional
For a private company, it is one which The membership is restricted to 2 or more
limits the number of its members to 100 persons and not more than 20 for trade and
not including the company's former and business. However, professional
current employees (S.5). Section 6 partnerships have a maximum of 50
provides that a company that is not a members
private company under section under
section 5 is a public company
One person can form a company The minimum number is two.
. It attains a separate legal existence upon . The partnership has no separate legal
incorporation existence, it’s the same as its partners,
applying 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 shareholder partnership debts
The shareholder is not an agent of the The partner is an agent of the firm
company
The liability of members is limited either Liability in partnership is unlimited except
by shares or guarantee except for for the limited liability partnerships
unlimited companies
The shares in a public company are freely
The shares of the partnership
transferable can only be transferred with
the partners’ consent
Companies have perpetual succession Death, insanity, insolvency of a partner
terminates the partnership unless
otherwise agreed
The company is managed by a board of The partnership is managed by all partners
directors elected by the shareholders
The company is formed using the The major document is the partnership
memorandum and articles of association deed or the partnership Act

FUNDAMENTAL CONCEPTS OF COMPANY LAW

There are two fundamental legal concepts
i. The concept of legal personality; (corporate personality) by which a
company is treated in law as a separate entity from the members.
ii. The concept of limited liability;

Concept of legal personality

A legal person is not always human, it can be described as any person human or
otherwise who has rights and duties at law; whereas all human persons are legal
persons not all legal persons are human persons. The non-human legal persons are
called corporations.

The word corporation is derived from the Latin word Corpus which inter alia also
means body. A corporation is therefore a legal person brought into existence by a
process of law and not by natural birth. Owing to these artificial processes they are
sometimes referred to as artificial persons not fictitious persons.

Limited liability

Basically liability means the extent to which a person can be made to account by law.
He can be made to be accountable either for the full amount of his debts or else pay
towards that debt only to a certain limit and not beyond it. In the context of company
law liability may be limited either by shares or by guarantee.
Under Section 4(2) (a) of the Companies Act 2012 (hereinafter The Act or
Companies Act), in a company limited by shares the members’ liability to contribute
to the company’s assets is limited to the amount if any paid on their shares.

Under Section 4 (2) (b) of the Companies Act in a company limited by guarantee the
members undertake to contribute a certain amount to the assets of the company in the
event of the company being wound up. Note that it is the members’ liability and not
the companies’ liability which is limited. As long as there are adequate assets, the
company is liable to pay all its debts without any limitation of liability. If the assets
are not adequate, then the company can only be wound up as a human being who fails
to pay his debts.
Nearly all statutory rules in the Companies Act are intended for one or two objects
namely
i. The protection of the company’s creditors; ii. The
protection of the investors in this instance being the members.

These underlie the very foundation of company law.

FORMATION OF A REGISTERED COMPANY

A company may either be a statutory, chartered or registered company. 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 to stop 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 guarantee.

If the company is unlimited it may or may not have its capital divided in to shares
depending on its purpose. If it is intended to make and distribute profits, a share
capital is more appropriate.

S. 4 of the Companies Act provides;

(1) 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.
Subsection 2 defines.
a. Company limited by shares; 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.

b. Limited by guarantee; 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,
c. Unlimited company; a company not having any limit on the liability of its
members Further, the promoters have to choose between a public company and a
private company. These fulfill 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 of the companies Act to

mean; (1) A “private company” means a company
which by its articles— (a) restricts the right to transfer
its shares and other securities;
(b) 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
(c) prohibits any invitation to the public to subscribe for any shares or
debentures of the company.
(2) 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 member.

S.6 defines a public company as one which is not a private company under section 5.

From the above, the classification of a registered company is as follows;

i i. A limited company either by shares or
guarantee
ii ii. An unlimited company iii iii. A public
company iv iv. A private company.

In order to incorporate themselves into a company, those people wishing to trade

through the medium of a limited liability company must first prepare and register
certain documents. These are as follows;

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;
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.
7. (1) The memorandum of every company shall be printed in the English language
and shall state—
(a) 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;
(b) that the registered office of the company is to be situated in Uganda;
and (c) may also state the objects of the Company.
(2) The memorandum of a company limited by shares or by guarantee must also state
that the liability of its members is limited.

(3) 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 amount.

(4) In the case of a company having a share capital—

(a) the memorandum must also, unless the company is an unlimited company, state
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;
(b) a subscriber of the memorandum may not take less than one share; and
(c) each subscriber shall write opposite his or her name the number of shares he or she
takes.

(5) Notwithstanding subsection (1)(c), 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—
(a) the object of the company is to carry on any trade or business whatsoever; and
(b) the company has power to do all such things as are incidental or conducive to the
carrying on of any trade or business by it.

S. 8. Provides for the Signature of memorandum.

(1) 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.
(2) 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
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 this Act.”

The mode for alteration of the Company’s objects is provided for under S. 10 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 S. 11 and which can also be altered
by a special resolution under S. 16. However, its not mandatory to register the articles
of association.

Registration;

S. 18 provides that (1) A company shall be registered by filling in the particulars

contained in the registration form in the second schedule to the Act.
S.19 (1) 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.
(2) A company shall indicate its registration number on all its official documents.

Under S. 18 (3) 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.

This certificate issued by the registrar is under S. 22 taken be conclusive evidence that
all the requirements of this Act in respect of registration and of matters precedent and
incidental to registration have been complied with and that the association is a
company authorized to be registered and duly registered under the Act.

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

Membership.

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

That (1) 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.
S. 47 (2) A person who agrees to become a member of a company, and whose name is
entered in its register of members shall be a member of the company.
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 court has the power to order the rectification of the
register and payment by the company of any damages sustained by any party
aggrieved.

This was considered in the case of Mathew Rukikaire Vs. Incafex S.C.C.A No. 3 of
2015. It was held; per Prof. Tibatemwa-Ekirikubinza

The process of incorporating a company limited by shares involves registration of

the company’s memorandum and articles of association which are signed by
subscribers. A ‘subscriber’ is the term applied to the first members of a private
limited company who add their names to the memorandum of association during
the company formation process. By so doing, they agree to form a company and
become members/share- holders in the company. However, other persons can
become members of the company when shares in the company are allotted.

When a person either individual or corporate is allotted shares subsequent to the

formation of the company, that person becomes a ‘shareholder’, ‘member’ or
‘owner’ and stands in the same position as the subscriber. Such persons agree to
become part of a company by taking a particular number of shares through a
process known as allotment
What can be deduced from S.47 is that a person may become a member of a
company in two ways;
(a) by subscribing to the memorandum of association; and
(b)by agreement to be a member subsequent to the formation of a company

After analyzing authorities, court held that a person becomes a shareholder or member of
a company if allotment is followed by registration. It further concluded that it is “the
company” which has the obligation to enter each member on the members register. In this
context the company’s duty lies with the company secretary, whose duty it is to ensure
that the company complies with relevant legislation and regulations.

From the above therefore, a person can be a legally recognized owner of the company if
he is a REGISTERED MEMBER. This is by subscribing to the memorandum, or be
allotted shares and have the allotment registered. The name of the member must therefore
be entered as a member in the company’s register of members.

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 indicted in the certificate of incorporation. The law creates an artificial person
which is a juridical entity with 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

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 share. 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 appointed as
directors and they were in charge of managing the overall control with Salomon.
Immediately after the transfer of the business to the company, there was a depression
in the boot industry and government failed to honour obligations to the company in
time and the profitability of the company began to decline. Mr. Salomon and 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 out 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 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 were a
mere scheme to enable him 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
Act 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;
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 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 ad 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 the
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 no thing 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

“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 share-holders; 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 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 to 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 ;
1. to encourage business,
2. to protect people from risk of business,
3. to promote trade (capitalism) and
4. the concept of constructive notice as creditors should make inquiries.

Lord Watson stated the need for inquiries on page 40 that;

 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 which 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
inquiry in regard to these matters. Whatever may be the moral duty of a
limited company and its share-holders, 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.

i. The decision established the legality of the so-called one-man company;
ii. It showed that incorporation was as readily available to the small private
partnership and sole traders as to the large private company.
iii. 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. 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 capital of £3000 divided into 3000 £1 shares. Of
these shares Mr. Lee held 2,999 and the remaining one share was held by a third party
as his nominee. In his capacity as controlling shareholder, Lee voted himself as
company director and Chief Pilot. In the course of his duty as a pilot, he was involved
in a crash in which he died. His widow brought an action for compensation under the
Workman’s Compensation Act and in this Act, workman was defined as “A person
employed under a contract of service” so the issue was whether Mr. Lee was a
workman under the Act 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.”

It further held 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.

Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619

- Macaura was the … of filimon estates and he sold the whole of his timber in an
estate to a company in consideration for an allotment to him of 42,000 fully paid
shares. All the company’s shares were held by him. Following the sale, Macwoler
effected policies in his own name with the Northern assurance company covering
the timber against the fire. When the timber was destroyed by fire, a claim was
brought by Mcowler against the insurance company and this claim was rejected on
the ground that he had no insurance interest in the timber since it belonged to the
company Canadian ….ltd. This case established the principle that the property of a
company belongs to the company and not its shareholders. That no creditor or
shareholder can have any insurable interest in the companies property.

Consequences or attributes of Corporate personality

1. The company is a legal entity, distinct from its members hence capable of enjoying
rights and incur 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 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)

2. A company can enter into a contract with one of its own; lee v lee

3. Company property belong to the company and not its members;

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.
Payment was effected by the allotment to the Appellant of 42,000 shares fully paid up
in £1 shares in the company. No other shares were ever issued. The company
proceeded with the cutting of the timber. In the course of these operations, the
Appellant lent the company some £19,000. Apart from this the company’s debts were
minimal. The Appellant then insured the timber against fire by policies effected in his
own name. Then the timber was destroyed by fire. The insurance company refused to
pay any indemnity to the appellant on the ground that he had no insurable interest in
the timber at the time of effecting the policy.

The court 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 person is the only shareholder and creditor of the
company, and in such case, 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 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
shareholder, were covered by the insurance.
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.”

4. As an artificial person, a company has no racial attributes;

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
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 a 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 obtained 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 –
(i) 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;

5. Limited Liability – since a corporation is a separate person from the members,

its members are not liable for its debts;

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

Sentamu v UCB (1983) HCB 59

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

6. Capacity to sue and to be Sued: As a legal person, a company can take action in
it’s 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 immortal and thus exists
only 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.

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 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 engage into
partnerships.

IGNORING THE CORPORATE ENTITY (LIFTING THE VEIL OF

INCORPORATION)

Although Salomon’s case finally established that a company is a separate and distinct
entity from the members, there are circumstances in which these principle of
corporate personality is itself disregarded. These situations must however be regarded
as exceptions because the Salomon decision still obtains as the general principle.

Although a company is liable for its own debt which will be the logical consequence
of the Salomon rule, the members themselves are held liable which is therefore a
departure from principle. The rights of creditors under this section are subject to
certain limitations namely (under statutory provision).

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 call it AB
Limited, which made an offer to ABC Limited to buy their shares in the old company.
A and B accepted the offer, but C refused. A and B sought to use provisions of
Section 210 in order to acquire C’s shares compulsorily.
The court held that this was a bare faced attempt to evade the fundamental principle of
company law which forbids the majority unless the articles provide to expropriate the
minority shareholders. Lord Justice Cohen said “the company was nothing but a legal
hut. Built round the majority shareholders and the whole scheme was nothing but a
hollow shallow.” All the minority shareholder had to do was shout and the walls of
Jericho came tumbling down.

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

Here the Defendant was a former employee of the plaintiff company and had
covenanted not to solicit the plaintiff’s customers. He formed a company to run a
competing business. The company did the solicitation. The defendant was not 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 the 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

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, 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 on 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 as the company
cannot be identified with the wrong doer. 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.

PROMOTERS

The Companies Act does not define the term promoter but it is used to describe people
involved in setting up the company that is individuals who are involved in the
processes of formation up to incorporation excluding those providing professional or
administrative services.

One of the most well known definition is that of Bowen J, in Whaley Bridge Calico
Printing Co v Green (1879) 5 QBD 109 where he states that:
The term promoter is a term not of law, but of business, usefully summing up
in a single word a number of business operations particular to the commercial
world by which a company is generally brought into existence.

At common law the best definition is that by Chief Justice Cockburn in the case of
Twycross – v – Grant (1877) 2C.P.D. 469

Cockburn says “a promoter is one who undertakes to form a company with reference
to a given project and to set it going and who takes the necessary steps to accomplish
that purpose.”

The term is also used to cover any individual undertaking to become a director of a
company to be formed. Similarly it covers anyone who negotiates preliminary
agreements on behalf of a proposed company. But those who act in a purely
professional capacity e.g. advocates will not qualify as promoters because they are
simply performing their normal professional duties. But they can also become
promoters or find others who will. Whether a person is a promoter or not therefore, is
a question of fact. The reason is that Promoter of is not a term of law but of business
summing up in a single word the number of business associations familiar to the
commercial world by which a company is born.

It may therefore be said that the promoters of a company are those responsible for its
formation. They decide the scope of its business activities, they negotiate for the
purchase of an existing business if necessary, they instruct advocates to prepare the
necessary documents, they secure the services of directors, they provide registration
fees and they carry out all other duties involved in company formation. They also take
responsibility in case of a company in respect of which a prospectus is to be issued
before incorporation and a report of those whose report must accompany the
prospectus.
It is important to know whether one is a promoter or not and the point in time he first
became a promoter or when he ceased to be a promoter because the law regards a
promoter as having certain duties towards a company.

DUTIES OF A PROMOTER

His duty is to act bona fide towards the company. Though he may not strictly be an
agent, or trustee for a company, anyone who can be properly regarded as a promoter
stands in a fiduciary relationship vis-à-vis the company. This carries the duties of
disclosure and proper accounting particularly a promoter must not make any profit out
of promotion without disclosing to the company the nature and extent of such a
Promotion. Failure to do so may lead to the recovery of the profits by the company.

The question which arises is – Since the company is a separate legal entity from
members, how is this disclosure effected?

Erlanger v New Sombrero Phosphates Co. (1878) 3 A.C. 1218

The promoters of a company sold a lease to the company at twice the price paid for it
without disclosing this fact to the company. It was held that the promoters breached
their duties and that they should have disclosed this fact to the company’s board of
directors.

Facts;
Frédéric Émile d'Erlanger was a Parisian banker. He bought the lease of the Anguilla
island of Sombrero for phosphate mining for £55,000. He then set up the New
Sombrero Phosphate Co. Eight days after incorporation, he sold the island to the
company for £110,000 through a nominee... The board, which was effectively
Erlanger, ratified the sale of the lease. Erlanger, through promotion and advertising,
got many members of the public to invest in the company.
After eight months, the public investors found out the fact that Erlanger (and his
syndicate) had bought the island at half the price the company (now with their money)
had paid for it. The New Sombrero Phosphate Co sued for rescission based on non-
disclosure, if they gave back the mine and an account of profits, or for the difference.
Held;
The House of Lords unanimously held that promoters of a company stand in a
fiduciary relationship to investors, meaning they have a duty of disclosure. Further,
they held, by majority that the contract could be rescinded.

As Lord Cairns said

I do not say that the owner of property may not promote and form a joint stock
company, and then sell his property to it, but I do say that if he does, he is bound to
take care that he sells it to the company through the medium of a board of directors
who can and do exercise an independent and intelligent judgment on the transaction,
and who are not left under the belief that the property belongs, not to the promoter,
but to some other person.

It was clearly stated by James LJ:

A promoter is ... in a fiduciary relation to the company which he promotes or causes to
come into existence. If that promoter has a property which he desires to sell to the
company, it is quite open to him to do so; but upon him, as upon any other person in a
fiduciary position, it is incumbent to make full and fair disclosure of his interest and
position with respect to that property.

Again, in Lagunas Nitrate Co v Lagunas Syndicate[1899] 2 Ch 392., Lindley MR

said: The first principle is that in equity the promoters of a company stand in a
fiduciary relation to it, and to those persons whom they induce to become
shareholders in it, and cannot bind the company by any contract with
themselves without fully and fairly disclosing to the company all material facts
which the company ought to know.

Here, the necessary and sufficient disclosure will be to those persons who are invited
to become the shareholders. In Salomon v A Salomon and Co Ltd, the lower courts
had taken an adverse view of the sale of the business to the company at a gross
overvalue by Salomon, who was obviously the promoter, but, in the House of Lords,
an argument that the sale of the business to the company should be set aside on
Erlanger principles was rejected, since the full circumstances of the sale were known
by all the shareholders. So, it appears that there is no duty on a promoter to provide
the company with an independent board but disclosure must be to all shareholders.

Lagunas Nitrate Co v Lagunas Syndicate

Two promoters who were also the only directors, subscribers and shareholders
published a prospectus inviting the public to take shares and sold their property to the
company. This sale was disclosed in the prospectus indicating that they had interest in
the property.
It was held that there was no breach of fiduciary duty since there was adequate
disclosure hence no rescission.
Since the decision in Salomon’s case it has never been doubted that a disclosure to the
members themselves will be equally effective. It would appear that disclosure must be
made to the company either by making it to an independent Board of Directors or to
the existing and potential members.
If to the former the promoter’s duty to the company is duly discharged, thereafter, it is
upon the directors to disclose to the subscribers and if made to the members, it must
appear in the Prospectus and the Articles so that those who become members can have
full information regarding it.
It was held in Gluckstein v. Barnes that promoters are bound to disclose all the
profits they have accumulated during the promotion of a company and the company
may sue the promoters to recover any secret profit that they may have obtained in the
course of formation of the company.

In this case, Gluckstein and three others bought the Olympia exhibition premises in
liquidation proceedings for 140000 and then promoted a company Olympia ltd to
which they sold the property for 18,000. There were no independent directors. In a
prospectus inviting applications for shares and debentures 40,000 profit was disclosed
but not a further 20,000 which they had made by buying securities on the property at a
discount and then enforcing them at their face value. The company went into
liquidation within four years and the liquidator claimed part of the secret profit. The
promoters were liable to refund.

It was held that the company should have been informed of what was being done and
consulted whether they would have allowed this profit. That the duty to disclose is
imposed by the plainest dictates of common honesty as well as by well settled
principles of common law.

Since a promoter owes his duty to a company, in the event of any non-disclosure, the
primary remedy is for the company to bring proceedings for either rescission of any
contract with the promoter or recovery of any profits from the promoter.

As regards Rescission, this must be exercised with keeping in normal principles of the
contract.
1. the company should not have done anything to ratify the action
2. There must be restitutio in intergram (restore the parties to their original position)

The public policy behind restrictions on a promoter

is; i i. To protect the company from unfair dealings
of insiders. ii ii. To protect innocent third parties like
creditors iii iii. To protect prospective shareholders

REMUNERATION OF PROMOTERS

A promoter is not entitled to any remuneration for services rendered for the company
unless there is a contract so enabling him. In the absence of such a contract, a
promoter has no right to even his preliminary expenses or even the refund of the
registration fees for the company. He is therefore under the mercy of the Directors.
But before a company is formed, it cannot enter into any contract and therefore a
promoter has to spend his money with no guarantee that he will be reimbursed.

But in practice the articles will usually have provision authorising directors to pay the
promoters. Although such provision does not amount to a contract, it nevertheless
constitutes adequate authority for directors to pay the promoter.

PRE INCORPORATION CONTRACTS

These are transactions which are entered into before the company exists and where the
company appears to be a party to the contract. It is a contract made before a
company’s existence by the promoters.
Until a company is formed, it is legally non-existent and therefore cannot enter into
any contract or even do any other acts in law. Once incorporated, it cannot be liable
on any contract nor can it be entitled under any contract purported to have made on its
behalf before incorporation. Ratification is not possible when the ostensible principle
is non-existent in law when the contract was entered into.

So, prima facie, at common law, a pre-incorporation contract is void and cannot be
ratified as ratification requires an existent principle.
This principle was established by the case of Kelner v Baxter.

Kelner v Baxter (1866) LR 2 CP 174

A group of company promoters for a new hotel business entered into a contract,
purportedly on behalf of the company which was not yet registered, to purchase wine.
Once the company was registered, it ratified the contract. However, the wine was
consumed before the money was paid, and the company unfortunately went into
liquidation. The promoters were sued. They argued that their liability had passed to
the company, and were not personally accountable.

Held;
A pre-incorporation contract is void ab initio and can’t be ratified. Ratification
presupposes an existent principle having capacity to contract at the time the contract
was entered into.
That whoever professes to act on behalf of a nonexistent principle may be held
personally liable.

Erle CJ ;
Where a contract is signed by one who professes to be signing “as agent,” but
who has no principal existing at the time, and the contract would be altogether
inoperative unless binding upon the person who signed it, he is bound thereby:
and a stranger cannot by a subsequent ratification relieve him from that
responsibility. When the company came afterwards into existence it was a
totally new creature, having rights and obligations from that time, but no rights
or obligations by reason of anything which might have been done before.

Byles J;
The true rule, however, is that persons who contract as agents are generally
personally responsible where there is no other person responsible as principal.

This case was considered and distinguished in Newborne v Sensolid (Great Britain)
Ltd [1954] 1 QB 45
The plaintiff was the promoter and prospective director of a limited company,
Leopold Newborne (London) Ltd, which at the material time had not been registered.
A contract for the supply of goods to the defendants was signed: “Leopold Newborne
(London), Ltd” and the plaintiff’s name, “Leopold Newborne”, was written
underneath. In an action for breach of the contract brought by the plaintiff against the
defendants,
Held – The contract was made, not with the plaintiff, whether as agent or as principal,
but with a limited company which at the date of the making of the contract was non-
existent, and, therefore, it was a nullity and the plaintiff could not adopt it or sue on it
as his contract.

Per Lord Goddard CJ;

 It seems to me a very long way from saying that every time a prospective
company, not yet in existence, purports to contract everybody who signs for
the company makes himself personally liable
This contract purports to be made by the company, not by Mr Newborne. He
purports to be selling, not his goods, but the company’s goods. The only
person who has any contract here is the company, and Mr Newborne’s
signature is merely confirming the company’s signature. The document is
signed: “Yours faithfully, Leopold Newborne (London), Ltd”, and the
signature underneath is that of the person authorised to sign on behalf of the
company.

In this case in rejecting Kelner v Baxter, court looked at the way in which the contract
was signed, it
was the company which purported to make the contract and the promoter did not sign
as agent or on behalf of the company but only to authenticate the signature of the
company. Remember in
Klener v Baxter, the promoters signed as “on behalf of the company”
However, Newborne’s case still strengthened the position in Kelner that a pre-
incorporation contract cannot be enforced against the company.

The above case of Newborne was applied in Black v Smallwood. In this case, Black
and others contracted to sell land to the company known as Western Suburbs
Holdings and the agreement was signed by the defendants Robert Small and J Cooper
as the directors. The two signed as directors in the mistaken belief that the company
had been incorporated.

Court applied Newbornes case and held that Kelner v Baxter, is not an authority for
the principle that an agent signing for a non-existent principle is bound. That if a pre-
incorporated contract objectively has an intention to bind the company only then the
promoter does not necessarily take the liability especially if the promoter had not
known the fact that the company had not been incorporated.

The two cases then modify the rule in Kelner on liability of a promoter on a
preincorporation to this; whoever professes to act as an agent of a non existent
company is personally liable on the contract, but this depends on the intention of
the promoter at the time of signing.

However, all the three cases support the proposition that a pre-incorporation contract
is void and unenforceable.

The question then is how can a company be bound by a pre-incorporation contract?

The only way a company can be bound is to make a new contract between the
company after incorporation and the parties concerned. This is what is called in law a
novation.
It was held in Motani v Thobani (1945) 2 EACA 37 that a sale agreement made
before the company was incorporated was not binding on it and could not
subsequently be ratified by the company. The company could only be liable if there
were a new contract to which it was a party.

The question of whether there is a new contract, is a question of fact depending on

each case.

Price v. Kelsall (1957) E.A. 752

One of the issues in this case was whether or not a company could ratify a contract
entered into on its behalf before incorporation. The alleged contract was that the
Respondent had undertaken to sell some property to a company which was proposed
to be formed between him and the Appellant. In holding that a company cannot ratify
such an agreement, the Eastern Africa Court of Appeal as then constituted O’Connor
President said as follows;
A company cannot ratify a contract purporting to be made by someone on its
behalf before its incorporation but there may be circumstances from which it
may be inferred that the company after its incorporation has made a new
contract to the effect of the old agreement.
The mere confirmation and adoption by Directors of a contract made before
the formation of the company by persons purporting to act on behalf of the
company creates no contractual relations whatsoever between the company
and the other party to the contract.”

Re Northumberland Avenue Hotel Co Ltd (1886),.

A contract was made between W. and D., as the agent for an intended company, for
the assignment of a lease. The company, on its formation, entered on the land the
subject of the lease and erected buildings on it, but did not make any fresh agreement
with respect to the lease.

Held, the agreement being made before the formation of the company, was not
binding on the company, and the acts of the company were not evidence of a fresh
agreement between W. and the company. Even if the company takes the benefit of a
contract made before its incorporation, the contract is not binding on the company.
Justice Lopez; when the company came into existence, it could not ratify that contract
because the company was not in existence at the time the contract was made.
That the company might have entered into a new contract upon the same terms
as the agreement and this should not be inferred from the conduct and the
transactions of the company when it came into existence.

In Howard v Patent Ivory Manufacturing Co (1888) 38 Ch 156 the court noted that
it has to be a fresh agreement even if its on the same terms.
.
The above common law position in Baxter and the subsequent cases has been
modified further by S. 54 of the Companies Act 2012 which provides that;
(1) 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.
(2) A company may adopt a pre-incorporation contract with its formation and
registration made on its behalf without a need for novation.
(3) In all cases where the company adopts a pre-incorporation contract, the liability
of the promoter of that company shall cease.

The effect of the above section is that, a pre-incorporation contract is no longer void
but voidable as it can be adopted by the company without a need for a novation.
However, the section stresses that a promoter is personally liable on the pre-
incorporation contract no matter how he signs it unless the company adopts the
contract and thereby his liability ceases.

The interpretation of this section was given by Lord Denning in Phonogram Ltd v
Lane (1981)3 ALL ER 182. Where he stated that;
The section means that in all cases where a person purports to contract on
behalf of the company not yet formed, then, however he expresses his
signature, he himself is personally liable on the contract. That there has to be
clear exclusion of personal liability and this cannot be made by inferences
from the way in which the contract was signed.
This section does not overrule the common law position, which is still good
law where the company fails to adopt the contract.

ARTICLES OF ASSOCIATION
A Company’s constitution is composed of two documents namely the Memorandum
of
Association and the Articles of Association. The Articles of Association are the more
important of the two documents in as much as most court cases in Company Law deal
with the interpretation of the Articles.

S.11 states that it shall be lawful for a company to register in addition to its
memorandum and articles of association, such regulations of the company as the
company may deem necessary. However, Section 12 of the Companies Act provides
that a Company limited by guarantee or an unlimited company must register with a
Memorandum of Association, Articles of Association describing regulations for the
company.

A company limited by shares may or may not register articles of Association. A

Company’s Articles of Association may adopt any of the provisions which are set out
in Schedule 1 Table A of the Companies Act 2012.

S.13 of the Act;

(1) Articles of association may adopt all or any of the regulations contained in Table
A.
(1) (2) In the case of a company limited by shares and registered after the
commencement of this Act, if articles are not registered or, if articles are
registered in so far as the articles do not exclude or modify the regulations
contained in Table A, those regulations shall, so far as applicable, be the
regulations of the company in the same manner and to the same extent as if
they were contained in the duly registered articles.
Table A is the model form of Articles of Association of a Company Limited by
Shares. It is divided into two parts designed for public companies in part A and for
private companies in part B (II) thus a company has three options. It may either i i.
Adopt Table A in full; or ii ii. Adopt Table A subject to modification or iii iii.
Register its own set of Articles and thereby exclude Table A altogether.

In the case of a company limited by shares, if no articles are registered or if articles

are registered insofar as they do not modify or exclude Table A the regulations in
Table A automatically become the Company’s Articles of Association.

Section 15 of the Companies Act requires that the Articles must be in the English
language printed, divided into paragraphs numbered consecutively dated and signed
by each subscriber to the Memorandum of Association in the presence of at least one
attesting witness.

As between the Memorandum and the Articles, the Memorandum of Association is

the dominant instrument so that if there is any conflict between the provisions in the
Memorandum and those in the Articles the Memorandum provisions prevail. However
if there is any ambiguity in the Memorandum one may always refer to the Articles for
clarification but this does not apply to those provisions which the Companies Act
requires to be set out in the Memorandum as for instance the Objects of the Company.

The relationship between the memorandum of association and Articles of association

was given by Lord Bowen in Guinness v land Corporation of Ireland (1882) Ch D
349
There is an essential difference between the memorandum and articles. The
memorandum contains the fundamental conditions upon which alone the
company is allowed to be incorporated. They are conditions introduced for the
benefit of the creditors, and the outside public as well as the shareholders. The
Articles of association are the internal regulations of the company. They
cannot be said to be construed together. That is the fundamental conditions of
the charter of incorporation and the internal regulations of the company cannot
be construed together. It is certain that for anything which the Act of
parliament says shall be in the memorandum, you must look to the
memorandum alone. If the legislature has said that one instrument is to be
dominant, you cannot turn to another instrument and read it in order to modify
the provisions of the dominant instrument. The memorandum prevails over the
articles.

Whereas the Memorandum confers powers for the company, the Articles determine
how such powers should be exercised.

Articles regulate the manner in which the Company’s affairs are to be managed. They
deal with inter alia the issue of shares, the alteration of share capital, general
meetings, voting rights, appointment of directors, powers of directors, payment of
dividends, accounts, winding up etc. They further provide a dividing line between the
powers of share holders and those of the directors.
LEGAL EFFECTS OF THE ARTICLES OF ASSOCIATION
An issue which has caused a considerable amount of litigation and much discussion
among commentators is the extent to which the terms of the company’s constitution
can be enforced both by the company and its members. The starting point is S.
21,Companies Act 2012 which states as follows:
Subject to this Act, the memorandum and articles shall, when registered, bind the
company and the members of the company to the same extent as if they had been
signed and sealed by each member and contained covenants on the part of each
member to observe all the provisions of the memorandum and articles.

This has the effect of establishing the memorandum and articles as a ‘statutory
contract’ between the company and its members, and among members inter se the
terms of which can be enforced both by the company and the members

Reference may be made to the case of Hickman v. Kent (1950) 1 Ch. D 881
Here the Articles of the Company provided that any dispute between any member and
the company should be referred to arbitration. A dispute arose between Hickman and
the company and instead of referring the same to arbitration, he filed an action against
the company in the High Court. The company applied for the action to be stayed
pending reference to arbitration in accordance with the company’s articles of
association.
The court held that the company was entitled to have the action stayed since the
articles amount to a contract between the company and the Plaintiff one of the terms
of which was to refer such matters to arbitration.

Justice Ashbury had the following to say: “That the law was clear and could be
reduced to 3 propositions;
i i. That no Article can constitute a contract between the company and a third
party;
ii ii. No right merely purporting to be conferred by an article to any person
whether a member or not in a capacity other than that of a member for
example solicitor, promoter or director can be enforced against the company.
iii iii. Articles regulating the rights and obligations of the members generally
as such do create rights and obligations between members and the company”.

Ashbury thus held that; general articles dealing with the rights of members as such
should be treated as a statutory agreement between them and the company as well as
between the members interse.

From this case, therefore, the effect of the articles of association creates a statutory
contract derived from S. 21 itself and the law cannot say that there is a contract and
you say otherwise.
The contract which s 14 creates, however, is and remains a special statutory
contract, with its own distinctive features. The contract derives its force from the
statute and not from any bargain struck between the parties and, therefore, it is subject
to other provisions of the Act. Section 16 for instance, provides that the articles, the
terms of the statutory contract, can be altered by a special resolution of the members
voting in general meeting, in contrast to the case of a ‘normal contract’, where
unanimity between the parties would be required for a variation of contractual terms.
Enforcement of the articles;
Under S. 21 The articles create a statutory contract binding the company and the
members and the members inter se.

This means that the articles can be enforced by both the company and members.
In Hickman v Kent, the company successfully enforced the articles against a member
who had referred the dispute to the high court yet the articles required the dispute to
be before an arbitration.

The articles can also be enforced by a member against a company and against another
member. This is shown by the case of; Wood v. Odessa Waterworks Company
[1880] 42 Ch. 636 The articles empowered the directors with the sanction of a
general meeting to declare a dividend to be paid to the shareholders. The company
passed an ordinary resolution proposing to pay no dividends but instead to give the
shareholders debentures. Wood, a shareholder sought an injunction to restrain the
company from acting on that resolution.
Held;
That the proposal was inconsistent with the articles of association and the injunction was
granted. Sterling J. had the following to say: “the articles of association constitutes a
contract not merely between shareholders and the company but also between each
individual shareholders and every other.”

This case shows that any member has the right to enforce the observance of the terms
of the articles. This case was followed in Rayfield v. Hands

Rayfield v. Hands (1960) Ch.d 1 (1958)2 ALL ER 1941

Here the company’s articles provided that every member who intends to transfer his
shares shall inform the directors who will take those shares between them equally at a
fair value. The Plaintiff called upon the directors to take his shares but they refused.
The issue was whether the articles gave rise to a contract between the Plaintiff and the
directors.
The court here held that the Articles related to the relationship between the Plaintiff as
a member and the Defendants not as directors but as members of the company.
Therefore the Defendants were bound to buy the Plaintiff shares in accordance with
the relevant article. The plaintiff was not obliged to join the company as a party.

The principle in this case therefore is that one member can enforce the articles against
another member without joining the company as a party.

Salmon v Quin Axtens Ltd 91909) 1 Ch 311 (1909) AC 442

The claimant Salmon had been one of the two managing directors (as well as a
member) of the company, the constitution of which provided that the company’s
managing directors had the power to veto certain resolutions of its board of directors.
Salmon duly exercised his right to veto such a resolution. However, the company
purported to carry it out anyway. Accordingly Salmon sought an injunction to prevent
the company from acting in breach of its constitution.
Held;
That Salmon as a member of the company was entitled to require the company to
abide by its articles. The effect of allowing the board to continue would have been to
remove the power of veto which could only be done using a special resolution.

Membership or outsider rights for enforcement.

It must be noted that for a member to enforce the terms of the articles, he or she must
be acting in his capacity as a member. Even if one is a member but seeks to rely on
the articles in another capacity either as director, solicitor of the company, his action
will fail.
Lord Ashbury stated the position in Hickman v Kent that “An outsider to whom rights
purport to be given by the articles in his capacity as such outsider, whether he is or
subsequently becomes a member, cannot sue on those articles treating them as
contracts between himself and the company to enforce those rights.: He thus held that;
i i. That no Article can constitute a contract between the company and a third party;
ii ii. No right merely purporting to be conferred by an article to any person whether a
member or not in a capacity other than that of a member for example solicitor,
promoter or director can be enforced against the company.

This can be explained by the following cases.

Eley v. Positive Government Security Life Association Co. (1876) Ex 88
In this case, the company’s articles provided that Eley should become the company
Solicitor and should transact all legal affairs of the company for mutual fees and
charges. He bought shares in the company and thereupon became a member and
continued to act as the company’s solicitor for some time. Ultimately the company
ceased to employ him. He filed an action against the company alleging breach of
contract.

The court held: that the articles constitute a contract between the company and the
members in their capacity as members and as a solicitor Eley was therefore a third
party to the contract and could not enforce it. The contract relates to members in their
capacity as members and the company so its only a contract between the company and
members of that company and not in any other capacity such as solicitor.

This view was applied in ;

Beattie v Beattie (1938) CH 708 (1938) 3 ALL ER 214

A dispute arose between a company and one of its directors, concerning an alleged
breach of a duty by the director. There was a clause in the company’s articles obliging
all disputes between the company and a member to be referred to arbitration. The
appellant director, who was also a member, sought to rely on this clause to avoid the
dispute being aired in court.
Held;
A member seeking to enforce the constitution must be acting in his capacity as a
member. Constitution provisions that do not relate to membership rights will not
normally form part of the statutory contract. The claim failed because this was a
dispute between the company and the appellant in his capacity as director. As director
and a disputant in this action, he had no right to enforce the terms of the article.

The first cases succeeded because, the action was being brought by a person in his
capacity as a member. Outsider rights are therefore unenforceable under the articles.

ALTERATION OF ARTICLES

The articles of association, being a statutory contract can only be altered subject to the
Act. any provision forbidding amendment of the articles is null and void because the
Act provides for amendment.

Section 16 of the Companies Act gives the company power to alter the articles by
special resolution. This is a statutory power and a company cannot deprive itself of its
exercise. Reference may be made to the case of

Andrews v. Gas Meter Co. (1897) 1 Ch. 361

The issue herein was whether a company which under its Memorandum and Articles
had no power to issue preference shares could alter its articles so as to authorise the
issue of preference shares by way of increased capital
The court held that as long as the Constitution of a Company depends on the articles,
it is clearly alterable by special resolution under the powers conferred by the Act.
Therefore it was proper for the company to alter those articles and issue preference
shares. Any regulation or article which purports to deprive the company of this power
is therefore invalid, on the ground that such an article or regulation will be contrary to
the statute.

The only limitation on a company’s power to alter articles is that the alteration must
be made in good faith and for the benefit of the company as a whole.

Allen v. Gold Reefs of West Africa (1900) 1 Ch. 626

In this case the company had a lien on all debts by members who had not truly paid up
for their shares. Mr. Zuccani held some partly paid up shares and also owned the only
fully paid up shares issued by the company. The Articles were altered to extend the
Company’s lien to those shares which were fully paid up. held
That since the power to alter the Articles is statutory, the extension of the lien to fully
paid up shares was valid. So long as the resolution was done bonafide for the benefit
of the company as a whole, restrictions on the freedom of a company to alter its
articles are invalid.
These were the words of Lindley L.J.
“Wide however as the language of Section 13 ( ours is 16) mainly the power
conferred by it must be exercised subject to the general principles of law and equity
which are applicable to all powers conferred on majorities and enabling them to bind
minorities. It must be exercised not only in the manner required by law but also bona
fide for the benefit of the company as a whole.”
Further reference may be made to the case of Shuttleworth v. Cox Brothers Ltd
(1927) 2 KB29 Here the Articles of the Company provided that the Plaintiff and 4
others should be the first directors of the company. Further each one of them should
hold office for life unless he should be disqualified on any one of some six specified
grounds, bankruptcy, insanity etc. The Plaintiff failed to account to the company for
certain money he had received on its behalf. Under a general meeting of the company
a special resolution was passed that the articles be altered by adding a seventh ground
for disqualification of a director which was a request in writing by his co-directors
that he should resign. Such request was duly given to the Plaintiff and there was no
evidence of bad faith on the part of shareholders in altering the articles.

The Plaintiff sued the company for breach of an alleged contract contained in their
original articles that he should be a permanent director and for a declaration that he
was still a director.
The court held that the contract if any between the Plaintiff and the company
contained in the original articles in their original form was subject to the statutory
power of alteration and if the alteration was bona fide for the benefit of the company,
it was valid and there was no breach of contract. Lord Justice Bankes observed as
follows
“In this case, the contract derives its force and effect from the Articles themselves
which may be altered. It is not an absolute contract but only a conditional contract.”
The question here is who determines what is for the benefit of the company? Is it the
shareholders or the Courts?

Scrutton L.J. had the following to say

“to adopt such a view that a court should decide will be to make the court the
manager of the affairs of innumerable companies instead of shareholders themselves.
It is not the business of the court to manage the affairs of the company. That is for the
shareholders and the directors.”

Brown v. British Abrasive Wheel Co. (1990) 1 Ch. 290

Here a public company was in urgent need of further capital which the majority of the
members who held 98% of the shares were willing to supply if they could buy out the
minority. They tried persuasion of the minority to sell shares to them but the minority
refused. They therefore proposed to pass a Special Resolution adding to the Articles a
clause whereby any shareholder was bound to transfer his shares upon a request in
writing of the holders of 98% of the issued capital.
held
The court held that this was an attempt to add a clause which will enable the majority
to expropriate the shares of the minority who had bought them when there was no
such power. Such an attempt was not for the benefit of the company as a whole but for
the majority. An injunction was therefore granted to restrain the company from
passing the proposed resolution.
One reason for this was that there was no direct link between the provisions of extra
capital and the alteration of the articles. Although the whole scheme had been to
provide the capital after removing the dissenting shareholders, it would in fact have
been possible to remove the shareholders and then refuse to provide the capital.
Sidebottom v. Kershaw Leese & C0.[1920]1 Ch. 154
A company had a minority shareholder who was interested in some competing
business. The company passed a special resolution empowering the directors to
require any shareholder who competed with the company to transfer his shares at their
fair value to nominees of the directors. The Plaintiff was duly served with such a
notice to transfer his shares. He thereupon filed an action against the company
challenging the validity of that article.

He argued that a previous case of Brown v British abrasive, where a change for
compulsory share purchase was held invalid as not being bonafide for the benefit of
the company as a whole should be applied here too.

Held;
The court held that the company had a power to re-introduce into its articles anything
that could have been validly included in the original articles provided the alteration
was made in good faith and for the benefit of the company as a whole and since the
members considered it beneficial to the company to get rid of competitors, the
alteration was valid.
That the alteration was for the best interests of the company as the minority
shareholder by competing with the company could damage the company.
Lord Stendale Mr.
The whole of this case comes down to rather a narrow question of fact, which
is this; when the directors of this company introduced this alteration giving
powers to buy up the shares of the members who were in competing business,
did they do it bonafide for the benefit of the company or not? It seems to me
quite clear that it may be very much to the benefit of the company to get rid of
members who are in competing business.”

Dafen Tinplate Co Ltd v Llanelly Steel Co (1920) 2 Ch 124

D was a shareholder in the L company. The company realized that D was buying steel
from an alternative source of supply and also attempted to buy up the company’s
shares. L responded by altering its articles through a special resolution to include the
power to compulsorily purchase the shares of any member requested to transfer them.
D argued that the alteration was invalid.

Held;
That the alteration was too wide to be valid. The altered article would confer too much
power on the majority. It went much further than was necessary for the protection of
the company. The judge applied the bonafide for the benefit of the company test in an
objective sense,

Peterson J interpreted the Allen v Gold Reefs test as being “whether in fact the
alteration is genuinely for the benefit of the company” and in holding that this was
not, stated;
It may be for the benefit of the majority of the shareholders to acquire the shares of
the minority, but how can it be said to be for the benefit of the company that any
shareholder against whom no charge of acting to the detriment of the company can be
urged and who is in every respect a desirable member of the company and for whose
expropriation there is no reason except the will of the majority should be enforced to
transfer his shares to the majority or anyone else?

It has been stated by writers that the case of Sidebottom applied a subjective clause
while that of Dafen applied an objective clause.

In Peters American delicacy Co ltd v Heath (1936) 61 CLR 457, it was held that;
An alteration of articles which discriminates against holders of partly-paid up
shares in favor of the majority shareholders did not constitute a fraud on the
minority in the circumstances. Such alteration must be valid unless the party
complaining can establish that the resolution was passed fraudulently or
oppressively or was so extravagant that no reasonable person could believe
that it was for the benefit of the company.
Characteristics of the contract created by the articles of association.

As already stated, the nature of the contract is statutory and hence is distinct from the
ordinary contract. The contract which S.21 creates, however, is and remains a special
statutory contract, with its own distinctive features. The contract derives its force from
the statute and not from any bargain struck between the parties and, therefore, it is
subject to other provisions of the Act It therefore has the following characteristics.

i. It is a statutory contract which derives its force from the statute and not
from any bargain struck between the parties.
ii. The contract can be altered by a special resolution. This is in contracts to
the case of a normal contract where unanimity between the parties would
be required for a variation of contractual terms.
iii. Unlike an ordinary contract, a statutory contract is not defeasible on the
grounds of misrepresentation, common law mistake, undue influence or
duress. All these relate to consent but by subscribing to the articles, the
party will have consented and the company is an artificial person
conducting its business through individuals, so the question of vitiating
factors does not arise.

iv. The court has no jurisdiction to rectify the articles once registered even if it
could be shown that they did not as they presently stood, represent what
was the true original intentions of the persons who formed the company.
This is because, the articles are registered.

Scott v Frank Scott (London) Ltd (1940) CH 794

The issue was whether the defendant was entitled to have the articles of association
rectified in the manner claimed by them.

Bennet J at first said that he was prepared to hold that the articles of association as
registered were not in accordance with the intention of the three brothers who were
the only signatories and shareholders. He however held that; The court has no
jurisdiction to rectify the articles of association of a company although they do not
accord with what is proven to have been the cocurrent intention of all the signatories
there in at the moment of signature.

The court of appeal unanimously confirmed this view holding that; There is no room
in the case of a company incorporated under the appropriate statute or statutes for the
application to either memorandum or articles of association of the principles upon
which a court of equity permits rectification of documents whether interpartes or not.

v. The articles cannot be supplemented by additional terms implied from

extrinsic circumstances.

Bratton Seymour Service Co Ltd v Oxborough (1992) 3 CLC 693

The company was set up to manage the commercial aspects of a development
consisting of a number of flats, the shares being held by the flat owners. The question
for the court was whether it was possible to imply into the company’s articles a term
that the shareholders should make contributions for the upkeep of the garden,
swimming pool and other communal amenity areas if the development.
Held;
The court of appeal held that no such term could be implied.
Neither can the company nor any member seek to add to or to subtract from the terms
of the articles by way of implying a term derived from extrinsic surrounding
circumstances. Permitting such would be prejudicial to third parties, namely
potential shareholders who are entitled to look and rely on the articles of
association as registered. (public policy); An implication should only be derived
from the language of the articles but not purely from extrinsic circumstances.

The characteristics of the statutory contract created by articles of association, its

enforcement and effect, were stated by Steyn LJ; in the above case of Bratton
Seymour Service Co Ltd v Oxborough (1992) 3 CLC 693 as follows;
The law provides that the memorandum and articles of association when
registered bind the company and its members to the same extent as if they
respectively had been signed and sealed by each member. By virtue of the
section, the articles of association become upon registration a contract
between the company and the members. It is however, a statutory contract of a
special nature with its own distinctive features. It derives its binding force not
from a bargain struck between parties but from the terms of the statute. It is
binding only in so far as it affects the rights and obligations between the
company and the members acting in their capacity as members. If it contains
provisions conferring rights and obligations on outsiders, then these provisions
do not bite as part of the contract between the company and the members even
if the outsider is coincidentally a member.

The contract can be altered by a special resolution without the consent of all
the contracting parties. It is also unlike an ordinary contract, not defeasible on
the grounds of misrepresentation, common law mistake, undue influence or
duress.
 Neither, can the company nor any member seek to add to or to subtract from
the terms of the articles by way of implying a term derived from extrinsic
surrounding circumstances.

THE DOCTRINE OF ULTRA VIRES

A Company which is registered under the Company’s Act cannot effectively do

anything beyond the powers which are either expressly or by implication conferred
upon in its Memorandum of Association. Any purported activity in excess of those
powers will be ineffective even if agreed to by the members unanimously. This is the
doctrine of ultra vires in company law.

The purpose of this doctrine is said to be twofold

i. It is said to be intended for the protection of the investors who thereby know
the objects in which their money is to be applied.
ii. It is also said to be intended for the protection of the creditors by ensuring
that the
Company’s assets to which the creditors look for repayment of their debt
are not wasted in unauthorised activities.

The doctrine was first clearly articulated in 1875 in the case of Ashbury Railway
Carriage v. Riche (1875) L.R. CH.L.) 653

In this case the Company’s Memorandum of Association gave it powers in its objects
clause To make sell or lend on hire railway carriages and wagons, to carry on the
business of mechanical engineers and general contractors, to purchase, lease work and
sell mines, minerals, land and realty. The directors entered into a contract to purchase
a concession for constructing a railway in Belgium. The issue was whether this
contract was valid and if not whether it could be ratified by the shareholders.

The House of Lords held that the contract was ultra vires the company and void so
that not even the subsequent consent of the whole body of shareholders could ratify it.
Lord Cairns stated as follows:
This contract was entirely beyond the objects in the Memorandum of
Association. If so, it was thereby placed beyond the powers of the company to
make the contract. If so, it was not a question whether the contract was ever
ratified or not ratified. If the contract was void at its beginning it was void
because the company could not make it and by purporting to ratify it the
shareholders were attempting to do the very thing which by the Act of
parliament they were prohibited from doing. It was the intention of the
legislature not implied but actually expressed that the corporations should not
enter, having regard to the memorandum of association, into a contract of this
description. The contract could not have been ratified by the unanimous assent
of the whole corporation.
 It is necessary to state that nothing shall be done beyond that ambit and that no
attempt shall be made to use the corporate life for any other purpose than that
which is so specified.

The ultra vires rule from this case therefore is this; that any matter that is not
expressly provided for in the memorandum of association is ultra vires; that any
contract entered into outside the terms of the objects clause was ultra vires and,
therefore, void. Further, the contract could not be ratified by the consent of the
shareholders.

The clear view of their Lordships was that the rule existed for the protection of both
the shareholders, both present and future, and the persons who might become creditors
of the company The courts construed the object clause very strictly and failed to give
any regard to that part of the Objects clause which empowered the company to do
business as general contractors. This construction gave the doctrine of ultra vires a
rigidity which the times have not been able to uphold.

The harshness of the rule was seen in; Re Jon Beauforte [1953] Ch 131.
Here, a company had been incorporated with an objects clause which authorised the
company to carry on business as makers of ladies’ clothes, hats and shoes. The
company later decided to manufacture veneered panels. To further this latter business,
the company contracted with a builder to construct a factory, entered into a contract
with a supplier of veneer and ordered coke from a coke supplier to heat the factory.
All three remained unpaid when the company went into liquidation and the liquidator
rejected their proofs in the winding up on the ground that the contracts were to further
an ultra vires activity and were, therefore, void. These rejections were upheld by
Roxburgh J.

The rejection of the coke supplier’s proof was particularly harsh, since, whereas the
builder conceded that the contract was ultra vires, the coke supplier was unaware of
the purpose for which the coke would be used and it could easily have been used to
further legitimate objects.
However if a contract was void for being ultra vires, then notice on the part of the
third party, whether actual or constructive was irrelevant to the result

At the present day, the doctrine is not as rigid as in Ashbury’s case and
consequently it has been eroded.

The first inroad into the doctrine was made five years later in the case of ; Attorney
General V. Great Eastern Railway 1880) 5 A.C. 473

An Act of parliament authorized a company to construct a railway. Two other

companies combined and contracted with the first to supply rolling stock. An
injunction was brought to restrain this, saying that such a contract was not explicitly
provided for in any of the Acts incorporating the companies. Held;
The contract was not ultra vires, but was warranted by the Acts. Powers conferred by
statute are taken to include, by implication, a right to take any steps which are
reasonably necessary to achieve the statutory purpose. The court should not hold as
ultra vires whatever may fairly be regarded as incidental to or consequential upon
those things which the legislature has authorized.

Lord Selbourne stated as follows:

“the doctrine of ultra vires ought to be reasonably and not unreasonably
understood and applied and whatever may fairly be regarded as incidental to
or consequential upon those things that the legislature has authorised ought not
to be held by judicial construction to be ultra vires.”

Lord Blackburn said: ‘ where there is an act of Parliament creating a corporation for
a particular purpose, and giving it powers for that particular purpose, what it
does not expressly or impliedly authorise is to be taken to be prohibited’ and
‘those things that are incident to, and may reasonably and properly be done
under the main purpose, though they may not be literally within it, would not
be prohibited’

An act of the company therefore will be regarded as intra vires not only when it is
expressly stated in the object’s clause but also when it can be interpreted as
reasonably incidental to the specified objects. As a result of this decision, there is now
a considerable body of case law deciding what powers will be implied in a case of
particular types of enterprise and what activities will be regarded as reasonably
incidental to the act.

In Re David Payne and Co Limited (1904) Ch 608

David Payne and Co’s memorandum of association contained a clause to borrow and
raise money for the purposes of the company’s business and there was a clause in the
articles of association which gave power to the directors to borrow or raise or secure
any sums of money on the security of the property of the company by issue of
debentures.

The directors of the company wanted to borrow money to be used for a different
purpose other than the company’s business. K one of the directors of Exploring Land
and Minerals Co attended a meeting where such a decision was taken and was asked
to convince his company to lend money to Payne. K then convinced the company’s
director to advance the money which were lent to Payne on issue of debentures.
However, K did not disclose to his company that the money was intended for a
different purpose than was borrowed. In winding up Payne Co. the liquidator
challenged the debentures on grounds that the borrowing was not authorized by the
memorandum and articles of association of the company and was ultra vires and that
K’s knowledge ought to be imputed on the lending company.

Held;
Where a company has a general power, to borrow money for the purposes of its
business, a lender is not bound to inquire into the purposes for which the money is
intended to be applied and the misapplication of the money by the company does not
avoid the loan in the absence of knowledge on the part of the lender that the money
was intended to be misapplied.
K’s knowledge ought not to be imputed to the lending company in as much as K owed
no duty to that company either to receive or to disclose information as to how the
borrowed money was to be applied and that the debenture was a valid security.

In this case, the court was not prepared to construe the words ‘for the purpose of the
company’s business” as limiting the corporate capacity but construed them as limiting
the authority of directors.

‘Cotman’ Clauses/ independent objects clause.

Companies responded to the ultra vires doctrine with the development of what came
to be called ‘independent objects’ or ‘Cotman’ clauses. by drafting very wide and
lengthy objects clauses which attempted to include every conceivable form of
commercial activity.

This was the device of inserting a clause at the end of the memorandum specifying
that each objects clause was to be construed as a separate and independent object and
that clauses were expressly stated as not to be treated as ancillary to each other. The
technique is called ‘cotman’ because it was established in Cotman v Broughma.

Cotman v Brougham (1918) AC 514

A rubber company had an object clause with thirty sub clauses enabling it to carry on
almost every kind of business. The first sub clause authorized the company to develop
rubber plantations and sub clause 12 allowed the company to promote companies and
deal in shares of other companies. The company underwrote and had allotted to it
shares in an oil company. The final clause of the objects clause said in effect that each
sub-clause should be considered as an independent main clause and not subsidiary to
another.
When the oil company was wound up, the rubber company was placed on the list of
contributories and it asked to be removed from the list because the contract was ultra
vires and void.
The House of Lords unanimously held;
That the effect of the independent objects clause was to constitute each of the 30
objects of the company as independent objects. That the transaction was indeed within
the capacity of the company.

Although the House of Lords disapproved strongly of the independent objects clause,
the fact that the Registrar of Companies had granted a certificate of incorporation
based on the memorandum was held to conclusively bind the court.

Nevertheless, the practice was described as ‘pernicious’ by Lord Wrenbury and Lord
Finlay LC was of the view that the relevant Act, the Companies (Clauses)
Consolidation Act 1908 (UK), should be amended to prevent what the court saw as an
abuse of the legislation.
In an instructive passage outlining the struggle between the draftsmen and the court,
Lord Wrenbury stated:
There has grown up a pernicious practice of requiring memoranda of
association which under the clause relating to objects contain paragraph after
paragraph not delimiting or specifying the proposed trade or purpose, but
 confusing power with purpose and indicating every class of act which the
corporation is to have power to do. The practice is not one of recent growth. It
was in active operation when I was a junior at the Bar. After a vain struggle I
had to yield to it, contrary to my own convictions. It has arrived now at a point
at which the fact is that the function of the memorandum is taken to be, not to
specify, not to disclose, but to bury beneath a mass of words the real object or
objects of the company, with the intent that every conceivable form of activity
shall be found included somewhere within its terms. The present is the very
worst case of the kind that I have seen.

Lord Parker of Waddington gave the public policy behind the memorandum of
association. :
“The truth is that the statement of a company’s objects in its memorandum is
intended to serve a double purpose. In the first place, it gives protection to
subscribers, who learn from it the purposes to which their money can be
applied.

In the second place, it gives protection to persons who deal with the company,
and who can infer from it the extent of the company’s powers. The narrower
the objects expressed in the memorandum the less is the subscribers’ risk, but
the wider such objects the greater is the security of those who transact
business with the company.

Subjective objects clause.

Eventually, the Court of Appeal was even prepared to give effect to a clause which
provided that the company could ‘carry on any other trade or business whatsoever
which can, in the opinion of the board of directors, be advantageously carried on by
the company in connection with or as ancillary to any of the above businesses or the
general business of the company’ and held that a particular transaction was intra vires
even though it had no objective connection with a relationship to the company’s main
business.

Bellhouse v. City Wall Properties (1966) 2 Q.B 656

The company’s objects as set up in the Memorandum of Association contained the
Clause authorising the company to “carry on any other trade or business whatsoever
which can in the opinion of the Board of Directors be advantageously carried on by
the company in connection with or as ancillary to any of the above businesses or a
general business of the company”.
In connection with its various development skills the company’s managing director
met an agent of the Defendants who required some finance to the tune of about 1
million pounds. The Plaintiff’s Managing Director intimated to the Defendant’s agent
that he knew of a source from which the Defendant could obtain finance and
accordingly referred them to a Swiss syndicate of financiers. Which had earlier
contacted the plaintiff company to finance any of their projects but the plaintiff
company had nothing planned at the moment. The defendants promised to pay the
plaintiff company a commission of 20,000 pounds and after getting the money the
defendant company refused to pay the commission and was used for breach of
contract. The Defendants argued that there was no contract between the parties. In the
alternative they argued that even if there was a contract such contract was in effect
one whereby the Plaintiffs undertook to act as money-brokers which activity was
beyond the objects of the plaintiff company and which was therefore ultra vires.

The issues was whether the contracts were ultra vires

The court of first instance decided that the contract was ultra vires and it was open to
the defendant to raise the defence of ultra vires. However a unanimous court of appeal
reversed the decision and held that the words stated must be given their natural
meaning and the natural meaning of those words was such that the company
could carry on any business in connection with or ancillary to its main business
provided that the directors thought that could be advantageous to the company.
That the contract was intra vires provided that the directors of the company honestly
formed the view that the particular business could be carried on advantageously in
connection with or ancillary to its main business.

Lord Justice Salomon L.J stated as follows:

As a matter of pure construction, the meaning of these words seems to me to
be obvious. An object of the plaintiff company is to carry on any business
which the directors genuinely believe can be carried on advantageously in
connection with or as ancillary to the general business of the company. It may
be that the directors take the wrong view and in fact the business in question
cannot be carried on as the directors believe; but it matters not how mistaken
the directors may be. Providing they form their view honestly, the business is
within the plaintiff company’s objects and powers. This is so plainly the
natural and ordinary meaning of the language of sub-cl (c) that I would refuse
to construe it differently unless compelled to do so by the clearest authority;
and there is no such authority

The rule of ultra vires was finally settled in the case of Rolled Steel Products
(Holdings) Ltd v
British Steel Corp

Rolled Steel Products Ltd gave security to guarantee the debts of a company called
SSS Ltd to British Steel Corporation. This was a purpose that did not benefit Rolled
Steel Products Ltd. Moreover, Rolled Steel's director, Mr Shenkman was interested in
SSS Ltd (he had personally guaranteed a debt to British Steel’s subsidiary Colvilles,
which SSS Ltd owed money to). The company was empowered to grant guarantees
under its articles but approval of the deal was irregular because Mr Shenkman's
personal interest meant his vote should not have counted for the quorum at the
meeting approving the guarantee. The shareholders knew of the irregularity, and so
did British Steel. Rolled Steel Products wanted to get out of the guarantee, and was
arguing it was unenforceable either because it was ultra vires, or because the
guarantee had been created without proper authority.
At first instance Vinelott J held British Steel’s knowledge of the irregularity rendered
the guarantee ultra vires, void and incapable of validation with the members’ consent.
British Steel appealed.
Held;
The Court of Appeal held that the transaction was not ultra vires and void. Simply
because a transaction is entered for an improper purpose does not make it ultra vires.
Court emphasised the distinction between an act which is entered into for an improper
purpose (which is not beyond the capacity of a company, or void) and an act which is
wholly outside a company's objects (and hence ultra vires and void). However, it was
unenforceable because British Steel, with knowledge of the irregularity, could not rely
on a presumption of regularity in the company’s internal management. Since British
Steel ‘constructively knew’ about the lack of authority, they could acquire no rights
under the guarantee.

On ultra vires Browne-Wilkinson LJ said the following.

In this judgment I therefore use the words "ultra vires" as covering
only those transactions which the company has no capacity to
carry out, i.e., those things the company cannot do at all as
opposed to those things it cannot properly do. The two badges of a
transaction which is ultra vires in that sense are (1) that the
transaction is wholly void and (consequentially) (2) that it is
irrelevant whether or not the third party had notice. It is therefore
in this sense that the transactions in In re David Payne & Co Ltd
[1904] 2 Ch 608 were held not to be ultra vires.
Slade J laid down the principle of ultra vires as follows;
(1) The basic rule is that a company incorporated under the Companies Acts only
has the capacity to do those acts which fall within its objects as set out in its
memorandum of association or are reasonably incidental to the attainment or
pursuit of those objects. Ultimately, therefore, the question whether a
particular transaction is within or outside its capacity must depend on the true
construction of the memorandum.

(2) Nevertheless, if a particular act is of a category which, on the true construction

of the company’s memorandum, is capable of being performed as reasonably
incidental to the attainment or pursuit of its objects, it will not be rendered
ultra vires the company merely because in a particular instance its directors, in
performing the act in its name, are in truth doing so for purposes other than
those set out in its memorandum. Subject to any express restrictions on the
relevant power which may be contained in the memorandum, the state of mind
or knowledge of the persons managing the company’s affairs or of the persons
dealing with it is irrelevant in considering questions of corporate capacity.

(3) While due regard must be paid to any express conditions attached to or
limitations on powers contained in a company’s memorandum (eg a power to
borrow only up to a specified amount), the court will not ordinarily construe a
statement in a memorandum that a particular power is exercisable ‘for the
purposes of the company’ as a condition limiting the company’s corporate
capacity to exercise the power: it will regard it as simply imposing a limit on
the authority of the directors (see Re David Payne & Co Ltd [1904] 2 Ch 608).
 (4) At least in default of the unanimous consent of all the shareholders, the
directors of a company will not have actual authority from the company to
exercise any express or implied power other than for the purposes of the
company as set out in its memorandum of association.

(5) A company holds out its directors as having ostensible authority to bind the
company to any transaction which falls within the powers expressly or
impliedly conferred on it by its memorandum of association. Unless he is put
on notice to the contrary, a person dealing in good faith with a company which
is carrying on an intra vires business is entitled to assume that its directors are
properly exercising such powers for the purposes of the company as set out in
its memorandum. Correspondingly, such a person in such circumstances can
hold the company to any transaction of this nature.

(6) If, however, a person dealing with a company is on notice that the directors are
exercising the relevant power for purposes other than the purposes of the
company, he cannot rely on the ostensible authority of the directors and, on
ordinary principles of agency, cannot hold the company to the transaction.

Court therefore held that;

In order to be ultra vires a company transaction had to be done in excess of, or
outside, the capacity of the company and not merely in excess or abuse of the powers
of the company exercised by the directors. Accordingly, whether a transaction was
ultra vires depended solely on the construction of the memorandum of association
and whether the transaction fell within the objects of the company, properly
construed; and a transaction which was within the objects of the company or which
was capable of being performed as reasonably ancillary or incidental to the objects
was not ultra vires merely because the directors carried out the transaction for
purposes which were not within the memorandum of association.

LAWTON LJ on the effect of limited liability.

It is a legal fiction which has been recognised by the law for over a hundred
years. It is said to have helped the growth of innumerable new businesses. The
fact that limited liability has all too often enabled many to enrich themselves
at the expense of those who have given credit to the companies they control is
the price the business world has to pay for the potentiality for growth and
convenience which goes with limited liability.

The effect of S. 51 on ultra vires;

The ultra vires rule is said to be currently of no use with the enactment of S. 51 of the
companies Act 2012. However, some of the decisions remain relevant for the
purposes of the internal management and control of the company.
Subsection 1 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.
Thus, ultra vires as either a defence by the company or by a contracting party to an
action to enforce a contract is no longer possible. This brings about as much
protection as is possible for a contractor against the ultra vires rule.

One should note, however, that sub-s (2) provides that:

A member of a company may bring proceedings to restrain the doing of an act which
but for subs (1) would be beyond the company’s capacity; but no such proceedings
shall lie in respect of an act done in fulfilment of a legal obligation arising from a
previous act of the company.

This preserves the right of members to restrain by injunction the company from acting
outside the objects clause and, therefore, in breach of the S.21 contract. But this right
is lost once, for example, an ultra vires contract proposed by the company has been
signed with the contracting party.

This ‘internal aspect’ to ultra vires is further preserved by sub-s (3), which provides
that: 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)
would be beyond the company’s capacity may only be ratified by the company by
special resolution.

However, as the subsection 4 continues:

4) A resolution ratifying the action under subsection (3) 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.

Therefore the ultra vires rule is only effective regarding internal management and
control of the company but can no longer be raised as a defence or justification once
an act has already been
DONE.

GRATUITOUS GIFTS

The issue of ultra vires was also involved where a company made or was proposing to
make a gratuitous disposition or gift either to its employees or ex-employees or by
way of a charitable or political donation.

Can a company validly make a gift out of corporate property or asset? The law is that
a company has no power to make such payments unless the particular payment is
reasonably incidental to the carrying out of a company’s business and is meant for the
benefit and to promote the prosperity of the company.

This issue was first decided in the case of ; Hutton V West Cork Railway Co. (1893)
Ch.d A company sold its assets and continued in business only for the purpose of
winding up. While it was awaiting winding up, a resolution was passed in the
company’s general meeting authorising the payments of a gratuity to the directors and
dismissed employees.

The court held that as the company was no longer a going concern such a payment
could not be reasonably incidental to the business of the company and therefore the
resolution was invalid. In the words of the Lord Justice Bowen said
“The law does not say that there are not to be cakes and ale but there are to be no
cakes and ale except such as are required for the benefit of the company”

This means that therefore, gifts and expenditure on employees to keep and maintain a
contented workforce were acceptable but not after the company had ceased to be a
going concern or had gone into liquidation. The company could no longer have an
interest in a motivated workforce and, therefore, gratuitous redundancy payments
would be ultra vires.

The question is, suppose there is a clause in the Memorandum of Association that
such payments shall be made, is payment ultra vires? The authority that dealt with this
position was the case of

RE LEE BEHRENS & CO. [1932] 2 Ch. D 46

The object clause of the company contained an express power to provide for the
welfare of employees and ex employees and also their widows, children and other
dependants by the grant of money as well as pensions. Three years before the
company was wound up, the Board of Directors decided that the company should
undertake to pay a pension to the widow of a former managing director but after the
winding up the liquidator rejected her claim to the pension.
The court held that the transaction whereby the company covenanted to pay the
widow a pension was not for the benefit of the company or reasonably incidental to its
business and was therefore ultra vires and hence null and void.

Justice Eve stated as follows

Whether they reneged an express or implied power, all such grants involved
an expenditure of the company’s money and that money can only be spent for
purposes reasonably incidental to the carrying on of the company’s business
and the validity of such grants can be tested by the answers to three questions:
Is the transaction reasonably incidental to the carrying on of the company’s
business? Is it a bona fide transaction?
Is it done for the benefit and to promote the prosperity of the company?
These questions must be answered in the affirmative. The question may be
posed as to whether these tests apply where there is an express power by the
objects. This is one area where the courts are still insistent that creditors’
security must be reserved.

Parke v. Daily News [1962] 2 Ch.d 927

In this case the company transferred the major portion of its assets and proposed to
distribute the purchase price to those employees who are going to become redundant
after reduction in the stock of the company of the company’s business. The company
was not legally bound to make any payments by way of compensation. One
shareholder claimed that the proposed payment was ultra vires.

The court held that the proposed payment was motivated by a desire to treat the ex-
employees generously and was not taken in the interest of the company as it was
going to remain and that therefore it was ultra vires.

The Court observed as follows “

The company carried on the business of chemical manufacturers. Its object the
defendants were prompted by motives which however laudable and however
enlightened from the point of view of industrial relations were such as the law
does not recognise as sufficient justification. The essence of the matter was
that the Directors were proposing that a very large part of its assets should be
given to its employees in order to benefit those employees rather than the
company and that is an application of the company’s funds which the law will
not allow.”

Evans v. Brunner Mound & Co. 1921 Ch.d 359

The company carried on the business of chemical manufacturers. Its object clause
contained a power to do all such things as maybe incidental or conducive to the
attainment of its objects. The company distributed some money to some universities
and scientific institutions, which was meant to encourage scientific education and
research. The company thereby hoped to create a reservoir of qualified scientists from
which the company could recruit its staff.

The court held that even though the payment was not under an express power, it was
reasonably incidental to the company’s business and therefore valid.

This is one of the few cases where payment was recognised as being valid.