Company Law

Characteristics of a company (1) Company legal personality When a company is incorporated the subscribers of the Memorandum & other persons who become members of the company from time to time becomes a body corporate by the name contained in the Memorandum. The body corporate is capable of exercising all functions of an incorporated company & has perpetual succession & a common seal ; s. 15 (2) Company can enjoy rights & be subject to duties distinct from the rights & duties of members. Salmon v. Salmon & Co. S formed a company. Gave sold shares to family members at a nominal price. He bought debentures. After company was wound up question arose whether S was a person distinct from the company. Held (HL) the company is separate from S & S is a secured creditor of the company (as a debenture holder) & got preference over the other shareholders. Lee v. Lees Air Farming L formed a company for operating air-craft. L owned all shares of the company & was the Managing Director. L obtained insurance for his workmen. L was killed in a flying accident & Ls widow claimed compensation. Held Company & L are distinct legal entities. So L could be considered a servant of the company. L in his capacity as MD could give himself directions as a pilot. So a master-servant relationship exists between L & Company. Lifting / piercing the veil of incorporation the law sometimes go behind the corporate personality of the individual members Littlewood Mail Order Stores v. IRC The doctrine in Salmon often casts a veil over the personality of a limited company through which courts cannot see. But his cannot be the case. Court can draw aside the veil & look to see what really lies behind. - Court has been willing to lift veil of incorporation in the case of : (1) Agency & the alter ego doctrine Although a company is a separate entity possible to treat it as an agent of the holding company / other controlling power. Sukthew Singh v. Bhagataran An agent has legal personality different from that of principal even though the agent is subject to direction of the principal. So merely

because a company has legal personality of its own it does not mean that the company / corporation cannot be an agent / instrumentality of the State if it is subject to the control of the Government in all important matters of policy. Re F.G. Films Ltd Court had to consider whether an English film company was acting as an agent for an US company. Held British company is merely acting as agent for the US company because the US company provided all the manpower requirements for the production of the film & because 90% of the shares in the English co. are held by the US co. BUT Trade Exchange v. Asian Hotels Corporation (SL) P sought writ against R to renew a contract to operate a jewelry shop in Lanka Oberoi. CWE owned 95% of shares of R co. & the Government had granted some loans to the company. Held Mere fact that the share capital was contributed by the Government does not make a difference. The company & its shareholders are distinct entities. The fact a Gov corporation holds all the shares does not make R co. an agent of the Government. (2) Fraud Courts lift the veil of incorporation to prevent fraud. Jones v. Lipman L contracted to sell land to J. L later formed a company & transferred the land to the company so as to prevent J from exercising his rights of specific performance on L. Held Court granted specific performance against both L & the company because the company was a device & a sham which L holds before his face to avoid recognition in the eye of Equity. Single economic unit where there are several companies belonging to the same group courts are willing to treat all / some of them as one. Scottish Cooperative v. Mayer Members of subsidiary company accused parent company that affairs of subsidiary

(3)

were being conducted in an oppressive manner. Parent co. argued that the subsidiary was a separate legal entity. Held every step taken by the subsidiary co. is determined by the policy of the parent co. The business realities of the situation must be considered without confining the court to a legalistic view. (4) Determination of residence Court looks beyond veil of incorporation when looking at residence of co. for taxation purposes. Adam v. Cape Industries Court does not treat a trading corporation incorporated under the laws of one country as present within the jurisdiction of another unless (a) It has established & maintained fixed place of business there & at its own a expense & for more than a minimal time carried on its business there by servants / agents. (b) Its representative has been carrying on its business there at a fixed place of business for more than a minimal time. National Security Daimler v. Continental Court lifted veil of incorporation to find that all the shareholders of a company were Germans & held that all contracts entered to with the co. were void.

(5)

(2)

Memorandum of Association s. 2 Companies Act 2 / 7 / 50 persons in the case of private / public / people company can form an incorporated co. with / without limited liability by subscribing their names to an MOA. MOA ordinarily states : (a) Name of company (b) District in which the registered office is situated (c) Objects of the company (d) If limited liability a guarantee that the liability of the members is limited (e) Amount of the share capital & the division of share capital into shares of a fixed amount.

Objects of the company must be stated in MOA ; s. 4 Objects = the objects which the subscribers / promoters intend the company to carry out during the period of 5 years from the date of commencement of business. Ancillary powers of company be stated (ie, powers exercised for the purpose of carrying out the primary objects). Other objects must be stated (ie, powers exercised by co. with prior sanction of a special resolution of the company) Aim of stating objects in MOA 1. Protecting shareholders (by making them aware of the purpose of the co.) 2. Protects persons dealing with the co. (by making them aware of cos contractual power) Courts can imply certain powers to a company under principle of ultra-vires (a) Power to appoint / act through agents (b) Power to borrow money & give security in trading co. * But court will not imply power to (i) Guarantee profits of another company (ii) Promote / subscribe for shares / enter into a partnership / amalgamate with another co. (iii) Making donations to public institutions / exhibitions Company can alter its objects by a special resolution to ; s. 7 (a) carry on business more economically & efficiently Re Marshall co. is entitled to include a power to sell / lease its undertaking to another co. in consideration of shares in that co. (b) attain the primary objects by new improved means (c) enlarge / change local areas of operation (d) carry on a business which under the circumstances can be conveniently & advantageously combined with the business of the company. Re Cyclist Touring Club Co formed to protect & promote the interests of cyclists is not entitled to undertake the promotion of interests of all vehicle users as the interests of cyclists & other vehicle uses may conflict.

(e) restrict / abandon any of the primary objects (f) sell / dispose of the whole/part of the undertaking of the co. (g) to amalgamate with other co. / body of persons. * The holders of 15% of share capital who are not in favour of the alteration can apply to court within 21 days of the resolution being passed. * Ultra vires doctrine A contract can be ultra vires & not binding on the co. where (a) contract is beyond the objects of the co. as set out in MOA (b) contract is outside the power / authority of the individual purporting to contract on behalf of co. (a) Where contract is beyond the objects of the co. as set out in MOA Narrow objects clause protects shareholders as the purposes for which co. could use their money would be limited. ut narrow clause is disliked by outsiders risk of transaction running outside the objects of co. Ashbury Railway Carriage v. Riche Co. incorporated with objects of making & selling / hiring railway carriages & wagons / carry on business of mechanical engineers & general contractors / purchase, lease, work & sell mines, minerals, land & buildings. Directors contracted to run a railway in Belgium. Held Contract is ultra-vires. Even subsequent assent of shareholders would not ratify it. (Court gave a narrow interpretation to the term contractors in MOA to mean what mechanical do. (Ashburn approach resulted in 3rd ps being reluctant to deal with co. unless the proposed transaction was expressly stated as an object) - Means of avoiding a narrow interpretation of objects (a) MOA contains objects as well as powers (b) MOA contains a clause that each of the specified objects & powers should be treated as independent & in no way ancillary / subordinate to one another. Cotman v. Brougham Co. dealing in rubber. Objects had an independent general power to underwrite securities. Held it is intra vires the co. to underwrite the issue of shares in an oil co. The function of the MOA is not to specify but to bury the real objects of the co. under a mass

of words with the intent that every conceivable form of activity will be found to be included somewhere in the terms of the MOA. BUT Introductions Ltd v. National Provincial Bank Main object of co. providing foreign visitors with accommodation & entertainment. Objects clauses stated co. could borrow / raise money in such manner as it thinks fit & each object is an independent object. Bank lent money to co. to breed pigs taking debentures of co. as security. Held Debentures were not binding on co. & were void. So bank cannot enforce them. (c) Including words in MOA to carry on any other trade / business whatsoever which can, in the opinion of the Board of Directors, be advantageously carried on by the Co. in connection with / ancillary to any of the above businesses. Newstead v. Frost General object of co. to carry on business as bankers, capitalists, financiers, merchants & generally to undertake & carry out all such obligations & transactions as an individually capitalist may lawfully undertake to carry out. Held It is intra-vires to enter into a partnership with F which minimized Fs UK tax on foreign earnings.

(b) Where individual contracting on behalf of co. has no power ultra vires can be cured by estoppel / lapse of time / ratification / acquiescence. Royal British Bank v. Turquand Co. issued a bond under its common seal signed by 2 Directors. According to Articles, Directors could borrow on a bond only if the sum had been approved by an ordinary resolution. No resolution had been issued. Held Bond is binding on co. because lenders are entitled to assume that a resolution had been passed & that the Directors acted regularly. So bond is valid. (estoppel)

BUT Turquand does not apply where (a) 3rd p knows of the irregularity / lack of authority Howard v. Patent Ivory Manufacturing Co. Directors had power under Articles to borrow up to 1000l without the consent of a general meeting. Directors borrowed 3500l & obtained debentures in return. Held Co. is liable only up to 1000l on the debentures. an outsider purports to act as a Director in the transaction (outsider acting for & on behalf of the co. in the transaction) Morris v. Kansson X who had ceased to be a Director & Y who had never been a Director purported to hold a Board Meeting & appointed M as a Director. X, Y & M then purported to allot shares to M. Held Appointment & allotment of shares to M is invalid. Turquands rule does not apply since M purported to act as a Director in the transaction. there are suspicious circumstances which should put a 3rd p on inquiry Underwood v. Bank of Liverpool & Martens Director & main shareholder of a co. paid cheques drawn in favour of the co. into his personal bank account. Held this was a suspicious circumstance. Bank should have made further inquiries as regard the good faith of the Director. So bank cannot rely on Turquand rule. a document is forged so as to be a document of the Co. (unless it is held out as genuine by an officer of the co. acting intra-vires) Ruben v. Great Fingall Consolidated R lent money to Sec of Co. Sec of Co. gave R forged share certificates certifying that R was registered as the transferee. Sec put common seal & forged signatures of 2 Directors (as required by the Articles). Held Since Co. had not held out the Sec to do more than deliver the certificates that were duly made co. can dispute the claim for Secs act.

(b)

(c)

(d)

Insider Trading Insider Trading = Trading in listed securities on the basis of unpublished price sensitive information ; s. 24 (2) Securities & Exchange Commission Act 1987 * Unpublished price sensitive info (a) relates to specific matters concerning the co. directly / indirectly (b) is not generally known to persons who are accustomed to deal in listed securities (c) which if generally known to persons who are accustomed to deal in listed securities will be likely to affect the price of the securities materially Eg. Info regarding declaration of dividends / rights issues & bonus issues / takeover bids / major contracts to be entered into / disposal of a major part of business / financial results of co.

(a) Trading in the securities (b) Counseling / procuring any other person to deal in the securities (c) Communicating the unpublished price sensitive info to another person Is prohibited for (i) Individuals connected with the co. An individual is connect with a co. if he - is a director of co. / related co. - occupies the position of an officer / employee of co / related co. - occupies a position involving a professional / business relationship between himself & co. (ii) Take over bidders An individual who is going to take over a co. in a particular capacity cannot trade in listed securities of the co. in another capacity if he knows that the fact that the offer is going to be made is unpublished price sensitive info. (iii) Public Servants A public servant / former public servant how holds unpublished price sensitive info by virtue of that position & where it would be reasonable for him not to disclose it except for the proper function of his functions

(iv) Tippees Individuals who have info which they have obtained directly / indirectly from individuals connected with a co. / take over bidders / public servants if tippee knows the person who have the info could not reasonably have been expected to disclose other than for the proper performance of his functions. Exceptions s. 32 (8) & s. 32 (9) (a) Where an person does an act for a purpose other than making a profit / avoid a loss Eg. stock brokers a required to sell off shares bought by them on behalf of clients if clients do not pay for them within 15 days. Such a sale if to comply with Stock Exchange Rules so permitted. Where a person enters into a transaction in good faith in the course of functioning as a liquidator / receiver / trustee in bankruptcy. Where a stock broker / stock dealer does an act on info received in the ordinary course of the business & done in good faith in the course of business Where a person does an act merely to facilitate the completion / carrying out of the transaction

(b) (c) (d)

Winding up Compulsory winding up (by court) Court can wind up co. if ; s. 255 (a) co. has resolved to be wound up by special resolution (b) (c) (d) co. has defaulted in delivering the statutory report / holding the statutory meeting co. does not commence business within 1 year of incorporation / co. suspends business for more than 1 year members of co. are reduced to less than the minimum number

(e)

co. is unable to pay debts - where ; s. 256 (i) a claim for Rs. 500 is delivered to registered office of co. by creditor & it is not paid within 3 weeks
- If court believes there is no dispute to the debt creditor is entitled to a winding up order as of right co. cannot show it is not insolvent - Court must listen to the view of the majority of creditors if majority are against winding up court cannot order winding up. - If co. shows a substantial defence to the creditors claim cannot order winding up even if co. is in fact insolvent. Re Lympne Inverstments court must not be used as a debt collecting agent or as a means of asserting improper pressure on co.

(ii) execution of a decree / judgment / order of a court is returned unsatisfied in / in part (iii) it is proved to the satisfaction of court that co. cannot pay debts (f) court feels it is just & equitable that co. should be wound up Eg. Where * the sub stratum / main object of co. is gone * the only business of co. is ultra vires * cos objects are illegal / co. is formed for a fraudulent purpose * there is oppression of minority shareholders * there is complete deadlock in management of a permanent nature Seneviratne v. Seneviratne Court ordered winding up because there complete deadlock - Directors could not function & business had come to a standstill due to disharmony between 2 brothers who were shareholders.

Procedure - Petition to be present to DC in the jurisdiction of which the registered office of co. has been situated for the longest time within the previous 6 months. Petition must be presented by co. / a creditor / any contributory / Registrar of company in the course of investigations ; s. 257 After winding up application is made to DC co. / creditor / contributory can stay proceedings (anytime before winding up order is made) ; s. 259 After a winding up order has been made all actions can be continued against the co. with the leave of the court issuing the winding up order ; s. 264 (so that assets of co. are brought under the court issuing winding up order &
disputes which can be expeditiously concluded can be dealt with by the issuing court)

When a winding up order is made date of commence of order deemed to be from the date on which petition for winding up was presented to court so that (a) Disposal of cos property pending court inquiry is void (unless under a court order) - Ensures that assets of co. are maintained between date of petition & WUO.
- Court can permit disposal of assets if they are made in good faith for the purpose of carrying on business & without prejudice to creditors. - Court approval can be obtained after WUO is made

(b) Transfer of shares / alteration of status of members after petition is void (unless sanction by court after WUO is made) (c) All attachments / executions against assets of co. after petition is void (d) On appointment of liquidator powers of Directors cease (from date of petition) (e) Servants of co. are ipso facto dismissed from date of petition (f) Property & things in action of co. are taken into liquidators custody from date of petition (g) A floating charge created within 12 months prior to winding up is invalid (except where co. was solvent after charged was created / except to the extent of cash received for the charge)

Appointment & Powers of Liquidator Appointment After WUO is made court appoints a court official as Official Receiver. Official Receiver becomes the Provisional Liquidator Official Receiver determines wishes of creditors & contributors & appoints Liquidator Creditors & contributors can appoint a Committee of Inspection comprising of creditors & contributors to give directions to liquidator

Main duty of liquidator to handle cos affairs in such a way as to wind up the co. speedily & effectively

Powers With the sanction of Court / Committee of Inspection (a) Bring / defend legal action in the name of co. (b) Carry on business so far as necessary for the beneficial winding up of co. (c) Appoint an AAL to assist Liquidator in his duties (d) Pay off a class of creditors in full (e) Compromise / make arrangements with creditors (f) Compromise all debts owed to co. On his own (a) Sell property of co. (b) Execute all deeds / documents & affix common seal on behalf of co. (c) Take out letters of administration in respect of a contributory (d) Draw / accept / indorse Bills of Exchange in name of co. (e) Raise money on the security of cos assets (f) Appoint agents to do business (g) Do all necessary things for winding up co. & distributing assets Liquidator is subject to directions given by the general meeting of creditors / contributors / Committee of Inspection. (Directions of creditors override directions of Committee of Inspection) Liquidator is not personally liable for the obligation of the co. & no award under the Industrial Disputes Act can be made against the Liquidator ; Latif v. Fernando

Voluntary winding up Members of co. can resolve to wind up company if (a) Co. has been formed for a particular period / until a particular event occurs & that period had lapsed / the event has occurred & in a general meeting members by ordinary resolution decide to wind up. (b) Members resolve to wind up by special resolution (c) Members decide that co. cannot continue business because it is unable to pay debts (by an extraordinary resolution)

Effects of voluntary winding up From time of resolution to wind up co. ceases business (unless it is necessary for the beneficial winding up of co. Transfer of shares / alteration in the status of members is void (unless Liquidator consents) Court actions by / against co. will not be stayed

Procedure - Members pass a resolution in a general meeting that co. must be wound up If co. is wound out due to expiration of term / happening of event or upon a special resolution by members Members voluntary winding up (i) Directors make a declaration that a full inquiry has been made & that co is able to pay debts in full within 12 months of commencement of winding up (declaration of solvency)
(Declaration must be made 5 weeks prior to the date on which the resolution is passed to wind up the company)

(ii)

Members can appoint liquidator

Creditors voluntary winding up (i) Happens if no declaration of solvency by directors (ii) Directors to fix a creditors meeting
(Creditors meeting must be on the day following the members resolution that co. must be wound up)

(iii) Creditors can appoint liquidator & Committee of Inspection Winding up under the supervision of court s. 340 Where members pass resolution for voluntary winding up court can order that must continue under the supervision of court on such conditions as the court thinks just.. * * Creditors / contributors can apply to court on any matter Effects of winding up under court supervision - Same as a compulsory winding up for certain purposes (a) All dispositions after the commencement of winding up become void (unless court orders otherwise) (b) No attachment / execution against co. could take place after commencement of winding up.

Procedure - Application is made to court be a person who would be entitled to petition for a compulsory winding up. Petitioner must prove that the voluntary liquidator cannot continue winding up process with fairness to all concerned. Director of Bank Supervision can apply to DC for the winding up of a Finance Co. if ; s. 18 (7) Finance Companies Act 1988 (a) Co. is insolvent (b) It is in the interest of depositors to wind up co.

Manner of Distribution of Assets in Liquidation (1) Secured creditors with fixed charges can settle their claims out of their security. If security is not sufficient they become unsecured creditors for the balance. (2) All costs & charges incurred by liquidator (3) Preferential debts (a) Income tax & turnover tax for 1 year (b) Rates & taxes which are due in the 12 months immediately preceding winding up (c) Dues to the Government (d) Wages & salaries for the 4 months immediately preceding winding up (If a person has advanced money for the payment of wages & salaries he can make a claim) (e) EPF / ETF / Gratuity & industrial tribunal awards (f) Compensation payable under Workmans Compensation Ord. (g) Accrued holiday payments (4) Creditors with floating charges (5) Unsecured creditors (6) Debts due to members in their capacity as members (eg. calls paid in advance / unclaimed dividends) (7) Repayment of the paid up capital (8) Distribution of the surplus

Articles of Association * Articles of Association govern the internal management of the co. & the relationship between the members themselves. s. 2 (2) When MOA & Articles are registered they bind the co. & the members to the extent as if the MOA & Articles have been respectively signed & sealed by each member & contain covenants on the part of each member to observe all the provisions of the MOA & Articles. (1) Articles constitute a contract between co & the members (2) Articles grant rights & impose obligations on members in their capacity as members Hickman v. Kent or Romney Marsh Sheep Breeders Association P disputed with co. Co. threatened to expel P. Even though the Articles provided that disputes between co. & members must be referred to arbitration, P filed action in court. Held Since dispute related to matters affecting P as a member - dispute must be submitted to arbitration. (3) Members cannot rely on the Articles in their capacity as outsiders Eley v. Positive Government Life Assurance Articles provided that co. must always employ E as its solicitor. E himself became a member later. E sued company for not employing him as solicitor. Held E cannot rely on the Article because he was not making a claim as a member. Cumbria Newspapers Group v. Cumberland & Westmorland Herald Newspapers X co. had 10% shares in Y co. Articles of Y co. amended to say that - if new shares are issued / existing shares are sold X co is entitled to buy a proportionate amount - as long as X co held 10% shares of Y co. X co can nominate one person as director of Y co. Y co. later attempted to change the Articles. Held the specified rights related to the shares itself. So Articles can only be amended with consent of X co. (4) Articles become a contract between a member & other members Rayfield v. Hands Articles required that every director should be a shareholder & that if any member wishes to sell his shares the directors would buy them. A member wished to sell his shares by the directors refused to buy. Held There is a contract between the member & the member-directors by the Articles. So directors are bound to buy the members shares. * Amending Articles - Articles can be amended by a special resolution

- Following provisions are void : * Provision in an Article which makes Article unalterable * Provision is a separate contract which makes Article unalterable * Provision in an Article which imposes a requirement of more than a majority for alteration.

Meetings Types of Meetings (1) Statutory Meeting Is held 1-3 months after the issue of the certificate of trading in a public co. It is a general meeting ; s. 126 Directors must circulate a statutory report 14 days before statutory meeting which (a) is signed by 2 directors (b) containing details of * shares allotted * cash movements * descriptions of directors, auditors, secretary, managers * contracts to be submitted to the meeting for approval Members can discuss any matter relating to the formation of co. / other matter arising from the statutory report

(2) Annual General Meeting (AGM) 1st AGM is held within 18 months of incorporation. Thereafter every year. Not more than 15 months gap between one AGM & another 21 days notice is given for the calling of an AGM in a public co. (In a private co. only 14 days) Notice can be done away with if all members agree. A matter can only be resolved at any meeting only if the item has been specifically included in agenda. Exceptions : Ordinary Business ie, (a) Declaration of a dividend (b) Consideration of accounts / balance sheets / reports of directors & auditors

(c) Appointing directors in place of those retiring (d) Appointing & fixing remuneration of auditors - If AGM is not held within specified time (one every 15 months) Registrar of Companies can call / direct the calling of a general meeting of co. & can give directions regarding the calling / holding / conducting AGM (on the application of a member) (3) Extraordinary General Meeting (EGM) Directors can call EGM upon where there is a special business to be discussed. EGM must be called upon requisition of members holding more than 1/10 of share capital. If Directors do not call EGM within 21 days of requisition by the members- of the requisitionists can convene EGM within 3 months of expiration of the 21 days ; s. 128 (3) 14 days notice must be given before calling EGM in public co. (10 days notice in case of private co.) A EGM at shorter notice can be convened only with the agreement of 95% of members. If not practicable to call EGM in accordance with Articles / provision of Companies Act director / member can apply to court. Court can on its own / upon application make an order regarding the calling of calling / holding / conducting an EGM.

Notice of Meetings Notice of a meeting must be given to all members of co ; s. 133 Notice can be given personally / by posting to registered address In addition notice must be given by way of advertisement in a daily newspaper ; Table A Art. 133 If all members entitled to be noticed have not been given notice business transacted in meeting is invalid Young v. Ladies Imperial Club A member of committee informed chairman that she would be unable to attend committee meetings. So she was not informed of a meeting at which Y was expelled from the club. Held The failure to give notice of the meeting to the member invalidated the proceedings of the committee.

- Strictness of rule in Young has been mitigated by Table A Art. 52 An accidental omission to give notice of a meeting / the non-receipt of a notice will not invalidate meeting proceeding. Re West Canadian Collieries Some members did not receive notice because their names had accidentally not been put into machine. Held The omission to send notices was accidental & was covered by Article 52 Musselwhite v. Musselwhite & Son Directors wrongly believed that unpaid vendors of shares were no longer members even though their names on register of members. Held The error was not an accidental omission but an error of law. So not covered by Article 52

Notice must state place / date / time of meeting & the nature of business to be discussed at the meeting. Nature of business must be stated clearly & fairly so that every member can decide whether to attend or not. Macdonnel v. E Prill A notice which states that a general meeting is called to resolve on an increase of cos nominal capital is insufficient if it does not set out the amount of the proposed increase. Normandy v. Ind Coope A notice of resolution to alter the cos memorandum & articles / to adopt new ones must set out all material alterations which will be made to it. Not sufficient to state that new memorandum & articles is open for inspection at the registered office.