Since the inception of time, humans have always sourced various ways in which they could conduct business such as the barter system, guild system and early partnerships. Over time, these modes of conducting business became more refined and definite, having specific requirements and legal parameters. It is on this premise that we start off the discourse on forms of business associations in Nigeria.
Generally, there are four major forms of business associations in Nigeria which are:
- Sole Proprietorship
- Registered Trustees
- Registered Company
While the rationale for the choice of a particular business form may vary from one particular person to another, it is submitted that certain legal parameters exist; these parameters not only differentiate the business associations from themselves, but also influence the choice of a particular business association. We will now examine the four business associations and their distinct legal parameters
- Sole Proprietorship: A sole proprietorship (also referred to as sole trading) is a form of business in which one person owns all the assets of the business, and is equally liable for all the debts of the business. One major legal benefit of a sole proprietorship is that the sole trader is generally not required under law to register any information regarding its operation or financial affairs with any public registry. The legal implication of this is that the sole trader is not obligated to register his business with CAC or any other body, thus dispensing with the rigorous demands of registration. The only exception to this principle is where the sole trader takes certain steps that affect third parties. An example of such a step would be the use of a business name other than his natural name. In such an instance, the law (pursuant to s. 573 of CAMA 1990) would mandate him to register that business name with CAC.
Other benefits of a sole proprietorship which are of a non-legal nature include the fact that the owner may elect to operate alone or employ others, and he enjoys total control over the operations of the business. Also, the dissolution of a sole proprietorship does not require any special process unlike other forms of business associations
- Partnership: A partnership is a business association which involves 2 or more persons pooling their resources together to do business in common for the purpose of making profit. The legal framework for Partnerships in Nigeria includes common law rules, UK Partnership Act of 1890(which is a statute of general application), Lagos State Partnership Law(LSPL) 2003, Partnership (Amendment) Law 2009, Partnership Law of Western Nigeria 1959.
Section 3 of the Lagos law defines partnership as a relationship existing (which subsists) between persons carrying on business in common with a view to making profit.
- 25 of the law provides for the rights and duties of a partner. A partner has the right to sue another where there has been a fundamental breach of the partnership agreement
Legal Parameters which distinguish Partnerships from other business associations
One major legal parameter of partnerships is heralded by S. 3 of the LSPL, which provides that a partnership cannot consist of more than 20 persons, and cannot be less than 2 persons. The legal implication of this is that membership of a partnership is between 2 to 20. Section 25 of the LSPL also provides for the rights and duties of a partner.
- b) Classification
Another parameter which distinguishes a partnership from other forms of business association is how partnerships in Nigeria are classified. There are 3 types of Partnership under Nigerian law which are: General Partnership, Limited Partnership and Limited Liability partnership. Under general partnership, liability for debts of the partnership is generally unlimited and the business name is registered in accordance with s. 573 of CAMA 1990; in limited partnerships, debts are limited to the extent of the partnership agreement and membership must include at least 1 general partner. On the other hand, Limited Liability Partnership was introduced under the 2009 Partnership amendment law (sections 70 and 70(6)), and is essentially a hybrid of general partnership and private limited company.
c)Grounds for Dissolution
Another legal parameter that distinguishes partnerships from other business association is its mode of dissolution. S. 36 of LSPL 2003 outlines the ways by which a partnership can be dissolved, which are generally by express agreement or by operation of law. The latter can be used in situations where the business becomes unlawful, where it goes bankrupt or death of partners.
iii. Registered Trustees: This is a form of business association which permits a large group of people to pool resources together and vest same in 2 or more of themselves as trustees to be held in trust for benefit of themselves as beneficiaries or for the prosecution of a defined cause.
Legal Parameters which differentiate Registered Trustees from other business associations
- Object/Purpose of Business
- 590 of CAMA 1990 describes registered trustees as a form of business arrangement where some persons come together to carry on business as a body corporate, not for profit but for religious, educational, literary, scientific, developmental, cultural, sporting and charitable purposes. The legal implication of this is that unlike other forms of business association, registered trustees is not established for the purpose of making profit.
- b) Capacity of trustees
Not everyone can qualify to be a trustee under this business arrangement. Thus, s. 592 of CAMA outlines the capacity of trustees which include the following:
- He must not be an infant
- He must not be a person of unsound mind
- He must not be an undischarged bankrupt
- He must not have been convicted of an offence of fraud or dishonesty within 5 years of his appointment as trustee.
- c) Duties of trustees
Although directors and partners in companies and partnerships alike have duties, one major duty of a trustee which stands out is the duty to invest pursuant to s. 3(1) and (2) of the Trustee Investment Act of 1962, as well as the duty to accept and observe the terms of the trust. In the case of Nestle v. National West Minister, it was stated that where the trustee is in doubt about terms contained in the trust instrument, he should seek legal advice. Furthermore, the trustees stand in a fiduciary relationship with members of the organisation. The fiduciary duties of trustees include duty to act gratuitously, duty not to make secret profit and duty to account for profit. In the landmark case of Robinson v. Pett, it was stated as a general rule that a trustee is not entitled to renumeration and has a duty not to make secret profit. This position was affirmed by Lord Herschelle in Bray v. Ford.
- iv) Registered Companies: A company can best be described as a commercial association of persons recognized under statute as a legal entity. It could be carried out by the public, or private individuals who restrict public participation. It could be profit/non-profit inclined and its members may or may not enjoy limited liability. A profit inclined company is owned by shareholders who appoint a board of directors to direct the company and hire other managerial staff.
Legal Parameters which differentiate a Company from other business associations
- Corporate personality: One of the major incidents of incorporation of a company is corporate personality, which means that the company acquires legal status (quite distinct from its members) to sue and be sued in its name, acquire and hold property, and can also take loans and charge its property as security for the loans. This is as opposed to a sole proprietorship(where the sole trader is essentially the business) or partnership where the partners and the business are one, and as such, members acquire property and are sued in their names.
- Common seal: Every company possesses a common seal which must be affixed on any document or contract the company enters. The relevance of the common seal is for authentication and to prevent fraud. Neither a sole proprietorship nor a partnership has such common
- Memorandum and Articles of Association: Before a company is incorporated, certain documents must be submitted to the Among those documents are the Memorandum and Articles of Association, which contain certain intrinsic clauses. Pursuant to S. 39(1) of CAMA, any act of the members or the company itself which is in contravention of the MOA will be ultra vires. The ultra vires doctrine(with its limitations) was mainly designed to protect innocent third parties and investors from fraudulent acts of members or acts done in excess of their powers.
- Limited liability: In a limited liability company, the liability of corporate debt is generally limited by shares or by guarantee. This means that in the event of liquidation, the shareholders’ liability will only be limited to either the amount of money each member has invested in the company, or the amount they guaranteed to pay in the event of liquidation or winding up. On the other hand, the liability of partners in a partnership is unlimited. Thus, seeing as the partners and the business are one, all assets of the partners will be used to settle the debts of the business in the event of dissolution.
- Perpetual succession: One major advantage of a company is that it is capable of perpetual succession irrespective of whether members die or in the event that any member withdraws his membership. This is unlike a partnership where death of a partner is a ground for dissolution (section 36 of the Lagos Partnership Law 2003). A sole proprietorship is not also capable of perpetual succession as the business dies with its owner.
- Greater level of Regulation: A company is subject to a greater level of government regulation due to public participation. Also, the fact that companies cut across various sectors in the country also entitles them to be regulated in accordance with the pecularities of that sector. For instance, banks and other financial institutions are under the banking sector in Nigeria and are regulated by the CBN. Asides CAMA, other legislation which banks are subjected to include, the Banks and other Financial Institutions Act (BOFIA), Money Laundering Act, Assets Management Act, but to mention a few.
- Flexibility: Section 18 of CAMA 2020 enables one person to incorporate a private company. This is more flexible than a partnership which requires two or more people to set it up. The provision of section 18 accommodates SMEs with one owner wishing to incorporate their business as a company.
- 573 of CAMA 1990 provides that every individual, firm or corporation that has a place of business in Nigeria, and carrying on business in Nigeria under a ‘business name’ shall be registered in the manner prescribed under Part B of CAMA 1990.
- 588(1) of CAMA (the interpretation section) defines a business name as the name or style under which any business is carried on, whether in partnership or otherwise.
A business name could be owned by an individual, a partnership of 2 or more individuals and one or more companies who carry on business for the purpose of making profit. [It must be noted that these names or designations allow for easy identification and help in differentiating one business owner from another in the same field, in order to prevent a case of passing off.]
The business name or trade name may be the actual name of the proprietor or an assumed name under which the business operates or holds itself out to the public. Therefore, a sole trader or partner trading with a business name is registrable under this part of CAMA.
The conditions and limitations to registration of business names are provided for in sections 573 and 579 of CAMA 1990 respectively
- Conditions set out under Section 573
Subsections 1a, b and c of s. 573 provide that there would be no registration where an individual, partnership or company uses its true name or corporate name in the case of companies), without any additions. Otherwise, registration is compulsory.
Subsection 2 contains exceptions to subsection 1. It is to the effect that it is not in every circumstance that additions will render a business name registrable compulsorily. The sub-section provides that Any addition that shows that the business name is in succession to a former owner of the business, or a situation where partners have the same name and the only addition is an ‘s’; registration will not be required in such instances.
Limitations set out in section 579
Section 579 of CAMA 1990 sets out certain limitations to the effect that certain names are prohibited from being used as business names. These include:
- Any name containing words like National, Government, Municipal, State, Federal, Local Government, etc.
- Chamber of Commerce, Building Society, Trustee, Investment, Bank, Insurance;
- Names which are identical to any name of firm or company registered under the Act;
- Names which are similar to any trademark registered in Nigeria.
It is important to note that the Registrar(of CAC) may reject a name if in his opinion is deceptive or objectionable because it refers directly to any personage, practice or institution.
The leading case for limitations is that of Niger Chemists Ltd. V. Nigeria Chemists & Anor, where the court held that it was not necessary for the claimant to prove intent to deceive or actual deception. So long as the proposed name is so similar to his own as to be likely to cause confusion in the mind of the public.
On the other hand, s. 574 outlines the registration procedure of a business name. It provides that a registrable business name must within 28 days of commencing business provide a statement in prescribed form to the Registrar containing certain particulars, or within 3 months of the commencement of the Act.
Section 575 requires the Registrar to enter the business name in the Register of Business names. He may refuse to do this if the requirements set out in sections 573 or 579 are not complied with.
Section 576 provides that if the Registrar is satisfied that the requirements have been complied with, a certificate of registration would be issued and displayed in the principal place of business and other places of business of the particular company.
Effect of failure to register a business name
An important question to ask at this juncture is whether failure to register a business name under provisions of Part B of CAMA 1990 would render any contract entered into with that name invalid?
This question arose in the locus classicus case of Ogunmefun v. Nigerian Airways Ltd. In this case, the court was called upon to determine whether the failure of the plaintiff to register his business name under the Business Names Act 1961 (having regard to the fact that he was trading under a name different from his real name); made the contract of bailment of goods between the plaintiff and defendants invalid or unenforceable. Balogun J. held that the fact that a person carried out a trade or business in a name other than his real name and without registering that name as a business name, cannot in his view, have the effect of nullifying any transaction entered into by him with some other party in that name. And such non-registration cannot deprive that person of his legal right to sue for the price of any goods sold by him to that other party. However, in the case of Nurudeen Omotayo Alowonle v. Haruna Ishola, it was held that where parties are “in pari delicto” (partners in crime) i.e both of them are guilty of carrying on business knowing that business was not registered, the court in such a situation cannot enforce the claim of either parties.
We have already established that a company is a relationship in which two or more persons under statutory framework come together under a business name in such a way that the company has a distinct and separate personality from that of those persons. A cursory look at the laws regulating companies would reveal that corporate law is a chronology of all the abuses to which the corporate form has been subjected to, and how these abuses were dealt with at different times so as not to injure third parties who transact with the company. Company law therefore offers result-oriented answers to the problems raised in the past in an evolutionary form. This is how company law evolved:
- Sole proprietorship: the English primordial legal system saw the natural person as the first vehicle of commerce. That is why the first form of business association is sole proprietorship. Under sole proprietorship, a legal person, who is a sole trader carries on his business with his forename or surname, owning his stock, capital, profits, assets and liabilities. Essentially, the business lives and dies with the owner and he need not register his business name (unless he carries on the business with a name other than his forename or surname), nor obtain any license.
- Ecclesiastical Churches: at the advent of the 13th century, corporate evolution in terms of association of purposes united for a common purpose began in the Church of Engand and other monasteries. These ecclesiastical bodies procured charters from the Crown to operate as ‘Corporation Sole’ for the propagation of their objects. This idea was in fulfillment of two purposes. First was the administration of the civil society, while the second was for propagation of commerce. In the administration of civil society, it was conceived that a chartered could be procured from the Crown to recognize a designated community as a corporation with powers to regulate all aspects of communal life. This translated towns into economic power and administrative instrument of political power and local government. On the commercial front, the idea o a corporation took its roots in two forms of commercial undertakings in earliest times known as guilds and partnerships.
- The Guild System: The guilds were formed for several purposes; religious, social, as well as commercial. The guilds were a group of traders who, in order to protect their commercial interests, have provided that all persons carrying on like businesses must come under its auspices. While the guild system was the forerunner to the joint stock company, both companies were distinct in some regards. Under the guild system, bulk purchases of commodities can be undertaken by the guild on behalf of members. And members can be compelled to share their purchases with other members. The guilds could be better described as a system of collective bargaining for better commercial enterprises for its own profit as well as those of its members individually.
- Early Partnerships: there were 2 forms of early partnerships. The Commenda and the Societas. The Commenda was an arrangement by which a merchant (referred to as Commendator), who stayed at home lent money to a partner (referred to as Commendaturus) to employ in trade. The commendaturus was entitled to his expenses and generally to a quarter of the profit. However, IF THE CAPITAL WAS LOST THROUGH NO FAULT OF THE COMMENDATARUS, the Commendator bore the loss. The commendators were essentially capitalists who invested money in the undertakings and withought being responsible for any debt beyond the capital invested; they also had no share in the management. On the other hand, the commendaturus were in essence the directors of the undertaking and were personally liable to pay all contracted debts. While the Commenda was a temporary association of two or more, the Societas were a larger, more stuctured and more permanent one. They had certain doctrines or rules which bound members and promoted the commercial venture of the undertaking.
- Regulated Companies: this was a developed form of the Societas. Each member traded with his own stock, on his own account subject to the rules and regulations of the company. However, charters were obtained because of the eed to obtain monopoly of trade for the members of the company.however the companies at this stage were not yet incorporated.
- Joint Stock Companies (JSC): By the 17th century, a sophisticated system of trading in shares of joint stock companies had evolved. Propensity to form the joint stock corporation ensued because of the commercial advantages and legal incidents thereto. Two major differences between regulated companies and JSC was that while in regulated companies, each person conducts his own trade with his own stock subject to the rules and regulations of the company; in a JSC on the other hand, the company traded as a single person with stock contributed by its members. Furthermore, the capital pulled together in a JSC were broken into transferable units in favour of the members of the JSC. It must be stated that prior to this time, private trading associations were not granted charters of incorporation as they were not considered deserving on grounds of public policy. With the advent of JSC however, the need for incorporation became apparent due to a number of reasons.
The following are salient features of Joint Stock Companies:
- A large number of people pulling money together in common stock;
- The stock is then divided into units as shares by which subscription of participants are denominated;
- The units or shares are transferrable;
- The joint stock or business has defined objects;
- Management is referred to a committee of management;
- Members are entitled to profit from the joint stock business;
- No limitation of liability (this is because they are still essentially partnerships)
The Abuses and Intervention of the Bubble Act 1720
It must be noted that the privilege of corporate personality was only given to public companies established by Acts of Parliament for public good. As a result, private trading associations were not granted charters of incorporation as they were not considered deserving on grounds of public policy. Moreover, many of these trading associations could not afford the cost or overcome the difficulties of obtaining a charter. Joint stock company enthusiasts were therefore frustrated. Many simply formed companies without seeking a charter by executing a deed, similar in terms to a charter. Furthermore, to appear as a corporation and then induce subscriptions or capital from the rich, these promoters simply cloaked their companies with an aura of legality by acquiring charters of defunct companies.
Another major problem was the South Sea Bubble of the 17th century which was occasioned by a flood of speculative enterprises, which mimicked the activities of the South Sea Company and induced unsuspecting investors to subscribe to shares with little or no knowledge of the enterprise. This was equally matched by the promoters’ contrivances to overreach investors. It is submitted that the absence of general law, which facilitated promotion and regulation of company activities, led to social and legal problems. Trade in charters between incorporated and unincorporated companies increased. Unscrupulous promoters enriched themselves by forming sham companies with gross representations of objects and unsubstantiated financial projections. There was a growing exploitation of the gullible public. Stocks were arbitrarily prized by promoters and speculative trading became common practice.
The insurgency of these fraudulent practices led to the Parliament’s intervention as the financial and business of the country’s interest was being threatened. The product of this intervention was the Bubble Act of 1720 which by virtue of sections 18 and 20 purported to make all aforementioned acts of the promoters illegal. However, what the Act really did was to strangulate the development of Joint Stock Companies. The response of the legal and business communities was to devise a means of doing business without contravening the law. This is what birthed the Deed of Settlement Companies. By this, a deed of settlement allowed subscribers to agree to be associated in an enterprise with a prescribed joint stock divided into stipulated number of shares and management would be delegated to a committee of directors. The trust instrument would appoint trustees who are the legal owners of the company while the members are entitled to the beneficial interest of the company in form of profit.
Ever since, there has been a greater level of regulation of companies, particularly on matters pertaining to the incorporation process and the powers and duties of the managers, directors and promoters. For instance, in the Joint Stock Companies Act of 1844, Punishment of Fraud Act 1857, Companies Act of 1862, Directors’ Liability Act of 1890 and the Companies Act 1900. (insert relevant provisions of these Acts)
The Nigerian company legislation is not any different. CAMA 1990 reviewed all existing statutes at the time and codified equitable principles applicable to company law for the protection of investors and the public. It improved the 1968 Act and established the CAC, charged with regulating the incorporation, management, supervision, inspection, and winding up of companies. CAMA contains several provisions which prevent fraudulent practices. The most relevant are: section 62 (provisions on duties of promoters); sections 27 – 37 (incorporation process) and; sections 38-43 (ultra vires doctrine).
In conclusion, it is clear from the various company legislation provisions above that company law is about curbing the fundamental propensity of promoters, company owners, and managers, as well as preventing the fraudulent practices occasioned by their unscrupulous acts. It is submitted that these laws are imperative in order to prevent history from repeating itself.
It is submitted that in order to have a clear understanding of the laws guiding companies, the functionality/utility of company law has to be first looked at. That is, is company law public or private? In other words, the nature of company legislation depends on the classification into which corporate law falls in (whether public or private), and the understanding of the functions of corporate law.
Corporate law as private law:
The proponents of corporate law/company law as an aspect of private law believe that this aspect of law regulates private interactions of individuals. They see a company as an organisation of familiar members with common purpose who know, trust and understand each other, like in a family. The proponents of this theory posit that companies do not need laws that will bring too much imposition or laws that will dictate unnecessarily and fetter the free flow of business. According to them, company legislation should not contain mandatory provisions; instead, it should contain enabling provisions that will facilitate bargaining and enable parties to make profit without much impositions. In fact, the only desirable interference by the government according to them is to facilitate an environment for parties to do their business without hitches.
Corporate Law as public law
The proponents of company law as an aspect of public law believe that there is public interest in the activities of companies, particularly where creditors and shareholders of limited liability have problems with the company for instance. In the circumstances below, the government will intervene in companies thus making it an aspect of public law:
- When a company advertises its prospectus seeking subscriptions to the share capital from the public, the government becomes involved. This is worsened by the doctrines of corporate personality and limited liability. Corporate personality makes it possible for a member of the company not to be involved in its management. Limited liability shields such a member from the liability of the company even upon liquidation. If these principles induce the investment of the public, it is submitted that these investors should be protected by the government.
- Another reason why there is need for government control of companies is because the public automatically gets involved where there is corporate failure because it leads to macro economic problems in the society as evidenced by different stories of corporate failures in Nigeria such as the Financial Crisis of 2007/2008. Such corporate failures affect financial and secure credit institutions because people borrow money to invest in companies. Therefore, it is submitted that government intervention is imperative in this regard to prevent systemic failure.
- Due to the numerous advantages offered by the corporate form, it is susceptible to various abuses. In other words, the corporate form could be used as an instrument of fraud by fraudulent promoters to dupe innocent members of the public, as we have seen in the history and evolution of company discourse. This of course justifies the view of company law as an aspect of public law.
- One important thing to note is that in modern times, investment has transcended geographical boundaries and as such, foreign investors are a very intrinsic part of companies. Americans for instance invest in Nigeria because capital is now mobile. If companies were left unregulated and allowed to fail as a result of individual organisation of business, Nigeria will consequently lose its foreign investors as no sane person will want to invest in a failing economy. Hence, companies require government intervention for confidence to attract foreign investors. This makes company law an area of public interest.
- The attendant effects of corporate failure (which has been established as the consequence of non-regulation of companies) include unemployment, frustration and high crime rates in the country. Government intervention in companies is thus justified, to protect public interest and prevent the manifestation of societal vices.
- The activities of some companies have 3rd party effects. A very good example is the effects of the operation of Shell in the Niger Delta region of Nigeria. It is submitted that if there is no government intervention, it will be very difficult to protect the citizens and the environment from the negative activities of these companies (which are usually harsh). In Nigeria, government intervention in issues like this has led to concepts such as Corporate Social Responsibility (CSR) which is done by Nigerian companies today.
Note: Those who argue corporate law as an aspect of public law state that the rules governing corporate law should be mandatory, in order to protect public interest. On the other hand, those that argue corporate law as an aspect of private law believe that it should be facilitative/enabling and not mandatory.
The reality is that corporate law is an admixture of private and public law, and therefore should be facilitative/enabling and mandatory. This point is further buttressed by the fact that a thorough perusal of CAMA would show that some sections are facilitative (thus enabling the private transactions of private individuals without fettering their free transactions); while others are mandatory (protecting public interest against risks of corporate arrangements and governance). Therefore, CAMA comprises of laws that are both facilitative and mandatory.
MANDATORY, DEFAULT AND FACILITATIVE PROVISIONS IN CAMA
Mandatory provisions are those provisions in CAMA that are prescriptive in nature. They direct, prescribe and compel companies to do certain things or abstain from doing certain things without any exception. (only subject to the exceptions explicitly provided for in the Act). They usually contain the operative word ‘shall’ or ‘must’.
Default provisions emanate from the contractarian theory or claim. The contractarian theorists believe that in corporate law, contract defines each participant’s rights, benefits, duties and obligations in the corporate endeavour. They posit that corporate law should comprise of essentially default rules, and that parties should be allowed to bargain for rules they consider most efficient to address their circumstances. Note however that where parties finally decide the rule to follow, that rule becomes mandatory and thus binding on the parties. Default provisions usually contain the operative words ‘Except as otherwise provided’, ‘Unless otherwise provided’, ‘Subject to the provisions of…’.
Enabling/Facilitative provisions empower or enable the company to do something without compelling it to do it. For example, the law says you may remove a director by resolution or when a company is so empowered. Enabling provisions usually contain the operative word ‘may’.
We would now consider some mandatory, enabling, and default provisions in CAMA.
Examples of Mandatory Provisions in CAMA
- Section 20(1) which deals with Capacity of persons wishing to form a company.
- Section 26(4) which deals with Object of a company limited by guarantee.
- Section 19(1) which deals with maximum number of persons that can constitute an unregistered company.
- Section 29 which prescribes what various companies must add at the end of their business name.
- Section 30 prohibits companies from registering certain names.
Examples of Enabling/Facilitative Provisions in CAMA
- Sections 50-53 which enables companies to covert from one form to the other.
- Section 56 which enables foreign companies to apply for exemption from registration
- Section 100 which allows companies having share capital to alter conditions of memo.
- Section 120 which enables shares of a company to be issued at a premium
- Section 171 enables a company to issue debentures
Examples of Default Provisions in CAMA
- Section 38(1)
- Section 48
- Section 63(3)
- Section 64
- Section 118
The Memorandum and Articles of Association may be otherwise referred to as the constitution of a company. This is because, they set out the legal framework regulating the external an internal affairs of a company respectively. In other words, while the Memorandum of Association regulates the external affairs of the company, the Articles regulate the internal affairs.
MEMORANDUM OF ASSOCIATION
The memorandum (memo) is the first part of the constitution of a company. It is the basic document that delineates the the company’s relationship with outsiders. S. 27(1) of CAMA clearly outlines the list of the content of a memo which are:
- The Name of the Company: It has been established that pursuant to s. 573 of CAMA 1990, any corporation with a place of business in Nigeria, and carrying on business under a business name must register that business name with CAC. It therefore follows that every company is incorporated with a business name. S. 27(1) provides that the name of the comoany must be stated in the memorandum. Note that the name of the company shall end with the words ‘Limited’(Ltd), ‘Public Limited Company’ (Plc) or ‘Unlimited’(Ultd). In the case of Bank of Baroda v. Iyalabani Limited, the court held that the failure of a company to institute an action in its full name with an indication as to whether it is ‘limited’ or ‘unlimited, is fatal to establishing its corporate personality. The rationale for including Name of Company in the content of a memo is simple; it is aid the easy identification of the company and prevent a case of passing-off. As seen in s. 579 and s. 30(1) and (2) of CAMA, certain names are prohibited from being used when incorporating, while others names require the consent of the Corporate Affairs Commission to be obtained before they can be used.
- The Objects Clause: the nature of the business of a company is set out in the memorandum as objects and in clauses. It is a statement of the objectives or type of business for which the company is registered to carry on business. The objects clause has 3 functions. First, it serves to inform the intending incorporator, who contemplates the investment of his capital, within what field his capital is to be put at risk. Secondly, it serves to inform contractual partners whether the contractual relation into which they contemplate entering with the company, is one relating to a matter within its corporate objects. Thirdly, it is aimed at protecting creditors by ensuring that the company’s funds, to which they must look for payment is not dissipated in unauthorized activities.
- The Limitation of Liability Clause: This is another major clause in the memorandum of association. A company must state whether the liability for its debt in the event of winding up or liquidation is unlimited or limited (and if limited, is it by shares or by guarantee?).
- The Capital Clause: the memorandum of a limited liability company must state the amount of share capital and the nominal value of each share into which the share capital has been divided.
Section 27(5) of CAMA provides that the memo shall be signed by each subscriber in the presence of at least 1 witness who attests by signature, and stamped as deed
A very critical question to be asked is between Memo and Articles, which one is superior and prior in hierarchy. The answer to this question can be inferred from sections 47 and 48 of CAMA. S. 48 provides that articles of association could be altered by special resolution, but this is subject to the provisions of the Act and the Memorandum. Furthermore, s. 47 is to the effect that even though memo and articles are alterable, if a company wants its articles not to be altered without special procedure, all that needs to be done is to move it to the memorandum.
Legal Implication of a Memorandum of Association
The legal implication of a memorandum is highlighted by s. 38(1) of CAMA, which provides that except to the extent a company memorandum or any other enactment otherwise provides, every company shall for the furtherance of its business or objects have all the powers of a natural person of full capacity.
ARTICLES OF ASSOCIATION
The articles of association is a document which deals with the internal affairs of a company. It regulates the rights of members inter se (between themselves), and sets out the manner in which the company’s affairs are to be conducted. It deals with such matters as issues and transfers of shares, debentures, alteration of capital, meetings, dividends, accounts, directors and their powers, winding up, etc.
Pursuant to s. 33 of CAMA, every company must have registered articles which must be signed by the same persons who sign the memorandum of association (the subscribers)
The form and contents of articles of association are set out in Parts I, II, III, and IV of Table A in Schedule 1 of CAMA 1990. It is noteworthy that while these model articles in Table A of the first schedule to the Act are filled with several mandatory provisions, the Nigerian court has held in the case of Trade Links International (Nigeria) Ltd. v. Bank of America that these model articles can be amended, modified or added to by individual companies to suit the particular preference of the shareholders. However, the CAC in practice, compels companies to simply adopt relevant part of the Schedule without more. This practice of course departs from the provision in s. 34 of CAMA which enables incorporators to amend or expand the model articles as they desire; as well as the rule in trade Links International case. The major problem therefore lies in the fact that due to the imposition of form and content of model articles on incorporators, the company’s officials are tasked with extracting the regulations from two separate documents. What worsens this situation is the fact that most of the paragraphs in Table A are mandatory, which should not be so as articles regulate internal affairs of the company and should have enabling provisions as opposed to mandatory positions.
What considerations should therefore inform what a company should insert in its Articles?
- It must reflect provisions of the law that are enabling/empowering;
- It must reflect default provisions;
- It should not contain issues that are already covered by the Act, but those that the company may find relevant for its own peculiarity;
- Articles must not contain mandatory provisions.
INTERPRETATION OF ARTICLES
English case law indicates that the articles of association are subject to the memorandum, and if there is any conflict between them, the memorandum prevails. It is immaterial that the provision in the memorandum is one that the law precludes. In such an instance, the conflicting provision in the articles will be void. This of course buttresses the inference from ss. 47 and 48 of CAMA that a memorandum is superior to an article.
In the case of Ashbury v. Watson, where the rights of preference shareholders were set out in the memorandum, conflicting provisions in the articles were held void. A similar view was held by the court in the case of Guiness v. Land Corporation of Ireland.
Furthermore, it has been held in a plethora of cases that both the memorandum and articles of association should be read and interpreted together, and an ambiguity in one can be explained or resolved by reference to the other(Re Anderson’s case). However, it must be noted that the articles may not be referred to for the interpretation of a provision in the memorandum if the provision is one which by law should be in the memorandum. See the case of Re Southern Brazilian Etc. Co. Ltd.
Again, the articles of association being commercial documents, must be interpreted “ut res magisvaleat quam pereat” (that is to validate if possible). The case of Holmes v. Keyes is very instructive here. Jenkins L.J expresses the principle as thus “I think the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable.”
In Obaseki v. ACB Ltd, it was held that the articles of association just like the memorandum is a public document and to that extent serves as a notice to the public when registered.
Flowing from this premise, Section 16(1), 1968 Company Act of Nigeria- which provided that “the memo and articles shall, when registered bind the company and members there of to same extent as if they’d been signed and sealed by each member, and contained covenants on part of each member to observe all provisions of the memorandum and articles of association. The problem with this provision is that it didn’t clarify whether the company was also bound by a contract that was created when the documents were registered and this shows a problem in the language used as the provision didn’t recognize that once you register memo and articles, it constitutes a contract, but the question was between who and who? Section 16(1) only referred to members as parties, and didn’t refer to companies as a party to the contract.
To appreciate S. 41 of the Companies and Allied Matters Act 2004, it is pertinent to note the fact that it replaced S. 16 of the 1968 Companies Act and in the words of Lord Greene in Beatie v Beatie Ltd, it has been “the subject of considerable controversy in the past and it may well be that there will be considerable controversy about in future,” Section 41 of the 1990 CAMA sought to remedy this defect as it provides that when a memorandum and articles of association are registered, it should have the effect of a contract under seal, between the company and it’s members and officers themselves whereby they agree to observe and perform the provisions of the memo and articles as altered from time to time in so far as they relate to the company’s members and officers.
Therefore, this section appears to create five distinct set of contracts:
1) between the company and its members;
2) between the company and its officers;
3) between the members and its officers;
4) between the members inter se;
5) between the officers inter se.
Provisions showing that registration of Memorandum and Articles of Association creates a contract under seal can be seen in Section 27(5) and (6) which says that memo shall be signed by each subscriber and stamped as a deed and Section 34(3)(c) & (4) which says that articles shall be signed by each subscriber and stamped as a deed. What this means is that registration of Memorandum and Articles creates a binding contract on the company, members and officers. For example, if the articles provide that directors may declare dividends to be paid in proportion to their shares of as seen in Wood v Odessa Water, the directors must abide by it and cannot then decide to declare dividends in proportion to amount paid up on shares or declare that instead of paying dividends, members will be issued debentures redeemable over 30years . In such cases a member can bring actions to enforce his rights under the articles. This will be the case even if majority of the members approve the action proposed by the director since this will amount to alteration of the articles by ordinary resolution, not special resolution as seen in Section 48(1) . On the other hand, if articles provide an arbitration clause in case of dispute, then company can obtain order staging proceedings brought by a member who has not gone to arbitration as seen in the case of Hickman v Kent. Finally where the articles provide that if a member becomes bankrupt he shall be required to transfer his shares the company will be able to enforce it
The features of contract created by Section 41 is that it is a statutory contract which can only be altered in accordance in the statute creating it, it binds future members and it isn’t defeasible by things like misrepresentation, mistake, undue influence or duress. This was the rationale of the court in the landmark case of Borland’s Trustee v. Steel Brothers & Co. Ltd.
In looking at the enforcement of rights by members, it’s important to note that enforcement of these rights under Memorandum and articles of Association depends on capacity in which rights have been conferred and also on the nature of rights. Where an insider’s right is one given to members of the company as members and outsiders rights are given to those who are not members or they are members but are acting in their capacity as outsiders .
We must not neglect the locus classicus case of Hickman v Kent were P signed form of application for membership, agreeing to conform to the rules and regulations of the association and was informed by a letter that he been elected a member. By Article 48 of its articles of association, it provided that the differences between the association and any of the members relating to any of the affairs of the association should be referred to the decision of an arbitrator. When crisis arose, the plaintiff in 1914 issued a writ against the association and its secretary,claiming injunctions and declarations in respect of matters which related solely to the affairs of the association of the defendant company. The defendants sought a stay of action pursuant to Article 4 of Arbitration Act and Article 48 and 49 of the Articles . The plaintiff tried to rely on a line of cases like Browne v La Trinidad, Pritchards case etc to prove that articles do not constitute a contract between members and the company.
According to Astbury J, those cases only purport to confer a right in capacity other than that of a member I.e an outsider’s right. The cases are not concerned with members who sought to enforce rights given to them i the articles as members . He held that an outsider to whom rights purport to be given by the articles in his capacity as an outsider, whether he is or subsequently becomes a member cannot sue on those articles treating them as contracts between himself and company to enforce those rights.
Astbury J stated 3 principles :
1) no article can constitute contract between company and third person
2) no right merely purporting to be given by an article to a person, whether member or not, in a capacity other than that of a member, for instance as solicitor, promoter or director can be enforced against the company
3) articles regulating rights and obligations of the members generally as such ,do create rights and obligations between them and the company respectively.
These views were applied in Beatie v beatie where articles provided for arbitration clause but the director plaintiff couldn’t enforce because this was dispute between company and plaintiff in capacity as director.
Astbury J relied on a plethora of cases to give his judgment which included Johnson v Lyttke Iron Agency, Wood v Odessa Waterworks, Salmon v Quin & Axtens etc distinguishing them from the earlier ones relied upon by the plaintiff, for they were death wig cases where their members were able to enforce rights accruing to them in their capacity as members
In conclusion, under the 1968 Act, if a right is conferred on one as a member, it is enforceable upon citation of articles as source of right . However, if right is conferred in capacity other than members one can not enforce this right based on Articles of Association even if he’s a member but under Section 41 of CAMA the scope of those who will gave standing to sue has expanded . Therefore it looks like the distinction between insider and outsiders right as seen in the case of Hickman v Kent is unnecessary due to Section 41 of the 1990 CAMA.
Alteration of Memorandum of Association
Ultimately, every memorandum of association has two parts:
- Conditions: As we have already seen in s.44 includes the provisions of s. 27 and any other specific provisions in CAMA. Such specific provisions are seen in sections 288 and 289, which provide that a limited liability company (if authorized by its memo) can make the liability of its directors , managers and managing directors unlimited; and where it is already limited can through a special resolution (if so authorized by its articles) alter the memo to render their liability unlimited.
- Other provisions pursuant to s. 47(1): These are provisions which ordinarily might lawfully be articles but which could be put into the memo.
The important question at this juncture is whether provisions which fall under b above are alterable? The answer to this question is YES. They are alterable to the extent allowed by the Act (s. 44(1)).
Section 46 provides for the mode of altering the object clause of the memo and indeed other provisions of the memo.
ALTERATION OF ARTICLES
The first thing to note here is that articles are dynamic and more flexible than memorandum of association. This therefore makes the alteration process easier in the case of articles.
Justification for the alteration of articles
- Because the law clearly says so: S.48 clearly provides that subject to the provisions of the Act and to the conditions or other provisions in the memo, a company can by special resolution alter its articles, and such alteration shall have effect as if it was originally contained therein.
- General purpose of article: section 33 in talking about the context of the articles, provide that articles regulate the internal affairs of a company. Internal affairs of a company are never static, they change from time to time depending on the situation the company finds itself. It therefore follows that whatever regulates such “ever-changing” affairs of a company should also be capable of change, in order to accommodate emerging circumstances.
- Section 34 also anticipates additions, omissions and alterations of articles, as may be required in certain circumstances.
Having justified the alteration of articles, the next thing to consider is conditions for the alteration of articles.
Conditions for alteration of articles
- No company shall deprive itself of the right to alter its article:
The first condition to note is that no company shall deprive itself of the right to alter its articles either by inserting such exclusion clause in its articles or any other contract purporting to bind the company; as to do this will be contrary to the provisions of sections 48, 34 and 542 of CAMA. In Peter American Delicacy Company v. Healt, where the company articles contained a provision that cash dividends should be distributed in proportion to the amount of capital paid up on shares notwithstanding anything contrary arrived at under the authority of a general meeting (therefore restricting the power of the company to alter its articles in this regard). Latham C.J. took the opportunity to hold that the power to alter the articles of a company is a statutory power . Therefore, a company cannot deprive itself of this statutory power either by agreement or a provision contained in the articles. A similar view was held by the court in the case of Malleson v. National Insurance and Guarantee Corporation, where the court reasoned that it is not possible by articles of association, to make an unalterable article.
- The condition in (i) above does not entirely mean that articles cannot remain unaltered
The second condition to note is that although companies cannot make articles unalterable by express agreement or inserting a clause in the articles, the alteration of articles would be forbidden by moving such provisions of the articles to the memorandum, pursuant to section 47(2).
- Alterations must not contravene section 49 of CAMA
The third condition is that no alteration will be valid if it violates or is inconsistent with section 49, which provides that a company cannot by its memo or articles, increase the number of shares to be subscribed to by a member, after the date he became a member. S. 49 further prevents the increase of a member’s liability to contribute to the share capital in case of liquidation or winding up.
Statutory Guidance for Alteration of Articles
Section 48 of CAMA provides us with a critical statutory guidance for the alteration of articles. First thing to note is that alteration of articles is subject to the provisions of the Act. Second thing to note is that it is also subject to the conditions and other provisions contained in the memorandum. The third thing that s. 48 tells us is that for an alteration to take place, a special resolution must pass. S. 233 (2) provides that a resolution is special if passed by not less than 3/4 of the votes cast by such members of the company who are entitled to vote; and such vote must be passed at a general meeting. 21 days notice must be given for the general meeting, with an explanation as to the reason for the meeting. Note however, that the 21 days notice requirement can be dispensed with where majority of the shareholders (those holding up to 95% of the nominal value of the company share capital) agree a special resolution may be passed at a general meeting in which less than 21 days notice was given. Section 234 creates an exception to the provision in s. 48, (the exception only applies to private companies). It is to the effect that instead of passing a special resolution in a general meeting, the decision to alter may be passed by a written resolution , signed by all the members entitled to attend the meeting and vote. This method shall be as effective as if it were passed in a general meeting.
Judicial Guidance for the Alteration of Articles
A thorough perusal of the provision of section 48(1) of CAMA would show that the power to alter articles conferred by the section is very wide; as the power is subject only to the provisions of the Act and the memo. The implication here is that there could be occasions where the majority shareholders would move for the alteration of certain articles which are not in favour of the minority shareholders. In such a circumstance, the only thing the majority need consider is the intended alteration is not inconsistent withe the Act or the memorandum. Common examples of these circumstances include alterations which allow for compulsory purchase of a minority shareholding without any reason other than the majority’s benefit, or the dismissal of a director in circumstances where there is an obvious immediate target to the altered article.
Due to the vulnerable position of the minority shareholders who have no strength to prevent or block the passing of a special resolution (which requires a 3/4 vote), the courts had to intervene in order to prevent the law being used as a veritable instrument of fraud in the hands of the majority shareholders. As such, the courts developed some judicial guidelines to ensure that the alteration of articles of a company is not only done according to the law, but also according to the principles of equity and justice.
Guidelines developed by the courts regarding alteration of articles
The test for the judicial determination of the rightness or wrongness of a company’s resolution on the alteration of its articles was first set by Lindley MR in the locus classicus case of Allen v. Gold Reefs of West Africa Ltd. In that case, the company’s articles, which contained a clause which stated that the company should have a lien for all debts and liabilities of any member on partly paid shares was altered, giving the company rights of lien on both partly and fully paid shares. Zuccani was a member of the company. Although he had some partly paid shares, he was the only member who held fully paid shares. When Zuccani died, he still owed a substantial sum for arrears of calls on the partly paid shares, and his executors could not satisfy his debts. This was what led to the resolution that altered the company’s articles, giving it lien on both partly an fully paid shares. After the resolution, the company went further (after calls to pay the debts were not heeded) to forfeit the shares of Zuccani. The executors of Zuccani went to court, arguing that the resolution to alter the article was oppressive and done in bad faith, as the resolution operated unequally on the members and affected shareholders’ rights retrospectively.
In his popular judgment at the COA, Lindley MR rejected the view of the plaintiffs and upheld the alteration. According to him, when a shareholder acquires shares in a company, he becomes a party to a statutory contract. And he becomes a party not only to the terms of the articles as theystand but also on the basis that there is a statutory right to alter them. (Borland’s Trustees case). It is interesting to note that although Lindley MR ruled in favour of the defendants and thus upheld the alteration, he reasoned that however wide the power conferred by statute is, the power to alter(like any other power conferred by any statute) must be exercised subject to the law and principles of equity. According to him, “it (the power to alter) must be exercised not only in the manner required by law, but also bona fide the benefit of the company as a whole, and must not be exceeded”
The test by Lindley MR in Allen v. Gold Reefs case, set the tone for further discussion on the basic test that determines whether or an alteration is right or wrong. In subsequent cases, the court tried to interpret Lindley MR’s “bona fide for the benefit of the company as a whole” test. However, as evidenced by the variant decisions of various courts on this test(as we would soon see), it is submitted that the test gave room for a lot of confusion, as it was not clear whether “for benefit of company as a whole” meant the interest of the company as an independent entity apart from its members; or the interest of the company as a body of shareholders. We will now examine some cases which applied Lindley MR’s test.
The first case is that of Brown v. Abrasive Wheel Co. Ltd. Here, an alteration of the article to include a compulsory expropriation clause so that the minority shareholders’ shares could be bought out by majority shareholders, who had then indicated that they would invest in the company after the buy-out was rejected for not being ‘for the benefit of the company’. Astbury J. held that while it is not out of place for an alteration to involve expropriation, that power must be such that it could have been included in the original articles. Also, such alteration must be in accordance with the principles of justice and must be for the benefit of the company as a whole. It must be done in the absence of malice or fraud. In relation to the facts of the case, Astbury J reasoned that although the apparent alternative in the matter would have been the winding up of the company, as the company was having serious financial difficulties, he however found out that the majority shareholders were opting to buy out the minority shares not for the benefit of the company at large, but for their own personal benefit.
However, a different decision was reached in the case of Sidebottom v. Kershaw, Leese & Co. Ltd. because here, expropriation of shares was found to be in the benefit of the company. In the instant case, the COA sanctioned the alteration of articles which enabled the directors to require a shareholder or director of the company who carried on a competing business to transfer his shares. It did so on the ground that the alteration was for the benefit of the company as a whole. It is submitted that this case should be distinguished from Brown v. British Abrasive Wheel, as in this case, they were not obviously obligated to have amongst them as members, persons who are competing with them in business. The alteration was not directed at any shareholder or class of shareholders for any malicious motive (per Lord Sterndale); whereas in British Abrasive Wheel case, there was an obligation minority shareholders to give up their shares, which was done for the sole benefit of the majority shareholders.
It will be noticed that for the foregoing cases, the test “for the benefit of the company as a whole” means the company as an independent entity. However, in the case of Shuttle worth v. Cox Brothers $ Co. Ltd, there was a shift in the meaning ascribed to ‘benefit of the company’. This departure from the original meaning mostly occurs in cases where the issue at hand does not involve expropriation of shares (other affairs regulated by the articles asides expropriation). In such circumstances, what determines a valid alteration is not what the company as an independent entity thinks is in its best interest; rather, it is what the shareholders think is for the benefit of the company.
Note: A logical conclusion would thus be that the judicial guidelines relating to alteration of articles will depend on whether the alteration involves expropriation or not.
In Gamboto v. W.C.P. Ltd, the courts examined all judicial principles and came up with a more comprehensive test in determining the validity of an alteration involving expropriation. The test, known as the “proper purpose” test has two conditions: first, the alteration must be excercisable for a proper purpose; and second, its exercise must not operate oppressively against minority shareholders. Therefore, if the reason for alteration is to secure the company from a detriment or harm for instance, the alteration will be valid – provided it is not oppressive to minority shareholders.
Section 37 of CAMA provides that when a company is incorporated it becomes an independent legal person having the capacity to exercise all the powers of an incorporated company including the power to hold and acquire property, perpetual succession; to sue and be sued. The important question however is what is the nature of the powers of a company as an independent legal person?
In other jurisdictions such as the US and Canada, a company has the capacity of a natural person to do any lawful transaction. Hence, this definition makes redundant the need to have an object clause in the company’s memo.
But in Nigeria however, a combined interpretation of Sections 27, 38(1) (2), 39 and 40, shows that a company has capacity to exercise only those powers in the objects. Let us now consider the above-mentioned sections.
Section 38(1) provides that except as a company’s memo or any other enactment provides, a company shall for the furtherance of its authorized business or objects, have all the powers of a natural person.
Section 39 further provides that a company shall not carry on any business not authorized by its memo and shall not exceed the powers conferred upon it by its memo or this Act.
Note also the provision of s. 27(1) (d), which is to the effect that the powers of the company could be restricted through the memo and such restriction could be relied upon in proceedings against the company by a member or director of the company, or against present and former officers of the company (pursuant to section 40).
It has already been established that the nature of the business of a company is set out in the memorandum of association as objects and in clauses. It is a statement of the objectives or type of business for which the company is registered to carry on.
At common law, the ultra vires doctrine has two legs. The first is a prohibition of the company from carrying out acts beyond the scope of its stated objects. The second is the resultant effect of carrying out such unauthorized acts. When a company does an act which is beyond the objects set out in the memorandum, such act is said to be ultra vires, null and void. The position is not altered by the fact that the members approve of it.
The purpose of the ultra vires doctrine is two-fold: on the one hand, it enables the intending incorporator who contemplates the investment of his capital, to know within what field the capital is to be put to work. On the other hand, the rule also serves to protect those who deal with the company(investors, creditors, etc.), such that they know whether or not the contractual relations which they contemplate entering with the company, is one relating to a matter within its corporate objects. It may also be added that the ultra vires doctrine is aimed at protecting creditors by ensuring that the company’s funds to which they must look to for payment are not dissipated in authorized activities.
The locus classicus in stating this doctrine is the case of Ashbury Railway Carriage Company Ltd. v. Riche. In this case, the company’s object clauses stated that it was established to manufacture and sell railway carriages and other railway equipment, and to buy and sell timber and coal. The directors then bought a concession for constructing a railway in Belgium and entered into an agreement with financier, Riche, in constructing a railway line. Riche began work on the railway line but the company later repudiated the contract. Riche sued for breach of contract. The House of Lords held that the contract to finance the building of the railway was ultra vires and void, and could not even be ratified by unanimous assent of all the members. The company could have used the capital to make things for railways, but not to make railways themselves, the court held. Note that a distinction was however made between acts which are merely ultra vires the directors, that is, beyond their powers as delegated in the articles, and acts which are ultra vires the company itself. The former could be ratified but not the latter. This principle was affirmed by the Nigerian court in the landmark case of Continental Chemists Ltd v. Ifeakandu, where a company sponsored the training of a medical doctor abroad, with the contract that the doctor will serve the company for 5 years after the training. It was held that since establishment and running of hospitals was not within the objects for which the company was incorporated, the contract with the doctor was ultra vires the powers of the company, and so was void and could not be enforced.
At common law, the ultra vires doctrine was amenable to being used as both a shield and a sword. An outsider contracting with the company could at any time raise the issue of ultra vires as a sword to vitiate the contract and renege performance on its part. It was also became a shield for the company, where it is being sued for an obligation due under an ultra vires contract. The application of the doctrine under common law was haphazard and very unpredictable. It usually carried an element of unfairness particularly where the ultra vires contract has been partially or fully executed by either of the parties. The strictness of the ultra vires doctrine at common law was attributable to two things. One was that the objects of a company at that time were largely unalterable (could only be altered in very limited circumstances). The second thing was the doctrine of constructive notice (by this a company’s memo and articles were considered public documents for which every person having dealings with the company is presumed to have notice and knowledge of the contents of these documents). See the cases of Re Jon Beauforte (London) Ltd, as well as Re Lee Behrens case for a contextual analysis of the severity of the common law rule regarding ultra vires doctrine.
Evasion of the Ultra Vires Rule under common law
Without prejudice to the utility of the ultra vires doctrine as stated above, the doctrine sometimes worked hardship. For example, if someone had lent money to a company on an ultra vires contract, or where all the members had agreed that the company could gainfully undertake the transaction, it would be unfair to invoke the doctrine to the detriment of either party. Consequently, ways were sought to avoid the application of the doctrine. The courts started to depart from the strict construction of the ultra vires rule and allowed companies to carry on business transactions reasonably incidental to the objects of the company. In the case of Attorney General v. Great East Railway Co, it was held that the doctrine, strict as it is, should be applied liberally; that acts which can fairly be regarded as incidental to the specified objects will be treated as intra vires. Later the courts accepted widely stated objects as valid. See the case of Cotman v. Brougham, Bell Houses Ltd v. City Wall Properties Ltd.
ULTRA VIRES UNDER CAMA
The companies and Allied Matters Act reflects the growing criticism and dissatisfaction with the ultra vires principle and its effects at common law.
The Act as a first measure preserved the doctrine of ultra vires by declaring that a company shall neither carry out any business not authorized by its memorandum or exceed the powers set out in the memorandum or Act itself (pursuant to s. 39(1) of CAMA).
To the extent of the powers thus delineated in the memo, section 38(1) provides that the company shall have all the powers of a natural person of full capacity. However, s. 38(2) expressly prohibits political donations from the realm of intra vires acts.
To further buttress the existence of the doctrine under CAMA, section 39(2) provides that a breach of the rule may be asserted and relied upon by a shareholder, officer, creditor or the CAC in an action alleging that the affairs of the company is being carried on in a manner that is oppressive, unfairly prejudicial, unfairly discriminatory or in disregard of the interest of the member, officer or creditor. It must also be reiterated that any restriction on the powers of the company to carry out its objects contained in the memorandum of association shall have the contractual effect intended under section 41, and will be relied upon in proceedings between the company, its members, officers and creditors for the nonobservance of the ultra vires limitations.
Although, it is clear that the ultra vires doctrine is still alive through these sections, it must however be stated that CAMA liberalised the strictness of the doctrine that existed in common law. For this reason, s. 39 (3) provides that notwithstanding the provisions of subsection (1) of this section, no act of a company and no conveyance or transfer of property to or by a company shall be invalid by the reason of the fact that such act, conveyance or transfer was not done or made for the furtherance of any of the authorized business of the company or that the company was otherwise exceeding its objects or powers.
It is imperative to note in the light of these provisions that the doctrine of constructive notice with regard to third parties has been abolished by section 68 of CAMA which provides that a person shall not be deemed to have knowledge of the contents of a memo and articles of association of a company or of any other particulars, documents, or the contents of documents merely because such particulars or documents so registered by the Commission or referred to in any particulars or documents so registered or are available for inspection at an office of the company.
Note that the legal effect of s. 68 is to do away with the imputation of knowledge inherent in the constructive notice principle. The principle received judicial approval in the landmark case of Royal Brititsh Bank v. Turquand, where it was held that outsiders will always presume the regularity of internal affairs not otherwise delineated in the memorandum or articles of association. The rule of presumption heralded in Royal Brititsh Bank v. Turquand has been codified in section 69 of CAMA. The section provides that any person dealing with a company is entitled to presume:
- That the company’s memorandum and articles have been duly complied with;
- That persons named as officers or agents of the company have been duly appointed, and have the authority to exercise the powers and perform the duties customarily performed by such officer or agent;
- That the secretary or otherbofficer having authority to certify documents on behalf of the company has authority to warrant the genuineness or accuracy of the documents so certified;
- That a document has been properly sealed by the company if it bears what purports to be the signature of persons who can be assumed to be the directors and secretary of the company.
Note however that a person shall not be entitled to make such presumptions where the person has actual knowledge to the contrary, or if having regard to his position with or relationship to the company, he ought to have known the contrary. (this exception is contained in the proviso to section 69).
Corporate personality is the fact stated by the law that a company is recognized as a legal entity distinct from its members. This principle is provided for in section 37 CAMA 1990 now enshrined in section 42 CAMA 2020. A company with such personality is an independent legal existence separate from its shareholders, directors, officers and creators. This is famously known as the veil of incorporation.
Historically corporate personality was given to religious bodies but upon the advent of joint stock companies and acquisition of limited liability in 1862 it became necessary to concede corporate personality to commercial companies for the sake of commercial convenience.
As a result of corporate personality, a company has perpetual succession. It simply means the company is everlasting and will continue to do business until it is properly wound up. As a separate legal person, a company will not be affected by changes such as death, transfer of shares or resignation of any members but will continue to exist despite the number of times the changes of membership occur. Even if all the members die, it will not influence the privileges, immunities, estates and possessions of a company. A company being a legal person has an unlimited amount of debts. The company is fully responsible for the debts that will be incurred during the course of business. However, this principle does not apply to its members with a limited liability. In case the company is insolvent, members are not required to pay more than the initial amount invested on their shares or guarantee. Their liability is limited to the amount of shares they subscribe or any unpaid value on such shares. Therefore, creditors of the company cannot take any action against the members if the company went into liquidation as established in the landmark case of Salomon v. Salomon Co Ltd (1897)
Synopsis of the case (SALOMON V. SALOMON)
The appellant, Aron Salomon, for many years carried on business, on his own account as a leather merchant and wholesale boot manufacturer. He ran a sole proprietorship and wanted to convert it into a company. (Bear in mind that this was an 1897 case and as at that time, companies we had were joint stock companies.) He did this and incorporated the company along with his family members; his wife, his four sons and a daughter. At this point in time, for a company to be incorporated, the law required there must be a minimum of 7 shareholders, holding atleast one share each. Aron did this. Since Aron was the owner of the sole proprietorship, he sold the business to the company for £39,000. He was given £9000 in cash and 20,000 worth in shares. He automatically had 1 share previously, so adding the 20,000 shares equals Aron to have 21,000 shares. His balance was remaining £10,000 and this was given to him as debentures by way of floating charges and so Aron was paid up completely for selling the business.
A year into the business, the leather market had struggles due to strike and other things, this led them to borrow money because the business was struggling. They borrowed £5000 from a secured creditor, Edmund Broderip but also had to drop a form of collateral. The collateral was the £10000 pounds that was issued to Salomon as debentures. They later liquidated the company due to bad business, then unsecured creditors through a liquidator brought an action before the court. The liquidators asked the court to rescind the contract and remove the debentures that was already delivered and give a judgment against the appellant
The trial court per Vaughan J sided with the liquidators and held that since the appellant (Salomon) was the managing director, he was the one with the company and as such he should indemnify the company’s debt and a lien should be given on the sum of the money paid to the appellant by the company. Salomon then appealed
The Court of Appeal was of the opinion that the formation of the company, the agreement to transfer Salomon’s business to the company and the issue of the debentures to Salomon were all a mere scheme to enable him carry on his business in the name of the company I.e it’s because he wanted to still carry on his sole proprietorship business but under the guise of a company, that’s why he converted. They further held that everything Salomon did had the bearings of a fraudulent scheme
On the other hand, the House of Lords per Lords Halsbury, Herchell, Macnaughten, Morris and Davey disagreed with the decision of the court of appeal. According to them, the requirement under the company’s act which stated that there must be a minimum of 7 shareholders holding atleast 1 share each was followed and as such, the company was validly created and thus had corporate and legal personality under the law, therefore Salomon was not the same with the company. The House of Lords further held that Salomon should not indemnify the company.
The decision in Salomon v. Salomon is the locus classicus in elucidating the corporate personality principle. The case recognized that the corporate form is essentially an abstract legal body, created by law for the purpose of commerce. It consequently did not matter that an indivisible substantially held all its shares alone as seen in Lee v. Lee’s Air Farming. Neither did it matter that he performed most of the key roles in the company. From the date of registration of a company, it acquired corporate personality separate and distinct from its members. Since the company and owners of the company are separate entities, members of the company aren’t personally liable for the debts of the company and vice versa. The liability of the company therefore differs from that of the owners. In Macaura v. Northern Assurance, Macaura was the sole founder, shareholder and unsued creditor of a company which owned a large quantity of timber stores on Macaura’s land. He insured the timber in his own name and two weeks later, it was destroyed by fire. The court held that the insurers were not liable to pay Macaura since the timber didn’t belong to him but rather to the company, a separate legal entity. It is important to note that in exercising its functions and powers, it is not a trustee or a gent for its members, unless special circumstance creating a trust or agency are created. Even the subsidiaries in the face of full control are not regarded as agents of the company. In Adams v. Cape, It was held that that a holding company and its subsidiary are distinct and separate legal personalities.
The other principle of corporate personality is demonstrated in the case of Foss v. Harbottle (1843). A company may sue or be sued in its own name. The company must take the initiative to sue the other party by using its own name or handle any possibilities of criminal complaint that might be filed against it. For instance, John as a director cannot take an action against one of his employee for money laundering. It is the company’s position to sue the employee for the wrongdoing.
The corporate personality principle has also been applied in some Nigerian cases. In Kate Enterprises v. Daewoo Nigeria Ltd , it was held that upon incorporation, a company becomes a body corporate capable of exercising all functions of an incorporated company. Also in Dunlop Nigeria Industries v. Forward Nigeria Enterprises, it was held that it doesn’t matter if the company shares are owned substantially by one of the shareholders, Act by which a limited liability company is incorporated isn’t concerned with quantum of interest of its members, such company maintains its independent existence as a person distinct from any of it’s members. Corporate personality principle was also upheld in Intercontractors Nig v. NPF Management Board
In conclusion, it is important for companies to have corporate personalities so as to distinguish and separate the activities and liabilities of a Company from that of its shareholders and for such company to sue and be sued in its own name. This doctrine acts a shield for members of a company as it protects them on a personal level from third parties but can also have a boomerang effect on the members of the company.
The principle set out in Salomon v. Salomon that a body corporate is a separate entity, that is, separate from its members, led to the use of the phrase- “veil of incorporation”, which is said to hang between the company and its members. And in law, acts as a screen between them. However, this veil may be removed either by the judiciary or by statute. This process is known as lifting the veil.
The rationale for lifting the corporate veil lies in the fact that corporate personality casts an artificial veil on the company, making it difficult to hold members and officers of the company responsible for the liabilities of the company (even though the company clearly acts through these officers, whose acts are attributed or imputed on it), and even if they they will be liable at all, their liability is limited only to the amount of shares, if any, unpaid on their shares. It is thus important to note that the corporate vehicle has a potential to be used as an instrument of fraud or invading contractual obligations with third parties, if it is to be taken as an absolute principle of law, that is. Of course the courts of equity will not allow a statute to be used as an instrument of fraud (equity will not follow the law when the law is being used as an instrument of fraud).
Flowing from the above, the court in certain limited instances will look beyond the artificial being that a fraud perpetrator wants to put before the court, to hold the owners of the company personally liable. . In other words, the court at times would lift the veil so as not to allow the company to be used as an instrument of fraud, or as a means of evading contractual obligations. So for instance, where the corporate form is a ere sham or a mask worn by a person to defraud or evade contractual obligations, the veil will be lifted.
Judicial lifting of the Corporate Veil
Although the courts have not developed a consistent principle regarding lifting the veil. However, one thing is certain. The courts are prepared to lift the veil where to apply the corporate personality principle will produce results opposed to justice, convenience and public interest. The following are instances where the court will lift the veil.
- The veil will be lifted to prevent fraud or improper conduct
In Jones v. Lipman, Mr. Lipman entered into a contract to sell land but then sought to avoid the sale by transferring the land to a company that he controlled. Russell J. ordered specific performance against him and the company on the basis that the company was a device or a sham, which he holds before his face in order to evade his contractual obligations.
Similarly, in Gilford Motor Company Ltd v. Horne, where Mr. Horne , a managing director in the claimant company signed a restraint of trade clause on leaving his employment. After leaving his job, he set up a company in his wife’s name and solicited the claimant’s customers . It was held that the company was only a mere cloak to breach his covenant against solicitation. See also Trustor AB v. Smallborne
- Where motive or opinion of persons are material, the court will pierce the veil to ascertain the true position for the motive, intention and character of the persons who in fact control the company. In Daimler v. Continental Tyre & Rubber Co. Ltd, it was necessary for the House of Lords to determine whether the respondent company was an enemy alien company so that for the appellant to discharge its debt to it would involve trading with the enemy. It was conceded that a company incorporated in the country may assume an enemy character. This will be the case if its agents or the person in effective control of its affairs, whether authorized or not are resident in an enemy country or where ever resident, are adhering to the enemy or taking instructions from or acting under the control of enemies. Similarly, the House of Lords held in De Beers Consolidated Mines v. Howe that the residence of a company for tax purposes must be determined by looking at the acts and intentions of those who have managerial control.
- The courts will lift the veil of incorporation where the corporate form is being used to evade tax or other revenue obligations. See the case of Marina Nominees Ltd v. Federal Board of Inland Revenue as well as Re F.G. Films Ltd
- The court may disregard the corporate personality principle where agency can be established especially with regard to one company being an agent for the other. For example, in Firestone Tyre v. Llewellin, an English subsidiary company was treated as an agent of the American parent company for tax purposes so that although the subsidiary company manufactured and sold its own goods and credited the American company with the proceeds after deducting costs, it was held that the American company traded in England through the agency of the English Company. See also the landmark case of Wallersteiner v. Moir.
- Since a company is an artificial person, the courts will lift the corporate veil in order to ascertain its residence (usually for tax purposes), and they apply the test of “central management and control”, which is usually the place where its board of directors function. See the Supreme Court case of Pan Asian African Co. Ltd v. National Insurance Corp (Nig) Ltd.
- The court will pierce the veil of incorporation between entities which are in reality, one economic unit. This is also called the ‘single economic unit theory’. This theory is used in situations where a parent holding company creates a number of subsidiaries in order to facilitate skillful avoidance of liabilities. Whereas in economic reality, there is just one business but it is organized through several legal personalities. The court in an effort to unravel such economic structures are willing to pierce the corporate veil.
In DHN Foods v. Tower Hamlets LBC, DHN was a holding company in a group of 3 companies. One of the subsidiaries owned land which was used by DHN. When the land was compulsorily acquired by the council and DHN sought compensation for the disturbance of its business, it was held that DHN was distinct and separate from its subsidiaries. But Lord Denning applied the single economic unit theory and saw both the holding company and its subsidiaries as substantially one.
The decision was however subject to a lot of criticisms in subsequent cases, chief of which is the case of Woolfson v. Strathclyde Regional Council. In this case, Lord Keith maintained that it is appropriate to pierce the veil only where special circumstances exist indicating that it is a mere facade concealing true facts. His Lordship went on to articulate the principles of lifting the corporate veil as thus:
- Ownership and control of a company are not of themselves sufficient in justifying the piercing of the veil;
- The veil cannot be pierced merely because it is thought necessary in the interest of justice;
- The veil can only be pierced if there is some impropriety (but this alone is mot enough). The impropriety must be linked to the use of the corporate structure to conceal liability;
- There must be control by the wrong doer and the misuse of the company by them as a device or facade to conceal their wrong doing;
- A company can be a facade even though it was not originally incorporated with a deceptive intent.
Note that in the landmark case of Adams v. Cape Industries Plc, the English COA relied on the principle in Woolfson’s case, and unanimously rejected that Cape should be treated as part of a single economic unit. The court further held that the subsidiaries were not a facade and that there was no agency relationship between Cape Industries and NAAC on the facts.
The Nigerian Perspective on Judicial Lifting of the Corporate veil
Given the above principles and cases, an important question that needs to be asked at this juncture is whether the parameters for determining when to lift the corporate veil in Nigeria clearly defined? In addressing this question, we will have recourse to the following cases
- Prince Adeyemi v. Lan & Baker(Nig.) Ltd;
- Public Finance Securities Ltd v. Jefia;
- FOB Finance Services Ltd v. Adesola and;
- Chief Bola Adedipe v. Sameinder.
In Prince Adeyemi v. Lan & Baker(Nig.) Ltd, the appellant, the chief executive and manager of a company, acting on behalf of the company induced the respondent into paying for some bags of rice he had at the airport; and issued a performance guarantee in that regard. He however refused to issue receipt for the money paid. At the trial court he was found jointly and severally liable with the company for the money had and received. On appeal, he claimed to be the agent of a disclosed principal and should not be personally liable due to the doctrine of corporate personality. The court restated the general rule in Salomon v. Salomon that companies are separate an distinct from their shareholders and officers. With the result that only the company will be liable for acts carried out by these people within the ambit of the memo and articles. Corporate personality draws veil of incorporation over the company so that no one can go behind the veil to hold those by means of whom the company acts, liable (whose acts are attributed to the company). The court then proceeded to set the parameters for lifting the veil thus “if the company is a creature of a biological person (be he managing director or director), such that the company is a device, sham or mask by the eye of equity, the court will be ready to go behind to see the characters behind it”.
Let us examine the second case which is FOB Finance Services v. Adesola, where the respondent sued a finance investment company before the maturity of his 4 million investment, for a return of his capital plus interest. The trial court held the managing director and the company personally liable for the money had and received. At the COA, apart from holding that the action was premature, the court set out certain guidelines for lifting the veil of incorporation (per Aderemi JCA):
- The consequence of recognizing the separate personality of a company is to draw the veil of incorporation over the company. No one is therefore generally entitled to go behind and lift this veil. However, a statute will not be used to justify illegality or fraud. To avoid the normal consequence of a statute which may result in grave injustice, the court may pierce the corporate veil.
- The court further stated that even where illegality or fraud is observed in the conduct of the affairs of the company, the separate personality is not abandoned, since the court can impose liability on the company as well. Therefore, there must be clear evidence of the illegality and fraud in order for the veil to be lifted.
The third case to be discussed is that of Public Finance Securities v. Jefia. Here, the chairman and managing director of an investment company induced the respondent to invest his money in the company with the assurance and warranty that he will be paid, but failed to make good his obligation because of decline in business due to political crises and blackmail. The trial court held the company and the chairman jointly and severally liable but at the COA, Rowland JCA held that lifting the veil will be necessary where the legal entity will be used to defeat public convenience, justify wrong, perpetuate and protect fraud and crime – and where the company is involved in reckless and fraudulent trading or activities tainted with fraud. According to the court, because the manager provided no valid reason for the failed investment, that would automatically amount to constructive fraud, pursuant to s. 290 of CAMA; entitling the court to lift the veil.
We will now examine the fourth and final case, which is Chief Bola Adedipe v. Sameinder. In this case, the sole director of BOL-BOL &Co diverted the proceeds from the sale of stock-fish from the agreed account to a separate account for his own use, in violation of the agreement the company made with the respondent. Since the assets of the company were not able to satisfy the debt when the liquidation of BOL-BOL was ordered, the respondent urged the FHC to pierce the veil and find the sole director personally liable for his fraud. On appeal, counsel to the appellant argued that the allegation of fraud even in a civil case required proof beyond reasonable doubt in accordance with the Evidence Act. The court (per Ogunwunmi JCA) however held that the provision of the Evidence Act is inapplicable as, the standard of proof required to lift the corporate veil in the process of winding up as in s. 506(1) of CAMA is not beyond reasonable doubt , but balance of probabilities. All that the party needs to prove is actual dishonesty according to the current notions of fair trading among commercial men. The court cited Arowolo v. Ifabiyi, where it was held that the use of strong words such as “fraudulent” to describe one’s conduct in a transaction does not automatically transcend into a crime. Furthermore, the court reasoned (relying on the principle in DPP v. Shouldcamp) that when a company is being wound up, only civil liability attaches. Where a finding of fraud is made according to section 506 (1), but after liquidation order has been made, criminal liability can be vested on erring directors according to section 506(3).
From the analysis of the 4 cases above, one can deduce that unlike in English law, the factors which determine whether or not the veil will be lifted are not clearly defined, due to the following reasons:
Some cases, such as Prince Adeyemi’s case, restate the mere facade rule (that is when the incorporator uses the company as a device, sham or mask to conceal the true facts)
In FOB’s case, the veil will be lifted when the statute is used as an excuse to do justice.
But in Public Finance’s case, the parameters were widened to include when the legal entity is used to defeat public convenience, justify wrong, perpetrate and protect fraud and crime, or the company’s involvement in reckless trading or activities tainted with fraud.
Statutory lifting of corporate veil
CAMA is replete with examples of where a company could be used to commit illegality or defraud. Some of these sections include sections 290(1), 505(1), 506, 93, 95, 548 and 234 of CAMA.
From our discussions on company law, it is clear that the corporate form is susceptible to being used for fraud. Hence, company law over the years tries to reduce the propensity to use the company as an instrument of fraud. One class of people who can easily use the company as an instrument of fraud are promoters. The question therefore is ‘who is a promoter?.’
Common law definitions of a promoter as seen in Twycrose v Grant, Emma Silver Mining Co. v ltd, etc. all of which are to the effect that a promoter need not be a member or shareholder or director of the company. In so far as he; arranges for preparation of memo and articles, negotiates agreement for purchase of company property, solicits and obtains directors for company, agrees to place the shares of the company with prospective investors, prepares prospectus with which new members are solicited, procures capital for company, he is a promoter under common law.
By Virtue of Section 61 of CAMA 1990(Now Section 85 CAMA 2020)which defines promoters as any person who undertake to take part in forming a company with reference to a given Project and to set it going and who takes the necessary steps to accomplish that purpose or who with regard to a proposed or newly formed company, undertakes a part in raising capital for it, shall prima facie be deemed a promoter of the Company.
Under common law, a promoter was not regarded as an agent or trustee of a company. In Salmon v. Salmon, a company cannot enter into a contract before its formation because it is deemed to be inexistent prior to its incorporation. See the case of Re Ambrose Lake Tin and Copper Mining Co. However common law does not dispute the fact that the promoter stands in a fiduciary relationship with the company.
As seen in Omnium Electrics Palaces v Baines, the fiduciary duty of the promoter under common law includes the duty to account, duty of full disclosure and duty not to make secret profit. Also in Erlanger v New Sombrero, it was held that where a promoter does not make full and fair disclosure under common law , he is liable to account for the profit and the company can sue to enforce it. However, in Lagunas Nitrate Company v Lagunas Syndicate it was held that disclosure need not be to an independent board so long as it is to vendors or shareholders of company. However due to the fact that in practice, promoters are actually shareholders most times, common law maintains that it be before an independent board.
Section 61 old CAMA adopts the common law definition of promoters. The proviso in that section however exempts people acting in professional capacities such as solicitors, accountants, company secretaries of the company from being promoters. This was judicially approved in the case of Re Great Wheal Polgooth Co.
On the other hand the duties and remedies of the promoter are codified in S. 62 (1-3) which restates the common law position that the a promoter stands in a fiduciary position and has the duty of utmost good faith towards the company in any transaction and on its behalf and shall compensate the company for any loss suffered for reasons of his failure to do so. Subsection (2) talks about situations where promoters acquire property in accordance with his duty, he shall account for any profit made. Subsection(3) reaffirms the common law position on where the property is personal. It provides that unless fully disclosed, any property acquired by the promoter is acquired on behalf of the company. Under the Act, full disclosure can be made before an independent board or all shareholders of company
Prior to the Erlanger v New Sombrero case, full disclosure had to be made to the company’s shareholders. However in this case, the House of Lords unanimously held that promoters of a company stand in a fiduciary relationship with investors, meaning they have a duty of full disclosure before an independent board of directors.
Also, Section 62(3) of CAMA 1990, now 86(3)(a) CAMA 2020 provides that any transaction between a promoter and the company may be rescinded by the company unless, after full disclosure of all material facts known to the promoter, such transaction shall have been ratified on behalf of the company by the company’s board of directors independent of the promoter.
While the intent and purpose of the inclusion of the independent board of directors in the Act is to curb the fraudulent tendencies of promoters, it is however submitted that most times, the promoters are usually all directors in practice, thus ultimately leading to lack of fairness and accountability in the process of disclosure. Furthermore, Section 62 of CAMA 1990 (S. 86, CAMA 2020) is an enabling provision and does not mandate promoters to disclose fully to the independent directors as they can always disclose to shareholders or all members of the company as provided for in S. 62(3) (B) (C), now S86(3)(b)(c) CAMA 2020 respectively.
In conclusion, it is clear from the afore-mentioned principles and authorities that the provisions of the CAMA 1990 on the Independent review of insider related transactions does not adequately deal with the fraudulent and overbearing influence of promoters over the company.
Pre Incorporation Contracts are contracts purported to be made on behalf of the company before it is incorporated. They should be distinguished from provisional contracts which are contracts made by a company before the date at which it is entitled to commence business; and shareholder agreements, which are agreements made by shareholders as regarding internal matters that affect them. They are binding on the shareholders alone, unless the agreement is bound to have a direct effect on the company. For there to be a pre-incorporation contract:
- There must be a contract;
- It has to be entered into by a company yet to be formed;
- It must be purporting to confer a benefit on the company.
At common law, pre incorporation contracts were not binding on the company when it is formed even if it takes a benefit under it. The rationale for this principle is because before incorporation, a company has no legal personality. This in turn means that the company prior to incorporation, lacks contractual capacity. Furthermore, under common law, such a contract could not even be ratified by the company after its incorporation. In Kelner v Baxter& ors, a company was being projected to carry on hotel business. The plaintiff entered into an agreement to sell premises and stock to ‘A’, ‘B’,and ‘C’ on behalf of the company and the contract was signed by “ A,B&C on behalf of the company “. The company was incorporated but went bankrupt before the money was paid. It was held that if there had been an existing company at the time of the contract the defendants would have signed as agents of the company but as there was no company in existence at that time; the agreement would be wholly inoperative unless it were held to be binding on the defendants personally. The rule is that where a contract is signed by one who professes to he signing ‘as agent ‘ but who has no principal existing at that time, and the contract would be altogether inoperative unless binding upon the person who signs it, he is bound thereby and a stranger cannot by a subsequent ratification relieve him of that responsibility . This case was followed in the Nigerian case of Caligara Dario v Giovanni Satori & co. Ltd. However, there is nothing preventing the company after its incorporation from entering into a new contract to put into effect the terms of the pre incorporation contract.
It is clear from these cases that a company cannot by adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence. However where the contract purports to be made by the company with the agent signing on its behalf; the agent cannot sue on it. In Newborne v Sensolid (Great Britain) ltd , the contract on behalf of the non-existent company was signed “signed Leopold Newbourne(London) ltd” with “Leopold newborne” written underneath. It was held that the company is here the principal party to the contract and being non existent renders the contract void and it cannot be enforced by Leopold newborne. The distinction between the cases turned on the form of signature . Whereas in kelner case, the promoter signed for and on behalf of the company thus implying that the company is primarily liable with the connotation that in the absence of the company, he is the one acting, in the Newbourne case the promoter signed the name of the company and only added his own name for authentication thus implying that the company alone is to be bound. The case of Firgos nig ltd v zetters nig pools ltd impliedly holds that a new company can adopt the transactions of a defunct business which it succeeds even though it’s not in existence when those transactions were made.
In Edokpolo v Sem-edo Wire industries ltd, the Nigerian Supreme Court affirmed the common law principles on a company’s non liability for pre incorporation contract and the famous rule in Foss v Harbottle. The court held here that the company after incorporation could not ratify a 1975 pre incorporation agreement such that it became an agreement between it and any of the original parties thereto.
Following a growing web of criticisms, various jurisdictions including Nigeria have departed from the common law stance. S.72 of the old cama and S.96 of the CAMA 2020 are to the effect that a pre incorporation contract may now be ratified by the company after its incorporation and become binding on it. Also, prior to its ratification the person who purports to act in the name of or on behalf of the company shall in the absence of express agreement to the contrary be personally bound by the contract or other transaction and entitled to the benefit thereof. In the landmark case of Societe Generale Favouriser le development du commerce et de l’ industrie en France v Societe Generale bank (Nigeria) ltd, Dr Abubaka saraki, Dr ikomi and Mr kotoye and the appellant sometime in 1976 agreed to form a bank in Nigeria to be known as Societe Generale bank nig ltd and they executed a written contract wherein they described themselves as founders of the bank. By Article 11 of the agreement the parties were to submit any disputes to arbitration . After the company was incorporated in December 1976 it’s board of directors at at a duly convened meeting ratified the July 1976 agreement. The appellants acted as managers of the bank. Differences soon arose and the bank terminated the management agreement and instituted an action in 1989 claiming several monetary relief for the mismanagement or negligence of the appellant. The appellants sought to stay the proceedings contending that under the ratified agreement the parties were to submit all differences to arbitration. The application and binding effect of the agreement was the issue before the court. The supreme court held that:
- At common law a company before it’s incorporation has no capacity to contract. consequently nobody can contract for it as agent nor can any pre incorporation contract purportedly made on its behalf be ratified by the company after its incorporation. The rationale for this is that as there was no company in existence at the time of the contract, the agreement would be wholly inoperative unless it were held to be binding on those who entered into it on behalf of the company personally. However the company can after its incorporation enter into a new contra to put into effect the terms of the pre incorporation contract
- The common law position has now been changed by virtue if 72 of the CAME 1990 which makes it possible for a pre incorporation contract to be ratified by the company after its incorporation and thereby making it bound by it and entitling it to the benefit thereof. Since S. 624(1)(b) of CAMA aapplies S.72(1) of the same law to all companies existing as at the time CAMA came into force and the respondent was one of such companies, the law intends that S. 72(1) of CAMA would apply to pre incorporation contracts already ratified by the existing companies as well as to such contracts yet to be ratified. Mohammed JSC also stared that the provisions of S.624(1) and S.626 make it abundantly clear that the existing companies who wish to ratify pre incorporation contract agreement could do so because CAMA applied to them.
It would appear that prior to ratification, the distinction between the form of signature in Kelner v Baxter and in Newbourne v sensolid are still material because under S.72(2) the promoter in kelner v Baxter would remain bound and liable because there is no express agreement disclaiming his liability. On the other hand the promoter in Newbourne case may still escape liability because his form of signature indicates an express understanding not to be personally bound or liable
Yet, section 72(1) of CAMA 1990 has some significant problems which highlight the need for some reforms of the law. First, it does not contain specific provisions as to the time period for the ratification of the pre-incorporation contracts. It is therefore suggested that the law should be reformed to provide a time period for ratification. Second, there are problems posed by the separate legal personality and limited liability characteristics of a company. For instance, while Section 37 of CAMA 1990 prescribes that a company acquires contractual capacity from the date of its incorporation, Section 72(1), in turn, gives the company power to ratify acts done before it had acquired the capacity to do the same thing. To Agomo, this conflict is not cured by the use of the phrase: “..as if it has been in existence at the date of such contract” in Section 72(1). Therefore, Professor Agomo submitted that the conflict could be resolved by the insertion of the additional words—“notwithstanding any other provision to the contrary in this or any other statute,” between the words “and” and “thereupon” to read as follows:
“72. (1) Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon, notwithstanding any other provision to the contrary in this or any other statute, the company shall become bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract or other transaction and had been a party thereto”.
With the above amendment, the lacunae will be neutralized—neutralizing both the legal personality obstacle and the doctrine of agency, and of privity of contracts to give the issue the special treatment it deserves. Furthermore in practice, section 72(1) of CAMA when employed by an astute but unscrupulous promoter/incorporator may work disadvantage against third parties. The concept of separate legal personality expounded in Salomon v. Salomon & Co. Ltd, will work to separate the promoter from the corporation. Where the third party would have been able to fully recoup his losses from the incorporator, but the less-buoyant company has ratified the pre-incorporation, with the effect that there can be no reversal on the ratification, the third party gets short-changed. This has led commentators to suggest the requirement that the third party’s consent be obtained prior to the ratification by the company. In Agomo’s view, A suggestion has been made that “a possible way of avoiding this absurdity is by seeking an order of apportionment from the court as obtains under Section 14(3) of the Canadian Business corporations Act. The only snag is that the Nigerian CAMA does not contain similar provisions to Section 14(3) of the Canadian Business Corporations Act. Also the provision of S.72(2) CAMA which gives the promoter the opportunity to exclude his liability under an “express agreement” is suggested to be replaced with a “written agreement “. This is because the express agreements cover both written and oral agreements whereas only written agreements may be ratified under S.72(1) CAMA as seen in Garba v Sheba Inter Nig ltd
lastly, the provisions of S.72 CAMA 1990 is quite vague on how the ratification process will occur. This is another area where a reform is needed. It is therefore suggested that in meetings where the shareholders or the Board of Directors are deciding whether or not to ratify the pre-incorporation contract, interested members or directors shall not vote at such meetings. In addition, we also suggest that where the company rejects the pre-incorporation contracts, the third party should be given rights to pursue both the promoter and the company, especially where the company has taken the benefits of the pre-incorporation contract.
Capital of a company can be seen from 2 perspectives:
General perspective: here, capital is the net-worth of the business. It could either be fixed or floating.
Restricted/narrow perspective: capital as the value of assets contributed by the shareholders and subscribers of the company.
SHARE CAPITAL OF A COMPANY IN NIGERIA
The share capital is fundamental to a set up of a company. The extent of liabilities and dividends or profits of the owners of a company can only be determined by the number of shares subscribed to be the individual owners or shareholders. There are various types or classes of shares permissible under Nigerian law, specifically the Companies and Allied Matters Act (CAMA) LFN 2004.
Subject to the provisions of CAMA, a company may be formed as a limited or unlimited liability company. A limited liability company is the one where the liabilities of shareholders of the company are limited to the number of unpaid shares held by them.
Definition of Shares
A share is a unit of a company that defines the interest of a shareholder in the company measured to the equivalent to a sum of money. It represents a portion of a company’s share capital and confers certain rights and liabilities on the shareholder.
Shares are securities which companies issue to members of the pubic in order to raise money to finance their operations. Shares are securities because they represent the financial interest which a person has in the share capital of the company. So long as the company is still in business, the financial interest (shares) of a shareholder is protected by law and cannot be taken away except by lawful means such as by court order or by nationalization provided fair and adequate compensation is paid.(s.24-25,Nigerian Investments promotion Commission Act(,NIPC Act.)2004.
The shares represent the unit of a bundle of rights and liabilities which a member or shareholder has in a company as provided in the memorandum and articles of association of the company. A share is a chose in action (intangible property which gives the owner a right of action for possession) and it can be transferred to another subject to any restrictions that may be provided in the company’s articles of association or provision of the law.
There are certain rights and liabilities attached to shares of a shareholder. These rights include but not limited to the following;
- A shareholder is entitled to vote in the proceedings of company annual or general meetings. The most common voting right equates to one vote per share owned. it is an offence to issue a share with no vote or more than one vote according to the Act.
- The most important right of a shareholder is the right to receive a dividend (profit) whenever dividend is declared. This is done based on the number of shares owned by the shareholder.
- Right to attend meetings and contribute to the affairs of the company. This is possible by the shareholders having the power to influence the management of the company, through the control of the election of the board of directors.
- Rights to inspect the company’s statutory books, protect a proprietary interest in the management of the company.
- Rights to acquire more shares in the company. This is called preemptive rights. If the company intends to issue out shares to the public, the shareholders have the right to purchase a specific number of shares before it is offered to potential shareholders.
There are several ways of acquiring shares in a company. These ways are enunciated below:
- Subscription: this refers to the signing of the memorandum and articles of association during the incorporation of the company where at least one share is taken up by each member signing for the company to be formed. Upon registration of the company, the subscribers are deemed to have agreed to become members of the company and their names must be in the register of members alongside the shares assigned to them
- Allotment: this refers to the method of allotting a specific number of shares in a company to an applicant or prospective shareholder upon application. A company reserves the right on the number of shares to be allotted upon application.
The company where it wholly or partly accepts the application allots shares to the applicant and notifies the applicant of same and the number of shares allotted within forty-two days. The company is not bound to allot the full amount of shares applied for but is bound to write a letter of regret enclosing the balance of money paid for shares not allotted.
A prospective shareholder can also withdraw his application by written notice to the company any time before the allotment is done. Where shares have been allotted, the company is required to file a return on the allotment of shares with the Corporate Affairs Commission within one month of allotment with the necessary supporting documents.
- Transfer: ownership of shares can also be transferred from a current shareholder to another. There must be an instrument of transfer, which is a share certificate given by the company. Upon transfer, the transferee name will be registered in the register of members. The company has a duty to notify the Commission (the CAC) of the transfer of shares by notice in writing.
- Transmission of shares: ownership of shares is conferred on another by virtue of the occurrence of death or bankruptcy of the original shareholder. In the case of death, shares can be transmitted by will or letters of administration of the estate of the original shareholder. A person who acquires shares by transmission has the duty to notify the directors of the company showing evidence of the transmission. After the notification, the name of the new shareholder will be registered in the register of members.
PAYMENT FOR SHARES
Section 135 of CAMA allows the company to accept payment for shares in three forms
- Payment in cash
- Payment in Kind
- Payment in both cash and kind
If payment is made in kind, the company must independently value the property to find its true value before it credits the owner with shares in exchange for the property. Section 137(1) of CAMA.
Where shares are not paid for at all or partly paid for, the subscriber is liable to pay for the unpaid shares at a later date. The demand by the directors for the unpaid shares to be paid for is called ‘call on shares’. (Section 133 of CAMA). The subscriber is under obligation to pay for the share allotted to him which he did not pay for at the time of allotment.
The shareholder is entitled to 14 days notice to pay up (section 133(1) of CAMA).
FORFEITURE OF SHARES
When a call is made and the shareholder fails to pay for the unpaid shares, the Directors shall give him further notice to pay the amount due with interest by a given date, failing which he forfeits the unpaid shares. The Directors by a resolution shall be at liberty to sell off the shares to recover the money. Section 140 of CAMA.
Classes of shares
Shares are classified into five (5) categories in Nigeria, which are:
Ordinary shares: these are shares that carry no special rights or obligations. The ordinary shareholders bear the main risk in liabilities. These are the usual or normal shares issued by companies. They are called ordinary because they have no special rights attached to them. There is also no restriction on the extent to which they could share in the profits of the company. Once profits are set aside for distribution as dividends to shareholders, the preference shareholders are paid their fixed amount. The balance is distributed to the ordinary shareholders, if the balance is much, they get a large share. If the dividend is less they get a small share. The preference shareholders cannot ask for more than their agreed percentage of the profits even if the company makes more profit than expected.
Preference shares: these shares have additional rights attached to them. The shareholders receive fixed dividends every year. They benefit further from ordinary shareholders. These class of shareholders are entitled to be paid first whenever a dividend is declared. Dividends are profits set aside by the company for distribution to its share holders.
When dividends are declared, the preference shares are paid their agreed percentage first before any other share holder is paid. If for example it is agreed that the preference shareholders be paid 10% of the profits set aside as dividends, then once dividends are declared, they are paid their 10% first, then the remainder if any, may be shared by the other shareholders, otherwise the other shareholders get nothing (if nothing remains).
Deferred shares: These categories of shareholders receive dividends only where all other classes of shares have received a minimum dividend. These shares are also called founders shares. These are shares specifically allocated to the founders of the company or its main financiers. They are usually settled after the ordinary shares have been settled. The only problem is that instead of the ordinary shareholders taking the balance of what is left of the distributable profits after the preference shares have been settled, the ordinary shares are limited to an agreed percentage of the balance of what is left, instead of all of it. After the ordinary shares take the agreed percentage, what is left goes to the founder’s shareholders.
The Investment and Securities Act 2007 requires that Founders shares be disclosed in the company’s prospectus and the rights they carry. This is to avoid the situation where the management of the company will use the founder’s shares to exploit other shareholders especially the ordinary share holders.
- Cumulative shares: in this class of shares, if the dividend is missed or not paid back in full then it can accumulate when the company next has sufficient distributable reserves.
- Redeemable shares: these shares are issued only on the option that the company will buy them back at a future date. The shareholders also have the option of selling the shares back to the company.
Fundamentals of Share capital
Share capital refers to the funds raised by a company by issuing shares for cash or other considerations. At the time of incorporation of a company, the share capital would normally be stated in the memorandum of association and issued to the first subscribers. Shares can also be made in future to raise more capital, provided it is within the stipulated maximum amount authorized by the articles of association. Thus the authorized share capital refers to the maximum value of the shares that a company can legally issue.
The authorized share capital of a company can be issued, unissued or reserved. Issued share capital is the nominal value of the company’s share capital that has been taken up by shareholders, either paid in full, with consideration or yet unpaid.
Unissued share capital is the portion of a company’s capital that has not been issued to any shareholder. Where shares are unpaid for, the shareholder could be called upon to pay for those shares in compliance with the articles of association of the company. In the event of the company going into liquidation, the shareholders who have unpaid shares would be liable for the debts of the company to the extent of the amount owed for the shares taken up by them.
The share capital of a company can be changed or altered to an increase or a decrease. Where this occurs, the company is expected to file a change in the authorized share capital of the company with the CAC.
The company shares alteration can be effected by:
- Cancellation: Cancellation of shares is the process of cancelling unissued shares i.e. shares that have not been taken up or shares that are yet to be issued. The effect is to reduce the authorized share capital by the number of shares cancelled.
- Increase or Decrease: Share capital could also be altered by an increase or decrease in the authorized share capital after the necessary amendments have been made to the articles of association of the company. An increase in authorized share capital requires the creation of new shares, which will normally be issued to rank similar to the shares already in existence.
- Reduction: This can take place by the cancellation of any paid-up share capital which is lost or unrepresented by the available assets. Another form of a reduction in share capital is the cancellation of any paid-up share capital in excess of the company’s needs. In all cases of reduction, the share capital must have been issued. It may be paid up or unpaid. Reduction of the share capital must be distinguished from cancellation of share capital earlier mentioned. A company can only cancel part of its unissued share capital while in the case of reduction; it is the issued share capital that is dealt with.
In final summary, shares are important elements of a company formation. It represents the interest of a shareholder in a company. The share capital is equivalent to the amount of money invested by the shareholders in exchange for ownership of the company.
Section 37 of CAMA provides that “As from the date of incorporation mentioned in the certificate of incorporation, the subscribers of the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name mentioned in the memorandum…”
The subscribers to the memorandum of the company are the shareholders of the company. When the first share holders cease to be, some other persons will take over their shares or may become shareholders by acquiring shares in the company. It is the aggregation (totality) of these shareholders that constitute the company. However these shareholders must have their names entered in the register of members of the company to become members of the company. (s.79 (2) of CAMA). It is therefore only those shareholders whose names are on the company’s register of members that are members of the company. The term “shareholder” and “member” of a company are therefo re not the same thing. A shareholder is someone who holds at least one share in a company while a “member” is a shareholder whose name has been enter ed in the company’s register of members. A shareholder whose name is not entered in the register of members will not be entitled to membership rights.
Every company must have a minimum of two members at any time otherwise the directors who carry on the business of that company with less that two members will be personally liable for the debts of the company. Section 93,& Section 79(1) and (2) of CAMA however defines a member of a company as follows:
WHO MAY BECOME A MEMBER
The right and capacity to become a member of a company is open to any legal person, whether a natural person or an artificial person.
However the capacity of infants, personal representatives of deceased shareholders, corporations and Aliens are regulated as follows:
- Infants: A person under the age of 18 is not qualified to join in the formation of a company in his own right. He may only join if there are two adults also joining in the formation of the company along with him. In this case, the capacity of the two adults cures the incapacity of the infant. (s. 20(2) of CAMA). An infant who joins in the formation of a company shall however not be counted for the purpose of determining the minimum number of members of a company. (section 80 (2) of CAMA).
- Personal Representatives: When a shareholder dies, section 148 of CAMA provides that holders of the letters of administration of his estate (properties) of the deceased person, if he died without a will are the ones entitled to the shares held by him. If however he left the shares to some one in a will he made while alive, the person is entitled to those shares. If a deceased person left a will, in that case letters of administration are not applicable. However the benefiting persons do not automatically become members of the company. They must notify the company that they or their nominee should be registered in the Register of members of the company as the new holders of the shares inherited from the deceased shareholder. (section 155 (3) of CAMA).
- Corporations: A company upon incorporation becomes a legal person. It may therefore acquire shares in another company. However by section 20(3) of CAMA, a company under liquidation is not capable of acquiring shares in another company.
- Aliens: Aliens include foreign companies. They may acquire shares in Nigerian companies. Section 18 and 20(4) of CAMA. Section 17 of the Nigerian Investment Promotion Commission Act, 2004 also permits non-Nigerians to invest in any enterprises in Nigeria that is not prohibited.
Aliens must however secure the permits needed for them to enter Nigeria lawfully to carry out their business. These permits include, Business permit, Residency permit e.t.c.
HOW TO BECOME A MEMBER
A person may become a member by acquiring shares in a company in the following ways:
- By subscription: At the point of incorporating the company, it is required that the company have at least two shareholders who will sign the memorandum of Association and undertake to take at least 25% of the share capital among themselves (section 27(2)(b) CAMA.. These are the subscribers to the memorandum of the company. Section 79(1) of CAMA requires that as soon as the company is incorporated (i.e. registered) the subscribers shall have their names entered into the company’s register of members. The subscribers to the memorandum are therefore the first shareholders and members of the company.
- By Allotment: Allotment is the process of acquiring shares direct from the company whenever it issues or offers its shares for sale. In this case, when a person applies and is given certain number of shares, he is said to be allotted the shares. When he pays for the shares and his name is entered in the Register of members of the company he becomes a member. S. 125&127 CAMA.
- By transfer. Section 115 of CAMA provides that shares are properties whose ownership could be transferred from one person to another. A person may therefore become a shareholder if a former owner transfers his ownership of shares to him. This could be by sale or as a gift e.t.c. section 152 of CAMA however requires that the name of the new owner must be entered into the company’s register of members in replacement of the former owner, to become a member of the company.
- By Transmission: When a previous owner of shares dies and his shares are inherited by his personal representatives or heirs, this is called transmission of shares.
Shares may be inherited only by production of probate of a will of the deceased owner or letters of administration of his estate granted by the High Court. (section 148 of CAMA). The beneficiaries of the shares by transmission must have their names entered in the register of members of the company or elect a nominee to hold the shares on their behalf. In this case the nominee’s name shall be entered in the Register of members of the company to become a member of the company. (section 155 (3) of CAMA).
RIGHTS AND LIABILITIES OF MEMBERS
The right of members is stated in section 81 as the right to be invited and to attend any general meeting of the company and the right to speak and vote on any resolutions at the meetings. These rights are subject to the member having paid for all the shares he holds and if he has not paid for them for them, then until the company has made calls he continues to enjoy the membership rights. All a person needs to attend company meeting and vote is to hold and pay for at least only one share. (section 79(3) CAMA) where he holds more than one share but has paid for some, he may still attend company meetings unless the company insists on payment for all the shares.
LIABILITY OF MEMBERS
The liability of members depends on the type of company they are share holders in.
- Company Limited by Shares: The liability of members of a company limited by shares is limited to the amount if any, that may be outstanding on the shares they hold. If however they have paid for all their shares, they have no further liability in the company. Section 21(1) CAMA.
The company cannot force the members to take up more shares than they had willingly indicated to take; even if the memorandum is altered to increase the share capital of the company. (section 49, CAMA).
2. Company Limited by Guarantee: The liability of members of a company Limited by guarantee is limited to the amount each has agree to contribute to the assets of the company to meet its outstanding liabilities in the event of winding up, that is if its assets are not enough to settle its liabilities. Section 27(4) (b) of CAMA Thus, the members become liable to bring their agreed contribution if the company is winding up and the existing assets are not enough to pay the company’s debts.
3. Unlimited Company: The liability of members of an unlimited company is unlimited. (section 21 (1) (c) of CAMA). This means the liability stretches to the extent of the liability of the company.
DISCLOSURE OF INTEREST IN SHARES
The public company has power to require every or any member to disclose the capacity in which he holds shares in the company. This may be either as a personal owner i.e beneficial owner or as a nominee of another person. This requirement is not binding on private companies. Section 94(1) of CAMA.
The public company must keep a register of interests that shows the names of members with the kind of interest they have in the shares they hold. This register is different from the company’s Register of members (S. 97 of CAMA).
The Register of interest must also disclose the identity of substantial shareholders and how their substantial shareholding comes about. A person who holds at least 10% of the voting rights of a public company is a substantial shareholder. He is required to within 14 days of becoming aware that he is a substantial shareholder; notify the company giving his full names and address. He shall also state the shares held by him and those held by his nominees by virtue of which he is a substantial shareholder. (section 95 of CAMA).
REGISTER OF MEMBERS
Every Company registered in Nigeria is required to keep a register of members (section 83 of CAMA).
The register may be in bound copies or loose leaves,computer device, photographic film or in any other manner acceptable in commercial usage provided it is retrievable andlegible.. (section 550 of CAMA). The register shall be kept at the company’s registered office.
The Register contains the names of shareholders, the number of shares held by them, the date a person became a member and the date he ceased to be one.
A person becomes a member of the company only when his name is entered in the register of members. Section 79 (1) & (2) of CAMA. The term “shareholder” and “member” are sometimes used interchangeably; howeve r they are not the same. A person who acquires shares in a company is a shareholder and is entitled to dividends on the shares he holds. However he is not a member of the company until his name is entered in the register of members. Only members may attend company meetings, speak and vote on resolutions at company meetings. To enjoy these rights, a shareholder should exercise his right to having his name entered on the company’s register of members.
INSPECTION OF REGISTER OF MEMBERS
The register of members shall be open for inspection for at least two hours each day to members without charge and to any other person at a charge of N1.00 or less. A member or any other person with the permission of the company may obtain a copy of the register at a cost of 50k per 100 words (section 87 of CAMA).
RECTIFICATION OF REGISTER
Where the name of a shareholder is omitted from the register, or a person’s name is wrongly entered, or default is made or unnecessary delay is occasioned in deleting a shareholders name on the register of members having ceased to be a member, such person may apply to court for rectification of the Register. The rectification is to correct the register to reflect the correct information in respect of the aggrieved person’s shareholding status in the company. (section 90, CAMA).
- The subscribers of the memorandum of Association of a company are deemed to be members and they shall be included in the register of members of the company.
- Every other person who agrees in writing to become a member and whose name is entered in the Register of members of the company.
A person agrees in writing to be a member of a company if he acquires shares in the company by allotment, transfer, or transmission etc.
PROCEDURE FOR TRANSFER OF SHARES
The procedure for transfer depends on whether the seller is selling all his shares or only a part of it.
- Where the shareholder sells all his shares: In this case, the seller delivers his shares certificate to the buyer together with a document evidencing that he has sold the shares.
Either the buyer or the seller may then forward the certificate together with the document evidencing the sale to the company for registration. The company must within three months register the transfer of ownership to the buyer and issue him a new certificate showing he is the new owner of the shares. If the company has reason to refuse the registration, it must return the certificate, the document evidencing its sale together with a letter giving reasons for the refusal. Section 146 (2) and section 153 of CAMA.
2. Where only a part of the shares is sold. Where a shareholder sells only a part of the shares indicated on his shares certificate, or where he sells the shares in bits to different buyers, the procedure for transfer is as follows:
The seller prepares a document evidencing the number of shares sold to the buyer or the different buyers. He then sends the document together with the shares certificate to the company for certification. The company secretary will then stamp the document of transfer with the words “certificate ledged” or any similar words indicating that the buyer has lodged the share certificate for transfer of the shares sold to the buyer or respective buyers as indicated by him. The seller then hands the stamped document to the buyer or buyers.
Either the buyer or the seller will then follow up to have the company issue new shares certificate to the buyer or several buyers showing the number of shares sold to them. If some shares are still remaining to the credit of the seller, he too receives a new certificate evidencing ownership of the balance of his shares. The company must within three months of lodgment of the certificate and evidence of sale of the shares, issue new certificates as above stated or return the lodged documents with a letter giving reasons for the refusal. Section 146 and 157 of CAMA
If the seller has the electronic central securities clearing system on line stocks account of the Nigerian Stock Exchange, his stock broker will arrange the transfer on his behalf to the respective buyers.
TRANSFERS ON TRANSMISSION OF SHARES
Transmission of shares occurs when the shares of a deceased share holder are inherited or bequeathed to a heir or personal representative of the deceased shareholder. Where shares are held by two or more persons jointly then upon death of one or more of them, the surviving person shall be entitled to all the shares and they may be transferred to his name.
Where the shareholder held the shares as a sole owner, then his shares may be transferred only to the person named in his will or if he died without a will, then to the person who obtains letters of administration from the High Court in respect of the shares or the deceased’s property. Section 148 of CAMA. The above are in Law recognized as the personal representatives of the deceased share holder and are entitled to have his shares transferred to them or their nominee. Section 155 of CAMA.
RESTRICTION ON TRANSFER OF SHARES
In Okoya vs. Santilli (1994)4 NWLR (part 338) 256, the court held that shares are in the nature of personal property and are transferable in the manner allowed by the company’s articles of Association. This is also in line with section 115 of the CAMA, which provides that shares or other interests of a member in a company shall be property transferable in the manner provided in the articles of association of the company.
It therefore follows that the transfer of share is restricted in the manner allowed by the articles.
Section 22(2) of CAMA provides that every private company shall by its articles restrict the transfer of its shares. There is no similar provision relating to transfer of shares of a public company. It means there cannot be a restriction on the transfer of shares of a public company unless so directed by a court of law since there is no statutory requirement for a public company to restrict the transfer of its shares. However, public companies do not put restrictions on the transfer of shares because the shares of a public company may be freely traded on the Nigerian stock exchange.
A private company however must put restrictions on the transfer of its shares as prescribed in section 22 of CAMA as follows:
- Restriction clause: the articles of association of the company usually contains a restriction clause which prescribes that the directors in their absolute discretion without giving any reasons may refuse to approve the transfer of any shares whether or not it is a fully paid up share.
- Pre-emption clause. The articles of association in addition to the restriction clause or as an alternative to it, may provide that no shares of the company may be transferred to a non member unless no member can be found to purchase them at a fair price. The articles may alternatively provide that any member intending to sell his shares must first offer same to the existing members to buy and they may be sold to a non member only if no member is willing to buy at the market price and the directors must approve of the non-member to by the shares.
In Berry and Stewart v. Tottenham Hotspur F.C. Ltd (1935)Ch. 718. Berry owned one share in Tottenham Hotspur Football club Ltd. He sold it to Stewart. Berry wanted to transfer the share to Stewart and the directors refused to approve the transfer to Stewart of the shares sold to him by Berry. The directors did not give reasons for the refusal. Berry and Stewart sued to enforce the transfer. It was held that based on the restriction clause in the articles, the directors had the right to refuse to approve the transfer of any shares without giving any reasons.
Once the shares have been offered to existing members and they are unwilling or unable to buy them, the shares may be sold to outsiders without the directors having the right to refuse the transfer.
In Ocean Coal Co. Ltd v. Powell Duffryn Steam Coal Co. Ltd (1932)1 Ch. 654, the plaintiff offered his 135,000 shares at £2 to other members of the company with the approval of the Board of Directors. The members were unable to take up all the shares. It was held that the plaintiff was entitled to offer the shares to outsiders to buy since the other shareholders could not buy the shares.
Protection of Beneficiaries under a will: Sometimes a deceased member may name some persons as the administrators of his estate who are to ensure the deceased’s properties are distributed and/or managed as stated in the will. These persons therefore inherit the deceased persons shares on behalf and for the benefit of those who are named in the will as the beneficiaries inherit. The administrators therefore only have an equitable right in the shares but not the beneficial rights. This right becomes a legal right only when the shares are transferred to those entitled under the will. It is the duty of the executors of the will who in this case are the personal representatives of the deceased to ensure that they nominate those entitled to the shares under the will as those to whom the shares should be transferred to. (section 155 (3) of CAMA).
Any person claiming to have an interest in any shares or the dividends or interest on those shares may protect his interest by swearing to an affidavit indicating the nature of his interest and serving the company with the affidavit. The company shall then enter on the register of members the fact that such notice has been served on the company. The company shall therefore not register any transfer of shares of the deceased in respect of which it had received the affidavit of interest.
Any company which receives this notice of interest and in default proceeds to register any transfer in favour of any other person shall be personally liable to the person who lodged the notice of interest for any loss he suffers thereby. Section 156 of CAMA.
The Company shall give notice of at least 42 days to any other person seeking a transfer to him, of the shares complained of , for the matter to be resolved otherwise, the proposed transfer will not be effected. section 156 (2)
Mortgage/Attachment of Shares
Shares are personal property of value (s.115 of CAMA). They may therefore be mortgaged as security for a loan.
It is a legal mortgage if the shares are transferred to name of the mortgagee as security for a loan.
It is an equitable mortgage if the share certificate is only kept in the custody of the mortgagee as security for the loan.
Shares owned by a person may also be attached and sold in satisfaction of a judgment of a court of law. Order 5 rule 1, judgment Enforcement rules made pursuant to the sheriffs and civil process Act 2004.
COMPANY’S BORROWING POWERS
Section 166 of CAMA provides
“a company may borrow money for the purpose of its business or objects and may mortgage or charge its undertaking, property, and uncalled (unissued) share capital or any part thereof and issue debentures or debenture stock on other securities, whether outright or as security for any debt; liability or obligation of the company or of any third party.”
The company therefore has statutory power to borrow money and issue debentures to acknowledge the debt. It may also create a charge over its assets to secure the loan.
How the company’s borrowing powers may be exercised is however as stipulated in its memorandum or Articles of Association.
The directors must therefore exercise caution to exercise the borrowing powers of the company in accordance with the memorandum or articles of association of the company. If the directors purport to borrow money on behalf of the company but did not act in line with the provisions of the memorandum or articles of association of the company, they become personally liable. The company is not liable and it cannot also ratify the alleged borrowing as to make the company liable because the borrowing is illegal.
Meaning of Debentures
When a company borrows money, it may give a written acknowledgement to the creditor to evidence that the company is owing the money. The document will usually show the terms of the loan and the mode and date of payment. That document is called a debenture.
In Levy v. Abercorris State and Slab Co.(1887)37 Ch. 260 at 264, Chitty J. defined a debenture as “ a document which either cr eates a debt or acknowledges it and any document which fulfills either of these conditions is a debenture”. The above definition agrees with the CAMA which defines a debenture as ‘a written acknowledgement of indebtedness by the company setting out the terms and conditions of the indebtedness…’( s.567 CAMA.)
A debenture may be secured or unsecured.
A debenture is secured when it is guaranteed by a charge over the assets of the company so that in the event the company is unable to pay, the assets charged may be taken and sold by the creditor to recover his money.
A debenture is not secured if the debt is not secured by any assets of the company.
TYPES OF DEBENTURES
In company practice, debentures are recognized in the following types:
- Perpetual debentures. These are debentures that are intended to be permanent i.e. irredeemable or which may be redeemed only on the happening of an event or after a fixed period of time in which case until the event occurs or the fixed period reaches the debenture cannot be redeemed. Section 171 of CAMA
- Convertible debentures. These are debentures that have the option of being converted into shares of the company at the option of the company or the debenture holder, depending on their agreement. S. 172 CAMA.
- Secured and naked debentures. A debenture is secured if it creates a charge over the company’s assets or any part thereof. The charge may be fixed i.e. over a specified asset of the company or a floating charge i.e. which may attach any available asset of the company if the debenture is not redeemed when it is due.. A naked debenture is one which is not secured by any charge over the company’s assets or any part thereof. Section 173 of CAMA
- Redeemable debentures. These are debentures that are redeemable at any time by the company. section 174 CAMA.
- Bearer debentures. These are debentures that are payable to whoever presents them for payment. They are therefore negotiable instruments.
- Registered debentures. These debentures are payable only to those mentioned in the debentures as the registered holders.
DEBENTURE TRUST DEED. SECTION 183 OF CAMA
Where a company has issued several debentures of different classes discussed above, to the public, it must execute a debenture trust deed in respect of each class of debentures. The company will execute the trust deed on behalf of each class of debenture holders, get trustees that will manage the debenture and protect the interest of the debenture holders.
The debentures that are entitled to have a trust deed are either of the following
- Holders of debentures that are entitled to participate in any money payable by the company under the debenture deed; or
- Holders of debentures that are covered by a mortgage, charge or security created by the debenture deed.
The advantage of a debenture covered by a trust deed is that as soon as it becomes clear the company is unable to pay its debt, the trustees of the debenture holders will move in to ensure that the debentures covered by the trust deed take priority over other company debtors in taking over the company’s property to secure the interests of debenture holders covered by the trust deed.
ISSUE OF DEBENTURES
Where a company wishes to raise money by way of loan, it may issue debentures. This is a certificate indicating the company owes a specified amount which will be payable at a later date with agreed interest. The certificate may be of a fixed sum of say N1000 each. A person may buy several of them as his money can buy.
Where the debentures are to be issued to the public by a public company, then it must issue a prospectus as if it is issuing shares to the public.
In this case it must create a trust deed under which trustees will be appointed to take care of the secured debentures under the debenture trust deed. S. 183(1) of CAMA.
CHARGES SECURING DEBENTURES
When a debenture is secured by creating a charge over the assets of the company or a part whereof, it is called a charges secured debenture.
The debenture is a Naked Debenture if it does not create any charge over the company’s assets.
Fixed charges. This arises when the debenture is secured by creating a charge over some specified or fixed assets of the company, such as land, machines, e.t.c. In this case the debenture is also said to be a mortgage debenture because by creating the fixed charge, the company has mortgaged the assets and cannot deal with it as it pleases.
Floating charges. This is a debenture which does not create a charge over a given asset of the company. The charge is a general one which can attach to any asset of the company available except those already subject to a fixed charge.
Registration of charges. Once a company creates charges over its property, it shall within 90 days thereof deliver a notice to the corporate Affairs commission (CAC) for registration of the charges created. The CAC will then issue a certificate as evidence of registration (section 197(1) and 198(2) CAMA).
It is therefore important that one conducts searches with the CAC before taking up debentures with a company to be sure the assets are not already subject to a mortgage by the company. The charges once registered take precedence based on whose charges are registered first.
The company is also required by law to keep a register of charges it creates over its assets. Section 191 (1) of CAMA.
The company must also keep a register of its debenture holders (section 193 (1) of CAMA.
The two registers mentioned above are open for inspection and copies may be obtained on payment of the prescribed fees. (section 192 and 194 of CAMA.) Persons wishing to take up debentures with a company should insist on inspecting its register of charges and register of debenture holders to be sure the properties are not already mortgaged.
REMEDIES OF DEBENTURE HOLDERS
- The debenture holder is primarily a creditor who is entitled to his money (principal) with the interest agreed upon the arrival of the date agreed for payment.
He may therefore sue the company to recover his principal and interest (section 176 (2) and 209 (2) CAMA.
If he gets judgment in his favour, he may levy execution on any property of the company.
- Petition for winding up. Under section 408 (d) and 409 of CAMA, it is a ground for compulsory winding up if a company is unable to pay a debt of any sum above N2,000 if a demand is made and the company is unable to, within 21 days pay up the debt.
- Power of sale. The debenture holder has power of sale in two ways :
- Where the debenture deed contains a power of sale, then a debenture holder may move in to take over and sell the asset charged or chargeable under the debenture document. This is done by appointing a person as receiver to take over the property concerned s. 209 (1) CAMA.
- Right of foreclosure. Section 209 (2) (b) (i) of CAMA. The debenture holder may seek an order of court to foreclose the property of the company that was subject to the debenture. In this case the company loses ownership of the property to the debenture holder.
- Appointment of a Receiver/manager. Section 180 (3), 209(1) of CAMA whenever payment to secured debenture is due and remains unpaid, the secured debenture holder may appoint a receiver or receiver/manager if the debenture deed contains such a power. If no such power is provided, the debenture holders may apply to court for the receiver to be appointed. The receiver takes over the charged assets by taking further steps to realize the money.
- Proving for balance on winding up. In practice a secured debenture ranks among the priority debtors to be paid from the sale of the company’s property during winding up. If he had not gotten all or any of his money, he may sue the liquidator of the company for the balance of his money.
Who is a director?
A Director is a person duly appointed to direct and manage the business of a company (section 244 of CAMA). This definition covers any person occupying the position of director in a company irrespective of the name by which he is called (section 567 CAMA) thus a person who performs the functions of a director is a director even if he is not called by the name director.
The term also extends to persons on whose instruction or directions the directors of a company are accustomed to act. This category of persons are referred to or called shadow directors (section 245 of CAMA). The company has two major organs, the General meeting and the Board of Directors. (section 63 of CAMA) these two are the alter ego. They are therefore not servant or agents of the company when they act as a board or general meeting. They are the company itself. Individual directors who take up appointment with the company are in that capacity its agents i.e. Managing Director etc. It means that some directors are employees of the company (they are called executive directors). There are directors who are not employees of the company (they are called non-executive directors. s.282 (4) CAMA.
Types of Directors
- Non Executive Directors; These are Directors who do not hold any employment with the company as directors i.e. their position as directors is not by virtue of their being employed and paid salaries in the company. They only collect sitting allowances.
- Executive Directors: these are persons who are employed by the company as Directors under a contract of employment. Executive directors are responsible for the day to day running of the company, while non Executive directors only attend periodic meetings of the Board of Directors where company policies are formulated for the Executive directors to implement. (Section 282 (4) of CAMA).
- Alternate Directors: These types of directors are usually created by the Articles of Association of the company. They are directors appointed by a serving director to seat on the board in his place in case he has to be absent.
- Shadow Directors: these are persons on whose directives and instructions the Board of Directors is accustomed to act. This refers to those who control the decisions of the board from behind the scenes. (Section 245 of CAMA).
- Directors by estoppels. Section 250 and 260 of CAMA. Where a company holds someone out as its director and he so acts, the company is bound by his acts and the defect in his appointment i.e. the fact that he was never appointed in the first place will not be a defence for the company.
Number of Directors
Every company shall have a minimum of two directors at any time. (section 246 of CAMA). The company may by its articles of Association fix the maximum number of its directors (S.249 (3) of CAMA).
Appointment of Director
1(a) First Directors; By section 247, a first director is a person named in the memorandum of the company by the first subscribers (shareholders) of the company as director
- They may also be named in a clause in the articles of Association of the company as directors at the point of incorporating the company.
- Subsequent Directors
Apart from those who were the first directors appointed at the incorporation of the company, all others after them are subsequent directors. The may be appointed in the following ways:
- By power under the articles. Section 41(3) of CAMA. The articles of Association may confer power to appoint or fire any director on a person whether within or outside the company.
- By order of a court. ( section 248 (2) of CAMA). Where all the directors and shareholders of a company die, any of the personal (legal) representatives of the deceased shareholders may apply to the court for an order allowing them to convene a meeting of the company to appoint new directors for the company. If they fail to do so, the creditors of the company may do so.
- Life director. S. 255 and 262 of CAMA. A person may in the articles of Association be named as a life director of the company. He may notwithstanding be removed either by amending the articles to delete the clause appointing him life director or he may be removed by an ordinary resolution of the general meeting of the company subject to payment of damages to him for breach of his tenure of office. S.262 (6) CAMA.
- Appointment to fill casual vacancy. (section 249 (1) of CAMA). Where a director dies, resigns, retires or is removed before the expiry of his term of office, the Board of Directors may fill that vacancy. Such persons will be in office only until the next General meeting when they may be re-elected or removed.
- Election of Directors. Section 259 of CAMA. Unless the company’s articles of Association otherwise provide, all the directors of a company shall retire at the first Annual General Meeting of the company. At subsequent Annual General Meetings, one third of the Directors shall retire in the order of seniority. At these meetings, as the directors retire, those who present themselves or are nominated are voted in as directors to replace these retiring unless they are re-elected.
Rotation of Directors;
Section 259 of CAMA provides for rotation of directors as earlier noted in 3.2 above. The position in section 259 applies only if a company’s articles of Association are silent on the order of rotation (or retirement) of Directors.
- At the first Annual General Meeting all the Directors retire for fresh elections to take place. Retiring directors are eligible to re-election.
- At every subsequent Annual General Meeting, one third of the Directors shall retire. If the number is not a multiple of three i.e 3,6,9,12,15,18, e.t.c. The number nearest to one third shall retire.
The directors shall retire based on seniority in date of first appointment.
If those qualified to retire are more than one third, lot will be cast to determine the one third to retire i.e if 6 persons were appointed the same day and one third is to retire in their order of seniority only 2 will retire. To decide the 2 out of the 6 that will retire, lot will be cast since they all came in on the same day unless 2 volunteer to retire.
A retiring director who offers himself for re-election is deemed to be re-elected automatically unless:
- Another person is elected to replace him, or
- It was expressly resolved at the meeting not to fill the vacancy created by his retirement, or
- A resolution for his re-election is put to vote but lost.
NOMINATION AND VOTING OF DIRECTORS
- 259(4) and 261(3) of CAMA.
- retiring directors are eligible to offer themselves for re-election
- persons other than retiring directors shall be nominated by the Board of Directors; or
- such persons may in the alternative be nominated by any member of the company in writing to the company by depositing the notice of nomination with the nominee’s consent in writing with the company at least between 21 days to 3 days to the date of the Annual General Meeting where the election will take place. The person proposed must himself accept the nomination in writing.
Unless the articles otherwise provide, the appointment of directors is by ordinary resolution.
In a public company, each director is appointed by a separate resolution. In a private company however, the director may all be appointed by a single resolution. Section 251(1) of CAMA.
Age of Directors
The minimum age for appointment of a director is 18 years there is no maximum. Section 257 (1) (a) of CAMA. However for a public company to appoint a person of 70 years or above, special Notice of 28 days must be given to the company (section) 256 of CAMA) The company must in turn state in its notice of the General meeting concerned that it is proposed to present a person of 70 years or above for appointment as director (section 256 of CAMA). The person himself shall disclose this fact to the members at the general meeting.
Fiduciary duties of Directors ( loyalty and good faith.)
- The directors must observe utmost good faith towards the company in any transaction with or for the company S. 279 (1).
- They must act at all times in what they honestly believe to be in the best interest of the company. S. 279 (3) and (4).
- They must exercise company powers for the purpose specified and not for personal benefit. S. 279(5).
- They must not compromise their discretion to vote in a particular way in any Board resolution S. 279 (6)
- They must not delegate their powers in circumstances that amount to abdication of duties S. 279(7).
Directors Duties of care and skill s. 282
Every director shall exercise that degree of care, diligence and skill which a reasonably prudent director would exercise in comparable circumstances.
In Re City Equitable Fire Insurance Co. LTD (1925) Ch. 407, Romer J. laid down three yardstick for this duty as follows:
- A director need not exhibit in the performance of his duty a greater degree of skill than should be expected of a person of his knowledge and experience.
- A director is not bound to give continuous attention to the affairs of the company. It is enough if he attends periodic board meetings. The position is however different if one is an Executive director on salary with the company. S. 2. 282 (4)
- The directors are not guilty of breach of the duty of care and skill if having regard to the exigency of business they delegate their duties to the Managing Director or a Committee of the Board provided there is basis for trusting such officials of the board. Care should however be taken not to delegate duties as may amount to abdication of duties.
CONFLICT OF INTERESTS
A director shall not place himself in a position where his personal interests will clash with that of the company. Section 280(1) of CAMA. Conflict of interests may arise in the following situations :
- Where the director is utilizing the company’s property for his personal benefit outside approved limits S.280(20 (a)
- Where he utilizes his position to make secret profits out of the company’s opportunities. section 280(3).
- where he misuses company information coming to him by virtue of being a director.
These duties must be observed even after leaving office. S. 280(5)
LIABILITY OF DIRECTORS
- The directors are liable to account for any secret profits made, unless same had first been disclosed and approved or over looked by the General meeting s. 280(6).
- The liability of directors in the company is unlimited if the memorandum or Articles of Association states, so S. 288(1)
- A director who fraudulently fails to apply money received as loan on behalf of the company for a specific purpose, or money or other consideration as advance to the company for a contract or project, for the specified purpose or contract shall be liable personally for the money S. 290.
SALARY OF DIRECTORS S. 267
Directors are not entitled to any salaries unless the article of Association so provide, in which case the salary is fixed by the General meeting from time to time. The directors are however entitled to refund for expenses properly incurred in the course of the company’s business.
MEETING OF DIRECTORS
After incorporation, the first meeting of the Directors shall be within 6 months of incorporation. S. 263 (1).CAMA
Decisions at Board meetings shall be by simple majority votes and in case of a tie in votes cast, the chairman shall have a second vote or casting vote s. 263(2) CAMA.
The Board shall elect its chairman and fix his tenure. S. 263(4) CAMA.
Unless the articles otherwise provide, the quorum for meetings shall be 2 directors where the directors are not more than 6. If the number is more than 6, then quorum is one third or the nearest whole number to one third. S. 264(1).CAMA.
The board may delegate some or all of its powers to be exercised by the a committee of the board from time to time or appoint one or more of the directors to the office of managing Director and delegate all or some of its powers to him from time to time. S. 64 and S. 264.CAMA
All directors are entitled as of right to notice of meetings. S.219 & 266(1). Meetings are called at the instance of any director. S. 263(3)
The managing director is appointed and is removable by the Board. Yalaju-Amaye V. AREC Ltd (1990) 4 NWLR (pt 145) 425.
REGISTER OF DIRECTORS
The company Shall Keep a register of directors and Secretaries at its registered office s. 292(4)
REMOVAL OF DIRECTORS
The Board of Directors is one of the two principal organs of the Company. Their removal is governed by the CAMA. This unit outlines the circumstances and the procedure for removal of Directors under the CAMA.
The removal of directors is a statutory matter. The CAMA provides for the appointment and removal of directors. It therefore means that any company that wants to remove its directors must adhere to the procedure prescribed by the CAMA.
In the case of, Bernard Longe v. First Bank of Nigeria Plc, (2010) All FWLR 252 528 at 310 the Supreme Court clearly stated that directors are persons whose appointment under the CAMA is one with statutory flavor and may be removed only by strict adherence to the procedures prescribed by the CAMA. In that case, Bernard Longe was removed by the Board of Directors as Managing Director of First Bank of Nigeria Plc without complying with section 262 and 266 of the CAMA. The plaintiff lost at the Federal High Court and Court of Appeal, Lagos. He however won at the Supreme Court where the court ordered his reinstatement with full benefits as if he was not removed in the first place. It is therefore very important to adhere strictly with the procedures laid down by the CAMA for the removal of directors.
DISQUALIFICATION FROM APPOINTMENT, Section 257 (CAMA).
The following persons are disqualified from being appointed as directors under the law.
- Infants i.e. persons under 18 years as at the date of the appointment.
- A lunatic or person of unsound mind
- Insolvent persons (s. 253)CAMA
- Persons convicted of fraud S. 254.CAMA
- A corporate body, except if it chooses a nominee to represent it. (s.257 CAMA).
VACATION OF OFFICE. S. 258 CAMA
A person already appointed as director shall vacate or lose the office if the following circumstances occur:
- He fails, within two months of his appointment to acquire the required number of shares specified for directors in the Articles of Association of the Company
- He becomes bankrupt or reaches an arrangement or compromise with his creditors.
- He is convicted of fraud and thereby restrained by court order from taking part in the management of any company.
3. He becomes of unsound mind.
4. He resigns from office in writing to the company.
A person may not have been under the category of persons disqualified from being appointed a director under S. 257 CAMA. However, after being appointed a director and before the expiry of his tenure of office, he becomes caught up with one or more of those elements that disqualifies a person from becoming a director. In such a case he will be forced by law to resign or be removed from office by court order if he refuses to leave.
It should however be noted that in the case of a lunatic or an insolvent person, they can only be removed from office if it was a court of law that held that they are lunatic or insolvent. Only a court order on the issue is a final conclusion that a person is insolvent or a lunatic.
REMOVAL FROM OFFICE
Section 41 (3) of CAMA provides that the memorandum or articles of association of a company may empower any person to appoint or remove any director or other officer of the company. Where this is the case, then the director may be removed from office pursuant to section 41 (3).
The person who may remove a director by the power conferred by S. 41(3) shall be a person other than the company itself.
The above is one way by which a director may be removed. The other way is by complying with the procedure in section 262. This procedure will be employed where the company itself wishes to remove its director or when any other person wishes to procure a company resolution to remove a company director. S. 262.
In the case of a life director, though he is appointed for life he may be removed under section 262 by an ordinary resolution of the company’s general meeting subject to payment of damages. S262(6) CAMA.
However, he may also be removed by amending the company’s articles of association to delete the clause which appointed him a life director. This procedure is however very difficult as it requires three-fourths majority of total votes cast at the meeting. After a successful amendment, the life director stands removed. In this case there is no damage to be paid to him under section 262 (6) of CAMA since the basis for his claim has been removed i.e. the clause under which he could have claimed breach of his appointment has been removed through the amendment that was made deleting the clause in the articles that appointed him. He can no longer sue under the new articles since they no longer contain the clause for life directorship.
A Company may by ordinary resolution of the General meeting remove a director from office not withstanding anything in its articles or any agreement with him. Section 262 (1) of CAMA.
This however does not deprive the director so removed from claiming damages for breach of his contract of service where there was a contract between him and the company for a fixed period. Section 262 (6) of CAMA.
A director may be removed in the following manner:
- If there is a procedure specified in the articles or letter of appointment of the Director, especially the Executive Directors, the procedure should be followed i.e. section 41(3) of CAMA if it proves to be shorter or faster.
- If there is no other shorter procedure for removal of directors especially the non-executive directors, the only other procedure is as follows:
- The persons proposing the removal of a director will issue a special notice to the company containing the proposal for the removal stating reasons. The notice must give at least 28 days before the proposed date of the general meeting where the removal is proposed to take place. Section 236 & 262 (2) of CAMA.
- The Company Secretary then sends the notice to the director(s) to be removed requesting his response if any.
- If the response of the director concerned did not come in too late, the response will be sent out along with the Notice of meeting of the company at least 21 days to the date of the meeting.
- At the meeting, the director concerned is entitled to make oral representation, and have his written response circulated at the meeting if it was not earlier sent out with the Notice of meeting.
- The resolution to remove the director is then put to vote.
A simple resolution i.e. a simple majority of votes cast is required to remove a director. Section 162 (1) – (3) of CAMA.
The Corporate Affairs Commission is thereafter notified within 14 days of the resolution to remove the director.
Removal of life director
The procedure for removal of directors also applies to life directors. Section 255 of CAMA defines a life director as one appointed for life. S. 255 and 262 however provides that a life director may be removed by ordinary resolution not withstanding anything in the articles or in any agreement with him. All directors may be removed from office before the expiry of their tenure. However, such director is entitled to compensation or damages for the unexpired residue of his contract of service as director with the company. If a person is appointed director for a tenure of say 5 yrs and is removed, not due to a breach of his contract of service, say after only 2years .He is entitled to compensation equivalent to the money he could have earned for the balance of 3yrs had he not been removed from office.. Section 262 (6) of CAMA. In the case of a life director removed before his death or voluntary retirement, he shall get compensation equivalent to what the court may assess as the balance of his life expectancy.
If however the articles which made have a life director has been amended to delete the said clause, then the life director will not be entitled to any damages.
PUBLICATION OF REMOVAL
Once a director has been removed, it is important to notify the Corporate Affairs Commission within 14 days. The company shall also proceed to remove his name from its letterhead papers, receipts, documents in circulation etc. failure to take the above steps might make the company liable for the removed directors’ acts. The company will be deemed to hold him out as a director by not taking steps to publicise his removal in all its documents that are in circulator and with the Corporate Affairs Commission. Section 69(b), 250 and 260 of CAMA.
NATURE AND TYPES OF MEETINGS
The members of the Company in General meeting are the other organ of the Company apart from the Board of Directors. The members are an organ of the Company when they function at the general meeting of the Company.
There are three types of General meetings of the company. These are the statutory meeting, the Annual General meeting (AGM) and the Extra Ordinary General Meeting (EGM).
STATUTORY MEETINGS s.211.CAMA
This type of meeting is mandatory only for the public company. It must be held within six months of the incorporation of the company.
The meeting is meant to give Directors an opportunity to present the progress report of the company to the members of the company. The progress report is a report which the CAMA requires should contain certain prescribes information. These include the following:
- The number of shares allotted
- The total amount received in respect of the shares allotted
- Names, addresses and description of the directors, managers, Secretary, Auditor etc.
- Particulars of any pre-incorporation contracts
- Commission paid or to be paid in connection with the issuance of shares.
- Preliminary expenses of the company with the receipts.
- The balance of money at hand to the company’s account. Etc.
Members at the meeting are free to discuss the report and take resolutions thereon.
- 211(8) of CAMA.
Before the meeting is convened, a Copy of the progress report referred to as the Statutory Report must be filed with the Corporate Affairs Commission (CAC) forthwith as copies of the report are sent or given to members.
Failure to hold the meeting within the six months of incorporation or failure to deliver the statutory report to the CAC is a ground for compulsory winding up of the Company s. 408 (b) of CAMA.
The Company and any of it officers who is part of the default in holding the meeting as prescribe by law shall be liable to a fine of N50 per each day of default (S. 212 of CAMA).
ANNUAL GENERAL MEETING (AGM)
Every Company must hold an Annual General Meeting (AGM) in addition to any other meetings it may hold. There should not be more than 15 months between one AGM and the next.
The first AGM must however be held within 18 months of incorporation, thereafter the next AGM will be held within 15 months of each other. The Corporate Affairs Commission (CAC) has power to upon application extend the period within which an AGM could be held by 3 months. The CAC cannot however extend the period by which the first AGM may be held. (Section 213 of CAMA) If the company fails to hold its AGM as required by Law, the CAC may upon the petition of a member, call or direct the calling of the meeting and give such directions as it deems fit. These directions may include permission for a member to by himself hold the meeting and take decisions that will be binding on the Company. This one man meeting will be deemed to be the general meeting of the company. Section 213 of CAMA).
EXTRA ORDINARY GENERAL MEETING (EGM)
Extra Ordinary General Meetings as the name implies are general meetings called to deal with emergency or urgent matters that cannot wait for the next AGM. The EGM may be convened by the directors; however, members of the company may also convene one. This is called requisition of meeting.
One or more of the members holding at least one tenth of the paid up share capital of the company, in the case of a Limited liability company or one tenth of the company’s voting rights in the case of a company Limited by Guarantee (which has no share Capital) may requisition an EGM.
The requisitionists shall deposit a signed requisition in writing stating the agenda (object) of the meeting at the registered office of the company. The requisition shall be signed by one or more of them requesting the directors to within 21 days of the requisition proceed to convene the meeting. If the directors fail to call the meeting, the requisitionists may proceed to convene the meeting and take decisions which will be binding on the Company.
Expenses incurred in holding the meeting shall be borne by the company and recovered from the directors (Section 215 of CAMA).
ONE MAN MEETINGS
The general rule regarding meetings is that there has to be two or more persons for a meeting to hold. This principle makes both common and legal sense. A person cannot meet all by himself. He has to be with another person for a meeting to take place. In SHARP v. DAWES, (1876)2QB.D26, this assertion was given judicial recognition under the Common Law. In thi s ca se , a co mpa n y me etin g wa s co nv e ned but on l y th e secretary Mr . Sharp and another shareholder, Mr. Silversides attended. The meeting nevertheless proceeded to business with Mr. Silversides chairing. The meeting decided that a call be made on all shares that have not been paid for. Mr. Dawes received one of such calls but refused to pay, arguing that there was no valid meeting authorizing the calls to be made.
The Court per Lord Coledrige CJ. held that there was no valid meeting convened, Mr. Silversides being the only shareholder present could not by himself constitute a meeting, the meeting being a shareholders meeting.
The Court in the above case based its decision on the fact that in the ordinary use of the English language, a meeting could not be constituted by one shareholder. However, in Re London flats Ltd,(1969)2All ER744, Plowman, J. held that as a general rule, one shareholder could not constitute a meeting except where it could be shown that the word “meeting” had a special meaning and could include a single shareholder.
It is submitted that under the CAMA, Nigeria’s principal Companies legislation, the word ‘meeting’ as it relates to Company meetings admits of special circumstances where one man company meetings could be held.
ONE MAN MEETING UNDER THE COMMON LAW
As far back as 1911, one man meetings had been recognized by the Courts in England. In East v. Bennett Bros. Ltd,(1911)1Ch163, it was held that one member who held all the shares of a particular class of shareholders could by himself constitute a meeting of that class of shareholders. In this case it was argued and properly too that being the holder of all the preference shares of the company, no other person was affected by the preference shareholder’s action and therefore there was no basis for defeating the validity of his one man meeting.
It is respectfully submitted in the same vein that where the quorum for a given Company meeting is fixed by percentage of shareholding the holder of that percentage of shareholding could by himself alone constitute the quorum for the meeting to take place. The reasoning in East v. Bennett Bros. Ltd Supra could respectfully apply for example if quorum for a given meeting is fixed at say holders of 60%, if only one member holds the required 60% he constitutes the required quorum to hold the meeting by himself.
ONE MAN MEETING UNDER THE STATUTE
There are provisions of the CAMA which have the effect of admitting the legality of one man Company meetings as follows:
By court order
- Where there is default in holding Annual General Meeting, (AGM) within 15 months of a previous Annual General Meeting and the next, any member of the Company may apply to the Corporate Affairs Commission for directions. These directions “shall include a direction that one member of the company present in person or by proxy may apply to the Court for an Order take decision which shall bind all the members. Section 213(2) CAMA
- Where not due to default but due to impracticability, it is not possible to call a meeting of the company or of the Board of Directors, any shareholder or director may apply to the Court for an order to convene and hold the meeting. The Court has power under the CAMA to order that one member in the case of company meetings and one director in the case of board meetings may in person or by proxy hold the meeting and it shall be binding on all the members or the directors as the case may be. S. 223(5) CAMA
- Where there is a quorum at the beginning of a meeting but no quorum later to continue the meeting as required by law, due to the deliberate act of some members withdrawing from the meeting to break existing quorum, the Court may order a one man meeting where that is what is necessary if the meeting must hold. S. 232(5) CAMA
- Where Board Meetings are unable to hold due to consistent lack of quorum, a board member may apply to Court to hold a board meeting by himself and bind all the other members. CAMA
One man extra ordinary general meetings
Once the Board of Directors of a company receives notice by a member or members of the company for a requisition of an Extra-ordinary General Meeting (EGM) they must within 21 days convene the meeting. If they fail to do so, “the requisitionists or any one or more of them representing more than one half of the total voting rights of all of them may themselves convene the meeting. From the above, it is clear that if only one of the requisitionists holds rights representing more than one half of the total voting rights of all the requisitionists, he may by himself convene the EGM.
One man meeting by proxies
Any member of a company qualified to attend and vote at a meeting of the company shall be entitled to appoint another person, whether a member or not to attend and vote instead of him. It is submitted that since the statute allows appointment of proxies, a shareholder may attend a company meeting in person or by proxy. A shareholder who receives a proxy therefore attends the meeting for himself and as the representative of the others whose proxies he holds. He therefore has several capacities at the meeting. The shareholder armed with the proxy mandate could validity convene a meeting as if all the others were physically present if he and the proxies he holds constitutes the required quorum.
One man meeting in wholly-owned subsidiaries
A company is a wholly-owned subsidiary where the only shareholders of the company are its parent company and the parent company’s other subsidiaries are nominees of the parent company. Where a meeting of the wholly owned subsidiary is called and only the representative of the parent company is present and armed with a proxy mandate from the other subsidiary of the parent company which is itself a nominee of the parent company, a one man meeting could validly take place.
Although the general rule is that – one man cannot constitute a meeting all by himself, there are special situations where this may be possible. Under the Common Law this fact had been recognized first in East v. Bennett Bros. Ltd (Supra). The courts later acknowledged that where the statute allows the word “meeting” to admit of a special meaning as to include a one man meeting, then the courts could exercise jurisdiction to order for or validate one man meetings.
In Re El-Sombrero Ltd(1958)3 All ER 1, the applicant held 90% of the shares of the private company. The two directors of the company held 5% shares each in the company. The applicant desired to sack the directors. All efforts to convene a meeting of the company failed. Two shareholders are required to form a quorum for a general meeting to hold, so the two directors being the only shareholders besides the applicant never attended any meeting so that there will not be quorum.
The applicant therefore requisitioned a meeting. The other two shareholders as usual refused to attend. The applicant therefore applied for direction to hold a one man meeting as allowed by the section 135 (1) of the 1948 English Companies Act.
The other shareholders/directors opposed the application arguing that one man cannot constitute a meeting.
The court held that since it has become impracticable to hold a meeting, the courts had jurisdiction under the 1948 Companies Act to order for a one man meeting. The Court indeed granted the order.
One man meetings are an exception, they are a weapon in some cases where benefits or rights are deprived because of lack of a valid meeting to approve or exercise the rights or benefits.
The existence of the one man meeting option is also a minority protection as in the El-Sombrero case Supra where the majority uses their number to oppress a numerical minority.
NOTICE OF MEETINGS
When notice of meeting is to be issued, time must be given to enable the notice reach the persons intended and to enable them prepare and attend the meeting. Under the CAMA, section 217 provides that the length of notice for all types of general meetings of the company shall be 21 days from the date the notice was sent out, i.e. the 21 days include the date the notice was sent out. A general meeting may however be called by a shorter notice i
- In the case of an Annual General Meeting (AGM) all the members entitled to attend and vote at the meeting agree.
- In the case of any other general meeting if a majority of the members holding at least 95% of the nominal value of the shares carrying a right to attend and vote at the meeting agrees.
In practice, this may not be possible if the company has a large shareholder base. Only a company with a few share holders could be able to contact all the shareholders to get their prior agreement to a shorter notice.
The only circumstance where the requirement of length of notice may not be complied with is when members requisition an extra-ordinary general meeting as outlined under S. 215 (5) of CAMA.
Any notice that does not meet the requirements of length of notice is invalid as no meeting could validly hold without complying with the statutory length of period prescribed by the CAMA.
Entitlement to Notice of Meeting. Section 219(1) of CAMA.
It is mandatory to serve a Notice of Company General meeting on the following:
- Every member of the company.
- Levery person on whom the ownership of a share devolves by reason of his being a legal representative, receiver or a trustee in Bankruptcy of a member of the Company.
- Every director of the Company
- Every Current Auditor of the Company
- The Company Secretary.
Service of Notice
Notice of meeting may be given to those entitled either personally or by post to the address supplied by the person to the company for sending notices to him.
Notice sent by post must contain the correct address and correct postage stamp.
The notice so posted is deemed to be delivered after 7 days of the postage.
In the case of deceased or bankrupt persons, notice of meeting shall continue to be sent to their usual address before their death or bankruptcy until their legal representatives supply a new address if any to the company.
Where several persons hold shares jointly, notice sent to the holder first named in the company’s register of members shall be deemed to be notice to all the other joint holders. Section 220(1)-(4) of CAMA.
Failure to give Notice
Failure to give notice of meeting as required to any one person entitled to receive such notice shall invalidate the entire meeting if held. It does not matter that the person concerned had informed the chairman that he may not attend the meeting. The burden to send out notices is statutory and must be carried out. It is left for the recipient to decide whether or not to attend the meeting. S 218 and S. 221 of CAMA. In young v. Ladies Imperial Club Ltd (1920)2 KB 523. A meeting of the club was held in which the plaintiff (young) was not invited. she had told the chairman that she may not attend the meeting, so they did not invite her. The English court of Appeal held that the meeting was invalid for failure to invite young.
It is doubtful if the court would have made the same finding if young had sent a notice in writing requesting not to be sent the notice.
However, S. 221 provides that where the failure to send notice is an accidental omission, the meeting shall not be invalid or where the notice was sent but failed to arrive by no fault of the company i.e. if the notice was sent by post to the correct address with the correct postage stamp.
The burden is upon the company to prove that the failure to send the notice is accidental, or that the failure of the notice posted, to reach the person entitled was not due to the negligence of the company.
In Re West Canadian Collieries Ltd (1962) Ch 370, there was failure to issue notice of meeting to some members. The company contended that the failure was due to the fact that the printing plates containing the names of the members who were not issued notice were inadvertently kept out of the machine when the envelopes for the notices to the concerned members were being printed. The court was satisfied that the omission was accidental. The meeting was held to be valid.
However, where the failure to give notice of meeting was due to a misinterpretation or misrepresentation of the law or the articles, shall not amount to accidental omission. S. 221 (2) of CAMA. It will amount rather to an error of law which shall not be an excuse.
In Musselwhite v. C.H. Musselwhite & Sons Ltd (1962)Ch. 964 the company did not give notice of meeting to certain of its members who had sold their shares but had not been paid and so did not effect a transfer of the shares to the new members. The directors believed that having entered into a contract to sell their shares, they had thereby ceased to be members of the company and so were not invited to the company meeting in question. The court held that the error was one of law and was not an accidental omission. The meeting was consequently invalidated.
CONTENTS OF NOTICE OF MEETING
The notice of meeting shall contain the place, date and time of the meeting. It shall also specify, the nature of business to be transacted at the meeting in sufficient details to enable members decide whether or not to attend (Section 218(1) of CAMA).
No business may be introduced at the meeting if it was not specified in sufficient details. This therefore rules out the possibility of the popular “Any other Business” that is usually included on the agenda of meetings for the transaction of any other business not earlier included in the agenda. (Section 218(3) of CAMA.) If the business to be transacted is a special business, the resolution proposed must be quoted in the notice of meeting with the terms clearly indicated. (S. 218(1 CAMA In Baillie v. Oriental Telephone Co. Ltd (1915) 1Ch. 503, Directors of the holding company had also been receiving salaries as directors of a subsidiary company without the knowledge of the shareholders of the holding company. A meeting was called to give approval for the affected directors to retain the extra salaries not earlier disclosed. The notice did not however disclose how much money was involved. The resolution was passed without knowing how much money was being approved. Some shareholders challenged the resolution as invalid for not disclosing the vital details of the business to be transacted in that resolution. The English Court of Appeal held that the resolution was not binding on the company as the notice did not disclose the business to be transacted in substantial details to the share holders.
From the above, it is clear that the consequence of not disclosing the business to be transaction in substantial details to those entitled to attend the meeting will not invalidate the entire meeting but the resolution taken on the resolution with insufficient details.
An error or omission in the notice of meeting with respect to the place, date and time or the nature of business to be transacted shall not invalidate the meeting unless the officer responsible for the error acted in bad faith or failed to exercise due care and diligence. However, if the omission was an accidental error, necessary correction shall be made either before or during the meeting. (Section 218 CAMA).
The notice shall also contain a clause with reasonable prominence advising members of their right to appoint any person as proxy to attend and vote on their behalf if they would be absent. Failure to indicate this fact in the notice of meeting will not invalidate the meeting but every officer who is responsible for the default shall be guilty of an offence and liable to a fine not exceeding N500. Section 218(4) of CAMA.
VENUE OF MEETINGS
The company’s statutory meeting and all AGMs shall be held in Nigeria (S.216 of CAMA). This means the EGM could be held any where in Nigeria or outside.
COURT ORDERED MEETINGS
Where it is impracticable for any reason to convene a meeting of the company, any member, director or the court of its own motion may by order direct that the meeting be convened. Section 223 of CAMA. Okeowo v. Migliore (1979) 11 Sc. 138.
NATURE OF BUSINESS
Section 214 of CAMA specifies two types of Businesses that may be transacted at the General meeting. They are the Ordinary business and the special business.
Ordinary business includes:
- Declaration of Dividend
- Presentation of financial statements and report of the directors and Auditors.
- Election of Directors to replace those retiring
- Appointment and fixing of the remuneration of the Auditors
- Appointment of the members of the audit committee.
Any business that is not ordinary business is automatically special business. S.214 CAMA
This is the minimum number of persons who must be present at the place, and time of the meeting for the meeting to lawfully commence.
Unless the Articles otherwise provide, quorum must be present at the start and throughout the meeting. S. 232(1) & (2). Unless the Articles otherwise provide, the quorum for meetings shall be one third of the total number of members of the company or 25 members, which ever is less. Where the one third is not a whole number, then the number nearest to one third shall be the quorum. If the members are 6 or less, the quorum shall be 2 members. S. 232 (2) of CAMA.
Note: To arrive at a quorum, members present or their proxies are counted. A company which is a member of another shall be represented by a person appointed by a resolution of the Board of his company. S. 231 of CAMA.
The articles of association of a company should ordinarily provide for what will constitute a quorum in the company. If the articles are silent on the issue, then the quorum provided under S. 232 will apply. Most companies however prefer to adopt the procedure for quorum as provided under S. 232 of CAMA.
Every person who is entitled to a notice of meeting under S. 219 has a right to attend the general meeting of the company. S. 81, 227 & 228 of CAMA.
A person, who is entitled to attend and vote at a meeting, has the right to appoint a representative to attend and vote on his behalf. A representative so appointed is called a proxy. In some cases the proxy means the document issued by the member authorizing someone, whether himself a member of the company or not, to represent him at the meeting. In this case both the document of authorization and the person authorized are called the proxy. (S. 230 of CAMA).
For the purpose of deciding the quorum for a meeting therefore, those entitled to attend the meeting must be presented in person or by a proxy. Counting of the persons present in person or by a proxy will be done physically to be sure there is a quorum. Unless the articles otherwise provide, the meeting cannot start or if it has stated, cannot continue if the quorum ceases along the line during the meeting due to the withdrawal of some members in the course of the meeting. Each person present and each proxy document represents one person each, for example, two persons present in person and three proxy documents equals to five persons being present at the meeting. (S. 232 (1) of CAMA).
It may be possible for a shareholder to be a proxy to several persons. In such a case, the shareholder is counted as one person and each proxy he holds is counted as one person each. For example, if Mr. Bada is a shareholder (member) of Bada Nig Ltd. Five other shareholders each appoint him to represent them at the meeting, once Mr. Bada appears at the meeting with the five proxies i.e. letter of authority to represent each of the five shareholders, it means six shareholders have appeared for the meeting. If the quorum for the meeting is 6 persons, then with Mr. Bada appearing with the five proxies, a quorum has been formed for the meeting to start. In practical terms however it means only Mr. Bada is physically present.
CHARIMAN OF THE MEETING
The Chairman of the Board of Directors presides as chairman of the General meetings of the company. If there is no chairman of the Board or he is not present one hour after the time for the meeting, the directors present shall elect one of their members to preside. If no director is present, the members shall appoint one of their members to preside for that meeting only. There is no legal obligation for him to hand over the chairmanship to the board chairman if he eventually surfaces after the meeting has commenced. S. 240 of CAMA.
PROXY S. 230 OF CAMA
Any person entitled to attend the company meeting, may attend either in person or by proxy. A proxy is any person appointed by the person entitled to attend the meeting as his representative to attend and vote at the meeting on his behalf. The proxy has right at the meeting as the person he represents.
The proxy may be a member of the company or not. The important thing is that the person appointed should have a document showing or evidencing that has the authority of the person he is representing. The document is also called a proxy. S. 230 (1) and (7) of CAMA.
In every notice of meetings nowadays, the company usually indicates on the notice of meeting with reasonable prominence, a statement that a member entitled to attend and vote at the meeting may if unable to attend, appoint in writing a representative called a proxy to attend and vote on his behalf.
Under the CAMA, this is a requirement of the Law. Failure to observe this law will not invalidate the meeting, but every officer of the company responsible for the default shall be liable to a fine of N250 each. S. 230 (2) of CAMA.
In order to make things easy for members, a proxy form in duplicate is usually attached to the notice of meeting sent out to members. If they cannot attend the meeting, they could just fill out the proxy form indicating the names and particulars of the person they are appointing as proxy. One copy of the form is given to the proxy to present at the meeting in order to be admitted into the meeting. The other is sent direct to the company to the address indicated to arrive at least 48 hours before the meeting, notifying them of the appointment of the proxy. S. 230 (3) and (7) of CAMA.
In some cases, the company may solicit members who may not attend the meeting to appoint some given directors as proxy. Members who may not attend and are also not willing to or do not have the money to spend in sending a proxy may decide to utilize the offer, since members attend company meeting at their own expense.
VOTING S. 224
Voting is by show of hands i.e. one man, one vote, unless a poll is demanded before or as the chairman announces the result of the voting by show of hands. The Chairman or at least 3 members present representing at least one tenth of the paid up shares of the company may demand the poll and it is a legal right that cannot be refused except on the issue of the election of the chairman or adjournment of the meeting. (S. 225 of CAMA).
Voting by show of hands does not take care of the wishes of those who have the highest financial stake in the company. However when voting by a poll is made, the voting is by the number of shares a person holds. The articles of association determines how the votes in poll are arrived at. It may be one share one vote or each stock i.e. a bundle or combination of shares worth N1000 each equals one vote i.e. if a company’s share is N1.00 each, one needs to gather up to 1000 shares to get one vote,2000 shares to get two votes and so on.
Voting by a poll is usually demanded by the financial majority when they want to influence a decision in their favour. S. 226 of CAMA.
MINUTES OF MEETING
The Company Secretary must ensure that a record of the proceedings at the general and all other meetings of the company are kept. This record is called minutes of meeting. Unless the contrary is proved, the minutes of the meeting shall be prima facie evidence of what took place at the meeting. (S.241 of CAMA).
The minutes may be in loose leaves, bound books, retrievable electronic form etc.
- 550 of CAMA.
ADJOUNMENT /QUORUM OF MEETING
The meeting may be adjourned by the chairman where at any point in the meeting an adjournment becomes necessary because the members have for good reason left the meeting and the quorum is thereby affected. The meeting may be adjourned to the same place and time by a week and the meeting shall proceed then even if there is no quorum. The meeting will proceed on the quorum of the previous meeting.
If however the reasons for the absence of members are not sufficient, the meeting may continue even if there is no longer quorum by virtue of their leaving the meeting. S. 232(4) 7 (5) of CAMA.
As earlier noted, quorum must be present throughout the meeting. The meeting must end whenever the number of members present no longer meets the quorum. Where members withdraw from a meeting for the purpose of nullifying the quorum and for no justifiable reason and there is no longer quorum to continue the meeting, the meeting may lawfully continue. S. 232 (4) of CAMA.
If however there was a quorum but members later withdraw due to justifiable reasons and there is therefore no more quorum of members present to continue the meeting, the chairman shall adjourn the meeting for one week to hold at the same place and time. If at the next adjourned date there is still no quorum, the members present will constitute the quorum. If it is only one person present, he may seek court order to hold the meeting alone S. 232 (5) of CAMA. If however he attends with letters of proxy, then he is no longer one man, he may proceed with the meeting.
Where a meeting is called and within one hour of the time fixed for the meeting, no quorum is formed, the meeting shall be adjourned for one week or such other time, date and place as the directors may direct. S. 239 (3) of CAMA.
If at the next adjourned date there is still no quorum, the members present shall be the quorum and if only one person is present he may seek court order to constitute a one man meeting S. 239 (4) of CAMA.
A resolution is ordinary if it is require by the CAMA to be passed by a simple majority of votes (s. 233 (1) of CAMA.
Ordinary resolution is usually taken when the ordinary business of the Company is being transacted. These include:
- Declaration of dividends,
- Presentation of financial statements,
- Report of Auditors on the companies accounts,
- Directors reports,
- The election of directors in place of those retiring,
- The appointment and fixing of remuneration of the Auditors,
- The appointment of members of the audit committee. (S. 214)
There are certain situations in which ordinary resolution shall not be effective unless special notice has been given S. 236 of CAMA provides that where special notice is required of a resolution, such resolution shall not be effective unless 28 days notice was served on the company before the date of the meeting by the proposers or sponsors of the resolution.
This is to enable the company in turn to include the proposed resolution in the notice of meeting to be sent out to those entitled to attend the meeting. Under the CAMA, the following ordinary resolutions require special notice:
- To remove a director from office before the expiry of his tenure of office, or to appoint some one to replace a director that has been removed. S. 262 (2) of CAMA.
- To appoint or re-appoint a person 70 years or above as director in a public company.
Special Resolution requires at least three fourths of the total votes cast, i.e. 75% of the total votes cast must be in favour of the resolution S. 232 (2) of CAMA. Special resolutions are usually taken in special businesses of the Company. Where the three fourths majority cannot be reached, the resolution is defeated.
All businesses transacted at Annual General Meetings are deemed to be special businesses except the following:
- Declaration of dividends,
- Presentation of financial statements and the report of directors and auditors,
- The election of directors in place of those retiring,
- The appoint and fixing of remuneration of the auditors, the appointment of members of the Audit Committee.
Any other business aside from the above shall be special business requiring special resolution to pass. It would therefore amount to illegality to purport to pass any resolution as ordinary resolution except if it is in respect of the businesses outline above.
All businesses transacted at extra-ordinary general meetings shall be deemed to be special business. S. 215 (8) of CAMA.
The 21 days notice for holding of general meetings must be complied with for any meeting where a special resolution is proposed to be tabled. This provision is mandatory. S. 233 (2) of CAMA.
The only exceptions are:
- Where members holding not les than 95% of the value of shares carrying a right to vote agree to a shorter notice S. 233 (2) CAMA.
Where the meeting is an extra-ordinary general meeting convened by requisition in which the directors refused to co-operate, in such cases, the members may go ahead to hold their meeting and may comply with the rules of meeting as nearly as possible. This means where 21 days notice is not possible or desirable, they are not bound to comply.
Written Resolutions. S. 234
In the case of a private company, the CAMA allows it to pass written Resolutions which dispenses with the requirement of law that all resolutions of the General meeting shall be passed at a properly convened general meeting. A written resolution is one in which the resolution is drafted on paper and signed by all the members of the private company who are entitled to attend and vote had the resolution been taken to a general meeting S. 234 of CAMA.
Resolutions Requiring Special Notice
There are certain ordinary resolutions which require special notice to be effective.
Section 236 defines a special notice as one in which not less than 28 days notice has been given to the company by the proposers or sponsors of the resolution. This is to ensure that the company has enough time to, in turn include the resolution in the notice of company meeting to be issued to members.
Special notices are required to be given to the company in the following cases:
- Where it is proposed to remove a director before the expiry of his tenure of office. S. 262 (2) of CAMA.
- Where it is proposed to appoint another directors to replace the one removed. S. 262 (2) of CAMA.
- Where it is intended to appoint a person of 70 years or above as director of a public company, or to re-appoint such a person as director. S. 256 of CAMA.
21 days notice is required to convene a general meeting. Those therefore proposing a resolution to remove a director, or to appoint another person to replace a removed director, or to appoint or re-appoint a person who is 70 years or above as director of a public company, must give a minimum of 28 days notice of the proposal to the company. This is to give the company at least 7 days grace to include the items in the notice of meeting to be sent out.
Usually resolutions proposed at meetings and included in notice of company meetings are the ones proposed by the Board of Directors.
Sometimes, members of the company also want to propose their own resolutions for discussion at the next general meeting. The procedure for such members’ resolution is provided for in S. 235 of CAMA.
First, the resolution has to have the support of one or more members having at least one-twentieth or 5% of the total voting rights of all members having a right to vote at the proposed meeting or not less than 100 members with shares worth at least N500 each.
The requisition (proposed resolution) is then sent to the registered office of the company at least 6 weeks before the proposed date of meeting.
The directors are thereafter under obligation to include the proposed resolution for discussion at the next meeting. The item will therefore appear on the notice of the next meeting. If the proposed resolution requires a statement of explanation and it is so indicated in the requisition, the directors shall along with the notice of the meeting circulate the statement. It shall however not be more than 1000 words and a further summary of not more than 1000 words. The statement and summary shall be issued at the company’s expense.
The CAMA is however silent as to whether members may circulate their statements to the resolutions beyond 1000 words at their expense. This may however be permissible since the CAMA did not also prohibit such intention.
Upon incorporation, the company becomes a legal person of its own with a personality separate from that of its members. The personality of the company is however run by its human organs, namely the members in general meeting and the board of directors. Only these two organs can act or authorize an act to be done for the company. S. 63 (1) of CAMA
Where a wrong is done to the company, only the company can sue to redress the wrong being that the company upon incorporation is a legal person capable of suing and being sued S. 37 & 38 of CAMA.
The decision to sue to redress a wrong against the company is a management decision for the Board of directors to decide on, being the company organ responsible for management of the company. S. 63 (3) of CAMA.
Where the Board fails to discharge this responsibility, the members in a general meeting may institute legal proceedings in the name of the company. S. 63 (5) (b) of CAMA.
Where the company through its Board of Directors or General meeting does not institute legal proceedings to seek redress for wrong done to the company, no individual could do so. It means the wrong will go unredressed. The is the rule in FOSS v. Harbottle (1843(2H. 416 (also reported as 67 E.R. 189. In this case, The plaintiffs, Foss and Turton were shareholders of the Victoria Park Company which bought land for use as Pleasure Park. Harbottle and others were directors and shareholders in the company. Some of the directors had sold their own lands to the company at inflated prices. The plaintiffs sued to have the directors refund the excess price for exploiting their position to defraud the company. The court held that the wrong was done against the company and not to the plaintiff in their individual capacity. So they could not sue on behalf of the company without its authorization.
The rule in Foss v. Harbattle was again clarified in MacDougall v. Gardiner (1875)1 Ch.D 13 where Mollish L.J. stated at P. 25 of the Law report as follows:
If the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority are entitled to do legally, there can be no use having litigation about it. The ultimate end of which is only that a meeting has to be called and then ultimately the majority gets its wishes.
The rule in Foss v. Harbottle is also called the majority rule or the proper plaintiff principle. This rule avoids multiplicity of suits by the minority on a matter the majority is willing to overlook.
In Nigeria, the rule in Foss v. Harbottle, was first adopted by the Supreme Court in the case of Abubakar v. Smith (1973)6 EC 31.
Today the rule has been codified by S. 299 of the CAMA.
The problem with the majority rule is that it allows the majority to get away with several irregularities against the company which directly or indirectly affect the minority but they cannot do any thing about it.
The CAMA has however provided some relief which acts as checks and balances against the excesses of the majority which over the years had increased, resulting in fraud, oppression of the minority and breach of duties by the directors who are usually also in control as majority share holders.
In order therefore to enforce such likely breaches of director’s duties and to protect the minority shareholders, the law has provided remedies. These will be discussed in this unit.
The proper plaintiff rule
“Where irregularity has been committed in the cours e of the Company’s affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct” This was the principle laid down in Foss V. Harbottle in 1843. Only the company could sue to redress wrongs to it. The majority comprising the majority shareholders and the Board appointed by them sometimes abuse their office and would not expectedly take any action against themselves. Section 299 of CAMA has now codified this common law principle.
Under the common however before the CAMA was enacted, the courts has taken cognizance of the hardships of the rule in Foss V. Harbottle on the minorities. The courts had started introducing some measure of relief under their equitable and inherent powers to reduce the hardship of the rule in Foss V. Harbottle. These exceptions have now been codified in the CAMA. They are as follows:
Members Direct Action. Section 300 of CAMA
Members of the company have the right to go to court to ask for an injunction or a declaration against the company in the following situations:
- Where the company enters into any transaction which is illegal or ultra vires.
- Where the company purports to do by ordinary resolution what by the CAMA or the Articles is required to be done by special resolution.
- Any act of the Company which affects the individual right of the members in the Company.
- Where a fraud is committed against the company or the minority share holders and the directors fail to redress the wrong.
- Where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or the minority shareholders.
- Where the directors are likely to have benefited or have benefited from their negligence or breach of duty. Section 300 (a)-(f
Derivative Action S. 303.
A member may apply to the court for an order permitting him to commence a court action in the name of the company or on its behalf or to intervene in an action where the company is already a party for the purpose of taking over the prosecution or defence of the case depending on which side the company is. Section 303(1) of CAMA.
The grounds for obtaining this kind of relief are as follows:
- The wrong doers are the directors who are in control of the company and will not take any action.
- The applicant has given reasonable notice to the directors of his intention to apply for derivative action if the directors do not take the necessary action to redress the wrong.
- The applicant acts in good faith.
- It appears to be in the company’s interest that the action be taken. Section 303 (2) (a)-(d) of CAMA.
In Derivative actions, the company bears the cost since the action in its name or on its behalf unlike in members direct action where the action is taken commenced in the applicant’s name and not on behalf of the company. Section 204 (2) (c) & (d) of CAMA
Relief from Unfairly Prejudicial and Oppressive Conduct. S. 310 & 311, CAMA
A member may bring an action in court to seek relief where the he alleges that the affairs of the company are being run in a manner that is unfairly prejudicial and oppressive to his interest as a minority in the company.
The set of reliefs that could be granted are outlined in section 312(2) of CAMA and includes an order for the winding up of the company, an order setting aside the act constituting the oppression or unfair prejudice e.t.c.
Investigation by the CAC
The corporate Affairs Commission may on the petition of a member direct an investigation into the Affairs of a company to determine whether the affairs of the company are being properly run. S. 314-330.
Winding up on the Just and Equitable ground S. 408(e) of CAMA
A member may apply to the court for the winding up of the company on the grounds that it is just and equitable to do so. The grounds for this action are not stated. They are therefore open and will be granted based on the merits of each case.
The CAMA does not define what profit is. S. 380 of CAMA only provides that dividends may be paid out of distributable profits. Distributable profits are stated to be those profits arising from the use of the company’s assets ( even if it is a wasting asset), revenue reserves and realized profit on a fixed asset sold and where more than one asset is sold, the net realized profit on all the assets sold.
Before a company can declare distributable profits, it must ensure that the company is or would be able to pay its liabilities as they become due. Section 281 of CAMA.
It is clear from the above that distributable profits are those gains which the company has actually received over and above its accumulated losses or liabilities. That is to say, the company must set aside some revenues enough to settle all the liabilities of the company as they become due before it could declare a dividend..
It is only after this that what is left may be paid out as dividends. S.381 of CAMA. What is left as surplus is the net or realized profit. It is this profit that may safely be distributed to share holders as dividend.
Rules for Declaration of Profit.
A company may declare profits only if they are realized i.e. actual gains in cash or kind received by the company from:
- The use of the company’s fixed assets although it is a wasting asset, i.e. fixed assets that are lost or which depreciate in the course of production. S.380 (a) CAMA
- Revenue reserves of previous years. S.380(b) CAMA
- Revenues realized when an asset is sold above the book value i.e. the value of the asset as stated in the company’s record. S.380(c)
- There is enough money left to meet all company liabilities as may fall due. S.381 CAMA.
Thus it is not binding to make good losses of fixed assets wasted in the course of production provided in the process the company made money over and above the value of its current liabilities. The assets that are lost or wasted in the course of production whose loss need not be made good are raw materials used in production. In Lee v. Neuchatel Asphalte Co. (1889)41 Ch. D. 1, the plaintiff brought an action to restrain the company from paying a dividend out of alleged profits. The company was into asphalte mining. It got a mine and dug up the asphalte and declared some profit for the year ended 31st Dec. 1885. It therefore proposed to pay dividend out of the declared profit. The plaintiff contended that the company had not set aside a fund from the profit to represent the mine that depreciated in the course of production. According to them, it amounted to loss of capital if the money used to buy the mine was not set aside from the money profit realized. They argued that if the value of the mine which was a fixed asset bought with the company’s capital was set aside from the money realized, nothing will remain as profit or what may remain of the money realized may not be enough to pay any proposed dividend. The court of Appeal (English) held that where the capital of the company is invested in assets which is of a wasting nature, there was no obligation in law to create a fund out of realized revenue to recoup the wasting nature of the asset provided there would be enough left to pay the company’s liabilities after the dividends are paid out.
However, in Verner v. General Commercial Investment Trust (1894)2 Ch. 239 the court held that where the income of the company arises out of the turning over (utilization) of circulating capital, no dividend can be paid out unless the circulating capital is recouped.
Under the CAMA, there is also no obligation to make good losses of fixed assets which depreciate in the course of production. The only point is that a company shall not declare or pay dividend if there is any reasonable grounds for believing that the company would, after the payment be unable to pay its liabilities as they become due. S. 381 of CAMA.
- 567 defines circulating capital as “a portion of the subscribed capital of the company intended to be used by being temporarily parted with and circulated in business in the form of money, goods or other assets and which or the proceeds of which are intended to return to the company with increment and are intended to be used again and again and always return with accretion”.
According to the court in Varner’s case supra, circulating capital must be made good before any profit could be declared.
Revenue reserves. S. 380 (b) of CAMA where a company has kept aside part of its profits of previous years in a reserve account, it may take out of it to distribute as dividends in another year where no profits were made or where not enough profits was made. Such reserve profit could be carried forward as profit in a later year and declared as divided. S. 383 of CAMA.
Dividends mean a proportion of the distributed profits of the company which it sets aside for distribution to shareholders as benefits or yields from their investments in the company. The dividends may be fixed annual percentage as in the case of preference shares get, or it may be variable according to the prosperity or other circumstances of the company as in the case with what equity (ordinary) shares get. s. 567 of CAMA.
A dividend is therefore the sum of money which a share holder receives as his own share of the profits of the company set aside for distribution to shareholders depending on the number of shares they hold, or as part of his share of revenue the company receives from the sale of assets which are divisible among the shareholders.
RULES FOR DECLARATION OF DIVIDENDS
- Dividends are and as approved by the General meeting. The General meeting may decrease the amount recommended by the Board but may not increase the recommended amount section 379(1)-(3) of CAMA
- Dividend may be paid only out of the distributable profits. Section 379(5) of CAMA. Distributable profits are those profits outlined in S.380 of CAMA already discussed.
- Dividends may be paid out only if there are reasonable grounds for believing that the company is, or would be, after the payment able to pay its liabilities as they become due. Section 380 and 381 of CAMA
- Dividends may be paid out of the profits of the current year without first making good the losses of previous years. Ammonia soda co. Ltd v. chamberlain (1918) 1 Ch 266.
- Undistributed profits of previous years kept as reserve may be used to pay dividends. Dimbula Valley (Ceylon) Co Ltd. V. Laurie (1961) ch 353.
- Dividends must not be paid out of the company’s capital. The capital must always be maintained. In Flicropts’ case (1882) 21 Ch. D519 It was held as a fundamental principle of company law that a company’s subscribed (issued) share capital must be maintained. Where any part of it is lost in the course of business, it must be recouped in any subsequent profits before dividends are paid. The only exception is where the court or the law permits such payment out of capital i.e. without first making good a previous loss as in Lee v. Neuchatel Aphalte Co. Supra. (earlier cited).
Directors who are knowingly parties to the payment of dividends out of capital are jointly and severally liable to indemnify the company to the value of such dividend pay out.
The company’s paid up capital must be kept as a guarantee to creditors that there will always be money available to pay up the company’s debts. Thus the company’s capital is not available for use as dividend payment to shareholders. S. 386 (1) CAMA
However the directors have a right to recover dividends paid out of capital to shareholders who knew that the dividend paid to them was taken out of the company’s capital s. 386 (2) CAMA
Where employees under their contract of service are entitled to a share in the profits of the company, they may claim the share whether or not dividends have been declared provided profit was made. s. 384 CAMA
- Dividends may be paid out of profits without first making good a loss or depreciation in fixed assets but loss or depreciation in circulating assets must first be recovered. S. 567 of CAMA defines circulating Assets or capital as the portion of the subscribed (share) capital of the company intended to be used by being temporarily, parted with and circulated in business in the form of money, goods and other assets and which, or the proceeds of which are intended to return to the company with increment (profit) and are intended to be used again and again and to always return with some accretion.
Under S. 379 (5) (c) of CAMA, a company cannot pay dividends out of the appreciation in value of its capital assets (Fixed assets) i.e. where experts value a company’s fixed assets like its a building and value it far above its actual cost when it was built, the revaluation will reveal an increase which could be viewed as profit after the actual cost has been deducted. If the asset is not sold, the increase in value is an unrealised profit. It cannot be used to pay cash dividends. This unrealized value can however be applied to write off previous losses or where there are no losses, it could be used to issue bonus shares, as fully paid shares to shareholders.
However, where the asset is sold and money realised, the increased. Value of the asset over the actual cost becomes realized profit and may be used in paying dividends provided no previous losses are pending. Ammonia Soda Co. v. Chamberlain Supra.
RESERVATION OR CAPITALISATION OF PROFITS
Companies may make much profits and may not distribute all to the shareholders but save some part of it in a reserve account. This sum could be useful in future. Section 383 of CAMA allows this practice. It provides that the directors may set aside out of the profits of the company such sums as they think fit as reserve which will at the discretion of the directors be applicable for any purpose to which the profits of the company may be applied.
The General Meeting may however on the recommendation of the Board of Directors Capitalise any part of the reserved profits. Usually, to justify the capitalization of the reserve, the General meeting may set free such sums for distribution to shareholders but the sum will not be paid to them in cash but in kind by:
- either paying up any unpaid shares held by the members; or
- by paying up some unissued shares of the company and allotting them to the members as fully paid up. section 383(2)-(4) of CAMA
Dividends once approved by the general meeting are paid per share. For example, if dividend is declared at a rate of N1.00 per ordinary share, a person who hold 1000 shares gets N1,000.
The dividends are issued by way of a warrant which is a kind of a cheque. It cannot be cashed over the counter at the bank. It can only be paid into the shareholder’s current account.
Where however the shareholder has indicated that the money be credited direct to a given current account of the shareholder. It shall so be paid
Once a dividend is declared, it becomes a debt against the company and is recoverable within 12 years s. 385 of CAMA.
Where dividends are returned as unclaimed, the company shall send a list of the persons who did not claim their dividends with the notice of meeting of the next annual general meeting. After 3 months of this notice, the company may invest any unclaimed dividend for its benefit in an investment outside the company. The dividend however remains payable on demand for 12 years as earlier stated.
Where however a dividend warrant did not reach a shareholder due to the fault of the company, it shall attract interest at the current bank rate from 3 months after the date on which it ought to have been posted to him. s. 382 of CAMA.
A merger is any amalgamation of the undertakings of any part of the undertaking or interest of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies’ corporate section. S.119, ISA 2007.
Types of mergers
- Vertical Mergers. This is when two companies involved in different levels of production in the same industry merge.
- Horizontal Mergers. This is when two companies in the same level of production merge to eliminate competition
- Conglomerate Mergers. This is when two or more companies in different or unrelated business merge.
PROCEDURE FOR MERGERS
- The merger proposal is prepared, considered and approved by the boards of the merging companies.
- A pre-merger notice is given to the members of each company and the Securities and Exchange Commission (SEC)
- Any of the merging companies will then make an application to the Federal High Court to approve the merger
- If the court approves it, the general meeting of each of the merging companes is called separately to consider the merger documents.
The consolidation stage
- If the special majority of three fourth of members of each of the merging companies voting in person or by proxy approve the merger, it is then referred to SEC for approval.
- If SEC approves the scheme, any of the two companies will again apply to the Federal High Court for final approval.
- The merging companies shall cause a copy of the court order giving final approval to be delivered to SEC for registration within 7 days of the order.
- A notice is published in the Federal Government Gazette and in at least one News Paper.
- Thereafter SEC is notified of the completion of the merger.
Note: The above procedure is provided for in the SEC rules and Section 119-130 of ISA 2007.
Takeovers are another type of Business reconstruction. This process is however an aggressive way of takeover of the management or substantial voting rights in a target company. It is aimed at acquiring control in a desired company.
Definition of takeover
Section 131 of ISA 2007 explains what amounts to a take over as follows :
- Where a person acquires shares whether by a series of transactions (purchase) over a period of time or not, which taken together with shares already held or acquired by persons acting in concert with other persons carry 30 percent or more of the voting rights of the company; or
- Together with persons acting in concert, a person holds not less than 30 percent but not more than 50 percent of the voting right and such person or any person acting in concert with him acquires additional shares which increases his percentage of the voting rights and such such a person makes a takeover offer to the holder of any class of the equity share capital in which such a person or any person acting in concert with him holds.
Procedure for takeovers
- A bid is prepared to the Board of the Offeree Company which meets to consider it
- An application is thereafter made to SEC for approval to proceed with the bid
- If approval is given, it shall be in force for 3 months subject to further extension.
- If SEC refuses to give approval, the Offeror may seek judicial intervention
- If approval is given, the takeover bid is dispatched to the shareholders of the target company and the directors and SEC.
Takeover bids are not allowed in private companies.
- If approved the Offeror shall take up the shares deposited or indicated for the takeover by the shareholders of the target company.
The shares of dissenting shareholders shall be taken over at fair value by the offeror at the agreed price subject to SEC approval. Section 131 to 151 of ISA 2007.
Defunct companies are companies that are not functioning based on the record of the CAC. A lot of people incorporate companies but keep the certificate in their brief cases waiting for the rainy day when they may use them to do business. For some, this day never comes hence the company continues to exist without functioning. The CAC usually strikes off the names of such companies from its list, and treats them as non existent.
Defunct companies S. 525(1) of CAMA
Defunct companies are those companies that the CAC has reasonable cause to believe are not carrying on business.
Condition for declaration of being defunct
Whenever the CAC has reasonable cause to believe that a company is not carrying on business, it shall send to the company at its registered office, a letter by post inquiring whether the company is carrying on business (section 525(1) of CAMA.
Companies are required to file yearly, their annual returns which show they are carrying on business.
The CAC will have reasonable cause to believe a company is not carrying on business if it does not see the company filing its annual returns for some years.
Procedure for declaration of being defunct
- The letter of inquiry is dispatched to the suspected company at the address it filed as its registered office address at the point of incorporation. If the CAC does not receive a reply within one month, it shall send another letter by registered post within 14 days of the expiring of the initial one month notice, referring to the first letter and stating that no reply thereto has been received.
It shall further warn that if no reply is received to the second letter within one month from the date thereof, notice shall be published in the federal government Gazette with a view to striking off the name of the company from the register of companies.
- If the CAC receives reply that the company is not carrying on business or receives no reply at all within one month of the second letter, it shall cause notice to be placed in the federal government Gazette and a copy thereof sent to the company that at the expiration of 3 months from the date of the notice, unless cause is shown to the contrary its name shall be struck off the register of companies in Nigeria. If no good cause is shown at the end of the 3 months, the CAC shall be at liberty to strike off the name of the suspected company from the register of companies.
Consequence of declaration of being defunct.
- If the name of a company is struck off the register of companies upon a declaration of being defunct the company shall be dissolved. Section 252 (1)-(3) of CAMA
- The CAC may however before dissolution decide to place the company under winding up. Section 525 (5) (b) of CAMA
Restoration of Defunct Companies
Any member, creditor or the company who feels aggrieved by the striking off of the name of the company may apply to the court at any time before the expiry of 20 years from the publication of notice declaring the company to be defunct for the restoration of its name.
The court if satisfied that the striking off was done in error, or that it is just to restore the name of the company may so order. Section 525 (6) of CAMA
The company has 20 years within which it may seek court order restoring its name. it is doubtful if this will be possible. It is better to incorporate another company in the circumstance.
Partnership Law in Nigeria
The English partnership act 1890 applied in Nigeria as a statute of general application. Later, the western states except Lagos enacted the Partnership Act, 1959. This act was a reproduction of the English partnership Act 1890 except that it contained additional provisions on limited partnership which is like an incorporated partnership. The then Bendel State, now Edo also enacted the Bendel state partnership law of 1976 which was also a reproduction of the western states partnership law. The English partnership Act 1890 continued to apply as a statute of general application in the Northern states of Nigeria, Eastern states and Lagos.
Today most states in Nigeria have enacted the English partnership law 1890 into law in their respective states.
The partnership laws in force in the respective states are therefore similar.
Partnerships must however be registered in Nigeria under the Companies and Allied Matters Act, to operate lawfully or to be recognized by law.
No partnership consisting of more than 20 persons shall be formed for purpose of carrying on business for profit unless it is incorporated as a company in Nigeria (S. 19 (1) of CAMA.
The only exception to the above is if the partnership is:
- A co-operative society registered under the laws of any state in Nigeria
- Formed as a partnership for carrying on of business as legal practitioners or chartered accountants provided each of the partners is a legal practitioner or chartered accountant as the case may be. S. 1 (2) (b) (i) & (ii) of CAMA
Partnership is the relationship which exists between persons who have agreed to carry on business in common with a view to profit. Section 4, partnership law, Kaduna state, S.3 partnership law of Lagos state and section 1 partnership Act (UK) of 1890 and S. 574 (1) of CAMA, 2004..
Mere agreement to carry on business is not enough, for a partnership to exist, the parties must have started business. The business must be for profit. This carrying on business for the benefit of the members without intention to share profit may not amount to a partnership. Thus partnership cannot exist for charitable purposes.
Section 588 of CAMA defines business to mean any trade, industry, profession and any occupation carried on for profit. For a business to amount to a partnership therefore, it must be carrying on business for profit. The said business must be a continuous one not a once and for all venture, although under the common law a partnership could exist for a single venture only. In Mann v. D’Arcy, (1968)2 All ER 172, the parties entered into a single venture for the purchase and resale of a quantity of potatoes. It was held that this transaction was a business carried on in common for profit and so qualified as a partnership. There is therefore a departure by the partnership laws in Nigeria from the U.K. position on this issue. In Nigeria, a once and for all business venture does not qualify as a partnership.
The business of the partnership must be carried on “in common” i.e. all the partners must be in the business together as to incur liability on behalf of each other. Intention to carry on business is not enough and does not thereby create a partnership. In Keith Spicer Ltd v. Mansell (1970)1 WLR 333 M. and B agreed to go into business together and to form a limited company later which would carry on business in M’s restaurant. B ordered certain goods from Keith intending to use them for the business of the proposed company when formed. B. became bankrupt. Keith sued M. to recover the price of the goods contending that M & B were partners in business and therefore liable for each other’s debts under the partnership. It was held that M & B were not partners as they were never carrying business in common.
Legal Requirements for the formation of a Partnership
- The minimum number of persons required is two. The maximum is however 20. Only a firm of legal practitioners and chartered Accountants may have more than 20 members. A co-operative society too may have more than 20 members. Any firm except those stated above wishing to have more than 20 members must be incorporated as a corporate body. i.e registered company. Section 19(2) of CAMA.
- Infants i.e persons under 18 years do not have the capacity to form or join informing a partnership section 579 (3) of CAMA. However, an infant may join two other adults if permitted by the CAC to form the partnership if one of the partners submits a statement to the CAC to the effect that one of the partners is an infant. The statement shall be endorsed by a magistrate, legal practitioner or police office of the rank of Assistant superintendent or above. Section 574 (6) of CAMA.
- Persons of unsound mind may not join in forming a partnership.
- Incorporated companies are qualified to join in the formation of a partnership. They are persons recognized by law. The Board of directors usually passes a resolution appointing someone to represent the company in the partnership.
- Persons who have been declared to be bankrupt by a court of law cannot join to form a partnership.
- Aliens are prohibited from forming a partnership with any other person to practice a profession or trade in Nigeria unless they obtain the consent of the minister of interior (internal Affairs) section 8, immigration Act, 2004.
Formation and Registration of Partnership
The Corporate Affairs Commission is responsible for the registration of partnerships and all other business names in Nigeria. A partnership must therefore be registered with the CAC to obtain registration certificate to do business in Nigeria. Section 573 & 574 of CAMA.
The partnership must be registered under a name called firm name. This is the name in which the Corporate Affairs Commission will issue the certificate of registration and under which the partnership business will be carried on. Under S. 572 of CAMA,
A partnership must register its business name unless if;
- The business or firm name consists only of the true names of all the partners without any addition e.g. Akume, Aondohemba, and Erdoo.
It means therefore that if there is any addition i.e. “Akume, Aondohemba, Erodo & Co.”, the firm name must be registered as a business name. If the firm name is a special coinage of the partners i.e. “Icon solicitors”, “VOX Dei chambers” etc. the name must be registered.
A business name shall not be registered if it contains the words “National”, “Government”, “Municipal”, “Co-operative”, “Chamber of Commerce”, “Building Society”, “Guarantee”, “Trustee”, “Investment”,’ ‘ Bank”, “Insurance” or any such similar word or names that are identical or similar to an already registered business name or an existing trade mark.
The foregoing types of names may be registered only with the written consent of the corporate affairs commission. S. 579 of CAMA.
Certificate of Registration
Upon receipt of the certificate of registration, the partners shall cause a copy thereof to be exhibited in a conspicuous position at the principal and other places of business of the partnership, S. 576 (3) and 5 of CAMA.
Difference between partnership and Incorporated Companies.
The differences between a partnership and an incorporated company may be summarized as follows:
- An incorporated has a distinct legal personality different from that of its owners. A partnership on the other hand does not have a distinct legal personality. Its personality is tied to that of its members. The partnership is regarded as one with its members.
- The liability of the partnership is that of the individual partners. They are jointly and severally liable for the partnership debts. The members of the company are not liable for its debts unless the company is one with unlimited liability. In the case of a limited liability company, the liability of members is limited only to the value of shares they hold which they have not paid for.
- The incorporated company has perpetual succession ,i.e. the life of the company is not tied to that of its members. The death of any or all its members does not end the life of the company. In a partnership however, the life of the partnership is tied to that of any or all the partners. The death of one or all the partners means the end of the partnership.
- The share capital of the partnership is flexible and not fixed by law. The partners increase or decrease their capital by agreement only. A company’s capital however is fixed by law. The minimum is N500,000 for public companies and N10,000 for private companies. Once a company is registered, it cannot increase or decrease it capital except with the approval of the
- A partnership unless it is one of legal practitioners or chartered accountants, or a co operative society cannot have more than 20 members. A company on the other hand could have as many members as it could if it is a public company or 50 members for a private company.
Terms of Partnership Agreement or Deed
- The agreement should contain the full names, address and occupation of the partners
- Nature and place of business. The place of business should be stated. This will clearly state the head office and branch offices if any. The nature of business will also clearly be stated.
- Commencement date will also be stated for record. This will help in determining the age of the partnership.
- (d) Duration. The life span of the partnership should be stated clearly with precision as the time or the occurrence of an event on the occurrence of which the partnership should be terminated. If no time frame is stated, the partnership is deemed to be open to termination at any time upon the request of any of the partners. Section 33 (a) & (b) of partnership Act of Lagos and section 24 of partnership Act of Kaduna state.
Capital of Partnership
The amount which each member contributes to the partnership should be stated. Where a partner contributes more capital than others, provisions should be made for the payment to him of interests on the capital before the sharing of profit. The desirability of this provision is in the fact that unless so stated partners do not share profits in proportion to their contribution.
In LYON V. KNOWLE (1863) 3 B&S 556, the court held that a business arrangement between a theatre owner and the hirer of the theatre under which the owner was to receive half of the amount paid by the audience for their seats was so unfair and clearly in favour of the theatre owner that it does not raise even a prima Facie presumption of a partnership.
Capital does not mean only cash. It could be in form of property contributed to the business, but whatever it is must be valued in cash. Where premium is payable, the time and method of payment should be settled. A premium is the price paid by an incoming partner in order to be admitted into the partnership. It is a kind of fee and it is paid before the incoming partner is formally admitted, or after his admission.
Where one partner has paid a premium to another on entering into a partnership for a fixed term and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner the court may order the repayment of the premium or of such part thereof as it thinks just having regard to the terms of the partnership agreement and to the length of time during which the partnership has continued, unless:
- the dissolution is by the judgment of a court and is wholly or chiefly due to the misconduct of the partner who paid the premium; or
- the partnership has been dissolved by an agreement containing no provision for a return of any part of the premium.
The Firm Name
The partners should agree as to the name they want their firm to answer. They are quite free to take any name, so long as the name is not identical to an already registered business name, or contrary to the provisions of s.662 the Companies and Allied Matters Act. 1990.
- Bank Account. The partnership Bankers should be stated. Those to be signatories and how they are to sign should be stated
The agreement between the partners may also contain an arbitration clause, which means that in the event of a conflict the partners shall settle the issue either by themselves or by involving other parties first without recourse to the law courts. The reason for such a clause is that it is injurious to the interest of the partnership for the public to know that it is involved in litigation, even among its members. Customers may panic and the partnership may suffer irrecoverable losses as a result.
The use of a private arbitration panel ensures the protection of all the rights or parties involved and lead to an amicable settlement of disputes outside the court.
Partners should agree as to how the firm’s business is to be organised and run. The partners may specify whether all or some of the partners shall manage the business and whether such managing partners are to spend part or all of their time in the firm’s ventures.
In the absence of such stipulations,s.26(e) of the Kaduna Sate Edict for example provides, that each partner is entitled to participate in the management of the business. Where agreement is reached on who are to be managing partners, there should also be an agreement upon the duties they are to perform and the extent of their powers. They should also decide whether the managing partners are to be entitled to any remuneration. This is because s.26(f) of the Kaduna state Partnership Edict for example disentitles managing partners from taking any remuneration for acting in the partnership business since they share in th partnership profit. A managing partner is therefore not entitled to remuneration unless there is a special agreement, express or implied, to that effect.
Unless expressly provided for, it is presumed that no partner will draw salary except refund for out of pocket expenses and share in the profits of the partnership.
Where the partnership is for a fixed term, there should be a provision for retirement of partners, otherwise a partner cannot retire except as a result of a subsequent agreement of all partners. But where the partnership is for an indefinite duration and no provision is made for retirement a partner may retire at will and this automatically dissolves the partnership.
It is essential for partners to agree as to what happens upon the retirement of a partner because retirement dissolves the partnership. A retiring partner must give notice to all other partners.
Expulsion or suspension
The conditions should be clearly stated to avoid dispute.Expulsion or suspension cannot take place unless clearly provided for. The right to fair hearing shall be observed. No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement in writing between the partners. There can be no implied agreement to expel a member. The agreement must be express. The provision is a check on all partners from using frivolous means to expel partners from the firm. In OZODO V. OKWUANIZOR (1961)5 ENRLR 29 the High Court of Enugu held that both at common law and by the combined effect of Sections 24(8) and 25 of the 1890 partnership Act, no partner can be excluded from the partnership by a decision of a majority of partners unless the partnership agreement specifically so provides, and that all existing members of the partnership must either take part in, or approve, the decision having had notice of it.
An expulsion must be bona fide and made in the interest of the partnership. Notice must be given to the partner to be expelled with an opportunity to reply. Where there is an equal or an even number of partners and there is a deadlock in arriving at a decision affecting the business, as held in DONALDSON V. WILLIAMS(1833) 1 C&M 345, the status quo will remain.
Generally partnership may be dissolved when
- the tenure of the partnership expires
- when the business of the partnership ceases or is banned by law
- when a partner dies or is bankrupt or becomes of unsound mind, unless the partnership agreement says otherwise.
- when a partner gives notice to terminate the partnership
- when a partners is unable to meet up with his contribution to the partnership etc.
Partners may make provision agreeing to the admission of new member into the firm. Similarly, they may agree to make provisions for the child, personal representative or other nominee of a retiring or deceased partner to be admitted into the partnership. In all cases, however, new members cannot be introduced without the consent of all existing members.
A partnership agreement is the result of the consensus of the aggregate partners and the partners are quite at liberty to stipulate the rules which regulate the business ‘Which they have agreed to embark upon. However, whatever rules they make must conform with the nature of partnership and be within the scope of the law.
The concept of freedom of contract is that parties freely contract and by the same freedom the mutual rights and duties of partners (whether ascertained by agreement or defined by law) may be varied by the consent of all partners and such consent may be either expressed or inferred from a course of dealing.
Consent is therefore the cornerstone of any partnership. Without it, however, a fair inference from the conduct of the partners or the course of dealing may be drawn. It does not matter how a contract of partnership is drawn, so long as the intention of the partners is known. However made, it is subject to variation at the will of all the partners. The case of ENGLAND V. CURLING(1884) 8 Beau 129, demonstrates the extent of flexibility of the partnership business. In that case, the plaintiff and two of the defendants agreed to become partners as ship agents for seven, fourteen, and twenty one years duration, and then duly signed the agreement with their initials. A deed was prepared to carry out the agreement, but was never executed and it differed somewhat from the original agreement.
The parties carried on business for eleven years and then they started quarreling. The defendant, who appears to have been in the wrong from the beginning, gave notice to dissolve the partnership in three months. He retired from the partnership and entered into another partnership with other persons, carrying on business with them on the premises and in the name of the old firm. The new firm opened letters addressed to the old firm, and gave notice of its dissolution to its correspondents. The plaintiff filed an action for specific performance and injunction against them.
The court granted the relief sought. However, Lord Langdale, MR had this to say:
“With respect to a partnership agreement, it is to be observed that all the parties being competent to act as they please, they may put an end to or vary it any moment; a partnership agreement is therefore open to variation front to day, and the terms of such variation may not only be evidenced by writing, but also by the conduct tithe parties in relation to the agreement and to their mode of conducting their business. ( page 133 of the report.)
The terms of the partnership agreement means the usual terms which the court will be willing to recognized and order enforcement in the absence of express provisions stipulated by the parties.
RELATIONSHIP BETWEEN PARTNERS AND THIRD PARTIES
The relationship between the partners and between them and third parties determines the civil and criminal liability of the company and the overall success of the partnership. The relationship is governed both by statute and by the common law.
Relationship between the partners
The relationship between the partners is principally regulated by the partnership deed or agreement and the implied terms of the agreement.
However the general principles under the common law are based on utmost good faith. The partnership itself is based on the trust and friendship between the partners. In the above regard, the following rules are applicable under the common law.
- All partners are entitled to a share equally in the capital and profits of the partnership and they share equally in the losses of the partnership.
- No partner is entitled to any interest before profits are declared.
- Every partner should take part in management of the partnership
- No partner may introduce another person as partner without the prior consent of the others. This is because the partnership is founded on mutual trust and confidence. The introduction of a new member must therefore be viewed seriously by all the partners. An incompetent and dishonest partner may cause serious loss or embarrassment to the partnership. Where however the partnership articles or agreement allows a person the right to introduce a new partner, if he does so in the manner (if) any provided in the partnership agreement or deed, prior consent of the other partners is not necessary as consent in this case is implied.
In Byrne v. Reid (1902)2Ch. 735, the partnership deed between B. and
- allowed B the power to introduce any of his sons into the partnership on their retaining the age of 21 years. when one of B’s sons attained the age of 21, B proposed to introduce him to the partnership. R. refused. The court held that R. could not prevent B’s son from becoming a partner because the partnership deed operated as a consent.
- Every partner is under obligation to render true account and full information on all things affecting the partnership to other partners.
- Every partner shall disclose and account for any benefit derived by him in the course of the business of the partnership without the knowledge or consent of the others. X., Y., and Z were partners. X without the knowledge of Y and Z obtained for his own benefit the renewal of the lease of the business premises. The premises belonged to the partnership. It was held that X was duty bound to disclose and account for the secret benefit derived from lease of the partnership property. In another common law case, Bentley v. Graven (1953) 18 Beav. 75, B and C. were partners. C was asked to buy some goods for the firm. C without B’s knowledge sold his own goods to the firm at a considerable profit. C also didn’t disclose that the goods were his own. It was held that C must account to the firm for the secret profit made without disclosure. C. being a partner ought to have disclosed to B that he (Mr. C) was going to sell his own goods to the partnership. The non disclosure is capable of eroding the mutual trust and confidence between the partners.
- A partner must not carry on a competing business or divert the partnership business, or use the partnership information, good will or property for personal benefit not authorized by the others.
Relationship of partners with third Parties.
Every partner is the agent of the firm and his partners for the purpose of the business of the firm. The acts of every partner who does any act while carrying on in the usual way, the business of the kind carried on by the firm, binds the firm and his partners unless :
(A) the partner so acting has no authority to act for the firm in that matter; and (B) the person with whom he is dealing either knows that he has no authority or does not know or believe him to be partner.
Subject to the limitation just mentioned, every partner has implied authority to bind the firm by:
- selling the goods of the firm;
- purchasing on the firm’s behalf goods of the kind usually employed in the firm’s business;
- receiving payment of the firm’s debts and giving receipts for them; and
- engaging servants for the partnership business.
In trading firms a partner may further:
- Accept, make and issue negotiable instruments in the firm’s name;
- Borrow money on the firm’s credit and pledge the firm’s goods to effect that purpose; and
- Engage a solicitor in an action against the firm for a trade debt (Tomlinson v. Broadsmith (189611 B. 386).
It was held in Higgins v. Beauchamp (1914)3 KB.1192, that a trading firm is one which carries on the buying and selling of goods, but it is thought that this is only one example of a trading partnership and that it would be too narrow to confine this concept to those activities. In that case, B. and M. carried on business in partnership as proprietors and managers of picture houses. The partnership deed prohibited a partner from borrowing money on behalf of the firm. M. borrowed money from H. it was Held that the firm was not liable for the debt, because it was not a trading firm, and M. had therefore no implied authority to borrow on the firm’s behalf.
A partner may not, however, bind the firm by deed unless he is expressly authorised by deed, and he may not bind the firm by a submission to arbitration (Stead v. Salt (1825) 3 Bing. 101).
The firm and all the partners are bound by any act relating to the firm’s business done in the firm’s name, or in any other way showing an intention to bind the firm, by any person authorised, whether a partner or not. A partner has not, however, implied authority to bind the other partners in another business. D. & Co. were a partnership consisting of D., T. and L. and carrying on the business of produce dealers. D. was the only active partner. To cover the possibility of loss, D. asked M., the plaintiff, whether M. was prepared to buy a consignment of potatoes on board S S Anna Schaar as a joint venture, i.e. on the basis of sharing profits and loss, and M. agreed. M. contended that the joint venture was itself a partnership between him and D. & Co., and sued T. and L. for half his share in the profits arising from that venture. Held, the contention of M. was correct and the venture was concluded by D. for the partnership and could not be considered as “another” business; consequently, D. bound not only himself but also T. and L.: Mann v. D’Arcy and Others 11968] 1 W.L.R. 893.
If a partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary business, the firm is not bound unless he was specially authorised by the other partners. The partner himself is personally liable, and his act may subsequently be ratified by the firm. Again, if it has been agreed between the partners that any restrictions shall be placed on the power of any of the partners to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement . With respect to persons having no notice, the firm will be bound, notwithstanding the restriction, if the act done is within the ordinary course of business of the firm (Mercantile Credit Co. Ltd v. Garrod 11962] 3 All E.R. 1103).
The firm is liable for torts or wrongs of each partner if committed in the ordinary course of the firms’ business or with the authority of the other partners .
A partner in a firm, whose business it was to obtain by legitimate means information about the business contracts of competitors, bribed the clerk of a rival to break his contract of service by betraying his masters secrets. The bribe came out of the firm’s money, and the profits went into their assets. Held, as the partner had done illegitimately that which it was part of his business to do legitimately, the firms were liable for his act: Hamlyn v. Hous-ton & Co. (1903)1 K.B. 81. (See also Allied Pharmaceutical Distributors Ltd v. Walsh (1991)21.R.18).
If a partner acting within the scope of his apparent authority receives the property of a third person and misapplies it, or if the firm in the course of its business receives the property of a third person and, while it is in the firm’s custody, a partner misapplies it, in each case the firm is liable to make good the loss. This is really a statement of what are ordinary agency principles. Thus if a partner, acting within the scope of his apparent authority, becomes constructive trustee of property received, then equally so will his fellow partners .
The UK Partnership Act 1890 provides that the liability of each partner in respect of the firm’s contracts is joint (section 9). The liability of partners in respect of the firm’s contracts is joint and several. The liability of partners in respect of the firm’s torts is also joint and several (section 12).
Examples—A. and B. are partners. X. sues A. on a contract of the firm and recovers judgment against him, but the judgment is unsatisfied owing to A.’s lack of means. X. can sue B.
- and B. are partners. X. sues A. on a wrong for which the firm is responsible and recovers judgment which is unsatisfied. X. can bring an action against B. for the unsatisfied balance of his claim, because B.’s liability is joint and several.
The estate of a deceased partner is liable severally for the debts and obligations of the firm so far as they remain unsatisfied, but subject to the prior payment of his separate debts.
Liability of person by “holding out”
A person may be liable like a partner for the debts of the firm although he is not in fact a partner, if he by words spoken or written or by conduct represents himself or knowingly allows himself to be represented as a partner in the firm by the partners or any of them. His liability in such a case is only to those persons who have, on the faith of such representation, given credit to the firm (section 14 partnership Act 1890,UK); he is not liable, therefore, for the torts or wrongs of the firm, because such a liability does not depend on giving credit. In Beavan v. The National Bank Ltd,(1906) 23 TLR 65, B. carried on business as, M.W. & Co., and employed M.W. as the manager of the business. Held, these facts amounted to a holding out that M.W. was a partner.
A holding out which makes a person liable as a partner to a third person, does not necessarily establish that he and the person holding him out are, in fact, partners inter se though it provides some evidence tending to point to a partnership Floydd v. Cheney (1970) Ch. 602.
When a partner dies and the partnership business is continued in the old firm name, the continued use of that name or of the deceased partner’s name as part of it does not of itself make his estate liable for any partnership debts contracted after his death (section 14(2) UK partnership Act,1890.
In Bagel v. Miller (1903) 12 KB 212, M. was a partner in a firm. The firm ordered goods in M.’s lifetime, but delivery was not made until after M.’s death. Held, M.’s estate was not liable for the price in an action for goods sold and delivered as there was no debt due in respect of the goods in M.’s lifetime.
CHANGE OF PARTNERS
When a person is admitted as a partner into an existing firm he does not thereby become liable to the creditors of the firm for anything done before he became partner (section 17(1)1890 partnership Act, UK). The new firm may take over the old firm’s liabilities, but this of itself does not give the creditors any right to sue the incoming partner. This right may be acquired by novation which is an agreement, express or implied, between the creditor, the new firm and the old firm by which the original contract between the creditor and the old firm is discharged by the acceptance of the liability of the new firm.
A partner who retires from the firm remains liable for the partnership debts contracted while he was a partner. He may, however, be discharged from liability by an agreement between himself, the new firm and the creditors, and this agreement may either be an express one or be inferred from the course of dealing (section 17, 1890 Act).
For the debts of the firm incurred after his retirement he is liable to persons who (a) dealt with the firm before his retirement and continued dealing with the firm under that understanding that he is still a partner, unless he has given them notice that he is no longer a partner; or (b) had no previous dealings with the firm, unless he has either given notice of his retirement or had advertised it in the gazette or newspapers s.36 1890 Act
The estate of a partner who dies or becomes bankrupt is not liable for partnership debts contracted after the date of the death or bankruptcy.
A continuing guarantee given to a firm or to a third person in respect of the transactions of a firm is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm (section 18 1890 Act).
Engaging servants for the firm
- Partner who while acting within the scope of his apparent authority receives property form a 3rd party and misapplies it will bind the partnership in liability to pay. So also a partner who misappropriates a 3rd party’s property in the custody of the partnership or a partner.
The above liability is possible because every partner in law is an agent of the other. Section 7, Kaduna state partnership law 1991. (This law is the same with the others operating in other part of Nigeria). It is derived from the UK partnership Act 1890 which was a statute of general application in Nigeria. In conclusion, partnership business is based on trust. People should not enter into partnership with persons they do not trust as they are likely to bring misfortune to the other partners by creating liabilities for them with 3rd parties. This is so because the law treats each partner as an agent of the other.
The existence of a company may be brought to and end as provided for under the CAMA.
Winding up is the process by which a company’s existence is terminated i.e. liquidated and subsequently dissolved and its assets sold off for the settlement of its creditors, members and employees. The life of the company does not come to an end at the commencement of winding up proceedings. It is only the beginning of the end for the company. Its life actually comes to an end when the winding up processes are completed and the company is dissolved
There are three modes of winding up, winding up by court order (called compulsory winding up, voluntary winding up and winding up subject to court order.
Jurisdiction to Wind up A Company
The Federal High Court situate in the area where the registered office of the company has been for the last 6 months preceding the presentation of the petition to wind up the company shall be the place for the presentation of the winding up petition.. Section 251 (1) (e) of the 1999 constitution as amended also confers exclusive jurisdiction to wind up a company on the Federal High Court.
Grounds for Winding Up
Section 408 of CAMA outlines the legal grounds for the presentation of a petition for winding up as follows:
- Where the company has by special resolution agreed that the company be wound up by the court.
- Default is made in either holding the statutory meeting or in delivering the statutory report to the CAC. Sections 211, 410 (2) and 411 (3) of CAMA.
- The number of members of the company has reduced to a number below 2 persons. Section 410 (2) (a) (i) of CAMA
- The company is unable to pay its debts s.409 CAMA.
- The court is of the opinion that it is just and equitable to wind up the company.
Default in holding or in delivering the statutory report of a statutory meeting under S. 211 of CAMA is not an automatic ground for winding up. The court may if it sees reason, instead of a winding up order, extend the time within which the meeting should be held or within which the statutory report should be sent to the Corporate Affairs Commission. However, the court may make orders as to costs to be paid to the petitioners as it thinks fit. s. 411 (3) of CAMA.
Inability to pay debt has been defined in S. 409 as follows:
- Where a creditor to whom the company is indebted to a sum exceeding N2,000, issues a written demand for his money and the company is unable to pay the said sum within 21 days (3 weeks)
- Where a court judgment or order in favour of a creditor is returned unsatisfied by the company
- Where the court assesses the contingent and prospective liabilities of the company and is of the opinion that the company is unable to pay its debts.
Under the common law, it had been held by the House of Lords that once the conditions for proving that a company is unable to pay its debt have been satisfied, the company must be wound up. (Bowes v. Hope Life Insurance & Guarantee Co. (1865) 11 H.L. Cases 389.
Where the debt is genuinely disputed and there is reason to believe that the company has a reasonable defence, the winding up order will not be made. In Re London and Paris Banking Corporation (1875) L.R.19. Eq. 444. The company received furniture which the petitioner claimed to amount to £267. They put up a demand which was not satisfied in 3 weeks. They filed for winding up of the company. The company offered a defence that they disputed the debt that is why they did not pay. They had offered £155. But the petitioners had refused the offer before filing for winding up. After a valuation, the debt was put at £187. The court held that there was a bona fide defence of disputing the £267 debt. In the circumstance the winding up order was refused.
Prospective or contingent debts are debts which are not yet due but which the creditor feels that by the time they fall due, the company will not be in a position to pay and the assets may no longer be available to pay the debts.
Winding up on the just and equitable ground is an open ended ground. The door to what constitutes a just and equitable ground is left for the court to decide depending on the circumstances of each case. Under the common law, winding up has been granted under this reason, where the company’s business had collapsed or ceased to be Re German Date Coffee Co. (1882)20 Ch.D 169, or where there is a dead lock on the Board and be management of the company is impossible to be carried on. Re Yenidje Tobacco Co. Ltd (1916)2 Ch. 426.
Who may Petition for Winding Up
The category of persons eligible to present a petition for the winding up of a company is provided for in section 410 of CAMA as follows:
- The company itself through its Board of Directors or General Meeting. See section 63 (5) (b) of CAMA.
- A creditor to the company whether or not his money is due i.e. prospective or contingent creditor whose money will become due at a later date or upon the happening of a given event.
- The official receiver. See section 419 (1) of CAMA.
- A contributory. See section 403 and 410 (2) of CAMA
A trustee in bankruptcy to, or a personal representative of a creditor or contributory
- The CAC under section 323 and 410 (2) (d) of CAMA with the approval the Attorney General of the Federation.
- A receiver if authorized by the instrument under which he was appointed.
All of the above parties may present a petition for winding up jointly or severally.
Commencement of Winding Up
The winding up is deemed to have commenced at the time the petition for winding up is presented or filed in the court. Section 415 of CAMA . Once the winding up has commenced, any disposition of the company’s property is void. Section 413 of CAMA. No court attachment, sequestration or execution could also be levied on the property of the company. The creditors must wait to be paid when other creditors are being paid by the liquidator. Section 414 of CAMA.
Winding Up Order
Once a winding up order is made, it technically means the company has ceased to exist as a legal person but in practical terms the company continues to exist until it is dissolved.
The consequence of this is that:
- No legal action can be commenced against the company from then on, till it is dissolved, unless the leave of the court is obtained.
- If the court does not appoint a liquidator to takeover the affairs of the company until it is dissolved, the official receiver (i.e Deputy Chief Registrar of the Federal High Court becomes the official liquidator until the court appoints one. S. 422 (3) (b) and 422 (7) (a) of CAMA.
- The Directors and servants or employees of the company lose their jobs because their master, the company is dead. Madrid Bank v. Bayley (1866) L.R. 2 Q B 37 @ 40.
A copy of the winding up order shall be forwarded to the CAC. section 416 of CAMA.
The liquidator in a winding up by the court is an officer of the court appointed to conduct the affairs of the company until it is dissolved. Section 422 (1)
His principal duties include:
- Taking custody of the company’s properties S. 423 of CAMA
- Applying the assets of the company to discharge its liabilities S. 439 (1) of CAMA.
- Pay off whatever is left to the contributories as dividends.
- Perform such other duties as the court may order him. S. 422 (1) of CAMA.
Once he has completed his assignment, the liquidator may apply to the CAC to be discharged. If satisfied with the liquidator’s report on completion of his assignment, the CAC may then discharge him. The release of the liquidator operates as a discharge from liability. S. 431 (4) of CAMA.
When the liquidator has sold off the assets of the company and settled the liabilities of the company and the contributories with whatever is left (if any) and the affairs of the company have been fully wound up, the liquidator shall apply to the court for the company to be dissolved and the company shall be dissolved accordingly. That marks the end of the company’s life. s. 454 of CAMA
VOLUNTARY WINDING UP
Although a petition may be presented to the court to wind up a company, the members, if in agreement may also voluntarily pass a resolution to wind up the company.
When a company is being wound up by the voluntary resolution of the General meeting, it is referred to as voluntary winding up.
Conditions for Voluntary winding up. Section 457 of CAMA
A company may be voluntarily wound up in the following situations:
- When the period if any fixed for the duration of the company by the articles expires, or the event, if any occurs, on the occurrence of which the articles provide that the company is to be dissolved and the company passes an ordinary resolution requiring the company to be wound up voluntarily.
- If the company resolves by special resolution that it be wound up voluntarily.
On the passing of any of the above stated resolutions, the voluntary winding up has commenced. Section 459 of CAMA. The resolution passed shall be advertised in 2 daily newspapers and in the federal government gazette. section 458 of CAMA.
Once the winding up resolution has been passed, the question who between the members and the creditors will control the winding up will arise.
Members Voluntary Winding Up
Section 462 provides the test for deciding whether a voluntary winding up proceeds as a members’ voluntary winding up or not.
If within 5 weeks before the passing of the resolution to wind up voluntarily, the directors make a declaration in the prescribed form, called statutory declaration of solvency, the winding up shall be a members voluntary winding up.
The statutory declaration is to the effect that the directors have made a full enquiry into the affairs of the company and are thereby of the informed opinion that the company will be able to pay its debts in full within 12 months of the proposed resolution to wind up. The directors who make a false declaration of solvency commit an office and are liable each to a fine of N1,500 or imprisonment for a term of 3 months or both. If the company is unable to pay its debts in full within the 12 months after the resolution to wind up, the directors would be deemed to have made a false declaration of solvency unless the contrary is proved. Section 462 (3) of CAMA.
If the resolution to wind up voluntarily is made after the making of the declaration of solvency, the winding up shall be a members voluntary winding up.
Normally, after the declaration of solvency is made, the directors shall call a general meeting, pass the resolution to wind up voluntarily, then proceed to appoint a liquidator to take over the affairs of the company. This is because upon passing the resolution the winding up is deemed to have commenced and the powers of the directors cease. Section 462 (1) & (2) of CAMA.
Dissolution After Winding Up
When the affairs of the company have been fully wound up i.e. the liabilities of the company discharged and the balance (if any) of the proceeds from the company’s assets have been distributed to the share holders as dividends, the liquidator shall prepare a full account thereof.
He will then call a general meting of the members and lay the account before them. After the conclusion of the meeting the liquidator shall within 7 days send a copy of the account to the CAC together with a report of the general meeting which was held to consider the account. Section 468 (2) & (3) of CAMA.
Conversion to creditors Voluntary Winding Up. Section 466 of CAMA
If in the course of the members voluntary winding up, the liquidator discovers that the assets of the company cannot pay the debts of the company in full, He shall forth with call a meeting of the creditors of the company, lay the report before them, thereafter the winding up shall convert to a creditors voluntary winding up.
Dissolution After Winding Up.
When the liquidator has completed his work and presented his report to the member sin general meeting and registered the report with the CAC, the company is deemed to be dissolved 3 months thereafter. Section 468 (4).
Creditors Voluntary Winding Up
Where it is proposed to wind up a company voluntarily and the directors are unable to make a declaration of solvency 5 weeks to the proposed date for considering the resolution, the winding up shall be a creditors voluntary winding up. Where the directors had also conducted enquiry into the affairs of the company and they are of the view that the company will be unable to settle its liabilities within 12 months if the winding up resolution is passed, the winding up shall proceed as creditors’ voluntary winding up.
The company will call separate meetings of the members and the creditors on the same day or a day apart. The meeting of members will pass the resolution to wind up. The directors will then move over to the meeting of the creditors and lay before them a statement of the affairs of the company. section 472 (3) of CAMA. Thereafter they shall appoint one of the creditors to preside over the meeting. Section 472 (3) (b) of CAMA. The creditors may then proceed to appoint a liquidator to take charge of the affairs of the company and complete the winding up. S. 473 of CAMA. If the members in their meeting had appointed a liquidator, the one appointed by the creditors shall be the liquidator. However if the creditors fail to appoint one, then the one appointed by the members shall be the liquidator. Section 473 (1) of CAMA.
The creditors may at their first or later meetings appoint a committee of inspection comprising of not more than 5 persons to work with the liquidator to ensure that the interests of the creditors is well protected. This is needful because a voluntary winding up is converted to a creditors voluntary winding up when the directors are of the view that the assets of the company may not be enough to settle all the creditors (S. 462 of CAMA).
The appointment of the liquidator terminates the powers of the directors except as the General meeting or the liquidator shall decide i.e.He decides on which powers of the directors they may continue to exercise. S. 464 (2) of CAMA.
When the liquidator is appointed, the Corporate Affairs Commission shall be notified within 14 days and the appointment shall be published in 2 daily newspaper and also delivered to the federal government printers for gazette. S. 491 of CAMA.
It is expected that the winding up should conclude within one year. Where however this is not possible, the liquidator shall call a separate general meeting of the company and that of the creditors at the end of the first year and each succeeding year that the liquidation lasts. This is to lay before the meetings an account of his stewardship. S. 477 of CAMA . See also S. 467 of CAMA.
The creditors may sack the liquidator if they are not satisfied with his work. If they do not, a minority may apply to court and on good cause shown; the court may remove the liquidator and appoint another one. S.482 of CAMA.
Final Meeting and Dissolution
As soon as the winding up is completed, the liquidator shall prepare his statement of account and lay it before the meeting of the creditors and before the general meeting of members of the company.
The liquidator shall thereafter send a copy of the statement of account to the CAC for registration. At the expiry of 3 months thereafter, the company is deemed to be dissolved section 478 (10 (4) of CAMA.
WINDING UP SUBJECT TO COURT SUPERVISION
A company may be wound up voluntarily by resolution of the members. It may thereafter proceed as either members or creditors winding up. In the course of the winding up however, disputes or differences may arise in the manner the winding up is being conducted . Aggrieved members or creditors may apply to the court to supervise the winding up process for them.
When the court by order agrees to supervise a voluntary winding up, it is called winding up subject to court supervision S. 486 of CAMA.
Order for Court Supervision
If a company passes a resolution for voluntary winding up, the court may on a petition order that the voluntary winding up shall continue but subject to such supervision of the court and upon such terms and conditions as the court thinks just section 486 of CAMA.
Effect of Court Supervision
Winding up under court supervision shall be deemed to be a winding up under court order ie. It is proceeded with as if it is a Compulsory winding up and the court shall exercise power over the winding up as if it were a winding up by the court . Section 488 of CAMA.
A petition for winding up under court supervision is deemed in law to be a petition for compulsory winding up by the court. It means therefore that the winding up shall continue as if it were a winding up by the court. S. 487 of CAMA.
APPOINTMENT OF LIQUIDATOR
The court is at liberty to allow any liquidator already appointed to continue. The court may also remove the liquidator and appoint another in his place or instead appoint an additional liquidator to work with the one already appointed by the members or creditors as the case may be. S. 489 of CAMA.
The liquidator shall cause the court order making the winding up subject to court order to be advertised in the federal government gazette and in newspapers circulating in Nigeria within 28 days of the order S. 489 of CAMA.
The winding will however still be deemed to have commenced on the date the resolution for voluntary winding up was made s . 415 (1) of CAMA.
The winding up is under s. 488 of CAMA deemed to be a compulsory winding up so that any disposition of the property of the company and any attachment, sequestration, distress or execution of the estate of the company after the commencement of the winding up subject to court supervision is void.
MAJOR OFFICERS OF THE WINDING UP
In the process of winding up, the effect of commencement of a winding up is that the directors’ power to manage and direct the affairs of the company ceases.
There are officers who take over and manage the affairs of the company until it is dissolved. The process of a winding up could take one, two, or several years. During this period, the affairs of the company are managed by the major officers of the winding up.
The Deputy Chief Registrar of the Federal High Court or any other officer designated by the Chief Judge of the Federal High Court is the official receiver. In a compulsory winding up, when the winding up petition is presented to the court, the powers of the Directors ceases. The official receiver takes over the affairs of the company pending the appointment of a provisional liquidator. Even if a provisional liquidator is appointed, He takes charge of the company along with the official receiver pending the appointment of the liquidator. Section 420 (1) and 421 (1) of CAMA.
Upon the commencement of a winding up petition and pending the grant of the final order of winding up, the liquidator appointed (if any) shall be called provisional liquidator. He is appointed pending the outcome of the petition to wind up. If it fails, that terminates the appointment of the provisional liquidator. If the petition succeeds, a liquidator is appointed. The provisional liquidator may also be appointed the liquidator. Section 422 (1) of CAMA. It is usual however to appoint the official receiver as the provisional liquidator.
A liquidator is the person appointed to take charge of the company’s affairs after the winding up order has been granted or in the case of a voluntary winding up when the resolution to wind up has been passed. Section 422 (9) of CAMA.
The liquidator takes over the assets of the company, sell them off, and pays off the company’s liabilities. The balance of what is left is distributed as dividends to share holders and the company is then dissolved.
Nigerian Deposit Insurance corporation v. Obende, Provisional Liquidator of progress Bank Nig. Ltd (2001)5 NWLR pt 705, 184.
Proof and Ranking of Claims in Winding up
In winding up, the following is the order of payment.
- Preferential payment
- All local rates and charges, pay-as-you-earn-income tax, land, property, taxes etc.
- Salaries of any clerk or Servant, labourers etc in respect of services rendered.
- All accrued holiday remuneration of servants, labourers etc.
- All other costs of the winding up.
- Secured creditors
- Unsecured creditors
Section 492-494 of CAMA
Methods of Dissolution of Companies
When a company’s life is brought to an end by the completion of winding up or otherwise, it is dissolved and struck off the register of companies in Nigeria.
There are four ways by which a company could be dissolved.
- When a company is wound up and its assets sold off, the company is then dissolved.
- When mergers take place, one or more companies may merge into another company or two or more companies may merge and become a new company. The companies that cease to exist as a result of the merger are dissolved. Where a company takes over another and the company that is taken over cases to exists, it is then dissolved.
- Business reconstruction. Where an existing company is re-organized due to an arrangement and compromise and it is reconstructed into a new company and the old company transfers its business to the new company, the old company is then dissolved
- Where the Corporate Affairs Commission confirms that a registered company is no longer carrying on business, it may strike it off the register of members and dissolve the company. S. 525 of CAMA.