LBA I Notes Amended 1-2
LBA I Notes Amended 1-2
Section 3 (1) of the Companies Act No. 17 of 2015 Laws of Kenya states what
company means as means a company formed and registered under this Act or
an existing company. This is a very vague definition, in the statute the word
company is not a legal term hence the vagueness of the definition. The legal
attributes of the word company will depend upon a particular legal system.
Exceptions to the Rules are stated in the Act but not the rules themselves.
Therefore fundamental principles have to be extracted from study of numerous
decided cases some of which are irreconcilable. The true meaning of company
law can only be understood against the background of the common law.
LIMITED LIABILITY
Basically liability means the extent to which a person can be made to account
by law. He can be made to be accountable either for the full amount of his
debts or else pay towards that debt only to a certain limit and not beyond it. In
the context of company law liability may be limited either by shares or by
guarantee.
Under Section (3) (1) of the Companies Act,2015 in a company formed and
registered under this Act or an existing company by shares the members
liability to contribute to the companies assets is limited to the amount if any
paid on their shares.
Under Section 3(1) and 7 of the Companies Act, 2015 defines a company
limited by guarantee, where the members undertake to contribute a certain
amount to the assets of the company in the event of the company being wound
up. Note that it is the members’ liability and not the companies’ liability
which is limited. As long as there are adequate assets, the company is liable to
pay all its debts without any limitation of liability. If the assets are not
adequate, then the company can only be wound up as a human being who fails
to pay his debts. Note that in England the Insolvency Act has consolidated the
relationships relating to …. That does not apply here.
Nearly all statutory rules in the Companies Act are intended for one or two
objects namely
1. The protection of the company’s creditors;
2. The protection of the investors in this instance being the
members.
The documents are then lodged with the registrar of companies and if they are
in order then they are registered and the registrar thereupon grants a certificate
of incorporation and the company is thereby formed. Section 16(2) of the Act
provides that from the dates mentioned in a certificate of incorporation the
subscribers to the Memorandum of Association become a body corporate by
the name mentioned in the Memorandum capable of exercising all the
functions of an incorporated company. It should be noted that the registered
company is the most important corporation.
STATUTORY CORPORATIONS
A company which does not fall under this definition is described as a public
company. Section 10 provides that a public company grants its members the
right to transfer shares and the public the right to subscribe for ots shares and
debentures.
In order to form a public company, there must be at least seven (7) subscribers
signing the Memorandum of Association whereas only one (1) person need to
sign the Memorandum of Association in the case of a private company.
ADVANTAGES OF INCORPORATION
The full implications of corporate personality were not fully understood till
1897 in the case of Salomon v. Salomon [1897] A C 22
The House of Lords unanimously reversed this decision. In the words of Lord
Halsbury “Either the limited company was a legal entity or it was not. If it
was, the business belonged to it and not to Salomon. If it was not, there was no
person and no thing at all and it is impossible to say at the same time that
there is the company and there is not”
There were several other Law Lords who decided business in the House.
The Appellant owner of a timber estate assigned the whole of the timber to
a company known as Irish Canadian Sawmills Company Limited for a
consideration of £42,000. Payment was effected by the allotment to the
Appellant of 42,000 shares fully paid up in £1 shares in the company. No
other shares were ever issued. The company proceeded with the cutting of
the timber. In the course of these operations, the Appellant lent the
company some £19,000. Apart from this the company’s debts were
minimal. The Appellant then insured the timber against fire by policies
effected in his own name. Then the timber was destroyed by fire. The
insurance company refused to pay any indemnity to the appellant on the
ground that he had no insurable interest in the timber at the time of
effecting the policy.
The courts held that it was clear that the Appellant had no insurable
interest in the timber and though he owned almost all the shares in the
company and the company owed him a good deal of money, nevertheless,
neither as creditor or shareholder could he insure the company’s assets. So
he lost the Company.
Lee’s company was formed with capital of £3000 divided into 3000 £1
shares. Of these shares Mr. Lee held 2,999 and the remaining one share
was held by a third party as his nominee. In his capacity as controlling
shareholder, Lee voted himself as company director and Chief Pilot. In the
course of his duty as a pilot he was involved in a crash in which he died.
His widow brought an action for compensation under the Workman’s
Compensation Act and in this Act workman was defined as “A person
employed under a contract of service” so the issue was whether Mr. Lee
was a workman under the Act? The House of Lords Held:
“that it was the logical consequence of the decision in Salomon’s case that
Lee and the company were two separate entities capable of entering into
contractual relations and the widow was therefore entitled to
compensation.”
The court held that a limited liability company is a corporation and as such
it has existence which is distinct from that of the shareholders who own it.
Being a distinct legal entity and abstract in nature, it was not capable of
having racial attributes.
ADVANTAGES OF INCORPORATION
In East Africa Roofing Co. Ltd v Pandit (1954) 27 KLR 86 here the
Plaintiff a limited liability company filed a suit against the defendant
claiming certain sums of money. The defendant entered appearance and
filed a defence admitting liability but praying for payment by
instalments. The company secretary set down the date on the suit for
hearing ex parte and without notice to the defendant. This was
contrary to the rules because a defence had been filed. On the hearing
day the suit was called in court but no appearance was made by either
party and the court therefore ordered the action to be dismissed. The
company thereafter applied to have the dismissal set aside. At the
hearing of that application, it was duly represented by an advocate. The
only ground on which the company relied was that it had intended all
along to be represented at the hearing by its manager and that the
manager in fact went to the law courts but ended in the wrong court. It
was held that a corporation such as a limited liability company cannot
appear in person as a legal entity without any visible person and having
no physical existence it cannot at common law appear by its agent but
only by its lawyer. The Kenya Companies Act does not change this
common law rule so as to enable a limited company to appear in court
by any of its officers.
Although a company is liable for its own debt which will be the logical
consequence of the Salomon rule, the members themselves are held liable
which is therefore a departure from principle. The rights of creditors under this
section are subject to certain limitations namely (under statutory provision)
The statutes are not clear as to the meaning of fraud the question arises that
once the money has been recovered from the fraudulent director, is it to be laid
as part of the company’s general assets available to all creditors or should it go
back to those creditors who are actually defrauded.
In the case of Re William Justice Eve J. stated that such money should form
part of the company’s general assets and should not be refunded to the
defrauded creditors.
In the case of Re Cyona Distributors Ltd (1967) Ch. 889 the Court of Appeal
ruled that if the application under Section 323 is made by the debtor then the
money recovered should form part of the company’s general assets but where
the application is made by a creditor himself, then that creditor is entitled to
retain the money in the discharge of the debts due to him.
Lifting the Veil – Lifting the veil of corporate entity under statute - lifting the
veil of corporate entity under
common law.
One of the most important limitations imposed by the Companies Act on the
recognition of the separate personality of each individual company is in
connection with associated companies within the same group enterprise. In
practice it is common for a company to create an organisation of inter related
companies each of which is theoretically a separate entity but in reality part of
one concern represented by the group as a whole. Such is particularly the case
when one company is the parent or holding company and the rest are its
subsidiaries.
A holding company under section3 (1) of the Company’s Act 2015 is defined
"holding company" (of another company) means a company of which the
other company is a subsidiary company of the company;
"holding company", in relation to another company, means a company that-
(a) controls the composition of that other company's board of directors;
(b) controls more than half of the voting rights in that other company; (c)
holds more than half of that other company's issued share capital; or (d) is a
holding company of a company that is that other company's holding company;
Under Section -3(1) of the Companies Act,2015 a company is deemed to be
a subsidiary of another if but only if "wholly-owned subsidiary company" (of
another company) means a company that has no members other than that other
company and that other company's wholly owned subsidiaries (or persons
acting on behalf of that other company or its wholly-owned subsidiaries;
(a) That other company either
(i) is a member of it and controls the composition of its board of
directors or
(ii) Holds more than half in nominal value of its equity share
capital or
(b) The first mentioned company is a subsidiary of any company which is that
other’s subsidiary.
Under Section - where at the end of the financial year a company has
subsidiaries, the accounts dealing with the profit and loss of the company and
subsidiaries should be laid before the company in general meeting when the
company’s own balance sheet and profit and loss account are also laid. This
means that group accounts must be laid before the general meeting.
The group accounts should consist of a consolidated balance sheet for the
company and subsidiary and also of a consolidated profit and loss account
dealing with the profit and loss account of a company.
MISDESCRIPTION OF COMPANIES
Part 4 prescribes the requirements for a name of a company under the Act.
Under Section 67 of the Companies Act, 2015, a company is mandated to
disclose its name it requires that a company’s name should appear whenever it
does business on its Seal and on all business documents. Under paragraph 4 of
this Section, if an officer of a company or any person who on its behalf signs
or authorises to be signed on behalf of the company any Bill of Exchange,
Promissory Note, Cheque or Order for Goods wherein the Company’s name is
not mentioned as required by the Section, such officer shall be liable to a fine
and shall also be personally made liable to the holder of a Bill of Exchange
Promissory Notes, Cheque or order for the goods for the amount thereof unless
it is paid by the company. The effect of this section is that it makes a
company’s officer incur personal liability even though they might be
contracting as the company’s agents. Liability under
this Section normally arises in connection with cheques and company officers
have been held liable where for instance the word limited has been omitted or
where the company has been described by a wrong name.
Generally there is no reason why a company may not be an agent of its share
holders. The decision in Salomon’s case shows how difficult it is to convince
the courts that a company is an agent of its members. In spite of this there have
been occasions in which the courts have held that registered companies were
not carrying on in their own right but rather were carrying on business as
agents of their holding companies. Reference may be made to the case of
Smith Stone & Knight v. Birmingham Corporation (1939) 4 All E.R. 116
His Lordship then stated that in order to answer the question six points must
be taken into account.
If the answers are in the affirmative, then the subsidiary company is an agent
of the parent company.
Here a British company was formed with a capital of 100 pounds of which 90
pounds was contributed by the president of an American Film Company.
There were 3 directors, the American and 2 Britons. By arrangement between
the two companies, a film was shot in India nominally by the British Company
but all the finances and other facilities were provided by the American
Company. The British Board of Trade refused to recognize the Film as having
been made by a British company and therefore refused to
register it as a British film.
The court held that insofar as the British company had acted at all it had done
so as an agent or nominee of the American company which was the true maker
of the film.
The court held that the substance of the arrangement was that the American
company traded in England through the subsidiary as its agent and that the
sales by their subsidiary, were a means of furthering the American company’s
European interests.
There have been cases where Salomon’s case has been upheld that a company
is a legal entity.
Ebbw Vale UDC V. South Wales Traffic Authority (1951) 2 K.B 366
Lord Justice Cohen L.J “Under the ordinary rules of law, a parent company
and a subsidiary company even when a hundred percent subsidiary are
distinct legal entities and in the absence of an agency contract between the
two companies, one cannot be said to be an agent of the other.”
This was based on Section 210 of the Companies Act where an offer was
made to purchase out a company if 90% of shareholders agreed. There were 3
shareholders in the company. A, B and C.
A held 45% of the shares, B also held 45% of the shares and C held the
remaining 10% of the shares. A and B persuaded C to sell his shares to them
but he declined. Consequently A and B formed a new company call it AB
Limited, which made an offer to ABC Limited to buy their shares in the old
company. A and B accepted the offer, but C refused. A and B sought to use
provisions of Section 210 in order to acquire C’s shares compulsorily.
The court held that this was a bare faced attempt to evade the fundamental
principle of company law which forbids the majority unless the articles
provide to expropriate the minority shareholders.
Lord Justice Cohen said “the company was nothing but a legal hut. Built
round the majority shareholders and the whole scheme was nothing but a
hollow shallow.” All the minority shareholder had to do was shout and the
walls of Jericho came tumbling down.
Here the Defendant was a former employee of the plaintiff company and had
covenanted not to solicit the plaintiff’s customers. He formed a company to
run a competing business. The company did the solicitation. The defendant
argued that he had not breached his agreement with the plaintiffs because the
solicitation was undertaken by a company which was a separate legal entity
from him.
The court held that the defendant’s company was a mere cloak or sham and
that it was the defendant himself through this device who was soliciting the
plaintiff’s customers. An injunction was granted against the both the defendant
and the company not to solicit the plaintiff’s customers.
Jones v. Lipman (1912) 1 W.L.R. 832
This case the Defendant entered into a contract for the sale of some property
to the plaintiff. Subsequently he refused to convey the property to the plaintiff
and formed a company for the purpose of acquiring that property and actually
transferred the property to the company. In an action for specific performance
the Defendant argued that he could not convey the property to the Plaintiff as
it was already vested in a third party.
Justice Russell J. observed as follows
“the Defendant company was merely a device and a sham a mask which he
holds before his face in an attempt to avoid recognition by the eye of equity”
GROUP ENTERPRISE
The courts also look behind the façade of the company and its place of
registration in order to determine its residence.
THE DOCTRINE OF ULTRA VIRES
The court held that the contract was ultra vires the company and void so that
not even the subsequent consent of the whole body of shareholders could
ratify it. Lord Cairns stated as follows:
“The words general contractors referred to the words which went
immediately before and indicated such a contract as mechanical engineers
make for the purpose of carrying on a business. This contract was entirely
beyond the objects in the Memorandum of Association. If so, it was thereby
placed beyond the powers of the company to make the contract. If so, it was
not a question whether the contract was ever ratified or not ratified. If the
contract was going at its beginning it was going because the company could
not make it and by purporting to ratify it the shareholders were attempting to
do the very thing which by the act of parliament they were prohibited from
doing.”
The courts construed the object clause very strictly and failed to give any
regard to that part of the Objects clause which empowered the company to do
business as general contractors. This construction gave the doctrine of ultra
vires a rigidity which the times have not been able to uphold. At the present
day, the doctrine is not as rigid as in Ashbury’s case and consequently it has
been eroded.
The first inroad into the doctrine was made five years later in the case of
Attorney General V. Great Eastern Railway 1880) 5 A.C. 473
However businessmen did not wish to leave matters for implication. They
preferred to set up in the Memorandum of Association not only the objects for
which the company was establish but also the ancillary powers which they
thought the company would need. Furthermore instead of confining
themselves to the business which the company was initially intended to
follow, they would also include all other businesses which they might want the
company to turn to in the future. The original intention of parliament was that
the companies object should be set out in short paragraphs in the
Memorandum of Association. But with a practice of setting out not only the
present business but also any business which the promoters would want the
company to turn to, the result is that a company’s object’s clause could contain
about 30 or 40 different clauses covering every conceivable business and all
that incidental powers which might be needed to accomplish them.
In practice therefore the objects laws of practically every company does not
share the simplicity originally intended in favour of these practice it may be
argued that the wider the objects the greater is the security of the creditors
since it will not be easy for the company to enter into ultra vires transactions
because every possible act will probably be covered by some paragraph in the
Objects clause.
In this case the Plaintiff company’s business was requisitioned for vacant land
and the erection thereon of Housing Estates. Its objects as set up in the
Memorandum of Association contained the Clause authorising the company to
“carry on any other trade or business whatsoever which can in the opinion of
the Board of Directors be advantageously carried on by the company in
connection with or as ancillary to any of the above businesses or a general
business of the company”.
The court of first instance decided that the company was ultra vires and it was
open to the defendant to raise the defence of ultra vires. However a unanimous
court of appeal reversed the decision and hailed that the words stated must be
given their natural meaning and the natural meaning of those words was such
that the company could carry on any business in connection with or ancillary
to its main business provided that the directors thought that could be
advantageous to the company.
“It may be that the Directors take the wrong view and infact the
business in question cannot be carried on as they believe but it matters not
how mistaken they might be provided that they formed their view honestly
then the business is within the plaintiff’s company’s objects and powers.”
The courts have introduced 2 methods of curbing the evasion of the ultra vires
doctrine.
1. The ejusdem generis rule is also referred to as the main
objects rule of construction. Here a Memorandum of
Association expresses the objects of a company in a
series of paragraphs and one paragraph or the first 2 or 3
paragraphs appear to embody the main object of the
company all the other paragraphs are treated as merely
ancillary to this main object and as limited or controlled
thereby. Business persons evaded this method by use of the
independent objects clause. The objects clause will
contain a paragraph to the effect that each of the
preceding sub-paragraphs shall be construed
independently and shall not in any way be limited by
reference to any other sub-clause and that the objects set
out in each sub-clause shall be independent objects of the
company. Reference may be made to the case of Cotman
v. Brougham [1918]A.C. 514
The court held that borrowing was a power and not an object. The power to
borrow existed only for furthering intra vires objects of the company and
was not an object in itself. Therefore
1. The exercise of powers which will be intra vires is exercised for
the objects of the company and is ultra vires only if used for the
objects not covered by the company’s Memorandum of
Association.
2. Even an independent object clause cannot convert what are in
fact powers into objects.
2. LOSS OF SUBSTRATUM
Where the main object of a company has failed, a petitioner will be granted an
order for the winding up/liquidation of a company. Such a petitioner must
however be a member or shareholder in the company.
The object of the ultra vires rule is to make the members know how and to
what their money is being applied. This is the rationale of members’
protection.
In this case the major object of the company was to acquire a German Patent
for manufacturing coffee from dates. The German patent was never granted
but the company acquired a Swedish Patent for the same purpose. The
company was solvent and the majority of the members wished to continue in
business. However, two of the shareholders petitioned for winding up of the
company on the grounds that the company’s object had entirely failed.
The court held that upon the failure to acquire the German patent, it was
impossible to carry out the objects for which the company was formed.
Therefore the sub stratum had disappeared and therefore it was just inevitable
that the company should be wound up.
This substratum rule is too narrow and cannot sufficiently uphold the ultra
vires rule. Questions are, are members or shareholders really protected? Do
they know what the objects are? The Directors may choose any amongst the
many.
Secondly a member has to petition first and the court has to decide
3. GRATUITOUS GIFTS
Can a company validly make a gift out of corporate property or asset? The law
is that a company has no power to make such payments unless the particular
payment is reasonably incidental to the carrying out of a company’s business
and is meant for the benefit and to promote the property of the company.
A company sold its assets and continued in business only for the purpose of
winding up. While it was awaiting winding up, a resolution was passed in the
company’s general meeting authorising the payments of a gratuity to the
directors and dismissed employees.
The court held that as the company was no longer a going concern such a
payment could not be reasonably incidental to the business of the company
and therefore the resolution was invalid. In the words of the Lord Justice
Bowen said
“The law does not say that there are not to be cakes and ale but there
are to be no cakes and ale except such as are required for the benefit of the
company”
The object clause of the company contained an express power to provide for
the welfare of employees and ex employees and also their widows, children
and other dependants by the grant of money as well as pensions. Three years
before the company was wound up, the Board of Directors decided that the
company should undertake to pay a pension to the widow of a former
managing director but after the winding up the liquidator rejected her claim to
the pension.
The court held that the transaction whereby the company covenanted to pay
the widow a pension was not for the benefit of the company or reasonably
incidental to its business and was therefore ultra vires and hence null and void.
Whether they reneged an express or implied power, all such grants involved
an expenditure of the company’s money and that money can only be spent for
purposes reasonably incidental to the carrying on of the company’s business
and the validity of such grants can be tested by the answers to three
questions:
(i) Is the transaction reasonably incidental to the
carrying on of the company’s business?
(ii) Is it a bona fide transaction?
(iii) Is it done for the benefit and to promote the
prosperity of the company?
In this case the company transferred the major portion of its assets and
proposed to distribute the purchase price to those employees who are going to
become redundant after reduction in the stock of the company of the
company’s business. The company was not legally bound to make any
payments by way of compensation. One shareholder claimed that the proposed
payment was ultra vires.
The court held that the proposed payment was motivated by a desire to treat
the ex-employees generously and was not taken in the interest of the company
as it was going to remain and that therefore it was ultra vires.
The court held that even though the payment was not under an express power,
it was reasonably incidental to the company’s business and therefore valid.
This is one of the few cases where payment was recognised as being valid.
THE RIGHTS OF THE COMPANY & 3RD PARTIES UNDER ULTRA
VIRES TRANSACTIONS:
X was a director of company B and at the same time had some interests in
company A. He learnt that company B wished to borrow some money which it
intended to apply to unauthorised activities. He urged company A to lend the
money on the security of debentures. The issues were
(a) Whether the debentures were valid security;
(b) Whether the knowledge of X as to the intended application of the money
could be imputed to the company.
The court held that X was not company A’s agent for obtaining such
information and therefore his knowledge was not the company’s knowledge
and consequently the debentures were valid security.
1. At common law therefore, the first remedy of a person who parts with
property under an ultra vires transaction is that he has a right to trace and
recover that property from the company as long as he can identify it.
This principle also applies to money lent to the company on an ultra vires
borrowing so long as the money can be traced either in law or in equity. The
basis of this principle is that the company is deemed to hold the money or the
property as a trustee for the person from whom it was obtained.
2. The 3rd party has a personal right against the directors or other agents with
whom he has dealt. The rationale is that such directors or other agents are
treated as quasi trustees from which it follows that a 3 rd party is entitled to a
claim against them for restitution.
The intra vires creditor does not have the locus standi to prohibit ultra vires
actions. Again there is the presumption of knowledge of a company’s
documents and activities. In spite of the fact that the doctrine of ultra vires is
over due for reform, it has not undergone any reform in Kenya unlike in the
United Kingdom where it has been severely eroded.
All the company can do is to alter its objects under the power conferred by
Section 8 of the Companies Act Cap 486. The effect of the Section is that a
company may by special resolution alter the provisions in its Memorandum
with respect to the objects of the company. Alteration must be lodged with the
Register section 28(2)
Within 30 days of the date on which the resolution altering the objects is
passed, an application for the cancellation of the Resolution may be made to
Court by or on behalf of the holders who have not voted in favour of the
Resolution, of not less than 15% of the nominal value of the issued share
capital of any class and if the company does not have a share capital, the
application can be made by at least 15% of the members of the company.
If such an application is made, the alteration will not be effective except to the
extent that it is confirmed by a court. Normally a court has an absolute
discretion to confer, reject or modify the alteration.
Under Section 8 (9) of the Companies Act Cap 486 if no application is made
to the court, within 30 days the alteration cannot subsequently be challenged.
The effect of this provision is that as long as an alteration is supported by
more than 85% of the shareholders or so long as no one applies to the court
within 30 days of the resolution, companies have complete freedom to alter
their objects.
Note however, that such alterations do not operate retrospectively. Their effect
relates only to the future.
ARTICLES OF ASSOCIATION
Section 12 of the Companies Act requires that the Articles must be in the
English language printed, divided into paragraphs numbered consecutively
dated and signed by each subscriber to the Memorandum of Association in the
presence of at least one attesting witness.
Whereas the Memorandum confers powers for the company, the Articles
determine how such powers should be exercised.
They further provide a dividing line between the powers of share holders and
those of the directors.
Here the Articles of the Company provided that any dispute between any
member and the company should be referred to arbitration. A dispute arose
between Hickman and the company and instead of referring the same to
arbitration, he filed an action against the company. The company applied for
the action to be stayed pending reference to arbitration in accordance with
the company’s articles of association.
The court held that the company was entitled to have the action stayed since
the articles amount to a contract between the company and the Plaintiff one of
the terms of which was to refer such matters to arbitration.
Justice Ashbury had the following to say: “That the law was clear and could
be reduced to 3 propositions
1. That no Article can constitute a contract between the
company and a third party;
2. No right merely purporting to be conferred by an
article to any person whether a member or not in a
capacity other than that of a member for example
solicitor, promoter or director can be enforced
against the company.
3. Articles regulating the right and obligation of the
members generally as such do not create rights
and obligations between members and the
company”.
In this case, the company’s articles provided that Eley should become the
company Solicitor and should transact all legal affairs of the company for
mutual fees and charges. He bought shares in the company and thereupon
became a member and continued to act as the company’s solicitor for some
time. Ultimately the company ceased to employ him. He filed an action
against the company alleging breach of contract.
The court held: that the articles constitute a contract between the company and
the members in their capacity as members and as a solicitor Eley was therefore
a third party to the contract and could not enforce it. The contract relates to
members in their capacity as members and the company so its only a contract
between the company and members of that company and not in any other
capacity such as solicitor. But note that there can be an intra member contract.
Here the Plaintiff who was a member of the company petitioned the court to
stay the implementation of a resolution not to pay dividends but issue
debentures instead. Holding that a member was entitled to the stay of the
implementation of the Resolution Sterling J. had the following to say: “the
articles of association constitutes a contract not merely between shareholders
and the company but also between the individual shareholders and every
other.”
This case was followed in
Here the company’s articles provided that every member who intends to
transfer his shares shall inform the directors who will take those shares
between them equally at a fair value. The Plaintiff called upon the directors to
take his shares but they refused. The issue was did the articles give rise to a
contract between the Plaintiff and the directors. In their capacity as directors
they were not bound.
The court here held that the Articles related to the relationship between the
Plaintiff as a member and the Defendants not as directors but as members of
the company. Therefore the Defendants were bound to buy the Plaintiff shares
in accordance with the relevant article.
ALTERATION OF ARTICLES
Section 13 of the Companies Act gives the company power to alter the articles
by special resolution. This is a statutory power and a company cannot deprive
itself of its exercise. Reference may be made to the case of
The issue herein was whether a company which under its Memorandum and
Articles had no power to issue preference shares could alter its articles so as to
authorise the issue of preference shares by way of increased capital
The court held that as long as the Constitution of a Company depends on the
articles, it is clearly alterable by special resolution under the powers conferred
by the Act. Therefore it was proper for the company to alter those articles and
issue preference shares. Any regulation or article which purports to deprive the
company of this power is therefore invalid, on the ground that such an article
or regulation will be contrary to the statute. The only limitation on a
company’s power to alter articles is that the alteration must be made in good
faith and for the benefit of the company as a whole.
In this case the company had a lien on all debts by members who had not truly
paid up for their shares. The Articles were altered to extend the Company’s
lien to those shares which were fully paid up.
The court held that since the power to alter the Articles is statutory, the
extension of the lien to fully paid up shares was valid. These were the words
of Lindley L.J.
“Wide however as the language of Section 13 mainly the power conferred by
it must be exercised subject to the general principles of law and equity which
are applicable to all powers conferred on majorities and enabling them to
bind minorities. It must be exercised not only in the manner required by law
but also bona fide for the benefit of the company as a whole.”
Here the Articles of the Company provided that the Plaintiff and 4 others
should be the first directors of the company. Further each one of them should
hold office for life unless he should be disqualified on any one of some six
specified grounds, bankruptcy, insanity etc. The Plaintiff failed to account to
the company for certain money he had received on its behalf. Under a general
meeting of the company a special resolution was passed that the articles be
altered by adding a seventh ground for disqualification of a director which was
a request in writing by his co-directors that he should resign. Such request was
duly given to the Plaintiff and there was no evidence of bad faith on the part of
shareholders in altering the articles.
The Plaintiff sued the company for breach of an alleged contract contained in
their original articles that he should be a permanent director and for a
declaration that he was still a director.
The court held that the contract if any between the Plaintiff and the company
contained in the original articles in their original form was subject to the
statutory power of alteration and if the alteration was bona fide for the benefit
of the company, it was valid and there was no breach of contract. Lord Justice
Bankes observed as follows
“In this case, the contract derives its force and effect from the Articles
themselves which may be altered. It is not an absolute contract but only a
conditional contract.”
The question here is who determines what is for the benefit of the company?
Is it the shareholders or the Courts?
“to adopt such a view that a court should decide will be to make the
court the manager of the affairs of innumerable companies instead of
shareholders themselves. It is not the business of the court to manage the
affairs of the company. That is for the shareholders and the directors.”
The court held that the company had a power to re-introduce into its articles
anything that could have been validly included in the original articles provided
the alteration was made in good faith and for the benefit of the company as a
whole and since the members considered it beneficial to the company to get
rid of competitors, the alteration was valid..
Here a public company was in urgent need of further capital which the
majority of the members who held 98% of the shares were willing to supply if
they could buy out the minority. They tried persuasion of the minority to sell
shares to them but the minority refused. They therefore proposed to pass a
Special Resolution adding to the Articles a clause whereby any shareholder
was bound to transfer his shares upon a request in writing of the holders of
98% of the issued capital.
The court held that this was an attempt to add a clause which will enable the
majority to expropriate the shares of the minority who had bought them when
there was no such power. Such an attempt was not for the benefit of the
company as a whole but for the majority. An injunction was therefore granted
to restrain the company from passing the proposed resolution.
Sometimes the Articles may be altered in such a way that the implementation
of those articles in the altered form would give rise to breach of an existing
contract between the company and a third party and particularly so as regards
contracts between companies and their directors.
Where a director holds office under the Articles without a contract of service,
then his appointment is conditional on the footing that the articles may be
altered at any time in exercise of statutory power.
If however, a director’s appointment is entirely independent of the articles
then any alterations which affects his contract with the company will
constitute a breach of contract for which the company will be liable in
damages.
It was held that since his appointment was not subject to the articles, he could
only be removed from office in accordance with the terms of his appointment
and not by way of alteration of the articles. Damages were therefore payable.
Lord Atkins said “if a party enters into an arrangement which can only take
effect by the continuance of an existing state of circumstances there is an
implied undertaking on his part that he shall be done of his own motion to put
an end to that state of circumstances which alone the arrangement can be
operative.”
The court held that on a true construction of the company’s articles the
Plaintiff’s appointment was immediately and automatically terminated on
passing of the Resolution at the general meeting since the company had
expressly reserved to itself the power to dismiss the Managing Director.
The question is, can a company be restrained by injunction from altering its
articles if the alteration is likely to give rise to a breach of contract?
Part of the answer to this question was given in the case of British Murac
Another Article provided that the number of directors should not be less than 3
nor more than 7. The Plaintiff syndicate had recently nominated 2 persons as
directors. The Defendant company objected to these two persons as directors
and refused to accept the nomination and a meeting of shareholders was called
for the purpose of passing a special resolution under Section 13 of the
Companies Act cancelling the article.
The court held that the defendant company had no power to alter its articles of
association for the purpose of committing a breach of contract and that an
injunction ought to be granted to restrain the holding of the meeting for that
purpose.
Allen v. Goldreef
In that case Bowen L.J. stated as follows: “The word Class is vague it must be
confined to those persons whose rights are not dissimilar as to make it
impossible for them to concert together with a view to their common interest.”
Under Article 4 of Table A where the Share Capital is divided into different
classes of Shares, the rights attached to any class may be varied only with a
consent in writing of the holders of three quarters of the issued share of that
class or with assumption of a special resolution passed at a separate meeting
of the holders of the shares of that class.
However, under Section 25 (2) if the rights are contained in the Memorandum
of Association and if the Memorandum prohibits alteration of those rights,
then class rights cannot be varied.
Section 177 of the Companies Act requires every public company to have at
least two directors and every private company at least one director. The Act
does not provide for the means of appointing Directors but in practice the
Articles of Association provide for initial appointments by subscribers to the
Memorandum of Association and thereafter to annual retirement of a certain
number of directors and the filling of vacancies at the annual general meeting.
Under Section 184 (1) of the Companies Act every appointment must be voted
on individually except in the case of private companies or unless the meeting
unanimously agrees to include two or more appointments in the same
resolution. The appointment is usually effected by an ordinary resolution.
However, no matter how a director is appointed, under Section 185 of the
Companies Act he can always be removed from office by an ordinary
resolution in addition to any other means of removal which may be embodied
in the articles.
Unless the Articles so provide Directors need not be members of a company,
but if the articles require a share qualification, then the shares must be taken up
within two months otherwise the office will be vacated. Undischarged
Bankrupts are not allowed to act as directors without leave of the court. A
director need not be a natural person. A company may be appointed a director
of another. The disqualifications of directors are set out in article 88 of Table
A. The division of powers between the general meeting and the Board of
Directors depends entirely on the construction of the Articles of Association
and generally where powers of management are vested in the Board of
Directors, the general meeting cannot interfere with the exercise of those
powers.
The court held that the Articles constituted a contract by which the members
had agreed that the Directors alone should manage the affairs of the company
unless and until the powers vested in the Directors was taken away by an
alteration in the Articles they could ignore the general meeting directives on
matters of management. They were therefore entitled to refuse to execute the
sale.
Here the Directors were empowered to manage the company’s affairs. They
commenced an action for and on behalf of the company and in the company’s
name, in order to recover some money owed to the company. The general
meeting thereafter passed a resolution disapproving the commencement of the
suit and instructing the Directors to withdraw it
It was held that the resolution of the general meeting was a nullity Greer L.J.
stated
The court held that it was competent for the general meeting to appoint
additional directors even if the power to do so was by articles vested in the
Board of Directors.
Lennard’s Carrying Co. v. Asiatic Petroleum Co. Ltd. (1950) A.C. 705
In this case a ship and her cargo were lost owing to unseaworthiness. The
owners of the ship were a limited company. The managers of the company
were another limited company whose managing director a Mr. Lennard
managed the ship on behalf of the owners. He knew or ought to have known of
the Ship’s unseaworthiness but took no steps to prevent the ship from going to
sea. Under the relevant shipping Act the owner of a sea going ship was not
liable to make good any loss or damage happening without his fault. The
issue was whether Lennard’s knowledge was also the company’s knowledge
that the ship was unseaworthy.
The court held that Lennard was the Directing mind and will of the company
his knowledge was the knowledge of the company, his fault the fault of the
company and since he knew that the ship was unseaworthy, his fault was also
the company’s fault and therefore the company was liable. As per Viscount
Haldane
“My Lords a corporation is an abstraction. It has no mind of its own
anymore than it has a body of its own. Its active and directing will must
consequently be sought in the person of somebody who for some purposes
may be called an agent but who is really the directing mind and will of the
corporation, the very ego and centre of the personality of the corporation.
Here the Plaintiffs who were tenants in certain business premises were entitled
to a renewal of their tenancy unless the landlords who were a limited company
intended to occupy the premises themselves for their business purposes. The
issue was whether the Defendant company had effectively formed this
intention. There had been no formal general meeting or Board of Directors
meeting held to consider the question but the managing director’s clearly
manifested the intention to occupy the premises for the company’s business.
The court held that the intention manifested by the Directors was the
company’s intention and therefore the tenants were not entitled to a renewal of
the tenancy.
Crossly connected with this aspect is the so called rule in Turquand’s case:
This rule deals with a company’s liability for acts of its officers. The question
as to whether or not the company is bound or not depends on the normal
agency principles. If a company’s officer or a company’s organ does an act
within the scope of its authority, the company will be bound. The problem
which might arise is that even if the Act in question is within the scope of the
organs or officers authority, there might be some irregularity in the action of
the organ concerned and consequently in the exercise of authority. For
example, if a particular act can only be valued if done by the Board of
Directors or the general meeting, the meeting might have been convened on
improper notice or the resolution may not have been properly carried. In the
case of the Directors, they may not have been properly appointed. In these
circumstances can the company disclaim an act which was so done by arguing
that the meeting was irregular? Must a third party dealing with the company
always ascertain that the company’s internal regulations have been complied
with before holding the company liable?
The answer to this question was given in the negative in the case of
Here under the Company’s constitution the directors were given power to
borrow on bond such sums of money as from time to time by a general
resolution be authorised to be borrowed. Without any such resolution having
been passed, the directors borrowed a certain sum of money from the
Plaintiff’s bank. Upon the company’s liquidation the bank sought to recover
from the liquidator who argued that the Bank was not bound to recover it as it
was borrowed without authority from the general meeting.
The court held that even though no resolution had been passed, the company
was nevertheless bound by the act of the directors and therefore was bound to
repay the money.
This is the rule in Turquand’s Case which is often referred to as the rule as to
indoor management.
But should the company always be held liable for the act of any people
purporting to act on the company’s behalf? Suppose these persons are
impostors, what happens?
In order to avoid this some limitations have been imposed on the rule. Later
cases have refined the rule to a point where the position appears to that
ordinary agency principles will always apply
Here a mining company was founded by W and his friends and relatives.
Subscriptions were obtained from applicants for shares. These monies were
paid into the bank which had been described in the prospectus as the
company’s bank. The communication of the letter was sent to the Bank by a
person describing himself as the Company’s secretary to the effect that in
accordance with a resolution passed on that day, the bank was to pay out
cheques signed by either two of the three named directors whose signatures
were attached and countersigned by the Secretary. The bank thereafter
honoured cheques so signed. When the company’s funds were almost
exhausted, the company was ordered to be wound up. It was then discovered
that no meeting of the Shareholders had been held, and no appointment of
Directors and Secretary met but that with his friends and relatives, W had held
themselves to be secretary and directors and had appropriated the subscription
money. The issue was whether the Bank was liable to refund the money it had
paid back to the borrower.
The court held that the bank was not liable to refund any money to the
company as it had honoured the company’s cheques in reliance on a letter
received and in good faith.
Directors will not necessarily and for all purposes be insiders. The test appears
to be whether the acts done by them are so closely related to their position as
directors as to make it impossible for them not to be treated as knowing the
limitations on the powers of the officers of the company with whom they have
dealt. Otherwise a third party dealing with a company through an officer who
is or is held out by the company as a particular type of officer e.g. a Managing
Director and who purports to exercise a power which that sort of officer will
usually have is entitled to hold the company liable for the officer’s acts even
though the officer has not been so appointed or is in fact exceeding his
authority as long as the third party does not know that the company’s officer
has not been so appointed or has no actual authority.
A third party however, will not be protected if the circumstances are such as to
put him on inquiry. He will also lose protection if the public documents make
it clear that the officer has no actual authority or could not have authority
unless a resolution had been passed which requires filing in the Companies
Registry and no such resolution had been filed. These are normal agency
principles.
In this case Kapool & Hoon formed a private company which purchased
Buckhurst Park Estate. The Board of Directors consisted of Kapool, Hoon and
two others. The Articles of the company contained a power to appoint a
Managing Director but none was appointed. Though never appointed as such,
Kapool acted as Managing Director. In that capacity he engaged the Plaintiffs
who were a firm of Architects to do certain work for the company which was
duly done. When the Plaintiff’s claimed remuneration, according
to the agreement, the company replied that it was not liable because Kapool
had no authority to engage them.
The Court held that the act of engaging Architects was within the ordinary
ambit of the authority of a Managing Director of a property company and the
Plaintiffs did not have to inquire whether a person with whom they were
dealing with was properly appointed. It was sufficient for them that under the
Articles, the Board of Directors had the power to appoint him and had in fact
allowed him to act as Managing Director. Four conditions must however be
fulfilled in order to entitle a third party to enforce a contract entered to on
behalf of the company by a person who has no actual authority.
The court held that as a chairman he performed the functions of the Managing
Director with a full knowledge of the Board of Directors and that a contract of
service as the one entered into with the Secretary was one which a person
performing the duties of a Managing Director would have power to enter into
on behalf of the company. Therefore, the contract was genuine, valid and
enforceable. If however, the officer is purporting to exercise some authority
which that sort of officer would not normally have,
a third party will not be protected if the officer exceeds his actual authority
unless the company has held him out as having authority to act in the matter
and the third party has relied thereof i.e. unless the company is estopped.
However, a provision in the Memorandum or Articles or other public
document cannot create an estoppel unless the third party knew of the
provision and has relied on it. For this purpose, regulations at the Companies
Registry do not constitute notice because the doctrine of constructive notice
operates negatively and not positive. If a document purporting to be received
by or signed on behalf of the company is proved to be a forgery, it does not
bind the company. However, the company may be estopped from claiming the
document as a forgery if it has been put forward as genuine by an officer
acting within his usual or ostensible authority.
Look at
Rama Corp v Proved Tin & General Investment (1952) 2 Q.B. 147
PROMOTERS
The Companies Act does not define the term promoter but Section 45(5) says
“A promoter is a promoter who was a party to the preparation of the
prospectus.’
‘Apart from the fact that this definition does not speak much, it nevertheless
shows that the definition is only given for the purposes of that section.
At common law the best definition is that by Chief Justice Cockburn in the
case of
The term is also used to cover any individual undertaking to become a director
of a company to be formed. Similarly it covers anyone who negotiates
preliminary agreements on behalf of a proposed company. But those who act
in a purely professional capacity e.g. advocates will not qualify as promoters
because they are simply performing their normal professional duties. But they
can also become promoters or find others who will. Whether a person is a
promoter or not therefore, is a question of fact. The reason is that Promoter of
is not a term of law but of business summing up in a single word the number
of business associations familiar to the commercial world by which a company
is born.
It may therefore be said that the promoters of a company are those responsible
for its formation. They decide the scope of its business activities, they
negotiate for the purchase of an existing business if necessary, they instruct
advocates to prepare the necessary documents, they
secure the services of directors, they provide registration fees and they carry
out all other duties involved in company formation. They also take
responsibility in case of a company in respect of which a prospectus is to be
issued before incorporation and a report of those whose report must
accompany the prospectus.
DUTIES OF A PROMOTER
His duty is to act bona fide towards the company. Though he may not strictly
be an agent, or trustee for a company, anyone who can be properly regarded as
a promoter stands in a fiduciary relationship vis-à-vis the company. This
carries the duties of disclosure and proper accounting particularly a promoter
must not make any profit out of promotion without disclosing to the company
the nature and extent of such a Promotion. Failure to do so may lead to the
recovery of the profits by the company.
The question which arises is – Since the company is a separate legal entity
from members, how is this disclosure effected?
The promoters of a company sold a lease to the company at twice the price
paid for it without disclosing this fact to the company. It was held that the
promoters breached their duties and that they should have disclosed this fact to
the company’s board of directors. As Lord Cairns said
“the owner of the property who promotes and forms that company to
which he sells his property is bound to take care that he sells it to the company
through the medium of a Board of Directors who can exercise an independent
judgment on the transaction and who are not left under belief that the property
belongs not to the promoters and not to another person.”
Since the decision in Salomon’s case it has never been doubted that a
disclosure to the members themselves will be equally effective. It would
appear that disclosure must be made to the company either by making it to an
independent Board of Directors or to the existing and potential members. If to
the former the promoter’s duty to the company is duly discharged, thereafter,
it is upon the directors to disclose to the subscribers and if made to the
members, it must appear in the Prospectus and the Articles so that those who
become members can have full information regarding it.
Since a promoter owes his duty to a company, in the event of any non
disclosure, the primary remedy is for the company to bring proceedings for
1. the company should not have done anything to ratify the action
2. There must be restitutio in intergram (restore the parties to their original
position),
REMUNERATION OF PROMOTERS
A promoter is not entitled to any remuneration for services rendered for the
company unless there is a contract so enabling him. In the absence of such a
contract, a promoter has no right to even his preliminary expenses or even the
refund of the registration fees for the company. He is therefore under the
mercy of the Directors. But before a company is formed, it cannot enter into
any contract and therefore a promoter has to spend his money with no
guarantee that he will be reimbursed.
But in practice the articles will usually have provision authorising directors to
pay the promoters. Although such provision does not amount to a contract, it
nevertheless constitutes adequate authority for directors to pay the promoter.
One of the issues in this case was whether or not a company could ratify a
contract entered into on its behalf before incorporation. The alleged contract
was that the Respondent had undertaken to sell some property to a company
which was proposed to be formed between him and the Appellant. In holding
that a company cannot ratify such an agreement, the Eastern Africa Court of
Appeal as then constituted O’Connor President said as follows
“A company cannot ratify a contract purporting to be made by someone
on its behalf before its incorporation but there may be circumstances from
which it may be inferred that the company after its incorporation has made a
new contract to the effect of the old agreement. The mere confirmation and
adoption by Directors of a contract made before the formation of the company
by persons purporting to act on behalf of the company creates no contractual
relations whatsoever between the company and the other party to the
contract.”
However, acts may be done by a company after its formation which give rise
to an inference of a new contract on the same terms as the old one.
The Respondents filed actions praying for orders that the shares they paid for
be allotted to them and the company’s registered members be rectified
accordingly.
The Company argued that as the Respondents had paid money for the
purchase of their shares before incorporation, their claim could only be
directed against promoters because no pre incorporation agreement could bind
the company and the company could not even after incorporation ratify or
adopt any such contract.
The allotment of shares to the Respondents after the incorporation was held to
be sufficient evidence of a new contract between the company and the
Respondents. Therefore the Respondents were entitled to be allotted the shares
agreed upon.
If any preliminary arrangements are made, these must therefore be left to mere
gentlemen’s agreements or otherwise the promoters might have to undertake
personal liability.
It was held that A B and C were liable. Chief Justice Erne stated as follows:
“where a contract is signed by one who professes to be signing as agent
but who has no principal existence at the time, then the contract will hold
together the inoperative unless binding against the person who signed it. He is
bound thereby and a stranger cannot by subsequent ratification relieve him
from that responsibility. When the company came afterwards into existence, it
had rights and obligations from that time but no rights or obligations by reason
of anything which might have been done before.”
Here a contract was entered into between Leopold Newborn London Ltd and
the Defendant for purchase of goods by the latter. The defendant subsequently
refused to take delivery of the goods and an action was commenced by
Leopold Newborn Ltd.
It was discovered that at the time the contract was entered into, the company
had not been incorporated. Leopold Newborn thereupon sought personally to
enforce the contract.
It was held that the signature on the document was the company’s signature
and as the company was not in existence when the contract was signed, there
never was a contract and Mr. Newborn could not come forward and say that it
was his contract. The fact was that he made a contract for a company which
did not exist.
PROSPECTUSES
The word invitation and offering in that definition are loosely used because
when a company issues a prospectus it does not offer to sell any shares but
rather invites offers from members of the public. A prospectus is therefore not
an offer but an invitation to treat.
The word prospectus is thus a vague and uncertain term. Whether an invitation
is made to members of the public is always a question of fact. The question
“public” is not restricted to a certain section of the public but includes any
members of the general public. Reference may be made to the case of
A newly formed company issued 3000 copies of a document which offered for
subscription shares in a company and which was headed “for private
circulation only”. These copies were then circulated to the shareholders of a
number of gas companies and the question arose Was this a prospectus?
The court held that this was an offer to the public and therefore constituted a
prospectus.
CONTENTS OF A PROSPECTUS
1. Who the directors are; and What benefits they will get
from the Directorship;
2. In the case of a new company, what profits are being
made by the promoters;
3. the amount of capital required by the company to be
subscribed, the amount actually received or to be
received, the precise nature of the consideration
which is not paid in cash;
4. In the case of an existing company, what the
company’s financial records has been in the past.
5. the company’s obligations under any contracts it has
entered into;
6. the voting and dividend rights of each class of shares;
7. If a Prospectus includes any statement by an expert,
then the expert must have given his written consent
to the inclusion of the statement and the prospectus
must state that he has done so as per Section 42 of
the Companies Act.
In addition to these requirements the prospectuses must also be dated and the
date stated therein is taken to be the date of publication of the prospectus.
However, there are two instances when a prospectus need not contain the
matter set out in Schedule III namely
1. When the prospectus is issued to existing members or
shareholders of the company;
2. When the prospectus relates to shares or debentures uniform
with previously issued shares or debentures.
LIABILITY IN RESPECT OF PROSPECTUS
In this case the company had sustained continuous loses for over 6 years from
1921 to 1927. The company issued a prospectus which in all material facts
was correct. It further specified that the dividends being paid were high. But
these dividends were being paid out of abnormal profits made after World
War 1. Therefore the Prospectus was misleading in its context.
CIVIL REMEDIES
There are two primary remedies for those who subscribe for shares in a
company as a result of a misrepresentation in a prospectus
(a) Damages;
(b) Rescission of any resulting contract.
DAMAGES
Section 45 provides for compensation to all persons who subscribe for any
shares or debentures on the faith of the Prospectus for loss or damage they
may have sustained by reason of untrue statements included therein. If the
statement is false to the knowledge of those who made it, then this amounts to
fraud and damages will be recoverable from all those who made the statement
intending it to be acted upon. Refer to the case of
The allotment of shares in the company began on July 24 th and was completed
on 28th July. In October, the Plaintiff bought shares on the stock exchange. He
subsequently found that the prospectus issued in July contained some untrue
statements and therefore brought an action in respect thereof.
The court held that the Plaintiff could not base his action on the prospectus
which was intended to be addressed only to the original company subscribers
to the company shares. The Directors of a company are not liable after the full
original allotment of shares for all the subsequent dealings which may take
place with regard to those shares on the stock exchange.
However, the rule in Peek v. Gurney will not apply where a prospectus is
intended to induce not only the original subscribers for the company shares
but also to influence the subsequent purchase of those shares
Here the Plaintiff alleged that the Defendant sent him a prospectus inviting
him to buy shares in the company which they knew would be a sham but the
Plaintiff did not subscribe for the shares. The prospectus eventually produced
a very scanty subscription and the Defendant caused a telegram to be
published in the local Newspaper to the effect that they had struck a vain of
Gold. And this they alleged had confirmed the statistics in the prospectus.
The Plaintiff immediately bought shares on this basis. The company was
wound up. The question arose, Had the Prospectus served its purpose.
The court held that the prospectus was intended to induce the Plaintiff both to
subscribe for shares initially and also to buy them in the Market thereafter.
The telegram was part of the prospectus.
Lord Justice Smith stated as follows
“there was proved against the Defendant a continuous fraud on their
part commencing with ascending of the prospectus to the Plaintiff and
culminating in the direct lie told in a telegram which was intended by the
defendant to operate upon the Plaintiff’s mind and minds of others and did so
operate to his prejudice and the advantage of the Defendant. In this case the
function of the prospectus was not exhausted and a false telegram was brought
in to play by the Defendant to reflect back upon and countenance the false
statements in the prospectus.”
RESCISSION
2. If the allotee does not rescind the contract before the company
is wound up, he loses the right to do so as from
the moment the winding up proceedings commenced.
The rationale is the protection of the other company’s
creditors.
DIRECTORS DUTIES
The Plaintiff brought an action to set aside the share sales on the ground that
the directors owed them a duty to disclose the negotiations with the 3 rd Party.
It was held that the Directors were not agents for the individual shareholders
and did not owe them any duty to disclose. Therefore the sale was proper and
could not be set aside. However, if the Directors are authorised by the
members to negotiate on their behalf e.g. with a potential purchaser then the
Directors will be in a position of agents for such members and will owe them a
duty accordingly.
These duties except where expressly stipulated in the Companies Act are not
restricted to directors alone but apply equally to any officials of the company
who are authorised to act as agents of the company and in particular to those
acting in a managerial capacity. This is particularly so as regards fiduciary
duties.
70. (1) A private company, whether limited or unlimited,can convert itself into
a public company limited by shares if (but only if)-
(a) it passes a special resolution to that effect; companv
(b) the conditions specified in subsection (2) are satisfied; and (c) an
application for registration of the conversion is lodged with the Registrar in
accordance with section 74, together with the documents required by that
section.
(2) The conditions are-
(a) that the company has a share capital;
(b) that the requirements of section 7l are satisfied as regards its share capital;
(c) that the requirements of section 72 are satisfied as regards its net assets; (d)
if section 73 applies, that the requirements of that section are satisfied; (e) that
the company has not previously been converted itself into an unlimited
company;
(f) that the company has made such changes to itsname and to its articles as
are necessary inorder for it to become a public company; and (g) if the
company is unlimited, that it has alsomade such changes to its articles as are
necessary in order for it to become a company limited by shares.
7l (1) Requirements
DIRECTORS’ DUTIES PROPER
It was held that the Directors were negligent. Justice Romer reduced the
Directors duties of care and skill as follows
“A Director need not exhibit in the performance of his duties a greater
degree of skill than may reasonably be expected from a person of his
knowledge and experience.”
In this case a company had five directors and one of them confessed that he
was absolutely ignorant of business. A second one was 75 years old and very
deaf. A third one said he only agreed to become a director because he saw one
of his friends names on the list of directors. The other two were fairly able
businessmen. The directors caused a contract to be entered into between the
company and a certain syndicate for purchase by that company of some rubber
plantation in Brazil. The prospectus issued by the company contained false
statements about the acreage of the Plantation, the types of trees and so forth.
The information given therein was given to the Directors by a person who had
an original option to purchase that property. He had never been to Brazil and
the data was based on his own imagination. The Directors caused the company
to purchase the property. The question arose, were they negligent in so doing?
The court held that their conduct did not amount to gross negligence. Neville
J. had the following to say:
“It has been laid down that so long as they act honestly, Directors
cannot be made responsible in damages unless they are guilty of gross
negligence. A Director’s duty requires him to act with such care as is
reasonably expected from his having regard to his knowledge and
experience. He is not bound to bring any special qualifications to his
office. He may undertake the Management of a Rubber Company in
complete ignorance of anything connected with Rubber without
incurring responsibility for the mistakes which may result from such
ignorance. While if he is acquainted with the Rubber business, he must
give the company the advantage of his knowledge when transacting the
company’s business. He is not bound to take any definite part in the
conduct of the company’s business but insofar as he undertakes it he
must use reasonable care. Such reasonable care must be measured by
the care an ordinary man might be expected to take in the same
circumstances on his own behalf.”
The Court held that a Director is not bound to attend every Board meeting and
that he is not liable for misfeasance committed by his co-directors at Board
meetings at which he was never present.
Here the Director never attended any Board meetings for 38 years. It was held
that he was not liable.
3. In respect of all duties which having regard to all exigencies of business and
articles of association may properly be left to some other official. A Director
in the absence of grounds for suspicion will not be liable in trusting that other
official to perform that other duty honestly.
The court held that the reliance placed by the co-director on the general
manager and chairman was reasonable. He was not negligent and therefore
was not liable for not having discovered the fraud as he was not in the absence
of circumstances of suspicion bound to examine entries in the Company’s
Books to see that the Balance Sheet was correct.
It may be said that the duties of care and skill appear to be negative duties.
What about fiduciary duties?
FIDUCIARY DUTIES
A company had two directors. They fell out of favour with the
majority of the shareholders who were therefore threatened with the
election of 3 other directors to the Board. The directors issued
shares with the object of creating a sufficient majority to enable
them to resist the election of the 3 additional directors whose
election would have put the two directors in the minority on the
Board.
The Court held that the Directors were not entitled to use their
powers of issuing shares merely for the purpose of maintaining their
control or the control of themselves and their friends over the affairs
of the company or even merely for the purpose of defeating the
wishes of the existing majority of shareholders. The Plaintiff and his
friends held the majority of shares in the company and as long as that
majority remained, they were entitled to have their wishes prevail in
accordance with a company’s regulations. Therefore it was not open
to the directors for the purpose of converting a minority into a
majority and purely for the purpose of defeating the wishes of the
existing majority to issue the shares in dispute.
In this case the company had two classes of shares, ordinary and
preference shares. Each share carried 1 vote. The power to issue the
company shares was vested in the Directors. They learnt that a
takeover bid was to be made to the Shareholders. In the Bona fide
belief that the acquisition of control by the prospective take over
bidder will not be the interest of the company or its staff. The
Directors decided to forestall this move. They therefore attached 10
votes to each of the unissued preference shares and allotted to a trust
which was controlled by the Chairman of the Board of Directors and
one of his partners in the company’s audit department and an
employee of the company. To enable the trustees to pay for the
shares, the directors provided them with an interest free loan out of
the company’s reserve fund.
There were similar facts as in the former case but a meeting was
held before proceeding to court and that general meeting ratified the
Director’s action. The question also arose in this case, could a
decision of the general meeting cure the irregularity?
The court held if the allotment was made in bad faith, it was
voidable at the instance of the company because it was a wrong done
to the company and that being so, the company which has the rights
to recall the allotment has also the right to approve it and forgive the
breach of duty.
3. They must not fetter their displeasure to act for the company
for example, the directors cannot contract either among
themselves or with third parties as to how they will vote
at future Board meetings. However, where they have
entered into a contract on behalf of the company they
may validly agree to take such further action at Board
meetings as maybe necessary to carry out such a contract.
FIDUCIARIES CONTINUED
In order to create a balance between these two extremes and ensure that a
minimum standard prevails Section 200 was incorporated into the Companies
Act. Under this Section it is the duty of a director who is interested in any
contract or proposed contract to disclose the nature and extent of his interest to
the Board of Directors when the contract comes up for discussion. Failure to
do so renders the defaulting director liable to a fine not exceeding 2000
shillings. In addition the failure also brings in the equitable doctrine whereby
the contract becomes voidable at the option of the company and any profit
made by the director is recoverable by the company.
The shortcoming of the Section is that the Director has to disclose to the Board
of Directors and not to the general meeting. It is not sufficient for a Director to
say that he is interested. He must specify the nature and extent of his interests.
If the company’s articles take the form of Article 84 of Table ‘A’ then a
Director who is so interested is required to abstain from voting at the Board
meeting and his vote will not be taken in determining whether or not there is a
quorum on the Board. Once the Director has complied with Section 200 and
Article 84 then he can escape liability.
In respect of all other profits which a Director may make are out of his
position as a Director the equitable principle which requires the Directors to
account for any such profits is vigorously enforced. This is because the Courts
have equated Directors to trustees and their duties have also been equated to
those of Trustees. The question is, are they really trustees?
Selanger United Rubber Estates v. Craddock (1968) 1 All E.R. 567
In the latter case, the directors of a company were seen to be trustees only in
respect of the company’s funds or property which was either in their hands or
which came under their control. But this does not necessarily make directors
trustees. There are two basic differences between Directors as Trustees and
Ordinary Trustees.
(a) The function of ordinary trustee is to preserve the
Trust Property but the role of a director is to
explore possible channels of investment for the
benefit of the company and these necessitates
some elements of having to take a risk even at the
expense of the company’s property.
(b) Whereas trust property is vested in the Trustees, a
company’s property is held by the company itself
and is not vested in the trust.
Nevertheless if the directors make any secret profits out of their positions then
the effect is identical to that of ordinary trustees. They must account for all
such profits and refund the company.
Herein the company owned a cinema and the directors decided to acquire two
other cinemas with a view to the sale of the entire undertaking as a going
concern. Therefore they formed a subsidiary company to invite the capital of
5000 pounds divided into 5000 shares of 1 pound each. The owners of the two
cinemas offered the directors a lease but required personal guarantees from the
Directors for the payment of rent unless the capital of the subsidiary company
was fully paid up. The directors did not wish to give personal guarantees. They
made arrangements whereby the holding company subscribed for 2000 shares
and the remaining shares were taken up by the directors and their friends. The
holding company was unable to subscribe for more than 2000 shares.
Eventually the company’s undertakings were sold by selling all the shares in
the company and subsidiary and on each share the Directors made a profit of
slightly more than two pounds. After ownership had changed the new
shareholders brought an action against the directors for the recovery of profits
made by them during the sale.
The court held that the company as it was then constituted was entitled to
recover the profits made by the Directors. Lord Macmillan had the following
to say:
“The directors will be liable to account if it can be shown that what they
did is so related to the affairs of the company that it can properly be said to
have been done in the course of their management and in utilisation of the
opportunities and special knowledge and what they did resulted in a profit to
themselves.”
Phipps v. Boardman (1966) 3 All E.R. 721
In this case Boardman was a solicitor to the trust of the Phipps family. The
trust held some shares in the company. Boardman and his colleagues were not
satisfied with the company’s accounts and therefore decided to attend the
company’s general meeting as representatives of the Trust. At the meeting
they received information pertaining to the company’s assets and their value.
Upon receipt of the information, they decided to buy shares in the company
with a view to acquiring the controlling interest. Their takeover bid was
successful and they acquired control. Owing to the fact that Boardman was a
man of extraordinary ability, the company made progress and the profits
realised by Boardman and his friends on the one hand and the trusts on the
other were quite extensive. One of the beneficiaries of the Trust brought an
action to recover the profits which were realised by Boardman and his friends.
The court held that in acquiring the shares in the company, Boardman and his
friends made use of information obtained on behalf of the trust and since it
was the use of that information which prompted them to acquire the shares,
then the shares were also acquired on behalf of the trust and thus the solicitors
became constructive trustees in respect of those shares and therefore liable to
account for the profits derived therefrom to the trust.
The Defendant was the company’s Managing Director. The Board of Directors
was approached by a prospector who offered to sell his claims to the company.
The company’s consulting geologists advised that it was in order for the
company to acquire the claims. The directors decided that it was inadvisable
for the company to acquire the same mainly because of its strained financial
resources. Subsequently at the suggestion of the geologists, some of the
Directors agreed to purchase the claims at the price at which they had been
offered to the company. Thereafter they formed a company which took over
the claims and a second company for developing the resources. After the
control of Peso Silver Mines had changed the new directors brought an action
against the Defendant to account to the company for the shares held by them in
the new companies. But here the court held that since the company could not
have taken over the claims, there was no conflict of interest between the
Directors and the Company and therefore the Defendant was not liable to
account for the shares.
The court held that until the Defendant left the Plaintiff, he stood in a
fiduciary relationship to them and by failing to disclose the information to the
company, his conduct was such as to put his personal interests as a potential
contracting party to the gas company in conflict with the existing and
continuing duty as the Plaintiff’s Managing Director.
Roskill J.
“It is an overriding principle of equity that a man must not be allowed
to put himself in a position where his fiduciary duty and interest
conflict. It was the defendant’s duty to disclose to the plaintiff the
information he had obtained from the Gas Board and he had to account
to them for the profits he made and will continue to make as a result of
allowing his interests and duty to conflict. It makes no difference that a
profit is one which the company itself could not have obtained. The
question being not whether the company could have acquired it but
whether the defendant acquired it while acting for the company.”
By controlling share holders is meant those who hold the majority of the
voting rights in the company. Such share holders can always ensure control of
the company’s business by virtue of their voting power to ensure that the
controlling shareholders do not use their voting power for exclusively selfish
ends, the Law requires that in exercise of their voting power, these
shareholders must not defraud a minority. For example by endeavouring
directly or indirectly to appropriate to themselves any money property or
advantage which either belong to the company or in which the minority
shareholders are entitled to participate.
In the latter case the company brought action against its former Managing
Director for a declaration that the concessions for laying down a telegraph
cable from Portugal to Brazil was held by that former Director as a trustee for
the company. While this action was still pending, the Defendants who
were the majority shareholders in the company approached that former
Managing Director with a view to striking a compromise. It was agreed
between the parties that if that director surrendered the concessions to the
Defendants then the Defendants would use their voting power to ensure that
the action was discontinued. At a subsequent general meeting of the company,
by virtue of the defendant’s voting power, a resolution was passed that the
company should be wound up.
The court said that the resolution was invalid since the defendants had used
their voting power in such a way as to appropriate to themselves the
concessions which if the earlier action had succeeded should have belonged to
the whole body of shareholders and not merely to the majority. Lord Justice
Mellish stated as follows:
“although the shareholders of the company may vote as they please and
for the purpose of their own interest, yet the majority of the shareholders
cannot sell the assets of the company itself and give the consideration but must
allow the minority to have their share of any consideration which may come to
them.”
As the company is a distinct entity from the members and since directors owed
their duties to the company and not to individual shareholders, in the event of
breach of those duties any action for remedies should be brought by the
company itself and not by any individual shareholder. The company and the
company alone is the proper Plaintiff. This is generally referred to as the rule
in Foss V. Harbottle (1843) 2 Hare 461
In this case the Directors who were also the company’s promoters sold the
company’s property at an undisclosed profit. Two shareholders brought action
against them alleging that in so doing, that the directors had breached their
duties to the company. It was held that if there was any breach of duty, it was
a breach of duty owed to the company and therefore the Plaintiffs had no locus
standi for the company was the proper plaintiff. This rule has two
practical advantages namely:
1. Insistence on an action by the company avoids multiplicity of
actions;
2. If the irregularity complained of is one which could have been
effectively ratified by the company in general
meeting, then it is pointless to commence any litigation
except with the consent of the general meeting.
However there are four exceptions to this rule in which an individual member
may bring action against the directors namely:
(a) Where it is complained that the company
through the directors is acting or proposing
to act ultra vires;
(b) Where the act complained of even though not
ultra vires, the company can effectively be
done by a special resolution;
(c) Where it is alleged that the personal rights of
the Plaintiff have been infringed and/or are
about to be infringed;
(d) Where those who control the company are
perpetuating the fraud on the minority;
The problem likely to arise is that if the directors themselves are also
controlling shareholders, the rule in Foss v. Harbottle if strictly applied in
exercise of their voting powers, the Directors may easily block any attempt to
bring an action against themselves. In such cases a shareholder will be allowed
to bring an action in his own name against the directors even if the wrong
complained of has been done to the company. Such an action is called a
derivative action.
Another remedy against directors for breach is found in Section 324 of the
statute which provides as follows:
“If in the course of the winding up of the company it appears that any
person who has taken part in the formation or promotion of the company or
any past or present director has misapplied or retained any money or property
of the company, or been guilty of any breach of trust in relation to the
company on the application of the liquidator, a creditor or member or a court
may compel such person to restore the money or property to the company or to
pay damages instead.”
This section is designed to deal with actual breaches of trust which come to
light in the winding up proceedings or during the winding up proceedings but
winding up itself may be used as a means of ending a course of oppression by
those formally in control. Among the grounds for the winding up is one which
is particularly appropriate for such circumstances.
Under Section 219 (f) of the Companies Act the court may order a company to
be wound up if it is of the opinion that it is “just unequitable” the courts have
so ordered when satisfied that it is essential to protect the members or any of
them from oppression in particular they have done so when the conduct of
those in control suggests that they are trying to make intolerable the position
of the minority so as to be able to acquire the shares held by the minority on
terms favourable only to the majority. But a member cannot petition under this
section if the company is insolvent. If the company is solvent to wind it up,
contrary to the majority wishes will only be granted where a very strong case
against the majority is established.
The two Plaintiffs were the company director and secretary and factory
manager respectfully. As this was a small family concern, serious differences
arose between the plaintiffs and the beneficial owners of the undertaking.
Consequently the Plaintiff brought action under Section 211 alleging
oppression. It was held that if there was any oppression of the Plaintiffs, it
related to them as directors and the remedy under Section 211 is only available
to members. The suit was dismissed.
WHAT IS OPPRESSION
Here the Society wished to enter into the retail business. For this purpose a
subsidiary company was formed in which the two Respondents and 3
Nominees of the Society were the directors. The society had majority
shareholders and the Respondents were the minority. The Company required 3
things namely;
1. Sources of supplies of raw material;
2. A licence from a regulatory organisation called cotton control
3. Weaving Mills.
The Respondents provided the first two but weaving Mills belonged to the
society. For several years, the business prospered because of mainly the
knowhow provided by the Respondent. The company paid large dividends and
accumulated substantial results. Due to the prosperity, the society decided to
acquire more shares and through its nominee directors offered to buy some of
the shares of the Respondent at their nominal value which was one pound per
share but their worth was actually 6 pounds per share. When the Respondents
declined to sell their shares to the society, the society threatened to cause the
liquidation of the company. About 5 years later, Cotton control was abolished
which meant that the society would obtain the raw materials and weave cloth
without a licence. It accordingly started to do the same and also started
starving the subsidiary by refusing to manufacture for it except for an
economic crisis. As all the other Mills were fully occupied, the subsidiary
company was being starved to death and when it was nearly dead the
Respondent brought the petition claiming that the affairs of the company were
being conducted in an oppressive manner.
It was held that by subordinating the interests of the company to those of the
society, the nominee directors of the society had thereby conducted the affairs
of the company in a manner oppressive to the other shareholders. The fact
that they were perhaps guilty of inaction was irrelevant. The affairs of the
company can be conducted oppressively by the Directors doing nothing to
protect its interests when they ought to do so.
Re Hammer(1959) 1 WL.R. 6
In this case Mr. Hammer senior was a Philatelist (stamp collector) dealer and
incorporated business in 1947 forming a company with two types of ordinary
shares class A shares which were entitled to a residue of profit and Class B
Shares carrying all the votes. He gave out the shares to his two sons and at the
time of the petition each son held 4000 Class A shares and the father owned
1000 shares. Of the Class B Shares, the father and his wife held nearly 800 to
the 100 held by each son. Under the Company’s articles
of association, the father and two sons were appointed directors for life and
the father was further appointed chairman of the Board with a casting vote.
The father assumed powers he did not possess ignored decisions of the Board
and even in court, during the hearing asserted that he had full power to do as
he pleased while he had voting control. He dismissed employees using his
casting vote to co-opt self directors, he prohibited board meetings, engaged
detectives to watch the staff and secured payment of his wife’s expenses out of
the company’s funds. He negotiated sales and vetoed leases all contrary to the
decisions and wishes of the other directors.
The sons filed an action claiming that the father had run the affairs of the
company in a manner oppressive to them. The father was 88 years.
The court held that by assuming powers which he did not possess and
exercising them against the wishes of those who had the major beneficial
interests, Mr. Hammer senior had conducted the company’s affairs in an
oppressive manner.
These two cases are among the few where an application under Section 211
has succeeded. This is because section 211 has been subjected to a very
restrictive meaning. To succeed under Section 211, one must establish a case
of oppression.
There is no clear definition of the term and therefore it is not easy to tell when
a company’s affairs are being conducted oppressively. For example in the case
of Re Five Minute Car Wash Ltd (1966) 1 W.L.R. 745
It was held that the petitioner had not made a case of oppression and the
petition must be dismissed.
The basis of the whole concept or a company’s capital was explained by Jessel
M.R. in the Flitcrafts Case 1882 21 Ch. D 519 in this case for several years the
directors had been in the habit of laying before the meeting of shareholders
reports and balance sheets which were substantially untrue inasmuch as they
included among other assets as good debts a number of debts which they knew
to be bad. They thus made it appear that the business had produced profits
whereas in fact it had produced none. Acting on these reports, the meetings
declared dividends which the directors paid. It was held here that since the
directors knew that the business had not made any profit, they were liable to
refund to the company the monies paid by way of dividends.
Jessel M.R said as follows “when a person advances money to a company, his
debtor is that artificial entity called the corporation which has no property
except the assets of the business. The creditor therefore gives credit to that
capital or those assets. He gives credit to the company on the faith of the
implied representation that the capital shall be applied only for
the purposes of the business and he has therefore a right to say that the
corporation shall keep its capital and shall not return it to the shareholders.”
The capital fund is therefore seen as a substitute for unlimited liability of the
members. Courts have developed 3 basic principles for ensuring that the
company’s represented capital is actually what it is and for the distribution of
that capital.
1. Once the value of the company’s shares has been stated it
cannot subsequently be changed the problem which
arises in this respect is that shares may be issued for non
monetary consideration. For instance for services or
property in such cases the company’s valuation of the
consideration is generally accepted as conclusive. If the
property has been over valued, provided the valuation has
been arrived at bona fide, the courts will not question the
adequacy of the consideration but if it appears on the face
of the transaction that the value of the property is less
than that of the shares, then the court will set aside that
transaction. For this reason the shares in a company must
be given a definite value. The law tries to ensure that the
company initially receives assets at least equivalent to the
nominal value of the paper capital. Refer to Section 5 of
the Companies Act. Unfortunately if in the insistence
that shares do have a definite fixed value is not an
adequate safeguard because there is no legal minimum as
to what the nominal value of the shares should be.
CORPORATE SECURITIES
The best definition of the term share is that given by Farwell J. in the case of
Borlands Trustee v. Steel [1901] Ch. D 279 stated “ a share is the interest of
a member in a company measured by a sum of money for the purpose of
liability in the first place and of interest in the second and also consisting of a
series of mutual covenants entered into by all the shareholders among
themselves in accordance with Section 22 of the Companies Act.”
Under Section 99 of the Companies Act the registrar is under a duty to issue a
certificate of the registration of a charge and once issued, that certificate is
conclusive evidence that all the requirements as to registration have been
complied with.
SHARES
In a company with a share capital it is obvious that the company must issue
some shares and the initial presumption of the law is that all the shares so
issued confer equal rights and impose equal liabilities. Normally a
shareholder’s right in a company will fall under 3 heads.
1. Payment of dividends;
2. Refund of Capital on winding up;
3. Attendance and voting at company’s general meetings.
Unless there is indication to the contract all the shares will confer the same
rights under those heads. In practice companies issue shares which confer on
the holders some preference over the others in respect of either payment of
dividends or capital or both. This is the method by which classes of shares are
created i.e. by giving some of the shareholders preference over others.
In practice therefore most companies with classes of shares will have ordinary
shares and preference shares. The preference shares being those that enjoy
some preference with reference to voting rights, refund of capital or payment
of dividends.
There are certain rules that courts use to interpret or construe on shares.
WINDING UP
Section 212 of the Companies Act provides that a company may be wound up
as follows
1. Voluntarily;
2. Order of the Court;
3. By supervision of the Court.
In any winding up those in need of protection are the creditors and the
minority shareholders. Where it is proposed to wind up a company voluntarily
Section 276 of the Companies Act requires the directors to make a declaration
to the effect that they have made a full inquiry in to the affairs of the company
and having so done have found the company will be able to pay its debts in
full within such period not exceeding one year after the commencement of the
winding up as may be specified in the declaration. Such declaration suffices
as a guarantee for the repayment of the creditors. If the directors are unable to
make the declaration, then the creditors will take charge or the winding up
proceedings in which case they may appoint a liquidator.
Section 218 of the Companies Act gives the High Court jurisdiction to wind
up any company registered in Kenya. The circumstances under which a
company may be wound up by a court order are spelt out in Section 219 of the
Companies Act.
In practice the creditors will petition for a compulsory winding up where the
company is unable to pay its debts. The company’s inability to pay its debts
under Section 220 is deemed in the following circumstances
PETITION BY A CONTRIBUTOR
Another possible limitation is that stated under Section 22(2) of the Act. Here
the court has a discretion not to grant the winding up order where it is of the
opinion that an alternative remedy is available to the petitioners and that they
are acting unreasonably in seeking to have the company wound up instead of
pursuing that other remedy.
It is now established that the just and equitable clause in Section 219 of the
Act confers upon the court an independent ground of jurisdiction to make an
order for the compulsory winding up of the company. The courts have
exercised their powers under this clause in the following circumstances:
If any of these principles were violated in a partnership, the courts will readily
order the partnership to be dissolved. In the case of a small private company,
the courts have also held that such companies are run on the same principles as
partnerships and therefore if the company was run on such principles it is just
and equitable to wind it up where a partnership would have been dissolved in
similar circumstances.
The issue was it just and equitable to wind up the company? Sir Ralph
Winndham C.J. said as follows:
“in these circumstances the principle which must be applied is that laid
down in re-Yenidge Tobacco namely that in the case of a small private
company which is in fact more in the nature of a partnership a winding up on
the just and equitable clause will be ordered in such circumstances as those in
which an order for dissolution of the partnership would be made. In that case
the shareholders were two and they had quarrelled irretrievably. In the present
case, if this were a partnership an order for its dissolution ought to be made at
the instance of one of the quarrelling partners. The material point is not which
party is in the right but the very existence of the quarrel which has made it
impossible for the company to be ran in the manner in which it was