LEGAL ASPECTS OF CORPORATE

MANAGEMENT

Prepared by SABATHO MUKAMA

 Meaning
• Section 2 of the Companies Act (Cap 212)
defines Company as “…a company formed and
registered under this Act or an existing
company”. Not a very helpful definition.
• A company is nothing but a group of persons
who have come together or who have
contributed money for some common
purpose and who have incorporated
themselves into a distinct legal entity in the
form of a company for that purpose.
 INTRO CONTINUES
• A company is also define to mean a group of
persons associated together for the
attainment of a common end, social or
economic or a voluntary association of
persons or individuals formed for some
common purpose (Smith v Anderson 1880 ch.
D. 24
 Characteristics of a Company
 Separate Legal Entity

On incorporation under the law, a company becomes a

separate legal entity as compared to its members. The
company is different and distinct from its members in law. It
has its own name and its own seal, its assets and liabilities
are separate and distinct from those of its members.
It is capable of owning property, incurring debt and
borrowing money,
• having a bank account, employing people, entering
into contracts and suing and being sued separately.
The legal personality or separate entity was
recognized in
Oakes v Turquant (1867) L.R. 2 H.L. 325, but the
importance was firmly established in Salomon v
Salomon (1897) A.C 22.That a company is legal
person /legal entity separate from its members
 Limited Liability:

• The liability of the members of the company is limited

to contribution to the assets of the company up to the
face value of shares held by him. A member is liable to
pay only the uncalled money due on shares held by him
when called upon to pay and nothing more, even if
liabilities of the company far exceeds its assets. The
personal property of a shareholder cannot be attached
for the debts of the company if he/she holds fully paid
up share
 Perpetual Succession:

• A company is a Juristic person with perpetual

succession. A company does not die or cease to
exist unless it is specifically wound up or the task
for which it was formed has been completed.
Membership of a company may keep on changing
from time to time but that does not affect life of
the company. Death or insolvency of members
does not affect the existence of the company
 Separate Property:

• A company is a distinct legal entity. The company‟s property

is its own. A member cannot claim to be owner of the
company's property during the existence of the company. A
shareholder doesn‟t even have insurable interest in the
property of the Company. Macaura v Nothern Ins. Co.
(1925) AC 619 M was holder of nearly all shares of a timber
company. He was also a substantial creditor of the
company. He insured the Company‟s timber in his own
name. The timber was destroyed by fire. It was held that
the insurance company was not liable.
 Transferability of Shares:

• S. 63 (1) of the Companies Act states that “the shares or

other interest of any member in a company shall be
movable property transferable in a manner provided by
the articles of association”. Shares in a company, therefore,
are freely transferable, subject to certain conditions, such
that no share-holder is permanently or necessarily wedded
to a company. When a member transfers his shares to
another person, the transferee steps into the shoes of the
transferor and acquires all the rights of the transferor in
respect of those share
 Capacity to sue and being sued:

• A company can sue or be sued in its own

name as distinct from its members. It may also
inflict or suffer wrongs. It can in fact do or
have done to it most of the things which may
be done by or to a human being.
• The company is only able to sue or be sued in its own
name when it has been registered. If the company has
not acquired legal personality (not fully registered) it
can not institute a suit1. In the case of Fort Hall Bakery
Supply
co. vs. Federic Muigai Wangoe (1959) E.A. 474 a suit
was instituted by an unregistered firm of over twenty
members whose existence as body was not recognized
in law. The high Court of Kenya stated at page 475.
 Distinction between Company and Partnership

 A Partnership firm is sum total of persons who

have come together to share the profits of the
business carried on by them or any of them. It
does not have a separate legal entity. A
Company is association of persons who have
come together for a specific purpose. The
company has a separate legal entity as soon as it
is incorporated under law.
 LIABILITY AND PROPERTY
 Liability of the partners is unlimited. However, the
liability of shareholders of a limited company is limited
to the extent of unpaid share.

Property of the firm belongs to the partners and they

are collectively entitled
to it. In case of a company, the property belongs to the
company and not to its
members.
 TRANSFER OF SHARE
 A partner cannot transfer his shares in the
partnership firm without the consent of all
other partners. In case of a company, shares
may be transferred without the permission of
the other members, in absence of any
provision to the contrary in the articles of
association of the company.
 NUMBER OF MEMBERS
• There must be at least 2 members in
order to form a partnership firm. The
minimum number of members
necessary for a public company is
seven and two for a private company.
 DURATION
• On the death of any partner, the
partnership is dissolved unless there is
provision to the contrary. On the death
of the shareholder, the company‘
existence does not get terminated
 TYPES OF COMPANIES

• There are various ways by which companies

may be classified. Companies may be
classified on the basis of ownership or
members, on the basis of liability, on
the basis of control and on the basis of
incorporation
 members:Public and Private Companies

• Public Company means a company, which is not a private company.

Basic Characteristics are as follows.
 The general public is allowed to subscribe for membership on
fulfilling of few general conditions. Section 29 of Cap 212 requires
the Public company to have minimum number of 7 members to
commence business
 Minimum number of Directors is 2. Section 140 of the Companies
Act.
 The memorandum of a public company shall state that it’s a Public
company.
 Transfer of share is free.
 PRIVATE COMPANY
• A private company (sometimes refereed as to
quasi- partnership company) is in nature of a
partnership of persons with mutual
confidence in each other and its articles place
positive restrictions on absolute transfer of
shares. See S. 27 of Cap 212.
CHARACTERISTICS OF A PRIVATE COMPANY
Restricted membership. Section 27(1) of cap 212 limits the
number of its members to fifty.
Restricts the right of members to transfer its shares S. 27(1) (a)
of Cap212
Prohibits any invitation to the public to subscribe to any shares
in or the debentures of the company. S. 27(1) (c) of Cap 212.
it requires a minimum of one director to operate S. 140 (1) &
(2) Cap 212
 On the basis of liability: Limited and Unlimited companies

• Companies may be limited or unlimited

companies. Company may be limited by
shares or limited by guarantee. "Limited
Liability" - this refers to the liability
of the members, not the liability of the
company. The company will always be
liable to the full extent of its debts.
Company limited by shares
The liability of members is limited to the nominal
amount of shares they take. This applies for
companies formed for gain.

Company limited by guarantees

The liability of members is limited to the amount they
have agreed to contribute in the event of winding
up of the company.
 (a) Company limited by shares

• (i) The most common kind of registered

company.
(ii)Members of the company take shares
issued by the company. Each share is assigned
a nominal value - the amount that must be
paid to the company for the share.
• (iii)When the company is registered, its
memorandum must state the total nominal value
of all the shares it is going to issue (called the
registered capital, or nominal capital or authorised
share capital).The memorandum also states the
number of shares to be issued: e.g. 10,000 shares
of Tshs. 100 each = registered capital of Tshs.
1,000,000.
• (iv) Liability of a member (shareholder), when
the company is wound up is limited to the
amount, if any, of the nominal value of his
shares which has not been paid. No member
of company limited by shares can be called
upon to pay more than the face value of
shares or so much of it as is remaining unpaid.
 Unlimited Company

• The liability of members of an unlimited

company is unlimited. Therefore their
liability is similar to that of the liability of
the partners of a partnership firm. The
following are basic characteristics of
unlimited companies
 CHARACTERISTICS OF UNLIMITED
COMPANIES
• I. Members have unlimited liability (If
company is being wound up, members can be
made to contribute to the company's assets
without limit to enable it to pay its debts.)
II. Cannot be public companies.
 On the basis of control (Holding and Subsidiary companies)

• When a company has control over

another company it is known as a holding
company. The company so controlled is
known as a subsidiary company. A
company shall be deemed to be
subsidiary of another company .
A company is Subsidiary of another when;
• 1. That other company controls the composition of
its board of directors; or
2. That other company holds more than half in face
value of its equity sharecapital
3. Subsidiary of another subsidiary. Where the
company is a subsidiary of another company which is
itself a subsidiary of the controlling company,
the former becomes the subsidiary of the controlling
company e.g. Company B is subsidiary of the
Company A and Company C is subsidiary of Company
B, therefore Company C is subsidiary of A.
Company A.
 PROMOTION AND FORMATION OF A
COMPANY
• Promotion: refers to the entire process by which
a company is brought into existence. It starts with
the conceptualization of the birth a company and
determination of the purpose for which it is to be
formed. The persons who conceive the company
and invest the initial funds are known as the
promoters of the company. These are persons
who do the necessary preliminary work
incidental to the formation of a company.
• The promoters enter into preliminary
contracts with vendors and make
arrangements for the preparation,
advertisement and the circulation of
prospectus and placement of capital.
However, a person who merely acts in his
professional capacity on behalf of the
promoter
• Thus, it appears that promoter is neither
agent nor trustee of the company under
incorporation but fiduciary duties have been
imposed in him Erlanger v New Simbrero
Phosphate (1878 )3 A. C 1218. From the
moment the promoter acts with the company
in mind, a promoter stands in the fiduciary
position towards the company
 The promoters‟ fiduciary duties may be
summed up as follows
 He must not make any secret profit out of the
promotion of the company
 He must not make unfair use of position and
must take care to avoid anything which has
appearance of undue influence or fraud
 The promoter, once he has begun to act in the
promotion of the company, must give the
benefit of any negotiations or contracts into
which he enters in respect of the company
 Remedies available to a company against
the promoters: -
 Rescind or cancel the contract made and if he
has made profit on any related transaction,
that profit may also be recovered
 Retain the property and paying no more for it
than what the promoter has paid for
 the company can sue him to for breach of
trust
A promoter may be rewarded by the company
for efforts undertaken by him,as follows
 The company may decide to pay some
remuneration for the services rendered.
 The promoter may make profits on transactions
entered by him with the company after making
full disclosure to the company and its members.
 The promoter may be given an option to buy
further shares in the company.
 The promoter may be given commission on
shares sold. .
• The articles of the Company may provide for
fixed sum to be paid by the company to him.
However, such provision has no legal effect
and the promoter cannot sue to enforce it but
if the company makes such payment, it cannot
recover it back.
 Formation of companies
• Currently in Tanzania companies are formed
under the companies Act, Cap 212. Those
forming companies are called promoters. The
main tasks of the promoters are to prepare
various documents, and lodge these, with the
necessary fees, with the Registrar of
Companies
 THE CONSTITUTIONAL DOCUMENTS

• In forming a company one is expected to undergo the

following stages:
• Name of the company: the first thing the promoter
should do is to think of the name for which the company
is to registered in the light of section 30 of the CA
• Name Clearance: this requires the promoter to submit
the name of the proposed company to the registrar of
companies.
• If the name is approved, then the following documents
duly stamped together with the necessary fees should e
filed with registrar of companies (BRELA)
 The memorandum of association
 The articles of association
 Statement which declares particulars of the directors
(section 14 CA)
 The form which declares physical area of the registered
office (sections 14(2),(3) and 110 CA)
 A form for statutory declaration (section 16(2) CA
evidencing compliance with the requirement of the law.
 If all these requirements have been satisfied, the registrar
issues a certificate of incorporation. This is the company’s
birth certificate. Section 16/15 of the CA
 MEMORANDUM OF ASSOCIATION

• Statutory definition
• Section 2 of the CA.
• “Memorandum” means the memorandum of association of a
company, as originally framed or as altered from time to time;
• Case law
• In Ashbury Railway Carriage Co. Ltd V Riche (1875) L.R 653
Lord Cairns define memorandum as a charter of the company.
It defines the limitations and powers of the company.
• A charter of a co. is basically a constitution of the company.
Hence it defines the relationship between the company and
the outsiders.
 Purposes of the memo

 Informs the potential (intending) shareholders

of the theme (business) in which their capital
will be invested
 It enables the shareholders and creditors and
those who want to deal with the company to
know permitted range of the company.
 CONTENTS OF A MEMO section 4 of the CA

 The name of the Company

 Where the registered office is situated.
 The objects of the company. (The objects clause).
 A statement to the nature of the company
(Whether private or public)
 A clause stating liability of the members: It
states whether it is limited by shares/guarantee.
 Association clause
 The Name of the Company
• The company may be registered in the name it desires.
• However, the company may not be registered in a name
which in the opinion of the register is undesirable.
• Reasons for the registrar to refuse the name: section
30(1), (2) CA
• The name is identical to the one already registered
• Mere Resemblance of the name to the name of the co.
already registered
• The name suggests connection with the republic or the
president
 Registered office of a company (section
110 CA)
• Importance of a registered office:
 It is the domicile of a co.
 Place for storing/keeping the documents of
the co.
 For easy communications with the co.
 The objects Clause

• It serves two purposes:

It gives the idea to the prospective
shareholders the purposes for which their
money will be utilized
It helps the company to ascertain its powers.
It also helps persons dealing with the
company to ascertain the powers of the
company
 Limitation of liability (section 4(2) and 27 (a) – (c) CA

• According to Sections 4, the objects

clause is followed by a clause which
states that the liability of members is
limited. This is mandatory even for a
company which is allowed to dispense
with the word "ltd" in its name (section
34).
 The capital clause

• Any company limited by shares must state its

nominal capital and the value of each of the
shares into which the share capital is to be
divided.
• If the company is limited by guarantee, the
Memorandum should state that each member
undertakes to contribute to the assets of the
company in the event of its being wound up while
he is a member or within 1 year after ceasing to
be a member
 The associative clause

• The Memorandum of Association normally

concludes by or with an associative clause, by
which the two or more subscribers state that
they are desirous of being formed into a
company in pursuance of the Memorandum of
Association and if the company has a share
capital, that they respectively agree to take
the number of shares set opposite their
respective names.
• The attested signatures of the subscribers
then follow. An associative clause is the
foundation of the statutory contract between
the members of the company and the
company itself when incorporated
 Alteration of memorandum of association (section 8 CA, 2002)

• Alteration of the Memorandum of Association can take

place in the following ways:
 Alteration of the Objects Clause under S. 8 CA. There
are a number of requirements which must be satisfied
before a company can alter its objects clause.
 There must be a special resolution. A special resolution
is that resolution which requires 3/4 of the majority of
all members to vote and the notice of the meeting in
which it was passed was not less than 28 days prior to
the meeting. Otherwise, noncompliance renders the
resolution ordinary.
 THE ARTICLES OF ASSOCIATION

• Section 2 of the CA. the definition under this

section is extremely inadequate. It does not
offer much help.
• Other definitions:
• An article of association is a document
regulating the rights of the members of the
company among themselves and provides the
manner in which the business shall be
conducted.
 Roles of the AA

 The articles regulate the manner in which the

company's affairs will be managed.
 They serve as regulations for its internal
management of the company. That is, they
determine how the company objects will be
achieved and how the powers spelt out in the
Memorandum of Association will be exercised.
 They deal with such matters as the allotment
and issue of shares, the rights attaching to
shares, transfer, transmission of shares,
conduct of general meetings and the right to
receive notice and to attend and vote, the
appointment and powers of directors, the
accounts and payment of dividends.
• Section 9(1) (2) of the CA provides for the
form in the Articles must be:
 Must be in English language
 Must be printed
 Must be divided in paragraphs numbered
consecutively
 Must be signed by each subscriber to the
memo in presence of at least one witness
 Interpretation of the Memorandum and
Articles of Association
• The AA and Memo A are contemporaneous
documents. They have to be read together so that in
case of ambiguity/uncertainty, in any one, the
ambiguity may be removed by reference to the other.
• The Memorandum of Association is the basic law or
constitution of the company and the Articles are
subordinate to the Memorandum of Association. It
follows therefore that if there is a conflict between
the Memorandum and Articles of Association, the
Memorandum prevails.
 Effects of registration of the articles
Section 18(1) of the CA, 2002

• They become a contract.

 They bind the company and the members as if signed and
sealed by each member. Therefore, members are bound to
observe the provisions of the articles.
 Each member on his capacity is bound by the provisions of
the articles. On this basis a member may sue the company.
 The company is bound to each individual member. Every
member may enforce his rights against the company by
legal action, by virtue of the existence of the Memorandum
and Articles of Association.
 The members are bound to each other.
 DIRECTORS AND MANAGEMENT OF A COMPANY

• A company from juristic point of view is a

legal/artificial person. It has no physical
existence. As such it cannot act in its own
person. It can only do so only through human
agency i.e. directors.
• The company itself cannot act in
its own person, for it has no
person; it can only act through
directors, and the case is, as
regards those directors, merely
the ordinary case of principal and
agent”.
• The directors are a body to whom is
delegated the duty of managing the
general affairs of the company. A
corporate body can only act by
agents, and it is of course the duty of
those agents so to act as best to
promote the interests of the
corporation whose affairs they are
conducting”.
 Definition:

•Section 2 of Cap.212 defines director to

include any person occupying the position of
director by whatever name called.
•A director may generally be defined as a
person having control over the direction,
conduct, management or superintendence
of the affairs of a company.
 Qualifications of directors

1. Must be of the age of majority according to the

law to which he is subject. Section 194(1) of the
Companies Act 2002.
2. Must be of sound mind
3. Must not be disqualified by any law to which
he/she is subject.
a.Undischarged bankrupts – under Bankruptcy
Ordinance
4.Must not be disqualified by an order
of the court [s.197]
5.If the articles so require, the director
must have share qualification
 POSITION OF DIRECTORS

• They have been described by various

names; sometimes as agents, as
trustee, and sometimes as managing
partners
 DUTIES OF THE DIRECTORS

•1. Duty to act bonafide in the interest of the company (181 &
182(1)
A director of the company when performing his duties is required to act
honestly and in good faith and in what he believes to be the best interest of
the company.
•2. Duties of care, skill and diligence (s. 185)
•The director owes the company a duty to exercise the care, skill and
diligence which would be exercised in the same circumstances by a
reasonable person.
3.The non-conflict rule
4. duty to exercise powers for proper purpose (s. 185) and the duty to
have regard to interests of employees
 WINDING UP AND DISSOLUTION

• Winding up is a process whereby

all assets of the company are
realized and used to pay off the
liabilities and members.
Dissolution of the company takes
place after the entire process of
winding up is over. Dissolution puts
an end to the life of the company
•A dissolution order passed by the Court is like
the Death Certificate of the company.
Bankruptcy is a legal process by which the
assets of the insolvent individual or partnership
are realized and proceeds distributed to the
creditors. Company cannot be made bankrupt.
• A company to be wind up may be solvent or
insolvent.
 Modes of Winding Up (s. 267)

•A Company may be wound up in any

of the following modes:
1. By the Court i.e. compulsory
winding
2. Voluntary winding up, which may
be
(a) Member's voluntary winding up;
 WINDING UP BY THE COURT S. 272

• Winding up of a company under

order of a court is known as
compulsory winding up. A
petition for winding up the
company must be filed before
the court. It is the High Court,
which has the jurisdiction to wind
up companies
 The following are the situations where a company may be wound up by the Court (s. 279): -

 A company by special resolution resolves that the company be

wound up by the court. It should be borne in mind that, without
such act directors cannot pass a resolution that the company be
wind up by the court
 if the company does not commence business within one year from
its incorporation or it suspends business for a whole year.
 The number of its members falls below the minimum required
 It is unable to pay its debts (s. 280).
 The Court is of the opinion that it’s just and equitable to wind up
the company e.g. (a) Where the whole object of the company was
fraudulent , Where the company is insolvent. (d) Where there has
been mismanagement of funds by the directors.
 Persons entitled to petition in a
winding up by Court
 The Company , the company itself may
present a petition to the court for winding
up after it has passed a special resolution
 Any creditor
 Any contributory / shareholder.
Contributory means every person liable
to contribute to the assets of a company
in the event of its being wound up and
includes holders of its fully paid shares.
 VOLUNTARY WINDING UP

• In case of voluntary winding up, the

entire process is done without Court
Supervision. When the winding up is
complete, the relevant documents
are filed before the Court for
obtaining the order of dissolution. A
voluntary winding up may be done
by the members as it may be done
by the creditors.
 The circumstances in which a company may be wound up
voluntary are: -

 When the period fixed for the duration of the

company in its articles has expired.
 When an event on the happening of which the
company is to be dissolved as per its articles
happens.
 The company resolves by a special resolution
at a general meeting to be voluntarily wound
up.
• A voluntary winding up commences from the
date of the passing of the resolution for
 The effects of the voluntary winding

a.Company ceases to carry on its

business .
b.Board’s power cease on appointment of
liquidator in case of members voluntary
winding up.
c.A voluntary winding up does not
necessarily operates as a discharge of the
company’s servants but if it takes place
because the company is insolvent, it will