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BAYERO UNIVERSITY, KANO

FACULTY OF LAW

LECTURE NOTE ON

COMPANY LAW I (LAW 4301)

DELIVERED BY: PROF. NASIR AHMAD

SEMESTER: FIRST

LEVEL: 400

DEFINITION OF COMPANY

According to Barclay J in Re Stanley 1906, 1 Ch.D Pg 134 the word COMPANY defines anylegal meaning. However when the word is used loosely, it means an association of persons whocome together for the purpose of pursuing a common object(s), these objects may becommercial, political, philanthropic activities, culture or promotion of science and education andthe likes.

When the word COMPANY is used in strict legal sense it normally connotes an association ofpersons who come together for the purpose of pursuing economic activities i.e. for the purpose ofcarrying business activities in other to make gain or profit, such companies are termed asregistered companies or incorporations.

Objectives of Company

In the area of business activities, capital is of the essence, this is to say the more the capital themore the opportunities or investment and the more the profit is earned. The institution ofcompany provides an avenue whereby interested persons make contributions to the neededcapital for investment, after the investments, profit is normally generated and it is shared amongall the members of the company. Some people may have money but may not have the interest investing it or they may not have the investment know-how, through the use of company suchpersons can contribute to the capital of the company through the subscription of the shares of thecompany and allow the investment of the capital in the hands of the company, at the end of theday such persons share the profit realized by the company.

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Once a company is registered, it becomes a legal entity separate and distinct from the memberswho formed it, this legal entity makes the registered company to be liable for all its liabilities.Where a registered company incurs any liability, the law considers that liability as the liabilitiesof the company and not that of the members who formed the company, by implication, theinstitution of company exempts the members from any liability. A company may take the formof Company Limited by Shares, under this type of company and which is the common type ofregistered companies for business activities, the liabilities of the members after winding up islimited by the amount which they paid while subscribing for the shares of the company e.g. acompany was formed, the company carried out business activities for some time, it later wentinto liquidation, the asset of the company is only worth 10million Naira, the liabilities which thecompany incurred stands at 20million Naira, by law when the 10million is exhausted, themembers would not be asked to contribute the sum of 10million Naira in other to settle thebalance of the liabilities of the company which is 10million naira. Since the company has beenliquidated, the members will however lose the amount which the paid in the cause of subscribingfor the shares of the company.

COMPANY LAW

Company law like a branch of other law was developed and was evolved by the principles ofcommon law of England, these comprise case law, principles of equity and statute. Theprinciples of company law found themselves in the Nigerian soil and where made enforceablewhen Nigeria became a colony of British. Company law however underwent some reviews andmodifications in other for it to catch up with the Nigerian growth in terms of commerce andindustry e.g. in 1912, the Companies Ordinance was passed in Nigeria, similar CompanyOrdinance was passes in 1942, in 1948 the Companies Decree was passed, in 1990 due to therapid growth in economic activities, development in industries and the government physicalpolicies covering the areas of Oil Boom and Structural Adjustment Program, company law wasreviewed through the promulgation of Companies and Allied Matters Act now enact, this law isthe current law on companies, this law supersedes any other enactment and case law particular ofEngland on any issue dealing with companies in Nigeria. The CAMA made detailed regulationsregarding every aspect of company, the main characteristics of this law is the codification of theprinciples of company law established through the common law and reviewing the somewhatambivalent principles under the common law, the CAMA takes care on the registration,management and winding up of all companies registered in Nigeria.

Classification off Companies

Registered company by virtue of liability;

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1. Unlimited company2. Company limited by guarantee3. Company limited by share

In terms of the form/any of the above type of companies can either be private company or publiccompany.

Unlimited Company: This is defined by Section 21 (1) (c) of the CAMA, this is a company “nothaving any limit from the liability of its member……” but the nature of an unlimited company,when it becomes liquidated whatever belongs to it in terms of its asset will be converted intocash, the money realized from the assets is used in settling the liabilities which the companyincurred before its liquidation. If the asset is found to be insufficient to pay the liabilities of thecreditors then the members of the company will be under legal duty to contribute up to the finalsettlement of the entire liabilities of the company, e.g. a company was registered as an unlimitedcompany, after its liquidation, it is discovered its total sum of asset is only worth 10million Nairameanwhile the liabilities which the company incurred in the course of carrying on businessactivities before its liquidation is #20million, in this case the members of the company mustcontribute additional #10million in other to settle the balance of the liability.

In view of the fact that this kind of company afford no limited liability to its members it hardlybeen adopted by businessmen.

Company Limited by Guarantee: this is defined by Section 21 (1) (b) as a company “having theliability of its members limited by the memorandum of association to such amount as themembers may respectively thereby undertake to contribute to the assets of the company in theevents of its been wound-up”. In this type of company, each prospective member at the time ofincorporating the company pledges certain amount of money which he will pay when thecompany became wound-up. After the company is incorporated to carry out its object andbecame liquidated at that time each member is under the obligation to make good what he claimto contribute to the asset at the time of the incorporation, after each member has paid what hehad undertaken to pay this would be the extent of his liability in that company, this is so even ifall that is contributed by the members is not sufficient for the settlement of the liabilities of thecompany which it incurred before going into liquidation. By the requirement of law, this type ofcompany is not permitted to be registered with any share capital nor is it permitted to carry onany business activity for them, it is used to pursue common objects such as research, promotionof trade and profession for carrying philanthropic activities, for carrying out sport and similarrelated activities.

Company Limited by shares: this is defined by Section 21 (1) (a), this is a company “having theliabilities of its member limited by Memorandum of Association to the amount if any unpaidon the shares respectively held by them”. By the nature of this type of company, the liabilities ofits members is limited to the amount they paid while subscribing for the shares of the company,

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this will arise when a company becomes liquidated and after the liquidation, the assets of thecompany is discovered to be insufficient to pay all the creditors of the company, when therealized assets is distributed among the creditors of the company and the liabilities of thecompany remain the members are not under any obligation to contribute in other to settle theremaining or unsettled creditors of the company. A situation may however arise where thecompany demanded only part of the nominal value of its shares to be paid at the time of thesubscription of the shares e.g. the nominal value of each share of the company is 200Naira butthe company demanded the payment of only 100Naira as part payment of the nominal value ofthe shares at the time of the subscription. In this case, all the members must pay for the balanceof the nominal value of the number of shares they hold in the company, after this payment theyare no longer under any duty to make further contributions in other to settle the balance of theliabilities of the company. E.g. where a company was registered as a company limited by sharesafter winding up the total value of the assets of the company is only #10million, on the otherhand the liabilities of the company is #20million, after paying #10million liabilities to thecreditors, the members would not be obliged to make additional contribution of #10million inother to settle the balance of the liabilities of the company. If however any member paid onlypart of the nominal value of the shares he is holding in the company he is to pay for the balanceafter which he has no more liability in the company.

This type of company is so called company limited by shares because the extent of the liabilitiesof the members in the company after winding up is only the amount of money he paid for theshares of the company he was holding. This type of company uphold it members to limit theirliabilities, because of this many businessmen adopt it, in fact most of commercial trading andbusiness companies are registered under the name of company limited by shares.

In terms of form any of the above type of company can take private or public company.

Private company is defined by Section 22 (1) as “one which

a. restrict the right to transfer of its share,b. Limits its members to 50 persons”.

A private company by its nature is normally a small company in terms of its membershipcomprising members of its family, it may also comprise friends as members or persons who arerelated or close to one another in one respect or another, since private company is not largecompany and is only meant to include associate below limits the membership to 50 persons,based on the same respect, the law also restrict the rights of the members to transfer their sharesin the manner they so like. The articles of association normally provides that a member can onlytransfer his shares to an existing member and not to an outsider, the main advantage of this typeof company is that it does not require to follow the procedure of raising its nominal share capital,this because the members even before the incorporation contribute to the capital or share capitalwhich the company requires to invest after being duly incorporated. This advantage also allows

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the company to commence the business activities within its objects immediately after it has beenregistered.

Public company Section 24 defines a public company as “any company other than a privatecompany shall be a public company and it memorandum shall state that it is a publiccompany”. A public company is one that comprises large number of persons without anylimitation unlike in the case of private company the members may not be related to each otherwhat unite them is the carrying out of business activities under the company for profit or gains.In this type of company, members are freely allowed to transfer their shares to any interestedperson there is no restriction on this regard unlike in the case of private company a publiccompany must take all the necessary steps to raise the nominal share capital of the company, thisdone through a public offer for the subscription of its shares which is accompanied byprospectors, this procedure takes long time and the company cannot commence business activitywithout complying with this procedure.

In commercial business, money as the form of capital is of the essence, public company by itsnature allows the pulling of large capital as it contains large number of members. It is this capitalwhich enables the company to carry out their diversified business activities which bring profit toits members, multinational corporations and companies are usually of the nature of publiccompanies.

INCORPORATION, RESGISTRATION OR FORMATION OF A COMPANY

Incorporation, registration or formation of a company involves all the steps that must be taken toform or bring a company into existence and to make it start acting as a company, these steps arenormally taken by what is called “Prompters”. Section 61 defines promoters to be “any personwho undertakes to take part in forming a company with reference to a given project and to setit going and who takes the necessary steps to accomplish that purpose or who with regards to aproposed or a newly formed company undertakes a part in raising capital for it shall primafacie be deemed a promoter of the company provided that a person acting in a professionalcapacity for persons engaged in procuring the formation of a company shall not thereby bedeemed to be a promoter”. By this definition, any person who takes part in the process ofincorporating a company is a promoter of that company, equally any person who takes part inraising the capital of the company after the company has been incorporated is deemed a promoterof that company, in fact any activity done by any person towards bringing into existence of aregistered company such person by that action is deemed a promoter of that company. However,persons rendering their professional services particularly legal practitioners, chatteredaccountants and the likes in the cause of bringing into existence a registered company are notdeemed promoters of such company.

Duties of a Promoter

The main duties of promoters are;

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1. Taking all the necessary steps to bring a company into existence, this involves bringingthe people together to form the company, providing all the necessary information andparticulars of the company to be registered to the legal practitioner involve in theincorporation of the company, providing the first persons to subscribing for the share ofthe company from the memorandum, providing the person who has consented to be thefirst director of the company and providing all the necessary documents which the lawrequires in the cause of incorporation of the company,

2. Giving every helping hand in ensuring the proper and sound floatation of the company uptill the stage where it can commence conducting business activities, this covers thepremises of the company, negotiating and entering into contract and agreement on behalfof the company, preparation and issuance of prospectors of the company, issuance of theshares of the company to the public and doing every other things needed for the companyto commence conducting business activities.

Legal position of Promoters

In law, promoters are not the agents or trustees of the company they are promoting, thisnotwithstanding the law places promoters in fiduciary relationship viz-a-viz the company theyincorporate. This principle was establish in ERLANGER vs. NEW SAMBRERO Co 1878 3 ACPg 1218 @1236 where Lord Cains LC laid the principle of law “they stand in my opinionundoubtedly in fiduciary position they have in their hands the creation and the molding of thecompany they have the power of defining how and when and in what shape and under whatprovision it shall start into existence and begin to act as a trading corporation”, Section 62 (1)adopts the common law position of promoters, it provides “a promoter stands in a fiduciaryrelationship to the company”. By placing promoter in a fiduciary position with respect to thecompany he is incorporating, the law imposes certain duties to be discharged, these dutiesinclude the requirement of the promoter to always act in good faith for the interest of thecompany they are promoting, they are forbidden by the law from allowing their interest toconflict with that of the company, they are not allowed to derive any undue advantage by virtueof their position as promoters. The law however allows them to enter into transactions with thecompany provided that they make full disclosure of their interest in such transactions, wherepromoters breach these duties the law gives the company the right to rescind any contract,recover any profit made from it or any undue advantage which the promoters made out of theirpositions or even to make the promoters compensate the company for any loss it suffered as aresult of the breach.

In Erlanger’s case a syndicate headed by 1 Erlanger purchase an island which was said to containvaluable object at a sum of 55,000pounds, thereafter Erlanger promoted a company for thepurpose of buying the island from the syndicate , the company had 5 directors all of whom werenominated by him, at the time of the sale 2 out of the 3 directors were under his control the 2directors acting on behalf of the company purchased the island from the syndicate at11000pounds and no disclosure of the profit which the promoters made from the transaction was

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made, when the company realized this it sued Erlanger for breach of fiduciary duty and claimingthe rescission of the contract and for recovering the purchase price. The court held that Erlangerbreached his fiduciary duty as a promoter of the company by not fully disclosing the profit hemade from the transaction, the court therefore rescinded the contract and allowed the company torecover the purchase price. In another case GLUCKSTEIN vs. BARNES (1900) AC Pg 240, inthis case a syndicate of 4 persons intending to buy a property and form a company and resell theproperty to the company they formed both charges on the property at discount, the syndicatethereafter bought the property at 140,000pounds, formed a company and became the firstdirectors of the company and thereafter resold the property to the company at 180,000poundsthereby making the profit of 40,000pounds on the property and another 20,000pounds on thecharges which they sold to the company in full, in the prospectors of the company issued by thepromoters only the profit of 40,000pounds was disclosed, the 20,000pounds profit from thecharge was only described as made from intermediate transaction the company sued to recoverthe profit from the charge. The court held that the profit made from the charges on the propertywas not fully disclosed as required by the law, the court considered it as a secret profit and thepromoters where directed to return it to the company the court however allowed the contract onthe property because full disclosure was made.

Similarly, where promoters issued out false statement and a person relying on such statementacted e.g. by subscribing the shares of the company such a person will be entitled to damageswhere such statements are later found to be untrue. Section 62 adopts these common lawpositions on the duties and remedies for the breach of the duties of promoters;

1. a promoter stands in a fiduciary relationship to the company and shall observe theutmost good faith towards the company with any transaction to it or on its behalf andshall compensate the company for any loss suffered by reason of his failure to do so,

2. a promoter who acquired any property or information in any circumstances in whichwas his duty as fiduciary to acquire it on behalf of the company shall account to thecompany for such property and for any profit which he may have made from the use ofsuch property or information.

Payment for Promoter Services

The services rendered by non professional promoters are usually paid through the commissionthey earn in transactions, contracts and agreement with the company provided they havedisclosed their interest and there was no conflict of interest. Similarly, certain shares are given tothe promoters and the nominal value of such shares are paid in lieu of the services the promotersrendered in the cause of incorporating the company, as a rule however where promoters are notpaid or have not been paid for their services they cannot claim that when the company becomeincorporated, this was established in GLUKSTEIN’s case (1902) 2 Ch. D Pg 515, a syndicatespent 416pounds 25shillings in the cause of incorporating the company, the company went into

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liquidation shortly afterwards the promoter sued to recover the amount from the asset of thecompany the court held that they were not entitled to recover.

PRE-INCORPORATION CONTRACT

Contracts which promoters of the company entered in the course of incorporating the companyon behalf of the company are termed as pre-incorporation contract. In the course of companyformation, promoters in order to satisfy the necessity of the company may enter into contracts,agreements/transaction on behalf of the company. They buy premises, properties and such otherthings which the company needs either in the course of incorporation or after the companybecome fully registered.

Pre-incorporation contract under the general principle of company under common law causeserious legal challenges, this is because in law a company is only recognized when it has beenduly registered by the Corporate Affairs Commission. Under the law of Agency, a person canonly be treated as an agent where he has as existing principal or a principal within thecontemplation of law. This problem arose in the case of KELNER vs. BAXTER (1886) LR 2CP 174, in this case, a syndicate of three persons were promoting a company to buy and/or takefrom Mr. Kelner before the company was fully formed, the promoters entered into a contractwith Mr. Kelner to purchase 900pounds worth of wine on behalf of the proposed hotel company.The wine was supplied to the promoters who handed it over to the company when it was formedand subsequently consumed by the company, before payment was made the company went intoliquidation, Mr. Kelner was listed among the creditors of the company. The question waswhether the contract was validly entered when the promoter entered into the contract on behalfof the company they were registering. The court held that Mr. Kenler could not be among thecreditors of the company because the contract between him and the company was notenforceable as the company which Mr. Kelner purportedly acted on behalf of was not inexistence in law. Justice Haldane laid down the principle in his words, “as there was nocompany in existence at the time the agreement will be wholly inoperative, where a contract issigned by one who professes to be signing as an agent but no principal existing at that time thecontract will be all together inoperative”.

Secondly, even where the company wishes to ratify such contract after been dully registered,such ratification cannot be possible for the reason that ratification can only be made where theaction was made when there was a principal in existence. On this point the learned judge stated“could the company become liable for mere ratification? Clearly note, ratification can only beby a person ascertained at the time of the act done by a person in existence either actually orin contemplation of law. Both are called principle and are called authority then of course itseems to me that the company can never could be liable upon this contract”.

Based on this case the position of the common law on pre-incorporation contract were;

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1. pre-incorporation contract were not enforceable against the company since the principalwas not in existence at the time the contract was made,

2. this position will not change i.e. pre-incorporation contract are not enforceable against thecompany even if the company ratify such contract after becoming dully incorporated,

3. such contract may however be binding on the promoters who signed it even thoughpurported to be doing so on behalf of the company.

These principles were followed in Nigeria to govern pre-incorporation contract e.g. inSTEPHEN vs. BUILD COMPANY NIGERIA LTD (1968) …. where the Supreme Court heldthat a company is not bound and cannot ratify an agreement it entered into before itsincorporation even though the parties to the agreement intend it to bind the company and becomethe only director of the company and its shareholder. The same court in EDOKPOLORSCOMPANY LTD vs. SEM-EDO WIRE IND LTD (1984) 7 SC 561 @ 672 where the courtstated; “it’s a well known settled principles of company law that a company is not bound by apre-incorporation contract entered into by parties when it was not in existence. No one cancontract as agent of such proposed company there be no principal in existence to bind” . Inanother case DARIO CALCIARO vs. (1961) ALL LLR 534, in the case the defendantcompany and one century obtained 800pounds from the plaintiff in the name defendant’scompany prior to its incorporation. The plaintiff brought the action against the companycontending that the company have adopted and ratified the contract and was therefore bound byit, the court held that a promoter was not an agent of the company he was forming. The companycould not therefore adopt or ratify, act or contract purported to have been done or entered into byhim on the company’s behalf.

From 1990 when the CAMA came into existence, the principles of pre-incorporation contractunder the common law where repealed. Section 72 provides;

1. “any contract or other transaction purporting to be entered into by the company or byany person on behalf of the company prior to its formation may be ratified by thecompany after its formation and thereafter the company shall become bound by andentitled to the benefit thereof as if it has been in existence at the date of such contractor other transaction and has been a party thereto.

2. Prior to ratification by the company the person who purported to act in the name of oron behalf of the company shall in the absence of express agreement to the contrary bepersonally bound by the contract or other transaction and entitled to the benefitthereof”.

By the new position, a company is now statutorily empowered to ratify all pre-incorporationcontract after it has become dully registered, once ratification has been done, the contractbecomes enforceable. When a company decides not to ratify pre-incorporation contract, thepromoters who entered into that contract though purportedly on behalf of the company, suchcontract will be enforceable against them. However, where the promoters by express provision

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exempt themselves from such contract been enforceable against them, such express provisionexempts them from any liability arising from such contract.

PROCEDURE FOR THE INCORPORATION OF A COMPANY

Under Section 18 of the CAMA the minimum statutory requirement for the formation of acompany is two (2) persons, while in the case of a private company the maximum number is 50persons. Similarly, under Section 19 no company, association or partnership is allowed to beformed for the purpose of carrying out business for gains unless it is registered as a companyunder the provision of CAMA. Three stages are involve in the formation of a company,

Taking of Instruction: This is where persons who have made up their mind to register or form acompany comes to the person engage in the registration of the proposed company, such person(s)are usually qualified legal practitioner, a file is open and the legal practitioner gathersinformation about the company to be registered, such issues as the name or names which thecompany is to bear, the type of the company to be formed in terms of liability companyunlimited, company limited by guarantee or company limited by shares. And in terms of theform whether the company will be registered as a private or public company, other issues to becollected cover the nature or type of business activities which the company will be engaged inafter registration, the amount of money which the company is to invest after its incorporationotherwise known as nominal capital. The first person to be the director of the company, the placewhere the company will be carrying out business activities otherwise termed the registered officeof the company and other related information.

The preparation of the Incorporation Documents: The information collected or gathered, at thefirst stage will now be transferred into incorporating documents, these are;

i. Memorandum of Association; this is a fundamental document which contains the nameof the proposed company, the type of the company in terms of liability, the type ofbusiness activities of the company otherwise termed as the object, the amount of moneywith which the company is to registered which is divided into shares, and the registeredoffice of the company.

ii. The Articles of Association; this is a document containing rules on how the company isto be managed internally, it contains issues such as the directors and their powers, theclassification of the shares of the company, meetings and resolutions of the company,transfer of shares etc.

iii. Statement on Nominal Share Capital; this is a prescribed form provided by thecorporate affairs commission, in this form the amount of money with which the companyis to registered is provided-the nominal share capital is provided, the money is convertedinto shares and a nominal value is given to the shares.

iv. Notice of the Registered Office Address of the Company; this is also in prescribed formof the corporate affairs commission, where the company is to have its registered office is

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provided, where the company has branches, the head office and the branches are providedin this form Section 27 (1&2).

v. Particulars of the First Directors of the Company; this is also in CAC prescribed form,the form shall contain the particulars of the persons who have consented to become thefirst directors of the company, this should cover their names, ages, nationalities andoccupations, where the company requires what is termed as the qualification shares of thedirectors the particulars shall included the number of shares which each proposed directorhas taken. Where the company to be registered is a public company prospectors orstatement in lieu of prospectors is required to be prepared and to be among theincorporation documents.

vi. Statutory Compliance; this is also in CAC prescribed form, it contains a statutorydeclaration that all the requirement needed by CAMA to incorporate or register acompany have been complied with and this is to be sworn to by the persons engaged inthe incorporation of the company or by the persons named as the directors of thecompany.

vii. Any Other Document or Information; which the CAC may require to be filed along withthe incorporation documents e.g. tax clearance particularly for the persons who haveagreed to be the first directors of the company.

Filing of the Incorporation Document: The incorporation document prepared under the secondstage are filed with the corporate affairs commission but before that they are taken to the federalinland revenue for the purposes of paying stamp duties, the commission for stamp duties assessand determines what is to be paid as stamp duties for such incorporating documents. After thepayment of the stamp duties, the document are lodged with the CAC, the CAC is established bySection 1 CAMA, it is a body corporate with perpetual existence, a common seal and withcapacity to sue and be sued in its own name, its headquarter is in the FCT Abuja, it has offices insome states of the federation with the mandate to have an office in all the states of the federation.By Section 7 the commission has certain statutory powers and functions which they include theadministration of all the provisions of CAMA on all registered companies in Nigeria, it is withinthe powers of the commission to regulate, supervise the formation, management and winding upof all registered companies in Nigeria. Other powers of the commission cover the establishmentand management of company registered and offices in all the states of the federation, CAC alsohas the power to arraign and or conduct an investigation into the affairs of a company where theinterest of the shareholder and public so demand, it can also do any other things which arenecessary or expedient for the giving of full effects to the provisions of CAMA, the registrargeneral who is the head of the commission assess the incorporation document lodged before thecommission, when he is satisfied that all the CAMA and other related statutory requirement onthe formation of a company have been satisfied, issues a certificate of incorporation under thecommon seal of the commission in the name, nature and type of the company. The certificate is aconclusive evidence that all requirement on incorporation of a company have been duly

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complied with. Above all the certificate of incorporation brings into the being the companyunder the terms of the certificate.

CONSEQUENCES OF INCORPORATION

In law, the moment the registrar of the CAC issues out a certificate of registration to a company,that company is said to begin as a registered company. It thereby acquires the attributes of legalentity, this legal entity confers on it the capacity to do what all registered companies can do. It isa legal competent party to transact, to sue and be sued in its own and competent to enter intobusiness activities provided by it MOA and above all is distinct and separate from its members.

The locus classicus case where this golden principle was established in SALOMON vs.SALOMON & COMPANY LTD (1879) AC Pg 22, in this case, Mr. Salomon traded as aleather and shoe manufacturer for many years, in 1892 he decided to form a limited liabilitycompany for the purpose of carrying on the same business, he then registered Salomon andcompany limited, his own business was valued as 39,000pounds which he sold to the company,instead of collecting money, he took shares for the amount of 20,000pounds in the company, heloaned the some of 10,000pounds to the company and was issued with debentures securing theloan, the balance of 9,000pounds he took in cash, he has a wife and 5 children each of whomtook 1 share of the company in other to satisfy the requirement of forming a company, after thecompany started carrying on business activities, Salomon transferred is debentures to one Mr.Broderie and new debenture was created in the name of BRODERIE. Later on the companybecame liquidated and Mr. Broderie claimed his right in the debentures he held in the company.It was discovered that the asset of the company will not be sufficient to pay for all the creditorsof the company, this is because Mr. Broderie as a secured creditor must be paid before any othercreditors, it was further discovered that by paying Broderie it was indirectly paying Mr. Salomonand by paying Mr. Salomon is paying the same person who formed and registered the company.The trial court held that Mr. Broderie was not entitled to any payment because by paying him, itis indirectly paying Mr. Salomon and Mr. Salomon was the same person who formed and wasthe owner of the company, when the case reached the House of Lords, the judgment wasreversed and set the golden rule applicable to registered companies in the words of lordMacnagnitton “a company is at law a different person from the subscribers of thememorandum and although it may be that after incorporation the same business is preciselythe same as it was before and the same persons are managers and the same hands receives theprofit, the company is not in law the agent of the subscribers or trustee for them nor are thesubscribers as members liable in any shape or form except to the extent and in the mannerprovided by the Act”. The rule established in SALOMON vs. SALOMON became part of theprinciples governing company law and it was subsequently applied in similar case on the basesof the doctrine of judicial precedent. In LEE vs. LEE AIR & CO LTD (1960) 3 ALL ER Pg420, in this company the total number of shares was 300, Mr. Lee subscribed all but 1 he votedhimself the governing direct and chief pilot at a salary, he was killed in an aircraft while workingwith the company, his widow claimed compensation under the New Zealand Workman

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Compensation Act (1922) for personal injury to her husband while in the course of hisemployment. It was argued that she was not entitled as Mr. Lee was the sole owner of thecompany. The court held that applying the rule in Salomon vs. Salomon lee was a differentperson from Lee Air & Co LTD as such her husband died in the course of working for thecompany and she was entitled to compensation. In another case TUNSTANN vs. STEIGMAN(1962) 2 AER Pg 417, in this case the Landlord and Tenant Act 1954 allowed a landlord torefuse the renewal of tenancy agreement where the premises was to be used by him, when atenancy agreement was about to expire, the tenant applied for renewal the landlord refuse torenew on the ground that he wanted to use the premises under the tenancy agreement himself.The premises was a shop, he however formed a company and used the same premises forcarrying out the business activities of the company, the tenant sued arguing that the tenancy wasunjustifiably denied. The court held that by the Landlord and Tenant Act, application for renewalcould only be denied where the landlord was to use the premises himself, in this case applyingthe principle in SALOMON, the landlord used company not himself and there is the separationbetween company and himself. This principle found its application in Nigeria through theprovisions of Company Legislation and Case law e.g. in MARINA NOMINIES vs.FEDERAL BOARD OF INLAND REVENUE (1980) 5 NWLR Pg 48 where the SC held thatan incorporated company is a separate legal entity. Similar holdings were made in several casessuch as FEDECO vs. DEACON T.F AKOREDE (1993) 4 NWLR Pg 205, ODURU vs.SACH MOTISON (1992) 6 NWLR Pg 239, ADETOTI vs. AYORINDE (2001) 6 NWLR Pg343.

Section 37 CAMA adopts this golden principle as it provides “as from the date of incorporationmentioned in the certificate of incorporation the subscribers of the memorandum togetherwith such other person as may from time to time become members of the company shall be abody corporate by the name contains in the memorandum capable force with of exercising allthe powers and functions of an incorporated company including the power to hold land andhaving perpetual succession and a common seal but with such liability on the part of themembers to contribute to the assets of the company in the event of winding up as is mentionedin this Act”.

Many legal issues follow the attribution of legal entity to a registered company, these are;

1. The Liability as a Separate and Distinct entity; a company shoulder all its liabilities. It isnot that such liabilities are not to be shoulder by its members as long as the companyremain above concern members too are not in any way liable for any liabilities which acompany incurred at this stage it is the company as a legal entity that is answerable.However, when a company goes into liquidation and its assets is not enough to settle theliabilities of the company which it incurred while a going concern and which was notsettled until it went into liquidation the members are liable subject to the nature of thecompany cooperation. If the company was an unlimited company in this case themembers are liable to contribute in other to settle the liabilities where the company was

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registered as a company limited by guarantee the members are liable to the extent of theamount each member pledge to contribute. In case the company was registered as acompany limited by shares, the extent of the liability is where a member had not paid forthe balance or nominal value of the shares to hold in the company after that the membersare not liable as illustrated in SALOMON’s case.

2. Capacity to Sue and be Sued; as a separate legal entity, a company acquires the locusstandi to sue and be suede. Where a company wants to enforce its rights, it sues in its ownname i.e. the name with which it was registered. Similarly, if there is any liability againstthe company the company is sued in its registered name in other for it to discharge thatlegal obligation. In suing or where the company sues the personality of the members whoformed the company are not relevant. In SPARKS ELECTRICITY LTD vs.PONMILE (1986) 2 NWLR Pg 516, the plaintiff was a member of the company, hesued in his capacity as a member to compel the defendant for account and restitution forallegedly misappropriating the company’s property, the CA held that it is the companyand the company alone that has the capacity to sue the members as a result of theattribution of legal entity to a registered company have no legal capacity to sue. Similarlyin OKOMU OIL & Co LTD vs. ISA HILL, the SC held that it is the company and onlythe company that has the capacity to sue.

3. Capacity to Own Property; as a legal entity, all that belongs to the company is/are itsown, properties usually owned by the company are the premises including all thestructures, machineries and goods, cash in banks etc. others includes charges on hislanded property, insurance policy and light all this belongs to the company and not themembers, the members cannot claim the properties belonging to the company, forinstance in the case of MACAURA vs. NORTHERN INSURANCE COMPANY LTD(1925) AC 619, one Mr. Macaura and owner of a timber estate assigned the whole of it toa timber company kwnon as Irish Canadian Saw Mills LTD at the consideration for42,000pounds fully paid shares of the company at 1pound each . later Mr. Macauraensured the timber estate against fire policies in its own name, the timber estate gotdestroyed by fire Mr. Macaura claimed for the policy, the court held that Mr. Macaurahad not insurable claim in the timber estate as it belong to the company. Section 37allows a company to own landed property.

4. Perpetual Existence; As a result of the separation of the company from its members byvirtue of attribution of legal entity of a company, a registered company is said to enjoyperpetual existence, this is to say even if all the members of the company die that will notamount to bringing an end to the company the company continues to exist even after thedeath of its members, the only way of bringing an end to a registered company is bywinding up through the established or laid down procedure in winding up of a company.

5. Capacity to Borrow Money; a registered company as a legal entity has the power toborrow money for the purposes of pursuing its object, this capacity is however given onlyto public company, when a company borrows money the procedure under Section 166 is

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to create debentures to secure such loan this was illustrated earlier on in the case ofSALOMON’s.

6. Another consequence of attributing of legal entity to registered company is that aregistered company has nationality, domicile and residence; the nationality isdetermined by the law under which the company was registered, all companies registeredunder CAMA have Nigeria as their nationality. The domicile of a company is the placewhere the company was registered e.g. all companies registered in the FCT Abuja willhave Abuja as their domiciles. The residence of a company is where the company carriesout its business activities or a material part of it.

MEMORANDUM OF ASSOCIATION

The MOA is the fundamental document of a company, it governs mainly the relationship of thecompany and the outside world, it contains some important information about the name,registered office, object, liability and the pledge by the members to be bound as an association bywhat is therein contained in the memorandum. Stressing the importance of memorandum, BowenJ in GUINESS vs. LAND CORPORATION OF ISLAND (1882) 22 Ch.D @ 349 “thememorandum contains the fundamental conditions upon which a loan the company is allowedto be incorporated they are conditions introduced from the benefits of the creditors and outsidepublic as well as the shareholders”.

Section 27 provides that no company will be registered unless it has a memorandum whichsatisfied the prescribed manner and requirements

(1). “the memorandum of every company shall state;

a. the name of the company,b. that the registered office of the company shall be situated in Nigeria,c. the nature of the business(s) which the company is authorized to carry on or if the

company is not formed for the purpose of carrying on business the nature of theobject or objects for which it is established,

d. the restriction if any on the powers of the company,e. that the company is a private or a public company as the case may be,f. that the liability of its members is limited by shares or by guarantee or is unlimited

as the case may be.

(2). If the company has a share capital

a. the memorandum shall state the amount of authorized share capital not being lessthat 10,000naira in the case of a private company and 500,000naira in the case of apublic company with which the company proposes to be registered and the divisionthereof into shares of a fixed amount,

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b. the subscribers of the memorandum shall take among them a total number ofshares of a value of not less than 25% of the authorized share capital, and

c. Each subscriber shall write opposite to his name the number of shares it takes.

(5). the memorandum shall be decided by each subscriber in the presence of at least onewitness who shall attest signature.

(6). the memorandum shall be stamped as”.

From this provision, each memorandum must contain and satisfy the requirements on thefollowing clauses;

1. the name clause,2. the registered office clause,3. the object clause,4. the liability clause,5. the capital clause,6. association clause, and7. the subscription clause.

The Name Clause

The name clause is the most important part of clause of memorandum of association a companyis known and identified by its names, a company sues or is sued by its names, allcorrespondences by and to the company are done using the names of a company. The names of acompany are printed or affixed on the offices and places where the company conducts itsbusiness activities. Section 29&30 regulates the name or names of a company. As a rule, personswho could be promoter or the legal practitioners involve in the registration of a company areallowed to choose whatever name or names for the company to be incorporated. However,whatever name or names that have been chosen for a company must satisfy the followingstatutory requirements;

1. The name or names should not be similar or identical with a name or names that havealready been registered by the commission this is provided by Section 30 (1) (a). Thepractice nowadays in computer age is to conduct a search on the proposed name ornames, the result of the search would show whether a company has already beenregistered with such name or names. Section30 empowers the registrar of CAC to refuseregistering any company with a name or names which are similar or identical with acompany which has already been registered, in the same token the registrar is similarlyempowered to order for the cancellation of any company which has been registeredinadvertently after discovering that a company with similar name or names was alreadyregistered. A registered company on its own part can seek an injunction to restrain acompany registered after it bearing similar or identical names with it e.g. in NIGER

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CHEMIST LTD vs. NIGERIA CHEMIST LTD (1961) ALL NLR 171, the defendantcompany was restrained from using the word “NIGERIA CHEMIST” on the ground thatit had been registered under the name “NIGER CHEMIST LTD”. The rationale behindthis is not to confuse the public, when two companies are similar confusion is bound toarise of issues relating to correspondence, identification even suing and been sued.

2. The names of the company should not contain or include certain words like chamber ofcommerce unless such is a company limited by guarantee, under section 30 (1) (b),equally under (2) a,b,c,d under the same section a company cannot without the consent ofthe commission include in its name federal, national, regional, state or government of anyother word which in the opinion of the commission suggested or is calculated to suggestthat it enjoys the patronage of the government of the federation or the government of astate in Nigeria or any ministry or department of government. Similarly words thatsuggest or are calculated to suggest the company is connected with any misquality orlocal authority are not allowed to be included in the name or names, a company cannotuse ,,,,,

3. A company cannot use name or names which in the opinion of the commission is capableof misleading as to the nature or extent of its activities or where it is undesirable, offenceor contrary to public policy.

4. A company is not allowed to use any name that will violate any existing trade mark orregistered companies unless the consent of the owners of the trademark or business namehas been obtained.

5. Section 29 (1&5) requires that the name of the company must end by its nature in termsof liability and form, where a company is registered or to be registered as a companylimited by shares the name or names must end with the word Limited Company orabbreviated as LTD. In the case of a company limited by share which take the form ofpublic company the name or names must end with the words Public Limited Company orabbreviated as PLC. The rationale behind this requirement is to inform and warn thepublic of the nature of the company they deal with. This requirement has been in placesince the passing of the Limited Liability Act 1885, this was the Act which recognizedthe limitation of liabilities by registered companies through companies limited by shares,lord Brainwell fought and succeeded on this requirement, it was named father of limitedliability and this what he says “the mistike word limited was intended to act as a red flagwarning the public of the peril which they face if they are dealing with the dangerouslynew invention”. In the case of a company limited by guarantee the name shall end withthe words Limited by Guarantee or the abbreviation LTD/GTD, where the company is anunlimited one the name or names must end with the words unlimited or abbreviatedULTD.

Registered Office Clause

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As a requirement of Section 27 (1) (b) of CAMA, every company must have a registered office.The registered office of a company is where it can be physically traced and its wherecommunication to the company are addressed. The section request the memorandum to provide aregistered office of the company, the address is required to be physical post office, private mailbox and in our time …. are not acceptable. Furthermore, all companies whose domiciles are inNigeria, their registered office must be in Nigeria, the name(s) of the company are printed andconspicuously affected at the registered office of the company. Certain documents of thecompany are to be kept at the registered office of the company, such documents include thememorandum of association, the article of the association, the statutory books of the companycomprising the registration of members, index of the member, director’s shareholder, registrationof directors and secretary, registration of charges and other books of association. Thememorandum shall that the registered office of the company is then providing of physicaladdress.

The Object Clause

Object mean the type of business activities for which the company is registered or which thecompany pursues or carry on after its registration, where the company is non-trading companythe purposes for which the company is formed e.g. if the company is for sport then the areas arementioned, for research in science the areas of the research are provided, every memorandum isrequired to contain d specific objects for which the company is registered. In terms of the legalentity of a registered company the object clause is significant through the object clause the extentof the capacity of a registered company is determined. A company is not like natural personwhereby it has or is given the power to do whatever it likes, it powers and capacity is determinedby its object clause, as a rule anything can be listed under the object clause i.e. any type ofbusiness activity which the company is desirous of pursuing can be listed, as a rule d objectclause contains such biz activities, there are however some restrictions in setting out the objectsof the company,

1. The business or purposes must not be contrary to the provision of any law, in otherwords, the business or object must be lawful in eyes of law e.g. an object of a companycannot contain the business of narcotic drugs, importation and exportation of contrabandgoods, obscene publication and the likes,

2. The objects shall not render the company as a trade union e.g. where the object empowerthe company to be negotiating for the general welfare of its members.

The Doctrine of Ultra Vires,

A registered company is but a juristic personality, by this a company can only pursue or carry outthe business activities or purposes which have been spelt out, the object clause of itsMemorandum of Association, emphasizing this position of law, lord ….. in EASTERNCOUNTIES RAILWAYS vs. HAWKES (1855) 5 HLC Pg 331 “the legal personality of the

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company exist only for the particular purposes of its incorporation as defined in the objectclause”. By this a company must restrict and confine its activities to what is set out in its objectclause, it is another way of making the point that a company in law has no capacity to doanything outside what is provided by its object clause, where a company goes outside its objectclause such action is by law regarded as ultra vires meaning an action entered without the pre-requisite legal capacity. The doctrine of ultra vires applicable to registered companies wasestablished in the locus classicus case of ASHBURY RAILWAY CARRIAGE & IRONCOMPANY vs. RICHIE (1875) L.R 7HL 653, in this case d company was registered with theobjects of lending or hiring railway carriages and wagons, carrying the business of mechanicalengineering and general contractors, purchasing, leasing, working and selling mines, lands andbuilding. The directors entered into a contract to purchase a concession for constructing arailway in Belgium, the transaction was later ratified by the shareholders at a general meeting ofthe company, the question before the house of lords were;

1. Whether the contract for the purchase of concession for constructing a railway inBelgium was within the capacity of the company as it was not listed in d object clause ofthe company,

2. Whether by ratifying such contract by the shareholders of the company, the company wasthereby given the capacity to enter into the contract in question.

The house of lord, Per lord Cain laid down the following principle regulating ultra vires contract“a contract of this kind was not within the words of the memorandum of association in pointof fact it was not a contract in which the memorandum of association implies thememorandum of a company is as it were the area beyond which the action of the companycannot go this contract was entirely beyond the objects of the memorandum of association ifso it was thereby placed beyond the powers of the company to make the contract if so it wasnot a question of whether the contract ever is ratified or was not ratified, if it was a contractvoid at it beginning it was void because the company could not make the contract, if everyshareholder of the company had been in the room and every shareholder of the company hadsaid that is a contract which we desire to make which we authorized the directors to make towhich we sanctioned the placing the seal of the company the case would not have stood in anydifferent position from that in which it stands now, the shareholder would thereby byunanimous consent have been attempting to do the very thing which by the Act of theparliament they were prohibited from doing”. By this case ultra vires transactions are regardedas void transaction, being void transaction they stand as null and void and without any legalefficacy, in other words ultra vires transactions cannot be enforced by or against the company,secondly the members of the company at general meeting cannot ratify ultra vires transactionseven where they purported to do so their action amounts to naught.

7th APRIL, 2016

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The principles established in Ashbury’s case were applied in the subsequent cases therebyforming part of the principles of company law. In Re JON BEAU FORTE (LONDON LTD)(1953) ALL E.R 634, the company contend in its object clause the business of costumiers andgown making the company embarked on the business of making veneered panels and erected afactory for that purpose, the question aroused as to whether the company could validly engage inthe business of veneered panels. The court held that the business of veneered was ultra vires thepowers and capacity of the company as it was not listed in the object clause of the memorandumof the company. In another case INTRODUCTION LIMITED vs. NATIONALPROVINCIAL BANK LTD (1961) ALL E.R 887, the main objects for which the companywas formed was to offer accommodation and services to overseas visitors, this object was carriedon for some years the company however switched over to pig breeding as it sole business whileso engaged it raised a substantial loan from the National Bank Limited by secure debentures, thevalidity of such loan was questioned before the court, the court held that as pig breeding businesswas ultra vires to its object the loan for the purpose of such business was equally ultra vires,being ultra vires the bank was not entitled to recover it. The principles established through caseson ultra vires found its way into the Nigerian company law in other words the rules of theDoctrine of Ultra Vires were also applicable in Nigeria, this was illustrated by the case ofCONTINENTAL CHEMIST LTD vs. DR. IFEAKANDU (1966) ALL NLR Pg 1, thecompany was registered with objects for the importation and exportation of drugs, buying andselling of drugs, manufacturing and compounding drugs, the company entered into a contractwith the defendant to educate him to become a medical doctor on the condition that he practicedunder the company’s name on certain fixed salary after he qualified as a medical doctor andpractitioner the company employed him to look after both in and out patients, later on he gave uphis job with the company the company sued to recover the amount it paid to train him to becomea medical doctor and for damages as a result of his breach of contract. The court held thatrunning a hospital business and any training linked with that were outside the object clause of thecompany, the court found Dr. Ifeakandu not in breach of any contract and the company cannotrecover the amount it paid to train him to become a medical practitioner as that was outside itsobject.

Techniques of Evading Ultra Vires

The rules of ultra vires appear to be very harsh to the working of a registered company. Acompany or third party dealing with it may run into ultra vires rules, in which case suchtransactions will be declared as null and void. A company might have performed its own part ofthe contract as in the case of Dr. Ifeakandu but as a result of the ultra vires rules it cannot benefitor even recover the price of such contract, a third party may as well be a victim of ultra vires ruleas in the case of Introduction’s case where by the bank supplied the loan facility to the companybut only to discover that it could not recover due to the application of the ultra vires rules, so inother to avoid this, draftsmen involve certain techniques while drafting the object clause ofmemorandum of association. The common ones are;

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1. Inflating the object; by this technique, the object clause id made to contain several typesof business activities all the foreseeable business activities under the sun are listed, thiswill allow the company to change over from one business to another as the object is richenough to contain all the businesses which the company can undergo even in the distantfuture.

2. The independent clause otherwise termed as COTMAN vs. BROUGHMAN RULE; bythis technique a company is trying to avoid the rules of construction applicable to theobject clause and the memorandum as a whole. In deciding on ultra vires transaction, thecourts examine the name or names of the company and the main business listed under theobject clause, in so doing the courts determine what is the main sub-straightom or mainbusiness of the company, once this is done any business which cannot be directly linkedup or connected with the main business of the company are declared as ultra vires eventhough stated in the object clause, in order to avoid this words such as “all the objects setout in a series of paragraphs shall in no manner be limited or restricted by inference toor inference from the terms of any paragraph or name of the company”. A provision ofthis nature will make every business listed in the object to stand on its own andindependent of the other business listed in the object.

3. General concluding words otherwise termed as BELL HOUSE CLAUSE; Amemorandum after providing the catalogue of its business activities may end with generalwords which empower the directors to carry out any other businesses though notmentioned in the object clause which they believe to be advantageous to the company,words like this “to carry any trade or business whatsoever which can in the opinion ofthe board of directors be advantageously carried on by the company in connection withthe general business of the company”. Words like this empower the company carryout/on other business activities even though outside the object clause.

Reforms of Ultra Vires Rules

In the course of reviewing the company laws of many countries, the ultra vires rules werediscovered to be of no use to the company so many countries expunged the rules from theprinciples of company law, Nigeria followed suit in 1990 when CAMA was promulgated,Sections 39&40 which deals with the ultra vires rules provides; Section 39

(1) “a company shall not carry on any business not authorized by its memorandum and shallnot exceed the powers conferred upon it by its memorandum or this Act,

(3) notwithstanding the provisions of subsection 1 of this section no Act of a company and noconveyance or transfer of property to or by a company shall be invalid by reason of the factthat such act, conveyance or transfer was not done or made for the furtherance of any of theauthorized business of the company or that the company was otherwise exceeding its objectsor powers,

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(4) On the application of ….

a. Any member of the company, orb. The holder of any debentures secured by a floating charge overall or any of the

company’s property or by the trustees of the holders of any such debentures the courtmay prohibit by injunction the doing of any act or the conveyance or transfer of anyproperty in breach of subsection 1 of this section”.

By these provisions the rules of ultra vires have been statutorily reviewed to mean;

a. Ordinarily a company is expected to carrying out/on only such business activities listedunder the object clause of its memorandum,

b. The fact that transactions including conveyance done by the company are outside itsobject such transaction or conveyance will not be invalid on the ground of that reason,this means that ultra vires transactions including conveyance are no longer voidtransaction. The legal implication is that neither the company nor the third party isentitled to raise the plea of ultra vires in order to avoid liability from such transactions.

c. Both shareholders and debenture holders of a company are now given the power toquestion a company from pursing ultra vires transaction, this power is exercised throughobtaining an injunction restraining the company from pursuing ultra vires transactions.

The Liability Clause

The clause contains the type of company in terms of its liability. Where the company is limitedby shares this is provided in the same way where the company is limited by guarantee or isunlimited is provided, the normal phrase is the company is a company limited by shares.

Capital Clause

This part of the memorandum contains the nominal share capital or the authorized share capitalof the company, this is the amount of money with which the company carries business activitiesafter its incorporation. Section 27 (2) (a) requires that for a private company the share capitalmust not be below #10,000 while #500,000 in the case of a public company, the amount ofmoney is them converted into shares and monetary value is given to the shares e.g. the nominalshare capital of the company is #10million divided into 10million shares of #1 each.

Subscription Clause

Under this clause the names and particulars of the persons who have agreed to subscribe to theshares of the company from its memorandum are provided, it is usually in a tabular formproviding for the particulars of the subscribers and the number os shares subscribed by themopposite their respective name. by the requirement of Section 2 b at least 25% of the nimonal

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share capital must be subscribed under this clause, 1 person is to witness each subscriber of theshares, a subscriber is not a competent witness for this purpose.

Association clause

This is the clause dealing with the subscriber’s commitment to be bound by the provisions of thememorandum of association and that they have agreed to the number of shares which theysubscribed and appear opposite their names. In the case of a company limited by shares thenormal association clause reads “we the several persons whose names and address are subscribedhereto are desirous of been formed into a company in pursuance of this memorandum ofassociation and we respectively agree to take the number of shares in the capital of the companyset opposite our respective names”.

MISCELLANEOUS PROVISION OF MEMORANDUM

A registered memorandum of association is classified as public document, by this the public isdeemed to know its contents. It is also to be opened to public inspection and the company isunder duty to produce it to any person on demand subject to following the laid down procedure.Memorandum is among the documents that are to be kept in the registered office of thecompany, every member of the company is entitled to a copy of the memorandum of associationas provided by Section 42. Memorandum of association once registered is regarded as a contractunder seal thereby having binding effects, the binding effects covers the members of thecompany and the outside world dealing with the company, by its binding nature, the companyand the outside world are bound by all that are thereby contained in the memorandum ofassociation, this covers issues relating to the names, registered office, objects, share capital andthe rest, a company or third party cannot act or claim as otherwise contained in the memorandume.g. where a company act ultra vires even by the provisions of Sections 39&40, the members andshareholders can restrain the company through an injunction. Where a company is registered asan unlimited company, the members are bound to contribute to settle all the liabilities of thecompany after winding up in case the asset is found insufficient. Similarly where a company isregistered as a company limited by shares the third party cannot demand the members to settlethe liabilities of the company where the assets cannot do so after winding up.

Section 41 provides the binding nature

(1). “subject to the provisions of the Act, the memorandum when registered shall have theeffect of a contract under seal between the company, its members and officers and themembers and officers themselves whereby they agree to observe and perform the provision ofthe memorandum of association as altered from time to time in so far as they relate to thecompany”.

While interpreting section 41 the Court of Appeal in the case of LADEJOBI vs. ODUTOLAHOLDINGS LIMITED (2002) 3 NWLR Pt 753 Pg 121 @ 152 states “the memorandum

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when registered becomes a binding contract between the company and its members andofficers and between members and officers themselves its provisions are binding on the partiesthereto any contravention of the provisions is actionable at the instance of the interestedparty”.

ARTICLES OF ASSOCIATION

The second important document of a registered company is the articles of association. Thearticles of association contains how a registered company is managed, they deal with on mattersrelating to the day to day management of the affairs of the company, it provides for the powersof the directors, secretaries and other officers of the company who are saddled with the day today management of the affairs of the company. The articles also provide for the rights andobligations of the members of the company to the company much as it provides for the rights andobligations of the company to its members. As a rule the memorandum of association isconsidered especially on areas dealing with the outside relationship of the company, prevailsover the articles of association. When there is conflict on this matter the memorandum prevailsbut where the conflict is on issues which are exclusively within the jurisdiction of the articles,the articles in this situation prevails over the memorandum of association.

Contents

Section 33 provides that every articles of association must contains and provide detailed rulesand regulations governing the following matters;

1. Share Capital; this is the amount with which the company is registered, the articlestherefore regulate all issues relating to the shares of the company, this include the amountof shares which is to be issued to the public, how the invitation to the public is made,manner or procedure of subscribing for the shares, classification of the shares intoordinary, preferred and differed if any and commission on shares. Other issues to beregulated by the articles on shares includes shares held on trust, shares certificate, transferof shares, transmission of shares, conversion of shares into stocks, increase reduction andconsolidation of shares, share warrants and every other issue on shares.

2. Borrowing power; a public company is empowered to borrow money for the purpose ofpursing the objects of the company. The articles of association shall contain that powerand regulate on the extent of the amount which the company can borrow, how the powersto borrow money are to be exercised, the circumstances under which such powers areexercised and who exercise that powers and such other related issues.

3. Meetings of the company; the policies and resolutions on the management of the affairsof a company are arrived at during the meetings of the company. The articles thereforeshall contain regulations on the meetings of the company which are usually the statutorymeeting, annual general meeting and the extraordinary general meeting. The articles shallprovide rules on how any of these meetings is convened, the procedure at such meeting

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particularly covering the chairman of the meeting, the secretary agenda business and thepersons entitled to attend such meeting whether in person or by proxy, the articlessimilarly provides for the point of such meetings and the procedure for arriving atresolutions at such meetings.

4. Directors of the company; the powers of the company are mainly exercised by thedirectors on its behalf. The articles must provide detailed regulations on the number ofthe directors of the company, appointment, tenure of office, remunerations, powers,retirement, rotations and appointment of alternate directors must be covered by thearticles. The articles shall as well cover issues on the meetings of the board of directors,managing directors, executive directors and every other issue on the directors of thecompany.

5. Seal of the company; company authenticates all the transactions it entered throughaffixation of its seal, seal represent the signature of a registered corporation. The articlesmust provide rules governing the form of the seal of the company when the seal of thecompany is to be affixed, who uses the seal of the company, circumstances under whichthe seal of the company can be used and the custodian of the seal.

6. Dividend and Reserve; the main objective of a company which carries on businessactivities is the gain in the profit of the company. The articles shall therefore provide howthe profit of the company in the form of dividend is to be distributed to its members,issues on the declaration on the distribution of the dividend, the fixation of reserved fromthe dividend, capitalization of the dividend and every other issue related to dividend is tobe regulated by the articles.

7. Account; the articles is to contain rules governing the books of account of the company,keeping proper books of account and other issues relating to the preparation andpublication of an annual profit and loss account of the company, the balance sheet of thecompany and similar related issues.

8. Audit of the company; as a rule the books of account of the company must be audited,the articles of association therefore provides on the appointments, duties, remunerationsand similar important issues relating to the auditing of the books of account of thecompany.

9. Notices; before such persons entitled to attend any meetings of the company notice ofsuch meeting are issued to them. The articles of association provides on the form of suchnotices and how such notices are sent to the members who are entitled to attend themeetings of the company.

10. Winding up; the articles of association makes provisions on how the company is to bewound up especially in the case of voluntary winding up. The articles regulate on matterswhich are consequential to winding up such as the right of the preferential shareholders inthe asset of the company, appointment and duties of liquidators and such other relatedmatters.

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11. Indemnity; the articles of association provides on how the directors, secretaries and otherofficers of the company are to be indemnified for any loss the suffered in the course ofmanaging the affairs of the company. In addition to these matters the articles may containany regulation towards effect management of the company and the realization of therights and obligations of the members and the company.

Effect of Articles of Association

Articles of association like memorandum of association is treated as a contract under sealbetween the company and its members, once registered it therefore becomes valid andenforceable contract on the company and on its members, Section 41 provides;

“(1). Subject to the provision of this act the …… articles of association when registered shallhave the effect of a contract under seal between the company and its members and officersand between the members and officers themselves whereby they agree to observe and performthe provisions of the articles as altered from time to time in so far as they relate to thecompany, members or officers as such”. The Court of Appeal in LADEJOBI interpreted theeffect of registered articles in these words “the…. Articles of association when registeredbecomes a binding contract between the company and its members and officers and betweenmembers and officers themselves it provisions are binding on the parties thereto anycontravention of the provisions is actionable at the instance of the interested party”. Thebinding effect of the articles is seen from three (3) angles;

1. The company is bound by its provisions,2. The members are bound by the provisions of the articles, and3. The relationships between the members of the company per members are as well

regulated by the articles.

The Company is Bound by its Provisions

The articles constitute a binding contract on the company, the articles provides the right andobligation of the members in the company. In the cause of dealing with it members the companymust strictly abide by the provisions of the articles, a member can always enforce his rightagainst the company as provided by the articles of association. The courts are willing to order acompany to be bound by the provisions of its articles e.g. in WOOD vs. ODESA WATERWORKS COMPANY (1889) 42 Ch.D Pg 636, the company passed a resolution to paydividends not in cash contrary to the provisions of its articles, a member sued the company andchallenged the resolution of the company to pay the earned dividend in debentures contrary tothe provisions of the articles which stipulates such payments to be made in cash. The court heldthat as the articles constituted a contract between the company and its members, the companywas bound to pay dividend in cash to the members, the company was not allowed to change the

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position of the articles by paying dividends to the members in debentures. In another caseOBIKOYA vs. EZENWA (1964) 2 NMLR 133, the articles of association provided that apermanent director shall not vote for the removal of another permanent director, at a meeting ofthe company a special resolution was passed altering this position and thereby giving power tothe permanent director to vote for the removal of another permanent director. At the samemeeting and before the special resolution was confirmed by the court, the company purported toremove the plaintiff as a permanent director, he sued challenging his removal. The court heldthat the articles constitute a binding contract between the company and its members and since thepurported alteration of the articles amounted to nothing the removal was invalid as a permanentdirector voted contrary to the provisions of the articles.

The Members Are Bound By the Provisions of the Articles

Through the articles of association the members of the company…. in favour of the company andare therefore bound by its provisions. If there is any obligation to be discharged by the membersto the company or that the articles provides for the procedure of exercising their rights in thecompany members are bound by such provisions e.g. in PICKMAN vs. KENT OR RUMNYMARSH BREEDERS ASSOCIATION (1915) 1 Ch.D Pg 88, the articles of associationprovided that in case of any dispute between the company and any of its members such disputeshall be referred to arbitration, when dispute arose between a member and the company themember brought an action before a court of law. The court held that as the articles of associationconstitute a binding contract on the members such a member must refer his dispute to anarbitration as required by the articles and not to the court of law.

Members Are Bound Inter Say

The relationship between the members of the company per say is regulated by the articles. Thisis to say where the articles regulate the relationship of the members of the company in theircapacities as members, the members are bound by such provision. Lord Arshell in WENTONGvs. SUFFERING (1897) AC 299 @ 315 says; “it is quite true that the articles constitute acontract between each member and the company and there is no contract in terms betweenindividual member of the company but the articles thus nonetheless regulate their rights intersay”. E.g. in the case of Re FIELD vs. HUNTS (1958) 2 ALL ER 194, the articles ofassociation provided that any member who wished to sell his shares should inform the directorswho will take the shares equally between them at a fair value, the plaintiff called upon thedirectors to take his shares at a fair value as provided by the articles but failed to do so, hebrought the action to compel the directors to buy his shares at a fair value. The court held that thedirectors were bound by the provisions of the articles in which case they must buy the shares ofthe member at a fair value. In another case HOLLAND’s TRUSTEES vs. STEEL BROSCOMPANY (1901) Ch.D 275, the articles of association provided that where a memberbecomes bankrupt, his shares should be sold to certain members at a fair price, when a memberbecame bankrupt his trustees claimed the shares and contended that they were not bound by the

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articles. The court held that as the articles regulates the relationship of the members inter say, theshares of the bankrupt member must be purchased only by a member and not an outsider, thetrustees were bound to accept the provisions of the articles.

FORM OF MOMERANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

Section 28 CAMA requires that MOA and AOA must conform with the form provided under thissection. The Registrar General is empowered not to register any MOA or AOA which does notconform with the prescribed form. The section provides;

“Subject to the provisions of Section 27 of the Act, the form of MOA of

a. A company limited by shares,b. A company limited by guarantee, andc. An unlimited company

shall be as specific in tables B, C and D respectively in Schedule 1 to this Act or as near thatform as circumstances admit”.

The schedule provides piecemeal for all the types of company. Although, it’s not detailed toaccommodate all the peculiarities of a given company but it must substantially conform to theform.

Similarly, Section 34 requires that the AOA shall conform to the form provided by Part 1, 2, 3,& 4 of table 1 in schedule 1. However, with such alteration, addition or omission as may berequired in a given circumstance. So long the form is retained, it is quite admissible for the MOAand AOA to contain all the peculiarities of a given company, and this is covered by Section 28CAMA which requires the MOA to be as near to the form as circumstances permit and underSection 34 which allows alterations, additions and omissions in order to accommodate thespecialty of a given company.

Memorandum and Articles must be in printed form containing paragraphs which are numberedconsecutively. Those memos and articles shall be signed by each subscriber of the memorandumof association in the presence of at least one witness who shall attest the signature.

Finally, the articles shall the same stamp duty as if they were contained in a deed.

Drafting Techniques

In order to comply with the statutory requirement on the forms of memorandum and articles ofassociation, the relevant table dealing with the company in question is referred to the particularsof the company are provided using the specimen form but with such addition/alteration/omissionin order to include all the particulars of a given company.

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Another way is to find an already registered memorandum and articles of association, using itssubstitution, alteration and omissions are done in order to include the particulars of the companyin question.

Alteration of Memorandum of Association and Articles of Association

By the provisions of Section 37 & 41 CAMA, registered memorandum and articles are treated asbinding contract on the company, members and the outside world dealing with the company. Thebinding effects remain so unless altered in accordance with the provisions of the Act. Section44(1) CAMA prohibits a company from altering any part of its memorandum and it provides; “Acompany may not alter the conditions contained in its memorandum except in the case and inthe manner and to the extent for which express provision is made under this Act”.

By the provision of the Act, memorandum which has been registered or registered memorandumcan only be altered by the following laid down procedures with respect to each clauses.

Name Clause

Under Section 29, 30 & 31, the registrar general is empowered to order for the alteration of thename clause of a memorandum of association which he avertedly registered but with a name thatresembles an already registered company. Similarly, such order can be given where the RegistrarGeneral discovered a name or a registered name which conflict with an existing trademark orbusiness name.

The Object Clause

The object clause can be altered by special resolution. In the case of share capital clause, it canbe altered by ordinary resolution and the alteration can be for any of the following reasons;

i. To consolidate all the shares of the company and division into shares of larger amountunder Section 100(1)(a),

ii. To sub-divide its shares into shares of smaller amount under Section 100(1)(b),iii. To convert in sphere of share into stocks under Section 100(1)(c),iv. To cancel and issue shares under Section 100(1)(d), andv. To increase its share capital.

In the case of reducing its share capital, a company can only do this if permitted by its articles.Where the articles so permit, a special resolution must be passed for the reduction of its sharecapital, such resolution must be confirmed by a Federal High Court. The remaining clauses ofthe memorandum can be altered by special resolution under Section 47. In the case of Articles ofassociation, Section 48(1) provides; “subject to the provision of this Act and the conditions orprovisions contained in its memorandum, a company may by special resolution alter or add toits articles”.

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By this provision, a company is allowed to alter any paragraph of it Articles of association. Thiscan be done by addition, deletion or by entirely substituting any paragraph or all the paragraphswith new ones. In effecting the alteration of any part of the memorandum or any paragraph of thearticles, the following procedure is adopted;

a. The provision dealing with passing of resolution as provided by the article or the Act isfollowed. After the resolution is passed, a new memorandum and/or articles are draftedcontaining the alteration, the same procedure for registration is followed i.e. it is againregistered with the CAC. However, two (2) copies are submitted to the commission, theold one and the new one reflecting the alteration.

b. Where the alteration affect the name of the company, the Registrar General issued outanother certificate of incorporation containing the new name of the company. In all otherissue however, the certificate is retained only that the altered memorandum of associationor articles of association are substituted with the old one at the commission.

LIFTING THE VEIL OF INCORPORATION

SALOMON’s case and Section 37 CAMA have laid down the golden principle applicable toregistered company and corporation. By that principle once a company is registered, it is treatedat law as a legal entity separate and distinct from its members by this principle, it is among otherthings the company the pierce its responsibilities and liabilities. However, there are certainsituations and circumstances whereby this golden principle is discarded. When the rule isdiscarded, the veil of incorporation is said to be lifted, once the veil is lifted, the law looks at thenatural persons who take the cover of the placard of incorporation in order to avoid liability andresponsibility.

The natural person(s) under that situation will be made to bear the liabilities and responsibilitiesinstead or in-place of the company. On this issue lord Denning M.R in LITTLEWOODSMAIL ORDERS STORES vs. IRC (1969) 1 WLR Pg 124 @ 125 said as follows; “Thedecision in SALOMON has to be watched very carefully, it has often been supposed to court aveil over the personality of the company through which the court cannot see, but is not true.The court can and do often draw aside the veil, they can and often do full of the marks theylook to see what nearly lies behind”. Contribute on the issue Dervin J in BANK vs.SLATFORD (1953) QB 248 @ 278 said; “There are certain situations when the legislatureforges a sledge hammer capable of crack open the corporate shell”.

From these judicial statements, the veil of incorporation can be lifted by court and legislature orstatutory provisions.

Courts

Courts of law have the inherent power to decide on the appropriate circumstances when the veilof a company can be lifted for the purpose of making the natural persons liable instead of the

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company, no exhausted or exhaustible situation can be given, it is for the court to decide.However, through the decisions of the court, the court will lift the veil of incorporation in thefollowing situations;

i. Where the company is been used for the commission of fraud as a rule, courts are boundto prevent the perpetuation of fraud and would therefore not allow fraud to be perpetuatedusing the rule of corporate personality.

ii. Where the shareholders used the company as an agent, under the rule of agency, theprincipal is bound by the action of his agent. Applying this rule, the principal in this case,the shareholders or natural persons will be liable for the action of the company whichthey termed to be their agent.

iii. Where the overriding interest so demandiv. Where there are improper conduct by the members of the company e.g. where the

company becomes sham or fictitious. In GRESHAM LIFE INSURANCE vs. THEREGISTRAR OF COM. (1973) 1 ALL NLR, the Supreme Court held that the veil ofincorporation could be lifted in order to find the reality behind the corporate personalitywhen the company did not have an established place of business in Nigeria. Similarly, inBILLFORD MOTORS COM. vs. TONS (1935) Ch.D 935, a former director of theplaintiff’s company had bound himself by a covenant not to solicit. In order to avoid thecovenant, he formed a company and used the company to solicit. The court held that hecould not be allowed to escape the obligation of the covenant by hiding under thecompany.

Statutory

CAMA has listed the following situations whereby the veil of incorporation is deemed lifted andthe concern natural persons are the one to be liable instead of the company;

i. Where the members of the company fall below the minimum statutory requirements;under Section 18 CAMA, a company at all material time must have at least two (2)members. So, where a company having only one member but continue to carry businessas a company for more than six (6) months, every director or officer during that time isliable jointly and severely for the debt the company incurred during that time. This isprovided by Section 93.

ii. Where the number of the directors becomes below two (2); Section 246 CAMA requiresthat every company must have at least two (2) directors. In a situation where at the timeof a contract or any transaction or carrying out business activities, the number of directorsfall below two (2) every director and member of the company will be liable underSection 246(3) CAMA for all the liability and debts of the company provided that suchpersons are aware of this fact and the business was carried out six (6) days after.

iii. Personal liberty of directors/officers; where a company receives money by way of loanfor a specific purpose or receives money or property by way of advanced payment for the

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execution of a project or a contract, every director/officer of the company who fails toapply the money or property for the purpose for which it was received with intent todefraud will be personally liable to the party from whom the money or the property wasreceived. This is covered by Section 290.

iv. Reckless/Fraudulent Practices; where in the course of winding up of a company, itappears that any business of the company has been carried out in a reckless or fraudulentmanner or with intent to defraud the creditors of the company , the court may on theapplication of the receiver, liquidator, creditor or contributor of the company to declarethat any person(s) who were knowingly parties to the carrying on of business ispersonally responsible for all debts or other liabilities of the company or as the court maydirect. This is under Section 506(1).

v. Company not mentioned on the bill of exchange; Section 631(1) CAMA, everycompany is required to have its name(s) mentioned in legible character in all bills ofexchange, promissory note, endorsement and checks. If any officer of the company orany other person on its behalf issues or authorizes the issue of bill of exchange,promissory note, endorsement, checks or order for money or goods without the name ofthe company so legibly mentioned, such person will be personally liable to the companyunless otherwise the amount is dully paid to the company.