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29 Dec

COMPANY LAW 1.4 INCORPORATION AND PRE-INCORPORATION CONTRACTS

INCORPORATION OF COMPANIES.

How can a company be formed?

  1. By Grant of Royal Charter: This operated under the monarchical systems. Given to ecclesiastical bodies and others. E.g. Bank of England and Whales.
  2. By Registration: either as a private or public company. After dividing into Public or Private Company, there is a further sub division of Private/Public companies Limited by Shares[1], those limited by guarantee[2] and those with Unlimited Liability.
    1. Private Companies: is a company declared to be private by its memorandum-Section 22(1) The total members must not exceed fifty (50[3])-Section 22(3). The Articles of a private co should restrict[4] transfer of its shares-Section 22(2). It cannot invite the public to subscribe to/buy its shares nor can it ask the public to deposit money with it. Except companies so authorised by law-Section 22(5). Its minimum Authorised Share Capital is #10,000-Section 27(2) CAMA. If the co contravenes the provisions of Section 22, it shall be treated as if it were not a private company-Section 23.
    2. Public Companies: A co stated to be public under its memorandum. It must have a Minimum Authorised Share Capital of #500,000-Section 27(2). Generally has no restriction on number of shareholders or transferability of shares.
    3. Statutory Company: formed under special legislations regarded as the enabling law/statute. E.g. PHCN, NNPC, the University of Lagos, etc.

DISCUSSIONS:

On the Registration/Incorporation Process: Any association or group carrying on business for the purpose of making profit with more than 20 members must be registered as a company[5]Section 19.

We look at members’ capacity[6]. Section 18 provides that they should be not less than 2 persons. These “two persons” may be humans or body corporates or a mix of both.

Requisite documents[7] are to be lodged with the Registrar-General of Companies, CAC. After the Registrar scrutinises the documents[8], requisite fees are paid and a Certificate of Incorporation is issued or refused[9] (with reasons).

An aggrieved applicant whose application has been refused may apply to the commission (CAC). The commission would then apply to the court within 21 days of receipt of the aggrieved’s application. Cases have shown that the court would compel the CAC to register the company in deserving circumstances… especially where there is no illegality and the provisions of the Act have been complied with-R V Registrar of Companies. In Lasisi V Registrar of Companies an order of mandamus was issued to compel the registrar to register British Leyland International (Nigeria) noting that the Act has been complied with and the memorandum of the company is lawful. In King V Registrar of Companies, the court noted that the registrar should properly exercise his discretion and not be influenced by extraneous factors. See Also Kehinde V Registrar of Companies.

The certificate of incorporation is rebuttable proof that the company is duly registered. A person who asserts that the company was not incorporated should prove his assertion-Abakaliki LGC V Abakaliki Rice Mills Owners Enterprises. Section 634 EA. Consequently, those who assert that a co has been incorporated should prove same by producing the certificate of incorporation- Registered Trustees of Pentecostal Assemblies of the World Inc V Registered Trustees of African Apostolic Christ Church.

Where a certificate was procured by duress, fraud, violation of an enactment or issued in error, the court has the power to review and nullify the certificate-R V Registrar of Companies.

 

On Conversion of a Company from one form to another.

Note that a company limited by guarantee cannot be converted.

  1. By Default: Where a private co contravenes the provisions of Section 22, it would no longer be regarded as a private co-Section 23.
  2. Private to Public or Limited to Unlimited Liability: First, the company must have a share capital[10]. Then the members should pass a “special resolution” saying that they want to convert from private to public or limited to unlimited (as the case may be). An application is then made to the CAC in prescribed form.
  • A co limited by shares can convert to an unlimited Liability Company and vice versa[11]Section 51.
  • A Private company may convert into a public co and vice versa-Section 53(1-8)

On Foreign Companies: A foreign company which wishes to transact business in Nigeria must be incorporated as a separate entity in Nigeria-Procter and Gamble Co V Global Soap and Detergent Industries Ltd. Section 54. WEMA Bank V NNSL. This does not however rob it of the right to sue and be sued in Nigeria-Section 60(b) Watanmal PTE Ltd V Liz Olofin and Co. in Kwame V Sucre Export (London) Ltd the appellant’s alleged that the respondent was an unregistered foreign company and could not sue in Nigeria. This contention was rejected.

On Service of Process on Companies: It can be done by delivering it to the company’s registered office or head office or giving it to a principal officer[12] of the company-Buhari V Haddy Smart Nig Ltd. For foreign companies, Order 7 rule 10 HCLL adds that it can be given to an agent of the foreign company who is within jurisdiction.


 

COMPANY PROMOTERS.

In Twycrose V Grant, defined as one who undertakes to form a company with reference to a given project and to set it going. In Emma Silver Mining Co V Lewis, defined as one who gets a company floating.

Section 61 CAMA defines a promoter as a person who takes part in forming a company… who takes the necessary steps to set it going… except a person acting in professional capacity e.g. lawyer, solicitor, secretary, etc.

It is a question of fact. Acts like; arranging for the preparation of the memorandum of the company (Garba V Sheba), Negotiating agreement for the purchase of property by the company, (Re Olympia) and so on made the actors to be regarded as promoters. He need not be a subscriber to the memorandum.

At common law, a promoter is neither the agent nor trustee of the company-Laguna’s V Laguna’s: Omnium Electric Palaces V Baines. This is because the company is not in existence at the time of promoters acting- Kelner V Baxter. An Agent cannot act on behalf of an inexistent principal. The current position under Section 62(1) is that promoters stand in a fiduciary position.

DUTIES OF A PROMOTER.

We have established that Section 62(1) puts him in a fiduciary position. He therefore must act with utmost good faith-Section 62 (2) and account to the company for profit made while acting as a promoter. Note that the company (after incorporation) can ratify[13] or rescind[14] a transaction which the promoter purported to carry out on its behalf-Section 62(3). Section 62(4) removes the time bar/limitation in relation to suing a promoter.

  • A promoter should not allow his interest to conflict with that of the (proposed) company-Erangler V New Sombero Phosphate.
  • All secret profits must be disclosed to an independent board of the company. In Gluckstein V Barnes, the court held that the promoter ought to have disclosed the E20,000 profit he derived from the sale of a property to the co to be formed. In Re Leeds and Hanley Theatre of Varsities, the promoters of a company bought property and resold to the company at an increased price. They did not disclose that they were the vendors. The court held that they were to account to the company for the profit realized[15] and disclose that they were the real vendors. Although in practice, the courts are usually reluctant to rescind contracts entered into by the promoters where it would be inequitable or relatively impossible to restore the parties to their previous positions. In Lagunas Nitrate Co V Lagnas Syndicate. Where the property was sold at an overvalued rate by the promoter to the company, and the shareholders alleged that the prospectus was misleading. The court held that rescinding the contract and restoring the parties to their position was impossible as various people have changed their position in relation to the contract with the company.

The shareholders may rescind the contract or sue the promoter for damages from breach of fiduciary duties-Section 62(3) Re Cape Breton Co.

Remuneration of promoters.

In Garba V Sheba, the court held that since a co cannot contract before its formation, a promise by the company (before its incorporation) to pay the promoter cannot be enforced. Similar position was maintained in Re National Motor Mail Co, Clinton’s Co. In practice, the promoters would usually be the directors and would find a way around. For example, they usually buy the property and resell to the company at a reasonable profit (this was okayed by the court in Re Ambrose Lake Tin and Copper Mining Co). Same done in Re Cape Brenton where the purchase was E5,000 and the promoters sold it for E42,000 to the company. They got away due to lapse of time. Also in Omnium Electric Palaces V Baines, the court noted that since the promoter is neither a trustee nor agent of the company, he is not bound to disclose profit. However, since Section 62 puts the promoters in a fiduciary position, sales to the company at a profit should be disclosed… sub 4 removes the time limitation for suing a promoter.

PRE-INCORPORATION CONTRACTS

Are contracts purported to be made on behalf of the company before its incorporation[16]. Pre-incorporation contract is defined in Section 72 as “any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation”.

Incorporation contracts were not binding on the company at common law and they could not be ratified by the company even after incorporation. This is because before incorporation, the company is regarded as being inexistent, thereby lacked contractual capacity. As in Howard V Patent Ivory Manufacturing Company, the court held that an inexistent co (principal) cannot ratify. In Kelner V Baxter and Ors. A, B and C, signed a contract (while the company was not yet in existence) for the supply of goods (wine) that were to be used in the business of the company. The signatures were followed by the words “on behalf of the Gravesend Royal Alexandra Hotel Co. Ltd.”. The company was subsequently registered but quickly became insolvent. The court held that the supplier could sue the signatories personally because the contract was not binding on the company[17]. In Caligara Dairo V GlovanniSatori and Co, a contract of loan entered into on behalf of a co before its incorporation was held not to bind the company. At common law, the company could circumvent this restriction by:

  • Entering into a new contract (after its incorporation) with terms similar to the pre-incorporation contract- Transbridge Co V Survey International.
  • Provide (in the object clause) that the company would enter into a contract similar to the pre-incorporation contract-Okafor V

Although the courts usually disregarded the common law pre-incorporation technicalities to prevent fraud. In Firgos Nig Ltd V Zetters (Nig) Pools Ltd, over $7000 was spent in concluding a contract for the supply of goods to the company (yet to be incorporated). The company held that it is not bound to pay. The court held that the company is estopped from denying the transaction.

Notwithstanding the long yarns above, the current position is contained in Section 72 of the CAMA:

  • The company can ratify pre-incorporation contracts after it has been incorporated.
  • Prior to ratification (and if the company eventually does not ratify), the promoter (who purported to act on behalf of the company) would personally bear the responsibility and benefits of the contract.

In Edokpolo V Sem-Edo Wire Industries Ltd, the court affirmed the common law position, in Foss V Harbottle also followed common law position. In Edokpolo’s case, a shareholder’s agreement entered into before the formation of the company was distinguished from a pre-incorporation contract. Although this case has been criticised for regarding a shareholder’s agreement as a pre-incorporation contract?

In SocieteGeneraleFavouriser Development Du Commerce Et De L’Industrie En France V Societe Generale Bank (Nigeria), the court held that Article 11 of the pre-incorporation agreement (which stipulated that disputes of the company should be submitted to arbitration) should be obeyed by the company.

 

[1] In the event of trouble, the liability of each member is limited to the share he has in the company. His private/personal property cannot be used to settle debt.

[2] For a co limited by guarantee, the liability of the member is limited to the amount which he had agreed to contribute in the event of the company being wound up while he is a member or within one year from his cessation of membership-Section 92(4). These companies usually enjoy certain benefits like tax exemptions. However In Rev Shodipo v FBIR where the court held that although a co ltd by guarantee would be exempted from tax, it would be liable to pay tax when it engages in business.

[3] Excluding persons who are bona fide in employment of the company or retain their shares after termination of their bona fide employment.

[4] The Restriction may be absolute or pre-emptive (which gives preference to transfer to members before outsiders)

[5] Exceptions are made for Co-operative societies and partnerships for practicing law or accountancy.

[6]             The following have no capacity: :: Infants (Persons less than 18 years unless there are also two or more other capacitated promoters). :: Persons of unsound mind. :: Undischarged bankrupt. :: A person with fraudulent disposition disqualified under Section 254 from being a director of a company-Section 36. :: A corporate body in liquidation.

[7] Documents of incorporation are provided for in Section 27, 35 and 36 of the CAMA they include;  include Memo, Article, notice of address, statement of authorized share capital etc.

[8] The commission is to scrutinise the document and register within 30 days or give notice of its refusal with grounds within 30 days.

[9] Can be refused if it does not comply with the provisions of the Act or other laws. If the company seeks to carry out illegal purpose. If the subscribers are incapacitated or incompetent. If the name the company proposes to use would conflict with an existing trademark or registered business name-Section 36(1), Exxon Corporation v Exxon Nominees Ind Ltd.

[10] A co limited by guarantee does not have a share capital therefore cannot be converted to a public company.

[11] It however cannot subsequently reconvert to an unlimited LTD after converting to a Limited Liability Co-Section 51(1 and 2).

[12] Like Director, Secretary, and so on.

[13] This ratification can be by the board of directors or all members or at a general meeting after the promoter has fully disclosed the facts and nature of the transaction.

[14] In such case the prompter bears the transaction personally. Enjoys the benefit, performs the duties and suffers the liability (where any) arising from the transaction which the company refuses to ratify.

[15] The promoter can be reimbursed for out-of-pocket expenses and other legitimate expenses like charges and advertisement

[16] This should not be confused with provisional contracts which are merely made by the company before the date at which it is entitled to commence business-Re Otto Electrical Manufacturing Co, Jenkins Claim.

[17] This does not mean that the contract is invalid. It just means that the promoter would personally bear the contract. This must be contrasted with a case where the promoter signed as the company rather than on behalf of the company. In such a case, the contract would be invalid at common law. In Newborne v Sensolid (Great Britain) ltd, the signature on the contract was purported to have been concluded by the company rather than the promoter on behalf of the company. As he signed in the company’s name. This is distinguished from Kelner’s case where he signed on behalf of a co.

Isochukwu

Quite eccentric really

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