LOADING...
29 Dec

COMPANY LAW 1.11 CAPACITY AND LIABILITY OF A COMPANY

CAPACITY AND LIABILITY OF COMPANIES.

Under this, we shall be discussing the following:

  1. Constructive Notice Rule: Section 35 (1a) CAMA requires memat to be registered with the CAC. Such registration makes the MEMAT public documents. The old rule states that any person dealing with the company is deemed to have constructive notice of the company’s public documents. Lord Wensleydale noted in Ernst V Nicholls that members of the public should acquaint themselves with the nature of the co from its public documents before dealing with it. Persons dealing with the co are expected to inspect their public documents to ascertain that the transaction falls within the competence or object clause of the company else, he would have himself to blame. In Re John Beauforth (London) Ltd, a company whose object was to manufacture dresses went into a contract involving the manufacturing of veneered panels. Dealers sought to enforce the contract. Court held: They can’t, they ought to have known that the company was set up to make dresses and not veneered panels. This doctrine has been criticised by Pennington as being fanciful. The Nigerian Law reform considered the doctrine as inconvenient and impracticable. Therefore, Section 68 CAMA[1] has negated this rule. Section 68 provides that this constructive rule shall apply only to charges and mortgages.

 

  1. The Rule in Royal British Bank V Turquand[2]: The principle formulated in this case is that a third party who deals with a company in reliance with its public documents is entitled to assume that all matters of internal management had been complied with. This rule has been enacted in Section 69[3] CAMA 1990 which enshrines the presumption of regularity for the purpose of protecting third parties dealing with the company[4]. This rule has been applied in Metalimpex V A.G Leventis and Co Nig Ltd[5], Trenco (Nig) Ltd V African Real Estate Ltd[6]. Obaseki V African Continental Bank Ltd[7]. Exceptions:
  • Where there are suspicious circumstances which ought to put the third party on enquiry- Underwood Ltd V Bank of Liverpool and Martins.
  • Where the third party knows of the internal irregularity- Howard V Patent Ivory Manufacturing Co[8]. Morris V Kansen
  • Where the documents relied on by the third party is a forgery-Reuben V Great Fingall Consolidated Company.
  1. The Ultra-vires rule: Look at the discussion on Object Clause above. When a company does acts outside the objects for which it was established, the court may declare that it acted ultra-vires. E.g. Shell Petroleum starts dealing in Foreign exchange or EcoBank starts selling petroleum or INEC starts selling cars.

Strictly speaking, anything done outside the Objects stated in the memorandum is void[9] notwithstanding ratification by the shareholders. Lord Cairns in the Ashbury case noted that the rule “serves the dual purpose of protecting both investors and creditors”. In Ashbury Railway Carriage and Iron Company V Richie the company was established to manufacture and sell railway equipment, buy and sell timber, coal metal and other like materials. The co bought a concession for construction of a railway to Belgium and later repudiated the contract. Held that the company was not liable as the contract was ultra vires. The court noted that the company could use its money to make railway things but not to make railways themselves. This rule was applied in Continental Chemist V Ifeakandu. The co can circumvent this liability by altering their object. At common law, the ultra vires rule was used as a shield and a sword to vitiate contract and avoid performance. This worked hardship especially where there had been part performance by the other party. E.g. INEC may receive delivery of 200Jeeps from XYZ and co. When XYZ and co asks INEC to pay, it would then say that since it was established to conduct elections and not to sell cars, it was not liable to pay under the “ultra vires contract”. So the court began to liberalise by allowing transactions that are “reasonably” incidental to the objects of the company… as was seen in A.G V Great Eastern Railway Co[10].

Smart practitioners sought to evade the ultra-vires rule by:

  • Drafting the object clause extensively to include every conceivable objects which the company may want to pursue in future. They list a thousand and one objects in their memorandum. See Anglo Overseas Agencies Ltd V In Cotman V Brougham[11], Lord Wrenbury advocated for a plain and unambiguous specification of objects. He indicated his unhappiness regarding the practice of drafting the object clause in very wide terms noting that it only shows that the drafters are confused and mixing the term “power” with “object”. The courts responded by utilising the “main objects” rule of construction (just like the ejusdem generis rule). With this, they regarded the first few paragraphs (1-3) as the main object and other numerous paragraphs as merely ancillary.
  • In response to the Court’s response, the draftsmen started using “Independent Object Clauses”. They would insert (at the end) that each object is to be interpreted independently and not restricted by another object. This was upheld in Cotman V Brougham to hold the company liable.
  • Another devise used by the practitioners involved drafting the object clause in subjectively worded terms. This is popularly known as “Bellhouse clause”. In Bellhouse Ltd V City Walls Properties, the co’s object was to develop properties. They had a clause which gave them power to “do all such other things incidental or conducive to the above objects or any of them”. The case of Re Introductions Ltd responded to this. In this case, the co was founded to provide services to tourists. It had a Bellhouse clause allowing it to do any other acts necessary. In 1960, the co began pig breeding as its only business. The court held moving from tourism to exclusively pig-breeding was ultra-vires and the loan procured for that purpose was void. In Re German Date Coffee Company[12] the court held that once the substratum of a company has failed, the co should be wound up. As in this case the co was established to work a Swedish patent but it did not get the patent. The court held that it should be wound up. Same position was upheld in Re Amalgamated Syndicate[13] This is to prevent it from doing something else.

Assignment in the Handout: Check the Reform of the Ultra-Vires Rule.

The English Cohen Committee on the Reform of Company Law in 1945 recommended the amendment of the rule. Again, in 1962, the Jenkins Committee on Company Law Reform recommended the abolition of the rule. In 1972, the UK joined the European Community and had to reform the Ultra Vires rule in conformity with European standards. Section 9(1) of the European Communities Act 1972 removed the doctrine of constructive notice and stated that ultravires transactions would not be void if the third party acted in good faith and without notice. The English Companies Act 1985 further provided that the memorandum can be altered so as to enable companies to amend their objects to suit their new purpose or business instead of breaching the ultra vires rule.

Section 39(1) of our CAMA preserved the ultra-vires doctrine by providing that that a company cannot carry out business not authorised by its memo and should not exceed the powers by its memo[14]. Similarly, Section 40 provides that non-compliance with the Ultravires rule may be relied upon when suing the company or its members and directors. It may also be a ground for asserting that the company’s business is being carried on in an unfair, prejudicial or reckless manner-Section 39 (2). Section 65 CAMA. Section 39(3) however provides that the mere fact that the company performed an act that is not in furtherance of its business does not make it invalid. Section 39(5) provides that compensation is payable as damages to the innocent third party that has already started performing the contract. Moreover, the object clause can be amended.

Note however that the reform of the Ultra Vires rule has not affected the stand with regards to political donations. A company is prohibited from donating to political parties and the like.

AUTHORITY, POWER AND LIABILITIES OF A COMPANY.

AUTHORITY: Under this, our concern shall be: when can decisions of a human agent of the company be attributable to the company? When can a person be regarded as acting on behalf/authority of the company? Who acts on behalf of the company? Whose actions can be attributable to that of the company?

Initially, authentication by company’s seal amounted to authority. Later decisions of majority of the members in general meetings were regarded as acts of the company… later, board of directors were appointed for the day to day management of the business. Due to business expediency, certain powers of the board are delegated to individual managing directors and later, to officers and agents.

  1. Organic Theory/Doctrine of Alter Ego: Seeks to identify the human controllers of the company. Viscount Heldane LC in Lennard’s Carrying Co. V Asiatic Petroleum Co Ltd explained the doctrine of alter ego thus: “a company is an abstraction. It has no mind of its own… it needs a person… called an agent who is really the directing mind and will of the corporation. The very alter ego and centre of personality of the corporation”.

This theory regards the board of directors and the members in general meeting as the “organs” of the company. It goes to reason that third parties can treat their acts (acts of the BOD and GM) as those of the company and the company would be bound. See Section 65 CAMA.

Criticism of the Organic Theory: A company may escape liability for the acts of its other agents and officers who are not its organs. Lord Hoffmann in the Meridian Global Funds Management Asia Limited V Security Commission said that the organic theory is “misleading”. He noted that the true question to ask was who was in control of the alleged dealing/transaction? Rather than focusing on the BOD and GM. Based on the facts of the who has authority to act? As in reality, the P.A/Secretary of the Chairman may wield more powers than a managing director, In this case, two senior investment managers who were not even members of the company’s board were held to be controllers. Lord Hoffman’s theory has been criticised on the ground that it is very uncertain and the person to be blamed would not be known until the issue/facts occur.

  1. Agency: generally, an agent binds his principal (the company) with third parties provided he acted within the scope of his authority. There could be ratification where he acted outside authority. Note that a partner is regarded as the agent of the firm.
  2. Vicarious Liability: Section 66(3) CAMA ensures vicarious liability of the company for acts of its servants acting within the scope of their employment. In tort, a principal is vicariously liable for actions of his employees within the scope of their employment.

The General principle in criminal law is that there is no vicarious liability.

POWERS: DIVISION OF CORPORATE POWERS.

The primary organs are the members in general meeting and the board of directors– See Section 63 and 65 CAMA. At common law, the distribution of powers was determined by memat.

Section 65 provides that acts of the members in general meeting, the board of directors or of managing directors while carrying on the usual business of the company shall be treated as the acts of the company. This supports the Organic theory. Third parties can rely on acts of the GM and BOD except; the third party knows that the GM or BOD has not power to do conclude the transaction or act or the third party knows that the BOD, MD[15] or GM had acted in an irregular manner.

The question now is; between the members in General Meeting[16] and the BODirectors[17], who controls?[18]

Initially, the general meeting was seen as the controlling organ of the co and more superior to the BOD see Wight Company V Tahourdin. There was a shift in position in Automatic Self Cleansing Filter Syndicate V Cuminghame, where it was held that the GM cannot dictate to the board in the exercise of its management powers. Same point noted in Ladejobi V Odutola Holdings ltd, Emesim V Nwachukwu.

Section 63(3) clearly demarcates the functions of both organs except the articles provide otherwise. Furthermore, Section 63(4) provides that the board are not bound to obey/take orders from the GM when they are acting within their authority and in good faith and due diligence. Section 63(5) however provides for instances where the GM may interfere in/ perform the functions of the board:

  • When the board are disqualified or unable to act because of deadlock[19].
  • When it relates to instituting legal proceedings in the name and on behalf of the company.
  • The GM can make recommendations to (and advise) the board regarding action to be taken by the board.
  • Where it relates to ratifying or confirming actions taken by the board of directors

What about other officers and agent of the company?

Agents acts are generally not deemed to be the acts of the company except it has been authorised by the company (whether expressly, impliedly or ostensibly[20])

Prior representation or authorisation and subsequent ratification after full knowledge of the facts-Section 66(2) CAMA.

CRIMINAL LIABILITY OF COMPANIES.

Can a company be convicted for a crime? Initially, a company could not be held liable for a criminal offence since it cannot be put behind bars and it has no mind of its own to commit a fault-based offence.

Presently, it appears a co can be convicted for a crime. See Section 65, DPP V Kent and Sussex Contractors Ltd.

There are various doctrines that have been utilized to hold a company liable.

  • Lifting the veil.
  • Vicarious liability.

Viscount Heldane LC in Lennard’s Carrying Co. V Asiatic Petroleum Co Ltd explained the doctrine of alter ego thus: “a company is an abstraction. It has no mind of its own… it needs a person… called an agent who is really the directing mind and will of the corporation. The very alter ego and centre of personality of the corporation”. Also, in In HL Bolton Engineering Co. Ltd V. T.J Graham and Sons ltd: Lord Denning personified a company to the human body having brains and hands. The hands being the ones that take direction from the brains. The brains of the company being the managers and the hands being the servants. The ones that control are the brains of the company and their state of mind can be attributed to the state of the company’s mind. (This entails vicarious liability).

In DPP V Kent Sussex Contractors Ltd[21]a company was held criminally responsible under the Defence Regulation of Iran for the offence of producing false document with intent to deceive. The officers of the company that signed the document were related to the transaction.

In R V ICR Haulage Ltd, the court held that a company can be indicted for a criminal offence with the exception of offences like bigamy, perjury and murder.

Moore V I. Bresler Ltd[22], The court convicted the company, manager and sales secretary. for declaring certain false tax returns. Notwithstanding that it was done by the company’s worker with the intention to defraud the company. R.S. Welsh Criticised this case. So did Glanville Willams noting that there is no justification for the courts to extend the doctrine of vicarious liability to the area of crime noting that VL is a creation of Tort.

THE POSITION IN NIGERIA.

In Ogbuagu V The Police[23]. The appellant was the proprietor of a newspaper publishing house. When leaving Jos, he instructed the employee not to publish the paper while he was away. The servant nevertheless published the paper which contained a seditious article. The court held that the proprietor was not liable. However in R V African Press[24], a case with similar facts… the court held that both the defendant and editor were jointly liable.

In Police V Adamu[25] The court held that once a vehicle is being used to carry smuggled goods, the mens rea of the owner is immaterial because the statute regulating customs and excise is a strict liability one.

The truth is that most of these cases relate to vicarious liability. The reason being that there is lack of legislation in this area in the Nigerian courts. There appears to be no consistency between Nigerian Decisions.

There are some contemporary statutes that impose liability on companies. E.g. under the CITA, a company can be convicted for acts of tax evasion.

It appears that the company may not be convicted where it is the company that is being defrauded. In FRN V Dr, Nwoche Ojogwu and the Capital Merchant Bank[26], the MD (also promoter) floated other fraud companies which he diverted into his personal purse. The MD was sentenced to 18years and the bank was discharged and acquitted.

Note that conviction does not amount to liquidation or physically sealing the company. The company is convicted “symbolically”. In essence, it is regarded as an ex-convict and denied certain rights and privileges.

 

[1] The Section provides: “a person shall not be deemed to have knowledge of the contents of the memorandum and articles of a company or of any other particulars, documents, or the contents of documents merely because such particulars or documents are registered by the Commission or referred to in any particulars or documents so registered, or are available for inspection at an office of the company”.

[2] 1856, 6E and B 327, 25 Law Journal QB 317. In this case, the directors of the company borrowed money from a bank. It was held that the bank need not prove that there had been a resolution authorising the directors to borrow.

[3] Presumption that company’s memorandum and articles have been duly complied with, officers duly appointed to exercise the power it is carrying out and so on.

[4] Any person having dealings with a company or with someone deriving title under the company, shall be entitled to make the following assumptions and the company and those deriving title under it shall be estopped from denying their truth that‐

(a) the company’s memorandum and articles have been duly complied with;

(b) every person described in the particulars filed with the Commission pursuant to sections 35 and 292 of this Act as a director, managing director or secretary of the company, or represented by the company, acting through its members in general meeting, board of directors, or managing director, as an officer or agent of the company, has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director, managing director, or secretary of a company carrying on business of the type carried on by the company or customarily exercised or performed by an officer or agent of the type concerned;

(c) the secretary of the company, and every officer or agent of the company having authority to issue documents or certified copies of documents on behalf of the company, has authority to warrant the genuineness of the documents or the accuracy of the copies so issued;

(d) a document has been duly sealed by the company if it bears what purports to be the seal of the company

attested by what purports to be the signatures of two persons who, in accordance with paragraph (b) of this

section, can be assumed to be a director and the secretary of the company.

[5] (1976) 2 Section 91 (1976) UILR.

[6] (1978) 1 LRN 146.

[7] 1966 NMLR 35.

[8] (1888) 38 Ch. D 156.

[9] Ashbury Railway Carriage and Iron Company v Richie

[10] [1880] 5 A.C 473.

[11] [1918] A.C 514.

[12] (1881-82) L.R 20 Ch D 169 (Court of Appeal).

[13] [1897] 2 Ch. D. 600. Contrast Re Kitson and Co Ltd.

[14] In Fact, Section 39(4) provides that any member or holder of any debenture by a floating charge may apply to the court for an injunction to prohibit the doing of an act contrary to Section 39(1) (i.e. outside the company’s authorised business)

[15] The BOD may delegate one or more of their powers to a committee or appoint one or more of themselves as managing director(s). The person appointed is the Managing Director (MD)

[16] For provisions on the Members in General Meeting see Section 213 and 214 CAMA.

[17] Section 246 CAMA requires a minimum of 2 directors.

[18] In layman terms; “Who has more mouth/rep”

[19] Where one or more of the directors cannot meet.

[20] The company had represented the agent or officer as having its authority to act in that manners.

[21] 1944 1 kb.

[22] 1944 2 KBD 515.

[23] 1953 30 NLR 139.

[24] 1957 WRNLR Page 1.

[25]1944-57 15 NLR 98

[26] number 1 1997 FBTLR 179.

Isochukwu

Quite eccentric really

Leave a Reply

error: Contact 09032228252
%d bloggers like this: