Unilag Company Law 2016/2017 Answers
COMPANY LAW FIRST SEMESTER 2016/2017 ANSWERS.
UNIVERSITY OF LAGOS.
(not to be regarded as final. You may add your’s
Remember to answer each question on a new page)
ANSWER TO QUESTION ONE (1)
The vehicle through which business is carried on may come in various forms/arrangements the choice of which is determined by various considerations and circumstances. Forms of business include:
- SOLE PROPRIETORSHIP: when compared to others; is the least costly/complex form where a single person (called sole proprietor) handles/controls finance, decisions, profit, loss and responsibilities. The ripple effect is apparent in its restricted access to human and capital finance, unlimited liability and risks termination upon death of the sole proprietor. This form is usually adopted by small businesses.
- PARTNERSHIP. A partnership is a relationship between two or more persons who carry on business in common with a view to make profit-Section 3 Partnership Law of Lagos. In partnership; decisions, profit, loss, rights and responsibilities are shared between the partners (as per the stipulation in the partnership agreement, law or regulation). Unlike companies; Separate Legal Personality, perpetual succession and limited liability are GENERALLY ABSENT in partnerships. Furthermore, it should consist of not more than 20 partners except law/accounting partnerships-Section 19 CAMA.
It may be registered as a LIMITED PARTNERSHIP where partners are desirous of being more than 20 or limiting the liability of one or more partner(s) who would cease to be in active management- Generally Section 40-50 Partnership Law Of Lagos. In addition to the above, if the partnership wishes to have a separate personality, it can register as a LIMITED LIABILITY PARTNERSHIP-Sections 58 and 84 Partnership Amendment Law of Lagos 2008.
Partnerships may be dissolved by acts of the parties, court or operation of law (maybe expiration of fixed time, accomplishment of purpose, business becomes illegal or it remains only one partner.
For the purposes of Sole Proprietorship and Partnerships, it is worthy to note that where the name used (business name) is not the full name, surname, and (or) initials, or surname of the business owner or partners, such name must be registered within 28 days of commencing business-Section 573 and 574 CAMA.
- COMPANY: Unlike sole-proprietorships and partnerships; (Section 21 CAMA and Salomon v Salomon and Co shows that) upon registration (with the authorized share capital), a company acquires a separate legal entity with perpetual succession.
For the purpose of this discussion, it includes; Limited Liability and Unlimited Liability Companies but eschews Registered/Incorporated Trustees and Gte as they are non-business organizations.
A LIMITED LIABILITY COMPANY: here the liability of members are limited to shares held by them in the company. It may be PUBLIC LTD or PRIVATE LIMITED LIABILITY. In distinguishing, (Sections 22 and 27 CAMA generally shows us that) Private Companies are restricted from: -having more than 50 members, -unrestrained transfer of shares and raising capital or receiving deposits from the public.
If it is an UNLIMITED LIABILITY COMPANY, the members liability is not limited and his personal assets may be used to set off the company’s liability where necessary. This is unattractive for business purposes and is usually assumed by professionals who are willing to take personal responsibility for their obligations and services.
Essentially, in determining the status and liability of a company, we look at its Memorandum of Association specifically the name, status and liability clauses.
- STATUTORY CORPORATIONS: A separate entity (with perpetual succession, can sue and be sued) established by a legislation regarded as the enabling law/statute which governs its capacity and regulates its endeavours. For example; PHCN, NNPC. The Liability is usually limited to the amount of stock held by the members and it can raise funds through the issue of stocks. Corporations are more expensive (time and money) to establish. Furthermore, government involvement usually results in bureaucracy.
In conclusion, there is no doubt that the choice of a particular form of business association would be informed by various considerations such as the liability, object, size of members and company, sphere of operation, formalities, mode of raising capital, transferability of shares, cost of registration, legal and tax requirements, to mention a few.
ANSWER TO QUESTION TWO A (2(A))
The above dictum as expressed in Trevor v Whitworth to emphasise the capital maintenance rule which is substantiated by the following:
– A company should not purchase its own shares except it is from the profit of the company-Trevor v Whitworth.
– Stringent Requirements must be complied with before the capital of a company can be reduced. There should be a special resolution passed at the general meeting of which due notice was given to members. Such alteration should be sanctioned by the court and communicated to CAC who would in turn; issue a certificate to be annexed to the MEMO of the Company. Section 45 and 100 CAMA.
– Distribution of dividends (returns on investment) to shareholders can only be made out of the profits of the company not its capital.
– The company can only exercise its powers to the extent provided by the memorandum. Therefore endeavours outside/beyond the registered objects of the company would be regarded as ultra-vires-Section 38, 39 CAMA, Ashbury Railway Carriage and Iron Company V Richie. This is to protect investors whose considered the objects of a company before deciding to invest.
– Financial Statements disclosing the true state of the company should be made available to creditors and shareholders-Section 334 CAMA.
– Where a company is unable to pay its debt after due demand, (by virtue of Section 408(d)), a creditor can apply that it be wound up-Tate Industries Plc V Devcom Merchant Bank Ltd.
– In the event of winding up, a liquidator is usually appointed to gather the assets of the company and settle creditors first before shareholder.
– The general requirement on a company to comply with the binding provisions of Law, Memorandum and Articles of Association as they are binding on the company- Rayfield V Hands.
In conclusion, the capital maintenance rule seeks to prevent arbitrary / unjustified dissipation of company’s capital (which is the net-worth of a business) and protect the interest of the company and the Creditors (being the persons who provided the capital)
ANSWER TO QUESTION TWO B (2B)
Shares can be issued (117 CAMA) and bought provided same is done in accordance with the Law, regulations, Memorandum and Articles of Association. The ultimate aim is to ensure transparency and fair play. In view of that, the issues arising are:
– Whether Uvwiekoko Co Ltd can purchase shares in Beta Co ltd.
– Whether the shares of Beta Co. Ltd, can be issued at a premium.
ON ISSUE ONE: Although a company is a separate legal entity (Salomon v Salomon and Co Ltd), the law may pierce beyond this abstraction by “lifting the veil” to look at the actual state of things-Yalaju Amaye v A.R.E.C. In DHN Food Distributors Ltd V Tower Hamlets LBC the court established that such could be applied to a company (called subsidiary) owned/controlled by a larger company (called holding company) by regarding them as a “single economic unit” in deserving circumstances. Although a variation could be seen in Adams v Cape Industries Ltd.
Section 165 CAMA implies that a subsidiary is not allowed to purchase/hold shares in its holding company unless such is done as a personal representative or trustee or in consolidation or such was acquired before the enactment of the CAMA.
The purported purchase of shares by Uvwiekoko Co Ltd may not be allowed.
ON ISSUE TWO:
Shares are said to be issued at a “premium” where they are issued at a price above the nominal/face value. This is allowed but (Section 120 CAMA requires that), a sum equal to the premium received on those shares shall be transferred to the “share premium account”. So as to balance the difference between the par value of the company’s shares and the amount that the company actually received for newly issued shares. The Share Premium Account should be used for specific purposes and not be tampered with or withdrawn from without the leave of the court.
In conclusion, Uvweikoko Co Ltd may not be allowed to purchase shares from Beta Co. Ltd except it come under the legal exceptions stated above and the premium shares gotten should be paid into the share premium account
ANSWER TO QUESTION THREE A (3A)
A promoter can be regarded as the person who takes part in forming a company-Section 61 CAMA. That is; to get it going/floating-Twycrose V Grant. Except (of course) a person acting in professional capacity such as a lawyer, solicitor or secretary.
At common law, the promoter was regarded as neither an agent nor trustee because the company is inexistent as at the time the promoter is acting-Kelner v Baxter. The current statutory position as contained in Section 62(1) CAMA is that the promoter stands in a fiduciary relationship to the company. By fiduciary, this means that the relationship is founded upon trust and good faith.
The consequence of such relationship (As deciphered from Section 62 CAMA) is that the promoter should act with utmost good faith. This means that; he should be honest, accountable, disclose secret profits, act in the interest of the company and should not allow his interest to conflict with that of the proposed company-Erangler V New Sombero Phosphate.
In conclusion, the relationship between a company and the promoter is quite sacrosanct and where the promoter breaches his fiduciary obligations, the company is entitled to sue him-Re Cape Breton Co.
ANSWER TO QUESTION 3B.
The above dictum by Nnamani JSC in Edokpolor v Sem Edo Wire Industries Ltd is very instructive in looking at the nature of pre-incorporation contracts being contracts purported to be made on behalf of the company prior to its formation-Section 72.
At common law, pre-Incorporation contracts were neither binding on the company NOR could it be ratified by the company upon incorporation it being regarded as an inexistent principal at the time the contract was entered into-Kelner V Baxter and Ors. In the Edokpolor’s case, the 60-40 sharing agreement of the parties entered into before the company was incorporated was in contention, the court recognised that a more binding arrangement can be made where both parties either enter into a new contract (after incorporation) with terms similar to the pre-incorporation contract (Okafor V Ezenwa) or by inclusion of the terms of the pre-incorporation agreement in the memorandum of association.
The current position under Section 72 CAMA is that the company upon incorporation (and through its members/board and after full disclosure by the promoter) can consider transaction(s) which the promoter purported to carry out on its behalf and ratify (accept to be bound) or rescind such transactions. In the latter case, the promoter is made personally liable and takes rights and responsibilities under the transaction.
In conclusion, the company may take the advice of the court in Edokpolor’s case above OR utilize the powers granted under the CAMA to decide whether it would be bound by the pre-incorporation agreement. Although (as was noted in Firgos Nig Ltd V Zetters (Nig) Pools Ltd) equity can come in where the company unfairly/fraudulently purports to evade its obligations.
ANSWER TO QUESTION FOUR (4)
Although a company is a separate legal entity (Salomon v Salomon and Co Ltd), the law may (in deserving/equitable circumstances) pierce beyond this abstraction by “lifting the veil” to look at the actual state of things-Yalaju Amaye v A.R.E.C. Section 290 CAMA.
From the facts of this case, it is necessary to consider:
– Whether Dayo, Deola, Deremi and Dado (shareholders and directors of WOMY Ltd can be made liable for 1901 Ltd’s actions.
– Whether WOMY holdings Ltd can be made liable for the damages caused by 1901 Limited.
ON ISSUE ONE: Lord Denning noted in Bolton Engineering Co V Graham and Sons ltd that a company can be likened to a human body which has a brain and nerve centre. The brain controls and the hands act. He then stated that; the directors and managers represent the directing mind and their action can be treated as that of the company. Similar position maintained in Section 65 CAMA.
Furthermore, if it is discovered that the arrangements by the directors and shareholders was reckless or done with intent to defraud, liability can be imputed under Section 506 CAMA.
On Issue Two: DHN Food Distributors Ltd V Tower Hamlets LBC establishes that where a company has various subsidiaries, the court may (in deserving circumstances) regard all the subsidiaries and the company as a single economic unit. This single economic theory was affirmed in Amalgamated Investment and Property Co Ltd V Texas Commercial International Bank Ltd recognized in Section_336(1) for the purposes of preparing financial statements.. Although a deviation may be seen in Adams v Cape Industries Ltd. This shows that it all depends on the facts of each case.
Additionally, the doctrine of vicarious liability as also found in Section 66(3) CAMA ensures that the company is liable for acts of its servants done within the scope of their employment. This is pursuant to the general principle of tort, a principal can be held vicariously liable for actions of his employees within the scope of their employment.
ANSWER TO QUESTION FIVE A (5A)
By “mandatory”, we are referring to provisions in the CAMA that must be obeyed and cannot be deviated from notwithstanding anything contained in the Memorandum or Articles of Association. Some include:
– Section 22 (2) mandating private companies to (by articles) restrict transfer of shares and (3) mandating the number of members in private company to not exceed fifty.
– Section 27 (1) stipulating certain requirements of the Memorandum of Association and (2) providing for the mandatory authorised share capital of Private and public companies.
– Section 257 disqualifying certain persons from being directors of a company.
– Section 30 dealing with prohibited and restricted names.
– Section 51 prohibiting certain conversions and re-registrations.
By “default” we are referring to provisions in the CAMA that apply where there is no provision in the Memorandum or Articles of Association stipulating otherwise. Some include:
– Section 87 on inspection of Company’s register.
– Section 117 on the power of the company to issue shares.
– Section 144(g) Stipulating that all shares rank equally unless a contrary intention appears in the company’s articles.
– Section 151 (4) on the power of a member to transfer his shares.
– Section 63 (in sub (3) and (4)) while demarcating the powers of the Board and Members.
By “enabling” we are referring to provisions in the CAMA which grants powers to a company to legally do certain things if they wish to. Some include:
– Section 31(2) enabling a company to change alter its name.
– Section 45(2) Enabling a company to alter its objects.
– Section 45(4) enabling the company to alter its share capital.
– Section 48(1) enabling a company to alter contents of its articles
– Section 118 enabling the company to issue class shares.
– Section 133 enabling company through its directors to call on shares.
– Generally a lee is granted to members in general meeting to determine when its books and registers would be inspected (provided not less than 2 hours in a day).
ANSWER TO QUESTION 5B
The Articles largely regulate the internal affairs of the company. Schedule 1 CAMA contains certain specimen Forms which companies can adopt with modifications (where necessary) to suit their preference-Section 34 CAMA, Bucknor-Maclean V Inlaks Ltd. Company promoters should however be guided by the following considerations when drafting their articles:
– Restrictions on transfer of shares: which is compulsory for private companies-Section 22 CAMA
– Pre-emptive rights:
– Modulations on class of shares.
– Modulations on meetings and voting.
– The Articles can provide the minimum and maximum number of directors provided in the former case, they are not (not less than two).
– Additional modulations on alteration of shares, manner of issue of shares, power to remove a director, duration for the company’s existence
– Any concept, word or phrase they wish to give a unique meaning should be put in the “interpretation section”.
The articles must be signed by each subscriber in the presence of at least 1 witness who shall attest to the signature… and shall bear a stamp as if contained in a deed-Section 34(4) CAMA 1990. This document therefore becomes binding
ANSWER TO QUESTION 5 C
This agreement made before the incorporation of the company may not be binding upon incorporation-Kelner v Baxter. Even from Section 72 CAMA it is automatic. Therefore Kunle may:
– Ensure that the terms of the agreement are incorporated into the Memorandum and Articles of Association of the Company (where possible). As Per Nnamani JSC in Edokpolo V Sem-Edo Wire Industries Ltd; this is “an indication of a strong desire by the contracting shareholders that the proposed company after its incorporation should execute the terms of the agreement so included”. Furthermore, the Memorandum and Articles of Association are binding on the members and company-Section 41 CAMA, Rayfield v Hands.
– To avert future legal struggles that can arise from the argument (which the other parties may put up) that the agreement is not a pre-incorporation agreement, Kunle may additionally ensure that there is a separate contract evincing this arrangement.
ANSWER TO QUESTION 5 D
No doubt various provisions of the CAMA authorise the company by its members through due process can make certain decisions and alterations-44, 45, 48, and so on.
The question essentially is; whether the majority can alter the articles in such a way that the interest of the minority shareholders can be bought off/expropriated?
The hitherto (essentially English) position (as was seen in Shuttleworth v Cox Bros Ltd) was that the courts are not willing to interfere where such acts were bonafide (that is to say for the benefit of the company)-Allen v. Gold Reefs of West Africa Ltd
However, the high Court of Australia in Gambatto v WCP Ltd dramatically turned the tide of corporate power in favour of minority shareholders by preventing an attempt by Industrial Equity Ltd (EL) to expropriate the plaintiff’s minority shareholding in WCP Ltd through an alteration of WCP’s articles of association. The court provided that an additional test of fairness must be considered. The expropriation should not be oppressive. By annexation, the CAMA provides an avenue for a minority to sue where in the interest of justice.
Therefore, the alteration must be for proper purpose (that is for the benefit/interest of the company) and then (additionally) it must be fair (both in pricing and dealing).
In conclusion, the court reversed the traditional onus of proof by placing it squarely upon majority shareholder instead of the minority claimant. In all, there is a need to strike a balance.
ANSWER TO QUESTION 6A
A company is granted certain legal advantages and statuses (Salomon v Salomon and Co.) but such should be exercised within the confines of the law, memorandum and articles of association (Section 38 and 39 CAMA) they being binding on the company-Section 41 CAMA, Rayfield v Hands. Therefore (as seen from the case of Ashbury Railway Carriage and Iron Company V Richie) embarking on endeavours that are not envisaged by memorandum could be regarded as ultra-vires. This can occur where for example, Eco-bank starts selling Petrol, NNPC starts selling Yam.
Without much ado, we shall consider:
Issue One: how to ensure that BCE Ltd would not be confined to only decoration services: Would be by couching the object clause in a wide and encompassing manner. The court in Edokpolor v Sem-Edo Wire Industries recognised this. It could list various objectives although for strict interpretation purposes, the court usually regards the first few paragraphs as the main object. Second, they may add the “Bell-House Clause”. That is; after listing the objects, they would insert the clause thus; “to do all such other things incidental to or conducive to the above objects or any of them” as was done in Bellhouse Ltd V City Walls Properties.
Issue Two: how to ensure that BCE Ltd should not partner with any other company or enterprise regarding any business opportunity except with the approval of the three friends: This can be done by incorporating these terms to the Articles and/or memorandum of Association usually under the restriction clause. The court in Edokpolor v Sem-Edo Wire Industries recognised the possibility of incorporating terms of agreement in the memorandum.
Issue Three: To enable the donation of 2 percent of the profit of the company to the Open Heavens Orphanage: Although charitable acts of a company are laudable, the court noted in Hutton V West Cork Railway Company that such donations must be reasonably incidental to the objects, bonafide and for the benefit of the company. These hurdles may however be circumvented if kkk incorporate (as part of the objects of the company) that 2 percent of the profit of the company would be donated to Open Heavens Orphanage. Furthermore, (for the donation being a CSR and Charitable endeavour) they may be entitled to tax reliefs under the Companies Income Tax Act if Open Heavens Orphanage is registered, the donation is receipted and actually made out of their profit.
They are advised accordingly especially in view of the fact that (as seen in Section 39 and 40 CAMA) non-compliance with the ultravires rule (that is to say; the company embarking on unauthorized endeavours) may constitute a ground for asserting recklessness, fraud and in suing the company or its members and directors.
In the event that the company has already been registered, kkk may (following due process) amend the contents of the memo.
Also that they generally should not be in active management of the company being legal professionals and in accordance with the Legal Practitioners Act.
ANSWER TO QUESTION 6 B
Too Broad. Kindly use your discretion.
Leave a Reply