Company Law1 - the summaries of the Ghanaian Law under the Companies Act, Act 179 PDF

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the summaries of the Ghanaian Law under the Companies Act, Act 179...

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INCORPORATION S5 companies code talks about incorporation. The legal requirement here is that there should be at least 20 members maximum.

S8 tells us how the legal requirement should be met that is by complying with the provisions of the code.

Therefore we shall look at the cases of “Salomon v Salomon [1897] AC 22” and “Lee v Lee’s Air Farming Ltd [1960] 3 ALL ER 420” which are the most cited cases on the separation of legal personality.

“Salomon v Salomon [1897] AC 22”

This case lays down one of the key principles of company law:

Upon incorporation there is a separation of legal personality. Thus a company is a legal entity on its own.

Case facts Aron Salomon was the owner of a boot making business. He changed the company into a limited liability company and had £20,000 worth of debentures issued to him and the other 6 members of his family had one each. When the company became insolvent and the assets sold, one of the creditors Adolf Anholt was paid off and the remaining went to the appellant. This meant that there was not enough to pay the ordinary creditors worth up to £7733.

The trial judge held that the company was Salomon’s nominee and therefore the 2 were the same.

The COA in agreeing with the trial judge thought that Salomon has abused the concept of incorporation because he had used the company for his benefit and therefore should pay up.

The HOL held That the proceedings were not contrary to the true intent and meaning of the Companies Act 1862; that the company was duly formed and registered and was not the mere “alias” or agent of or trustee for the vendor; that he was not liable to indemnify the company against the creditors claims; that there was no fraud upon creditors or shareholders; and that the company (or the liquidator suing in the name of the company) was not entitled to rescission of the contract for purchase.

Lord Halsbury:

The Act appears to me to give a company a legal existence with, as I have said, rights and liabilities of its own, whatever may have been the ideas or schemes of those who brought it into existence.

1. The law only required that each member should have 1 share. There was no requirement that they should be independent of each other. 2. The business belonged to the company and not to Salomon. If anything, S was just the agent of the business. Either the company is a legal entity or not. If the company was a separate entity then the business belonged to the company and not Salomon. If the company was not a legal entity then there was nothing of which S could be the agent.

Lord MacNaghten The company is at law a different person altogether from the subscribers to the memorandum and although it may be said that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hand receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable in any shape or form, except to the extent and in the manner provided by the Act. that is, I think, the declared intention of the enactment.

In “Lee v Lee’s Air Farming Ltd [1960] 3 ALL ER 420”

Case facts There Lee, for the purpose of carrying on his business of aerial top-dressing, had formed a company of which he beneficially owned all the shares and was sole governing director. He also appointed himself as chief pilot. He caused the company to insure against liability to pay compensation. He was killed in a flying accident. The trial judge held that the widow was not entitled to compensation because Lee could not be regarded as a “worker”. Privy Council held that Lee and his Company were distinct legal entities and therefore he could be an employee as the relationship was that of master and servant.

In “Macaura v Northern Assurance Co Ltd [1925] AC 619”

Where a company owns its own property, the members have no proprietary rights in such property.

Case Facts

Mr Macuara transferred his timber business to a limited liability company. He took out an insurance policy, in his own name in respect of timber, which belonged to the company. The timber was destroyed in a fire. In order to claim on the insurance policy, Mr M had to demonstrate that he had in “insurable interest” in the timber, which meant that he had to prove that he has ownership rights. Since he had forgotten to transfer the insurance to the company when he incorporated the company, when the timber burnt down, it was held that he had no insurable interest in the property and could not claim the insurance.

CONSEQUENCES OF INCORPORATION “Morkor v Kuma [1998-1999] SCGLR 620; 635”

1. A company can enter into a contractual relationship. By its nature, a company has to work through human beings. S24 of the Companies Code says that so long as a company is working in furtherance of its business, it has all the powers of a natural person of full capacity.

S137 of the code also identifies the organs of the company as 

The members in general meeting



The board of directors



Agents and other persons as authorised by any of the above persons:

“Tesco Supermarkets Ltd v Nattrass [1972] AC 153; 170 Lord Reid “I have said that a board of directors can delegate part of their functions of management so as to make their delegate an embodiment of the company within the sphere of the delegation. But here the board never delegated any part of their functions. They set up a chain of command through regional and district supervisors, but they remained in control. The shop managers had to obey their general directions and also to take orders from their superiors. The acts or omission of shop managers were not acts of the company itself. In my judgement the appellants established the statutory defence.”

2. Separation of property

“Macaura v Northern Assurance Co Ltd [1925] AC 619”

Where a company owns its own property, the members have no proprietary rights in such property.

“Majdoub v W Bartholomew [1962] 1 GLR 122”

Case Facts A partnership was converted into a limited liability company. As a partnership they owed B. After incorporation, they agreed that they would settle their debt. This they failed to do. So B took an action attach property of the company to A.

It was held that they could not do that because the assets belonged to the company. The partnership and the company were two separate firms.

“Short and Treasury Commission [1948] 1KB 116; 122 T tried to argue that S were the part owners of the undertaking. The undertaking is something different from the totality of the shareholding.

3. Perpetual Existence or Succession A company can exist forever. There is however a requirement that it must have at least 2 directors.

4. Legal Action A company can sue or be sued. “Foss v Harbottle (1843) Hare 461” The principle here is that if a wrong is done to a company, it is that company that must take action.

“Bank of West Africa v Apenteng [1972] 1 GLR 153” Note here that S263 says that documents may be served on a company at its legal office. 5. Limited Liability The principle here is:

If a company is in debt, the members cannot be sued.

It must be noted here that one can have a company whose liabilities are unlimited so that the members can be sued jointly and severally. Also, one can have companies, which are limited by guarantee. So a member is liable to the extent of his shareholding in the company. Guarantee companies are usually not set up for profit e.g. the Ghana Stock Exchange. Limited Liability provides protection against creditors. Some creditors get round this insisting on personal guarantees from the directors.

6. Borrowing

The company can borrow and also get collective collateral. The company can also create debentures: 

Floating charge – covers the present and future assets of the company



Fixed charge – relates to specific assets of the company.

It does not prevent the company from using the assets whilst it is under a charge.

7. Transferability of Interest Technically speaking, shares and debentures are transferable. DISADVANTAGES

1. Formalities There are sanctions involved for not satisfying formalities

2. Cost of Incorporation

3. Need to employ auditors otherwise cannot commence business 4. Have to employ commercial managers

5. Loss of Privacy – have to disclose certain information. This is to protect creditors, advise investors etc.

LIFTING THE CORPORATE VEIL The court will go round the corporate veil and attach legal responsibility to people e.g. directors etc. This will be discussed under 3 headings: Where there are express statutory provisions under 

Company’s Code



Other legislation



Judicial Decisions

Generally the courts apply Salomon v Salomon COMPANYS CODE



Breach of the prescribed minimum members

Under S8 of the code, it is provided that any one or more persons may form a company. S38 says that if a company ceases to have a member and it carry’s on business for more than six months without a member, then every director who was in office during the said 6 months shall be liable for payment of all debt and liabilities of the company incurred during that period. This reinforces the idea of perpetual succession. The deceased shareholders’ shares have to be transferred to his successor upon his death. The defendants can either sell his shares, or liquidate the company upon the death of the sole owner. Therefore those who resign before the 6 months will not incur any liability.1



Breach of minimum number of directors

S180 (1) – every company shall have at least 2 directors. This is to ensure continuity. S180 (3) – if the defendants are less than two and continue to do business afte four weeks, the company and directors shall be liable for the debts incurred after the four weeks.



Trading for profit by a guaranteed company

S10 (1) – a guaranteed company may not lawfully be incorporated with the object of carrying on business with a view to making profit. S10 (2) – the consequences for doing so is that all officers and members aware of the breach shall be liable for the payment of debts and liabilities incurred by the company and will also be liable to a fine. S16 (5) defines trading for profit.

1

What happens if all the directors resign?

It does not mean the income of the company should not exceed its liabilities. So where income exceeds liabilities, the money should be ploughed back and used for the objects of the company. NB that the income shall be used solely for the promotion of its objects. The income should not be distributed as this is an offence.



Premature Trading

S27 - the company will not be allowed to commence business if it has not filed returns with the registrar general. S29 – the consequences of not filing the appropriate returns is that for every day you operate without satisfying S27, you are liable to a fine.



Failure to satisfy the minimum capital requirements

S28 – is only applicable to companies limited by shares. 2 Thus for a Public Limited company, the capital requirements are 20 million cedis of which 5million must have been paid in cash. This is to prevent the situation of having under-capitalised companies. It is also to protect creditors.

Private companies – 5 million cedis of which 1 million cedis should have been cash.



Misdescription

S121 – a company must affix its name outside the company and every place it carries its business at. The company should have its name engraved on its seal

The name should be mentioned on all its stationery, business letters, invoices and all negotiable instruments.



The use of seal/signing negotiable instrument without the company’s name

S121(3) and (4) – liable to a fine (office), plus any obligation that may be incurred.



S15(5) – failure to change name of company as directed

The registrar general may direct a company to change its name. The reason being that the change in the company’s objects and name may be misleading. A company has the right to 2

Also have S27 of the Company’s Code Amendment Act 1997 Act 531

appeal against such a direction. If confirmed by a court the company or any other director will be liable to a fine.

STATUTORY PROVISIONS UNDER OTHER PIECES OF LEGISLATION



S26 Bodies Corporate (Official Liquidation Act 1963 Act 180)

If in the course of an official winding up, it appears that any of its business has been carried on with the intent to defraud creditors of the company or for any fraudulent purposes, the court may declare that the persons who knowingly were parties to the carrying on of the business shall be liable to any debts incurred by the company.



Banking Law 1989 PNDC Law 225

Nationality of banks- looks at shareholding structure Foreign banks are banks in which less than 60% of the equity share capital is held by Ghanaians. It is lifting the veil because we go behind the company and responsibilities are attached. That is you have to have the minimum capital requirement.



Ghana Investment Promotion Centre Act 1994 Act 478

S40 – a Ghanaian company is one whose majority capital is owned by citizens of Ghana, including the state and statutory corporations. The implication of this is that foreign investors have to provide evidence from the bank that they did not bring in foreign capital. Again this is lifting the veil.



Internal Revenue Act 2000 Act 592

Taxation is based on source and residence. Under S161, the company has to be incorporated and have its management and control exercised in Ghana. S69, 70 and 71 are tax avoidance provisions. This empowers the commissioner to prevent any person from splitting their income with the intention of reducing their amount payable as tax. JUDICIAL DECISIONS

1. Fraud or avoidance of contractual obligations

“Morkor v Kuma [1998-99] SCGLR 620” – justice Akuffo The CEO and major shareholder signed a loan on behalf of he company. When there was default, both the company and the CEO were sued for the return of the money. Originally there was no contention as to whether the CEO was the proper person to be sued. At the COA this point was raised. This defence was upheld. The Supreme Court held that the defendant could not be sued. Unless there were factors to indicate she was personally liable, then she could not be held. Except in cases of fraud or avoidance of contractual obligations, the corporate veil will not be lifted.



“Amartey v SSB [1997-98] GLR pg 503”

A used his house to secure lending. When there was default, correspondence was sent to Amartey as managing director. This was not sent to him in his capacity as mortgagor. So in the course of the trial he denied having read the letters. On this basis, the court held he was being fraudulent. Therefore the court lifted the veil. They held that he had had notice of the default.



“Jones v Lipman [1962] 1 WLR pg 832”

J and L agreed on the sale of a company. L had cold feet and incorporated a company and sold the land to the company. The court held this was fraudulent and his obligation was to confer the land to J. so the court said that L and company were the same and therefore granted specific performance against both L and company. “Gilford v Horne 1933 CH 935” G was competing with a company he had left. The court said he could not say that it was the new company competing with the old.

In “Re Bugle Press Ltd 1961 Ch 270” There were three shareholders and two held 90% of the shares. The two wanted the third shareholder to sell his shares to them. He refused. To bring themselves within the relevant statute, they formed a company. The law was that if the company’s shares had the requisite 90%, then the third has to sell. The court held that the arrangement was a sham and therefore the veil will be lifted.

Farrar on page 92 says a crucial element is whether the company was formed after or before the existence of the matter.

Gower says look at the motive.

2. Single Economic Unit “DHN Food v Tower Hamlet LBC 1976 1 WLR 852” DHN operated through two main subsidiaries which held land and vehicles. The argument put forward by the company was that all the three companies were one economic unit in order for their claim for compensation to be high. Lord Denning held that the 3 companies for present purposes were to be treated as one and the parent should be that one. “Adams v Cape Industries [1991] 1 All ER 92”9 Doubts were expressed as to whether DHN was right. Each company was a separate legal entity.

3) Agency “Smith, Stone and Knight v Birmingham [1939] 4 All ER 116” The company traded through a subsidiary. When the land was acquired, the parent company claimed compensation. It was held that the subsidiary was the agent of the parent company 1) Where the profits of the subsidiary were those of the parent company 2) Where the persons conducting the business of the company were appointed by the parent company 3) Where the parent company is the head and brains of the subsidiary company 4) Whether the parent company governed the adventure 5) Where the profits made by the subsidiary company were made by the skill and direction of the parent company 6) Whether the parent company was in effective and constant control of the subsidiary

“Kuni v State Gold mining Corporation [1978] 1 GLR 205” K worked for prestea mines. When K was injured, he chose to sue SAME. Were they liable? The court cited the above 6 factors and said that SAME were liable. Who was controlling the subsidiary? See Littlewoods v McGregor [1969] 3 All ER 855 at 860

4) Public Policy “Daimler v Continental Co [1916] 2 AC 307” In this case, the court held that you have to look at the shareholding structure to see who were the shareholders. It was discovered that the shareholders were Germans so that the contractual obligation was not enforced.

5) Interests of justice

“Morkor v Kuma [1998-99] SCGLR 620; 632” Justice Akuffo said that justice would lead to the lifting of the corporate veil. In Cape, the courts said they would not lift the veil merely because justice so required.3 Gower concludes that the courts will not be prevented from lifting the veil if they want. Therefore the true one is sham or façade.

PROMOTERS Virtually every company formed must be promoted. Promoters are group of persons who control the affairs of a company as well as conceive of the idea to form a company. They must form a business plan, must prepare the registration of the company, appraise the business plan, raise the initial finance, get consent from the people who agree to be 1 st directors, etc.

In Erlanger, Lord Caines said as follows:

“They have in their hand the creation and managing of the company. They have the power of defining how and when and in what shape and under what supervision the company shall come into existence and begin to act as a trading corporation.”

So a promoter is any person who is, or has been engaged or interested in the promotion of the company.

Proviso: a person acting in a profess...