Lectures 4-5 - CONCISE NOTES WITH CASES PDF

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CONCISE NOTES WITH CASES...

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LECTURESFOUR&FIVE FORMATION OF A COMPANY Outline I.

Formation and incorporation of companies

II.

Company Names

III.

Commencement of Business

IV.

Mechanics of Incorporation

V.

Regulations (The Constitution) of Compan0ies

VI.

Corporate personality

VII.

Consequences of incorporation

I.

FORMATION AND INCORPORATION OF COMPANIES

A. Right to Form a Company 1. s.5 - An association of more than 20 persons carrying on business for profit must register as a company 2. s8 - Any one or more persons may form an incorporated company by complying with the provisions of the Act regarding registration.

B. Requirements: 1. s14 - Submission of Regulations to Registrar (i.e. Constitution) Usually promoters adopt the model Regulations in schedule II of the Act and make the necessary modification. 2. The Registrar shall register the company after considering the following: a. Whether the Regulations comply with the Act. For example, Section 180 requires that every company must have at least two directors.

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(See Section 17 of the Act about the form of Regulations (Table A and Table B in the second schedule)); b. Whether the objects for which the company is being formed are lawful. In R v Registrar of Joint Stock Companies; Ex parte Moore [1931] 2KB 197, the Registrar of Companies refused to register a company formed to sell lottery tickets. In terms of s41 Lotteries Act, 1823, lottery tickets could only be sold by persons authorised by the Act. The fact that the company was being formed to avoid the risk of prosecution by the individuals forming the company amounted to an illegal or improper purpose. Accordingly, the refusal to register the company was right.

Also in R v Registrar of Companies; Ex parte Attorney-General, R v Registrar of Companies, ex parte A-G [1991] BCLC 476 The Registrar refused to register a company, Lindi St. Claire (Personal Services) Ltd formed for organizing the services of a prostitute. The only director was Miss St. Claire who described herself as a prostitute. It was held that the Registrar’s refusal was justified because the intended business was contrary to public policy. See Bodies Corporate Official Liquidation Act, 1963 (Act 180). Per ss4 (1), (2) - The A-G can present a petition to court for the winding up of the company if the authorised business of the company is unlawful. c. That any of the subscribers to the Regulations is an infant or of unsound mind; and d. Whether all the directors named in the Regulations are competent or qualified under Section 182 to be appointed as directors.

C. Effect of registration 1. Certificate of incorporation is issued and gazetted if requirements are met signifying the birth of the company - Section 14 (4) - (8) of Act 179

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(But See R v Registrar of Companies, Ex parte AttorneyGeneral [1991] BCLC 476 where a court set aside incorporation of company on grounds of public policy 2. The company becomes a separate legal entity distinct from its owners. 3. It becomes a legal person with legal capacity that is distinct from the persons holding the shares Salomon v Salomon [1897] AC 22 Lee v Lee’s Air Farming Ltd [1960] 3 All ER 420

II. COMPANY NAMES 1. To incorporate a company, an appropriate name should be selected by the incorporators. 2. An appropriate name is one which is not misleading or undesirable i.e. bears no relationship to the nature of its business. 3. A business name may be registered by either a natural person or a corporate body. This may be done under the REGISTRATION OF BUSINESS NAMES ACT 1962 (ACT 151). 4. Act 151 requires that every business name be registered other than a business operating under the true personal name or surname or initials of the proprietor. The name must not be misleading or UNDESIRABLE. 5. Form A of RBNA requires the following particulars: 

the business name;



the general nature of the business;

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the principal place of the business;

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particulars of the proprietor;

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

date of commencement of business; and

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Registration to be done within 14 days of commencement of business

6. Section 15 (1) of Act 179 - A company limited by shares is required to have “limited” (also Ltd, s121 (5)) as the base or ending of its name. 7. Publication of name - Section 121 (1) Penalties may be incurred by a company for default as well as officers of the company- Section 121 (4). See NAJAT METAL ENTERPRISE v NAJAT METAL ENTERPRISE [1982 -83] GLR 81.

III.

COMMENCEMENT OF BUSINESS The issuance of certificate of incorporation is not enough for a duly incorporated company to commence business. Before such a company can exercise any borrowing powers or incur any indebtedness except expenses or transactions incidental to its incorporation, two things must be done: A. Filing of particulars The company must have filed certain particulars with the Registrar by way of a return in duplicate. The particulars are set out in Section 27 as follows: 1. Name; 2. Authorized business or nature of objects; 3. Names and former names, addresses and business occupations of its directors and secretary and particulars of any directorships held by them; 4. Name and address of auditor; 5. Address of company’s registered office and principal place of business in Ghana and the post office number of its registered office i.e. the location and postal addresses;

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6. Address of place where register of members is kept and maintained. If other than at the registered office of the company. B. In the case of companies limited by shares: 1. the amount of its stated capital; and 2. the number of its authorized shares of each class and the number of its issued shares of each class and the amount paid thereon. It must also indicate the amount paid in cash and the amount paid otherwise than cash. The return shall be signed by two directors and secretary of the company. A company limited by shares in addition to the filing of particulars in Section 27 must also file the declaration in a prescribed form in compliance with the minimum capital requirement (Section 28). Before a company that is Ltd by shares can commence any business or exercise borrowing powers or incur any indebtedness, there shall have been paid to it the issue of its shares, consideration to the value of at least a prescribed amount of the consideration paid, at least a prescribed lesser amount shall have been paid in cash.

Section 1 of the Companies Act (Amendment), 1997 (Act 421) amends Section 28 of Act 179 and in case of a public company it must have a minimum capital of GH¢2000.00 of which at least GH¢500.00 shall be paid in cash. But a private company must have GH¢500.00 minimum capital out of which GH¢100.00 must be paid in cash. NB: These provisions apply to any company formed after the coming into force of the Act. The rationale for insistence on the minimum capital requirement is to avoid business folding up due to inadequate capital shortly after incorporation.

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According to Gower, the justification is that: I.

It ensures that those named as directors have consented to their appointment;

II.

It forces the directors to assume responsibility as they should, for these are essential pre-requisites to commence business; and

III.

It enables directors to appreciate that formation of a company is not just something they can leave perfunctorily to be done for them in their lawyer’s office.

See the Report and Section 29 – Penalties for breach of Sections 27 & 28. IV.

THE MECHANICS OF INCORPORATION A. Registration, s14 1. Natural or juristic persons can form a company 2. Only one share is required, see Salomon v Salomon 3. Minimum 2 Directors. B. Appointment of Directors, ss16 (2) (d) - (e), 137 (3), 202, 182 1. No minors 2. No persons of unsound mind 3. No corporate body 4. Those convicted of fraud or dishonesty 5. Those declared bankrupt in or outside Ghana 6. Must not be an undischarged bankrupt C. Submission of Regulations to the Registrar, ss14, 16-18

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V.

REGULATIONS (THE CONSTITUTION) OF COMPANIES, s16 A. The governing instrument of a company. They contain provisions relating to: 1. the company’s objects or business 2. its organizational structure 3. the powers of the various organs 4. procedures to follow for various matters 5. amendment provisions 6. capital structure of the company and the like

DUPAUL WOOD TREATMENT V ASARE [2005-2006] SCGLR 667. A complete new set of Regulations were purportedly adopted to replace the one subscribed at incorporation. Supreme Court held same to be invalid as it did not comply with ss16 & 22 of Act 179

B. Regulations must disclose: 1. the name of the company, with "Limited" as the last word of the name in the case of a company limited by shares; 2. the nature of the business or businesses which the company is authorized to carry on, or if the company is not formed for the purpose of carrying on a business, the nature of the object or objects for which it is established; 3. that the company has, for the furtherance of its authorized businesses or objects, all the powers of a natural person of full capacity except in so far as such powers are expressly excluded by the Regulations; 4. the names of the first directors of the company; and 5. that the powers of the directors are limited in accordance with Section 202 of this Act.

C. The form of the Regulations 1. Must mirror the model Regulations in Table A and B of Part 1 and Table A and B of Part 2 of the Schedule II of the Act (See Section 17). 2. Is a key document dealing firstly with internal matters and secondly as a public document for the public to be able to inform itself about the constitutional structure of the company.

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3. What is called the Regulation in Ghana may have other names in other jurisdictions such as Charter, Statutes, Memorandum and Articles of Association (See Section 303 (1) (a) of the Act). 4. Under English Company law, the constitution of a company embodies the Memorandum of Association and Articles of Association. Memorandum of Association is the company’s primary constitutional document but usually does not contain much in the way of detail. Usually certain standard form matters – name, objects, address of registered office, share capital etc. The Articles of Association regulates the company’s internal affairs. See Chapter 2, UK Companies Act, 2006

D. Contractual Effects of Regulations When Registered - Section 21 of Act 179 1. At Common Law a) The Regulations was a contract between the members and the company Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1Ch 881 b) The Regulations was a contract between the members inter se Rayfield v Hands [1958] 2 All ER 194 Eley v Positive Govt Security Life Assurance (1876) 1 Ex D 88 Beattie v Beattie [1938] 3 All ER 214 It therefore constitutes a contract under seal between the company and its members and officers and between the members and officers themselves whereby they agree to observe and perform the provisions of the Regulations, as altered from time to time, in so far as they relate to the company, members, or officers as such. In Wood v Odessa Waterworks [1889] 42 Ch D 636 it was said “the [A]rticles of [A]ssociation constitute a contract not merely between the shareholders and the company, but between each individual shareholder and each other.” This “contract” has many features that are not the norm for a private contract

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See for example Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693 Where the Court of Appeal rejected a request to imply a term into the articles of association of a registered company. Steyn LJ referred to the memorandum and articles when registered as being a statutory contract that derives its force not from a bargain struck between the parties but from the terms of the statute, and referred to the contract being alterable by special resolution with no reference to a unanimous decision of the members. A similar approach was taken in Towcester Racecourse Co Ltd v The Racecourse Association [2003] 1 BCLC 260. Other odd features relate to variation by majority and restricted remedies. This aspect of Company Law has generated much academic debate: Wedderburn [1957] C.L.J. 193 Goldberg (1972) 35 M.L.R. 362, (1985) 48 M.L.R. 158 Gregory (1981) 44 M.L.R. 526 Prentice (1980) 1 Co Law 179 Drury [1986] C.L.J. 219

c) It can vest power in any person stated by Regulations, whether or not the person is a member or officer, to appoint or remove any director or officer of the company.

i.

Enforcement by Member Against Company Eley v Positive Life Insurance (1876) 1 Ex. D 88 Pender v Lushington (1877) 6 Ch.D. 70 Wood v Odessa Waterworks (1889) 42 Ch.D. 636 Salmon v Quinn and Axtens Ltd [1909] A.C. 442 But see - Re Richmond Gate Property Co. [1964] 3 All E.R. 936 Mutual Life v Rank [1985] B.C.L.C. 11

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Cumbrian Newspapers v Cumbrian Printing Co [1986] 3 WLR 26 (supports Eley) Globalink Telecommunications v Wilmbury Ltd [2003] 1 BCLC 145 (stresses again no contract with officers only members) ii.

Enforcement by company against member Hickman v Kent and Romney Sheepbreeders Assoc. [1915] 1 Ch. 881 (orthodox) Beattie v E.F. Beattie Ltd. [1938] Ch. 708

iii.

Enforcement by member against member Welton v Saffery [1897] A.C. 299 Rayfield v Hands [1960] Ch. 1 (wider approach?)

2. Under Ghanaian Law, s21 a) When registered Regulations have the effect of a contract under seal: i. " between the company and its members and officers ii. between the members and officers themselves; whereby they agree to observe and perform the provisions of the Regulations, as altered from time to time, in so far as they relate to the company, the members or the officers." b) s21 (2) - However, where the Regulations empower a person to appoint or remove a Director or any other officer of the company that power is enforceable by that person although that person is not a member or officer of the company NB Directors’ Security of Tenure How do we reconcile ss21 (2) and Section 185 of Act 179 regarding removal of Directors?

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Bushell v Faith [1970] AC 1099 Allows a director to be protected from being removed from office by attaching special voting rights to his shares. Compare this decision with Sections 21 , 26 and 185 of Act 179 c) s21 (3) - An aggrieved Member can bring an action, in a representative capacity, to challenge breach of the Regulation on behalf of other affected members to stop multiplicity of cases. Gower indicates that such a rule is intended to prevent multiplicity of actions. The result of the action will then bind all those who are represented.

See Further: SECTION 324 ADEHYEMAN GARDENS V ASSIBEY [2003-2004] SCGLR 1016 DUPAUL WOOD TREATMENT V ASARE [2005-2006] SCGLR 667.

3. Service contracts, (Section 193 of Act 179) Re New British Iron Co. ; Exparte Beckwith [1898] 1 Ch. 324 The terms of the articles may be incorporated into an external contract between the company and a third person. A contract which incorporated the company’s articles must, however, be taken as acknowledging that the articles are alterable in the normal way. But alteration of the articles does not affect the contract retrospectively. Punt v Symons & Co. [1903] 2 Ch. 506 British Murac Syndicate Alperton Rubber Co. [1915] 2 Ch. 186 Southern Foundries v Shirlaw [1940] A.C. 70 An injunction will not be granted to enforce a contract by a company not to alter its articles. A company, however, by altering its articles cannot justify a breach of contract. An alteration of the articles in breach of contract will render the company liable to pay damages.

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E. Alteration of Regulation 1. A company in business is a dynamic entity. It may be necessary from time to time to alter its Regulations. 2. The Act tries to strike a balance between the need to avoid easy and frequent alteration and the need to have alterability. 3. In this regard the Act requires a special resolution to be passed in order to alter Regulation. a) Special Resolution - See Section 168 (2) Section 22 of the Companies Act, 1963 (Act 179) provides that by special resolution, a company may alter or add to its Regulations or adopt new Regulations.

DUPAUL WOOD TREATMENT V ASARE [2005-2006] SCGLR 667 – where complete new set of Regulations were purported to have been adopted to replace the one subscribed during incorporation. The Supreme Court held same to be invalid as it did not conform to Section 16 and 22 of Act 179. Any alteration must be made ‘bona fide in the interest of the company as a whole’. This phrase contains both subjective and objective elements. This is because it relates to the motives of those who decide on the alteration whether their act is in the interest of the company. On the other hand, it was held in Greenhalgh v Arderne Cinemas Ltd (1951) that any alteration had to be in the interest of the ‘individual hypothetical member’. In other words, if the members have acted in good faith in what they believe to be for the benefit of the corporators as a general body, the court will allow the alteration or the addition to be made, unless there are not grounds upon which reasonable men could have come to the same decision.

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Facts of the Case: The articles of a private company provided that no shares should be transferred to non-members so long as a member was willing to buy them at a fair value. The majority shareholder wished to sell shares to a non-member and a resolution was passed altering the articles to allow a transfer to any person if sanctioned by an ordinary resolution. And an ordinary resolution was passed sanctioning the transfer of 500 shares to a non-member. A member claimed that the resolutions were void on the ground that the interests of the minority had been sacrificed to those of the majority. It was held that the special resolution was valid as it had been passed bona fide for the benefit of the company as a whole. That is, the corporators as a general body. A special resolution would be liable to be impeached if its effect were to discriminate between the majority and minority shareholders so as to give the former an advantage of which the latter were deprived.

Per Evershed MR, “It is now plain that ‘bona fide for the benefit of the company as a whole’ means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole”. However, if an alteration or an addition is made not for the benefit of the company but has the effect of merely discriminating between the shareholders, then the court will restrain the company from making the alteration or the addition. In Brown v British Abrasive Wheel Co (1919), an alteration to the articles of the company was proposed to give the majority shareholders the right to buy shares of the minority. It was held that the alteration was invalid as it would benefit the majority shareholders rather than the company as a whole. Again, if an alteration or addition is made bona fide for the benefit of the company as a whole, it is immaterial that it results in hardship for

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the minority of the shareholders. In Sidebottom v Kershaw Lese & Co (1920), an alteration to the articles gave the directors the power to require any shareholders, who entered into competition with the company to transfer their shares to nominees of the directors at a fair price. It was held that under those circumstances the alte...