law 5112 capital and financing
TRANSCRIPT
LAW 5112LAW 5112Corporate Law and GovernanceMBA
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 1
CAPITAL AND CAPITAL AND FINANCING OF A FINANCING OF A
COMPANY COMPANY
Public Company Limited by Shares Perspectives
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 2
Capital and Financing of A Capital and Financing of A companycompany In modern company law the term capital is
used to cover;
Share capital-Funds subscribed by members
Loan capital-funds provided by commercial finance providers and investors holding debentures or debenture stocks.
All funds whether provided by members creditors or retention of profits plus the assets in which funds has been invested.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 3
Share: What is it?Share: What is it?The interests of a share holder in
a company The interest is what is owned
and gives a share holder certain rights as defined by the articles.
Thus a share is what is used by the company in determining the rights in the first place and in the second place the liabilities of a member in the company
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 4
continuationcontinuationTraditionally, however, the capital
of the company can still be in a different unit that shares that is stocks.
A stock is one unit of the company capital comprising several number of shares put together.
Example a company may wish that every 100 shares be bound to form one Unit of stock.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 5
Share and stock Share and stock distinguisheddistinguished A share is a distinct
individual unit of a capital in a company and
shares can be bought and sold in a whole units
Shares are required to be distinguished
A company can issue shares directly
Stock is not divided into equal parts/denomination
Subject to the articles Stocks may be bought or sold in any convenient multiples or sub division
Stocks bears no distinguishing numbers as shares do
Companies can not issue stocks directly it can only convert its fully paid up shares into stock
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 6
Terminologies applied in this Terminologies applied in this topictopicNominal authorized or Registered
Capital
Is the sum mentioned in the capital clause of Memorandum and articles of Association of a company.
It is a maximum amount which the company raises by issuing shares and on which the registration fee is paid.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 7
Issued CapitalIssued CapitalThis refers to the nominal value
of shares which are offered to the public for subscription
This is because the co. in most cases does not issue all capital at once
In all circumstance it can not exceed he authorized capital
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 8
Subscribed capitalSubscribed capitalThis is the part of the issued
capital which has been subscribed or taken by purchasers of the shares and allotted to them.
This may be less than issued capital and can not exceed registered Capital.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 9
Called up capitalCalled up capitalIs the part of the issued capital
which have been called upon the shares.
The tendency is that the company does not require the members to pay full for their shares.
Thus the amount required to be paid is what is termed as the called up capital
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 10
Paid up capitalPaid up capitalIs the amount of called up shares
capital which is actually paid to the company by the members.
At the time when a member of a company have failed to pay steps like forfeiture or surrender of shares can be done by the company and the party respectively.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 11
Categories of shares in a company Categories of shares in a company
The categorization can lead into four main classes of shares, these includes;
Equity shares/ ordinary sharesPreference sharesDeferred or founders SharesCorporate shares
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 12
Equity shares/ ordinary Equity shares/ ordinary sharessharesMembers holding them are said to have
equity in the company. Ordinary shares have a right to return of
capital and payment of dividend ranking after preference shares,
Ordinary shares claim the pool of surplus assets in the solvent winding up after the return of capital to all other shareholders.
Ordinary shares usually carry one vote per share
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 13
Preference sharesPreference sharesIt carries preferential rights in
respects of dividend at a fixed amount or at a fixed rate.
It also carries preferential rights in regard to payment of capital on winding up or otherwise
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 14
Classes of preference Classes of preference sharessharesCumulative or Non Cumulative Redeemable and Non
redeemable preference shares, see section 61 of the Companies Actand section 58 of the Companies Decree
Participating or non participating preference shares.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 15
Deferred or founders Deferred or founders SharesSharesAre issued to the founders of the
company as a reward to heir services.
They get a portion of the profit if the dividend on ordinary shares exceeds a certain fixed amount.
Their rights are determined by the memorandum or articles.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 16
Corporate sharesCorporate sharesAre the shares created by a company
for issue to its employees. They are given to the managing staff
and employees of the company
The company pays for them to the employees as fully paid up shares
The company’s trustee will look after these shares in the event of an employee leaving the company
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 17
The capital Clause of the The capital Clause of the memorandum of Association of a memorandum of Association of a companycompanyThe capital Clause of a company
states the amount of the capital with which it is registered, divided into shares of fixed amount.
The capital is called authorized, nominal or registered capital
A company at any time can alter its capital clause as it wishes
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 18
Alteration of the capital clause section Alteration of the capital clause section 64/61 of the co Act& Decree respectively64/61 of the co Act& Decree respectivelySuch powers may only be exercised
by the company in general meeting and that must be authorized by the articles of association.
A company can alter its capital clause in any of the following manners/ ways:
a) Increase its share capital by new shares
b) Consolidate and divide all or any of its share
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 19
CONTINUATIONCONTINUATIONc) Convert all or any of its paid up
shares into stock d) subdivide its shares, or any of
them, into shares of smaller amount e) Cancel shares which have not been
agreed to be takenTake note that alteration may be in
terms of increasing or reducing or even restructuring the capital clause of the company
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 20
Reduction of share Capital s 69/ 66 of the Reduction of share Capital s 69/ 66 of the Co. Act & Decree respectivelyCo. Act & Decree respectivelyA company can do either of the
following:Extinguish or reduce the liability on
any of its shares in respect of share capital not paid up; or
Either with or without extinguishing or reducing liability on any of its shares;◦ cancel any paid up share capital which
is lost; 04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 21
ContinuationContinuationpay off any paid up share capital
which is in excess of the requirements of the company,
alter its memorandum by reducing the amount of its share capital and of its shares accordingly
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 22
continuationcontinuationUnder the companies Act as opposed
to the Decree there should be a lapse of about 35 days from the date of passing of a special resolution to the date of it coming into effect,
The same alteration need be registered to the registrar of companies for it to be effective see section 69 (3).
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 23
continuationcontinuationThis approach under the act has
made a less intervention of the court in the process of reduction of the share capital of the company
That requirement seem to have been substituted by the requirement of the declaration of solvency by the Director's accompanied by the Auditors Report
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 24
continuationcontinuationAlso the reduction need be gazzetted
see section 69(4) of the Act
Creditors whose interest seemed to be jeopardized have a right to object in court in 28 days after the resolution has been gazzeted, see section 71 of the Act
Formerly the resolution were to be filed in court for confirmation if the creditors will not object see section 67 of the Decree.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 25
Stages for reduction in Stages for reduction in summarysummarySpecial resolution
Directors certificate of solvencySpecial resolution for reduction be
gazzeted and announced in local news paper.
Elapse a period of 35 daysRegistration to the registrars’
office04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 26
Effects for non Compliance of Effects for non Compliance of the procedures:the procedures:Read section 71 (2) (b) and (3)Read Section 72 (2) of the
Companies Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 27
Other modes of Reduction of share Other modes of Reduction of share capital of a companycapital of a companyA company may alternatively
reduce its share capital in the following ways:◦Forfeiture of shares,◦Surrender of shares, and ◦Redemption of shares.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 28
Why reducing the capital Why reducing the capital of a companyof a companyGenerally the capital of the company
need to remain as registered
Returning surplus capital; Releasing a liability to pay up capital,
thus reducing the nominal value of the shares;
Eliminating losses, which may be preventing the payment of dividends;
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 29
Cont..Cont..Redemption of shares where there
are insufficient distributable reserves;
As part of a scheme of arrangement where there is a merger of two large companies of similar size; and
Distribution of dividends to shareholders.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 30
Increase of the share capital of the Increase of the share capital of the companycompanyRegarding the increase of the share
capital, the company whenever so wishes is required to give a notice of the increase to the registrar within 30 days after the passing of the resolution authorizing the increase see section 66(1) of the Act
The decree seem silent on this aspect
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 31
Debt financing of a Debt financing of a corporationcorporationDebt capital is a common way of
financing business enterprises and for successful companies,
Debt capital represents the obligation of a company to repay the loan made by the debt holder.
That is making payments of principal sum and interest on a fixed schedule
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 32
DebenturesDebenturesThe most usual form of borrowing
by a company is by issue of debentures
The term debenture means; a document which either creates a debt or acknowledges it, or;
an acknowledgment of debt and obligation or covenant to pay. This obligation is in most cases accompanied by charges.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 33
continuationcontinuationDebentures are therefore, a form of
security which may be bought and sold in such a way as shares.
In order to give lenders some security against non payment of their loans a charge is often made against the assets of the company.
Commonly are issued through prospectus
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 34
continuationcontinuationAs a general matter debts do not
have the participation, voting, conversion and redemption rights that constitute the fundamental ingredients of equity securities.
The debenture holders are regarded as and are the creditors of the company and not members
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 35
Classes of debenturesClasses of debenturesAccording to negotiability
◦a) Bearer debentures◦b) Registered debenture
According To Security:◦a) Secured debenture, ◦b) Unsecured debenture
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 36
continuationcontinuationAccording to Permanence:
◦a) Redeemable debentures; ◦b)Irredeemable debentures see
section 68/88 of the Act & decree respectively
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 37
Coverage so farCoverage so far::Meaning of capital of a companyShare capital
◦Maintenance of the capitalDebt capital
◦Meaning and types
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 38
CHARGES ON THE ASSETS OF THE CHARGES ON THE ASSETS OF THE COMPANYCOMPANYWhenever a company has power to
borrow, it has also powers to security for the debt by a charge on all or any of its properties.
Charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 39
Fixed charge Fixed charge Is a charge which is against a specific,
clearly and well defined property of the company.
The property under charge is defined at the time of creation of charge.
The nature and identity of the property does not change during the existence of the charge.
The company cannot transfer the property so charged before paying the creditor whose interest is protected under it
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 40
Floating charge Floating charge ◦ It is a charge on the classes of assets of
the company both now and future ◦ That class of assets is one which, in the
ordinary course of business of the company, is changing from time to time.
◦ It is contemplated by the charge that, until some steps are taken by or on behalf of those interested in the charge, the company may carry on business in ordinary way.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 41
Consequences of a Floating ChargeConsequences of a Floating Charge The company can;
Deal with the property on which a floating charge is created, till the charge crystallizes.
Not withstanding the floating charge, create specific mortgage of its property having priority over the floating charge.
Sell the whole of the undertaking if that is one of its objects specified in the memorandum, in spite of the floating charge on undertaking. See Re Foster v Borax Co. [1901] 1 Ch 326
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 42
CRISTALIZATION OF A CRISTALIZATION OF A FLOATING CHARGEFLOATING CHARGE
When a charge holder takes some steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge.
At this time the company can not dispose off the cared assets without first paying off the charge holder
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 43
When does a floating charge When does a floating charge become fixedbecome fixedA floating charge will become fixed
upon the following conditions:◦Cessation of the business of the
company. ◦Upon the commencement of winding
up of the company.◦If a debenture holder, having become
entitled to realize the securities by the reasons of the fact that the principal money has become payable (due).
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 44
REGISTRATION OF REGISTRATION OF CHARGESCHARGESEvery company must keep a
register of charges affecting its assets
The registrar must contain short description of the property charged, the amount of the charge the name of the person entitled to the charge
See part iv of the companies Act for details, especially section 96/97 and 100/ 92 of Act & decree)
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 45
Duty to registerDuty to registerIt is the duty of the company to
register the charges.Read section 100 of the CAHowever the interested person may
register it on his own cost and claim for compensation from the company
Read section 102 on the content of the charge register at the registrars office
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 46
Effects of Registration:Effects of Registration:It acts as a notice to the public at
large that the charge holder has an interest in the charged property.
Once a certificate of charge is issued by the registrar, it is conclusive evidence that, the document creating the charge is properly registered.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 47
CONSEQUENSES OF NON-CONSEQUENSES OF NON-REGISTRATIONREGISTRATIONA charge which is compulsory
registerable but which is not registered is void
See section 96 of CA
Omission to register the particulars of charge as required is punishable with fine.
See section 101 (2) of the Companies Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 48
Memorandum of Memorandum of satisfactionsatisfactionUnder section 104 of the companies
act it is provided that, the registrar may, on evidence being given to his satisfaction that the debt for which any registered charge was given has been paid or satisfied , may order that a memorandum of satisfaction be entered on the register, and shall if required furnish the company with the copy there of
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 49
DIRECTORSDIRECTORSMANAGEMENT OF A COMPANY
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 50
IntroductionIntroductionA company is not a natural person so
it works through people called Directors.
These are officers who constitute the board of directors.
A company therefore can not work on its own although it is a person
Thus it relies much to the natural person for it to operate.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 51
Question: Who is a Question: Who is a director?director?The companies Act defines a
Director to mean, "Any person occupying the position
of director by whatever name called."
Such a definition is not exhaustive, thus does not provide a clear picture of who directors are?
See section 2 of the Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 52
continuationcontinuation In Abadin Railway Co. v. Black Bros
(1854) stated that;
Directors are a body to whom is delegated a duty of managing general affairs of a Co.
"A corporate body can only act through agents and it of course the duty of those agents so to act as best to promote the interest of corporation whose affairs they are conducting…"
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 53
continuationcontinuationIn determining whether a person is a
director or not it does not depend on the name but on the nature of the office has.
That is the activities he performs and duties and liabilities that binds such a person in relation to the company.
That he must have control, over direction, conduct, management and superintendent of the affairs of the Company.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 54
ContinuationContinuationAccording to Lord Denin, directors
are the directing mind of the company since the company
His lordship gave a clear position regarding the directors of the company as the directing mind of the company since it is as such not a natural person.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 55
Lord Denins’ positionLord Denins’ position“A company may in many ways
be likened to a human body.
It has a brain and a nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 56
ContinuationContinuationSome of the people in the company
are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will.
Others are directors and managers who represent the directing mind and will of the company and control what it does.
04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 57
ContinuationContinuationThe state of mind of these
managers is the state of mind of the company and is treated by the law as such.”
See Bolton (Engineering) Co Ltd v TJ Graham & Co Ltd, HL, [1957] 1 QB 159. At page 172
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 58
Minimum number of Minimum number of Directors Directors For every company the minimum number
of directs in each and every company must be two except for One man company.
The law sets the minimum of two directors it is advisable however that one of theme must be a natural person.
See section 3 and 186 of the Company Act.See also section 25 of the Business
law(Miscellaneous Amendment )Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 59
QUALIFICATION OF QUALIFICATION OF DIRECTORSDIRECTORSThe provisions of the Act provides for
the qualifications that a director should posses these qualifications include.
Age; a director should be of age of majority i.e. not below 21 years and should not be of an age above 70 years.
What did the rule intend to bring in the aspect of company management?
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 60
ContinuationContinuationThe rule intends to fill in the lacuna
that was left with the Companies Ordinance.
It also bring in the aspect of maturity in decision making as it directs on the minimum and maximum age limit.
Of important to note is that the Act does not prohibit having directors of lower age than 21 but not than 18.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 61
continuationcontinuationIt also allows a life time director
in as much as he was so appointed before the Act come into force.
Directors must also be of sound mind
Directors must not be disqualified by any other laws
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 62
ContinuationContinuationDirector must not be disqualified
by any other order of the court as per section 196 Companies' Act
Directors must have share qualifications, where the articles of Association of the company so direct.
See, section 142 (1) of Companies Act.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 63
Types of DirectorsTypes of DirectorsThere are four types of directors
in a company:◦Shadow Director◦Alternate Directors◦De Facto Directors◦Executive Directors
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 64
Shadow DirectorsShadow DirectorsIs any person, other than a
professional adviser, with whose instructions the Directors of the company normally comply (a person in accordance with whose directions or instructions the Directors of a company are accustomed to act).
He is a person who is not a directors but on his influence to the directors, they rely much
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 65
ContinuationContinuationAnd implement his advice and they
are accustomed as such so to act.This should be distinguished from
a professional adviser who does his advice openly and when required.
A shadow director hides behind the directors and does not claim to be a director
In Re Hydrodam (Corby) Ltd, [1994] 2 BCLC 180
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 66
Cont..Cont..Shadow directors are bound by
the terms of the companies Act in the same way as it applies to the directors of the company
Read:Bourne N. (1994) Business Law and Practice, Cavendish Publishing Ltd London, UK pp 113
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 67
ContinuationContinuationThe court stated that in order for
someone to be a shadow Director four things must be shown:◦ (a) there should be those who are the
proper or de factor Directors of the company
◦ (b) that the person directed those Directors on how to act in relation to the company,
◦ (c) that those Directors acted in accordance with those directions and
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 68
continuationcontinuation◦ (d) that they were accustomed so to
act. As such this class of directors differ
from a de facto director in the sense that they do not pose and claim to be as directors
After they have given the advice they do not go father to show as if they are directors
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 69
Alternate Directors Alternate Directors The articles of association may
provide for the appointment of alternate Directors.
They are persons, who are nominated by Directors to act in their absence.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 70
Cont….Cont….They can only be appointed with
the agreement of the majority of the Directors and he is entitled generally to perform all the functions of his appointer in his absence.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 71
De Facto DirectorsDe Facto DirectorsIs a person who has not been validly
appointed or who is disqualified but whom, in effect, occupies the position of, and acts as if he was a director. He is a person :◦ who assumes to act as a Director and◦ who is held out as a Director by the
company and◦ he claims and purports to be a Director
though he has never actually or validly been appointed as such
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 72
ContinuationContinuationOne need to undertake the
functions that are to be carried out by a director for him to be referred as a de facto director.
In Re Richborough Furniture Ltd, Lloyd J. [1996] 1BCLC 507. stated his opinion, also in Secretary of State for Trade and Industry v. Tjolle [1998]1BCLC
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 73
Test for de facto DirectorTest for de facto DirectorFor someone to be made liable as
a de facto Director, the court would have to have clear evidence that :◦he had either been the sole person
directing the affairs of the company or, ◦ if there were others who were true
Directors, that he was acting on an equal footing with the others in directing the affairs of the company.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 74
ContinuationContinuation If it is unclear whether the acts of the person
in question are referable to an assumed Directorship, or to some other capacity such as a shareholder or, as here, a consultant, the person in question must be entitled to the benefit of doubt.
Read the following cases on De-Facto Director and Shadow directors: ◦ NSW v Drysdale [1978] 22 ALR 161,◦ Mistnorm P/L v Yasseen [1996] 14 ACLC 1387
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 75
Executive DirectorsExecutive DirectorsAre directors concerned with the
actual management of the company, They are involved in the day to day
management of the Company. They are engaged by the company
to work on full time basis.Generally, he must have a contract
with the company that gives him the position as such
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 76
Cont…Cont…He have extensive management
powers delegated to him by the articles and may, in practice, have specific titles within the company, for example, Managing Director
Read:◦Bourne N. (1994) Business Law and Practice, Cavendish Publishing Ltd London, UK pp 113
◦Dine Janet (5th Ed) (2005) Company Law, Palgrave Macimillan Hampshire UK page 165
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 77
A managing directorA managing directorIs a director who by virtue of :
◦an agreement with the company (employment contract say for example) or
◦of a resolution passed in the general meeting or by its board of directors or
◦by virtue of its memorandum or articles of association,
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 78
ContinuationContinuationIs entrusted with substantial powers of
management, which would not be otherwise exercisable by him.
It thus include a director occupying the position of the managing director regardless of the name called.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 79
POSITION OF A DIRECTOR POSITION OF A DIRECTOR Question: What is the relationship
between the directors and the company?
Directors as Agents or trustees of the Company; ◦a Company being an artificial person acts
through directors who are elected representatives of shareholders.
◦They are in eyes of law agents of a Company for which they act on its behalf.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 80
ContinuationContinuation◦ The law of Agency regulates their
relationship.They are more than agents because
they have some independent powers.
They are not bound to consult the shareholders in most matters and the articles of Association gave them power to exercise such things without necessary consulting shareholder.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 81
Continuation:Continuation:It is even much true currently
where the directors are not bound by any thing in the Memorandum of association of the company◦Eastern Railway Co. v Itein it was
stated that; (1872) LR & CH APP 149◦are mere trustees or agents of the Co;
that the trustees of Cos' money and properly and agent in the transaction they enter on to on behalf of Co.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 82
Trusteeship and directorsTrusteeship and directorsThey must account for all the
Companies' money and property which they exercise control on.
They are trustees of the power entrusted into them in the sense that they must exercise them honestly in the interest of the Company and shareholders and not on their own interest.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 83
Fiduciary positionFiduciary positionDirectors position is that of
fiduciary in nature.They stand to work for the benefit
of the other who is a company. As such they should not consider
their interest first but that of the company.
In Re Forest Dean Coal mining Co., (1879) 10ChD 450
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 84
ContinuationContinuationDirectors have been called:
◦ trustees or commercial trustees and ◦sometimes they have been called
managing partners, ◦It is immaterial how they are called
but the role they play.◦They stand in a fiduciary position
towards the company in respect of their powers and capital under their control.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 85
DUTIES OF DUTIES OF DIRECTORSDIRECTORS
DIRECTORS OF A COMPANY
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 86
IntroductionIntroduction“We should remind ourselves that being
a company director is a wonderful thing for the person who is a company director.
But it is a position of great responsibility which involves running the affairs of a company for the benefit of other people.
It is a heavy responsibility we should not water down”. Godsmith-UK 2006 Hansards
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 87
continuationcontinuationDirectors duties have been spread
out over numerous statutes and case decisions making it difficult for directors to know when they may have breached their duties to the company.
The statutory l duties of directors replace those previously decided and set by case law.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 88
ContinuationContinuationIt is important that any director
whether of a big or small company is familiar and complies with their duties.
Ignorance is no defense and; the consequences can be severe both for the company and personally.
As a director you must always act in the best interests of the company.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 89
Duties of DirectorsDuties of DirectorsDuty of care and Skills: section 185Duty to act in good faith: section
182 Duty to disclose interest: section.
209 Duty in relation to employees:
section 183 Duty to exercise Powers for
proper purposes: section 184 Contractual Duty.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 90
Duty of care and SkillsDuty of care and Skills::There are no minimum skill that a
director is expected by the law to demonstrate
They are expected to demonstrate the reasonable care and skill of any other director of his knowledge and skill would have done.
They are as such allowed to entrust their duties to any other delegated individuals
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 91
ContinuationContinuationDirectors remain liable for the final
decision.◦“ The duty does not prevent a director
from relying on the advice or work of others,◦ but the final judgment must be his
responsibility.◦ He clearly cannot be expected to do
everything himself. ◦ in certain circumstances directors may be in
breach of duty if they fail to take appropriate advice – for example, legal advice…” Goldsmith,
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 92
Duty to act in good FaithDuty to act in good FaithDirectors have a duty to act
bonafide and in good faith in the interest of the Company
It is thus not in the interest of the company if the act is aimed at benefiting their own desires or rather the interest of a third party instead of that of a company. See an answer at; Keith Abott, etal (2007) (8th Edition) Business law pg 429
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 93
ContinuationContinuationAs such the directors must promote
the successes of the Company.As a Director one must act in good
faith for the success of the company and benefit of the shareholders having regard to the likely consequences of any decision long term. This will include considering the interests of:◦ employees, business relationships
with suppliers, 04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 94
ContinuationContinuation-Customers and others,
the impact on the community and environment,
maintaining the reputation of the company for having high standards of business conduct,
acting fairly between members of the company and;
subject to the legal requirements, to consider and act in the interests of creditors.
Read: People’s Department Stores Inc vs Wise [2004] 244 DLR (4th) 564
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 95
Duty to disclose interest.Duty to disclose interest.See section.See section.This is sometimes referred to as
a non-conflict rule, it imposed a duty upon a director not to place himself in a position where his duty to the company and his personal interests conflicts.◦Avoidance of personal Profits: ◦Disclosure of interests
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 96
Duty in relation to Duty in relation to employeesemployeesDirectors are required to have regard
to the interest of the employees and the members as well.
This duty is enforceable like any other duties director owe to the company.
This may feature much during mergers where caution need to be taken to reduce loss of jobs by employees
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 97
Duty to exercise Powers for Duty to exercise Powers for proper purposesproper purposesThis is the duty that arises itself
from the roots of the fiduciary position of the directors to the company. In the case of Bristol &West Building Society v Mothew (1998) Ch. 1
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 98
ContinuationContinuationMillett L.J.: stated that, “A fiduciary is someone who has
undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
A fiduciary must act in good faith, ◦ must not make profit out of his trust, ◦ he must not place himself in a position where his
duty and his interest conflict,
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 99
continuationcontinuation◦ he may not act for his own benefit or the benefit of a
third person without the informed consent of the principal.”
Mills v Mills where Dixon J said: "Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power“
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 100
How to determine proper How to determine proper purposespurposesIt must be shown that the
substantial purpose of the directors was not improper nor in breach of their duties as a director.
Honest or altruistic behaviour does not prevent a finding of improper conduct. Whether acts were performed for the benefit of the company is objectively determined
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 101
ContinuationContinuationThe courts must determine
whether, but for the improper or collateral purpose, the directors' powers would not have been exercised
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 102
Examples of improper Examples of improper conductsconductsExercising the Board's power to
issue shares with the substantial motive of defeating the voting power of existing shareholders by creating a new majority
Failing to give proper full information in a notice of a general meeting;
Using company funds to seek their re-election to the Board of directors;
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 103
ContinuationContinuationRead the case of Permanent
Building Society v Wheeler [1994] 12 ACLC 674
See section 184 of the Companies Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 104
Contractual Duty.Contractual Duty.
In addition to the above duties, a director should remember his/her contractual duties under employment contract.
Also beware of your rights and responsibilities as both an employee and a director
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 105
Coverage so far:Coverage so far:Types of Directors
Position of directors
Duties of Directors
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 106
MEETINGS OF THE MEETINGS OF THE COMPANYCOMPANY
COMPANY MANAGAEMENT
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 107
IntroductionIntroductionA company is an association of
several persons. Decisions are made according to
the view of the majority. These dicissions take place at the
various meetings, which take place between members and between the directors
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 108
Types of meetings in a Types of meetings in a companycompanyGenerally, meetings in a
company are of the following types:◦Class meetings◦Meetings of members◦Meeting of the Board of directors◦Other meetings
Meetings of the creditors
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 109
Class MeetingsClass MeetingsAre meeting which are held by
holders of a particular class of shares, e.g. preference shareholders.
Such meetings are normally called when it is proposed to vary the rights of that particular class of shares.
At such meeting, these members discuss the pros and cons of the proposal and vote accordingly.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 110
continuationcontinuation(See provisions on variations of
shareholder’s rights s. 73 of Companies Act.
Class meetings are held to pass resolution which will bind only members of the class concerned, and only members of that class can attend and vote.
Procedures for calling are the same as AGM unless otherwise stated in Articles of Association
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 111
Meetings of the Board of Meetings of the Board of Directors:Directors:
◦Meeting of the Board of Directors as and when the Board so decide
◦Meeting of a Committee of the Board depending on the number of comettee that may be established in a company
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 112
Meeting of creditors:Meeting of creditors:A company, either as a running
concern or in the event of winding up, has to make certain arrangements with its creditors.
Meetings of creditors are called for purposes of 261 & 262, a co. may enter into:◦ arrangements with creditors with the
sanction of the Court for reconstruction or
◦any arrangement with its creditors.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 113
Members MeetingsMembers MeetingsThese are meetings where the
members/shareholders of the company meet and discuss various matters.
Member’s meetings are of the following types
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 114
Annual general meeting see Annual general meeting see section 133section 133This is kind of meeting required
to be held every company in each year.
The company may however hold its 1st AGM within 18 months after the date of its incorporation and, no more that 15 months must elapse between two AGM.
04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 115
ContinuationContinuationThe notice calling the meeting
must state the time, date and place of the meeting must be mentioned in the notice.
It must be accompanied by :◦a copy of the annual accounts of the
company,◦ director’s report on the position of
the company for the year and ◦auditor’s report on the accounts.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 116
ContinuationContinuationCompanies having share capital should also
state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence.
The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 117
Legal effects of not Legal effects of not conducting the Annual conducting the Annual General MeetingGeneral MeetingIn case of default in holding an
annual general meeting, the consequences are provided under section 133(4) & (7).
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 118
Usually Business of an AGMUsually Business of an AGMDirectors lay by the Co. annual
accounts and reports for the most recent financial period.
Auditors term of office ends at AGM, so they must be re-appointed or new auditors must be appointed.
Declaration of dividends to be paid to the shareholders
Re-appointment of appointment of new directed to replace the retiring ones.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 119
continuationcontinuationA notice of not less than 21 days
is required 64 the AGM as per s. 135 of Co. Act 2002.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 120
EGM section 134 for Co. Act EGM section 134 for Co. Act 20022002Extraordinary general meeting is
any meeting which is not AGM. Such meeting are called by board of directors for some reasons
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 121
continuationcontinuationAn explanatory statement of the
special business must also accompany the notice calling the meeting.
The notice must/should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 122
Who can call for EGMWho can call for EGMS. 134 (2) provided that the directors
must call an EGM if requisitioned by holds of 10% of paid up capital of the co.
Also the provision of section 137 of Act the court can, on its own motion or on application by any member who entitled to vote in any type of meeting in the Co; order the holding of any type of such meetings to be conducted (whether AGM or EGM).
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 123
Convening meetings:Convening meetings:In convening the meeting the
following must be taken in account.
Notice of the meeting to be issued not less than 21 days.◦Authority to call the meeting, that is
the meeting should be convened by required authority that is directors.
◦Thus, if a person without authority issued a notice of meeting this void.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 124
Conditions of a valid Conditions of a valid meeting:meeting:
◦Must be properly convened◦Parties calling the meeting must be
properly authority to do so◦There must be a proper and an adequate
notice◦The meeting must be legally constituted
(i.e. Chairperson & quorum)◦Business at the meeting must be validly
conducted in accordance with the regulations governing the meeting.
04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 125
Voting rights of the members Voting rights of the members of a companyof a companyThe member of a company has a
right to vote for any motion posed in a company.
The voting right is mainly exercised by way of shares.
The more number of shares one have the more the voting rights a person has.
However, voting may also be done by way of show of hands.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 126
Proxy s. 138 Co. Act 2002:Proxy s. 138 Co. Act 2002:A member may appoint another
person to attend and vote at the meeting on his behalf.
A member may appoint different proxies for the different shares he holds in the Co.
Also he can appoint different proxies in the sense that if one fails then the other may do so.◦ Is this same to Company representative in
meetings see section 141 of the Companies Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 127
Under what conditions doe a Under what conditions doe a proxy voteproxy voteConditions:Company be a Company having
share capitalNot to appoint two proxies to
attend or one occasion.Proxy not to work/vote except on
poll.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 128
continuationcontinuationHowever, a poll is allowed if a
prescribed no of members demand a poll as stated in the MEMAT section 139(1)(b).
A Co. cannot refuse a demand for a poll made by:◦At least 5 members having the right to
vote◦Any members representing one tenth
or more of the total voting rights04/07/23
By Ombella J.S: Contacts: [email protected] or 0713227298 129
Revocation of a proxyRevocation of a proxyA proxy can be revoked by a
member at any time and is automatically revoked by death or insolvency of a member.
A member may revoke his proxy by himself before the proxy have voted, once a proxy has exercised the right to vote, a member can not retract his vote
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 130
Quorum:Quorum:Means the minimum no of persons
who must be present for the meeting to be valid.
A meeting which invalid quorum is void same as the decision there too.
The articles of Association of a Co. shall provide for a quorum without which a meeting shall not constitute a quorum. See section 136 of the companies Act
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 131
MINORITY MINORITY PROTECTIONPROTECTION
MAJORITY RULE IN COMPANY LAW &
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 132
Meaning of Majority RuleMeaning of Majority RuleMajority rule is a principle that
derives itself from the fact that only the majority of the votes in the company can determine the fate of the company.
That is as log as the majority has passed the resolution then the it is immaterial that few members of the company did not vote for it
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 133
ContinuationContinuationThe court will not therefore
intervene the resolution passed by the majority since by agreeing to be a member in such a company, the shareholders agreed to submit to the will of majority of the members.
Therefore the decision of the majority is the decision of the company
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 134
CONTINUATIONCONTINUATIONMajority rule has its root in the
famous case of Foss v HarbottleIn this case the court ruled out as follows:◦The wrong done to the company was one
which could be ratified by the majority of members.
◦The company was the proper plaintiff for wrongs done to the company, and the company can act only through its majority shareholders.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 135
ContinuationContinuation◦The majority of members should be
left to decide whether to commence proceedings against the directors.
Therefore, the court will not interfere with the company as long as all its decisions are covered under the articles and memorandum of association of a company.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 136
ContinuationContinuationIn an Indian case Rajahmundry Electric Supply Co v Nageshwara Rao the court had the following to say:
◦ The court will not in general, intervene at the instance of shareholders in matters of internal administration, and will not interfere with management of the company by its directors so long as they are acting within the powers conferred on them under the articles of association.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 137
Importance's of the ruleImportance's of the ruleThat a company is a separate
legal person different from its members.
The wrong done to the company should therefore be pursued by the company itself and no one else (Say its shareholders).
It also helps to limit the possibility of multiplicity of suit
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 138
Minority shareholders Minority shareholders ProtectionProtectionMinority shareholders refer to the
members of the company who hold less than fifty percent of the shares in a company in an ordinary resolution.
This means therefore that these members in a company may not determine the fate of the company but the majority who can ordinarily pass a resolution in their favour
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 139
ContinuationContinuationWith the growing trend of private
companies where the possibility of a lot of shares being concentrated into the hands of a single shareholder the rule that the majority shall determine the fate of the company may be misused to the detriments of the minority.
Thus the law need to protect them against this possible abuse by the majority
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 140
Minority protection in Minority protection in TanzaniaTanzaniaWhere the act complained of is
ultra vires or illegal;Where a shareholder's personal
rights are infringed;Where the act complained of
requires more than an ordinary resolution (e.g. a special resolution)
Where there is 'fraud on the minority'.
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 141
ContinuationContinuationWinding up on the 'just and
equitable' ground. CA 2002, under section 233
under Chapter ten of the Act - the statutory remedy for 'unfairly prejudicial conduct'.
Rules of conducting a meeting
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 142
-END--END-Thanks for being attentive
Presented byOmbella J.S
HoD Research and Outreach ServicesDirectorate of Quality Assurance
&LL.M Programme Coordinator
Faculty of LawMzumbe University
04/07/23By Ombella J.S: Contacts: [email protected] or 0713227298 143