Company Law

For today looking at the following: Formation or Incorporation of companies Pre incorporation Contracts

Introduction What is a company? – An entity registered in accordance with the Companies Act, 1963, (Act 179). – Set up to carry on business – Created by law thus has a legal status – Could be set up by an association of people or one person – section 8 – Has a distinct personality separate from its owners and officers – Has legal obligations and rights, can sue and be sued – Has all the powers of a legal person except specifically excluded by the regulations

The association of people who form the company become the members/owners/shareholders of the company It has officers who act for and on its behalf, because it cannot act for itself These officers are the directors and the company secretary There may be other officers appointed by the directors

A company is for a purpose A company needs resources called capital to carry out its objective Responsibility of members to provide the company with the needed capital to undertake its business The company can also raise its capital to carry on its own business

Capital must be used for the stated purpose and not appropriated for personal use by members Management, i.e., policies, designing and implementing programmes, is done by the directors

Functions of a company Creates avenues for investment Serves as a means by which commercial activities can be carried out – e.g. Banking laws provide that only an incorporated body can apply for a license to operate a bank Source of tax revenue for Government

Formation or Incorporation of Companies A company must be formed through registration according to laid down procedures Companies Act, 1963 (Act 179) Registration is also called incorporation Effect is that it becomes a legal entity separate and distinct from its owners and has its own obligations and rights

Salomon v. Salomon: a businessman converted his business from a sole proprietorship into a company in accordance with the existing laws on registration of companies in the UK. House of Lords said that the effect of registration in accordance with the law was to make the business a separate legal person from the owner, Mr. Salomon.

Section 8 of the Companies Act states that any one person may form a company Person here also means legal entities, hence a company can form another company Companies Act empowers the Registrar General to decline to register a business if its objectives are unlawful It also empowers him to decline to register a company where one of the subscribers is an infant or a person of unsound mind

2 people are crucial in the incorporation of a company: – The promoter Promoter is a person who is engaged/interested in the formation of a company Promoters are to submit the company’s regulations for registration

The Registrar General is responsible for registration. Can however refuse to register on the following grounds: Objects of the business are unlawful Any of the subscribers is an infant or a person of unsound mind Any of the directors named is incompetent Upon registration, a certificate of incorporation is issued: serves as evidence of incorporation A certificate for commencement: this is needed before the company starts operation. Certain provisions has to be complied with before this is issued.

Legal consequences of incorporation Separate legal personality Perpetual succession Capacity to sue and be sued Capacity to acquire and own property Separation of corporate assets from personal assets Capacity to borrow and create a charge over corporate assets Capacity to enter into legal relations Taxable unit

Pre-incorporation contracts The pre – incorporation period refers to the period between the commencement of the process of incorporating a company to the period when incorporation is complete Such contracts are entered into and by the promoters and meant for the company when it is formed Generally companies are not bound by pre- incorporation contracts

For a company to be bound it has to consent to be bound by the contract Section 13 of Companies Act provides that a company may ratify to be bound. The company is not obliged to do so and until it does so, it is not bound The contract then is binding only on the person who enters into the contract Hence any benefits arising cannot be enjoyed by the company

On ratification, the company becomes bound and entitled to any benefit under the contract The company will be treated as if it had been in existence at the time of the contract and had been a party to it

How to ratify a pre-incorporation contract Ratification has to be done by decisions or resolutions of any of the governing organs of a company, i.e., BOD, members in a general meeting or all members of the company acting unanimously Split v. Oysa: a representative of a company yet to be formed entered into a contract to charter a ship for the business of the company. After formation the MD wrote a letter to the ship owners acknowledging company’s readiness to pay some money as compensation in respect of a breach of the contract.

The company later refused to pay the money arguing that the payment of the money was in respect of a contract that was formed before its incorporation and therefore not binding on it. Issue was whether the letter from the MD could be said to be ratification and therefore binding the company. Held: the mere letter by the MD was insufficient to operate as ratification of the contract.

A resolution must be either by: – The members of the company in a general meeting, or – The BOD and subsequently confirmed by the members in a general meeting Hence if the MD’s letter was communicating a decision of the board or a decision of the members of the company in a general meeting approving the transaction, that would have amounted to ratification

Panagiotopoulos v. Plastico Ltd: promoters entered into a contract to purchase land, factory and machinery to be used by the company on its incorporation. On incorporation the company entered into possession of the land and started using the factory and machinery to carry on its business. It also started paying the purchase price for the items but later defaulted. Seller then sued to recover balance. Issue was whether the company by taking possession of the land, factory and machinery and by making payments of the purchase price, could be said to have accepted to be bound by the pre incorporation contract.

Court found that the payment was made by the company in the mistaken belief that the contract was binding. Court said that the company after incorporation must have entered into a new contract to the effect of the terms of the one entered into by the promoters The making of the payment in mistaken belief could not form sufficient basis to draw inference that the company had entered into a new contract in respect of the pre-incorporation contract Company therefore not obliged to pay the purchase price