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Q.1 What is the effect of incorporations of a company?
Answer:
Before elaborating on the effect of a company, one must know what a
company is. The word company has no strict legal meaning. To a
layman the word company means an association of people who have
decided to associate for the purpose of carrying on business either for
profit or for charity. To a lawyer a company is an entity that is created
by law and given a legal status and personality on its own distinct from
its owners and officers. An entity has a legal status and personality if in
law it can exercise it legal right and is subject to legal obligations in its
own right. It should however be noted that not every association of
people is counted as company. An association will count as company, if
it is registered in accordance with law that provides for the registration
of companies. In Ghana, the Companies Code 1963 Act 179 is the Law
that provides for the registration of companies. So, if an association of
persons is registered in accordance with Companies code Act 179, it is
counted as company.
After a company has been brought into existence it come with certain
consequences of incorporation such as
1. It becomes separate legal entity (case Salomon v. Salomon &
Co) (1897)
2. It has a perpetual succession (companies code act 179) section
38 and 180
3. It has the capacity to sue and be sued (Bank of West Africa v.
Appenteng) (1972)
4. It has the capacity to acquire own and dispose property both
movable and unmovable (Macaura v. Northern Assurance)
(1925)
5. It has the capacity to separate corporate assets from personal
assets
6. It has the capacity to borrow keep account and create charges
over corporate assets
7. It has the capacity to enter in legal relation. Lee v. Lees Air
Farming Ltd (1960) Morkor v. Kuma (1998-99)
8. It becomes a taxable unit.
SEPARATE LEGAL PERSONALITY/ ENTITY
One consequences of the incorporation is that it acquires a legal status
and personality on its own, separate and distinct from its members and
officers. It has a separate legal existence in its own right. As a legal
person, it has legal rights and obligations attributed to it. It can act as
an independent legal person in its own name. a case that illustrate this
point is Salomon v. Salomon & Co.
Facts:
Mr. Salomon had carried on a successful business as a sole
trader in the manufacture of leather boots and shoes. Mr.
Salomon converted his sole proprietorship business into a
limited liability company. Mr. Salomon had sold his business
to the company at the inflated price of 38,782 pounds. The
company had seven members: Mr. And Mrs. Salomon and
their five children. Mr. Salomon had 20,001 shares, and Mrs.
Salomon and the children had one share each.
The company purported to pay for Mr. Salomon’s interest by
the company allotting to him 20,000 shares at one pound
each, making payment of 20,000 pounds. The company also
issued him with debentures of 10,000 pounds. The company
then paid Mr. Salomon the balance of 8,782 pounds in cash.
Thus the company owed him 10,000 pounds since he was a
debenture holder secured by a charge on the company’s
assets in his favor. Mr. Salomon and two of his sons were
appointed directors. Mr. Salomon was also the managing
director of the company. The business of the company did not
prosper. Eventually the company became insolvent. The value
of the company’s assets as realized was 6,000 pounds; but
the company owed 7,733 pounds to unsecured creditors and
10,000 to Mr. Salomon whose debt was secured as a
debenture holder.
In the confused lawsuit, which followed the main body of
unsecured creditors, advance two principles of arguments:
The sale transaction was a sham and so Salomon was still the
owner of the business and liable for its debt
The was irregularly formed because six of the seven
members/shareholders were mere nominees of Salomon
HELD:
It was held that the business was owned by and its debts were
liabilities of the company, not of Salomon personally;
Although Salomon owed beneficially all the issue shares of the
company he could also be a secured creditor with enforceable rights
against the company in that capacity.
PERPETUAL SUCCESSION
The second consequence is that a company enjoys continuity of legal
existence. This means that on incorporation, the company continues to
exist in the eyes of the law even when its member or officers die or
cease to be associated with it. The only lawful processes by which the
legal existence of company may be terminated are winding up,
liquidation and dissolution. However according to Sec. 38, 180 give the
details.
CAPACITY TO BE SUE AND BE SUED
A company as a legal being can sue in its name and can be sued in its
name. A company is sued when its breaches it legal obligations
which may result from a contract, a tort or statute. A company can also
sue for the purpose of acts of the company simply because the person
being sued is a member or an officer of the company.
Question 3
The Companies Code 1963 Act 179 provides the laid down procedures
for the sitting up of any company in Ghana. The member(s) of the
proposed company must prepare the company’s Regulations. The
Regulations of a company is a contractual document which when
registered, sealed and delivered; bind the members, officers and the
company as to the terms thereof. S.16 of the Companies Code 1963
Act 179 state the content of the regulations which include the name of
the company, the nature of the business or businesses which the
company is authorized to carry on, or the nature of the object or
objects for which it is established, 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, the names of the first directors
of the company, that the powers of the directors are limited in
accordance with section 202 of this Code.
Section 21(1) of the Companies Code 1963 Act 179 state the effect of
the Regulations: Subject to the provisions of this Code, the
Regulations, when registered, shall have the effect of 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.
The effect of the above provision is that if a membership duty is
imposed on a member in his capacity as a member, then he must
perform it otherwise the company can sue him form non-performance.
The court will, therefore enforce issues dealing with rights of a member
which have been conferred on a member or duties imposed on him in
his capacity as a member. On the other hand, if a person is a member
of a company and certain right are conferred upon him in his capacity
as a member he has a right to ask the company to perform it because
it is bound by the Regulations.
Another issue, which has caused more difficulty, is
precisely what type of rights the members or the company can
enforce as Regulations. There are numbers of effects to section
21 (1) of Act 179 and these are as follows:
1. The Regulation of a company must constitute a specialty
contract between the company and its members as well as
its officers. Being a specialty contract, it implies that none
of the parties to this three party contract need give
consideration in order to be able to sue on it. The case of
Hickman v Kent or Romney Marsh Sheep Breeders
Association (1920) illustrate a proper interpretation of a
company’s Regulations and whether a company member
could be bound by its terms.
Hickman v Kent or Romney Marsh Sheep Breeders Association
(1920) FACTS:
The company’s articles included a clause to the effect that all
disputes between the company and its members were to
referred to arbitration, before court. Mr. Hickman complained
about refusal to register his sheep in the published flock book
and was under threat of being expelled. He brought court
proceedings against the company and the company sought an
injunction.
HELD:
The proceedings were stayed. The articles prevented Mr.
Hickman since there was a contract. As a member, Mr. Hickman
was bound to comply with the company procedure for arbitrating
disputes and could not resort to court.
Since the matter in dispute related to memberships duty, he was
bound to refer to the case to arbitration. Our law adopted the rule in
Hickman v Kent case by providing that, the Regulations constitutes
terms of a contract between the company and a member in his
capacity as member. The company must therefore respect its duties.
2. The provisions of the Regulations can, therefore, be said to
be terms of this contract and thus when they are breached,
it will entitle each aggrieved party to sue for breach of
contract. This can be derived from the case of
Eley v Positive Government Security Life Assurance Co. (1876)
FACTS:
Mr. Eley was employed as a life solicitor for the company on
contract for service. Later, he became a shareholder. Whilst so
employed his contract for service was terminated. He sued the
company for breach of contract, claiming that he had a
contractual right to act as the company’s solicitor arising from
the articles.
HELD:
He failed because he was not a party to the contract, since he
was not a member: he had not taken shares in the company
when it was formed. This was not a right given to him as a
member and he could not rely on the articles as a contract for
professional services. The right to be a director of a company has
also been held as an outsider right.
Thus in Eley’s case, the Regulations do not constitutes terms of a
contract between a member and the company not in his capacity as
member.
3. Members can sue fellow members on the enforcement of
the
Regulation and likewise officers can sue fellow officers too
for the same purpose. Note that, the word “Officer” as an
innovation. Any duty imposed on an officer must be
perform by him. The word Officer in this context refers a
Director, Secretary or Employee. Where a member is not
performing his membership duty another member can sue,
as it is in the case of Rayfield v Hands
FACTS:
Here Mr. Rayfield asked the directors to buy his fully paid up
shares but they refuse to do so. The articles required the
directors to be members, i.e. to hold qualification shares and to
purchase shares from any member who wishes to sell.
HELD:
This was enforceable against the directors in their capacity as
members.
The duty imposed on the Directors was in their capacity as members
and therefore this was a duty imposed on all members. Any member
who is aggrieved has the right to sue. An officer is not a member but
can sue a member if he is not performing his membership duty. This is
because an officer has certain duties conferred on him as well
The Regulations when registered constitute the terms of the contract
between the members themselves. That is a member v. members.
The duties impose on a member, must be performed by all members,
therefore if any member refuses to perform his duty any member can
sue him for not doing his duty.
4. Section 21(1) above shows that the contract envisaged
here refers to the provisions of the Regulations as they
apply to the three parties as in their various capacities as
company members and officers. Thus an officer or member
cannot sue in another capacity other than that as an officer
or member.
5. If the Regulations impose a duty on a director not in his
capacity as a member he can refuse to oblige because is it
a membership duty.
This is illustrate in Beattie v E F Beattie (1938)
FACTS:
The company’s articles contained an arbitration clause (in the
wording as in Hickman’s case). Mr. Beattie, a member and
director of the company, was in dispute with the company. It was
a wide-ranging dispute concerning his right as a director. He
brought court proceedings against the company.
HELD:
He was not bound by the arbitration clause since he was acting
in his capacity as director, not a member.
The rule in Beastie’s case will be enforce in Ghana, thus a duty impose
on a director must be performed by him. An Employee is a full time
personnel or one under a contract of service.
6. The contract concerned can be “altered from time to time”.
This refers to a novation by operation of law. This novation
may be by way of change in the subject matter of the
contract (i.e. the provisions of the Regulations), change of
officers of the company, change in the mane of the
company or change in the membership of the company.
1) Since section 21 (1) does not apply to outsiders, subsection 2 of
section 21 attempt to make it clear that when certain categories of
outsiders have given credit to the company and have thus been
empowered by the Regulations of the company to appoint and
remove a director or officer of the company they can do so. This
section codifies the decision in Woodland Ltd v. Logan (1948)
Where the Regulations empower any person to appoint or remove
any director or other officer of the company such power shall be
enforceable by that person notwithstanding that he is not a member
or officer of the company.
Finally the section 21 (3) of the Companies Code 1963 Act 179
stipulate that in any action by any member or officer to enforce any
obligation owed under the Regulations to him and any other member
or officer, such member or officer shall, if any other member or officer
is affected by the alleged breach of such obligation, sue in a
representative capacity on behalf of himself and all other members or
officers who may be affected. This is aimed at preventing a multiplicity
of lawsuits by insisting that suits to enforce the provision of the
Regulations shall be by way of a representative action (class suits).
In conclusion, a company Regulations therefore shows how that
particular company is constituted and administered. It is however
mandatory under the code that company’s Regulations must
contain the name, objects, powers, the names of Directors, the
limit placed on the power of the Directors, the liability of the
company and the nature of that liability. Hence the code under
Section 21 of the Companies code Act 179 spells out the character
of registered Regulations and the relationship between members
and the company and between members themselves and it is
summarized as follows:
a) A contract between the company and its members;
b) A contract between the company and its officers;
c) A contract between the member on one hand and officers on
the other;
d) A contract among the members;
e) A contract among the officers