In forming a company, its shareholders may seek to minimise the liability of the company and themselves to creditors

The term company  is an association of many persons who contribute money or money’s worth to a common stock, and to employ it in some common trade or business, and who share the profit or loss arising there from”

Black law dictionary(2004) 8th edition at page 846 also defines the term company as a corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing. Company is also define to mean a group of persons associated together for the attainment of a common end, social or economic or a voluntary association of persons or individuals formed for some common purpose.

The company starts its breath after its registration, Section 14 provides for the registration of the Memorandum and Articles of Associations. After the documents have been registered the companies acquires the legal personality and becomes the separate entity with  capability to own property, incurring debt and borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. The doctrine of separate legal entity was firmly established in the case of Solomon v. Salomon & Co.LTD where lord Macnaghten held that:-“the company is, in the eyes of law, a separate person independent from Salomon and was not his agent though initially the holder of all shares of the company was also a secured creditor, and was entitled to repayment in priority to unsecured creditors”

.According to Lord Halsbury, in Salomon, expressly refers in his speech to the fact that there was no fraud or agency Of course, if there is an express agency agreement between the shareholder and the company so that the latter is the agent and the shareholder is the principal, the court is obliged to lift the veil and treat the business or the activities of the company as that of the shareholder. Therefore any activity of the company shall be treated as the same as of the shareholders and this is an indication that the liability of the company is the liability of the shareholders.

2. CIRCUMSTANCES UNDER WHICH SHAREHOLDERS CAN MINIMIZE THEIR LIABILITY TO THE COMPANY UNDER COMPANIES ACT OF (ACT NO 12) 2002

The act imposes liability to the members of the company for the debts where business was carried out by fewer than two members. Section 26 provides that if at any time the number of members of a company is reduced below two, and it carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and knows that it is carrying on business with fewer than two members, shall be liable (jointly and severally with the company) for the payment of the whole debts of the company contracted during that time.

The Act also imposes the company with civil liability for misstatement in offer document. Section 50 provides that where an offer document invites persons to acquire shares in or debentures of a company, every person who is a director of the company or, as the case may be, the offer or at the time of the issue of the offer document, every person who has authorized himself to be named and is named in the offer document as a director of the company, or as the case may be, the offeror or as having agreed to become such a director whether immediately or after an interval of time; every person who has authorized himself to be named and is named in the offer document as a director of the company, or as the case may be, the offeror or as having agreed to become such a director whether immediately or after an interval of time;  every person being a promoter of the company; and every person who has authorized the issue of the offer document or any part thereof shall be liable to pay compensation to all persons who acquire any shares or debentures in reliance on the offer document for the loss or damage they may have sustained by reason of any untrue statement included therein.

The Act requires the company to deliver annual returns to the registrar, if it fails to do so within twenty eight days the company and every officer of the company who is in default shall be liable to a fine and, in the case of a continued failure to deliver an annual return, to a default fine.This provision exempted the shareholders from the liability  of default for annual  return to the registrar because it is an administrative duty which should be performed by the officers employed by the companies to run its business.

Section 66 of the Act requires the company to issue notice to the registrar of increase of share capital beyond the registered capital within thirty days after the passing of the resolution authorizing the increase in case of default the company and every officer of the company who is in default shall be liable to a default fine. Section 80 also imposes the liability to the company and officers where the company defaults in issuing the transferee with the notice of refusal to register a transfer of any shares or debentures within sixty days after the date on which the transfer was lodged with the company.

Section 100 of the Act also imposes the duty to the company to register to the registrar within forty two days the charges it creates. The provision goes further and states that where the registration is affected on the application of some person other than the company, that person shall be entitled to recover from the company the amount of any fees properly paid by him to the Registrar on registration. In case of default the company and any officer responsible shall be liable to a default fine.

Therefore the shareholders are exempted from all the liabilities occur under the circumstances explained above. These liabilities shall not affect their rights such as the right to dividends.

3:CIRCUMSTANCES UNDER WHICH THE COURT ENEABLE SHAREHOLDERS TO MINIMIZE THEIR LIABILITY TO THE COMPANY AND CREDITORS.

In the case United States v. Milwaukee Refrigerator Co, the court observed that a corporation will be looked upon as a legal entity as a general rule but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons. The court also in Littlewoods Mail Order Stores Ltd. V. Inland Revenue had this to say:-

“The doctrine laid down in Solomon v. Solomon & Co. Ltd. has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind”.

This means that the court can intervene the business of the company to determine whether such business was performed by the company for its benefits or it was performed by an individual person by using the name and seal of the company for his own benefits. The following are circumstances under which the court can lift up the Vail of the company to determine whether the doctrine of legal personality of a company is lawfully applied or not:-

Fraud situations. The liability of the shareholders can be minimized to the individuals when the court satisfies that the individuals who are the machinery of incorporation has been used the company’s name for some fraudulent purpose. 

In Wallersteiner v Moir (1974). In this case, the defendant Moir had accused the plaintiff of a number of fraudulent acts. The court had to consider whether a loan made by a company to another company which was under the control of its director was illegal under Section 190 of the Companies Act 1948 (now, s 330 of the Companies Act 1985) of England which prohibits the giving of a loan to a director. Lord Denning MR considered that the company was the puppet of Dr Wallersteiner as the company was his creature and therefore that the loan should be treated as a loan made to him. Fraud was an issue in the case of Woolfson v Strathclyde Regional Council  where the court ruled that “it is only permissible for a court to lift the veil where special circumstances exist indicating that [the company] is a mere façade concealing the true facts’’ Therefore the shareholders shall not be liable if it is observed that there was a fraud transactions made by individuals under the seal of the company.

Tax evasion. The court may ignore the corporate entity where company is used for tax evasion. Tax planning may be legitimate as it is within the framework of the law. Where it is desired to determine for tax purposes the residence of a company the court will lift the veil and find out where its central management is, and that place will determine the residence of the company. 

Where the court finds that the company is used for tax evasion, the liability shall be to the persons who are responsible in managing the company hence the shareholders escapes liability under this situation.

The court also can exempted the shareholders in liability for the acts committed by  the person who uses the company as its agent for his own benefit .This was the issue in the case of Wallersteiner v Moir, Lord Denning MR, stated  that:-

“I am quite clear that the companies were just the puppets of Dr Wallersteiner. He  controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures for whose doings he should be, and is, responsible “

According to the decision of this case where the person uses the company as his agent to make personal gains through  the name of the company he shall incur the liability of the company and therefore the shareholders ‘money cannot be called upon to pay for the liability. The case of Armagas Ltd v Mundogas SA (1986), provides that in order for a person to act as an agent he ostensible  authority .Lord Keith of Kinkel as he was then  said:

                        “Ostensible authority comes about where the principal, by words or conduct,

                 has represented that the agent has the requisite actual authority, and the party

                 dealing with the agent has entered into a contract with him in reliance on that

                        representation”.

Therefore when a person in the company authority enters into a contract of his own benefit by using the company name and the other party to the contract believes the person to represent the company hence the shareholders shall be not liable rather the person who purports to act under the company’s seal.

3:CONCLUSION

A company is a legal person different from its members. The principle may be referred to as “a vail of a corporation”. The court in general consider themselves bound by this principle and the effect of this principle is that there is a fictional veil and not a wall between a company and its members. Due to the fact that human started  using this veil of corporate personally to make fraud or improper conduct to benefit himself hence the court decided to intervene this situation in order to determine who is the beneficiary of the corporate and who is responsible for any liability of the company. Therefore when the court finds that the individuals use the corporate veil for their own benefits it will exempt the shareholders from such liability on the principle that the person must suffer from his own wrong.

THE DOCTRINE OF ULTRA VIRES IN COMPANY LAW

When a company is registered, the incorporators are required to send a memorandum of association to the registrar and one of the clauses of the memorandum is the ‘objects clause’. The original intention of the legislature is that the incorporators should have to identify the purposes for which the company was formed and that these would be publicly known. Contracts that were outside of a company’s objects clause were ultra vires and void. Such contracts could not be enforced by the company or against the company

The term ‘Ultra vires’ is an ambiguous expression as commented on by Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corp.In this case the term Ultra Vires was described in two expressions which are “nulity” and “wrongful exercise of power”, where by ‘nullity’ the court meant that ‘A company, being an artificial person, has no capacity to do anything outside the objects specified in its memorandum of association. If the transaction is outside the objects, in law it is wholly void and by ‘wrongful exercise of power’ the court elaborated that is where a company makes a transaction which was within its objects, but should not have been made. Under the companies Act (Act no 12) of 2002 empowers a member of a company to sue the company when it is doing something which is beyond its capacity.

Historically, this doctrine of ultra vires under company law was firstly underlined in the case of Ashbury Railway Carriage and Iron Co v Riche.The fact of this case shows that a company, which had clauses in its memorandum stating that the objects of the company were to make and Sell railway carriages, wagons, all kinds of railway plant and rolling stock, and to carry on the business of mechanical engineers and general contractors, purchased a concession for making a railway in Belgium. Riche was to construct the railway under a contract with the company but, subsequently, the company repudiated it as being ultra vires. The House of Lords held that:-“the contract was ultra vires the company and void so that not even the subsequent assent of the whole body of shareholders could ratify it”. The clear view of their Lordships was that, the rule existed for the protection of both the shareholders, both present and future, and the persons who might become creditors of the company. Although it is difficult to see that the rule benefited the latter as individuals, since they were at risk of having their transactions impugned, the benefit was presumably to those creditors who were comforted by the knowledge that the assets of the company could not be dissipated on speculative ventures.

Generally, the whole doctrine of ultra vires rests on the principle of constructive notice, in order to determine what is within the power of the company (intra vires) and what is beyond the power of the company (ultra vires) a person dealing with a company is deemed to know what is in its memorandum and articles of association by making a constructive notice to the registrar of company. In this doctrine of ultra vires sympathy is not forthcoming for the persons who are contracting with the company without discover the contents of the memorandum and articles of association. The doctrine of Ultra vires in this sense therefore seems to protect the company from liability incurred by the other party to the transaction against the company.

However in Re Jon Beauforte, where a company had been incorporated with an objects clause which authorized the company to carry on business as makers of ladies’ clothes, hats and shoes. The company later decided to manufacture veneered panels. 

To further this latter business, the company contracted with a builder to construct a factory, entered into a contract with a supplier of veneer and ordered coke from a coke supplier to heat the factory. All three remained unpaid when the company went into liquidation and the liquidator rejected their proofs in the winding up on the ground that the contracts were to further an ultra vires activity and were, therefore, void. 

These rejections of the liquidator were upheld by the wording of Roxburgh J that the rejection of the coke supplier’s proof was particularly harsh, since, whereas the builder conceded that the contract was ultra vires, the coke supplier was unaware of the purpose for which the coke would be used and it could easily have been used to further legitimate objects. 

This decision recognizes the ultra vires transaction where the person dealing with a company acted in good faith. Also the companies Act (Act no 12) of 2002 protects the person who acted on good faith while making ultra vires transaction with the company.  The term good faith in respect of this doctrine was defined in Barclays Bank Ltd v TOSG Trust Fund Ltd (1984), where Nourse J stated obiter that:-“a person acts in good faith if he acts genuinely and honestly in the circumstances of the case and that it is not necessary to show that he acted reasonably to demonstrate that he acted in good faith.”This doctrine seems to prevent the creditors and investors to engage in as many commercial activities as they wish depending on their capital hence it was to be reformed in favour of the investors.

THE REFORM AND CURRENT POSITION OF THE DOCTRINE ULTRA VIRES

Dr Dan Prentice of Oxford University was asked by the government of England to investigate the area of objects clauses and ultra vires with a view to find the possible abolition of the ultra vires doctrine and recommending any necessary safeguards for investors and creditors. Dr Dan Prentice came up with the following recommendations which were adopted by the Companies Act of 1989 of England as well as the Companies Act of Tanzania (Act no 12) of 2002.

Companies be given freedom to alter their objects clauses in any circumstances by special resolution. This recommendation was affirmed in Cotman v Brougham (1918). In this case, the House of Lords had to consider the objects clause of Essequibo Rubber & Tobacco Estates Ltd. The objects clause enabled the company to carry on virtually every type of activity. In the Court of Appeal, Lord Cozens Hardy MR had said:

               “Now we are familiar with an enumeration of objects which extends the full

                 Length of the alphabet, and sometimes beyond it, so that you get sub-clauses

    (aa) and (bb) after you have exhausted all the other letters”

This is also reflected under the companies Act of 2002 which empowers the company by special resolution the power to alter the provisions of its memorandum with respect to the objects of the company.By virtue of this provision the company can alter its objects in the Memorandum and Articles of Associations by adding the business which was not formerly included in the Articles or it can alter by removing the object which authorizes a certain business and replace by it another business.

Companies should be able to adopt a general objects clause permitting them to operate as general commercial companies. This means that companies should have to draft very wide and lengthy objects clauses which attempted to include every conceivable form of commercial activity. Practically this can be evidenced in Re New Finance and Mortgage Company Limited (in liquidation) (1975). Where the object clause of this company provided that the company could act ‘as financiers, capitalists, concessionaires, bankers, commercial agents, mortgage brokers, financial agents and advisers, exporters and importers of goods and merchandise of all kinds, and merchants generally’. The company in fact ran two garages and garage shops. 

The company went into voluntary liquidation and Total Oil (Great Britain) Ltd sought to prove in the liquidation in relation to the sale of motor oil to the company. The liquidator rejected the proof as he contended that the purchase of the oil was ultra vires. The court held that the words ‘and merchants generally’ were broad enough to cover all types of commercial transactions and that therefore the purchase of the motor oil was intra vires,

The company should include in the Memorandum and Articles of Association and independent clause which gives the directors the power to make any transaction which they think is incidental. This was experienced in the case of Deuchar v. The Gas Light and Coke whereby the plaintiff was the shareholder in the defendant Company and was also the Secretary of a Company which supplied the defendants with caustic soda. The plaintiff sought the declaration from the court that the manufacture of the caustic soda and chlorine by the defendants, and the erection of the factory for the purpose, was ultra vires the company. Asbury, J., had found that the activities were fairly incidental to the powers given in the objects clause, and the court of Appeal affirmed this decision.

The doctrine of ultra vires is no longer valid as new changes are adopted in Company law in order to protect the investors and the creditors’ interests. The companies Act of 2002 provides for the indoor management of the company which gives the company freedom in conducting its business by abolish the doctrine of constructive notice. 

Section 37.The provision of the Act reads that: - “A party to a transaction with a company is not bound to enquire as to whether it is permitted by the company's memorandum or as to any limitation on the powers of the board of directors to bind the company or authorize others to do so”. By this provision therefore the statement that once the documents of the company has been registered they become public document is no longer exists.

3: CONCLUSION

The doctrine Ultra vires is in its declining rate as a result of monopoly capitalism which focuses at making huge profits. Therefore the law seeks to protect the interests of the investors by simplify this doctrine of ultra vires in order to allow the investors to conduct as many business as they can in order to make huge profit and to increase production and supply

 Of goods and services in the country.

BIBLIOGRAPHY

BOOKS

Goulding S, (1999) The Company law,2nd edition cavendish Publishing Limited, London

Prof Bourne N, (2000) Essentials of Company law 3rd edition cavendish Publishing Limited, London

Prof Bourne N,(1998) Principles of Company law 3rd edition cavendish Publishing Limited, London

STATUTES

The companies Act (Act no 12) of 2002