The case of Salomon v Salomon Ltd. laid down the legal principle of corporate personality. What this means in law is that once a Company is registered, it is given an artificial personality. Subsequent to registration the Company can sue or be sued as a person. Further the Company and its members are separate and distinct from one another. If the Company owes money to the bank or its creditors, the creditors cannot sue its members but can only recover their debts from the Company. If the Company is unable to meet its debts, it goes into insolvency(closed down). Even if the Company’s owners are rich, the creditors are barred from sueing its Directors or shareholders. To summarize the above principle- the legal principle established by the case of S v S Ltd. is the separate legal entity principle. A Company is separate and distinct from its members and directors. This principle is also known as the “veil of incorporation.” Cases which applied this principle include Lee v Lee’s Air Farming Ltd. & Macaura v Northern_Assurance Co. Both these cases held that sole owners of a Company were separate persons and are distinct from the Company itself.
WHEN A COMPANY IS INCORPORATED THE FOLLOWING PRINCIPLES WILL EMERGE. 1. Limited liability- The Company is liable for its own debts, but it obtains its capital from its members to conduct its business and when the Company makes a profit, it distributes the profits to its members in proportion to the number of shares each member holds.
2. Sucession- When any member sells his shares in the Company, there is no change in the Company itself. Although the shareholders change, the Company does not because of its separate legal personality. A person can buy and sell shares on the stock exchange, but the corporate personality does not change.
3. Shareholdings- A persons interest in the Company is represented in the amount of shares he holds.
4. Assets, rights and liabilities.- All assets which are held by the Company belong to the Company and not to the members. In Salomon v Salomon Ltd (1897), it was held that a Company had a legal existence separate from its members so Mr. Salomon could be a creditor of the Company and the Company had to pay him in spite of the fact that he was literally the owner of the business.
5. Capital- members of a Company make a payment to the Company in return for the shares issued. These payments are described as the Company’s capital.
6. Appointment of Directors- since the Company is an artificial person, clearly there must be someone to manage the Company. Members have the power to vote and appoint individuals to manage the Company. Such persons appointed are described as Directors.
7. Board of Directors.- The Company will be managed by Directors who will act as a group through a Board of Directors. The members will meet in a General Meeting where matters not delegated to the Board will be discussed.
8. Company’s Constitution- There are 2 main documents on which the Company is founded. One is the MA (Memorandum of Association) and the other is the AA (Articles of association)
9. Registration- In Malaysia, the Company is birthed into existence when it is registered under the Companies Act 1965.Thereafter it retains its separate legal personality until it is either struck off the Register at the CCM or liquidated by the process of winding up.( usually in cases of bankruptcy)
INSTANCES WHEN A COURT OF LAW HAVE LIFTED THE VEIL OF INCORPORATION.
In times of war- Daimler Co. Ltd v Continental Tyre & Rubber Co. This case was decided during the time when England was at war with Germany. Continental sued Daimler for money due in respect of goods supplied. Daimler claimed that the Company was actually owned by German Nationals and paying them was illegal under the Trading with the Enemy Act. The Court lifted the Corporate veil to discover if this was so, and found as a fact that it was the Germans who were operating the business. D was therefore successful in its defence. To Prevent a fraud from being perpetrated Gilford Motors v Horne [1933] Horne was at one time the Managing Director of Gilford Motors. One of the terms of his employment contract was that, in the event that he leaves the Company, he will not solicit the customers of the Company. Eventually Mr. Horne left the Company and setup his own Company by the name of JM Horne & Co Ltd. through which he had business dealings with the previous Company’s clients. Gilford Motors sued Mr. Horne. Horne’s claimed that it was not him that was doing the business but the Company and that under Company Law they were 2 different people. However the Court was not convinced and lifted the veil of incorporation. In this instance, Mr. Hornes was just trying to hide behind a Corporate veil to steal business from his former employer. Where a fraud is perpetrated, the Court will lift the Corporate veil. Aspatra Sdn. Bhd. v Bank Bumiputra Malaysia Bhd. (1988) It was held that the Court could lift the veil to determine whether the assets of the Company were really owned by them or whether there was an abuse of the principal that a Company is a separate legal entity. To enforce a legal obligation Jones v Lipman. [1962] Lipman contracted with Jones to sell him a house. But for some reason he later changed his mind. To avoid being sued by Jones he quickly set up a Company named Alamed Ltd. and transferred the title of the house to the Company. Jones sued him but Lipman claimed that the house was already sold to Alamed Ltd and therefore he was no more the legal owner of the house. The judge who heard the case was Russell L. After hearing Lipman’s story of the Corporate veil –the judge rejected it. He stated, “Alamed Ltd. is a creature of Lipman’s device and a sham, a mask which he holds before his face in an attempt to avoid the eyes of equity.” Mr. Lipman was ordered to sell the house to Mr. Jones. When a Court order anyone to do something- it is known as specific performance. When A Court prohibits anyone from doing something it is known as an Injunction. Where a group of Companies is regarded as a Single Corporate Entity. Hotel Jaya Puri Bhd v National Union of Hotel,Bar or Restaurant Workers [1980] Although technically a person working for the restaurant was an employee of the restaurant , the reality was that the workers were employees of the hotel. The Court unveiled the corporate veil and concluded that the workers were in fact and in law, the employees of the hotel. STATUTORY EXCEPTIONS 1) S36(4) Companies Act 1965 By this section if the number of members falls below 2 and the Company carries on business for longer than 6 months while it is so reduced, the remaining member who is cognisant of the fact that it is so carrying business will be personally liable for the debts of the Company incurred after 6 months. RESPONSIBILITY FOR FRAUDULENT TRADING In Re Williams C.Leitch Brs. Ltd.( No.1) [1932]All E.R. 892 at 895 the Company was insolvent but its Directors continued to carry on business and purchased further goods on credit . Maugham declared one of the Directors personally liable for the price of the goods, citing: “…..if a Company continues to carry on business and to incur debts at a time when there is knowledge of the Directors on reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the Company is carrying on business with intent to defraud.” DIFFERENT TYPES OF COMPANIES Business is usually done by a group of people except in the case of sole proprietors where one man runs the whole show. To set up a business, one needs to know the different kinds of Companies which is permitted by the law. Section 14 (1) of the CA 1965 –“… any two or more persons associated for any lawful purpose may, by subscribing their names to a memorandum and complying with the requirements as to registration , form an incorporated Company. 14(2) A Company may be 1. limited by shares. 2. limited by guarantee 3. limited both by shares and guarantee 4. an unlimited Company Company limited by shares This is the most safest kind of business arrangement. In situations like this, a person’s liability is only limited to the amount of shares he holds. If the value of the shares increases, he makes a profit. Many people have become rich by buying and selling shares on the Stock Exchange. However many people have also become poor by investing in the wrong Company. A Company is a person separate from its members. It can sue or be sued in its own name. Needs to be registered with the Registrar of Companies under the Companies Act 1965. One must deposit the MA and the AA with the ROC. Shares are transferable The MA and the AA of a Company (Ma & AA)usually include in their objects clause an express power to borrow. There is no limit to membership. There must be a Company constitution. Members to not play a practical role in the daily operation of the business. Company can use the Companys assets for borrowing $$ from the Bank. A Company can be wound up following certain procedures. Companies are required to supply certain information to the public. A members liability is limited to the amount of shares that person holds. In the event the Company goes bankrupt, creditors are barred from going after the members due to the concept of corporate personality. Question- Write short notes on the borrowing powers of the Company. Suggested Answer Companies are set up to conduct business and this includes the power to borrow money from outsiders- usually the Banks. The Memorandum and Articles of Association will usually include a clause that expressly gives the Company to borrow money. Clause 74 of Table A of the Companies Act 1965 gives powers to the Directors to borrow. But this clause does not place any limitations on the powers to borrow. That is left for the Company itself to decide. Every Company will have its own limitation on the powers to borrow. This is found in the MA and the AA of the particular Company. But this contains a potential problem. What is the legal situation if the Directors exceed or abuse their powers to borrow. Foe example, if the AA states that the Company’s borrowing powers must not exceed RM100,000 but the Directors borrow RM200,000? Or what happens if a printing Company buys land which is beyond the MA? In this situation, it depends on the knowledge of the lender. If the Bank knew about the Company’s limitation, than the Company cannot in law, recover the loan. But how are innocent outsiders to know what are the borrowing powers of the Company? In such a situation the rule in Turquand’s case will apply. This is known as the indoor management rule. Here the Company will be bound even though it exceeds its borrowing powers because outsiders cannot be held liable for the illegal acts of the Company and are not expected what goes on within the Company. Further Sect 20 of the Companies Act states, “No act of purported act of a Company … and no conveyance or transfer or property … to by a Company shall be invalid by reason only of the fact that the Company was without capacity or power to do the act to execute or take the conveyance or transfer” Lenders are advised to request a copy of the MA & AA and verify for themselves if there are any limitations as to the borrowing powers of the Company. In order to legalize acts which would otherwise be ultra vires, a Company may by special resolutions alter the articles in its MA with respect to the objects of the Company Section 28(1) Company’s ACT 1965. The effect of Section 20 is that the Company is estopped from claiming that a contract is ultra vires when the ultra vires contract is fully performed. This section is meant to protect outsiders and also holds the Company liable for its acts. Factors for courts to consider • Absence or inaccuracy of corporate records; • Concealment or misrepresentation of members; • Failure to maintain arm's length relationships with related entities; • Failure to observe corporate formalities in terms of behavior and documentation; • Failure to pay dividends; • Intermingling of assets of the corporation and of the shareholder; • Manipulation of assets or liabilities to concentrate the assets or liabilities; • Non-functioning corporate officers and/or directors; • Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances); • Siphoning of corporate funds by the dominant shareholder(s); • Treatment by an individual of the assets of corporation as his/her own; • Was the corporation being used as a "façade" for dominant shareholder(s) personal dealings; alter ego theory; It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable. • Berkey v. Third Avenue Railway, 244 N.Y. 602, 155 N.E. 914 (1927). Benjamin Cardozo decided there was no right to pierce the veil for a personal injury victim. • Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992). The Fourth Circuit held that no piercing could take place merely to prevent "unfairness" or "injustice", where a corporation in a real estate building partnership could not pay its share of a lawsuit bill • Fletcher v. Atex, Inc., 68 F.3d 1451 (2d Cir. 1995) Ultra vires Ultra vires is a Latin phrase meaning literally "beyond powers", and slightly less literally (from interpolating the definite article "the", not found in Latin) "beyond [the] powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is characterised in law as intra vires (nearly literally "within [the] powers", after interpolating "the"; standard legal translation and substitute, "within power"). If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed "valid" and those that are ultra vires "invalid". Ultra vires is a Latin term meaning "beyond powers". The term is usually used to refer to acts taken by a corporation or officers of a corporation that are taken outside of the powers or authority granted to them by law or under the corporate charter. Some states have enacted laws to prevent the use of the defense of ultra vires action to unfairly avoid obligations under otherwise valid contracts. The concept of acting "under color of law" means acts are done while a person acts or purports to act in the performance of official duties under any state, county, or municipal law, ordinance, or regulation. This is a similar concept that refers to the apparently authorized status of the action, as distinguished from the unauthorized status of their actions, which ultra vires refers to. The following is an example of a state statute dealing with the concept of ultra vires: a. "Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act. A corporation's power to act may be challenged: 1. In a proceeding by a shareholder against the corporation to enjoin the act; 2. In a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former director, officer, employee, or agent of the corporation; or 3. In a proceeding by the Attorney General under Section 10-2B-14.30. b. In a shareholder's proceeding under subsection (b)(1) to enjoin an unauthorized corporate act, the court may enjoin or set aside the act, if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profits) suffered by the corporation or another party because of enjoining the unauthorized act. "
DOCTRINE OF ULTRA VIRES-EFFECTS AND EXCEPTIONS CONCEPT
The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of the company’s memorandum. Basic principles included the following: 1. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified. 2. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party 3. A fortiori, a transaction which was fully performed by both parties could not be attacked. 4. If the contract was fully executory, the defense of ultra vires might be raised by either party. 5. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available. 6. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires.
ORIGIN AND DEVELOPMENT
Doctrine of ultra vires has been developed to protect the investors and creditors of the company. The doctrine of ultra vires could not be established firmly until 1875 when the Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653 was decided by the House of Lords. A company called “The Ashbury Railway Carriage and Iron Company,” was incorporated under the Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were “to make, and sell, or lend on hire, railway carriages and waggons, and all kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the business of mechanical engineers and general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agents.” The directors agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of that country), agreed to assign the concession to a Société Anonyme formed in that country, which société was to supply the materials for the construction of the railway, and to receive periodical payments from the English company. The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction. The contract here was to construct a railway. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862 It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association. Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this doctrine was made clearer. In this case the House of Lords affirmed the principle laid down in Ashbury Railway Carriage and Iron Company Ltd v. Riche5 but held that the doctrine of ultra vires “ought to be reasonable, and not unreasonable understood and applied and whatever may fairly be regarded as incidental to, or consequential upon, those things which the legislature has authorized, ought not to be held, by judicial construction, to be ultra vires.” The doctrine of ultra vires was recognised in Indian the case of Jahangir R. Mod i v. Shamji Ladha and has been well established and explained by the Supreme Court in the case of A. Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India8. Even in India it has been held that the company has power to carry out the objects as set out in the objects clause of its memorandum, and also everything, which is reasonably necessary to carry out those objects.9 For example, a company which has been authorized by its memorandum to purchase land had implied authority to let it and if necessary, to sell it.However it has been made clear by the Supreme Court that the company has, no doubt, the power to carry out the objects stated in the objects clause of its memorandum and also what is conclusive to or incidental to those objects, but it has no power to travel beyond the objects or to do any act which has not a reasonable proximate connection with the object or object which would only bring an indirect or remote benefit to the company. To ascertain whether a particular act is ultra vires or not, the main purpose must first be ascertained, then special powers for effecting that purpose must be looked for, if the act is neither within the main purpose nor the special powers expressly given by the statute, the inquiry should be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is found: (a) Within the main purpose, or (b) Within the special powers expressly given by the statute to effectuate the main purpose, or (c) Neither within the main purpose nor the special powers expressly given by the statute but incidental to or consequential upon the main purpose and a thing reasonably done for effectuating the main purpose. The doctrine of ultra vires played an important role in the development of corporate powers. Though largely obsolete in modern private corporation law, the doctrine remains in full force for government entities. An ultra vires act is one beyond the purposes or powers of a corporation. The earliest legal view was that such acts were void. Under this approach a corporation was formed only for limited purposes and could do only what it was authorized to do in its corporate charter. This early view proved unworkable and unfair. It permitted a corporation to accept the benefits of a contract and then refuse to perform its obligations on the ground that the contract was ultra vires. The doctrine also impaired the security of title to property in fully executed transactions in which a corporation participated. Therefore, the courts adopted the view that such acts were voidable rather than void and that the facts should dictate whether a corporate act should have effect. Over time a body of principles developed that prevented the application of the ultra vires doctrine. These principles included the ability of shareholders to ratify an ultra vires transaction; the application of the doctrine of estoppel, which prevented the defense of ultra vires when the transaction was fully performed by one party; and the prohibition against asserting ultra vires when both parties had fully performed the contract. The law also held that if an agent of a corporation committed a tort within the scope of the agent's employment, the corporation could not defend on the ground that the act was ultra vires. Despite these principles the ultra vires doctrine was applied inconsistently and erratically. Accordingly, modern corporation law has sought to remove the possibility that ultra vires acts may occur. Most importantly, multiple purposes clauses and general clauses that permit corporations to engage in any lawful business are now included in the articles of incorporation. In addition, purposes clauses can now be easily amended if the corporation seeks to do business in new areas. For example, under traditional ultra vires doctrine, a corporation that had as its purpose the manufacturing of shoes could not, under its charter, manufacture motorcycles. Under modern corporate law, the purposes clause would either be so general as to allow the corporation to go into the motorcycle business, or the corporation would amend its purposes clause to reflect the new venture. State laws in almost every jurisdiction have also sharply reduced the importance of the ultra vires doctrine. For example, section 3.04(a) of the Revised Model Business Corporation Act, drafted in 1984, states that "the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." There are three exceptions to this prohibition: it may be asserted by the corporation or its shareholders against the present or former officers or directors of the corporation for exceeding their authority, by the attorney general of the state in a proceeding to dissolve the corporation or to enjoin it from the transaction of unauthorized business, or by shareholders against the corporation to enjoin the commission of an ultra vires act or the ultra vires transfer of real or personal property. Government entities created by a state are public corporations governed by municipal charters and other statutorily imposed grants of power. These grants of authority are analogous to a private corporation's articles of incorporation. Historically, the ultra vires concept has been used to construe the powers of a government entity narrowly. Failure to observe the statutory limits has been characterized as ultra vires. In the case of a private business entity, the act of an employee who is not authorized to act on the entity's behalf may, nevertheless, bind the entity contractually if such an employee would normally be expected to have that authority. With a government entity, however, to prevent a contract from being voided as ultra vires, it is normally necessary to prove that the employee actually had authority to act. Where a government employee exceeds her authority, the government entity may seek to rescind the contract based on an ultra vires claim.
EFFECT OF ULTRA VIRES TRANSACTIONS
A contract beyond the objects clause of the company’s memorandum is an ultra vires contract and cannot be enforced by or against the company as was decided in the cases of In Re, Jon Beaufore (London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And Others v. Butterfly Marketing PrivateLtd., (2001) 105 Comp. Cas Mad 763, A borrowing beyond the power of the company (i.e. beyond the objects clause of the memorandum of the company) is called ultra vires borrowing. However, the courts have developed certain principles in the interest of justice to protect such lenders. Thus, even in a case of ultra vires borrowing, the lender may be allowed by the courts the following reliefs: (1) Injunction --- if the money lent to the company has not been spent the lender can get the injunction to prevent the company from parting with it. (2) Tracing--- the lender can recover his money so long as it is found in the hands of the company in its original form. (3) Subrogation---if the borrowed money is applied in paying off lawful debts of the company, the lender can claim a right of subrogation and consequently, he will stand in the shoes of the creditor who has paid off with his money and can sue the company to the extent the money advanced by him has been so applied but this subrogation does not give the lender the same priority that the original creditor may have or had over the other creditors of the company.
EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES
There are, however, certain exceptions to this doctrine, which are as follows: 1. An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholders in proper form.20 2. An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders. The law, however, does not require that the consent of all the shareholders should be obtained at the same place and in the same meeting. 3. If the company has acquired any property through an investment, which is ultra vires, the company’s right over such a property shall still be secured. 4. While applying doctrine of ultra vires, the effects which are incidental or consequential to the act shall not be invalid unless they are expressly prohibited by the Company’s Act. 5. There are certain acts under the company law, which though not expressly stated in the memorandum, are deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. For example, a business company can raise its capital by borrowing. 6. If an act of the company is ultra vires the articles of association, the company can alter its articles in order to validate the act. CASE NOTES: Eley v The Positive Government Security Life Assurance Company, Limited, (1875-76) L.R. 1 Ex. D. 88 It was held that the articles of association were a matter between the shareholders inter se, or the shareholders and the directors, and did not create any contract between the plaintiff and the company and article is either a stipulation which would bind the members, or else a mandate to the directors. In either case it is a matter between the directors and shareholders, and not between them and the plaintiff. The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653. The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction. The contract here was to construct a railway. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862 It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association. Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2 K.B. 9 It was held that • the contract, if any, between the plaintiff and the company contained in the articles in their original form was subject to the statutory power of alteration and • if the alteration was bona fide for the benefit of the company it was valid and there was no breach of that contract; • there was no ground for saying that the alteration could not reasonably be considered for the benefit of the company; • there being no evidence of bad faith, there was no ground for questioning the decision of the shareholders that the alteration was for the benefit of the company; and, • the plaintiff was not entitled to the relief claimed. In Re New British Iron Company, [1898] 1 Ch. 324 It was held that the article is not in itself a contract between the company and the directors; it is only part of the contract constituted by the articles of association between the members of the company inter se. But where on the footing of that article the directors are employed by the company and accept office the terms of art. 62 are embodied in and form part of the contract between the company and the directors. Under the article as thus embodied the directors obtain a contractual right to an annual sum of 1000l as remuneration. It was held also that although these provisions in the articles were only part of the contract between the shareholders inter se, the provisions were, on the directors being employed and accepting office on the footing of them, embodied in the contract between the company and the directors; that the remuneration was not due to the directors in their character of members, but under the contract so embodying the provisions; and that, in the winding-up of the company, the directors were entitled to rank as ordinary creditors in respect of the remuneration due to them at the commencement of the winding-up. Rayfield v Hands and Others, [1957 R. No. 603.] Field-Davis Ltd. was a private company carrying on business as builders and contractors, incorporated in 1941 under the Companies Act, 1929 , as a company limited by shares, having a share capital of £4,000, divided into 4,000 ordinary shares of £1 each, of which 2,900 fully-paid shares had been issued. The plaintiff, Frank Leslie Rayfield, was the registered holder of 725 of those shares, and the defendants, Gordon Wyndham Hands, Alfred William Scales and Donald Davies were at all material times the sole directors of the company. The plaintiff was a shareholder in a company. Article 11 of the articles of association of the company required to inform the directors of his intention to transfer shares in the company, and which provided that the directors “will take the said shares equally between them at a fair value.” In accordance with this the plaintiff so notified the directors, who contended that they need not take and pay for the plaintiff’s shares, on the ground that the articles imposed no such liability upon them. The plaintiff’s claimed for the determination of the fair value of his shares, and for an order that the directors should purchase such shares at a fair value. It was found that the true construction of the articles required the directors to purchase the plaintiff’s shares at a fair price. Article 11 is concerned with the relationship between the plaintiff as a member and the defendants, not as directors, but as members of the company. Guinness v Land Corporation of Ireland, (1883) L.R. 22 Ch. D. 349 The Land Corporation of Ireland, Limited , was incorporated under the Companies Act on the 12th of July, 1882, as a company limited by shares. By the memorandum of association of a company limited by shares it was stated that the objects of the company were, the cultivation of lands in Ireland , and other similar purposes there specified, and to do all such other things as the company might deem incidental or conducive to the attainment of any of those objects. The 8th clause of the articles of association, provided that the capital produced by the issue of B shares shall, so far as is necessary, be applied in making good to the holders of A shares the preferential dividend of £5 per cent., which they are to receive on the amounts paid up on their shares. This action was brought by one of the B shareholders on behalf of himself and the others, to restrain the directors from issuing any A shares on the footing of their being entitled to the benefit of that article, and to restrain the directors from applying in accordance with it the capital arising from the B shares. It was held that the application of the B capital provided for by the articles is not an application of capital to carrying on the business of the company, but is providing an inducement to people to take shares and subscribe capital to carry on the business and that article 8 was invalid, as it purported to make the B capital applicable to purposes not within the objects of the company as defined by the memorandum of association, and in a way not incidental or conducive to the attainment of those objects, and that the directors must be restrained from acting upon it. The articles of association of a company cannot, except in the cases provided for by sect. 12 of the Companies Act, 1862 , modify the memorandum of association in any of the particulars required by the Act to be stated in the memorandum. Understanding The Winding Up of the Company Winding up of Company: Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator, is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights. Kind of Companies can be wound up: Only a limited company can be wound-up. The term "winding-up" (or "wound-up") bears a similar meaning of "liquidation". It generally means that all the assets of the company would be realized (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up would bring a company to an end. A limited company is a company that is registered under the Companies Ordinance. It is a separate legal entity (i.e. it can sue or be sued in legal proceedings). The liabilities of shareholders are limited to the value of the company's shares held by them (limited by shares). Another situation, which is not common in commercial organizations, is that the liabilities of shareholders are limited to the amount in which the shareholders have agreed to contribute to the company's assets if the company is being wound-up (limited by guarantee). An "unlimited company" or a sole trader is not a "company" in a strict sense. It is a business operated in the form of a sole proprietorship. In other words, the business is owned by an individual. A sole proprietor is solely and personally responsible for the liability of the business. A partnership is a form of business owned by two or more persons (partners). The partners are personally jointly and severally liable (i.e. every partner should be liable) for the liability of the business. An overview of winding-up procedures: You can get a general picture on the winding-up procedures (except "voluntary Winding up) from the following steps: a) Firstly, issuing a written demand for debt repayment to the target company b) Secondly, presenting a winding-up petition to the Court and the company. c) Thirdly, Court hearing for the petition. d) Fourthly, granting of winding-up order by the Court. e) Fifthly, meeting of creditors and other relevant parties. f) Sixthly, appointment of liquidator. g) Seventhly, realization and distribution of company's assets to the creditors. h) Eighthly, release of duties for liquidator. i) Lastly, dissolution of the company. Modes of Winding up of the company: A Company may be wound up in any of the following modes: 1. By the Tribunal i.e. compulsory winding 2. Voluntary winding up, which may be (a) Member's voluntary winding up; (b) Creditor's voluntary winding up; Winding up by the Tribunal: If the company has, by special resolution, resolved that the companyØ may be wound-up by the tribunal; If default is made in delivering the statutory report to the registrarØ or in holding the statutory meeting; If the company does not commence its business within a year from itsØ incorporation, or suspends its business for whole of a year; If the number of members are reduced then their required number;Ø If the company is unable to pay its debts;Ø If the tribunal is of the opinion that it is just and equitable thatØ the company should be wound up; If the company is in default in filing up with the Registrar itsØ balance sheet and profit and loss account for five consecutive financial years and If the company has acted against the interests of the sovereignty andØ integrity of India or security of any state, friendly relation with foreign States, public order, decency and morality. Voluntary Winding Up: In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: - 1. When the period fixed for the duration of the company in its articles has expired 2. When an event on the happening of which the company is to be dissolved as per its articles happens 3. The company resolves by a special resolution at a general meeting to be voluntarily wound up. A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof. Persons may petition the Court for winding up: -
1. The Company
2. Any creditor of the Company
3. Any contributory or shareholder. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of its fully paid shares. While every member of a company becomes a contributory, not every contributory is a member. Besides members, any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory.
4. The Registrar may petition for winding up in the following circumstances:
- (i) If default is made in delivering statutory
report or holding the statutory report.
(ii) If the
company does not commence its business within one year from its incorporation
or suspends its business for a whole year.
(iii) If it
appears to him either from the financial position of the company as disclosed
in the balance sheet of the company or from the report of a special auditor or
an inspector that the company is unable to pay its debts.
(iv) Where
the Registrar is authorized by the Central Government to petition for winding
up the company.
(v) Where
the number of members of the company fall below the statutory minimum.
(vi) Where it is just and equitable that the
company be wound up.
5. Any person authorized by the
Central Government. Under section 243, if any report of an inspector appointed
to investigate the affairs of the company discloses:
- (i) That the business of the company is being
conducted to defraud its creditors or members or for a fraudulent or unlawful
purpose
(ii) That
the persons concerned in the formation or management have been guilty of fraud,
misfeasance, and it appears to the Central Government from such report so to
do, then the Central Government may authorize any person including the
Registrar to petition for winding up the company on the ground that it is just
and equitable to do so
. 6. The Official Liquidator attached to a Court where a company is already
being voluntarily wound up and such voluntary winding up cannot be continued
with due regard to the interests of the creditors or contributors or both. Liquidator can be released from the relevant duties in a winding-up proceedings: The liquidator can apply to the Court for the release of the duties once the followings have been accomplished: - all the assets of the company have been realized (i.e. all assets have been sold and converted to cash); - investigations related to the winding-up proceedings are completed; and - a final dividend (if any) has been paid to the creditors to settle the debts The liquidator will send notices, together with a summary of the relevant receipts and payments in the liquidation, to the creditors and contributories of the company of the intention to apply to the Court for release from the duties as liquidator. At this point, any creditor or contributory has 21 days from the date of the notice to raise objection to the intended release of the liquidator. After obtaining the order for release from the court, the liquidator will file a "Certificate of Release of Liquidator" with the Registrar of Companies. The company shall be dissolved two years after the filing of the "Certificate of Release of Liquidator". Conclusion: After analyzing, it is found that the right to apply for winding up is the creature of statute and not of contract. But it should be noted that the winding up proceeding are greatly affected by the facts and circumstances of a particular case. The machinery of winding-up cannot be used as a pressure tactics. It is the stage, where by the company takes its last breath.
