Memorandum and articles of association.

MEMORANDUM AND ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION

A: Meaning and Importance

Memorandum means the memorandum of association of a company, as originally framed or as altered from time to time .  This definition is neither exhaustive nor explanatory.

The memorandum of association is a document of great importance in relation to proposed company .  It contains fundamental conditions upon which alone the company is allowed to be incorporated.  It is a charter of the company and defines its reason for existence.  It also regulates the external affairs of the company in relation to outsiders .  Its purpose is to enable shareholders and those who deal with the company to know what its permitted range of enterprise is.  It does not only show the object of the formation of a company but also the utmost possible scope of it.  The memorandum defines the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulation for their own governance as they think fit .  The importance of the memorandum of a company can be gauged by the fact that it contains rules regarding the capital structure of the company, the liability of its members, and scope of activities.

The following facts indicate the importance of the memorandum:-

(1) It provides the basis of incorporation

(2) It determines the areas of operation of the company.

(3) It defines the relationship of the company with the outsiders.

(4) It is unalterable charter of the company.  Although it can be altered under some special circumstances.

B: Purposes of Memorandum

The purposes of memorandum of association are two-fold:-

(i) The prospective shareholders shall know the field in or the purpose for which their money is going to be used by the company and what risks they are undertaking in making investment.

(ii) The outsiders dealing with the company shall know with certainty as to what objects of the company are and as to whether the contractual relation into which they contemplate to enter with the company is within the objects of the company .

C: Preparation of Memorandum of Association (s. 12 of cap 212)

The promoters must prepare the memorandum of association in accordance with the requirements of the Law, which relate to the formats and content of the memorandum of association.  Examples of various forms of memoranda; depending on the nature of companies are given in various tables in schedule 1 of the Companies Act, Cap.212.

Table B for memorandum of Company Limited by shares

Table C for memorandum of Company Limited by guarantee and not having share capital.

Table D for memorandum of company Limited by guarantee and having a share capital.

Table E for memorandum of unlimited company having a share capital

Section 4(1) of the Companies Act 2002 states that the memorandum of every company shall be printed in English language.  Section 5 of the same Act states that the memorandum shall be dated and shall be signed by each subscriber in the presence of at least one attesting witness.  Opposite the signature of every subscriber and attesting witness there shall be written in legible characters his full names, his occupation and postal address.

D: Contents of Memorandum and the procedure to alter them.

Clause I: The Name

The name of the company establishes the identity and is a symbol of the company.  The promoters have to choose the name with which the company is to be registered.  They should avoid undesirable names , names which are misleading or too similar.  No company is to be registered with a name that is similar with the existing company.  This is due to the fact that the name of a company is part of its business reputation.

Every company is required to paint or affix its name on the outside of every office or place in which its business is carried on, in conspicuous position, in letters easily legible .  The name of Public Company must end with the words “Public Limited Company” and for private company with the word “Limited” .

Section 34 (1) makes it an offence for a person who is not dully incorporated with limited liability, to trade or carry on any business or profession under a name or title of which “limited” or any contractions or imitation of the word is the last word.

Alteration

The company can change its name by passing a special resolution in a general meeting to that effect.  After passing a special resolution the registrar need to approve the changes in writing for the alteration to be effective . If the Registrar refuses to approve the changes, he is required to give reasons for such refusal (s.31)

The minister responsible for trade may direct the company to change its name if, in his opinion the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public (s.33(1)

Th direction must be complied with within six weeks unless there is an application to the court to set aside. Such an application to the court must be made within three weeks from the date of the direction (s. 33(2) & (3) 

Clause II: Registered Office (ss. 14(3), 110 &111)

A company shall at all times have a registered office which all communications and notices may be addressed. On incorporation, the situation of the company’s registered office is that specified in the statement sent to the Registrar under s. 14 of the Companies Act.

The company may change the situation of its registered office from time to time by giving notice in the prescribed form to the Registrar within fourteen days after the date of change. 

Clause III: The objects of the company

The objects clause defines the sphere of the company’s activities, the aims that its formation seeks to achieve and the kind of activities or business that it proposes to undertake.  A company cannot conduct any business foreign to its objects clause.  If anything which is not authorized by the object clause is undertaken, it is considered ultra vires and hence not biding on the company .

The objects clause gives protection to shareholders who learn from it the purposes for which their money can be applied.  It ensures them that their money will not be risked in any business other than that for which they have been asked to invest.  Similarly, it protects individuals who deal with the company and who can infer from it the extent of the company’s powers.

The subscribers to the memorandum may choose any object or objects for the proposed company.  However the objects should not;

(i) Include anything illegal

(ii) Be in contravention of the Companies Act

(iii) Include anything which is against public policy

Alteration (s. 8)

 By special resolution

 Application for confirmation – who can apply? – s.8(2)

 Holder of not less in the aggregate than 10% in nominal value of the company’s issued share capital or any class thereof or, if the company is not limited by shares, not less than 10% of the company’s members or

 Holders of not less than 15% of the company’s debentures entitling the holders to object the alterations of its memorandum

 Application should be made within 30 days after the date on which the resolution altering the company’s memorandum was passed.

 If no application is made the company shall within fourteen days from the end of the period for making such application deliver to the registrar a printed copy of its memorandum as altered [s.8(9)(a)].s, 

 If application is made – s.8(9)(b).

 The company shall immediately give notice of that fact to the Registrar

 Within fourteen days from the date of the order canceling or confirming the alteration wholly or in part, deliver to the Registrar a certified copy of the order, and in case an order confirming the alteration wholly or in part, a printed copy of the memorandum as altered

The doctrine of ultra vires

The company has the power to do all such things are:

(a) Authorized to be done by the Companies Act, Cap.212.

(b) Essential to the attainment of its objects specified in the memorandum.

(c) Reasonably and fairly incidental to its objects.  Anything else is ultra vires the company.

Ultra vires act is void, as such it can not create any legal relationship.  Such an act being void cannot be ratified even by the whole body of shareholders.  The leading case on this point is Ashbury Rly carriage and Iron Co. Ltd. V. Riche (1878) Lt 7 HL 653.  In this case a company was incorporated with the following objects

(a) to make, sell or lend on hire, railway carriages and wagons;

(b) to carry on the business of mechanical engineers and general contractors;

(c) to purchase, lease, work and sell mines, minerals, land and buildings.  The company entered into a contract with Riche for financing of the construction of railway line in Belgium.  The question raised was whether that contract was covered within the meaning of “general contractors”.  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.

To overcome the obstacles imposed by the ultra vires doctrine, experts have come up with three ways/methods of drafting the objects clause:

1. The inflicted object clause – state any imaginable business

2. The Independent object clause – each of the clauses shall stand as if it severally formed an object clause of an independent company.

3. Subjective objects clause – The company can engage in any business which in the opinion of the directors, the company can advantageously engage in.

Clause IV: Liability Clause [s.4 (2) & (3) of Cap.212]  

(a) Whether the liability of the company is limited or unlimited.

(b) If limited, is it by shares or by guarantee.

Clause V: The capital clause

The capital clause of a company states the amount of capital with which it is registered, divided into shares of fixed amount.  The amount of such capital is determined by the cost of starting the business and there is no statutory limitation regarding minimum or maximum.  The capital is called authorized, nominal or registered.

Alteration of Share Capital

The power of a limited liability company to alter share capital is provided under s.64 (1) of Cap.212.  Such powers can only be exercised by the company in general meeting.  And it must be authorized to do so by its articles of association. 

A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: -

1. Increase its share capital by new shares of such amount as it thinks expedient.

2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. 

3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.

4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived.

5. Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court.

A: Reduction of share Capital 

The law relating to the capital of a company has something sacred. The general principles of law founded on principles of public policy and rigidly enforced by courts is that no action resulting in a reduction of capital should be permitted unless reduction is effected

a. Under statutory authority or forfeiture

b. In strict according to procedure, if any, laid down in that behalf in the articles of Association. Any reduction contrary to this principle is illegal and ultra vires.

A reduction of capital may be effected in different ways

a. Reduction of capital without sanction of the court

1.  Forfeiture of shares. The company may, if authorized by its articles, forfeit shares for non payment of calls. This result in forfeiture of shares if the forfeited shares are not re- issued.

2.  Surrender of shares. The company may accept surrender of shares partly paid to save it from going through the formalities of forfeiture.

3.  Cancellation of shares. The company may if so authorized by its articles, cancel shares which have not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so canceled. 

4. Redemption of redeemable preference shares. The company may redeem preference shares in accordance of the provision of the ordinance.

b. Reduction of capital with the consent of the court.

Reduction of capital in any other form apart from the ways stated above must be carried out in conformity with the provision of sections 68 – 72

of Cap 212. According to these sections, a company limited by shares or guarantee can reduce its capital if 

a. Authorized by the articles

b. A special resolution has been passed to this effect

c. It has been confirmed by the court

Section 69 gives the company the power to reduce its share capital in any way but specifically mentioning the following ways in which the reduction of capital may be effected. 

a. It may extinguish or reduce the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Tsh 1000 each with Tsh. 600 paid up, the company may reduce them to Tsh. 600 fully paid and thus release the shareholder from the liability on uncalled capital of Tsh. 400/-.

b. Pay off or return part of the unpaid capital not wanted for the purpose of the company. For example, where the shares are fully paid of Tsh1000 they may be reduced Tsh. 400 each and Tsh. 600 may be paid back to the shareholders.

c. Cancel paid up capital which is lost or unrepresented by the available assets either with or without extinguishing or reducing the liability on any shares. Due to heavy trading losses, C Company reduces its equity share of Tsh 100 each fully paid up to Tsh. 20 per share. If the company extinguishes liability on these shares the Tsh 100 shares will become shares of Tsh. 20 fully paid up. If it does not extinguish liability on these shares the Tsh 100 shares will continue to be shares of Tsh. 100 each, Tsh. 20 paid up.

The procedure to follow in order to reduce share capital

1. Special resolution

 Notice calling a meeting to propose a resolution must be accompanied

i. Director’s certificate of solvency

ii. Auditors report

Any director of a company giving a certificate of solvency without reasonable ground shall be liable to imprisonment or fine or both.

2. Advertise in the gazette, and in case of a public company, one national news paper, in each case within five working days of the resolution being passed

3. Application to the court by any creditor to object to the reduction within twenty eight days from the advertisement of the resolution.

4.  File a resolution to the Registrar thirty five days from the date when a resolution was passed.

B: Increase in share capital ss. 64 -67

The nominal share capital of a company can be increased, even though it has not yet issued all its authorized capital, by ordinary resolution of the company in general meeting. The company’s articles usually contain the authority to allow the company to increase its capital but in case the articles does not allow they must be altered by special resolution to this effect. The law requires that where the company has increased its share capital beyond the registered capital, notice must be given to the registrar within thirty days from the date of passing the resolution by which the increase is affected 

The increase must not be done with ill motive. In the case of Clemens v. Clemens Bros. Ltd (1976) 2 All E.R 268 resolutions to increase the capital and issue of new shares in such a way as to deprive the plaintiff, a shareholder her “negative control” of the defendant company were set aside as having been passed by an inequitable use of defendant’s rights. In this case the plaintiff owned 45% of the issued share capital of the defendant company and her aunt owned the remaining 55%. Although at one time both the plaintiff and her aunt had been directors of the defendant company, at the relevant time the plaintiff was no longer a director, the aunt and her fellow directors proposed to increase the company’s share capital by the creation and issue of further shares. The plaintiff concerned was that the proposed share issue would dilute her holding and voting power from 45% to 25%. She commenced proceedings against the company and the aunt seeking a declaration that the resolutions were oppressive, and an order setting them aside. It was held that resolutions were specifically and carefully designed to ensure not only that the plaintiff can never get the control of the company but deprive her of what has been called her negative control i.e. powers to prevent the passage of any special resolution of which she disapproved.  

In the case of Tanzania Knitwear Ltd. v. Shamsu Esmail (1989) 1 T.L.R 48 resolution was passed by directors of the company to issue 800 shares. It was also resolved that each shareholder be offered to purchase the said shares according to individual shareholding. It was held that where shareholders are offered to purchase new shares on a pro-rata basis, the applicant cannot be heard to complain that the resolution was oppressive to him. However the resolution was declared illegal because it was passed by directors contrary to the requirement of section 51(2) of the Companies Ordinance which required such resolution to be passed by a company in general meeting.

Clause VI: Association Clause

In this clause, the subscribers declare that they desire to be formed into a company and agree to take the shares stated against their names.

2. ARTICLES OF ASSOCIATION

A:  Meaning

The articles of association are the rules and regulations of a company formed for the purpose of internal management.  The articles regulate the manner in which the company’s affairs will be managed.  While the memorandum lays down the objects and purposes for which the company is formed, the articles lay down rules and regulations for the attainment of these objects.

Lord Cairns defined articles of association as:

“The articles play a part subsidiary to the memorandum of association.  They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which business of the company is carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made” .

According to section 2(2) of Cap.212, “articles” means the articles of association of a company, as originally framed or as altered by special resolution, including, so far as they apply to the company, the regulations contained in Table A in the first schedule to either the repealed Ordinances or in Table A in the first schedule to the Act.

In framing the articles of a company, care must be taken to see that regulations framed do not go beyond the powers of the company itself as stipulated in the memorandum.  They should not violate any provisions of the Act.  If they do, they would be ultra vires the memorandum or the Act, and will be null and void.

The company may adopt all or part of the regulations contained in Table A to be its articles of association [s.11 of cap.212].

B: Contents of Articles of Association

(a) Share capital, rights of shareholders, variation of these rights, payment of commissions, share certificates

(b) Lien on shares

(c) Calls on shares

(d) Transfer and transmition of shares

(e) Forfeiture of shares

(f) Conversion of shares into stock

(g) Alteration of capital

(h) General meeting and proceedings thereat

(i) Voting rights of members; voting & poll; proxies

(j) Directors, their appointment, remuneration; qualification; powers and proceedings of Board of directors.

(k) Manager

(l) Dividends & reserves

(m) Accounts, Audit and borrowing powers.

(n) Winding up.

C: Alteration of Articles of Association

The company can alter articles by special resolution. (s. 13(1) & (2)

3: LEGAL EFFECTS OF MEMORANDUM & ARTICLES

The memorandum and articles when registered bind the company and the members thereof to the same extent as if;

(1) They had been signed and sealed by each member;

(2) They contained covenants by the company and each member to observe all the provisions of the memorandum and of the articles [s.18 (1)].

The effect of s.18 is to constitute through the memorandum and articles of a company, a contract between each member and the company.  The legal implication can be discussed under four headings on how the documents bind different groups.

(1) Members to the company

The memorandum and articles constitute a binding contract between the members and the company.  Each member is bound as if he/she actually signed the memorandum and articles.

In Borland’s Trustee v Steel Bros & Co. Ltd.  the article of a company as altered provided that the shares of any member who become bankrupt should be sold to certain persons at a fair price.  B. a shareholder became bankrupt and his trustee in bankruptcy claimed that he was not bound by the altered articles.  It was held that the articles were a personal contract between B and the rest of the members and B and his trustee were bound.

(2) A company to members

A company is bound to the members in the same manner as are the members bound to the company.  The company can exercise its rights as against any member, only in accordance with the provisions in the memorandum and the articles.

(3) Members Inter se

As between members themselves the memorandum and articles constitute a contract between them and are also binding on each member against the other or others.  However, such a contract can be enforced through the medium of the company.  This was elaborated by Lord Horschell in Welton v. Saffery  where he observed.

“It is true that the articles constitute a contract between each member and the company and there is no contract in terms between the individual members of the company but the articles do not, any the less, regulate their rights inter se.  Such rights can only be enforced by or against a member through the company or through the liquidator; representing the company but…. No member has as between himself and other members any right beyond that which the contract of the company gives”.

In some cases, the articles seek to regulate the rights of shareholders in their capacity as members.  In such a case they constitute a contract between the members ‘qua’ members.  Such contracts can be directly enforced by a member against another without joining the company as a party.

(4) Company to the Outsiders.

The articles do not constitute any binding contract as between a company and an outsider.  An outsider cannot take advantage of articles to found a claim against a company.  This is based on a general rule of law that a stranger to a contract cannot acquire any right under such contract.

4: CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES

On registration, the memorandum and articles of association of a company become public documents.  These documents are available for public inspection in the Registrar’s office on payment of such fees as may be prescribed.

Every outsider dealing with the company is deemed to have notice of the contents of the memorandum and articles of association.  This is known as “Doctrine of constructive Notice” or “Constructive Notice of Memorandum and Articles”.  It is presumed that persons dealing with the company have not only read these documents but that they have also understood their proper meaning.

The documents are open and accessible to all.  It is the duty of every person dealing with a company to inspect these documents and see that it is within the powers of the company to enter into the proposed contract.  The presumption that an outsider has read and understood the memorandum and articles was elaborated by Lord Hatherley in Mahoney v East Holyford Mining Co.  as follows:

“But whether he actually reads them or not it will be presumed he has read them.  Every Joint Stock Company has its memorandum and articles of association… open to all who are minded to have any dealings whatever with the company and those who so deal with them must be affected with notice of all that is contained in these two documents”.

Thus, anyone dealing with a company is presumed to know the contents of the memorandum and articles.

5. DOCTRINE OF INDOOR MANAGEMENT

This doctrine imposes an important limitation on the doctrine of constructive notice.  The persons dealing with the company are presumed to have read the memorandum and articles.  Once they are satisfied that the company has powers to enter into the proposed transaction, they are required to do no more.  They are entitled to assume that as far as internal proceedings of the company are concerned, everything has been regularly done.  The outsider is presumed to know the constitution of a company but not what may or may not have taken place within the doors that are closed to him.  This doctrine is also known as the rule in Royal British Bank v. Turquand or just Turquand Rule.

Royal British Bank v Turquand 

The directors of a company had issued bond to Turquand.  They had the powers under the articles to issue such bond provided they were authorised by a resolution passed by the shareholders at a general meeting of the company.  No such required resolution was passed by the company.  It was held that Turquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution had been passed.

Exceptions to the doctrine of Indoor Management.

The doctrine is subject to the following limitation:

(1) Knowledge of irregularity.

A person dealing with the company will not be entitled to protection under this rule if he has notice, actual or constructive, that the prescribed procedure has not been complied with by the company.

(2) Forgery

The doctrine does not protect a person where forgery is involved.  A company cannot be held liable for forgeries committed by its officers.

(3) Negligence on the Part of the Outsider

If an individual is put upon enquiry he cannot claim the benefit under the doctrine in the circumstances under which he would have discovered irregularity if he had made proper enquiry.