Q.1 What is the effect of incorporations of a company?

Answer:

Before elaborating on the effect of a company, one must know what a

company is. The word company has no strict legal meaning. To a

layman the word company means an association of people who have

decided to associate for the purpose of carrying on business either for

profit or for charity. To a lawyer a company is an entity that is created

by law and given a legal status and personality on its own distinct from

its owners and officers. An entity has a legal status and personality if in

law it can exercise it legal right and is subject to legal obligations in its

own right. It should however be noted that not every association of

people is counted as company. An association will count as company, if

it is registered in accordance with law that provides for the registration

of companies. In Ghana, the Companies Code 1963 Act 179 is the Law

that provides for the registration of companies. So, if an association of

persons is registered in accordance with Companies code Act 179, it is

counted as company.

After a company has been brought into existence it come with certain

consequences of incorporation such as

1. It becomes separate legal entity (case Salomon v. Salomon &

Co) (1897)

2. It has a perpetual succession (companies code act 179) section

38 and 180

3. It has the capacity to sue and be sued (Bank of West Africa v.

Appenteng) (1972)

4. It has the capacity to acquire own and dispose property both

movable and unmovable (Macaura v. Northern Assurance)

(1925)

5. It has the capacity to separate corporate assets from personal

assets

6. It has the capacity to borrow keep account and create charges

over corporate assets

7. It has the capacity to enter in legal relation. Lee v. Lees Air

Farming Ltd (1960) Morkor v. Kuma (1998-99)

8. It becomes a taxable unit.

SEPARATE LEGAL PERSONALITY/ ENTITY

One consequences of the incorporation is that it acquires a legal status

and personality on its own, separate and distinct from its members and

officers. It has a separate legal existence in its own right. As a legal

person, it has legal rights and obligations attributed to it. It can act as

an independent legal person in its own name. a case that illustrate this

point is Salomon v. Salomon & Co.

Facts:

Mr. Salomon had carried on a successful business as a sole

trader in the manufacture of leather boots and shoes. Mr.

Salomon converted his sole proprietorship business into a

limited liability company. Mr. Salomon had sold his business

to the company at the inflated price of 38,782 pounds. The

company had seven members: Mr. And Mrs. Salomon and

their five children. Mr. Salomon had 20,001 shares, and Mrs.

Salomon and the children had one share each.

The company purported to pay for Mr. Salomon’s interest by

the company allotting to him 20,000 shares at one pound

each, making payment of 20,000 pounds. The company also

issued him with debentures of 10,000 pounds. The company

then paid Mr. Salomon the balance of 8,782 pounds in cash.

Thus the company owed him 10,000 pounds since he was a

debenture holder secured by a charge on the company’s

assets in his favor. Mr. Salomon and two of his sons were

appointed directors. Mr. Salomon was also the managing

director of the company. The business of the company did not

prosper. Eventually the company became insolvent. The value

of the company’s assets as realized was 6,000 pounds; but

the company owed 7,733 pounds to unsecured creditors and

10,000 to Mr. Salomon whose debt was secured as a

debenture holder.

In the confused lawsuit, which followed the main body of

unsecured creditors, advance two principles of arguments:

The sale transaction was a sham and so Salomon was still the

owner of the business and liable for its debt

The was irregularly formed because six of the seven

members/shareholders were mere nominees of Salomon

HELD:

It was held that the business was owned by and its debts were

liabilities of the company, not of Salomon personally;

Although Salomon owed beneficially all the issue shares of the

company he could also be a secured creditor with enforceable rights

against the company in that capacity.

PERPETUAL SUCCESSION

The second consequence is that a company enjoys continuity of legal

existence. This means that on incorporation, the company continues to

exist in the eyes of the law even when its member or officers die or

cease to be associated with it. The only lawful processes by which the

legal existence of company may be terminated are winding up,

liquidation and dissolution. However according to Sec. 38, 180 give the

details.

CAPACITY TO BE SUE AND BE SUED

A company as a legal being can sue in its name and can be sued in its

name. A company is sued when its breaches it legal obligations

which may result from a contract, a tort or statute. A company can also

sue for the purpose of acts of the company simply because the person

being sued is a member or an officer of the company.

Question 3

The Companies Code 1963 Act 179 provides the laid down procedures

for the sitting up of any company in Ghana. The member(s) of the

proposed company must prepare the company’s Regulations. The

Regulations of a company is a contractual document which when

registered, sealed and delivered; bind the members, officers and the

company as to the terms thereof. S.16 of the Companies Code 1963

Act 179 state the content of the regulations which include the name of

the company, the nature of the business or businesses which the

company is authorized to carry on, or the nature of the object or

objects for which it is established, that the company has, for the

furtherance of its authorized businesses or objects, all the powers of a

natural person of full capacity except in so far as such powers are

expressly excluded by the Regulations, the names of the first directors

of the company, that the powers of the directors are limited in

accordance with section 202 of this Code.

Section 21(1) of the Companies Code 1963 Act 179 state the effect of

the Regulations: Subject to the provisions of this Code, the

Regulations, when registered, shall have the effect of a contract under

seal between the company and its members and officers and between

the members and officers themselves whereby they agree to observe

and perform the provisions of the Regulations, as altered from time to

time, in so far as they relate to the company, members, or officers as

such.

The effect of the above provision is that if a membership duty is

imposed on a member in his capacity as a member, then he must

perform it otherwise the company can sue him form non-performance.

The court will, therefore enforce issues dealing with rights of a member

which have been conferred on a member or duties imposed on him in

his capacity as a member. On the other hand, if a person is a member

of a company and certain right are conferred upon him in his capacity

as a member he has a right to ask the company to perform it because

it is bound by the Regulations.

Another issue, which has caused more difficulty, is

precisely what type of rights the members or the company can

enforce as Regulations. There are numbers of effects to section

21 (1) of Act 179 and these are as follows:

1. The Regulation of a company must constitute a specialty

contract between the company and its members as well as

its officers. Being a specialty contract, it implies that none

of the parties to this three party contract need give

consideration in order to be able to sue on it. The case of

Hickman v Kent or Romney Marsh Sheep Breeders

Association (1920) illustrate a proper interpretation of a

company’s Regulations and whether a company member

could be bound by its terms.

Hickman v Kent or Romney Marsh Sheep Breeders Association

(1920) FACTS:

The company’s articles included a clause to the effect that all

disputes between the company and its members were to

referred to arbitration, before court. Mr. Hickman complained

about refusal to register his sheep in the published flock book

and was under threat of being expelled. He brought court

proceedings against the company and the company sought an

injunction.

HELD:

The proceedings were stayed. The articles prevented Mr.

Hickman since there was a contract. As a member, Mr. Hickman

was bound to comply with the company procedure for arbitrating

disputes and could not resort to court.

Since the matter in dispute related to memberships duty, he was

bound to refer to the case to arbitration. Our law adopted the rule in

Hickman v Kent case by providing that, the Regulations constitutes

terms of a contract between the company and a member in his

capacity as member. The company must therefore respect its duties.

2. The provisions of the Regulations can, therefore, be said to

be terms of this contract and thus when they are breached,

it will entitle each aggrieved party to sue for breach of

contract. This can be derived from the case of

Eley v Positive Government Security Life Assurance Co. (1876)

FACTS:

Mr. Eley was employed as a life solicitor for the company on

contract for service. Later, he became a shareholder. Whilst so

employed his contract for service was terminated. He sued the

company for breach of contract, claiming that he had a

contractual right to act as the company’s solicitor arising from

the articles.

HELD:

He failed because he was not a party to the contract, since he

was not a member: he had not taken shares in the company

when it was formed. This was not a right given to him as a

member and he could not rely on the articles as a contract for

professional services. The right to be a director of a company has

also been held as an outsider right.

Thus in Eley’s case, the Regulations do not constitutes terms of a

contract between a member and the company not in his capacity as

member.

3. Members can sue fellow members on the enforcement of

the

Regulation and likewise officers can sue fellow officers too

for the same purpose. Note that, the word “Officer” as an

innovation. Any duty imposed on an officer must be

perform by him. The word Officer in this context refers a

Director, Secretary or Employee. Where a member is not

performing his membership duty another member can sue,

as it is in the case of Rayfield v Hands

FACTS:

Here Mr. Rayfield asked the directors to buy his fully paid up

shares but they refuse to do so. The articles required the

directors to be members, i.e. to hold qualification shares and to

purchase shares from any member who wishes to sell.

HELD:

This was enforceable against the directors in their capacity as

members.

The duty imposed on the Directors was in their capacity as members

and therefore this was a duty imposed on all members. Any member

who is aggrieved has the right to sue. An officer is not a member but

can sue a member if he is not performing his membership duty. This is

because an officer has certain duties conferred on him as well

The Regulations when registered constitute the terms of the contract

between the members themselves. That is a member v. members.

The duties impose on a member, must be performed by all members,

therefore if any member refuses to perform his duty any member can

sue him for not doing his duty.

4. Section 21(1) above shows that the contract envisaged

here refers to the provisions of the Regulations as they

apply to the three parties as in their various capacities as

company members and officers. Thus an officer or member

cannot sue in another capacity other than that as an officer

or member.

5. If the Regulations impose a duty on a director not in his

capacity as a member he can refuse to oblige because is it

a membership duty.

This is illustrate in Beattie v E F Beattie (1938)

FACTS:

The company’s articles contained an arbitration clause (in the

wording as in Hickman’s case). Mr. Beattie, a member and

director of the company, was in dispute with the company. It was

a wide-ranging dispute concerning his right as a director. He

brought court proceedings against the company.

HELD:

He was not bound by the arbitration clause since he was acting

in his capacity as director, not a member.

The rule in Beastie’s case will be enforce in Ghana, thus a duty impose

on a director must be performed by him. An Employee is a full time

personnel or one under a contract of service.

6. The contract concerned can be “altered from time to time”.

This refers to a novation by operation of law. This novation

may be by way of change in the subject matter of the

contract (i.e. the provisions of the Regulations), change of

officers of the company, change in the mane of the

company or change in the membership of the company.

1) Since section 21 (1) does not apply to outsiders, subsection 2 of

section 21 attempt to make it clear that when certain categories of

outsiders have given credit to the company and have thus been

empowered by the Regulations of the company to appoint and

remove a director or officer of the company they can do so. This

section codifies the decision in Woodland Ltd v. Logan (1948)

Where the Regulations empower any person to appoint or remove

any director or other officer of the company such power shall be

enforceable by that person notwithstanding that he is not a member

or officer of the company.

Finally the section 21 (3) of the Companies Code 1963 Act 179

stipulate that in any action by any member or officer to enforce any

obligation owed under the Regulations to him and any other member

or officer, such member or officer shall, if any other member or officer

is affected by the alleged breach of such obligation, sue in a

representative capacity on behalf of himself and all other members or

officers who may be affected. This is aimed at preventing a multiplicity

of lawsuits by insisting that suits to enforce the provision of the

Regulations shall be by way of a representative action (class suits).

In conclusion, a company Regulations therefore shows how that

particular company is constituted and administered. It is however

mandatory under the code that company’s Regulations must

contain the name, objects, powers, the names of Directors, the

limit placed on the power of the Directors, the liability of the

company and the nature of that liability. Hence the code under

Section 21 of the Companies code Act 179 spells out the character

of registered Regulations and the relationship between members

and the company and between members themselves and it is

summarized as follows:

a) A contract between the company and its members;

b) A contract between the company and its officers;

c) A contract between the member on one hand and officers on

the other;

d) A contract among the members;

e) A contract among the officers