The Companies Act 2012 commenced on 1 July 2013 (the Companies Act (Commencement) Instrument SI 24 of 2013).
The key reforms contained in the Companies Act focus on incorporation of the company and consequential matters, company finance, management and administration of the company, protection of minority shareholders, registration of foreign companies, voluntary winding-up of the company and the introduction of a code of corporate governance. All aspects of capital markets (such as the prospectus) and insolvency provisions have been omitted from the Companies Act and transferred to the Capital Markets Authority Act and the Insolvency Act 2011 respectively.
Single-member companies: In what is a significant introduction, the Act permits any one or more persons to form an incorporated company with or without limited liability. This provision now allows the incorporation of a one-person company in Uganda and follows on from the position of the law that has been adopted by jurisdictions such as the United Kingdom. Under the Act, a single-member company is obliged to nominate two individuals, one of whom shall become the nominee director in case of death of the single member and the other shall become alternate nominee director to work as nominee director in case of non-availability of the nominee director.
Increase in membership of private companies: The Act increases the number of individuals who may form a private company from fifty to one hundred.
General objects clause: The Act now permits a company to have a general objects clause in its memorandum. The Act provides that it is sufficient where the company is a commercial company for the memorandum to state that the company’s object is to carry on any trade or business whatsoever and that the company will have the power to do all such things as are incidental or conducive to the carrying on of any trade or business by it. In practice, it will be acceptable for a company to have what is essentially a one-page memorandum.
This is a new development which essentially abolishes the operation of the ultra-vires doctrine. In the past, as a result of the operation of the ultra-vires doctrine, it became the practice for companies to increase the objects clause by adding to the principal objects a large number of objects just in case they were needed.
Also, companies began to add a large number of powers to their objects clauses. There is a technical difference between objects of a company and the powers given to it to implement those objects. These powers are implied and a company has an implied power to do whatever is reasonably incidental to the carrying on of its objects. However, because of the ultra-vires rule, and some confusion as to which powers were implied and which had to be expressly stated, companies’ objects clauses contained a mixture of objects and powers. The Act additionally provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything contained in the companies’ memorandum. That being so, directors may, under specific circumstances, still be liable in person for acts that are performed ultra vires.
Of great concern is what a general objects clause signifies for a company’s borrowing powers and whether this power has to be expressly stated in the memorandum. Strictly speaking, the answer is ‘no’ because in law, the borrowing power of a commercial company is implied and considered incidental to the carrying on of business. Nevertheless, a resolution of the company will still be required for the power to be validly exercised.
Corporate governance: A new addition to the Act is a code of corporate governance under section 14 and Table F to the Act. The code supplements the substantive provisions of the Act on the composition and responsibility of the board of directors. The code also requires a division of responsibility between the chairperson of the board and chief executive officer (CEO) who heads the company’s management arm.
There is also specific provision on the qualification of directors to enable them handle strategy, performance, standards of conduct and resources of the company; provisions to regulate the remuneration of directors, board meetings, committees and evaluation of the board; provisions on deadlines in securities transactions which may involve directors, company secretary’s role in relation to the board, risk management, internal audit and audit committee, sustainable reporting on company performance, relationship with the shareholder(s) and communication.
The code is, however, only enforceable against a public company. Private companies have the option to either adopt the code or not.
A company that has adopted the code of corporate governance shall file a statement of compliance annually with the Registrar and the Capital Markets Authority. A company that fails to comply with this requirement shall be liable to pay a fine of 50 currency points (UGX 1,000,000).
Lifting the corporate veil: The Act provides that the High Court may, where a company or its directors are involved in acts including tax evasion, fraud or where, save for a single member company, the membership of a company falls below the statutory minimum, lift the corporate veil. This a stipulation that did not exist in the previous Companies Act and marks the codification of common law rules that apply to lifting the veil and which have been variously implemented by Ugandan courts.
Re-registration of companies: The Act provides for an expanded procedure of re-registration of a company from (1) a private company to a public company, (2) a limited liability company to an unlimited company, (3) an unlimited company as limited and (4) a public company as private.
A private company with a share capital may be re-registered as a public company if a special resolution that it should be so re-registered so delivered to the Registrar. The special resolution shall alter the company’s memorandum so that it states that the company is to be a public company and make such other alterations in the memorandum and articles to bring it into conformity with the requirements relevant to a public company. Financial documents must also be delivered. These include a written statement by the company auditors and a copy of the relevant balance sheet. A certificate of re-registration is then issued as conclusive evidence of compliance with the requirements in the Act in respect of re-registration.
A limited liability company may re-register as unlimited. This option, however, is a not available to public companies and companies which had previously re-registered to limited liability companies. The documents to be lodged with the Registrar for this application are a form of assent subscribed by or on behalf of all the members of the company to the company being registered as unlimited and a statutory declaration made by the directors of the company. A certificate of re-registration is then issued as conclusive evidence of compliance with the requirements in the Act in respect of re-registration
An unlimited company may register as limited if a special resolution that it should be so registered is passed. The resolution must state the company share capital (if not limited by guarantee) and other requirements required of a company with share capital. A certificate of re-registration is then issued as conclusive evidence of compliance with the requirements in the Act in respect of re-registration.
Use of ‘Limited’: The Act requires all limited liability companies, upon registration, to add the initials ‘LTD’ or the word ‘Limited’ at the end of its name.
Power to require company to abandon misleading name: The Act provides the Registrar with the power to direct a company to change its name where, in the Registrar’s opinion, the name by which a company is registered gives a misleading indication of the nature of activities as to be likely to cause harm to the public. Where such a decision is made by the Registrar, the company in questions possesses a right of appeal to the High Court.
Form of contracts by a company: A company may make a contract by execution under its common seal or on behalf of the company by a person acting under its authority, express or implied. This provides an explicit definition (which did not exist in the previous Companies Act) of how a company may make a contract.
Abolition of constructive notice doctrine: The Act provides that a party to a transaction with a company is not bound to enquire 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 authorise others to do so.
The constructive notice doctrine, whereby a third party dealing with the company was deemed to know the contents of its memorandum and articles of association and limitation on the company’s powers, has been abolished. This is in line with modern trends and effectively makes it easier for outsiders to deal with the company without any apprehension as to its capacity.
Pre-incorporation contracts: The Act codifies the common law by providing that contracts which purport to be made on behalf of the company before the company is formed have the same effect as if made with the person purporting to act for the company.
Execution of documents by a company: The Act addresses the question of execution of documents by a company. It provides that a document executed by a director and the secretary of a company, or by two directors of a company and expressed to be executed by the company, has the same effect as if executed under the common seal of the company.
Company may provide financial assistance for acquisition of shares: Any financial assistance given by the company to a person acquiring shares in the company is not prohibited if it is done in good faith and in the interests of the company. The good-faith exception is a new addition and the interpretation of what amounts to “good faith” will form a key issue. Under the Act, a private company is not prohibited from giving financial assistance for the acquisition of its shares or for the acquisition of shares in another company or for the acquisition of shares in another company where the acquisition of shares is in its holding company.
The following items do not amount to financial assistance: (a) a distribution of a company’s assets by way of dividend, (b) an allotment of bonus shares, (c) a reduction of capital confirmed by an order of court, (d) a redemption of shares and (e) anything done under an order of court or arrangement with creditors.
While there is a substantial relaxation of the prohibition in the case of private companies, special restrictions attach to public companies. Financial assistance may only be given if the company has net assets which are not reduced by the financial assistance or, to the extent that those assets are reduced by the financial assistance, if the assistance is provided out of distributable profits.
Share capital and dividends: Express provision has been made in the Act codifying the fundamental company law rule that dividends must not be paid out of capital and can only be paid out of profits available for that purpose. A company’s profit available for the payment of dividends is its accumulated realized profits less the company’s accumulated realized losses.
In case of a willful or negligent contravention of this rule, the directors under whom the contravention happened shall be jointly and severally liable at any time within six years after paying the unlawful dividend to the company and the company creditors upon its dissolution or insolvency.
Transfer of shares in a single-member company: A single member company may transfer or allot shares (1) on the death of the single member, (2) by operation of law and (3) by a single-member company converting into a private company not being a single-member company.
Following the death of a single member, a single-member company may either be wound up or converted into a private company not being a single-member company by the nominee director transferring the shares in the name of the legal heir(s) of the single member within thirty days and then proceed to pass a special resolution for the company’s change of status within thirty days of the transfer of shares.
In case of a transfer of shares or further allotment, the company shall pass a special resolution for the company’s change of status and alter its articles accordingly within thirty days of the transfer of shares. In case of operation of law, the company shall transfer the shares within seven days in the name of the relevant persons to give effect to the order of the court in question or other authority.
Power to extend time to register charges conferred upon the Registrar: The Act maintains the position that every charge created by the company is void against the liquidator and any creditor of the company unless the charge is delivered to the Registrar for registration within forty-two days of its creation. The Act also maintains the position that where a charge becomes void under this section, the money secured thereby shall immediately become payable. The power to extend time for the registration of charges has been conferred upon the Registrar. Previously, it lay with the High Court. The grounds for extension remain the same.
For mortgages, forty-two days start to run from the time of filing the mortgage instrument with the Registrar of titles. For debentures and other charges, the time shall run from the date of execution/creation.
De-registration for failure to provide details of registered office: It is mandatory for a company registered under the Act to provide details of its registered office and a registered postal address on the day on which it commences to carry on business or as from the fourteenth day after the date of incorporation. Where a company fails to comply with this provision, and fails to heed a notice requesting it to comply, the Registrar may elect to de-register the company. The Registrar may also impose a default fine.
Annual general meeting: In a significant departure from the previous Companies Act Cap, the Act discriminates between public and private companies and the requirement to hold an annual general meeting.
The Act provides that a public company shall in each year and within fifteen months from the last one hold a general meeting. A private company may at the requisition of a member hold an annual general meeting and this has the effect of rendering annual general meetings for private companies’ non-mandatory. Where no meeting is held following a member’s requisition, the Registrar may call or direct the calling of the meeting.
Unqualified report: Where the balance sheet is prepared for a financial year of the company, the auditors’ report shall state whether in the auditors’ opinion the report is without material qualification and that the balance sheet has been prepared in accordance with the Act. Where the balance sheet was not prepared for a financial year, the auditors’ report shall state without material qualification if in the auditor’s opinion the balance sheet has been properly prepared in accordance with the provisions of the Act which would have applied if it had been so prepared.
Qualifications of a secretary: While every company is required to have a secretary, a single member of a company is not obliged to have one. The Act introduces qualifications for a secretary of a public company. A secretary of a public company must an advocate, a chartered accountant, a chartered secretary or a person who by virtue of his/her holding or having held any other position or his/her being a member of any other body appears to the directors to be capable of discharging those functions. This is a new addition. There is no stipulation in the Act regarding the qualifications the secretary of a private company must possess.
Minimum and maximum age of directors: The Act revises the minimum age of directors and discards the maximum age of directors that is contained in the previous Companies Act. The minimum age is lowered to eighteen (from twenty-one) and the maximum age of seventy is discarded.
Duties of directors: Director’s duties have been codified under the Act. The duties of directors are to act in a manner that promotes the success of the business of the company, exercise a degree of skill and care as a reasonable person, act in good faith in the interests of the company and ensure the company’s compliance with the Act and any other law. Common law duties such as the duty to retain discretion, despite not being codified, remain enforceable.
Disqualification of directors: The Act introduces a statutory bar to a person acting as a director for a period of three years if he or she fails to keep proper accounting records, prepare and file accounts, send returns to the Registrar, file tax returns and pay tax and/or allows a company to trade while insolvent.
Director and inter-company loans: The rules regarding the extension of loans to directors have been expanded in the Act.
The Act states that a company shall not make a loan to a director of the company or its holding company, or enter into any guarantee or provide any security in connection with a loan made by any person to such director. This rule relates to public companies only and no pecuniary threshold/bar is provided. This prohibition is designed to protect the company’s creditors and the company itself. However, there are a number of exceptions.
The Act recognizes the major exception that a company may provide any of its directors with funds to meet expenditure incurred or to be incurred for the purposes of the company or to enable the directors perform their duties provided prior approval from the general meeting is sought.
Inter-company loans and guarantees (members of a group of companies/holding company and its subsidiaries) are not prohibited, as are transactions at the behest of the holding company such as a loan by a company to its holding company.
The contravention of this rule gives rise to civil and criminal remedies. The transaction is voidable at the instance of the company unless full restitution is not possible or any consequential rights acquired in good faith for value by the transactions would be affected by its avoidance. Penal sanctions in the form of a fine and imprisonment for a limit of two years in the event of contravention also follow.
Connected and related persons: The Act introduces the concept of connected and related persons. A connected person is a person who is connected with a director of a company and a director who is associated with or controlling a body corporate.
Company directors occupy a special position vis-à-vis the companies of which they are directors. Without regulation, directors could potentially enter into transactions with their companies which would result in them placing their interests before those of the company, its shareholders and/or its creditors.
The strings of connection for a person to be connected with a director include filial relations, a body corporate with which the director is associated, a trustee of any trust the beneficiaries of which include the director and his/her relations and a partner to the director or any person otherwise connected to the director.
A director is associated with a body corporate if he/she and the persons connected with him/her are interested in shares comprised in the equity share capital of that body corporate of a nominal value equal to at least 20% of that share capital or entitled to exercise or control the exercise of more than 20% of the voting power.
The Act bars substantial property transactions between a company and a director of the company or its holding company or a person connected with such a director unless the arrangements is approved by an ordinary resolution of the company or, if the director or connected person is a director of its holding company or a person connected with the director, by an ordinary resolution of the holding company.
Arrangements entered into by the company in contravention of this rule are voidable at the instance of the company unless full restitution is not possible, any consequential rights acquired in good faith for value by the transactions would be affected by its avoidance or the arrangement is affirmed by the company in a general meeting within a reasonable period.
Director disclosures: As part of the general equitable principle that directors should avoid a conflict of their interests and duties, the Act requires a director to disclose interests and other substantial transactions involving the company of which he/she is a director. For example, all substantial contracts involving the director and the company must be disclosed.
Amalgamation of companies: Two or more companies may amalgamate and continue as one company which may be one of the amalgamating companies or may be a new company. An amalgamation must have an amalgamation proposal and the incorporation document of the amalgamated company as the key authorising documents.
Minorities/alternative remedy to winding up in cases of oppression: The Act has modified the remedy in respect of the oppression of minority shareholders by providing that a complaint should be lodged by the aggrieved member to the Registrar instead of the High Court. A member may apply to the Registrar by petition for relief on the ground that the company’s affairs are being conducted in a prejudicial manner.
Protection of members against prejudicial conduct: The Act allows a member of the company to apply to the court by petition for an order on the ground that the company affairs are being conducted in a manner unfairly prejudicial to the interest of its members generally or some part of its members, or a proposed act or omission of the company would be prejudicial.
Voluntary winding up: Part IX of the Act makes provision for the voluntary winding up of companies which are not insolvent. This is logical since in the presence of an Insolvency Act, insolvency procedures would be misplaced in the Companies Act As far as financial institutions are concerned, the provisions in Part XI of the Financial Institutions Act 2004 governing the liquidation of commercial banks continue to apply.
Enhanced fines for violations : The violations of the Companies Act now attract hefty fines ranging between 25 currency points (UGX 500,000) to 1,000 currency points (UGX 20,000,000).
This article is intended as a general overview and discussion of the case dealt with. This information is not intended to be, and should not be used, as a substitute for taking legal advice in any specific situation. Sebalu & Lule is not responsible for any actions taken or not taken on the basis of this article