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CLASSIFICATION OF COMPANIES CORPORATIONS.

Corporation is a person in law i.e. quite distinct from the individuals who are its members.
Corporations can own property, have rights and are subject to liabilities.

Types of corporations:
a) Corporate sole.
Has only one member.
Can continue even after death of those members.
b) Corporation aggregate.
Have more than one member.
Are classified according to the means the artificial corporate personality has been granted: - thus
(i) Chartered corporations
Are incorporated by the grant of a royal charter by the crown.
Nowadays charters are given to non-profit making bodies of public importance (good).
(ii) Statutory corporations
Created by passing an act of parliament e.g. the national coal board.
(iii) Registered corporations.
Are those created by compliance with the terms of an act of parliament.
Companies act 1844 provided a third and easier method of incorporation by registration following
compliance with formalities. In 1855 limited liability concept was introduced.

Types of registered companies
1. Public companies
Under section 1 (1) are formed by seven or more members, the purpose being to attract investment
from the general public.
2. Private companies.
Formed by two or more members. Defined by sec.28 (1) as a company which by its articles: -
a) Restricts rights to transfer shares e.g. by clause that members must offer their shares first
to other members or to directors or a clause under which directors have a right to refuse to
register a transfer.
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b) Limits the number of its members to 50 (excluding present or past employees). Joint
holders of shares are treated as a single member.
c) Prohibits any invitation to the public to subscribe for its shares or debentures.

Limited companies
Liability of a company is unlimited in the sense that it must pay all debts due from it so long as its
assets are sufficient to meet them. Liability of members may be limited when the company is formed
by;

a) Shares.
Members are liable to the extent of the amount paid on their shares, including share premium if any.
There is no liability regarding unissued capital.
In case of private companies a guarantee is usually required before credit is given.

b) Guarantee
Normally these companies dont have share capital.
They are non-profit making organizations.
Where there is no share capital, there is no liability or the members unless and until the company
goes into liquidator in which case they were liable to the extent to which they have agreed by the
memorandum of association to contribute to the assets of the company.
The guarantee is usually to contribute Sh1 though it may be more.
The guaranteed sum is payable by those who are members at the time of winding up and if they
cant pay the liquidator may proceed against those who were members previously but only in respect
of debts incurred while they were members.
An unlimited company may re-register as a limited company (by shares or guarantors) unless it has
previously been converted from a limited to an unlimited company.
Members must pass a special resolution agreeing to the change, and the resolution must make the
appropriate alterations so that it confirms to the requirements.
The special resolution is then sent to the register of companys and re-registration is effected by a
director or a company secretary of the company by signing an application form sending it to the
registrar together with a printed copy of the companys memorandum and articles in their new form,
the register then issues a new certificate.
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Unlimited companies.
There is no limit to the liability of the members.
Mostly used by stockbrokers because stock exchange cant admit a company as a member unless its
members are personally liable for its debts.
An unlimited company can avoid giving publicity to its financial affairs.
An unlimited company can be formed by: -

a) By being formed as such;
Either with or without share capital and as a public or private company.
Where there is no share capital members contribute equally to the debts and liabilities of the
company.
b) By being re-registered
Sec. 43 CA 1967 allows a company limited by shares or guaranteed to re-register as an unlimited
company.
All members must consent in writing and all the consents together with a statutory declaration by
the directors that the consents have been obtained and a copy of the memorandum and articles
altered so as to confirm to those of an unlimited company.
The registrar may then issue a certificate and publish the fact of issue in the Gazette.

Special features of unlimited companies.
a) It need not deliver copies of its annual accounts, directors and auditors reports to the
registrar with its annual return
It enjoys privacy as regards its financial affairs.
This privilege is not extended to an unlimited company, which is a subsidiary or holding of a
limited company, or unlimited company, which is potentially under control of two or more
limited companies.
b) Provisions of CA 1948 governing the alteration of capital do not apply to unlimited
companies.
A company may alter its capital structure by a special resolution altering the articles.
Notice of any alteration must be given to the registrar within one month unless alteration
increases the companys nominal capital, when notice must be given within 15 days.
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c) An unlimited company may acquire any of its own shares if its articles authorize it to do so,
even though it uses its own assets to purchase them. (Re Borough commercial and building
society (1893) ).
If at the time it acquires the shares the company knows that its existing assets and amounts which it
could expect to exact from its members on winding up will not be enough to satisfy its liabilities the
acquisition of the shares will be set a side as a fraud on its creditors (Mitchell vs. city of clas gow
Bank (1879)).
d) An unlimited company need not give a more than seven days notice to its members of an
extra ordinary general meeting called to pass a resolution other than a special one. The period
for other companys is 14 days.
e) An unlimited company may issue shares of no porr value.
f) An unlimited company has no statutory power to issue redeemable preference shares, but
since it can purchase its own shares if articles provide, it could in practice issue redeemable
preference shares and provision of section 58 would not apply.

Other instances of unlimited liability.
(a) Section 31
Under this if a company carries on business for more than six months with less than seven
members (or two in a private company), every member who knows of the fact is liable for the debts
of the company which are incurred of the period of six months has expired.
The section does not apply as regards damages after awarded e.g. a breach of contract by the
company.
(b) Section 332
The section applies if the company is being wound up. The court must be satisfied that the
companys business has been carried on with intent to defraud creditors.
Person carrying on business fraudulently must be made personally liable for the companys debts.
Example directors could be held liable if knowing that the company is unable to pay its debts as
they fall due, they ordered goods on credit or received money from customers for goods, which the
company might not be able to supply.
(c) Section 202
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The memorandum of a company may provide or be altered to provide, that the liability of its
members shall be limited but the liability of its directors shall be unlimited. This alternative is hardly
ever adopted in practice.



Separate legal personality of a company
The case, which established the independent legal personality of a company, Salomon vs. Salomon
and company Ltd (1897) (1,1).
Major consequences of the Salomon case.
a) It established the validity of registration as a means of creating a corporation formerly these
was done by charter for statute.
b) Registration was established as a method of creating a company with a separate legal
personality.
c) A registered company has perpetual succession.
d) Separate personality is made to function by the board of directors which is the agent. There is
thus need for members to have some control over the board. Some of the ways the member can
achieve this control was:-
a. The ultra vires rule.
Shareholders can seek a court injunction wherever directors involve in transaction that are beyond
the company powers.
These days the courts construct objects clause widely so that this control is often more apparent
than real ( Re New Finance and Mortgage Co. Ltd (1975)).
Also acts by directors which are defective whether because of lack of authority or quorum or
because of some defect I their appointment or because of their motives were improper, can be
validated by ordinary resolution of the members after full disclosure of the facts to them in a general
meeting, provided the acts in question are not ultra vires the company (e.g. Barnford vs. Barnford
(1969) Y4).

b) Accounts and audits
The board is required to account for its financial stewardship by ensuring the production of annual
accounts which must be audited and presented to the members at the
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c) Sec. 184 removal of directors is made easy.
A company may by ordinary resolution remove a director before the expiration of his period of
office regardless of the way in which he was appointed not withstanding anything in its articles or
any agreement in his favour section 184 (1).
Special notice of 28 days to the company is required of the intention to move the resolution
(sec.184 (2)).
Following the acceptance of limited liability in Salomon, certain protections are given to creditors
and potential creditors.
a) Publicity as to financial standing - Companies must file the annual returns.
b) Share capital (creditors fund) cannot be returned to shareholders.
(i) Capital reductions must be a approved by the court under section 66.
(ii) A limited company may not purchase its own shares (Trevor and
Whortworth 1887 (1/6)), nor, subject to certain exceptions, lend money to persons
so that they may buy the companies shares (s.54)
There is an exception when shares are issued as redeemable preference shares (section 58).
(iii) Dividends must be paid out of profits and not out of capital.
There are provisions to prevent the capital of a company being watered down as it comes into the
company by the control of the issue of shares at a discount (section 57) and of underwriting
commission paid on shares on the issue of shares.
Exceptions to the rule of separate legal personality.
1. Companies act 1948
If the membership fall below the statutory minimum for six months.
There is also liability where on winding up the court is satisfied that a companys business has been
carried on within intent to defraud its creditors.

2. Public interest
Personal qualities of shareholders may be investigated in public interest (Daimler Co. Ltd vs.
continental Tyre (1916)(1/7).

3. Evasion of legal obligations
When a company is formed to evade legal obligations (e.g. Gilford motor Co. Ltd vs. Horne (1933))
shareholders may be personally liable.
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4. Personal relationship company sec. 184 of 1948 act,
Which allows removal of a director by an ordinary resolution after 28 days has also given rise to
abuse of the corporate entity theory in the private company. This is because a director can be easily
be removed without a mistake of in part, unless there is a special clause in articles as in Bushell v.
Feith.
Personal relationship companies are in essence partnerships where each member assumes continuing
involvement in management. In order to ascertain whether the company is a personal relationship
company, it is necessary to lift the corporate veil and discover the hopes and aspirations of the
members.