Corporate law manual mzumbe university

LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW (LAW 650)
PREPARED BY:
Hilary Lubengo LL.B (Hons) Dar, LL.M (International Business Law)
Wales, UK
Joel Laurent LL.B (Hons) Dar, LL.M (Corporate Law and Finance)
Widener, USA

LECTURE NOTES ON ESSENTIALS OF CORPORATE LAW
INTRODUCTION AND BASIC CONCEPTS
The word 'Company' is an amalgamation of the Latin word 'Com'
meaning "with or together" and ‘Pains’ meaning, "bread". Originally, it
referred to a group of persons who took their meals together. Section 2
of the Companies Act, 2002 (Cap 212) defines Company as “…a company
formed and registered under this Act or an existing company”.
A company is nothing but a group of persons who have come together or
who have contributed money for some common purpose and who have
incorporated themselves into a distinct legal entity in the form of a
company for that purpose.
Lindley L.J defines a company as “an association of many persons who
contribute money or money’s worth to a common stock, and to employ it
in some common trade or business, and who share the profit or loss
arising therefrom”1
Lord Justice Marshall defines a corporation as “an artificial being,
invisible, intangible, existing only in contemplation of the law. Being a
mere creation of law, it possesses only properties which the charter of its
creation confers upon it either expressly or as incidental to its very
existence”
Under Halsbury’s Laws of England, the term "company" has been defined
as a collection of many individuals united into one body under special
domination, having perpetual succession under an artificial form and
vested by law with the capacity of acting in several respect as an
individual, particularly for taking and granting of property, for
contracting obligation and for suing and being sued, for enjoying
privileges and immunities in common and exercising a variety of political
rights, more or less extensive, according to the design of its institution or
the powers upon it, either at the time of its creation or at any subsequent
period of its existence. Normally, in the world of commerce the word
“company” is used to denote an association of people so associated for an
economic purpose e.g. business. Please note that companies can be
formed for other purposes as well – for example – for charity.
A company is also define to mean a group of persons associated together
for the attainment of a common end, social or economic or a voluntary
association of persons or individuals formed for some common purpose
(Smith v Anderson 1880 Ch. D. 247).
1
Taken from Saleemi N.A & Opiyo, A.G, Company Law Simplified (1997) at p.1
2

A company as an entity has several distinct features which together
make it a unique organization. The following are the defining
characteristics of a company:
Separate Legal Entity: On incorporation under the law, a company
becomes a separate legal entity as compared to its members. The
company is different and distinct from its members in law. It has its own
name and its own seal, its assets and liabilities are separate and distinct
from those of its members. It is capable of owning property, incurring
debt and borrowing money, having a bank account, employing people,
entering into contracts and suing and being sued separately. The legal
personality or separate entity was recognized in Oakes v Turquant (1867)
L.R. 2 H.L. 325, but the importance was firmly established in Salomon v
Salomon (1897) A.C 22. In this case, Salomon sold his boots business to
a newly formed company for ₤ 30000. His wife, one daughter and four
sons took up one share of ₤ 1 each. Salomon took 23000 shares of ₤ 1
each and ₤ 10,000 debentures in the company. The debentures gave
Salomon a charge over the assets of the company as the consideration of
the transfer of business. Subsequently, when the company was wound
up, its assets were found to be worth ₤ 6,000 and its liabilities amounted
to ₤ 17,000 of which ₤ 10000 was due to Salomon (secured by
debentures) and ₤ 7000 due to unsecured creditors. The unsecured
creditors claimed that Salomon and the company were one and the same
person and that the company was merely agent for Salomon and hence
they should be paid in priority to Salomon. It was held that the company
was, in the eyes of law, a separate person independent from Salomon
and was not his agent though initially the holder of all shares of the
company was also a secured creditor, and was entitled to repayment in
priority to unsecured creditors.
Lord Macnaghten observed:
“The company is at law a different person altogether from the
subscribers to the memorandum, and though it may be that
after incorporation the business is precisely the same as it
was before, and the same persons are managers, and the
same hands receive the profits, the company is not in law
the agent of the subscribers or trustee of them. Nor are
subscribers liable, in any shape or form except to the extent
and in a manner provided by the Act”
Limited Liability: The liability of the members of the company is limited
to contribution to the assets of the company up to the face value of
shares held by them. A member is liable to pay only the uncalled money
due on shares held by him when called upon to pay and nothing more,
even if liabilities of the company far exceeds its assets. The personal
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property of a shareholder cannot be attached for the debts of the
company if he/she holds fully paid up share.
A company may be limited by shares or by guarantee (s. 3(2) of the
Companies Act, 2002). In a company limited by shares the liability of
members is limited to the unpaid value of shares. In a company limited
by guarantee, the liability of a member is limited to such amount, as the
members may undertake to contribute to the assets of a company, in the
events of its being wound up. The importance of limited liability was
expressed in Senkin v Pharmaceutical Society of GB (1921) 1 Ch. 392.
Limited liability is the offspring of a proved necessity that, men should be
entitled to engage in commercial pursuit without involving the whole of
their fortune in that particular pursuit in which they are engaged.
Perpetual Succession: A company is a Juristic person with perpetual
succession. A company does not die or cease to exist unless it is
specifically wound up or the task for which it was formed has been
completed. Membership of a company may keep on changing from time
to time but that does not affect life of the company. Death or insolvency
of members does not affect the existence of the company. It is created by
the process of the law and can only be put to an end by the process of
law.
Separate Property: A company is a distinct legal entity. The company’s
property is its own. A member cannot claim to be owner of the company's
property during the existence of the company. A shareholder doesn’t
even have insurable interest in the property of the Company. Macaura v
Northern Ins. Co. (1925) AC 619 M was holder of nearly all shares of a
timber company. He was also a substantial creditor of the company. He
insured the Company’s timber in his own name. The timber was
destroyed by fire. It was held that the insurance company was not liable.
Transferability of Shares: S. 74 of the Companies Act states that “the
shares or any other interests of any member in a company shall be
transferable in a manner provided by the articles of the company.”
Shares in a public company are freely transferable, subject to certain
conditions, such that no shareholder is permanently or necessarily
wedded to a company. When a member transfers his shares to another
person, the transferee steps into the shoes of the transferor and acquires
all the rights of the transferor in respect of those shares.
Section 27 of the Companies Act restricts the right of the members of a
private company to transfer shares.
4

Capacity to sue and being sued: A company can sue or be sued in its
own name as distinct from its members. It may also inflict or suffer
wrongs. It can in fact do or have done to it most of the things which may
be done by or to a human being.
The company is only able to sue or be sued in its own name when it has
been registered. If the company has not acquired legal personality (not
fully registered) it cannot institute a suit2
. In the case of Fort Hall Bakery
Supply co. v. Federic Muigai Wangoe (1959) E.A. 474 a suit was instituted
by an unregistered firm of over twenty members whose existence as body
was not recognized in law. The high Court of Kenya stated at page 475.
“It is not registered as a company under Companies Ordinance or
formed in pursuance of some other Ordinances or Act of
parliament or letters of patent. It cannot therefore be recognized
as having any legal existence.
In the words of Bankes, L.J. in Banque Internationale de Commerce de
Petrograd vs. Goankassaow (1923) 2. K.B. 682 at 688
“ The party seeking to maintain the action is in the eye of law no
party at all but a mere name only, with no legal existence…A
non- existence person cannot sue, and once the court is made
aware that the plaintiff is non- existence, and therefore incapable
of maintaining the action, it cannot allow the action to proceed
Separate Management: A company is administered and managed by its
managerial personnel i.e. the Board of Directors. The shareholders are
simply the holders of the shares in the company and need not be
necessarily the managers of the company.
The Meaning and Nature of Corporate Personality
Corporate personality is the fundamental principle or doctrine that goes
to the root of company law that a company, being a legal person, is
entirely distinct from its members who formed it. After being
incorporated, a company becomes an independent legal entity vested
with a personality separate from that of its shareholders. The
personality gives a company an artificial life, perpetual succession,
the right to own and dispose property, and limited liability. Thus, a
company has full legal personality and is, so far as possible, to be
treated analogous to an individual.
2
The proper procedure for seeking legal remedy in a court by a body of persons who have no corporate
existence, is by way of a representative suit as provided under Order 1 rule 8 of the Civil Procedure Code
5

This theory is a by-product of the English House of Lords decision in
Salomon v. Salomon& Co. Ltd 3
. In that landmark case Aron Solomon, a
successful leather merchant, decided to incorporate his business in
1892, with himself, his wife and five children as the only shareholders.
The business assets were transferred into the corporate name for the
somewhat ambitious value of 39,000 pounds. Each of the other members
of the family took one share; Salomon himself took 20,001 shares. A
10,000-pound debenture was created charging the assets of the
company. Less than a year later the corporation encountered financial
difficulties and, after paying off the debenture holder, the company’s
assets were insufficient to pay off the unsecured creditors. These
creditors then attempted to fix financial liability on Aron Salomon.
Both trial judge and the Court of Appeal held that Mr. Salomon was
liable for the company’s debts, on the ground that the company was
either an agent, a trustee or a nominee of the true owner. The House of
Lords rejected this view on corporations. Lord Halsbury said4
:
“Either the limited company was a legal entity or it was
not. If it was, the business belonged to it and not to Mr.
Salomon. If it was not, there was no person and no thing to
be an agent at all”.
Corporate law, therefore, erects an imaginary wall between a company
and its shareholders from liability for a company’s actions. Once
shareholders have made their promised capital contributions to the
company, they have no further financial liability. All these mean that
contracts of a company are not contracts of the shareholders, and debts
of a company are not debts of its shareholders5
.
Lifting/Piercing the Cooperate Veil
From juristic point of view a company is a legal person different from its
members Salomon v Salomon & Co Ltd. (1897) A.C. 22.The principle may
be referred to as the ‘Veil of incorporation”. The courts in general
consider themselves bound by this principle. The effect of this principle
is that there is a fictional veil (and not a wall) between the company and
its members. That is, the company has a corporate personality which is
distinct from its members.
3
[1897] A.C. 22 (Eng., H.L.)
4
See Salomon v. Salomon., op. cit., at p. 31
5
See MALLOR J. et al., Business Law and the Regulatory Environment. Concepts and Cases: 10th
Edn:
Boston: Mc Graw-Hill Companies, Inc., 1998, at p. 826.
6

The human ingenuity however, started using this veil of corporate
personality blatantly as a crack for fraud or improper conduct, thus it
became necessary for the courts to break through or lift the corporate
veil or crack the shell of corporate personality and look at the persons
behind the company who are the real beneficiaries of the corporate
fiction. In United States v. Milwaukee Refrigerator Co.6
, the court observed
“A corporation will be looked upon as a legal entity as a
general rule… but when the notion of legal entity is used
to defeat public convenience, justify wrong, protect fraud
or defend crime, the law will regard the corporation as
an association of persons”.
In Littlewoods Mail Order Stores Ltd. V. Inland Revenue7
, Denning
MR. Observed:
“The doctrine laid down in Solomon v. Solomon & Co.
Ltd. has to be watched very carefully. It has often been
supposed to cast a veil over the personality of a limited
company through which the courts cannot see. But
that is not true. The courts can and often do draw
aside the veil. They can, and often do, pull off the
mask. They look to see what really lies behind”.
The power to pierce the corporate veil, though, is to be exercised
“reluctantly” and “cautiously” and the burden of establishing a basis for
disregard of corporate fiction rests on the party asserting such claim.
The circumstances which have been considered significant by the courts
in actions to disregard the corporate fiction have been “rarely articulated
with any clarity”. This is true because the circumstances necessary vary
according to the circumstances of each case and every case where the
issue is raised is to be regarded as sui generic (to be decided in
accordance with its own underlying facts.)
Various Cases in which corporate veil can be lifted.
Protection of Revenue
The court may ignore the corporate entity where company is used for tax
evasion. Tax planning may be legitimate as it is within the framework of
the law. Where it is desired to determine for tax purposes the residence
of a company the court will lift the veil and find out where its central
6
(1905) 142 Fed 247
7
(1969) WLR 1241
7

management is, and that place will determine the residence of the
company.
Prevention of fraud or improper conducts
The legal personality of a company may also be disregarded in the
interest of justice where the machinery of incorporation has been used
for some fraudulent purpose. In Jones v Lipman (1962) All ER 442. L
agreed to sell certain land to J. He subsequently changed is mind and to
avoid the specific performance of the contract, he sold it to a company
which was formed specifically for that purpose. L and a clerk of his
solicitors were the only members. J brought action for specific
performance against L & and the company. The court looked at the
reality of the situation, ignored transfer and ordered that the company
should convey the land to J.
Determination of character of a company whether it is enemy.
A company may assume an enemy character where persons in de facto
control of its affairs are residents in an enemy country. In Daimler Co. v
Continental Tyre & Rubber Co. Ltd (1916) a company was incorporated in
England for the purpose of selling in England tires made in Germany by
a German Company which held bulk of shares in the English company.
The holders of remaining shares except one, and all the directors were
Germans, resident in German. During the First World War, the English
company commenced an action for recovery of a trade debt. Held: The
Company was an alien company and the payment of the debt to it would
amount to trading with enemy, and therefore the company was not
allowed to proceed with the action.
Where the Company is a sham or is formed to avoid legal obligations
Where the use of an incorporated company is being made to avoid legal
obligations the court may disregard the legal personality. Nicole &
Sandra partners, sell their business to Benja and undertake not to start
a similar business and not to compete with Charles for certain number of
years. After some time they form a private company, become the
principal shareholders and directors and start a similar business. The
court may restrain the company from carrying business.
In the case of Gilford Co. Ltd v Horne (1933) Ch. 935 C.A. Horne a former
employee of a company was subject to a covenant not to solicit its
customers. He formed a company to carry on a business which, if he
had done so personally, would have been a breach of the covenant. An
injunction was granted against him and the company to restrain from
8

carrying business. The company was described in a judgment as “a
device, a stratagem” and a as a mere crack or sham for the purpose of
enabling the defendant to commit a breach of his covenant against
solicitation.”
Protecting public policy
The courts invariably lift the corporate veil to protect public policy and
prevent transactions contrary to public policy. In the case of Connors v.
Connors Ltd (1940) 4 All ER 174 it was held that where there is a conflict
with public policy, the court will lift the veil of incorporation.
Statutory lifting
Apart from judicial considerations, the exercise may also be carried out
statutorily under the provisions of Companies Act e.g. where the number
of members is reduced bellow the statutory minimum
Enlightenment to Business associations
One must also not confuse a business with a company. For that purpose
it is important to appreciate distinction between Sole Proprietorship, a
Partnership & a Company:
Sole Proprietorship: This is an individual carrying on business either
in his own name or in an assumed name which is usually referred to as
the Trade Name. For example: Mr.Kagya buys diamonds from Kenya and
sells it to Malawi. He does so in his own name. The law permits Mr.
Kagya to make his purchases of diamonds and to sell it to any person
whether in Tanzania or elsewhere. As with any business he will have a
capital, some assets, liabilities from time to time and profits or losses. As
with all business, if need be, he is required to register his business under
the Business Names Registration Ordinance and any other relevant law.
He is required to file tax returns and he is taxed on his profits. He merely
has to satisfy the Tanzania Revenue Authority of the extent of his profit
or loss from his own balance sheet which need not be audited. The TRA
may require him to audit his balance sheet if there is suspicion as to his
income or expenses. As the business grows Mr. Kagya may hire
employees, consultants, and establish branch offices. In all respects
Mr.Kagya is running a business but is not a company. Mr. Kagya may at
the beginning adopt a trading name or register a trading name later. For
example he may call is business “Nshomi Trading Company”. As far as
the General Public is concerned they will be dealing with a business
called Nshomi Trading Company. However the legal position is that it is
9

Mr. Kagya trading as Nshomi Trading Company. If a supplier or buyer of
diamonds wishes to institute proceedings against the business he would
do so against “Mr. Kagya trading as Nshomi Trading Company. The
liability of Mr. Kagya is personal. If there is a judgment against Mr.
Kagya he is personally responsible to satisfy the judgment. In the event
of a judgment being entered against him he will have to pay up the
damages that are assessed against him personally. If he cannot satisfy
the judgment he runs the risk of being declared bankrupt by the
judgment creditor.
It is important to remember that a sole proprietor is personally
responsible for his liabilities. So too, he is the only person entitled to
profits. He need not share his profits.
When two or more people join together for a common purpose, usually
the purpose of doing business for profit, such an association is called a
Partnership. Partners do business under a trade name for instance Mr.
Kagya of the Sole Proprietorship can bring in his friend Mr. Lau as a
partner and can trade under the name of Nshomi Trading Company. For
purposes of the law it really means Kagya and Lau trading in partnership
under the name and style of Nshomi Trading Company. The Partnership
has an existence of its own to the extent that it can sue and be sued in
its own name. However, the consequences of a liability against the
partnership are that each of the partners is fully liable to the entire
extent of the debt.In law, each partner is the agent for the other. The act
of one partner binds the firm and the other partners.
Distinction between Company and Partnership
1. A Partnership firm is sum total of persons who have come together to
share the profits of the business carried on by them or any of them. It
does not have a separate legal entity. A Company is association of
persons who have come together for a specific purpose. The company has
a separate legal entity as soon as it is incorporated under law.
2. Liability of the partners is unlimited. However, the liability of
shareholders of a limited company is limited to the extent of unpaid
share or to the tune of the unpaid amount guaranteed by the
shareholder.
3. Property of the firm belongs to the partners and they are collectively
entitled to it. In case of a company, the property belongs to the company
and not to its members.
4. A partner cannot transfer his shares in the partnership firm without
the consent of all other partners. In case of a company, shares may be
10

transferred without the permission of the other members, in absence of
any provision to the contrary in the articles of association of the
company.
5. There must be at least 2 members in order to form a partnership firm.
The minimum number of members necessary for a public company is
seven and two for a private company.
6. On the death of any partner, the partnership is dissolved unless there
is provision to the contrary. On the death of the shareholder, the
company' existence does not get terminated.
11

TYPES OF COMPANIES
There are various ways by which companies may be classified.
Companies may be classified on the basis of ownership or members, on
the basis of liability, on the basis of control and on the basis of
incorporation
On basis of ownership/members: Public and Private Companies
1.) Public Company means a company, which is not a private company.
Basic Characteristics
a. The general public is allowed to subscribe for membership on
fulfilling of few general conditions. The minimum number of
members is seven.
b. It can not commence business unless it obtains a certificate of
commencement of business]
c. The memorandum of public company shall state that it is a public
company
d. Transfer of shares is free
Under the Companies Act a public company is the company limited by
shares or guarantee and having a share capital, being a company the
memorandum of which states that it is to be a public company.
2.) Private Company
This is normally what Americans call a close corporation. A private
company (sometimes refereed as to quasi- partnership company) is in
nature of a partnership of persons with mutual confidence in each other
and its articles place positive restrictions on absolute transfer of shares.
See S. 27 of Cap 212.
Basic characteristics
a. Restricted membership. Section 27(1) (b) of Cap 212 limits the
number of its members to fifty. In determining this number of 50,
employee-members and ex-employee members are not to be
considered.
b. Restricts the right of members to transfer its shares S. 27(1) (a) of
Cap 212
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c. Prohibits any invitation to the public to subscribe to any shares in
or the debentures of the company. S. 27(1) (c) of Cap 212. The
Companies Act, 2002 creates an offence for a private company
which is not a private company limited by guarantee and not
having a share capital to offer to the public (whether for cash or
otherwise) any shares in or debentures of a company.
S 28 of the Act states that if a private company alters its articles such
that they no longer include the provisions required for a private company
(s.27), the company shall on the date of the alteration, cease to be a
private company and shall amend its memorandum to state that it is a
public company. The company should, within 14 days send notification
to the registrar who shall issue a certificate to the effect that the
company is the public company.
On the basis of liability: Limited and Unlimited companies
Companies may be limited or unlimited companies. Company may be
limited by shares or limited by guarantee. "Limited Liability" - this refers
to the liability of the members, not the liability of the company. The
company will always be liable to the full extent of its debts.
(a) Company limited by shares (s.3(2)(a) of Cap 212
(i) The most common kind of registered company.
(ii)Members of the company take shares issued by the company. Each
share is assigned a nominal value - the amount that must be paid to the
company for the share.
(iii)When the company is registered, its memorandum must state the
total nominal value of all the shares it is going to issue (called the
registered capital, or nominal capital or authorised share capital).
The memorandum also states the number of shares to be issued: e.g.
10,000 shares of Tshs. 100 each = registered capital of Tshs. 1,000,000.
(iv) Liability of a member (shareholder), when the company is wound up
is limited to the amount, if any, on the nominal value of his shares which
has not been paid. No member of company limited by shares can be
called upon to pay more than the face value of shares or so much of it as
is remaining unpaid.
(v) Shares are normally partly or fully paid for when issued, so company
will have a contributed capital.
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b) Company limited by the guarantee. S. 3(2)(b) of Cap 212
A company limited by guarantee is a registered company having the
liability of its members limited by its memorandum of association to
such amount as the members may respectively thereby undertake to pay
if necessary on liquidation of the company. Members agree to contribute
a specified amount to the company’s assets in the event of the company
being wound up. (Total amount payable by all members is called the
"guarantee fund"). Companies limited by guarantee are not usually
formed for business ventures
The liability of members to pay the guaranteed amount arises only when
the company has gone into liquidation and not when it is a going
concern. Members, therefore, do not have to pay anything as long as
company is a going concern - so company has no contributed capital.
C. Unlimited Company: S.3(2)(c)
The liability of members of an unlimited company is unlimited. Therefore
their liability is similar to that of the liability of the partners of a
partnership firm. The following are basic characteristics of unlimited
companies
I. Members have unlimited liability (If company is being wound up,
members can be made to contribute to the company’s assets
without limit to enable it to pay its debts.)
II. Cannot be public companies.
III. Can be set up with or without a share capital.
IV. Not subject to the same restrictions on alteration of capital as
other types of company, and do not normally have to file annual
accounts.
On the basis of control (Holding and Subsidiary companies)
When a company has control over another company it is known as a
holding company. The company so controlled is known as a subsidiary
company. A company shall be deemed to be subsidiary of another
company if: -
1. That other company controls the composition of its board of
directors; or
2. That other company holds more than half in face value of its equity
share capital
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3. Subsidiary of another subsidiary. Where the company is a
subsidiary of another company which is itself a subsidiary of the
controlling company, the former becomes the subsidiary of the
controlling company e.g. Company B is subsidiary of the Company
A and Company C is subsidiary of Company B, therefore Company
C is subsidiary of Company A.
The control of the composition of the Board of Directors of the company
means that the holding company has the power at its discretion to
appoint or remove majority of directors of the subsidiary company
without consent or concurrence of any other person.
In determination whether one company is subsidiary of another, shares
held or powers exercisable in the following cases shall not be taken into
account.
a) Any shares held or power exercisable by the other company in
fiduciary capacity
b) Where shares are held or power is exercisable by any person by
virtue of the provisions of any debenture or of a trust deed for
securing any issue of such debentures; and
c) Where shares are held or power is exercisable by lending company
by way of security only for the purpose of a transaction entered
into in the ordinary course of that business
You may also refer to section 487 of the Companies Act.
On the basis of incorporation
(1) Statutory: - these are companies created by special Act of the
legislature. Such companies are generally formed to carry out some
special undertakings. These companies are owned by the government
and the main objectives of these companies are to provide some
necessary services for the benefit of the entire country. The provisions of
companies Act may apply if not inconsistent with the special Act.
S.2 of the Companies Act defines Statutory Corporation as the meaning
given in the public corporations Act: ''public corporation'' means any
corporation established under the Public Corporation Act or any other
law and in which the Government or its agent owns fifty one percent or
more of the shares but does not include an institution of learning, a
district development corporation, a research institution or a sports
institution;
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(2) Registered: - these are Companies formed and registered under
Companies Act 2002, Cap 212. Such companies come into operation
only when they are registered under the Act and the certificate of
incorporation has been issued by the registrar. Such companies derive
their powers from the Companies Act, memorandum and articles of
associations.
(3) Unregistered Companies – S.425 of Companies Act, 2002
(4) Foreign Companies means a company incorporated in a country other
than Tanzania under the law of that other country and has established
the place of business in Tanzania. According to S.433 of the Companies
Act, foreign companies are companies incorporated outside Tanzania,
which, after the appointed day, establish a place of business within
Tanzania and companies incorporated outside Tanzania which have,
before the appointed day, established a place of business within
Tanzania and continue to have a-place of business within Tanzania on
and after the appointed day.
A foreign company shall not be deemed to have a place of business in
Tanzania solely on account of its doing business through an agent in
Tanzania at the place of business of the agent.
According to section 434 of the Companies Act, Foreign companies
which, after the appointed day, establish a place of business within
Tanzania shall, within thirty days of the establishment of the place of
business, deliver to the Registrar for registration -
(a) a certified copy of the charter, statutes or memorandum and
articles of the company or other instrument constituting or
defining the constitution of the company, and, if the instrument is
not written in the English language, a certified translation thereof,
(b) a list of the directors and Secretary of the company containing
the following particulars; his present name and surname and any
former name or surname, his usual address, his nationality and
his business occupation, if any; Provided that, where all the
partners in a firm are joint secretaries of the company, the name
and principal office of the firm may be stated instead of the
particulars mentioned
(c) a statement of all subsisting charges created by the company,
being charges of the kinds set out in section 99 and not being
charges comprising solely property situate outside Tanzania;
(d) The names and addresses of one or more persons resident in
Tanzania authorised -
(i) to accept on behalf of the company service of process and
any notices required to be served on the company, and
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(ii) to represent the company as its permanent representative
for the place of business, including a statement as to the
extent of the authority of the permanent representative,
including whether he is authorised to act alone or jointly.
(e) the full address of the registered or principal office of the
company, and the full address of the place of business in
Tanzania;
(f) a statutory declaration made by a director or Secretary of the
company stating the date on which the company's place of
business on Tanzania was established, the business that is to be
carried on and, if different from the registered name of the
company, the name under which that business is to be carried on;
(g) a copy of the most recent accounts and related reports of the
company including, where such are not in English, a translation of
the same.
On the registration of the documents specified above, the Registrar shall
certify under his hand that the company has complied with the
provisions of that section and such certificate shall be conclusive
evidence that the company is registered as a foreign company. This
certificate is commonly known as “Certificate of Compliance”.
17

PROMOTION AND FORMATION OF A COMPANY
Promotion: refers to the entire process by which a company is brought
into existence. It starts with the conceptualization of the birth a company
and determination of the purpose for which it is to be formed. The
persons who conceive the idea of forming a company and invest the
initial funds are known as the promoters of the company. These are
persons who do the necessary preliminary work incidental to the
formation of a company. Chronologically, the first persons who control
Company’s affairs are its promoters.
Promoter not a term of law, but of business, usually summing up in a
single word a number of business operations familiar to the commercial
world, by which a company is generally brought into existence. Whaley
Bridge Calico printing Co. v Green & Smith (1880) 5 QBD.
The promoters enter into preliminary contracts with vendors and make
arrangements for the preparation, advertisement and the circulation of
prospectus and placement of capital. However, a person who merely acts
in his professional capacity on behalf of the promoter (e.g. lawyer,
Accountants, etc) for drawing up the agreement or other documents or
prepares the figures on behalf of the promoter and who is paid by the
promoter is not a promoter.
Legal Status
As to exact legal status of a promoter, the statutory provisions are silent.
His legal status is incapable of precise statement but Lindely L.J describe
his position in Lydeny & Wigpool Iron Co vs. Bird (1886) 33 Ch.D as
follows
“Although not an agent for the company nor trustee for it before its
formation, the old familiar principles of law of agency and of
trusteeship have been extended and very popularly extended to
meet such cases.”
Thus, it appears that promoter is neither agent nor trustee of the
company under incorporation but fiduciary duties have been imposed in
him Erlanger v New Simbrero Phosphate (1878) 3 AC 1218. From the
moment the promoter acts with the company in mind, a promoter stands
in the fiduciary position towards the company.
The promoters’ fiduciary duties may be summed up as follows
18

1. He must not make any secret profit out of the promotion of the
company. Secret profit is made by entering into a transaction on
his own behalf and then sells the property to the company at a
profit without making disclosure of the profit to the company or its
members. The promoter can make profits in his dealings with the
company provided he discloses these profits to the company and
its members. What is not permitted is making secret profits i.e.
making profits without disclosing them to the company and its
members8
. He must also make full disclosure to the company of all
relevant facts including to any profit made by him in transaction
with the company.
2. He must not make unfair use of position and must take care to
avoid anything which has appearance of undue influence or fraud
3. The promoter, once he has begun to act in the promotion of the
company, must give the benefit of any negotiations or contracts
into which he enters in respect of the company. Thus where he
purchases some property he cannot rightfully sell the property to
the company at a price higher than he gave for it. If he does so the
company may upon discovering it, rescind the contract and recover
purchase price.
Remedies available to a company against the promoters: -
1. Rescind or cancel the contract made and if he has made profit on
any related transaction, that profit may also be recovered
2. Retain the property and paying no more for it than what the
promoter has paid for.
3. If these are not appropriate (e.g. cases where the property has
altered in such a manner that it is not possible to cancel the
contract or where the promoter has already received his secret
profit), the company can sue him to for breach of trust. Damages
up to the difference between the market value of the property and
the contract price can be recovered from him.
A promoter may be rewarded by the company for efforts undertaken by
him in forming the company in several ways. The more common ones
are: -
1. The company may decide to pay some remuneration for the
services rendered.
8
disclosure may be made to either an independent board of directors or the existing and intended
shareholders e.g. by making disclosure in the prospectus
19

2. The promoter may make profits on transactions entered by him
with the company after making full disclosure to the company and
its members.
3. The promoter may sell his property for fully paid shares in the
company after making full disclosures.
4. The promoter may be given an option to buy further shares in the
company.
5. The promoter may be given commission on shares sold.
6. The articles of the Company may provide for fixed sum to be paid
by the company to him. However, such provision has no legal effect
and the promoter cannot sue to enforce it but if the company
makes such payment, it cannot recover it back.
If the promoter fails to disclose the profit made by him in course of
promotion or knowingly makes a false statement in the prospectus
whereby the person relying on that statement makes a loss, he will be
liable to make good the loss suffered by that other person. The promoter
is liable for untrue statements made in the prospectus. A person who
subscribes for any shares or debenture in the company on the faith of
the untrue statement contained in the prospectus can sue the promoter
for the loss or damages sustained by him as the result of such untrue
statement.
Pre-Incorporation Contracts
The legal position is that two consenting parties are necessary to a
contract, whereas company, before incorporation, is not an entity.
Kelmer v Baxter (1866) L.R. 174). The promoters cannot therefore, act as
agent for a company which has not yet come into existence. As such the
company is not liable for the acts of the promoters done before
incorporation. A pre-incorporation contract purported to be made by a
company which does not exist is a nullity. As such the company when it
comes into existence can neither sue nor be sued on that contract.
Position of promoters:
• Company is not bound by pre-incorporation contracts
• Company cannot enforce pre-incorporation contract
• Promoters remain personally liable.
Can a company ratify/adopt a pre-incorporation contact after it comes
into existence?
20

• Company cannot ratify a contract entered into by the promoters
on its behalf before incorporation. The doctrine of ratification
applies only if an agent contracts for a principal who is in
existence and who is competent to contract at the time of
contract by agent.
• It cannot by adoption or ratification obtain the benefit of the
contract purported to have been made on its behalf before it
came into existence.
Pre-incorporation contract - solutions to personal liability
The following methods may be used to ensure that the company
becomes, after incorporation, an effective party to a pre – incorporation
contract:
a. A draft agreement may be settled with the other party so that when
the company is formed it enters into the draft agreement thus
giving it contractual force when signed also by the other party. In
order to ensure that the company does enter into the contract, the
memorandum or articles of a new company can be drafted to
include a provision binding the directors to adopt it. It will be
noted here that the promoter here is not liable because there is no
contract with him.
b. The promoter can make the contract himself and be bound by it,
provided the other party agrees that the promoter shall be released
from his obligations under the contract if and when the company
enters into a new, but as regards terms, identical contract with the
other party after incorporation. This is really recommended for
those cases – which are many – where the promoter(s) will be in
effective control of the company after incorporation and can ensure
the making of a new contract9
.
c. Where the promoter is anxious that the company should acquire
property which he does not himself own, he may take an option to
purchase for, say three months. If the company later wishes to
take the property, the promoter may assign the benefit of the
option to the company or enforce it for the benefit of the company.
If the company does not take over the property, the promoter is not
liable to do so but he may loose any money which he paid for
option.
9
Simply making the contract with the third party and allowing the promoter to assign the benefit of it
to the company when it is formed is not recommended because the law does not allow a person to
assign the burden of a contract. Therefore the promoter remains personally liable for the performance
of the agreement even after the assignment to the contract.
21

d. Section 40 (1) of the companies Act states that the promoter is personally liable
‘subject to any agreement to the contrary’. Thus the promoter could agree when
making of a contract that he should not be personally liable on it, even if the
company after incorporation do not make a new contract.
e.
Formation of companies
Currently in Tanzania companies are formed under the companies Act
2002, Cap 212. Those forming companies are called promoters. The main
tasks of the promoters are to prepare various documents, and lodge
these, with the necessary fees, with the Registrar of Companies.
Forming a company under Cap 212 one is expected to follow the
following steps:
• Name: The first thing the promoter should do is to think of a name
in light of section 30(2) of the Cap 212. The promoter can make a
written application to the Registrar for reservation of a name. Such
reservation will remain in force for a period of thirty days or such
longer period not exceeding sixty days, as the Registrar may, for
special reasons allow. (s. 30(1) of Cap 212
• If the proposed name of the company is approved then the
following document duly stamped together with the necessary fees
are to be filed with the registrar:
1) The memorandum of association duly signed by subscribers.
This in effect, defines the company and what it can do. It is
the requirement under section 5 (1) of the Act that there
should be at least one witness who must attest the signature
by subscribers to the memorandum.
2) The articles of Association, if any, signed by the subscribers
to the memorandum of Association. These usually regulate
the internal management, and the rights and duties of
shareholders vis-à-vis the company and each other. They
deal with matters such as transfer of shares, meetings,
voting and other rights of shareholders, dividends, and
directors’ powers of management. A public or private limited
company by shares need not, in fact, submit any articles. If
it does so, it will be taken to have adopted Table A, a model
articles in regulations made under the companies Act.
3) A statement in prescribed form containing the names and
address (or registered office) of:-
22

(a) the person or persons being the first director or
directors of the company
(b) the person or persons being the first secretary or joint
secretaries of the company; and in the case of a first
director or directors, the particulars of any other
directorship held during the five years preceding the
date on which the statement is delivered to the
Registrar.
4) A statement specifying the intended address of the
company’s registered office on incorporation.
5) A statutory declaration, in pursuant to section 16(2) of Cap
212 by the advocate of the High Court or by the person
named in the articles as a director or the company secretary
declaring that the requirements of the ordinance have been
complied with, and the registrar may accept such
declaration as sufficient evidence of compliance.
If all the requirements in respect to registration and matters incidental to
it have been satisfied, the registrar issues a certificate of incorporation
which is the company’s birth certificate10
.
10
It is very important to take not that the registrar has absolute discretion to register the memorandum and
articles of association. The registrar is not bound to give reasons. However, where the registrar refuses to
register the Memorandum and articles delivered to him, he shall return the same to the person who tendered
them for registration and shall advise the applicant in writing that in exercise of the power or, as the case
may be, he refuses to register the memorandum and articles of association.
23

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 time11
. This definition is
neither exhaustive nor explanatory.
The memorandum of association is a document of great importance in
relation to proposed company12
. 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 outsiders13
.
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 fit14
.
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 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
11
S.2 of the Companies Act, Cap.212
12
Kapoor N.D. Elements of Company Law (1991) at pg.67.
13
Saleemi NA & Opiyo, A.G. Company Law simplified (1997) at pg.57
14
Ashbury Rly carriage & Iron Co. Ltd. V. Riche (1875) LR7 HL.653
24

contemplate to enter with the company is within the objects
of the company15
.
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 names16
,
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 legible17
. The name of Public Company must
15
Cotman v Brougham (1918) AC 514
16
s.30 (2) of cap.212 e.g names which suggest a criminal or immoral intent, or names which are
misleading.
17
s.112 of Cap.212
25

end with the words “Public Limited Company” and for private company
with the word “Limited”18
.
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
effective19
. 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)
The 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.
18
s.4(1)(a) of Cap.212
19
s.31(1) of Cap.212
26

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 company20
.
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).
20
Saleem et al., op.cit. at p.61
27

 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.
28

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.
29

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 Capital21
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.
21
Under the new Companies Act reduction of share capital do not apply to an open – ended investment
company whose establishment has been duly authorized under the Capital Markets and Securities Act. See
Section 68. Open-ended investment companies (OEIC) is a company that is able to redeem its own shares
for cash and manages a portfolio of investments on behalf of its members.
30

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.
31

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
32

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”22
.
22
Taken from Saleemi & Opiyo, op cit., at p.71
33

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;
34

(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.23
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. Saffery24
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
23
(1901)1 Ch.279
24
(1897) AC.299
35

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.25
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
25
(1875) LR7 HL 869
36

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 Turquand26
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.
26
(1856) 6E & B 327
37

(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.
38

MEMBERSHIP OF A COMPANY (S.24 OF CAP 212)
One can become a member of a company by any one of the following
ways: -.
1. By subscribing to the memorandum of association: A subscriber to
the memorandum of association becomes a member on
incorporation of the company in respect of the shares subscribed
by him without any further act by him. He will be liable for
whatever number of shares he has subscribed for up to the unpaid
amount on those shares. A Subscriber to the memorandum cannot
have canceled his membership on the ground that he was induced
to become a subscriber by the promoters of the company.
2. By a director undertaking to take and pay for his qualification
shares. [s. 191]
3. By agreeing in writing to become a member in any of the following
ways provided the name is entered in the Register of Members of
the Company.
• By application and allotment
• By taking a transfer of shares
• By transmission of shares
Membership may be acquired from an existing member by
purchase of the shares of the transferor and lodging with the
company a transfer deed duly executed by both the transferor and
the transferee together with the share certificate. When the
transfer is registered by the company, the name of the transferee is
entered in the register of members of the company in place of the
transferor.
In the case of transmission, a person can become a share holder in
consequence or by reason of the death or bankruptcy of a member
or any other event constituting transmission. But that person will
become a member only when he applies in writing requesting the
company to make him a member and the company puts his name
on the register of members.
4. By allowing his name to be on the register of members or otherwise
holding himself out as a member or allowing himself to be held out
as a member. A person will be deemed to be a member if he allows
39

his name to be on the register of members or otherwise holds
himself or allows himself to be held out as a member. Any person
competent to enter into a contract can become a member of the
company. (Read s. 121 on remedy for a person whose name is
entered erroneously or retained)
Who can become a member?
Any person competent to enter into a contract can become a member of a
company. There is no prohibition on minors being shareholders or
members although a company may refuse to accept a minor as a
shareholder. However an infant can become a member of a company but
he or she must act through parent or guardian. When minor applies for
and receives allotment of shares, the same rules prevails as when he
subscribes to the memorandum. Applying ordinary contract law rules, a
contract to purchase shares is voidable by the minor within a reasonable
time of attaining the age of majority. If the minor repudiate the contract,
he will not be liable for future calls but cannot recover the purchase
price unless there has been a total failure of consideration Steiberg v.
Scala (Leeds) Ltd. (1923) 2 Ch 452, which is likely to be the case. Until
minor repudiates, the minor has full rights of membership.
Partnership firm
A firm cannot be registered as a member because it is not a legal person
and partners may not remain constant. A firm however may purchase
share in a company in the individual names of its partners as joint
shareholders.
Insolvents
A bankrupt person May be a member of a company although the
beneficial interest in his shares is vested in the trustee in bankruptcy as
from time to time when is adjudged bankrupt. Unless the articles
provides to the contrary, a shareholder does not cease to be a member of
a company on becoming bankrupt.
Companies
A registered company cannot become a member of another company
unless authorized by its memorandum to hold such shares. A company
cannot hold its own shares. Cannot be a member of itself. A subsidiary
company cannot hold shares in its holding company, except where the
subsidiary company is acting as personal representative or trustee and
the holding company has no beneficial interest under the trust.
40

Register of members (ss 115 – 127 of Cap 212)
Every company must keep a register of its members at its registered
office stating the names, addresses and occupation, if any, and number
of shares held by each member and the date which each person became (
ceased) to be a member. If there more than 50 members there must be
an index (s.116). The register is to be open for inspection by members
and the public during business hours and copies must be sent on
request within ten days on paying prescribed fee.
Rectification of the register
The court may order rectification of the register if any one is improperly
omitted or included in it (s. 121). This is in fact the procedure where by
title to shares is established.
Cessation of membership
A person ceases to be a member of the company in any of the following
ways: -
a. By transferring his shares to another person. However, the
transferor will continue to be a member until the shares are
registered in the name of the transferee.
b. By forfeiture of his shares on non-payment of calls due
c. By a valid surrender of shares to the company
d. By death but until the shares are transmitted to his legal heirs, his
estate will be liable for any money due on the shares;
e. By the company selling his shares in exercise of its right under the
articles of association of the company (e.g. right to lien)
f. By the Court or any other competent authority attaching and
selling the share in satisfaction of decree or claim
g. By redemption of the preference shares;
41

h. By the official assignee disclaiming his shares on his adjudication
as an insolvent
i. By rescission of contract of membership on the ground of
misrepresentation or mistake.
j. By the company buying back the shares
Rights of members
The members of a company enjoy various rights in relation to the
company. These rights are conferred on members of the company by
Companies Act or by the memorandum and articles of association of the
company or by the general law. These rights are such as right to vote,
right to demand a poll or join in the demand for poll, right to transfer
shares, rights to participate in appointing directors and auditors in the
annual general meeting, rights to receive dividend when declared.
Voting Rights of the Members
Every member of a company limited by shares holding equity shares with
voting rights will have votes in proportion to his share in paid up equity
capital of the company. In respect of equity shares with differential
rights, voting rights shall depend on the prescribed rules.
Generally, preference shareholders like debenture holders do not have
any voting rights. The rights to vote at meetings are usually restricted by
providing that they shall have no rights to attend such meetings.
However, they can vote on matters directly relating to the rights attached
to the preference share capital. Any resolution for winding up of the
company or for the reduction or repayment of the share capital shall be
deemed to affect directly the rights attached to preference shares.
Whenever preference shares are, however, authorized to vote by poll,
their shares are weighted more than other classes. Weighting here means
so many votes will be allocated to each share a member holds so that
when such member votes, his votes are calculated by multiplying each
share by the number of votes attached to each share.
Every equity shareholder with voting rights has a right to vote at a
general meeting. However, a member’s voting rights can be revoked if
that member does not make payment of calls or other sums due against
him or where the company has exercised the right of lien on his shares.
Liability of members
42

Liability of a member depends upon the nature of the company. (See
types of companies on the basis of liability)
No Notice of Trust
The company is not allowed to enter any notice of trust on the register –
thus the registered owner is treated as the beneficial owner so far as the
company is concerned even if he is a trustee for someone else.
Sometimes the shares of a company belonging to a person may be
registered in the name of other person. The person in whose name the
shares are registered is the trustee and the person to whom the shares
belong is the beneficiary of the shares.
For all practical purposes, a trustee is the shareholder and is liable for
calls, even though the calls exceed the value of the trust property in his
hands (Phoenix Life Ass. Co. Re.(1862) 31 L.J. Ch. 749). The trustee,
however, is entitled to be indemnified by the beneficiary who is ultimately
liable for calls [Hardoon v. Belilios (1901) A.C. 118. Section 122 clearly
states that no notice of any trust, express, implied or constructive, shall
be entered on the register of members. The object of S. 122 is
• To relieve the company from any obligation to take notice of the
rights of third parties in respect of shares registered in the names
of any members, and
• To preclude any person claiming an equitable interest in shares
from treating the company as trustee in respect thereof.
43

PROSPECTUS
After obtaining a certificate of Incorporation the promoters will take steps
to raise the necessary capital for the company. A public Company may
invite the general public to subscribe to the capital of the company and
for this purpose a prospectus has to be issued. The basic objective of
issuing a prospectus is to arouse public interest in the proposed
company and induce the general public to buy its shares and
debentures. If the promoters are confident of raising the required capital
privately they need not issue prospectus. In such a case a statement in
lieu of prospectus must be filed with the registrar of companies.
The word prospectus is not used under Companies Act and instead the
term offer document is used to mean any document, prospectus, notice,
circular, advertisement or other invitation, offering to the public for
subscription or purchase any share or debentures of a company.
Private companies are not required to issue prospectus see s. 27 of cap
212.
The central theme of a prospectus from money raising point of view, is
that it sets out the prospects of the company and the purpose for which
the capital is required. The prospectus is the basis in which the
prospective investors form their opinion and take decision as to the
worthiness of the company. From legal point of view prospectus is not an
offer but a mere invitation to treat. When a person makes an application
for shares on the basis of the prospectus that application is the offer.
Offer document is defined by S.2 of Cap 212 but in simple words it is any
document inviting deposits from the public or inviting offers from the
public for subscription of shares or debentures of a company
(subscription in the definition of prospectus means taking or agreeing to
take shares for cash.
Prospectus must be in writing; oral invitation advertisements in TV or
film are not treated as prospectus.
Invitation to Public
The document will be treated as prospectus only when it invites general
public to subscribe to it. The public is of course general word. But if the
document satisfies the condition of invitation to the public, it is a
prospectus even though it is issued to a defined class of the public. In
Nash v. Lynde (1929) A.C. 158.it was stated that If however, the
invitation is made to a small circle of friends of the directors or the
existing shareholders, It is not an offer to the general public. Whether the
shares have been offered to the public is a matter of fact and will depend
on the circumstances of each case. In South of England Natural Gas &
petroleum Co. Ltd Re (1911) I Ch. 573. A prospectus was issued marked
44

‘for private circulation only’ it also contained a statement that a copy of it
has been filed with the registrar. It was not publicly advertised and was
stated to have been distributed by the promoters only to shareholders in
certain gas companies in which they were interested. 3000 copies were
sent out. It was held that it was offer of shares to the public.
An offer will not be treated as made to the public
(1) If it is not calculated to result directly or indirectly, in the
shares or debentures becoming available for subscription or
purchase by persons other than those receiving the offer or
invitation.
(2) It is domestic concern of the persons making and receiving the
offer or invitation. Thus an offer to one’s kid cannot be
considered to be an invitation to public; Sherevell V Combined
Incandescent Mantle’s Syndicate (1907) 2.3 T.L.R 482.
FORM AND CONTENTS OF A PROSPECTUS.
Prospectus is the window through which an investor can look into the
soundness of a company’s venture. The investor must, therefore be given
a complete picture of the company’s intended activities and its position.
This is done through prospectus which must secure the fullest disclosure
of all materials and essential particulars and lay the same in full view of all
intending purchasers of shares or debentures.
S. 46 provided that every prospectus issued by or on behalf of a company
must be filed, and the date, unless the contrary is proved, is taken to be
the date of publication of the prospectus.
S.47 (1) States that offer document issued before on behalf of the
company or, by or on behalf of any person who was engaged or interested
in the formation of a company must state the matters specified and
contains in the reports required to be included from time to time in
regulations made by the Minister for the time being responsible for
finance or by the Capital Markets and Security Authority or such other
authority as may be designated by that minister for the purpose.
Prospectus is not required to be issued in the following cases.
(1) Where shares are not issued to the public.
(2) Where shares or debentures are offered to existing members or
debentures holders.
(3) Where shares/debentures offered are uniform in all respects with
previously issued shares/debentures.
45

(4) Where an offer is made in connection with a bona fide invitation to
a person to enter into an underwriting agreement with respect to
the shares/debentures.
Registration of offer document (s. 49)
No offer document shall be issued by or on behalf of the company or in
relation to intended company unless, on or before the date of its
publication, there has been delivered to the Registrar for registration a
copy thereof approved by the Capital Markets and Securities Authority.
Misstatements in Prospectus
If there is any misstatement of a material fact in a prospectus or if the
prospectus is wanting in any material fact, there may arise
1) Civil liability – s. 50
2) Criminal liability- s. 51 & 472
A person who has been induced to subscribe for shares (or debentures)
on the faith of a misleading prospectus has remedies against the
Company, and the directors, promoters and experts.
Remedies against the Company
1) Rescission of the Contract
Any person, who takes shares on faith of statements of fact contained in
a prospectus, can apply to the court for rescission of the contract if those
statements are false or fraudulent or if some material information has
been withheld. He must however, apply for the rescission with a
reasonable time and before he will have to surrender to the Company the
shares allotted to him. His name is then removed from the register of
members and he gets back the money paid by him for the Company
along with interest.
Conditions for rescinding
a) The statement must be a material misrepresentation of fact. The
misrepresentation is material when it is likely to influence a
reasonable man in his judgment whether or not to apply for
shares. In Henderson V Lacon (1867) L.R. 5 Eq. 249. A prospectus
stated that the directors and their friends have subscribed a large
portion of the capital and they now offer to the public remaining
shares, where as the fact was that the directors had subscribed
46

only 10 shares each it was held that, the subscriber could rescind
the contract.
A statement of fact must be distinguished from a statement of
opinion. statement that property of a company is worth a certain
sum of money or that due to hard work and efficiency of directors
the profits are expected to reach a certain figure are only opinions
and will give no ground for an action for rescission. The statement
that “the surplus assets, as appear by the last balance sheets, are
more than Tshs. 10,000/= is a statement of fact.
b) Statement must have induced the shareholder to take the shares.
This in fact is a question of fact depending on circumstance of
each case if a statement would influence a reasonable man, the
court will readily infer that it influenced the applicant. In the case
of Smith V Chadwick (1087) A.C 187 it was stated that if the
applicant’s acts show that he did not rely on the statements, he is
not entitled to rescind.
c) It must be untrue
A statement is deemed to be untrue if it is misleading in the form
and context in which it is included. Where an omission is
calculated to mislead, the prospectus is deemed in respect to such
omission, to be a prospectus in which untrue statement is
included. But a mere non-disclosure does not amount to
misrepresentation unless the concealment has prevented an
adequate appreciation of what was stated.
47

CONCEPT OF CAPITAL AND THE FINANCING OF COMPANIES
As Latham CJ said in the Australian Case of Incorporated Interest Pty Ltd
V Federal commissioner of Taxation (1943) 67 CLR 508 at 515:’ it is
impossible to say that capital has a single technical meaning which
prima facie should be attributed to the word in any statutory provision’
The legal concept of capital crops up in the law of trusts and revenue law
as well as company law. In trust law it describes the original trust fund
and any assets which replace the items in the original fund. A distinction
is drawn between capital and income. In revenue law, there is the same
capital and income distinction. In modern company law capital is used to
cover:
a. Share capital – the funds subscribed by members;
b. Loan capital – the fund provided by commercial finance providers
and investors holding debentures or debenture stocks;
c. All funds whether provided by members, creditors or by retention
of profits and
d. The assets in which funds have been invested.
Share
Share is the interest of a shareholder in a company. The interest is what
is owned and it gives a shareholder certain rights as defined by the
articles of association and has a nominal value.
Share Certificate
The ownership of interest is evidenced by a document called share
certificate. When a share has been allotted to a member the company is
required to issue certificate within six days. Where shares are transferred
from one member to another, the company must send a share certificate
to the new member within two months (s.82). [This does not apply to
shares transferred within the membership of the Stock Exchange]
A share certificate is merely a prima facie evidence of the fact that the
person stated as being the owner of the shares is the owner and that the
shares are paid up to the amount so stated (s. 83(1). On the other hand
the company cannot deny the truth of these statements against anyone
who relied on the certificate to his detriment unless the share certificate
is a forgery. (See Re Bahia and San Fransico Rly Co. (1868) LR 3 QB 584
and Reuben v. Great Fingall Consolidated (1906) AC 439)
48

Share Capital
This means the capital raised by a company by the issue of shares. The
capital clause in Memorandum of Association must state the amount of
capital with which company is registered giving details of number of
shares and the type of shares of the company. A company cannot issue
share capital in excess of the limit specified in the Capital clause without
altering the capital clause of the memorandum of association. The
following different terms are used to denote different aspects of share
capital: -
Nominal authorized or registered capital means the sum mentioned in
the capital clause of Memorandum of Association. It is the maximum
amount, which the company raises by issuing the shares and on which
the registration fee is paid. This limit cannot be exceeded unless the
Memorandum of Association is altered.
Issued capital means the nominal value of the shares which are offered
to the public for subscription. A company does not normally issue capital
at once, so that issued capital in such case is less than the authorized
capital. The issued capital can never exceed the authorized capital, it can
at most be equal to the authorized capital which is the case when all
shares have been issued to the public.
Subscribed capital means that part of the issued capital at nominal or
face value which has been subscribed or taken up by purchaser of
shares in the company and which has been allotted. The subscribed
capital may be less than the issued capital.
Called-up capital this is that part of the issued capital which have been
called up on the shares. It is the total amount called upon the shares
issued and which the shareholders continue to be liable to pay as and
when called. I.e. if the face value of a share is Tsh. 500/- but the
company requires only Tsh 200/- at present, it may call only Tsh. 200/-
now and the balance Tsh 300/- at a later date. Tsh. 200/- is the called
up share capital and Tsh. 300/- is the uncalled share capital.
Paid-up capital means the total amount of called up share capital,
which is actually paid to the company by the members. Often some
shareholders fail to pay the calls made on them and the amount thus
owing is known as “calls in arrears” or “calls unpaid”
49

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