BUSINESS ASSOCIATIONS

II

Kasim
Balarabe
LLB (ABU), BL (Nigeria) , LLM
(Geneva), LLM (VU
Amsterdam),
PHD Student
(Maastricht,
Netherlands)
Lecturer,
Faculty of
Law
Islamic
University in
Uganda

LECTURE ONE

Content of the

1
  Company Officers
i. Directors
ii. Company Secretary
iii. ‘Auditors’

2
 Direc
Management of Company and Status of
Directors
 A company is an artificial person and cannot manage its own
affairs. It is therefore the practice that since the law gives it
human attributes, there must be someone to perform such
duties.
 The control and management of a Company is usually
undertaken and distributed among the principal organs of the
Company: General Meeting, Managing Director. and Board of
Directors. Hence, directors are persons to whom the
management of the company is entrusted.
 A director is defined in law according to what they do, rather
than their actual job title. Even a person not formally
appointed to the board might be deemed a director if their
role could be considered equivalent to that of a director, or if
they have acted as a director. This is known as a de facto
director.
 Definition of Director: S. 2 Companies Act 2012 “includes
any person occupying the position of director by whatever
name called and shall include a shadow director” . Also
defined under S. 132(5) for accounting purposes to “include
any person in accordance with whose directions or
3 instructions the directors of the company are accustomed to
act.

Direct
 Bakibinga concluding on the difficulty of classifying directors
observes that since they act for the company, they must
necessarily be agent of that company but conceded that
because of the artificial nature of the principal, it is difficult to
discern the normal agency-principal relationship.
 If they are agents, who control them when in reality , they
control the company.
 If the shareholders are the principals, the directors are
not necessarily subject to the wishes of the majority.
 If they are trustees, do the rules applicable to a trustee apply
to them? E.g. a trustee is the legal owner of the res.
 According to Palmer, they are only deemed trustees if they
misapply the company’s property.
 The position of Palmer and Lindgren may be preferred
according to Bakibinga, that the position is sui generis who
stand on equal footing with shareholders in general meeting
within the corporate structure and they possess powers and
duties whose exercise may procedurally render them agents
4 or trustees of the company.
Types of Directors

3
 Direct
Shadow
director
A shadow director is a person whose instructions and decisions
the other directors accept and implement unlike a de facto
director he may not carry out those actions himself. A shadow
director often acts behind the scenes, which may be because
there is a reason why they cannot be formally appointed.
Differences between de
facto and shadow
directors
The major differences between a de facto director and a
shadow director are outlined in the official transcript of
Ultraframe (UK) Ltd v Fielding and others. The relevant
paragraphs are numbered 1254 to 1263. A person may be both
a de facto and a shadow director at the same time. Whether a
person who was appointed a director of a company which was a
5 corporate director of another company could be considered a
de facto director of the second company was analysed in a

Direct
Executive and
managing
directors
An executive director is responsible for the day to day running
of the company. A managing director is a position created and
filled by the board of directors. The managing director is the
most senior position in the company and is generally
responsible for its day to day management.
Appointment
of Directors
 Under the Companies Act 2012, S. 185, every public
company registered under the Act must have at least two
directors and others must have at least one, except a
company having only one director, such a director cannot
also act as the Secretary of the Company. See S. 187 (1).
6  Generally, the appointment of directors is regulated by
the Articles of Association of the company.

4
 Direct
 Directors must be elected on their individual merits.
 A director need not be a natural person, a corporation may
be so appointed, this being found useful to
enable a holding company to maintain complete control of a
subsidiary.
Casual Vacancies
 A casual vacancy is one which occurs between general
meetings e.g. due to the death, removal or resignation
of a director. Companies Acts under Table A empowers the
board to fill casual vacancies and to appoint
additional directors up to a maximum specified in the company’s
directors.
 A person appointed by the board holds office until the next
AGM. He will then be eligible for re-election.
 His appointment wont be considered in determining who will
retire by rotation.
Persons who may not be appointed directors
 A person declared bankrupt or insolvent by a competent court
in Uganda
 It’s a criminal offence for an undischarged bankrupt to act as
a director without permission of the court.
See S. 200.
7  When a disqualification order is made, a person may not
act as a liquidator, director, administrator,

Direct
Vacation of office
The office of the director may be vacated by:
 Death of the director
 Dissolution of the company
 Retirement of the company
 Retirement by rotation
 Table A states that at each AGM, one third of the directors
shall retire.
 Those who retire are those who have been longest in office.
 Retiring directors are eligible for re-election.
Removal of a Director
 A company can remove a director by ordinary resolution
despite anything in the articles of association or the
agreement by the directors. This is not applicable in the
case of a private company who was appointed to hold office
8 
for life before the commencement of the Act.
Special notice must be given of any resolution to remove a

5
 Direct
Disqualification of a Director
 S. 199 provides for the disqualification of directors.
 A person will be disqualified from acting as a director
for a period of 3 years if he/she fails to:
i. Keep proper accounting records
ii. Prepare and file accounts
iii. Send returns to the registrar
iv. File tax returns and pay tax, or
v. Allows a company to trade while insolvent.

Effects of Disqualification
S. 199 (2) states that a person disqualified as a director
shall not:
 Be a director of any company
 Act as director before the expiry of the disqualification
period
 Influence the running of the company through the
directors.
9 

Be involved in the formation of a new company.
Act in a way that promotes a company.

Direct
Remuneration of Directors
 Directors are in principle not regarded as
servants of the company but its controllers hence
not entitled to remuneration unless provided for in the
articles of association. See Hutton v. West Cork Rail
Co. (1883) 23 Ch. D 654; Moriarty v. Regent’s
Garage Co. Ltd (1921) 1 KB 423.
 Company’s articles usually indicate that directors
shall be entitled to such remuneration as shall be
determined by the company in general meeting by
resolution.
 A director is entitled to sue for the remuneration
which the company has agreed to pay him and may
even prove that in a winding-up.
 The articles may provide for directors to be paid a
fixed sum per annum. However in order to sue for
such sum, the directors must prove the existence
of a contract with the company. In this case,
10 provisions in the articles may not be sufficient
although an implied contract might be inferred on

6
 Direct
Powers of Directors
Relationship between the Board and the Company
 The extent of directors’ powers is defined by the
articles.
 Table A provides that the company shall be managed
by the directors who may exercise all the powers
except such to be exercised by the company in general
meeting.
 If shareholders don’t approve the director's acts,
they must either remove them or alter the articles to
regulate their future conduct.
 Shareholders cant take over the functions of the
directors.
 For the relationship between the Board of Directors
and the members in general meeting see the following
cases:
11 1. Automatic Self-Cleansing Filter Syndicate Co. v.

Direct
Managing Director
 Although most of the powers of the company have
been given to the General Meeting and
the Board by law, in practice the Board usually
delegates it power to the Managing Director.
 Table A states that the Directors may appoint one of
their members as managing directors
on terms as they think fit.
 A Managing Director has no settled functions by law.
His powers and duties are on his
service agreement. In Harold Holds Worth & Co.
(Wakefield) Ltd v. Caddies (1955). 1 WLR
352 (H.L) the Service Agreement of the Managing
Director of a holding company provided
that he should perform the duties in relation to the
business of the holding company and its
subsidiaries as should be assigned to him by the board
of the holding company. After policy
disagreement the board directed him to confine his
12 attention to the business of one of the
subsidiaries. Held: This was not a breach of his service

7
 Direct
Duties of Directors
Directors have the following common law duties;
 The duties of a director are determined by statute, common
law, the constitution of the company, i.e. its
articles of association, contracts of employment or service
agreements and the decisions of shareholders.
 The duties of a director as determined by common law
(fiduciary duties) include acting in good faith and in
the best interest of the company as a whole.
 A director has a duty to ensure the company acts as a
separate legal entity and not just for the benefit of
the members.
 The director must exercise his/her powers for the proper
purpose, e.g. to issue shares to raise capital
rather than to avoid a takeover.
 A director should avoid conflicts of interest. The director
must not place themselves in a position where
his/her personal interest conflicts with their responsibility
to the company. For example, depriving a
company of an asset or resigning as a director to take
advantage of an opportunity arising from their
former directorship.
13  A director is also under a duty not to make a secret profit or to
misapply company property.

Reception of Equity
in Ugandan
Section 198 provides for the duties of directors namely;
 To act in a manner that promotes the success of the
company’s business.
The directors are under a duty to act in such a way as to promote the
success of the company for the benefit of its
members as a whole. In achieving this objective the directors should
consider the likely long term consequences of any
decision, the interests of employees, the company’s business
relationships with suppliers, customers and others, the effect
of the company’s business on the community and the environment,
the need to maintain a reputation for high business
standards and the need to act fairly as between members of the
company. See Brady v. Brady Brady Vs. Brady (1998) Nurse
LJ held that though the interests of a company as an artificial entity
cannot be distinguished from the interests of persons
interested in it its desirable to maximize the company's size,
profitability, number of employees or any other business
objective for the company’s success.
 To exercise a degree of full skill and care as a reasonable
person would do looking after their own business.
The statutory duty to exercise reasonable care, skill and diligence was
a common law requirement subject to the test of
reasonableness. However the test was, at least in part, subjective.
Here a director is therefore expected to display the
14 care, skill and diligence exercised by a reasonably diligent person
carrying out the same functions. The Act also takes into
account the general knowledge, skill and experience that he/she

8
 Direct
 Section 198(d) provides for the director’s duty to comply
with the Act and any other law.
The duty of the directors is to the company
 Gower, principle of modern company law states
that directors owe their duties to the company but
not individual shareholders or employers. In Percival
v.. Wright (1902) 2 Ch
421, the directors purchased shares from their
members without revealing that negotiations were
ongoing for the sale of the company’s undertaking at
a favorite price. Held: The directors weren't in breach
of duty through their non disclosure.
 The duty of directors to individual shareholders. This
duty arises where directors place themselves as
against shareholders individually. This is on of the
established legal relationships to which fiduciary
duties are attached. In Coleman v. Myers (1977) 2 NLR
225
Court held that a fiduciary duty of disclosure arose
15 even in the absence of agency in the case of a small
family. A company where there was a great disparity

Secret
The secretary
 Section 187 provides for a company secretary. A sole director
is prohibited from being a secretary.
 The secretary is appointed by the directors on such terms as
they think fit.
 The directors may also remove the secretary.
Qualifications
 These depend on the type of company or venture.
 Section 190 provides for the qualifications of company
secretaries.
 The directors must take all reasonable steps to ensure that
the secretary is a person who appears to them to have the
requisite knowledge and experience.
 For a public company, he must be an advocate of the
High Court, or is a member of the institute of chartered
public accountants in Uganda, the institute of chartered
secretaries and administrators.
16 Powers

9
 Secret
Duties
The secretary has the following duties:
 Ensure that the company's documentation is in
order. That the requisite returns are made to the
companies register
 Taking minutes in meetings
 Sending notices to members and countersigning
documents to which the company seal is affixed.

17

Audit
Auditors
 An auditor is a person appointed to audit or check the
company accounts
 The audit is a check on the activities of the directors
and the company officers.
 It gives confidence to shareholders that their
investments aren't being mismanaged or
misappropriated.
Appointment of auditors
 This is provided under section 167. Every officer must
appoint an auditor to hold office from the conclusion of
that general meeting until the conclusion of the
next annual general meeting.
 The registrar has powers to appoint an auditor
where at an annual general meeting, no auditors are
appointed or re appointed.
18  Section 169 provides the grounds who aren't eligible
for appointment as auditors namely; officer or servant

10
 Audit
Qualification of auditors
 A person or a firm shall not be qualified to be appointed as
an auditor of a company unless he is a person registered as
an associate Accountant.
 Or a firm each of whose partner is a member of the
Institute of Certified Public Accountants of
Uganda registered under the Accountants Act.
Duties of the auditor
 To audit the company accounts including its annual balance
sheet and profit and loss statement.
 Prepare a report showing if reports have been well
prepared and if they give a true and fair view of the
company’s accounts.
 Carry out investigations to determine if proper accounting
records have been kept and whether they comply with the
entries.
Position of the auditor
19  A company auditor isn't an officer of the company as stated

20

11
 BUSINESS ASSOCIATIONS
II

Kasim
Balarabe
LLB (ABU), BL (Nigeria) , LLM
(Geneva), LLM (VU
Amsterdam),
PHD Student
(Maastricht,
Netherlands)
Lecturer,
Faculty of
Law
Islamic
University in
Uganda

LECTURE TWO

Content of the

1
  Minority Protection
i. Personal Action
ii. Derivative Action
iii. Representative Action

2
 Minority
Protection/Enforcem
INTRODUCTION
 Quite often a minority shareholder could
find himself or herself in the
precarious position of being locked into the
company. In other words, the
minority shareholder may be discontented
with a decision made by the
board of directors of the company or a
decision by the majority
shareholders.
 The general rule is, the powers of the
company rest in the board of
directors and the general meeting
 The minority members must accept the
decision of the majority
 The majority is the one with authority
3 (board of directors) while the

Litigation by the
Company: The Rule in
 For long, it had been settled that where it is
legally necessary to enforce as duty owing to the
Company, the only plaintiff is the Company itself
and not a member of the Company. This is
notoriously called the Rule in Foss v. Harbottle
(1843).
 Facts: The Plaintiff (an individual shareholder)
brought a suit against the directors of the
company who had sold their own land to the
company at a higher value and kept the proceeds
to themselves. So the question before court was
whether the members had a right to sue the
directors. It was held that the courts could not
entertain such a suit, because the wrong had been
done to the company and not the shareholders.
 The reality however, is that the Company is a
4 fiction and the power to litigate on its behalf is
vested in some person or group of persons.

3
 Litigation by the
Company: The Rule in
 In Ugandan jurisprudence, the Rule in Foss v.
Harbottle was reiterated in Salim Jamal and ors v.
Uganda Oxygen Ltd and 2 ors (1997) where Oder J cited
Mor v. Wallersteinner (1975) and held that it’s a
fundamental principle of law that a company is a legal
person with a corporate personality separate and distinct
from its shareholders or directors and with its own
property rights and interests to which alone it is
entitled. If its defrauded by the wrong door, the
company itself is the one person to sue for the damages.
The effect of the Rule in
Foss v. Harborttle
 The following should be clearly noted to
understand the rule in Foss v. Harborttle.
 In case something injurious has been done to the
company, the company is the proper
Plaintiff to bring an action and not
5 the individual shareholder.
 The majority shareholders mean those

Enforcement of
 This aspect of the law is
concerned with the
avenues through
which share
holders/ members of
a company can enforce
their rights, e.g. payment
of declared dividends,
removal of
6 incompetent
directors, etc. A

4
 Exceptions to the Rule in Foss v. Harbottle:
Personal Action
 The Rule in Foss v. Harbottle greatly strengthens the position of the majority
and if
there were no exceptions, the minority would completely be in their hands. A
number
of exceptions were created, whereby an individual shareholder can go to
court
notwithstanding the fact that the wrong was committed against the Company:
ENFORCEMENT OF MEMBERS’ RIGHTS UNDER COMMON
LAW A. PERSONAL ACTION
1. Where there is an ultra vires/illegal transaction by a
company
Case: Hutton v. West Cork Railway Co. A railway company which had no
provision in its articles for paying remuneration to directors, and had never paid any, sold
its undertaking to another company at a price to be determined by an arbitrator. By
the Act authorizing the transfer it was provided that on the completion of the transfer the
company should be dissolved except for the purpose of regulating their internal affairs
and winding up the same and of dividing the purchase-money. The purchase-money
was to be applied in paying the costs of the arbitration and in paying off any revenue
debts or charges of the company, and the residue was to be divided among the
debenture holders and shareholders. After the completion of the transfer a general
7 meeting of the company was held at which a resolution was passed to apply
£1050 of the purchase-money in compensating the paid officials of the company for their
company
loss wasalthough
of employment, proper since
they had no the company
legal claim was involved
for any compensation, in ultra
and £1500 in vires
transactions.

Exceptions to the Rule in

Foss v. Harbottle:
Personal Action
2. Where majority shareholders are using
company assets for their own self-
gratification
Case: Salim Jamal and ors v. Uganda oxygen and 2
ors (1997) it was held by the Ugandan Supreme
Court that where a wrong has been done to a
company, the minority shareholders can bring an
action to stop its continuance or to recover the
company’s property, damages or compensation
3. Where there is a breach of the
Articles of Association
If a breach of Articles takes place, any aggrieved
shareholder can proceed to court
notwithstanding that the company itself
may have been prejudiced.
Case: Hickman v. Kent (1915) 1 Ch 881. The Court
held that upon registration of a
8 company, the articles of association create a
contract between the members and

5
 Exceptions to the Rule in
Foss v. Harbottle:
Personal Action
4. Where the individual member’s personal
rights have been threatened/
infringed
If the wrong complained of amounts to an infringement of
the personal rights of a shareholder,
he can petition under a personal action notwithstanding
that it is the company that has been
wronged. In Misango v. Musigire (1966) E.A. 390, a
general meeting purported to alter Articles
of Association to the detriment of the plaintiff. It was also
stated that some 9 shareholders
had attended that meeting and voted in favour of the
resolution. Sir Udo Udoma C.J, held that
the action could be cancelled in so far as what was
complained of infringed on the rights of the
plaintiff.
5. Where the majority commits fraud, for
example, the making of secret
9 profits by the directors
Whenever it is established that the transaction

Exceptions to the Rule in

Foss v. Harbottle:
Personal Action
6. Interest of Justice
Courts are ready to entertain any action of a
shareholder which falls outside the
above exceptions if it is in the interests of
justice e.g. in Daniel's case, a
shareholder complained that the majority
shareholders who were also directors
negligently sold a company's plot of land to one of
the directors at a price of £
120,000. The issue before the court was whether this
suit should be maintained in
light of the rule in Foss v. Harbottle since there was
no allegation of fraud. It was
held that the shareholders could maintain the suit.

10

6
 Exceptions to the
Rule in Foss v.
B. DERIVATIVE ACTION
 A derivative action differs from a personal action
in the sense that although a
shareholder is allowed to sue personally, he is not
suing on his own behalf but on
behalf of the company because the company itself is
unable to sue for that wrong.
 The rationale behind the principle is that when the
people who have committed
the wrong are the same people who are supposed to
sue, they may not do it.
 However, the courts have insisted that a derivative
action should not be utilized
as a means of side stepping the rule in Foss v.
Harbottle. Therefore the following
conditions must be satisfied.
The action must allege fraud on the minority.
11 1.
2. The company is being controlled by those who

Exceptions to the
Rule in Foss v.
Harbottle:
C. REPRESENTATIVE ACTION
 A legal action in which one or a few
members of a class sue on behalf of
themselves and other members of the same class.
 A lawsuit brought by the shareholders of a
company, on its behalf, for the enforcement of a
corporate right.
 This is a hybrid of the two actions above. In all
the above actions, the plaintiff must have clean
hands.

12

7
 ENFORCEMENT OF
MEMBERS’
RIGHTS UNDER
ENFORCEMENT OF MEMBERS’ RIGHTS UNDER
STATUTORY LAW
1. Winding up the Company Under the Just and
Equitable Clause (S.222(f)) Companies Act,
1961:
 A company can be wound up if it is just and
equitable to do so. Before the shareholder can have the
matter entertained under this section, he must satisfy the
following conditions:
a. He must petition the court that the company be wound
up for just and equitable reasons.
b. The petitioner must be a contributory. That is, he
must be a shareholder who is liable to contribute to the
13 assets of the company during its winding up.

ENFORCEMENT OF
MEMBERS’
RIGHTS UNDER
What kind of Wrongs can be Entertained
Under the Just and Equitable Clause?
 The following have been accepted as major grounds
for winding up the company under the
Just and
Equitable
Clause:
a. Deadlock between Directors who are
also the only Shareholders:
In Reyenidje Tobacco Co Ltd (1916) 2 Ch.426; two
directors who were also the only shareholders only
communicated through a secretary. The directors hated
14 each other such so much that the company had to be
wound up.

8
 ENFORCEMENT OF
MEMBERS’
 In the case of Elder Vs Elder and Watson (1952) S.C
491, the court defined oppression as a visible departure
from the standards of fair dealing and the violation of
the conditions of fair play on which every shareholder is
entitled to rely.
 For one to rely on the plea of Oppression, he
must satisfy the following grounds:
a. The petitioner must satisfy the court that although the
facts justify the winding up of the company under S. 222
(f), such winding up would be unfair to him. That as such
he should be awarded a remedy under S.211, the
oppression section.
15 b. Where the court is satisfied with the petition, it

ENFORCEMENT OF
MEMBERS’
RIGHTS UNDER
 In Re H.R. Hammer Ltd (1959) I WLR 62, a father
who gave gifts of shares to sons continued to run the
company as his own and to disregard wishes of other
shareholders and company directors and even
resolutions of the Board of Directors. It was held that
oppression amounts to a conduct by the majority which is
harsh, burdensome and wrongful.
3. INSPECTIONS AND
INVESTIGATIONS
 These can be initiated either by the
registrar or the members themselves.
a. Investigations by members
16 may be initiated in 2 instances:

9
 ENFORCEMENT OF
MEMBERS’
RIGHTS UNDER
ii. Using a
Special
Resolution
 A special resolution may be passed that a court
appoints competent inspectors to investigate the affairs
of the company (S.166).
b. Investigations
by the Registrar.
 S. 164 - Where
the registrar:
a. Believes that the Company’s Act’s
provisions have not been complied with.
17 b. Believes that the books and documents of the

ENFORCEMENT OF
MEMBERS’
RIGHTS UNDER
c.
Investigations
by Court
 Under S. 166, the court may order for the
appointment of inspectors to look into the affairs of
the company if from the registrar's report either:
i. The company's business is conducted in a fraudulent or
unlawful or oppressive manner or members have not
been given all the information they are entitled to.
ii. Promoters or management
are guilty of misfeasance.
D. MISFEASANCE
18 PROCEEDINGS
 This is another remedy open to a shareholder who

10
 ENFORCEMENT OF
MEMBERS’
RIGHTS UNDER
There are 3
important
limitations:-
 The proceedings are only invoked during
the winding up of the company.
 Receivers are not caught by S.328 but liquidators
and any other defacto officer is caught.
 The section deals with only the wrongs involving
misappropriation of funds or property
(pecuniary claims).
 Where the proceedings are successful, the guilty
officer may be ordered to pay/replace the funds/property
19 or to contribute such sums of money as the company

20

11
 BUSINESS ASSOCIATIONS
II

Kasim
Balarabe
LLB (ABU), BL (Nigeria) , LLM
(Geneva), LLM (VU
Amsterdam),
PHD Student
(Maastricht,
Netherlands)
Lecturer,
Faculty of
Law
Islamic
University in
Uganda

LECTURE
THREE

Content of the

1
 MEETINGS AND
RESOLUTIONS

2
 Meet
INTRODUCTION
 A company meeting is a gathering of shareholders
and other officers to address
issues relating to the company.
 A company should hold a general meeting subject
to the Articles of Association.
 The Companies Act also provides for statutory and
extra ordinary meetings plus
the procedures for calling for, conducting and
adjourning meetings.
 Shareholders exercise their decision making
rights through shareholders'
meetings.
 The decisions of a properly constituted meeting of
the company bind the company
and its members.
 Every company must hold meetings in order to
3 discuss issues relating to the
company. In Irene Kulabako v. Malinga Ltd and 2 ors

Meeti
Types of meetings
There are 3 types:
1. Statutory General Meeting
2. Annual General Meeting
3. Extraordinary General Meeting.

3
 Meet
STATUTORY GENERAL MEETING
 Section 2 provides that a Statutory Meeting is defined
under section 137 (1) Companies Act.
 Section 137(1) states a Company Limited by shares or
by guarantee and having a share capital
must hold a Statutory General Meeting.
 Must be held between at least one month and not more
than three months from the date the
company is entitled to commence business.
 The meeting is held only once.
 It is intended to review the activities of the promoters
and directors during the formation or
incorporation stage.
 Section 137(2) requires the directors to forward a
statutory report to every member of the
company at least 14 days before the meeting is held.
 21 days’ notice should be given before the meeting is
held.

5 Contents of the Statutory Report under section 137

(4)

Meeti
 Particulars of any contract and modification of
any contract to be submitted to the meeting for
approval
 The details of arrears if any due to the directors, the
managing director or manager
 Names, postal addresses and descriptions of the
directors, auditors, a managers and
secretaries of the company if any
 The report as far as it relates to the shares allotted,
cash receipt in respect of shares,
receipts and payment of the company on capital to be
certified as correct by the auditors is
any under section 137(5)
 The members present are free to discuss any issue
relating to the formation of the
company or arising out of the statutory report
irrespective of whether notice on it has been
given or not but no resolution may be passed if notice of
it has not been given according to
6 section 137(8)
 Section 137(9) provides for adjournment from time

4
 Mee
ANNUAL GENERAL MEETING
 It is the company’s most important meeting
 It is intended to provide information to the
members regarding the business
 Section 138 Companies Act states that the
Annual General Meeting should be
held each year
 Section 138(1) provides that not more than 15
months shall elapse between the
date of one annual general meeting and the next
 The first general meeting shall be held within
18 months from the date of
incorporation though not necessarily in the year of
incorporation under section 138
(3)
 A private company may hold an Annual General
Meeting at the requisition of a
7 member under section 138(2)
 Directors have the responsibility of convening

Meeti
 Notice of the meeting must be given to the
members
 It must indicate the agenda, venue and time of the
meeting.
The Annual General Meeting may consider;
 Consideration of the directors and auditors' report
 Appointment of auditors and fixing their
remuneration
 Consideration of company accounts
 Declaration of dividends
 Other issues arising from the day to day running of
the business

5
 Meeti
EXTRA-ORDINARY MEETING
 Refers to a meeting which is not the Annual
General Meeting
 Also referred to as the “Emergency General
Meeting”
 Deals with issues which cannot be left pending
until the Annual General Meeting
 Section 138(1) states that a public company
shall hold a general meeting in
addition to any other meetings
 “Other meetings” means extra-ordinary meeting
 An extra-ordinary general meeting may
consider an alteration of the
memorandum of and Articles of Association, an
increase or decrease in the
company’s share capital
9  Section 139 provides that notwithstanding
anything in the Articles of the

Meeti
CONDUCT OF THE MEETING
 The Board of Directors has power to convene the
company’s general meeting
 However this must be in accordance with the
Companies Act or the Articles of
Association
NOTICE OF THE MEETING
 Section 140 provides for a notice of 21 days in
writing when calling for a meeting
of the company
 Section 141(a) provides that the notice of a
company meeting shall be served on
every member of the company in the manner under
Table A
 Notice must be served personally or sent to known
addresses of all the members
10  Electronic form and website may be used where a
member has agreed

6
 Meeti
Case: Greenvine College Ltd. The Applicant went to
court for a declaration that all resolution purportedly
passed by the company on the 15th August 2002
and 20th March 2003 were null and void as the
meetings weren't properly held. Held - Kiryabwire J;
Every general meeting shall be called by giving
21 days’ notice in writing and notice has to be
served or deemed to be served to such person
entitled to receive it
AGE
NDA
 This is integrated in the notice and circulated
to the members before the
meet
ing
11  Any comments to the agenda must be
communicated to the Secretary or

Meeti
 He is entitled to vote and has the same right as
the member to speak at the meeting according to
section 143(1)
 A proxy votes in accordance with his or her
appointer's instructions.
 A member cannot appoint more than one proxy
to attend on the same occasion
under section 143(2) (b)
 Section 143(2)(C) states that a proxy shall not be
entitled to vote except on a
poll
 . A proxy cannot be appointed in case of a
company with no share capital unless
the Articles of Association say so.
 A proxy must be appointed in writing and in a
prescribed form
 The proxy instrument of appointment must be
12 clear and precise
 The document must be delivered to the company

7
 Mee
CHAIRMAN

ting
Chairman is the chief authority and an umpire of the
meeting
 The Articles of Association provide for the appointment
of the chairman.
 Members can also elect one of them to be a chairman
on a show of hands
 The board chairman presides as chairmaѮ at every
genercl meeting of the ţompany
耍Duties ofР the Chairman
 To act in the companys interest
 T ensure that the meeting is propErly constytuted
 єo ensure that"t聨e procɥedings at the meࡥting are
prope⁒ly conducted
 Ġ` Ensereࠠ that prov䁩siůns /f the Cïmpani٥s Act" aîd
the0 Arti䁣les of Arsociation!are proࡰerly
obsevved
 Ensure dhat no discussio~ is Рallowed except when†
there is a speãၩfic motion befrg" the
13 meet聩nf
Powers of the Chairm聡n

Mee
VOTING
 Ƞ ࠠ This$is by show of hands
M  Each member is Entitled耠to only one vote ir聲espective
nf sh聡re聨olding
 The Articles oŦ Association may ⁨mwever provide
anothes way of voting.
 In case of a tie and the chairman has a casting vote, he
is free to vote
 A proxy may vote only on a poll
 A subsidiary company has no right to vote at the
meetings of a holding company
POLL
ࠍ  The chairman or the members may demand for a
poll when an issue is disputed or
controversial
 Section 144 provides the right to demand for a poll
 The chairman of the meeting is empowered to direct
the mode of exercise of the poll
14  Section 145 provides for voting on the poll

8
ĉ
č

Mee
I 䁮 Dharamsy Morajk an 聤 sols l⑴f v. Sulcî Naresh Kaɲa
(1997) karo 聫 oɲo JSC - held t⁨at the participation of 2 or
more persons in the meeting of the0dyrect聯䁲0where the
ၲesolution no⁴ to transmit shabes was rmacheɤအd 聩 dn t
invalidate the d)rectors dechcioN"since he†alone forѭed
ဍ theРၲequisite quorum
 $ Quorum ks usuallŹ 聦 ixၥd
bѹ the Articles of Associ䁡tion
Ġ 9$ Where its not fixed, itɳ 3 for public companies
en 2 䁦or privatm Comp!n)mw (S.141c))
 $ A MeeѴiog iѳ resolved if the quoru࣭ i 䁳 not
vealizedࠠwithin h聡lf an hour from䀠the date fixed

䀍 Ruɬ 䁥 s
relating to
quorum
 䀠 The qroxy ѩ⁳ not0to be
counted foz puRposes of quor5ѭ
15  Joint holdeၲs of shares ar䁥 treated as onɥ

Mee
 ting
Section 142 Companies Act now provides for the
court’s power to order a meeting
Minutes
 These are the official written records of the
proceedings of the meetings of the directors
or shareholders of a company
 Section 152 provides for a record of minutes of all
general meetings and proceedings at
meetings
 Minutes which are confirmed and signed by the
chairman can be produced in court as
evidence
 Company minutes should:
i. Be maintained or kept at the company’s registered office
under section 153
ii. Be numbered consequently, dated and signed by the
chairman or director
iii. Contain a fair and correct summary of each meeting
16 including the names of the directors
present

9
 RESOLUTIONS
RESOLUTIONS
 A resolution is a formal expression of a decision or an
extract of the minutes of a meeting
 Can also be called the summary of the minutes
 A resolution must be dated, signed by at least two
directors or secretary and registered by
the Registrar of Companies within 30 days after its passed
 Section 147 provides for circulation of members’
resolution and related particulars
Types of resolutions
 There are 3 types;
i. Ordinary resolution
ii. Special resolution
iii. Resolution requiring special notice

17

Resol
1.

utions
Ordinary Resolution
It requires a simple majority of the members present at
a general meeting.
 Total votes in favour must exceed the votes against
the resolution.
 Votes may be cast by show of hands or on a poll with
notice of the meeting given to the
members
 Resolution to operate a bank account or a change of
signatories may be by ordinary board
resolution
 Upon its registration with the Registrar of Companies,
the Bank cannot refuse to act upon
it. In Banex Ltd v. Gold Trust Bank Ltd (1994), Platt JSC
held that the re-organization of the
company was an internal matter and the Respondent
bank should have only looked at the
resolution which had been duly registered with the
Registrar of Companies.
18 Decision making in an ordinary resolution

10
 Resol

utions
2. Special Resolution
Provided under section 148(1)
 It requires at least ¾ of the members present and
entitled to vote in a special resolution
 Decision which require a special resolution relate to
the general conduct of the company with
its outsiders
Decisions requiring special resolution
 Alteration of the memorandum regarding the
registered office and the objects clause
 Alteration of the name of the company
 Alteration of the Articles of Association
 Creation of reserve capital
 Reduction of capital
 Variation in the rights of holders of any class of shares
 Authorizing payment of interest out of share capital
 Declaration of investigation into the company affairs
 Authorizing voluntary winding up of the company
19

Resolutions
Resolution Requiring Special Notice
 Provided under section 149
 Special notice is required under the law or Articles of
Association in some instances.
 Section 149(1) states that the resolution shall be
ineffective unless 21 days’ notice is given
 Notice of the resolution is to be given at the same time
and manner as notice of the meeting
 If its not practicable, notice shall be through in a
newspaper of wide circulation
Decision Requiring Special Notice
 Appointment as auditor of a person other than a
retiring auditor
 Resolution at an Annual General Meeting providing
that a retiring auditor not be re-
appointed
 Removal of a director before expiry of his term
 Appointment of another person as a director in place of
20 a director removed
 Appointment as a director of a person other than

11
21

12
 BUSINESS ASSOCIATIONS
II

Kasim
Balarabe
LLB (ABU), BL (Nigeria) , LLM
(Geneva), LLM (VU
Amsterdam),
PHD Student
(Maastricht,
Netherlands)
Lecturer,
Faculty of
Law
Islamic
University in
Uganda

LECTURE
FOUR

Content of the

1
  SHARE CAPITAL

2
 Share Capital
 A share is a unit of ownership that represents an
equal portion of a company’s capital.
 Section 2 defines a share as share in the share
capital of a company and includes stock except
where a distinction between stock and shares is
expressed or implied.
 It entitles the shareholder to an equal claim for the
company’s profits.
 The shareholder also has an equal obligation for
the company’s debts and losses.
 A share is a physical or virtual document the
company issues and distributes to all its partners.
3  Shares are bought and sold in the stock exchange

Share Capital
 Shares normally have a nominal or per value. This is
the shareholder’s limit to contribute to the company on
an insolvent liquidation.
 Companies raise capital for their business
ventures through debt or equity and many companies
have different classes of shares.
 Shares confer a number of rights on the shareholder.
Namely;
⁻ Voting rights, Rights to dividends, Rights to any return of

capital
The total
represents itsnumber
[Link] shares issued in a company
Types/Classes of Shares
4  Ordinary Shares, Preference Shares, Redeemable

3
 Share Capital
Most companies have just ordinary shares. They carry one
vote per share, are entitled to participate equally in
dividends and, if the company is wound up, share in the
proceeds of the company's assets after all the debts have
been paid.
Preferenc
e Shares
 These give the holder preferential treatment when
annual dividends are distributed to share holders.
Dividends are first paid to preference share shareholder
before ordinary shareholders. In the event of a company
bankruptcy, preferred share shareholders have a right to
5 be paid from the company assets first. Preference

Share Capital
 A company cannot issue
only redeemable shares.
Founders or
Deferred shares
 Shares on which no dividend is paid until other
classes of shares have received a minimum dividend.
Thereafter they will usually be fully participating. It is a
class of share that does not have any rights to the assets
of a company undergoing bankruptcy until all common
and preferred shareholders are paid. No longer commonly
used, these shares provided its holders with large
dividend payouts only after all other classes of
6 shareholders are paid.

4
 Share Capital
Allotment
of shares:
Private
companies
 This is the process through which a potential
shareholder/subscriber is given the number of shares he
has successfully applied for.
 Private companies restrict the issuance of shares to the
public under Section 5 (1)(a).
 A private company must restrict the
7 transferability of its shares in its articles of
association.

Share
Share certificates
 A share certificate is a document which shows one’s
ownership of shares in a company.
 Section 92 states that the share certificate shall be
prima facie evidence of title of the member to the
shares.
 Section 91 provides for the issuance of share
certificates within 60 days after the allotment.
 Section 91(3) imposes a fine of twenty five currency
points on the company and officers in case of default.
 The aggrieved allottee can serve the company with a
note to give him his certificate.
8

5
 Share
Legal effects of share certificates.
 Section 92. It’s prima facie evidence of ownership
of shares.
 It estops the company from denying the grant of
the shares.
 It estops the company from denying the
payment of the shares as stated in the certificate.



h are warrant

Can be issued in place of

Section 2 defines
a share certificate.
a share warrant according to
section 95(2).
 Section 9 5
authorizes a company limited by shares to
issue a warrant in respect of fully paid up shares.

6
7
8
9
10
11
12
A
1
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d
v
a
n
t
a
g
e
o
f
a
w
a
Shar e Capi tal

13
14
 Share Capital
 The Corporations' profit can either be re-invested in the business (retained earnings)
or be
distributed to shareholders through cash or share
repurchases.
 The doctrine of maintenance of capital: English law has developed the doctrine of
capital maintenance with the aim of ensuring that a company with a share capital must
obtain proper consideration for the shares that it issues and must not return funds so
received to its members, except in certain circumstances.
 The doctrine of maintenance of capital underpins the legal rules in the following
important areas: payment of dividends or other distributions to shareholders;
reduction of a company’s share capital and/or reserves; prohibition on the provision
by a company of financial assistance for the purchase of its own shares.
 Fundamentally, at common law, the decision as to whether or not the payment of
dividends is appropriate falls to the discretion of the directors, subject to any restrictions
found in the company's constitutional documents.
 In Makidayo Oneka vs Wines and Spirits Ltd and Anor (1974 ) Court held that unless
the articles and terms of issue of shares confer a right upon a shareholder to compel a
11 company to pay a dividend, the directors have the discretion to recommend to a
general meeting that
a dividend be declared.

Share Capital
 The overriding principles with respect to the payment
of dividends under the common law are that they are to
be paid out of profits and that a company cannot declare
and pay a dividend if it would result in the company being
unable to pay its debts as they become due.
 Whether or not a company may pay a dividend
depends on whether the amount to be paid comes out of
the “profits” or out of the “capital” of the company. The
courts have drawn this distinction as they perceived that
creditors extended credit to corporations on the implicit
condition that a corporation would not return capital to
their shareholders.

12 paid out
Accordingly, a dividend could only properly be
of “profits” of the company.

15
 Share
Capital
Importance of dividends
 Attractive returns. Companies that pay dividends are
usually historically stable.
 Less volatility- dividends help lessen the potential fall
of a company's stock price.
 Increased yield- dividends provide income
 Favourable tax treatment.
Legal rules relating to dividends
 Dividends shouldn’t be paid if the company will
consequently be unable to pay its debts.
13  Its permissible to pay dividends out of profits without
making up losses on fixed capital.

Share
Capital
Categories of Share Capital
 Authorized, Restricted, Nominal, Paid up, Issued
Capital. Unissued share capital
 Share capital can be divided into nominal, paid-up,
reserve and issued capital.
 Authorized shares are the total number of shares of
stock authorized when the company was created. Only
a vote by the shareholders can increase this number of
shares.
 Nominal capital must exist first before a company is
registered. This is also called start-up capital. This is
usually shown in the company’s nominal statement.
14  The capital can be divided, depending on each
shareholder's contribution in a company limited by

16
 Share
Raising of Capital
Share Capital
 This can be one of the most difficult tasks of a
company executive. It can be intimidating, energy
draining and time consuming. It can however also
provide critical fuel for continued creation when the
learning curve is gained.
Ways of Raising
Share Capital
1. Selling
Common stock
15  A company can raise capital by issuing common

Share
2. Borrowing Capital
 Government, local authorities, local development
agencies and international organisations are the major
sources of grants and soft loans.
 Grants are normally made to facilitate the purchase
of assets, generation of jobs or training employees.
 Soft loans are normally subsidized by the third party.
 Companies can also raise short term capital by
getting loans from banks and lenders usually to finance
inventories.
3. Selling Bonds
 A bond is a written promise to pay back a specific
amount of money at a certain date or dates in future.
16  Bondholders receive interest payments at fixed rates

17
 Share
 Capital
Bonds are advantageous due to the low interest
rate which is also considered as a tax deductible
business expense.
4. Issuance of
Preferred Stock
 Buyers of this stock have special status in case
the company faces financial trouble.
5.

Profits
 Companies can finance their operations by
retaining their earnings. There are varying techniques
17 used. For example electric, gas and other utilities

Share
Maintenance Capital
of
Share Capital
 This doctrine of maintenance of share capital is
designed to protect the company’s creditor.
 Case: Re exchange Banking Co (1882) Jessel MR:
stated that, the creditor gives credit to the company on
the faith of the representation that the capital shall be
applied for purposes of the business. The creditor has a
right to say that the corporation shall keep its capital and
not return it to the shareholders.
 A company is expected to be active, therefore the
18 share capital cannot be kept docile.
 The company must regulate

18
 Share
Capital
2) The company is put
into liquidation
3)The company
redeems/purchases its own
shares.
6.

Debentures
 A Debenture is a paper/ document indicating an
indebtedness of some kind of permanence of the
company.
A debenture is a document that either creates a debt
19 or acknowledges it, and it is a debt without collateral. In

Share Capital
 A private company may create debenture stock
since its not allowed to raise money by borrowing from
the public.
 A debenture stock is a loan fund created by the
company. It is a type of stock that makes fixed
payments at scheduled intervals of time. Debenture
stock differs from a debenture in that it has the status of
equity, not debt, in liquidation..

20

19
 Share Capital
Issuance of
shares
 Shares can be issued at premium, nominal and discount
levels
 Section 66 provides for the issuance of shares at a
premium.
 Premium is a term used when a company issues shares of its stock at price above
its par value. The excess cash, or premium received by the company is place in a
shared premium account and can be used to pay up unissued shares for distribution as
bonus shares; to pay a premium on the redemption of preferred stock ; writing down
company expenses or expenses incurred in the issuance of the shares.
 Section 67 authorizes the company to issue shares at a discount
when

 The issue of shares at a discount has been authorized/passed in a general

meeting and sanctioned by court.

21  The resolution must specify the maximum rate of the discount at which the shares
will be issued
company was entitled to commence business.

Share Capital
 The shares to be issued at a discount must be issued
within one month after the date on which the issue is
sanctioned by court or within such extended time as the
court may allow.
 A company which has agreed to issue shares at a
discount must apply to court for an order sanctioning the
issue under section 67 (2)
 Section 68 provides for the company’s power to
issue redeemable preference shares. Its however vital to
issue a member with a share certificate.
Transfer and
Transmission of
Shares

22 ownership
Transfer of shares is a means of transferring the
rights from one person to another. It is a

20
 Share Capital
 In a Private Limited Company, Directors have right to
refuse any transfer of shares once the reasons are in the
best interests of the company and are not oppressing any
shareholder rights.
 The transferee should have proper instrument of
transfer, this has to be registered under section 85.
 Most companies regulate the procedure of transfer
and transmission through the articles of association
Case: Re Smith Vs Fawcett Ltd (1942) The company’s
articles of association gave the directors uncontrolled
discretion to refuse to register any transfer of shares. The
company had two directors and two shareholders, Smith
and Fawcett. Fawcett died and Smith and the new
director refused to register a transfer of his shares. Held:
23 Lord Greene where articles confer on the directors a

Share Capital
Case: Simm Vs Anglo American Telegraph Co. (1879)
Court stated that a certificate issued due to registration
of a forged transfer means that no estoppel arises
against the company in favour of the person who
submitted the transfer for registration.
Financial
assistance
 It is unlawful for a company to assist
anybody to purchase its shares.
 Its like a donation. It
reduces the share capital.
24 However, this isn't applicable

21
 Share Capital
Company
repurchasing its own
shares
Case: Trevor Vs Whiteworth (1887) Facts: During winding
up, a shareholder claimed the balance of the principal for
fully paid up shares he had sold to the company before
winding up. Held: It was ultravires for a company to
purchase its own shares albeit the memorandum gives
authority to do so.
 The transaction is also
objectionable on the following grounds:
The value of the remaining shares is curtailed if the
25 
company paid more than the actual value of shares.

Share Capital
 Articles provide that the company shall a first lien
on each member’s shares for his debts and liabilities to
the company.
 The right of lien isn't inherent. It must be provided in
the articles.
 The company may have lien on fully paid up shares,
dividend payable on the shares, unpaid calls.
Surrender of shares
 Shares are surrendered when they are voluntarily
given up.
 A company may authorize its directors to accept a
surrender of shares.
26  The surrender is valid when the shareholder is willing

22
 Share Capital
 A surrender of shares will be void, if it amounts to a
purchase of shares by the company.
 Surrender will be void if its intended to relive a
member of his liabilities.
 Every surrender of shares involves a reduction of
capital which is unlawful except when sanctioned by
leave of court.
 A valid surrender of shares makes a person cease
to be liable for contribution as a past member if the
company wound up 12 months after his surrender.
 Validity surrender shares can be reissued in the same
way as forfeited shares

27 Forfeiture of shares

Share Capital
 A person whose shares have been forfeited
ceases to be a member in respect of those shares
 The right to forfeit shares must be pursued with the
greatest exactness.
 The provisions of the must be strictly followed.
 Forfeiture must be by properly appointed directors at a
meeting with quorum
 Any irregularity in the process makes the forfeiture
illegal.
Pre requisites of forfeiture
 The shareholder must be given notice requiring
28 him to pay the money due on call with interest.

23
 Share Capital
 There must be a proper board resolution.
 The power of forfeiture must be exercised bonafide
and for the company's benefit.
 Forfeited shares become company property
 It involves a reduction of company capital.
 The forfeited shares may be sold for any price they
fetch even a discount
Debenture and debenture stock
 Debentures are usually offered in issues under an
indenture.
29 the exchange.
An indenture is a document which sets out the terms of

Share Capital
 It’s a medium or long term debt instrument companies
use to borrow money.
 Money raised through debentures becomes company
capital and not share capital
 Debenture holders can freely transfer their debenture
stock to other parties.
 However they cant vote during company general
meetings
 Every company can convert its debentures into equity
shares
Convertible bonds have lower interest rates than non-
30 convertible corporate bonds

24
 Share Capital
 Section 106 imposes a duty on the company to register
the charges it creates.
 A floating charge is a type of security only available to
companies.
 Its an equitable charge on the company’s present and
future assets
 It allows the company to borrow through it has no
specific assets
Conclusion
 The raising of capital has a direct impact on the
value of shares due to the laws of demand and supply.
31  The doctrine of raising and maintaining capital is

32

25
 BUSINESS ASSOCIATIONS
II

Kasim
Balarabe
LLB (ABU), BL (Nigeria) , LLM
(Geneva), LLM (VU
Amsterdam),
PHD Student
(Maastricht,
Netherlands)
Lecturer,
Faculty of
Law
Islamic
University in
Uganda

LECTURE FIVE

1
 Content of the presentation

 RELATIONSHIP BETWEEN A COMPANY

AND SHAREHOLDERS

1. Members

2
MEMBERS

3
3
Introduction
 Section 47 Companies’ Act defines a member
 A member of the company appears on the register of members provided
under
section 119.
 A person can become a member through subscription, purchase,
allotment,
transmission or by estoppel.
 One ceases to member upon transfer, forfeiture, surrender, sale,
allotment,
winding up.
 Members must agree in writing to be entered in the register of members
with
exception to the subscribers to the memorandum.
 A person can become a member without being a shareholder through;
 Companies limited by guarantee or unlimited companies have
members but not
shareholders as they have no shares
 A deceased member continues to be a member although he is not
considered a
shareholder
 A transferor of shares is a member before his name is removed from
the
register.
 Subscribers to the memorandum can be members before allotment

Members
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4
Modes of becoming a member
 By subscription to the memorandum under section 8 (1).
 By agreeing to purchase shares.
 By allotment.
 Through transfer. This must be in accordance with the Articles of
Association.
 Through transmission.
 By estoppel.

Register of members
 Every company must keep a register of members under section 119.
It must
contain;
 The name, address and occupation of each member
 Shares held by each member if the company has its share capital.
 Date on which each person was entered in the register.
5
 Date on which any person ceased to be a member.
 Amount of stock by each member, if shares were converted to stock.
 The register of members must be located at the company’s registered
office/
branch.

6
Members

5 7
Rights of members

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y

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doc

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2
resolutions, agreements).
 Right to a share certificate.
 Right to transfer shares.
 Right to seek redress when his/her name is not registered.
 Right to inspect the register/minute.
 Right to demand a poll.
 Entitled to receive notice of meetings.
 Entitled to participate in company proceedings, appointment of
auditors,
directors, declaration of dividends, passing special resolution for winding up
Liability of members
 Liability of members depends on the type of company.
 Members are fully liable in an unlimited company.
 Liability of members is limited to the amount on unpaid shares for a
company
limited by shares.
 Members of a company limited by guarantee are liable to such a mount
as they
took to contribute in the event of its being wound up.

Members

1
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6
Termination of membership
 A person ceases to be a member upon;
 Transfer of shares
 Forfeiture of shares on account of non-payment
 Surrender of shares
 Sale of shares by the company or in execution of a decree
 Allotment by the articles
 Death of a shareholder
 Redemption of redeemable shares
 Conversion of share certificate into share warrant
 Winding up of a company

Conclusion
 Members of a company are persons who have agreed to become
members and
whose names appear on the register of members.
 Members are entitled to certain rights and are also liable in the event of
winding
up, however the liability depends on the type of company.

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6
BUSINESS ASSOCIATIONS II

Kasim Balarabe
LLB (ABU), BL (Nigeria) , LLM (Geneva), LLM (VU Amsterdam),
PHD Student (Maastricht, Netherlands)
Lecturer, Faculty of Law
Islamic University in Uganda

LECTURE SIX

1
Content of the presentation

 WINDING UP OF A COMPANY
2
1. Definition
2. Types of Winding Up
3. Effects of Winding Up

3
WINDING UP

3
4
DEFINITION and INTRODUCTION

 Winding up is the process by which the normal activities of the corporation or

association of person is stopped and the assets and liabilities of the association is
assessed and distributed among the shareholders as per the existing agreement.
 Winding up is the process through which the company becomes non-existent. It’s
the process through which a company’s life is extinguished.

 On winding up, the organization ceases to be a going concern. The owners are
eligible to get the share of residual property and may be required to compensate in
the event the assets are insufficient and the existing agreement so specifies.
 Winding up is regulated by the Companies Act, 2012 and the Insolvency Act,
2011.
 Winding up can be voluntary or compulsory by the courts of law
 A liquidator is appointed to control the company, collect its assets, pay debts and
distribute
the surplus among members according to their rights
 After winding up, the company’s name is struck off the register
 Liquidation is the normal means in which a company’s existence is brought to an
end.
 Only a limited company can be wound up.

Winding Up

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Types of Winding up
 Winding By court
 Voluntary Winding up
 Winding up Subject to the supervision of the court
 Winding up by the Court
Grounds for winding up by the Court
A company may be wound up by the court in the following circumstances
1. Where the company has passed a special resolution that it be wound up by the
court
2. Where default is made in delivering the statutory report to the Registrar or in
holding the
statutory meeting. Only in public companies. The court has a discretion to order
that the
report be submitted or the meeting be held
3. If the company does not commence its business within a year from incorporation
or suspends
its business for a whole year. The order will only be granted if there is no intention to
carry
on business.
Similarly, the order will not be granted where the omission is temporary or the
company was
prevented by circumstances beyond its control.
In the same way, if a company intends to carry on business in Uganda and abroad, it
will not
be wound up on this ground if it carries on business abroad but not in Uganda, so
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long as it
intends to do so as soon as practicable.
4. Where the number of members is reduced to below legal minimum: i.e. two
for private
company and seven for public company.

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Winding Up

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5. Where the company is unable to pay its debt. E.g. where the company has failed
to satisfy an execution issued against it. Or where it is clear that the company cannot
pay its debts considering its contingent and prospective liabilities. In RE: MEDIPHARM
PUBLICATIONS (NIG) LTD, a petition was lodged asking the court to wind up the
company. It was shown that the company was destitute, having a nominal capital of
£100 which had since been expended. Additionally, it had no assets and could not
meet its routine obligations. It had only about £3 in the Bank and a cheque for £100
was dishonoured. The winding up order was granted.

Points to Note
1. The demand for payment of the debt is crucial for determining whether a
company is unable
to pay its debts or not. In Re Capital Annuities Ltd [1979]3 All E R 704 it was held
that the
mere fact that for a period a company does not have sufficient money to pay its debts
did not
give rise to an order for winding up, since demand for payment of the debt had not
been
made. This is because having insufficient money to pay a debt does not constitute
inability to
discharge the debt.
2. A company will not be regarded as having neglected to pay its debts if it bona
fide disputes
the debt. The rationale is that great damage can be done to a serious company by a
winding up
order presented by an unreasonable creditor whose debt the company is able and
willing to
pay if established to be existing. In Re: Paper Conversion Co Ltd 1972
NCLR 391 the
petitioner instituted an action against the company to recover a sum of money.
While the
action was still going on in court, he also petitioned for the winding up of the company
on the

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Winding Up

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3. A Contributory
 This refers to a person who is liable to contribute to the assets of the company in
the event
of its being wound up.
 A contributory must have been a shareholder for at least 6 months during the
18 months
before the commencement of the winding up.
 On petitioning, he must show that there will be assets available for distribution
among the
shareholders and creditors and that he has an interest in the winding up.

Procedure for Winding Up

1
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 A petition is presented to court. Following presentation of the petition, an
application can be
made to the court for appointment of a liquidator, (the official receiver),
especially if the
company assets are in jeopardy.
 (The official receiver is a person attached to court to be involved in the
management of
property of a company in liquidation proceedings for and on behalf of the court).
 The provisional liquidator controls the assets of the company and after his
appointment; no
legal proceedings can be commenced or continued against the company without
court’s permission.
 Similarly, any disposition of the company’s property or transfer of shares is void
unless the
court otherwise directs.
 Further, any attachment, sequestration, distress or execution lodged against the
assets of
the company is void unless with the leave of the court.

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Winding Up

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Consequences of a Winding up Order
1. No legal proceedings can be instituted against the company without court’s
permission.
2. The company director’s power of management cease upon the appointment
of a liquidator
although they may appeal in the company’s names against the winding up order.
3. The directors and company employees are dismissed though they may be re-
employed by the
liquidator.
4. All the company’s business letters, invoices and orders for goods must bear the
statement
that the company is in liquidation.
Proceedings after Issue of a Winding up Order
1. People who were directors of the company at the date of issue of the winding
up order are
required to deliver a statement of affairs of the company within 14 days after
the
appointment of the provisional liquidator who then makes a report. The statement
shows all
the assets, debts and liabilities of the company, as well as the details of the creditors.
2. The official receiver is then supposed, on receipt of the above report, to submit a
report to
court showing the amount of capital issued, subscribed, paid up and estimated
amount of
assets and liabilities, the cause of the company’s failure – whether further inquiry is
required
with regard to promotion or formation of the company or its failure to conduct
business.
3. The official receiver also calls for separate meetings of creditors and
contributories and
informs them of the statement of affairs of the company, the cause of its failure and
any
other observations. The aim of the meetings is to decide whether to make an
application to
court for the appointment of a liquidator in the place of the official receiver.

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Winding Up

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Appointment of a Liquidator
 He may be appointed by court after the meetings of creditors and
contributories. Where
the 2 meetings fail to appoint a liquidator, court decides. Where court does not
appoint a
liquidator, the official receiver continues as the liquidator. Where the person other
than the
official receiver becomes a liquidator, he must notify the company registrar of the
appointment.
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Company Property after Winding up
 Following the issue of a winding up order, the liquidator is required to have
control of the
company property if the court so decides.
 Court can also order the transfer of the company’s property in the custody
of any
shareholder, agent, officer or trustee of the company to the liquidator.
 Court can also examine on oath for purposes of discovering the company’s assets:
Any officer of the company
A person known or suspected to have in his possession any property of the company.
A person who is supposed to be indebted to the company.
Any person whom the court deems capable of giving any information as to the
promotion,
formation, trade dealings, affairs or property of the company.

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Winding Up

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Protection of Company Property
 During the course of winding up, the liquidator may be enabled to avoid certain
payments and
securities effected by the company before the commencement of the winding up.
1. Floating Charge
 A floating charge created within 12 months of the commencement of winding
up on the
company’s property is invalid.
2. Fraudulent Trading
 If in the course of winding up it appears that the company’s business has been
carried on
with intent to defraud creditors or for any other fraudulent purpose, the court may
order that
any person knowing of this shall be personally responsible for the debts of the
company without
limitation of liability.
3. Misbehaviour
 Where during the course of winding up it appears that any person has misapplied
or retained
any money or property of the company or has been guilty of any misbehaviour or
breach of trust,
the court may examine such person’s conduct and order him to repay, with interest,
the money
used. E.g. where a promoter has made secret profits.
4. Disclaimer
 Where any of the company’s property consists of land burdened with unprofitable
contracts
or covenants, the liquidator may disclaim (abandon) in writing the property within 12
months of
the commencement of winding up or within 12 months of his becoming aware of such
property.

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Winding Up

10
 A person who is interested in the property can give a written notice to the
liquidator requiring him to decide on the disclaimer. A person who is injured as a result
of the disclaimer is deemed to be a creditor of the company with respect to the
amount of injury and he may prove the amount as a debt in the winding up.
5. Fraudulent Preferences
 Any payment or disposition of property made to a creditor before the
commencement of
winding up will be invalid if the main intention of the company in making it was to
prefer the
creditor over other creditors.

Priority of Payment of Debts on Winding Up

 The assets of the company should be applied in the following order to settle any
1
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claims or
debts:
1. First, to meet the costs, charges and expenses of winding up, including
payment of the
liquidator for his services.
2. To extinguish claims of preferred creditors.
3. To discharge the debts of ordinary creditors
4. To meet the claims of deferred creditors.

The Liquidator
 Any person except a body corporate may be appointed a liquidator. The
appointees are
usually accountants of not less than 5 years of standing.

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Winding Up

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2
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 A liquidator is appointed for the purpose of conducting the proceedings in
winding up of a
company and performing such duties in reference to the winding up as court may
order. Eg taking
into custody or control the company’s property, collecting the company’s assets,
paying debts and
distributing the surplus among the members according to their rights, etc.

Completion of winding up process by court

 When the affairs of the company have been completely wound up, the court on
application of
the liquidator makes an order dissolving the company. The liquidator is to within 14
days from the
dissolution order send a copy of the order to the registrar who registers it in the
company
registry or who strikes the name off the registry.

VOLUNTARY WINDING UP
 A Company may be voluntarily wound up by the members of the company
without involving
court, in the following instances,
1. If the company resolves by special resolution that it should be wound up
voluntarily.
2. If the company resolves by extra ordinary resolution that it cannot by
reason of its
liabilities continue its business or that it is advisable to wind up.
3. When the period if any, fixed for the duration of the company in its articles
expires or
where the event occurs which the articles provide shall be a ground for dissolution
and the
company passes an ordinary resolution requiring the company to be wound up
voluntarily

2
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Winding Up

12
PROCEDURE FOR VOLUNTARY WINDING UP
A. Where the Initiation is by the Company Members
1. Within 5 weeks before the passing of a winding up resolution, the directors of
the company
must make a statutory declaration that they have made full inquiry of the company’s
affairs
and have formed the opinion that the company will be able to pay its debts within a
period
not exceeding 12 months from the commencement of the winding up. A director
who makes
this declaration when it is false is liable to criminal sanction.
2. Members pass and file a special resolution that the company should be wound
up. Once this is 2
2
done, it means that winding up proceedings have commenced.
3. The company is to within 14 days of passing the resolution give notice of the
resolution by
advertisement in the gazette and in the newspapers. If default is made in not
advertising as
stated, the company and each officer involved will be liable to a fine.
4. Members appoint a liquidator and file a declaration of solvency stating that the
company will
be liable to pay its debts within 12 months from the commencement of the winding
up.
5. The notice of the appointment of the liquidator is to within 14 days of
appointment be
published in the gazette and newspapers and notified the company registrar.
6. The Liquidator’s remuneration is fixed by the meeting at which he is
appointed a nd the
effec t of appointing a liquidator is that a ll
th e
po w e
rs o f th e

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 o

direct rs cease except where

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 t issi t r tin

they are allowed to continue with h e pe r m o n o f h e gene a l me e g and the

liquidator.
7. Court has the power to appoint a liquidator where none has been appointed or
where the
company fails to appoint in time.

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Winding Up

13
8. Upon completion of winding up, the liquidator must after giving one month’s
notice in the gazette and newspaper where the meeting is going to be held, summon
a general meeting of the company so that he can present an account of the winding
up and how the property has been disposed of.
9. A copy of the account and return in respect of the meeting must be
forwarded to the registrar of companies within 2 weeks of the meeting.
10. The company is automatically dissolved three months after the registrar has
registered the return, unless the court on application of an interested person makes
an order deferring the dissolution.

B. Where the initiation is by the creditors of the company

 The company is required to summon a meeting of its creditors fixed for the
day on which the
resolution for winding up is to be proposed. The notice is advertised in the
newspaper and the
gazette.

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 At the meeting, a full statement by the directors of the position of the
company’s affairs
together with a list of the company’s creditors and the estimated amount of
their claim is
presented. The liquidator is also appointed at the meeting and a committee of
inspection.
 On completion of the winding up, the liquidator gives one month’s notice in the
newspapers
and gazette and calls a final meeting of the company and the creditors and presents
his account.

Winding Up

14
 Within one week of the meeting, the liquidator sends his account to the
registrar. The company is deemed dissolved automatically 3 months after
registration by the registrar of the account and return relating to the winding up.
2
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EFFECT OF VOLUNTARY WINDING UP
 The company ceases to carry on its business except in so far as may be
required by the
beneficial winding up of the company.
 The corporate state of the company continues until it is dissolved.
 Any transfer of shares that is not made without the authority of the liquidator
or any
alteration in the status of the members of the company is void, as long as it is made
after
the commencement of winding up.
 The assets of the company are applied in satisfaction of its liabilities in pari
passu and are
distributed among the members according to their rights and interests.

WINDING UP SUBJECT TO COURT’S SUPERVISION

 Upon petition, the court may order a voluntary winding up to continue subject
to Court’s
supervision. A petition for winding up subject to supervision of court is deemed to be
a petition
for compulsory winding up. Accordingly the law on winding up by court applies.

2
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15

2
9
BUSINESS ASSOCIATIONS II

Kasim Balarabe
LLB (ABU), BL (Nigeria) , LLM (Geneva), LLM (VU Amsterdam),
PHD Student (Maastricht, Netherlands)
Lecturer, Faculty of Law
Islamic University in Uganda

LECTURE SEVEN

Content of the presentation

1
2

 CAPITAL MARKET
 COLLECTIVE INVESTMENT SCHEMES

2
CAPITAL MARKET

3
Nature of Capital Market
 Capital markets are similar to other markets such as Nakasero market but
differ in terms of
the products traded and their organisation. Capital markets deal with the trading of
financial
products such as company shares, bonds issued by governments or private
companies, units in
Collective Investment Schemes, debentures, commercial paper and notes.
 These financial products can also be referred to as securities and are generally
traded on a
stock (securities) exchange.
 Capital markets are an arena – an arena in which businesses that need an
injection of cash
seek out investors. Investors, meanwhile, are on the lookout for profitable businesses
in which
they can grow their investment.

3
 In Uganda, the market where these securities are traded is called the Uganda
Securities
Exchange.

Classifications of Markets
1. Primary Market
 This refers to the market in which a company offers its shares to members of
the public for
the first time. It is also known as an Initial Public Offering (IPO). To buy shares during
the IPO, a
Share Application Form (SAF) is obtained from participating broker/dealers and
authorised
selling agents, which is completed by the prospective investor.
 The SAF is then sent to the Lead Broker and Registrar for processing,
and the share
allocation is made. Once payment is made, a receipt is issued to the purchaser.

Capital Market

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4
 If the offer is over-subscribed (applications exceeding the number of shares
available), the shares available are divided among applicants according to the
allotment criteria and the investor then receives a refund for the shares paid for, but
not allocated.
 The Registrar then sends share certificates of successful applicants to the
participating broker/dealers and authorised selling agents where original SAFs were
completed. The investor then receives the share certificate from the participating
broker/dealers or authorised selling agents.

 Secondary Market
 This is the market in which the shares of a company are listed on the stock
exchange. At the
secondary market, shares can only be bought through a licensed broker/dealer that
is a firm
that buys and sells securities on behalf of investors for a commission or a brokerage
fee.
 The broker/dealer or investment advisor will provide all the necessary advice,
that is, which
shares to buy. But the ultimate decision to invest depends on the investor.
 To sell shares, an investor needs to contact a broker/dealer and instruct
him/her to sell
either all or some of his/her shares.
 Secondary market trading takes place at the Uganda Securities Exchange
(USE) on Mondays,
Tuesdays and Thursdays from 10.00am to 12:00p.m. Information about trading
on the USE
is published in the Monitor and New Vision newspapers.

5
Capital Market

5
 Capital Market Authority (CMA) issues licences to qualified firms or
persons to transact business on the Exchange or give investment advice. These are
known as broker/dealers and investment advisors or fund managers. The list of
licensed brokers and all other market players can be obtained from the CMA website.
An investor must only deal with licensed professionals.

 Equity Capital Market

 These are the world’s stock markets. Private companies raise money by listing
themselves on a
stock market and then selling shares in their domestic market and often
internationally as well.
This is known as a flotation or IPO (Initial Public Offering) and means that the
company’s stock
can be bought and sold by investors.
 An IPO is a transformational event for a company – it changes from a private
affair, run by a

6
small group of shareholders to a public company, subject to significant regulation
and to the will
of its shareholders. For example, after floating Virgin, Richard Branson found having
to run ‘his’
company in a way that pleased his new institutional shareholders
incompatible with his
entrepreneurial style of management, so he bought back the company, returning it
to private
status.

 Debt Capital Market

 On the debt capital markets, borrowers/issuers – which can be
companies, banks or
governments – raise money by selling debt obligations (tradeable loans) to investors.
These are
called bonds and the investor becomes the owner of the bond.

Capital Market

7
6
 At predetermined intervals, the owner of the bond receives interest payments
from the company, which can be at a fixed or floating rate, depending on the terms
of the bond.
 The perceived credit risk of the bond (which is based broadly on the credit of
the issuer, the maturity of the bond, the currency of the bond and any particular
features of the bond) determines the interest rate.
 When the bond matures (when the duration of the loan expires), the bond
owner receives back the bond’s initial value, unless the issuer has gone bankrupt or
defaulted in some way.
 For the investor, the profit on bonds consists of the interest payments they
receive and any increase in market value of the bond. If the creditworthiness of the
issuer improves, the bonds will typically trade at a price of more than 100% of the
issue price.
 Unless the issuer of the bond has defaulted, or there are specified events in
the terms of the bonds, bonds are not usually payable before maturity.
 However, an investor can realise his asset by selling in the market (provided of
course there are purchasers interested in buying the bond!). Unlike shares, bonds
therefore have a secure yield.
 Furthermore, bonds guarantee to pay back the initial value of the loan unless
the company or government runs out of money.
 On an insolvency of the issuer, bondholders are paid with other creditors.
Shareholders only receive their share of what (if anything) is left after all other
creditors are paid. In normal markets, bonds are less volatile – this was not the case
for many bonds during the credit crisis.

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Capital Market

7
Legal and Institutional Frameworks for the Regulation and Operation of Capital
Market in
Uganda
 In Uganda, capital market is regulated by the Capital Market Authority
(CMA). It was
established in 1996 following the enactment of the Capital Markets Authority Act
(Cap 84). It is
a semi-autonomous body responsible for promoting, developing and regulating the
capital markets
industry in Uganda, with the overall objectives of investor protection and market
efficiency.
 CMA It approves the offers of all securities to the public, licenses market
professionals
like broker-dealers, investment advisers and fund managers. It licenses stock
exchanges and has
so far issued a licence to one stock exchange; the Uganda Securities
Exchange. Its overall
9
objectives are market regulation and investor protection

Functions of Capital Market Authority

 CMA has a number of functions, these include:
1. The development of all aspects of the capital markets with particular
emphasis on the
removal of impediments to, and the creation of incentives for longer term
investments in
productive enterprises.
2. The creation, maintenance and regulation (through implementation of a
system in which the
markets participants are self-regulatory to the maximum practicable extent) of a
market in
which securities can be issued and traded in an orderly, fair and efficient manner.

Capital Market

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 (To-date, rules and regulations have been promulgated covering prospectus
requirements (A prospectus is a legal document that gives general information about
the company, which is offering its shares to the public. Such information includes the
company's history and operations, products and services. It can be a notice, a
circular, an advertisement or any other invitation offering to the public a chance to
purchase shares or securities of a company), establishment of Securities
Exchanges, conduct of business, advertisements, maintenance of registers of
interests in securities, accounting and financial requirements and licensing of market
operators. Guidelines for the issuance of corporate bonds and commercial paper
have also been published. In addition, documents covering procedures for companies
going public and an investor's guide to shares and public flotation have been issued.)
4. The protection of investor interests.
5. The operation of an investor compensation fund (An Investor Compensation
Fund (ICF), was
established for the purpose of granting compensation to investors who suffer
pecuniary loss
resulting from the failure of a licensed broker or dealer to meet his contractual
obligations.
Annual contributions to the fund are made out of the Authority budget and from
market
practitioners. The aim of the fund is to enhance investor confidence in the newly
created
markets).
6. In its role as a regulator, the CMA oversees the activities of the
Uganda Securities
Exchange (USE), licensed intermediaries such as broker/dealers and investment
advisors.
CMA also regulates the operation of Collective Investment Schemes.

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Capital Market

9
Uganda Securities Exchange (USE)
 The Uganda Securities Exchange (USE) was licensed to operate as an
approved Stock
Exchange in June 1997 by the Capital Markets Authority of Uganda. The
members of the
Exchange are from the private sector.
 The USE began formal trading operations in January 1998 following the listing
of its maiden
instrument, the East African Development Bank (EADB) Bond. Various securities are
currently
being traded on the Exchange including the local and cross border listings.

Functions of Uganda Securities Exchange

1. Provision of Facility for Raising Funds
 The basic function of USE is to provide a facility for raising funds for
investment in long-

1
2
term assets (A stock, bond or other asset that an investor plans to hold for a long
period of
time).
2. The mobilization of savings
 The mobilization of savings for investment in productive enterprises as an
alternative to
putting savings in bank deposits, purchase of real estate, and outright consumption.
It is an
addition to the Banking System as it provides more diversity to the already available
financial
instruments.

Capital Market

10
3. Improvement of access to finance for new and smaller companies
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3
 This is futuristic in most developing countries because venture capital is
mostly unavailable.
The listing requirements of USE have been specially designed to meet the needs of
this sector.
4. Creation of Liquidity
 The creation of liquidity – this is the ability of securities to be converted into
cash at a
market price. Acquiring and selling of shares is fairly simple, inexpensive and swift
and can be
done at any time to suit the investor’s convenience.
5. The growth of the related financial services sector
 Institutions like the insurance, pension and provident fund schemes nurture
the spirit of
savings. USE provides an avenue through which financial securities can be
traded by such
institutions in order to facilitate their activities as financial intermediaries.
6. Facilitation of equity financing as opposed to debt financing
 Equity financing has a component of flexibility – the company pays holders
depending on its
performance; whereas debt financing requires that the holder of the security be
entitled to a
fixed sum in interest disregarding the performance of the company.
7. Divestiture of Government Owned Companies
 The USE assists in the divestiture (sale) of government owned companies. The
privatization
process through capital markets includes the flotation of shares and needs a
secondary market
for its success. Through this process indigenous people are able to attain a
stake in the
privatized companies.

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Capital Market

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8. Price Discovery
 Providing a mechanism for price discovery through open market
operations at the
Exchange. The price at which a deal is made indicates not only the value of the
shares in
question but also the value the market is willing to pay for the shares in question.

Importance of Capital Markets to Companies

 A share issue allows companies to increase the equity base of the company
and raise capital
without bearing the burden of high interest payments associated with borrowed
funds.
 Full disclosure requirements of a listing on the Stock Exchange encourage
companies to
observe good business and management practices and ensure better corporate
governance,
benefiting not just the firm but the economy as a whole.
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 The public profile of the company also is improved thus attracting greater
business
opportunities.

COLLECTIVE INVESTMENT SCHEMES

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 Collective Investment Schemes (CISs) are private financial arrangements
that pool resources of many small savers, generating a large pool. The
resources are then invested in various assets like shares, bonds, property and
treasury bills with the sole purpose of generating high returns while minimizing risk
through diversification of investments.
 Collective Investment Schemes (CISs) provide a means for mobilisation of savings
and enable small investors to participate in capital markets. CISs widen the choice of
investment vehicles; involve the public in the process of investing in securities
through pooling resources together, which are then invested by professional
managers.

 Types of Collective Investment Schemes:

1. Unit Trusts: A Unit Trust Scheme is a Fund into which small sums of monies
from
individual investors are collected to form a “pool” for the purpose of investing in
stocks, shares
and money market instrument by professional fund managers on behalf of the
contributors called
unit holders [subscribers].
 By investing in a unit trust scheme, the unit holders enjoy the benefits of
diversification and
professional management of their fund at low cost.
 The total fund of a unit trust scheme is divided into units of exactly equal
monetary value
e.g. If one unit is UGX1000, any person investing UGX100,000 will get 100 units.
One's
investment is measured by the number of units held.

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Collective Investment Schemes

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2. Venture Capital Funds: An investment fund that manages money from
investors seeking private equity stakes in start-up and small- and medium-size
enterprises with strong growth potential. These investments are generally
characterized as high-risk/high-return opportunities.
 Theoretically, venture capital funds give individual investors the ability to get in
early at a company's start-up stage or in special situations in which there is
opportunity for explosive growth. In the past, venture capital investments were
only accessible to professional venture capitalists. While a fund structure
diversifies risk, these funds are inherently risky.
3. Open-ended Investment Companies: this is a type of open-ended
collective investment formed as a corporation. As an open-ended company the
manager must create shares when money is invested and redeem shares as
requested by shareholders. As with other collective investments, the main function
is to make money for the shareholders. This is achieved via investing in different
asset classes such as equities, fixed-interest investments, and property. By using
economies of scale they facilitate access to professional investment management for
small investors.
4. Real Estate Investment Schemes: this is a scheme where a security that
sells like a stock on the major exchanges and invests in real estate directly, either
through properties or mortgages. REITs receive special tax considerations and
typically offer investors high yields, as well as a highly liquid method of investing in
real estate.

Collective Investment Schemes

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5. Specialized Funds: A mutual fund investing primarily in the
securities of a particular industry, sector, type of security or geographic
region. Because of the lack of diversification, specialized funds are higher risk but
potentially higher reward than most other types of mutual funds.
 In Uganda, there is one type of CIS called unit trusts.

Types of Unit Trust

 Uganda has three types of unit trust funds in which an investor can invest,
each with
different requirements; the Balanced Investment Fund; the High Yield Fund and the
Money
Fund.
1. The Balanced Fund: this is a long-term fund whose asset allocation is
mainly in long
term products and securities like bonds, shares, etc. A fund that combines a stock
component, a
bond component and, sometimes, a money market component, in a single
portfolio. Generally,
these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects
either a
moderate (higher equity component) or conservative (higher fixed-income
component)
orientation.
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 A balanced fund is geared toward investors who are looking for a mixture of
safety, income
and modest capital appreciation. These funds invest both in equity shares and fixed-
income-
bearing instruments (debt) in some proportion. They provide a steady return and
reduce the
volatility of the fund while providing some upside for capital appreciation. The
minimum
amount required to invest in this fund is UShs 50,000 only.

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Collective Investment Schemes

15
2. The High Yield Fund: this is a fund whose asset allocation is in 2
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medium-term securities and products (such as note which matures between 5 to 10
years). These funds buy low-rated or even un-rated bonds (aka: 'junk' bonds).
 These generally produce high income but carry the high risk usually associated
with junk bonds. If a company is in a poor financial position, it will need to offer a
relatively high rate of return on its bonds in order to compensate investors for taking
on more risk. In fact, the bonds of particularly risky companies have been traditionally
referred to as “junk” because they carry a high risk of default.
 The minimum amount required to invest in this fund is UShs 50,000 only.
3. The Money Fund: this is a fund which invests in short term products and
securities
like treasury bills, current accounts, etc. This fund is better suited for people who
wish to save
money over a short period of time. T-bills are issued through a competitive bidding
process at a
discount from par, which means that rather than paying fixed interest payments like
conventional
bonds, the appreciation of the bond provides the return to the holder.
 The minimum amount required to invest in this fund is UShs 250,000 only.
 Currently, there is only one licensed unit trust manager; African Alliance Uganda.

Collective Investment Schemes

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Benefits of Investing in Unit Trust
 Diversification of Risk: Investors can secure a much wider diversification of
risk, because
these funds usually invest in different investments. Studies show that the
greater the
diversification of a portfolio, the lower the risk in relation to the return. Those who
invest in
CISs are therefore seeking to lower risk in relation to their return.
 Access to Securities Investments: By investing a small sum (either in a lump
sum or on a
regular saving basis), an investor through the CIS can achieve a personal portfolio
spread over
several securities.
 Lower Transaction Costs: By investing in a CIS, investors incur lower costs
than if they
were to buy and sell a portfolio of individual securities directly. This is because
transaction
costs are generally related to the size of the transaction, and investors benefit from
the fund
manager's ability to deal in larger quantities of shares at lower average dealing
costs. Fund
managers can also allocate portfolios more efficiently than can individual investors.
 Professional Management: Due to the complexity of analyzing
information regarding
individual securities, most individuals do not have the professional skills to manage
their own
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investments. CISs provide full time professional management in a direct and simple
form and
this is especially important where market information is not widely available.
 Investor Protection: CISs have succeeded in developed markets due to an
effective legal
and regulatory framework. People need to have confidence that their money is
protected from
fraud, theft and other abuses. The CIS regulations provide the desired regulatory
framework
that will protect investors.

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