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Overview of the Companies Act 2012

Noah Edwin Mwesigwa and Brigitte Kusiima Sendi
Shonubi Musoke & Co
Kampala

The Companies Act, 2012 (the 'Act') introduces many significant changes in Ugandan Company law. The Act is a belated but welcome attempt to catch up with global trends in the law governing corporate entities.

The Act seeks to increase the membership of a private company from 50 members to 100 members with the resultant increase in the ability of the company to raise capital through increased share subscription and share holder loans from more members.

Notably the Act amply provides for corporate governance. Previously recourse was had to corporate governance principles imposed upon public listed companies as provided for under the Capital Markets Authority Act, its regulations and guidelines. Private companies have been given the option to adopt these rules contained in a schedule to the Act. All companies that adopt these rules are under an obligation to file a statement of compliance with both the Capital Markets Authority and the Registrar of Companies.

The Act has codified a number of common law principles. These include the lifting of the corporate veil in the event of fraud by the directors of the company and the duties of directors to include the duty to treat all shareholders equally and to ensure compliance with the Act and any law applicable to the company. The grounds for disqualification from acting as a director have further been extended to include failure to comply with filing statutory returns.

The rather archaic doctrine of 'ultra vires' has been repealed by the current law. The Act provides that any act done by the company shall not be called into question on the ground of lack of capacity or by reason of anything contained in the Companies Memorandum. However a member of the company may still bring proceedings to restrain a company from engaging in an action beyond the companies' capacity.

The Act introduces the hitherto untenable concept of a single member company. It provides that the single member shall nominate two individuals one of whom shall become a nominee director in the event of death of the single member and the other to act as an alternate nominee director in the event of non availability of the nominee director. The law further imposes on the nominee director in the event of death functions akin to those of an administrator under the Succession Act. These include the power to manage the affairs of the company until the transfer of the shares to the legal heirs. The company may upon the death of the single member either wind up or by special resolution convert to a private limited liability company.

Although the position regarding pre-incorporation contracts remains considerably the same, these are only binding on the promoter rather than the company itself. The Act provides that such contracts may be adopted by the company without the need for novation and thereafter the liability of the promoter shall immediately cease.

The Act takes on a more liberal approach to the concept of financial assistance by a company in the purchase of or subscription for its own shares or in a holding company. While the former position was that the above was strictly prohibited save for certain exceptions, the current law maintains the same exceptions but for example does not prohibit the allotment of bonus shares, a reduction of capital confirmed by the Court, a distribution of the company assets by way of dividend lawfully made or distributed in the course of the company's winding up, a redemption or purchase of shares made in accordance with the Act to mention a few.

Private companies are further not prohibited from providing financial assistance for the acquisition of their shares or those in their private holding company for as long as a portion of the capital is reserved as capital on which a call may only be made in the event of the Company's winding up. However the private company must comply with the requirements as to notice to the Registrar where such acquisition would ultimately result into a consolidation of share capital, conversion of shares into stock or any related particulars.

The above is however restricted with respect to public companies. In this case, financial assistance may only be given if the company has net assets, which are not reduced by the financial assistance, or to the extent that those assets are reduced by the financial assistance, if the assistance is provided out of distributable profits.

The Act introduces a further obligation on the company that has reduced its share capital to advertise the relevant resolution in the Gazette and a newspaper of nationwide circulation. The purpose of the advertisement would be to put the world on notice, particularly the creditors who have a right to object to the court confirmation of such resolution where the effect may be detrimental to their interests.

The Act places stringent terms in respect of the obligation of each company to have a registered office. In the event of non-compliance the Registrar of Companies reserves the right to de register such company where the company fails to remedy the above breach of the law upon notice of the same being given to it in the Gazette and in a newspaper of wide circulation.

The above Act, which has been passed shall repeal the long standing Companies Act, 1961 which had for all intents and purposes, given the global trends in corporate practice, become burdensome, onerous and outdated. The new law will hopefully instil and stimulate greater international governance principals and good business practice. It is hoped that the revamped Uganda Registration Services Bureau, which has sought to make the company registry services available online for convenience and ease will create new efficient policies and systems that will render the good work of the legislators practical, accessible and easily performable.

See also

Uganda
Africa

Legislation guide

Overview of the Companies Act 2012

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