It is no longer news that the President of Nigeria has assented to the Companies and Allied Matters Act 2020. While most controversy that has greeted the passage has largely emanated from faith-based organisations, there are however other pertinent concerns buried within its 870 sections. This discourse intends to specifically address the challenges that may arise from the removal of the restriction placed on the business object of the company on the one hand, and the requirement of placing the business object restrictions of the company in its articles on the other hand.
The business object of a company
The business object of a company sets out the business activities the company may lawfully carry out. It prescribes exhaustive businesses at least before the 2020 Companies and Allied Matters Act- which the company may undertake but by no means mandated to entirely carry out. The Company and Allied Matters Act 1990 (the Old Act) restricted the businesses which a company can engage in to only that contained under its Memorandum of Association so that when a company undertakes a business outside this scope, it is said to have acted ultra vires its powers.
Section 39 of the Companies and Allied Matters Act 1990 (Old CAMA) places the aforementioned restriction on the business object of a company. The section states that “A company shall not carry on any business not authorised by its memorandum and shall not exceed the powers conferred upon it by its memorandum or this Act.” Subsequent sub provisions of the above section, retains the validity of the business or transaction and precludes any person save for investors and creditors of the company to question its validity on the ground that the company has exceeded the scope of its registered business object.
Section 39 above is a Nigerian solution to the common law problems in corporate law. At common law, a company is limited to acting within the objects set out in its memorandum. Anything purported to be done by a company beyond that object is ultra vires and void.
The Companies and Allied Matters Act 2020 (the new CAMAs) has now supposedly done away with this restriction requirement. Section 35 of the New Act provides that “Unless a company’s articles specifically restrict the object of a company, its objects are unrestricted”. This new provision is a copious replica of Section 31 of the English Company Act of 2009 and essentially, advances two new introductions.
The first is that a company can now engage in any business at all save for when that business has been restricted by its articles. While the second proposition is that restriction on business objects will now be contained in the articles for it to hold legal weight. This is notwithstanding that the business object is contained in the Memorandum of Association. The good intentions of introducing this provision may be overwhelmed by subsequent resolutions of the confusions invited by a combined reading of it and other provisions of the companies and allied matters Act. This difficulty especially relates to transitional problems, application defects and fluid conceptualisations, we shall discuss them accordingly.
Transitional provisions
The first difficulty that may arise from the application of the New CAMA provision is transitional issues. This essentially is caused by the removal of Business object restriction from the memorandum and placing it in the articles. Under the Old CAMA, the business objects of the company and any restriction to be placed thereon, are solely matters reserved for the Memorandum of Associations. A combined reading of Sections 27, 38 and 39 of the old CAMA will evince this fact.
Further, Section 27, 43 and 44 of the New CAMA is even in all fours with the above position of the law on this subject. In a precipitous turn of events however, Section 35 of the New CAMA provided that any restriction to be placed on the business object of the company should be contained in Its articles of association. The reasonable interpretation of this is that while the Memorandum of association is the authorised business object host, any restriction to be placed on it going forward should be contained in the Articles of Association of the company.
Some restrictions could have been stipulated previously in the Memorandum of Association and not in the articles as is the norm under the old regime. The question then is what is the position of the new CAMA on their application? Section 45 of the New CAMA purports to provide a solution. It provides that such restrictions placed on the power and capacity of the company by the Memorandum of Association to carry on its authorised business or object (emphasis supplied) can be enforced by certain persons.
However, the restriction earlier referred to is placed on the business object and not the authorised business object. In other words, whatever business object not restricted becomes the authorised business of the company upon incorporation, Section 45 above supposed that the restriction is placed on the authorised business of the company. Section 45 therefore falls short of providing for a transitional provision. At most, corporate law practitioners can only really rely on the saving provisions of Section 869 of the New CAMA.
The approach adopted by the English Company Act and that of Hong Kong is preferable. Section 28 of the English company Act provides that the Provisions in the memorandum of existing companies will be treated as the provisions of the Articles if they are of a type that will not be in the memoranda of companies. In the same line, companies’ ordinance of Hong Kong prescribed that existing clauses of their MOA will be treated as part of the articles.
Application defects
Section 44 of the New CAMA prescribes the implication of companies acting outside the scope of their activities. The Section makes the actions of companies engaging on an object expressly prohibited by its memorandum of association as ultra vires. Noticeably, this section does not refer to the Articles of Association which the New CAMA has made the custodian of the business object restraint. With this understanding lies another difficulty- what will be the legal consequence if a company acts beyond its object as contained in the articles? The New CAMA is silent on this in the light of Section 44 referring to the Memorandum instead of the articles of association. God forbid that we shall refer to the adverse provision of the common law.
Fluid conceptualisations
Section 44 has two problems. The first was what was adumbrated above. The second is the use of the words “Expressly prohibited”. An “express prohibition” may differ from “specific restriction” as used in section 35. Save for the inclusion of some statutory bars on the powers of the company such as offering donations or gift to a political party, it is rare to see a company’s Memorandum of Association expressly prohibiting certain businesses. The new CAMA fails to adopt a unified and nonconflicting approach to the restriction that can be placed on the business object. Is It the intention to make acts of the company outside the specific restricted objects as ultra vires or expressly prohibited objects as ultra vires? It is not exactly clear from the altitude of the act.
In conclusion, the overall intention of the passage of the Companies and Allied Matters Act 2020 to open up the business environment from unnecessary legal and regulatory bottlenecks of the Old CAMA may be stalled by unforeseen difficulties arising from its application. A holistic application of the Act must be in perspective while considering the business object of the company. Necessary steps therefore need to be taken to make the good intentions of the Act more assertive in actual practice.
Onuora is a Lagos based Corporate lawyer with Taxation and Corporate law practice as his key practice areas. He can be reached via [email protected]
