PRELIMINARY REQUIREMENTS FOR INCORPORATION

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCES/FURTHER READING

INTRODUCTION

Section 18 of the Act provides that any two or more persons may form and incorporate a company by complying with the requirements of the Act in respect of registration of such company. In effect there are forms and requirements to be complied with, before a company can be incorporated. The promoter must ensure that he complies with all the legal requirements and therefore it is important for us to understand all these necessary requirements. The Registrar of companies is also permitted under the law not to register any company that does not comply. Where however the promoter has complied with the law and his application is refused, he is entitled to seek order from court to compel the Registrar to accept his application and register his company. In this unit we shall examine the mandatory preliminary requirements for incorporation of companies in Nigeria.

OBJECTIVES

At the end of this unit the student will be able to critically identify some preliminary requirements for incorporation.

MAIN CONTENT

MANDATORY INCORPORATION

No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on business for profit or gain by the company or association or partnership, or by the individual members thereof, unless it is registered as a company under the Act or is formed in pursuance of some other enactment in force in Nigeria (section 19). There is a mandatory incorporation for any group of persons formed with the aim of profit or gain, and any such organization that is not incorporated is illegal. In the case of Akinlose and Others v A.I.T and Others (1961) N.L.R 215, the association was being managed by over 100 members and it was not registered at all. There was a quarrel amongst them and they went to court, the court found that they were more than 20 members associated for profit and was not registered association, the Court declared the association to be illegal. Section 19(2) permitted three exceptions to the rule ,

• where the association is a registered co-operative society, it need not be incorporated.

We should note that this is not an entirely necessary exception because the cooperative society must be registered under the laws of the state on cooperatives, where this has been done, it does not operate as a company but as a society with its definite and defined objectives which is not basically for gain or profit but the welfare of its members.

• Any partnership formed for the purpose of carrying on practice as legal practitioners by persons each of who are legal practitioners. All legal practitioners in Nigeria are persons who have undergone the mandatory course in the Nigeria Law School, and have been duly called to the Nigerian Bar and registered to practice as Solicitors and Advocates of the Supreme Court of Nigeria. The law permits more than 20 of them to form a partnership for the purpose of their profession. The requirement is that they must not only be legal practitioner but they must be practicing as such and no more where they are not associated for the strict purpose of legal practice, they must incorporate their business
• Any partnership formed for the purpose of carrying on practice as accountants by persons each of whom is entitled by law to practice as an accountant in Nigeria. The person must be licensed to practice as an accountant by any of the legally recognized association for the regulation of accounting practice in Nigeria (A.N.A.N and I.C.A.N)

These are the only recognized exceptions to the rule and where anybody or association exceeds twenty in contravention of the law, every person who is a member of the company association or partnership during the time that it so caries on business after fourteen days shall be guilty of an offence and liable on conviction to a fine of N25.00 for every day during which the default continues.(section 19(3) )

RIGHT TO FORM A COMPANY

The minimum number of persons that may form a company in Nigeria is 2 (see section 18 CAMA 2004) under the companies Act 1968, the law makes a distinction between a private and public company. The law permits any two persons to form a private company but not less than 7 members are required to form a public company (section 377 of 1968  Act). However, under the CAMA 2004, the dichotomy between the private and public company has been removed and whether the company to be incorporated is private or public the minimum number is two members.

The pertinent question should be why “two members” what is the magic served by  the number? And what good purpose is to be served with the number? And what is the practical importance of this number to companies? while arriving at this number, and after considering the position in other jurisdictions, the Nigerian law commission stated that it is not possible to fix the minimum number of persons to form a company to one member, because, the word company connotes of least two persons and that one person cannot be called a company. The position taken by the law Reform Commission seems illogical and at variance with modern practice all over the world and the practice of businessmen in Nigeria.

In the first instance we must recognize the fact that most businesses always start with one individual who wish to trade and expand his sole trading into a limited liability company he does not need any other person to form his company to effectively carry out his trade. In essence, the addition of another party in most cases is only to fulfill the requirements of the law, and the additional member most times do not even know anything about the business and does not even participate in it. In many cases in Nigeria, people add the names of their spouse and children (underage or not) and the second member had always been dormant and totally ineffectual and therefore an anomaly.

Prior to 1992 at least two persons had to subscribe to become shareholders in a private company in U.K. As a result of the Twelfth EC Company Law Directive (89/667) implemented in 1992, private companies could be formed with a single member but public companies still needed at least two members. The Companies Act 2006, the current Companies Act in U.K, section 7 thereof now provides for a single person private and public companies. Most of the civilized nations have adopted the one man company e.g. Canada, Europe, while countries like South Africa, Ghana and Kenya to mention a few have adopted the one man company structure. There is therefore an urgent need for reform to bring the law in conformity with modern trends.

CAPACITY OF INDIVIDUAL TO FORM A COMPANY

Certain categories of persons are prohibited from forming or joining in the formation of company. In effect not all persons are permitted under the law to form a company. The following are expressly prohibited from forming a company:

• A person that is less than eighteen years of age. However by virtue of Section 20(2), where two other persons who are not disqualified are subscribers to the memorandum then the person under eighteen years will not be so disqualified
• A person that is of unsound mind and has been so found by a court in Nigeria or elsewhere or
• An undischarged bankrupt
• He is disqualified under section 254 of the Act from being a director of a company
• A body corporate in liquidation shall not join in the formation of a company under the Act (section 20)

We may need to examine the above more closely

• An infant may not by himself form a company. This may seem discriminatory. If an infant could effectively understand what he is about to do there should be no reason why he or she should not be allowed to do so. However, in contract, though an infant is allowed to enter into contracts, but some and except for contracts for necessaries, the contract will not be enforceable against the infant. Under common law, the contract will remain voidable at the option of the infant. But under the Infants Reliefs Act 1874, all contracts except for necessaries are entirely void (section 1). The pertinent question is that, could we call or regard the formation of a company as contractual as to fall within the realm of contract? Registration of company is an entirely voluntary action taken by responsible citizens in furtherance of business venture to make profits, and the subscriber to the memorandum does not thereby enter into any contract with anybody except the other shareholders by virtue of the article of association which legally is a binding contract between them. The law in fact goes further to permit the infant to subscribe to the memorandum where two other adults are also subscribers. This exception only confuses the issues more. The other two adults are also subscribers in their own right and do not hold in trust for the infant. They are presumed to represent themselves and not the infant and so the infant holds his shares and exercise control over them. Having subscribed to the articles of association he has entered into a contact and may be subject to the law on the rights and privileges of members of a company and this is entirely outside the realms of general law of contract

The reasonable option is to remove this prohibition and regard the infant subscriber as a reasonable responsible person capable of determining the propriety and reasonableness of his action.

5. The second prohibition as we have seen above is that a person of unsound mind is prohibited from forming or joins in forming a company. The person must have been so found by a court in Nigeria. In effect, if the person has not been so found or declared by a court in Nigeria then he could join in forming a company. The definition of unsound mind is not supplied by the Act, what level of unsoundness will qualify a person for disqualification under the section is not specified. The court referred to in the Act is also not specified. By virtue of section 650, the court is referred to as the Federal High Court, Court of Appeal or Supreme Court, could we then argue that where any other court apart from these three pronounce a person of unsound mind, such pronouncement may be disregarded in so far as it does not fall within the definition of court in the Act. Thereare no such proceedings in Nigeria, in which a court will pronounce on the state of mind of a person, so it may not arise. In criminal cases, where an accused person has put up a defense of insanity, and this has been certified by medical practitioners who had examined the accused person, the court may accept such plea and decide the matter, in such a case, such a declaration could be made but it is only limited to the defense for the crime alleged and at the time of the commission of the crime and no more, and does not stand for all time. And where such person has undergone treatment and is now medically fit, he could be allowed to form a company. The point being made here is that again this prohibition is of no use and should be removed entirely, as it is totally unworkable and ineffective

UNDISCHARGED BANKRUPT

A bankrupt is a person who cannot pay his debts of a specified amount and who has been so declared by a court of competent jurisdiction (see Bankruptcy Act Cap B2 LFN 2004) while being a bankrupt he is not qualified to stand for any elective office or act as a director of a company (section 253, CAMA 2004) see also section 126 Bankruptcy Act 2004). An undischarged bankrupt is not really expected to engage in any form of business until he has been discharged fully and properly. The Act do not specify if the undischarged bankrupt may engage in or join in the formation of unlimited liability company or company limited by guarantee which is no profit making organization and is not in fact a business strictly speaking.

Another problem is that the Bankruptcy Act is not being fully utilized by legal practitioners and businessmen probably due to the very technical nature of the law so that proceedings under the law is far and in between and therefore the provision in the section 20(1) (c) may also remain only a deed letter law, having no practical effect whatsoever.

DISQUALIFICATION UNDER SECTION 254

Section 254 provides that where a person is convicted by a High Court of any offence in connection with the promotion, formation or management of a company, or in the course of winding-up a company it appears that a person has been guilty of any offence for which he is liable (whether he has been convicted or not under section 513 of the Act, or has otherwise been guilty, while an officer of the company, or any friend in relation to the company or of any breach of his duty to the company, the court shall make an order that person shall not be a director of or in any way, whether directly or indirectly, be concerned or take part in the management of a company for a specified period not exceeding ten years.

The important point to note here is that this prohibition will only last within the years as ordered by the court but it shall not exceed ten years. Secondly, the court may only make an order prohibiting the person from being appointed a director or be involved in the management of a company and does not extend to being a subscriber to a memorandum. The law does not prohibit such person from being a shareholder of a company, and the order does not extend to prohibition from forming a company. We should also note that even where such order has been made by the High Court, there is no facility for the Corporate Affairs Commission (CAC) to detect as to the person under this disability and thus prevent him or her form being registered as a subscriber to a company.

The prohibition also will only exist on paper and the practical value is doubtful.

CONCLUSION

Any two or more person may form a company by complying with the provision of the Act. The argument is why two and not one as it is now the practice all over the world. The capacity to incorporate a company is also important in Nigeria, as a person under 18years of age is not permitted to form a company unless two other adult joint him. The purpose of this provisions is not also clear and is not targeted at serving any useful purpose. Other categories of persons disqualified are persons of unsound mind,undischarge bankrupt and person found guilty of management or fraud in the formation and management of a company under section 254 of the Act.

SUMMARY

In Nigeria only two or more persons may form a company, while one man company is not yet recognized in the country. A person under 18 years of age is prohibited from forming a company unless he or she is also joined with two other adults. A person of unsound mind and who has been so declared by a court in Nigeria is also prohibited from forming a company. An undischarged bankrupt and a person already convicted or found liable for fraud or mismanagement in the promotion or management of a company is also prohibited from forming a company. We must also note that a company is liquidation is also prohibited from forming a company.

TUTOR MARKED ASSIGNMENT

• Critically examine the capacity of individual to form company in Nigeria
• Make a case for a one man company in Nigeria