CORPORATE LAW 1 (LAWS 323)

Nature of Company Law: it is a set of laws, regulations and practices governing

the formation and operations of corporations. Corporations are all the
organisations that do businesses. This means we have both business and non-
business organisations. It involve the rights and duties of persons engaged in
owning, forming, managing and operating businesses. Incorporation means
registering a business as a legal entity so that it can operate like a person.

Consequence of Incorporation: When all the requirements for registration have

been complied with to the satisfaction of the Commission, it shall issue a
certificate with its seal indicating the nature of the coy i.e., the liability of
members and status. The certificate of incorporation shall be prima facie
evidence that all the requirements of CAMA in respect of registration and matters
precedent and incidental to it have been complied with and that the association is
a company authorised to be registered and duly registered under the Act, sec
41(6).

The effect is that, as from the date of incorporation mentioned in the certificate of
incorporation, the subscriber of the memorandum together with other persons
who will become members of the company, will be a body corporate by the name
contained in the memorandum. The entity becomes a body corporate with
perpetual succession and a common seal (if any), capable of suing and being
sued in its corporate name and capable of acquiring, holding or disposing of both
movable and immovable properties. It becomes a separate person from the people
who formed it in the eye of law. It can do businesses in its own name -sec 42.

CAC may withdraw, cancel or revoke a certificate of incorporation already issued

to a coy where it discovered that the certificate was fraudulently, unlawfully or
improperly procured.
the entity becomes a body corporate with perpetual succession and a common
seal, capable of suing and being sued in its corporate name and capable of
acquiring, holding or disposing of both movable and immovable properties.
Upon proper registration, it becomes a separate person from the people who
formed it in the eye of law. It can do businesses in its own name.

Lifting of Incorporation Veil: a registered corporation though a legal person in

the eye of the law cannot operate on its own, hence the persons who formed it
appoints those who will manage and direct its daily activities on behalf and in the
name of the corporation. Therefore, upon registration, an imaginary veil is used
to cover the corporation's face so as to hide the real persons behind its operations.

However, a court may direct that the veil of an incorporation be lifted where
there is evidence of fraudulent or unlawful conducts in the operations of the
corporation. CAC can also appoint inspectors for the purpose of lifting the veil of
incorporation – s. 369 CAMA

Types of Companies

By comparing the advantages and disadvantages of companies and partnerships,

one will be able to determine which one suits his business best.

(a) A Company may be:

 i) "Limited by shares" i.e. having the liability of its members
limited by the Memorandum of Association to the amount
unpaid on shares respectively held by them, or
ii) "Limited by Guarantee" i.e. having the liability of its members
limited by the Memorandum of Association to such amount as
the members may respectively undertake to contribute to the
assets of the company in the event of its being wound up; or
iii) "Unlimited" i.e. Not having any limit on the liability of its
members. (section 21)

(b) Private or Public Company: The company, whether limited by shares

or by guarantee or unlimited, may be PRIVATE or PUBLIC (section
21(2) subject to the following considerations:

i) Kind and size of business

ii) Membership
iii) Restrictions on issue and transfer of shares e.g. section 22(2),
section 22(5);
iv) Formalities
v) Cost

This means that there are 6 types of companies namely:

i. Private company limited by shares (Ltd)

ii. Public company limited by shares (Plc)
iii. Private company limited by guarantee (Ltd Gte)
iv. Public company limited by Guarantee (Plc Gte)
v. Private unlimited company (Ultd)
vi. Public unlimited company (Plc Ultd)
Private Company: A private company is one which is stated in its memorandum
to be a private company. It must by its articles restrict the transfer of its shares –
section 22(2) of CAMA- and its total membership must not exceed fifty (50), not
including persons who are bona fide in the employment of the company.

CAMA 2020 introduced what is called a small company and defines it as that
which has the following qualifying features in sections 394, 395 and 423:
a) It is a private company;
b) Its turnover is not more than N120,000,000 or such amount as may be
fixed by the Commission from time to time;
c) Its net assets value is not more than N60,000,000 or such amount as may
be fixed by the Commission;
d) None of its members is an alien ;
e) None of its members is a government or government corporation or
agency or its nominee; and
f) In the case of a company having share capital, the directors between
themselves hold at least 51% of its equity share capital.

A public company is defined as any other company other than a private company
and which is stated in its memorandum as a public company – section 24 of
CAMA.
The difference between a private company and public company are:

1) Membership of a private company is limited to fifty while that of public is

unlimited.
2) Minimum issued share capital of a private company is N100,000 while a
public company is N2,000,000 – section 27(2)(a) of CAMA.
3) A private company can commence business upon incorporation whilst a
public company will have to wait until it has been issued with a certificate
by the Registrar.
 4) Private companies are permitted to allot shares while a public company is
prohibited.
5) The name of a private company must include “Ltd” while a public limited
company is “Plc”.

Limited Liability Company: A company where the liability of its members is

limited by the memorandum, as to the amount, if any, unpaid on the shares
respectively held by them – section 21(1)(a) of CAMA. It is the largest type of
companies which is normally employed for business purposes. The shares, as the
unit of holding, represent the involvement and commitment of the interest of the
holders. A person who has paid his shares in full cannot be held liable for any
part of the liability of the company. On the other hand, where a shareholder has
sums outstanding on his shareholding, he can be called upon to pay by a duly
authorized person and this is so whether or not the company is being wound-up.

Features

1) The liability of members of a company limited by shares may have to be

implemented at any time during the active life of the company as well as
during the winding-up.
2) It is usually incorporated for the purpose of making profits for distribution
to members

Company Limited by Guarantee: This is a company registered without a share

capital. This is a company whose liability of its respective members are limited by
the memorandum to the amount that members have undertaken to contribute to
the assets of the company in the event of liquidation. Such companies are
incorporated for purposes of promoting commerce, art, science, religion, etc. and
the income and assets are applied for the promotion of the objects and not
available for distributing to members as profits– section 26 of CAMA.
The total liability of the members of a company limited by guarantee to
contribute to the assets of the company in the event of its being wound up should
not at any time be less than N100,000. This is intended to give some assurance to
third parties dealing with the company. Finally, section 26(4) of CAMA provides
that the memorandum of such a company shall not be registered without the
authority of the Attorney-General of the Federation.

Features

1. The liability will only have to be implemented after the commencement of

winding up of the company.
2. Members’ liabilities are limited by memorandum to such amount as they
may respectively undertake to contribute to assets of the company in event
of it being wound up.
3. The consent of the Attorney General of the Federation must be obtained.
4. It is allowed to do small business but not with a view to making profit for
distribution to its members but applied towards the attainment of its
objects.
5. The name must include the words ‘limited by Guarantee’ or by its
abbreviations (Ltd/Gte).

Unlimited Liability Company: A company not having any limit as regards the
liability of its members. This company is not common, being limited in its
usefulness. It is also like a partnership because every member is fully liable for
the debts of the company while being a member and does not have any limit on
the liability of its members. This unlimited liability makes it unattractive for
business purposes. It is used mainly by professionals who assume personal
liability for their obligations.

It must be registered with a share capital, and where an existing unlimited

company has no share capital, it must, not later than the appointed day, alter its
memorandum and articles so that it becomes an unlimited company having a
share capital not below the minimum issued share capital permitted under the
Act i.e., N100,000 or N2,000,000 as the case may be – section 25 and section
567 of CAMA.

It is usually useful where the members are able to estimate the kind of liability or
loss they are likely to incur in advance e.g. company working on a patent and its
development in terms of products, oil prospecting companies etc.

Features

1) It does not have membership liability i.e. unlimited liability.

2) Every member is liable in full for the debts of the company.
3) The name of the company must include ‘Ultd’.

Holding and Subsidiary Companies

* Section 381 CAMA defines a holding company occurring in a situation where a

company is a member of another company and controls the composition of the
Board of Directors of that other company or holds more than half in nominal
value of the equity share capital of that other company (that is, at least 51%),
then the first mentioned company is deemed to be a holding company, while that
other company is deemed to be its subsidiary. In this regards, CAMA provides
that a company shall be deemed to be the Holding Company of another, if that
other is its subsidiary.

That is the holding company can appoint or remove the holders of all or majority
of the directors. The holding company is deemed to have the power to appoint its
subsidiary company’s directors if any person cannot be appointed to it without
the holding company exercising this power in his favour or if the appointment of
a person to the directorship follows necessarily from his appointment as director
of the holding company or the directorship is held by the holding company itself
or by a another subsidiary of it.

This section went further to define what a wholly-owned subsidiary as a body

corporate that has no member except those of the holding company’s members of
nominees or those of its other wholly-owned subsidiaries.

Steps to Incorporation: The steps to be taken for incorporation of a company are

as follows:

i) Ascertaining the particulars of the proposed company and the persons

involved.
ii) The preparation of the incorporation documents.
iii) The filing of incorporation documents.
iv) The registration of the company.

Information relevant for incorporation/registration.

(1) Client's Personal Details: Obtain the full names, addresses and occupations
of the clients and every other person concerned in the promotion of the company
e.g. the subscribers.

(2) Date: For completion of registration

- will affect legal practitioner's fees

- commencement of business, for penalty on dormant companies.

- Tax considerations.

- Filing fee
(3) Name of Company: alternative names should be obtained.

Prohibited and Restricted Names:

No company or limited liability partnership, limited partnership, business name

or incorporated trustee shall be registered by a name which:
(a) is identical with that by which a company in existence is already
registered or so nearly resembles that name as to be calculated to deceive except
where the existing one is in the course of being dissolved and signifies its consent
in a manner required by the Commission.

(b) contains the words "Chambers of Commerce" unless it is a company

limited by guarantee;

(c) is capable of misleading as to the true nature or extent of its activities

or is undesirable, offensive, or otherwise contrary to public policy; or .

(d) Would violate any existing trade mark or business name unless the
consent of the owner of the trade mark or business name or trustee has been
obtained (sections 31 and 852;

The use of the following words as a name is subject to the approval of the
Commission Federal, National, Regional, State, Government or any other word
suggesting governmental patronage, Municipal, Chartered, Co-operative,
Building Society, Group or Holding, (se. Note also, further restriction in the use of
"Banks" and "Insurance".

Search: for availability of the names. See also section 31.

Reservation of Name: A name may be reserved by the Commission for a

maximum period of 60 days pending incorporation. (section 31)
 (4) Type of Company

As discussed above

(5) Sphere of Operation: Anywhere within Nigeria. A Company wishing to

operate outside the country must comply with the laws of the foreign country
concerned.

(6) Objects or Business of the Company see section 27(1): These must be legal,
sec 18(3) and authorized by its memorandum of association (section 44(1).

(7) Capital: Generally, the capital of a company connotes the totality of its
assets including borrowed money, which is loosely called loan capital.
(8) Subscribers: These are persons who sign the Memorandum of Association
(for a number of shares) and the Articles of Association (section 27) their full
particulars must be obtained.

- They must have capacity to form a company (section 20);

- must not be less than 2 . However, one person may incorporate a private
coy if he satisfies the requirements of the law, see sec. 18.
- must together subscribe shares amounting in value to at least 25% of the
authorised share capital.
- If there are non-Nigerian subscribers (see section 20(4)) applications must
be made under other relevant laws regulating foreigners participation in
busineee in nigeria such as the Immigration Act Cap Il LFN 2004. Also see
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act Cap. F34
LFN 2004.

(9) Membership of Company is made up of the following in line with sec 105
CAMA:
 (a) The subscribers who are deemed to have agreed to become members
and whose names must be entered in the Register of Members;

(b) Every other person who agrees in writing to become a member and
whose name is entered in the Register of Members; and

(c) Where the company has a share capital, each member is a

shareholder of the company holding at least one share, except if the
company is such that has only one shareholder.

(10) Expatriate (foreign) Employees, including directors, must be covered by

expatriate quota.

(11) Registered Office: address in Nigeria to be used as the Registered Office of

the company. Where the registered office is different from the head office, this
must be indicated (section 36(1) and (2);

(12) Articles of Association: Contains regulations for the management of the

company.

(13) Directors: Directors are the persons appointed by the company to manage
the affairs of the company (section 269 and need not be members of the
company. Every company must have at least two directors unless it is a small
company (section 271).

(14) Control and Management: May be achieved e.g. through control over
appointment of director, life directorship, distribution of shares, classes of shares
and rights attached to shares, custody of common seal etc.

(15) Public Issue of Shares and Prospectus: Only a public company can issue its
shares or debentures to the public, usually by way of a prospectus.
(16) Other Matters: e.g. Tax Relief: If any.

Formation of a company: Any two or more persons may form and incorporate a
company upon fulfilling the statutory requirements for the particular type of
company. One person may nevertheless be allowed to incorporate a private coy if
he satisfies the requirements of the law (section 18 Companies and Allied Matters
Act ).

Capacity to Form a Company

Section 20 of CAMA provides that an individual shall not be eligible to

incorporate a company if:

1. He is less than 18 years of age, unless there are two other persons of “full
age and capacity” who have already subscribed to the Memorandum of
Association of the company.
2. A person who is of unsound mind and has been so found by a Court in
Nigeria.
3. A person who is an undischarged bankrupt, and
4. A person who has been disqualified by the court from being a director of a
company under Sections 281 & 283 of CAMA.
5. A corporate body in liquidation.
6. A foreigner except where he has complied with the provisions of all laws
regulating the rights of aliens to engage in business in Nigeria.

Promoters of a Company

A promoter is a person who undertakes to form a company with reference to a

given object and set it going and takes necessary steps to accomplish that
purpose. Their advantage is that they shop or source for directors; they search for
accommodation; give instructions to incorporators and incur incorporation
expenses. Promotion of a company is any act done by an individual aimed at
bringing a company into existence. A professional e.g., a Legal
practitioner/accountant engaged in the promotion is not to be treated as a
promoter.

The legal relationship between a promoter and the proposed company: It is a

fiduciary relationship between the promoters and the company. The promoter is
to act in good faith towards the proposed company and he is to account for the
monies or properties received in the course of the promotion. The promoter is
liable to compensate the company for any loss incurred where he fails to perform
his fiduciary duty
Duties of a Promoter
1. Duty to account for money/properties received in the course of the
promotion activities.
2. Duty not to make secret profit.
3. He must disclose any property or information which he acquired on behalf
of the company especially where he has benefited from it.
4. Duty to disclose conflicting interests in transactions with the company.
5. Duty not to expose the company to loss.

Liabilities of Promoters
Where there is a breach of the duties imposed on a promoter, the company can
take any of the following actions for redress:
a. Action to render account of money or property received in the course of
promotion activities.
b. Action to account for secret profits made which was discovered by
company.
c. Action for damages for wrongful exploitation of confidential information
(fraudulent misrepresentation)
d. Refusal to ratify pre-incorporation contract tainted with conflict of interest.
e. Action to rescind contracts perfected by the Promoter.

Remuneration: There is no automatic right to remuneration. Exceptions to this

position are:
1. The Articles of Association of the company allows the directors to pay
them.
2. The promoters entered into a pre-incorporation contract with the
proposed company to pay for their incurred expenses.
3. The promoters entered into a personal contract with the persons
instructing them to float the company, such that even if the company did
not pay, the persons who instructed the promoters will be bound to pay.

Suspension of promoters: A promoter may be suspended where it is proved that

he committed any act which is an offence. Where a person has been convicted by
a court for any offence in connection with the promotion or formation of a
company, he may be barred from being a director or from taking part in the
management of any company for a period not exceeding 10 years as may be
specified by the court.

Pre Incorporation Contracts/Agreements

Pre-incorporation contracts are contracts entered into by any person on behalf of
a company before its incorporation. Under the Companies and Allied-Matters
Act, the promoters are personally liable but upon incorporation the company
may ratify the pre-incorporation contracts and it becomes binding. The company
cannot ratify an oral contract or promise to pay sums of money incurred by the
promoters on behalf of the company, so there must be a formal contract executed
to that effect. The company upon incorporation has an option to ratify a
contract/agreement to reimburse the Promoters only if there is a full disclosure.
 Pre-incorporation agreement is not binding on the company until it is ratified.
Conditions which incorporation contracts must satisfy before it is invoked are:
a. It must be reduced into writing for directors to exercise discretion to ratify.
b. Full disclosure must be made to the BOD and shareholders.
c. All the members at general meeting must agree to ratify and adopt it.
d. The company must insert the contract in the object clause of its memorandum of
association.
When a Pre-Incorporation Contract Needed
1. Payment of promoters’ expenses/remuneration
2. Joint venture business between a Nigerian and an Alien.
3. The new company is to take over the existing business or purchase
property.
4. Shareholders’ agreement or Formation agreement to protect shareholders’
interest.
5. Promoters/Directors service contracts.
6. Protection of confidential information used for promotion activities.
7. Contract to obtain regulatory permit and other preconditions to its
incorporation.

Contents of the Memorandum of Association section 27 of CAMA -

a) The name – this is the name approved by CAC, the name of the company
ending with the words indicating the type and status of the coy.
b) Registered office – section 27(1)(b) requires that the registered office of the
company will be situated in Nigeria.
c) Object clause – these are the purposes for which a company is formed, the
business for which the company is to carry out.
d) Restriction clause, if any - s. 27(1)(d) It could be restriction as borrowing
power of the company.
e) Status clause - s. 27(1)(e) provides for status of the company. A company
can either be private or public with regard to its status.
f) Limitation of liability – this is to decide if the company will be limited or
unlimited, and if limited, whether by shares or guarantee.

g) The share capital clause – if the coy has a share capital, the memorandum
will state the minimum issued share capital depending basically on the
nature of the business and the availability of other sources of working
capital ( this is a minimum of N100,000 for a private company and N2,
000,000 for a public company). Example "the minimum issued share
capital is N100,000 divided into 100,000 ordinary shares at N1 each".
h) Subscription clause - s. 27(2)(b) in this is the association clause and
subscription clause. The association clause contains declaration by the
subscribers of which must be at least two. For instance, “We, the several
persons whose names and addresses are subscribed hereunder are desirous
of being formed into a company in pursuance of the memorandum of
association and we respectively agree to take the number of shares in the
capital of the company set opposite our respective names”.
i) Subscription box– subscribers must take 25% of the authorized capital, but
they need not be the true owners of the company and after incorporation,
the shares may be transferred to the true owners. They must state their
particulars, the unit of shares taken by each of them and sign the
incorporation documents.
j) Attestation clause: the signing process of memorandum must be witnessed
to accordingly. Hence the provision for attestation. Professionals engaged
in formation of the company or some other reputable person can attest.
k) The memorandum must be stamped as a deed.
With regard to a company limited by guaranteed, the share capital clause, the
subscription clause and box are substituted by provisions of s. 27(4) of CAMA
stating as follows:

a) That the income and property of the company shall be applied solely
towards the promotion of its objects, and that no portion thereof shall be
paid or transferred directly or indirectly to the members of the company
except as permitted by, or under this Act ; and
b) That each member undertakes to contribute to the assets of the company
in the event of its being wound up while he is a member or within one year
after he ceases to be a member for payment of debts and liabilities of the
company, and of the costs of winding-up, such amount as may be required
not exceeding a specified amount and the total of which shall not be less
than N100,000.

The Doctrine of Ultra Vires: Ultra vires simply means acting beyond the power
conferred on a person. Under corporate law, sec 44 CAMA says it is when a
company is acting outside the object clause or exceeding its power under the
memorandum of its association.

Contents of Articles of Association (the company’s regulation) sec 32 of CAMA –

a) Shares – detailed particulars should be obtained in respect of shares.

b) Borrowing – although a trading company normally has power to borrow
money for the purpose of its business, care should be taken to regulate the
power as desired.
c) Meetings – special provisions required by the owners of the company
should be considered.
d) Directors – instructions may be required as to their appointment, tenure,
powers and duties, use of company seal, etc.
 e) Secretary – instructions should be given as to their appointment, duties and
powers, etc.
f) Accounts and audit – special details not provided in the act may be added
to the articles.
g) Dividends – instructions should be taken in respect of how dividends are to
be dealt with.
h) Common seal, if any- who has the custody of it.
i) Winding up- when and what to do.
j) Interpretation section- it defines and clarifies some terms.
k) Others – such other matters important to the business should be
considered and required.

Statutory declaration of compliance – after all the requirements of the law have
been complied with, and these documents are produced to the commission, there
must be made a statutory declaration in a prescribed form either

i. by the applicant or his agent; or

ii. a legal practitioner and attested to before a notary public or commissioner
for oaths

that the requirements for registration have been complied with – section
40(3) of CAMA. The Commission may accept or refuse the declaration, but if
it refuses it, then it must within 30days of receipt of the declaration send to
the person applying a notice of its refusal stating the ground of such refusal.

Company Securities

Company securities are all the capital with which a company runs its business
which are usually shares, debentures, stock and bond. A company’s capital may
either be equity capital or loan capital. Equity capital is raised internally from
members/shareholders through the issuance and subscription of shares; while
loan capital is raised externally through the issuance of debentures (borrowing).
Equity capital is better and more advantageous than loan capital

Shares is the total interest of a shareholder in a company. It is basically the

bundle of rights and liabilities which a shareholder has in a company as
stipulated in the terms of issue and the articles of the company. S. 138 CAMA. By
section 139 CAMA, the shares and other interests in a company are transferrable
properties and can be transferred in the manner provided in articles of
association of the company Weighted shares are shares that carry more than one
vote. Weighted shares must be provided for by articles of the company and used
in voting by poll.

Types of shares

The following are the types of shares that a company can have

i. Ordinary shares
ii. Preference shares
iii. Founder of deferred shares or deferred shares
iv. Management shares
v. Premium shares
vi. Redeemable
vii. treasury shares

Ordinary shares

Majority of shareholders in a company hold ordinary shares. These shares have

no special rights over other types of shares. Features include

i. The holders bear the financial risk of the company.

ii. Dividend of holders is not fixed so they can enjoy large profit when
declared.
iii. When dividends are declared, the ordinary shareholders are the last
persons to be paid
iv. It is the most common type of shares because every company issues it.
v. The holders are entitled to the balance of the distributable profits. That is,
as they bear the lion risk of the company, they also take the lion share of
the profit when the company makes great profit.

Preference shares

Preference shares is a special class of shares in that they can be seen as hybrid of
shares and debentures. That is, a preference share is a hybrid of equity capital
and loan capital. The features of preference shareholders are as follows:

i. Holders are neither affected by nor concerned with risks in the company.
ii. They earn a fixed rate of income at the end of the year e.g., 2% or 5%.
iii. Once dividends have been declared, they are paid before the ordinary
shareholders.
iv. It is usually beneficial to holders during the period of economic instability
as the percentage of their income is fixed.
v. If dividend is not declared in any year, then the income accumulates and
rolls over to the next year if the preference share is a cumulative
preference share. Preference shares can be divided into 3 parts:
a. A cumulative preference shareholder: if a company did not declare
its profit (dividend) on a particular year, his dividend would be
taken to the next year when profit will be declared thus if his
dividends are not paid; it will keep accumulating until he is paid.
This implies that whether the company makes profit of not, the fixed
percentage of dividend is guaranteed to roll over to the year of
profit.
 b. Non-cumulative preference shareholder is the opposite of
cumulative in that if profit is not declared in a year, his dividend for
that year will not accumulate to the next year.
c. Cumulative and participating preference shareholder has features of
cumulative preference shareholder and an additional feature of
sharing in excess or surplus profit of a company.

vi. When a company is being wound up, after paying creditors, they are the
next to be paid from the assets of the company and not as dividends is paid
from profit.

Rights of a shareholder

A shareholder has the following rights

a. Right to attend the general meetings of the company.

b. Right to vote at the general meetings– s. 138(2).
c. Right to dividend when it is declared.
d. Right to share in company’s capital surplus in the process of winding up of
the company – s. 643.
e. Right to petition for winding up of the company where necessary – s.
573(1)(e)
f. Right against unfair, prejudicial, oppressive and discriminatory conduct –
s. 353-354.
g. Right to return of capital upon winding up i.e., distribution of assets after
the company coy has settled its indebtedness.
h. Right to transfer shares in accordance with the articles of the company – s.
139
In private coys, sec. 22 CAMA stipulates that the selling shareholder must
first offer the shares to the other existing shareholders before the shares
can be offered to a third party. Secondly, shareholders cannot sell more
 than 50% of the shares of a private company to a buyer who is not a
shareholder unless that buyer has offered to acquire the shares of all the
remaining shareholders on the same terms. Thirdly, in relation to asset
sales, the approval of all shareholders is required before assets valued at
50% or more of the company's assets may be sold.

Liabilities of a shareholder: A shareholder is liable to contribute and pay the

amount left unpaid on the shares he subscribed for. In accordance with the terms
of the agreement under which the shares were issued to him or the articles. See
section 117(1).

DEBENTURES

A debenture is a written acknowledgment of a company’s indebtedness. Section

190 empowers a company to borrow money for the purpose of its business or
objects and may mortgage or charge its undertaking, property and uncalled
capital or any part thereof; and issue debentures, debenture stock and other
securities whether outright or as security for any debt, liability or obligation of
the company. A debenture holder lends money to the company and in turn the
company gives him a written acknowledgment of the principal sum and interest.

The debenture is a document giving details of a company’s indebtedness to a

creditor, called the debenture holder. It is usually secured by a charge created
over the company’s assets or properties and often but not necessarily by deed. By
section 208(1) CAMA, offer of debentures by a public company to the public for
subscription or purchase must be by a DEBENTURE TRUST DEED, and must be
accompanied with prospectus.

By section 191(1) CAMA, every company shall, within sixty days after the
allotment of any of its debentures or after the registration of the transfer of any
debentures, deliver to the registered holder thereof, the debenture or a certificate
of the debenture stock under the common seal of the company (if the company
has a common seal) or alternatively executed as a deed by the company.

Contents of a debenture : By section 192 CAMA, every debenture shall include a

statement of the following matters:

i. The principal amount borrowed;

ii. The maximum discount which may be allowed on the issue or re-issue of
the debentures and the maximum premium at which the debentures may
be made redeemable;
iii. The rate of and the dates on which interest on the debentures issued shall
be paid and the manner in which payment shall be made;
iv. The date on which the principal amount shall be repaid or the manner in
which redemption shall be effected, whether by the payment of instalments
of principal or otherwise;
v. In the case of convertible debentures, the date and terms on which the
debentures may be converted into shares and the amounts which may be
credited as paid up on those shares, and the dates and terms on which the
holders may exercise any right to subscribe for shares in respect of the
debentures held by them;
vi. The charges securing the debenture and the conditions subject to which
the debenture shall take effect.

Types of debentures

i. Perpetual
ii. Convertible
iii. Secured
iv. Naked
v. Redeemable
vi. Registered debenture
vii. Bearer debenture
viii. Syndicated loan debenture (also known as pari passu mortgage debenture
or series of debentures)

Perpetual debenture - s. 196

This type of debenture is ordinarily irredeemable. It may however be made

redeemable upon the happening of an event or a contingency, however remote
or on the expiration of a period, however long, notwithstanding any rule of
equity to the contrary.

Convertible debentures – s. 197

These are debentures issued upon the terms that in lieu of redemption or
repayment, the debenture may at the option of the holder or the company be
converted into shares in the company upon such terms as may be stated in the
debentures. The holder moves from a creditor of the coy to become a
shareholder.

Secured AND naked debentures – s. 198

By section 198(1) CAMA, debentures may either be secured by a charge over the
company's property or may be unsecured by any charge. Thus, where the
debenture is secured by a charge, whether fixed or floating, it is called a secured
charge. However, where it is not secured by any charge, it is a naked charge.

By section 198(2) CAMA, debentures may be secured by a fixed charge on

certain of the company's property or a floating charge over the whole or a
specified part of the company's undertaking and assets, or by BOTH a fixed
charge on certain property and a floating charge. A charge securing debentures
shall become enforceable on the occurrence of the events specified in the
debentures or the deed securing the same.

Redeemable debentures – s. 199

These are debentures which are liable to be redeemed or which are liable to be
redeemed at the option of the company. This kind of debenture can be redeemed
at any time even before the time fixed. It is only applicable to a coy limited by
shares. By section 200 CAMA, a redeemable debenture on its being redeemed by
the company can be re-issued subject to the provisions of the articles or
resolution of the company stating otherwise.

Bearer Debenture

Unlike a registered debenture which is only repayable to the person whose name
appears on the instrument, a bearer debenture is repayable to the holder or
bearer of the debenture instrument.

Registered debenture

Unlike a bearer debenture which is only payable to the holder or bearer of the
debenture instrument, a registered debenture is only repayable to the registered
holder of the instrument, that is, the person whose name appears on the
instrument and whose name is in the Register of Debenture holders.

Syndicated loan debenture (also known as pari passu mortgage debenture or

series of debentures):

This is a where a group or consortium of lenders agree to loan money and have
their debentures secured by a fixed or floating charge or both on one asset as
security, the value of which outweighs the total loan advance. It is pari passu
because the lenders agree that they would not observe priority of interest but that
their interest shall be equal in rank.

The debenture here is created by a Debenture Trust Deed. Pari passu mortgage
debenture is used in financing mega projects involving infrastructural
developments with huge financial requirements and which would be difficult
and risky for only one lender to lend out such huge sum.
The essential features of the creation of a pari passu mortgage debenture are:

- There must be at least two debentures created in series and secured by a

single asset of the borrower company
- The interests of the individual lenders are to rank pari passu or equally in
priority notwithstanding their individual contributions
- It is advisable that it be created through a Debenture Trust Deed so that the
legal personalities of the individual lenders can be subsumed in the trustee

By section 222(9) CAMA, upon the creation of a pari passu mortgage debenture,
the company shall, within ninety (90) days after the execution of the deed
containing the charge or if there is no deed then after the execution of any of the
series of the debenture, file with CAC, in respect of each of the issues, the
following particulars:

i) The total amount secured by the whole series;

ii) The dates of the resolutions authorising the issues of the series and the
date of the covering deed, if any, by which the security is created or
defined;
iii) A general description of the property charged; and
iv) the names of the trustees, if any, for the debenture holders; together
with the deed containing the charge, or, if there is no such deed, one of
the debentures of the series:

Floating charge – s. 203(1)

A floating charge means an equitable charge over the whole or a specified part of
the company's undertakings and assets, including cash and uncalled capital of
the company both present and future. A floating charge does not preclude the
company from dealing with such assets until it crystallises. That is, until the
charge attaches itself to the asset by crystallisation. By section 203(1), a floating
charge will crystallise in any of the following circumstances:
 a. the security crystallises or becomes enforceable; and the debenture
holder, pursuant to his powers under the debenture or the deed
securing the debenture, appoints a receiver or manager or enters
into possession of such assets; or
b. The court appoints a receiver or manager of such assets on the
application of the debenture holder; or
c. The company goes into liquidation;

NOTE when a floating charge crystallises, it becomes fixed

The features of a floating charge are:

- It is a charge on assets, both present and future

- The assets covered by the charge are of such a nature that they may change
from time to time in the ordinary course of the company’s business.
- Until the charge attaches itself to the assets by crystallisation, the company
may continue to deal with the asset unless expressly prohibited from doing
so.

Fixed charge – s. 204

The fixed charge is secured or attached to a particular piece of property/asset of

the company and the identity of the asset does not change, though it may be
extended, during the subsistence of the charge. Fixed charge can be legal or
equitable. The company cannot deal with the asset or create other charges
ranking in priority to the present. Generally, by section 204 CAMA, a fixed
charge on any property has priority over a floating charge affecting that
property. However, a fixed charge will not have such priority if:

 The terms on which the floating charge was granted prohibited the
company from granting any later charge having priority over the floating
charge
  The person in whose favour such later change was granted had actual
notice of that prohibition at the time when the charge was granted to him

Since the charge is fixed, the asset appropriated to the satisfaction of the debt is
immediately encumbered upon the creation of the charge.

Registration of charges:By section 222(1) and section 224(1) CAMA, every

company is under a duty to register every charge created by it and such
registration must be done within ninety (90) days from the date of the creation of
the charge. Note that after the expiration of the ninety (90) days, the court may
extend the time for registration upon application to it under section 230 CAMA.

Effect of failure to register/non-registration of a charge securing a debenture:

Where there is failure to register the charge within the prescribed 90 days or any
other extended period, there would be effects and consequences to both the
debenture holder and the company. They are provided for under section 222(1)
CAMA as follows:

- Effect to the debenture holder: the charge/security would be void as

against the liquidator and other creditors (other debenture holders) of the
company. However, the debt is not thereby discharged, but become
immediately payable as the debenture is rendered unsecured/NAKED.
- Effect to the borrower company: by section 222(1) the effect of non-
registration to the borrower company is that the debt become immediately
repayable and any agreed period for the repayment of the loan is
terminated.

Note that by section 231 CAMA, where there is a failure to register within the 90
days or where there are errors or misstatements, the available remedies which
the court can grant are extension of time within which to register or a
rectification of the register to correct errors or misstatements.
Certificate of Registration of Charge: By section 223(2) CAMA, upon the
registration of a charge securing a debenture, CAC must issue a certificate, which
serves as a prima facie evidence of compliance with the requirements of
registration. The certificate must be endorsed on every debenture or debenture
stock certificate issued by the company and secured on the charge in accordance
with section 228(1) CAMA.

Discharge/Satisfaction of a charge: By section 229 CAMA, where the debt for

which the charge was given has been satisfied, the company is to file
memorandum of satisfaction with the CAC. This is done by completing and filling
CAC Form – Declaration Verifying Memorandum of Satisfaction of Charge along
with its accompanying documents within fourteen (14) days after the release or
satisfaction.

Records kept by company upon creation of debentures/charges

Every company is required to keep the following records at the registered office
of the company

1. Register of charges: The following are the details to be contained in every

entry
 Description of the property charged if any
 The amount of the charge
 The name of the persons entitled thereto (excluding securities to bearers)
2. Register of debenture holders: A register of debenture holder shall contain
the following information:
1. The names and addresses of the debenture holders
2. The principal of the debentures held by each of them
3. The amount or the highest amount of any premium payable on redemption
of the debentures
 4. The issue price of the debenture and the amount paid up on the issue price
5. The date on which the name of each person was entertained on the register
as a debenture holder
6. The date on which each person ceased to be a debenture holder. S. 218(2)
CAMA.

The entry required under this section shall be made within 30 days of the
conclusion of the agreement with the company to become a debenture holder or
within 30 days of the date at which he ceases to be one

3. Register/Records of instruments: Every company shall cause a copy of

every instrument creating any charge requiring registration to be kept at
the registered office of the company

Debenture Trust Deed – s. 208

By section 208(1) CAMA, where debentures are offered to the public for
subscription or purchase, the company must execute a debenture trust deed in
respect of them and procure the execution of the deed by the trustee for the
debenture holders appointed by the Deed. If different classes are offered to the
public each must be covered by a separate debenture trust deed – s. 208(2)

Remedies of debenture holders in event of default: Where there is default on the

part of the company, by section 233 CAMA, the following are the remedies
available to the debenture holder:

a. Recovery of principal and interest

b. Petition for winding up: The debenture holder can bring a petition for
winding up of the company as a creditor – s. 571(d).
c. Debenture holders’ action: This is a representative action brought by one
or more of the debenture holders to recover the principal sum and interest.
See section 233(2)(a)
 d. Power of sale: where the debenture is secured with a fixed charge, the
debenture holder can exercise power of sale.
e. Foreclosure of the security/property:
f. Valuation of the security and providing proof for the balances on winding
up.
g. Appointment of receiver/manager either by the debenture holder if
authorized by the instrument or the court.

Prospectus: this is the document with which the application and registration of
securities are presented. The following can also serve as prospectus:

 Abridged prospectus: this is a summary of all that a prospectus ought to

have. It contains every requirement. It has all the key elements of a
prospectus, but in a summarised form.
 Deemed prospectus: this is a document which substantially complies with
the basic guideline of a prospectus and so, it is deemed to be a prospectus.
It is used in private placement.
 Statement in lieu of prospectus: this is the statement made before
embarking on public offer.