Financial Training Company

Corporate and
2007 Business Law- F4
(Zimbabwe)
Casebook

Corporate personality
Generally, the universal principle of corporate personality which applied to companies the world
over also applies to the law in Zimbabwe in that as soon as the company is registered it
acquires corporate personality which is separate from the natural persons or promoters behind
the company. This rule of law is generally acclaimed as the principle of law in Salomon v
Salomon and Company (1897) and the apposite pertinent decision of the court reads:

‘The company is at law a different person altogether from the subscribers to the memorandum
and though, it may be that after incorporation the business is precisely the same as it was
before and the same persons are managers and the same hands receive the profits, the
company is not in law the agent of the subscribers or trustee of them …’
In our jurisdiction, this decision has been reiterated in a number of cases for example in the
case of Dadoo v Krugersdorp (1937) in which the issue was whether or not a company could
acquire the race or nationality of the majority shareholders. Taking its cue or lead the South
African Appellate Division emphatically pronounced that once incorporated, a company is at law
a different person from the shareholders or natural persons who would have assisted in its
promotion or creation.

From the point of view of the Companies Act, s.9 of the Act states that a company shall have
the capacity and powers of a natural person of full capacity. This clearly emphasises the fact
that once incorporated the company attains a personality akin to that of a natural human being
of full capacity.
Notwithstanding the rule of the separateness of a company or its juristic personality,
Zimbabwean law recognises a number of instances when the veil (corporate personality) may
have to be lifted thereby effectively discarding the principle of separate existence of a company.
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Some of the notable exceptions are for instance, where corporate personality is being used for
fraud or some other illegal purpose. This fact was clearly outlined by Lord Helsbury in Salomon
v Salomon and Company (1897) when he explicitly admitted three sets of exceptional
circumstances where the corporate veil could be ignored which he pronounced as namely,
where fraud was present, the company was used as an agent of the incorporator and where the
company was not a real one but a fiction or a myth. Generally it should be noted that, under
common law courts are very willing to uplift the corporate veil where trust relationships are
involved and where the interests of third parties are at stake. It should be noted that whenever
determination of matters such as residence of a company are concerned the acts of agents
have been sufficiently recognised.

Apart from the common law or judicial exceptions to the rule of corporate status separateness
or personality, the Act itself provides that examples where the law refused to give full
recognition to the idea of a separate legal personality. Hence reference should be made to
Chapter 24:03 in s.32 and s.318.
Section 32 of the Act clearly imposes personal liability of a member where business came on
with no members. In terms of the said section, if a company has no members and the company
continues to trade for more than six months while it has no members, any person who
knowingly causes it do so will be liable, jointly and severally with the company for all debts
incurred by it after the six months have lapsed.

Section 318 is also very important. It tends to summarise the whole spirit of common law
principle on fraud or any form of business form or transaction knowingly or intentionally carried
out detrimental or prejudicial to third parties. In terms of s.318 (1) if at any time it appears that
any business of a company was being carried on recklessly, with gross negligence or with intent
to defraud any person or for any fraudulent purpose – the court may uplift the corporate status
of a company, upon application by the Master of the High Court or judicial manager or any
creditor. This is the civil liability which can be attached to any person, even if he is neither a
member nor a director, nor for that matter, an official of the company, so long as he is found to
have been knowingly a party to the fraudulent carrying on of the company’s business.

The statutory exceptions have not been confined to the statutory uplifting of the corporate veil to
the Companies Act alone, there are other Acts with provisions designed to achieve the same
goal. The best example is the Criminal Procedure and Evidence Act [Chapter 9:06] which
provides that when an offence has been committed for which any corporate body is or was
liable to prosecution, any person who was, at the time of the commission of the offence, a
director or servant of the corporate body is deemed to be guilty of the said offence, unless it can
be proved that he did not take part in the commission of the offence. The same provision goes

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on to say that such person will be liable for prosecution either jointly with the corporate body or
separately.

Active control
Once a company is registered in terms of the Companies Act, Chapter 24:03, it acquires juristic
personality with the capacity to acquire rights and incur duties and obligations appropriate to
itself.
The notion of legal personality of companies is based on the principle that there is a clear
distinction between the company and its members. As long as the essential requirements of
incorporation have been complied with, the company is perceived as a real entity and not a
fiction or myth. Neither is the company used as an agent of the incorporator, regardless of the
fact that it may be a .oneman company..

The fact that one or two persons are in full control of a company does not by itself deprive that
company of its juristic persona separate from the person or persons who control the company.
One or two cases can easily illustrate the point. In Lee v Lee Air Farming Ltd (1960) the
appellant’s husband formed a company of which he was the controlling shareholder, director
and chief pilot.
In line with statutory requirements, the company insured itself against liability to pay
compensation in case of accident to its employees. The appellant’s husband was killed while
working for the company. The question that arose for determination by the court was whether
he could be regarded as having been the company’s worker for the purpose of the New Zealand
Workers Compensation Act. The Privy Council held that he was a worker notwithstanding that
he virtually .owned. the company and was its Managing Director.

Also in the case of Dadoo Ltd v Krugersdorp Municipal Council (1920) under the legislation
relating to non-whites as it stood in 1915 (in South Africa) Asiatics were prohibited from owning
immovable property in the Transvaal but nothing was said as to Asiatic companies. In 1915 the
company of Dadoo Ltd was registered in the Transvaal, with a share capital of 150 shares of
which Mr Mahomed Dadoo held 149 and Mr Dindar held the other one share. Both Messrs
Dadoo and Dindar were Asiatics. The court ruled that the statutory prohibition did not apply to
companies even though their shares were held by Asiatics because ownership of the
immovable property by the company was not the same thing as ownership of that property by
the company.s Asiatic shareholders.

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As Innes C.J observed, .a registered company is a legal persona distinct from the members
who compose it... Nor is the position affected by the circumstance that a controlling interest in
the concern may be held by a single member. This conception of the existence of a company as
a separate entity distinct from its shareholders is no mere artificial and technical thing. It is a
matter of substance; property vested in the company is not, and cannot be regarded as vested
in all or any of its members ...

However in appropriate circumstances, as an exception to the rule, the courts have disregarded
the notion of corporate personality by piercing/lifting the .veil of corporate personality. in order to
identify the natural persons behind the artificial persona. Both the common law and statutory
law have a number of exceptions to this time honoured principle of law.

Statutory obligations of a registered company

The following are the main statutory obligations of a registered company.

(1) Establish and maintain a registered office in Zimbabwe (s.112).
(2) Continuously display its name in a conspicuous position in legible characters outside its
registered office and also outside every other place where it conducts its business (s.113).
(3) Have its name set out in legible characters on all business letters, notices, cheques,
invoices, receipts etc (s.113).
(4) State in legible characters the names of every director of the company on all trade
catalogues, trade circulars, business letters on or in which the company’s name appears
(s.188).
(5) Appoint auditors (s.150). The first auditors of a public company must be appointed within
one month of the date of the certificate to commence business and other companies must
appoint an auditor within one month of the issue of the Certificate of Incorporation.
A private company may dispense with an auditor in certain situations as stipulated under
s.150(7) of the Act.
(6) Public companies must prepare the Statutory Report and hold the Statutory Meeting. This
meeting must be held between one
and three months from the date of the certificate to commence business (s.124).
(7) Hold an Annual General Meeting and submit an annual return (s.125).
(8) Keep a minute book (s.138). Minutes of all proceedings of all general meetings and all
meetings of directors must be entered in this book.

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(9) Keep proper books of accounts (s.140). Every company must observe this requirement and
the advice of its auditors should be sought as to what books and records should be kept.
(10) Lodge all prescribed returns punctually.
(11) The following records must be kept at the registered office of every company:
(a) register of share allotments (s.74)
(b) register of mortgages, debentures and debenture holders (s.115)
(c) register of members (s.115)
(d) minute book (s.139)
(e) books of account (s.140(1))
(f) register of directors shareholdings (s.182)
(g) register of directors and secretary.

Registration of members
It is a mandatory requirement for every company to keep a register of its members and
punctually enter the following details:
(i) the names and addresses of the members
(ii) a statement of the shares held by each member
(iii) the date at which each person was entered in the register as a member
(iv) the date at which any person ceased to be a member.

Objects clause

The rationale behind the ultra vires doctrine was two-fold. Firstly, to protect investors in the
company so that they might know the objects for which their money was to be used or
employed. Secondly, to protect creditors of the company by ensuring that funds, to which alone
they could look for payment in the case of a limited company, were not dissipated or eroded in
un-authorised activities. See Ashbury Carriage Company v Riche (1875).

Management is usually in the hands of the board of directors, which is charged with the overall
day
to day running of the company. Section 10(2)(b) offers legal remedy to a member or creditor of
a company where, the company alters its objects or engages in a transaction which exceeds its
objects resulting in a loss suffered by the company.

In terms of s.16(1)(b) of the Companies Act, [Chapter 24:03] a company may by special

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resolution alter the objects clause of its memorandum of association. The requirements of a
special resolution are stipulated under s.133 namely that:
– It should be passed by a majority of not less than three-quarters of such members entitled to
vote as are present in
person or by proxy at a general meeting of which not less than 21 days notice has been given,
specifying the intention to propose the resolution as a special resolution and the terms of the
resolution and at which members holding in aggregate not less than one-quarter of the total
votes of the company are present in person or by proxy.
The initial decision to change the main objects clause of Nhapitapi (Pvt) Ltd will have been
made at a duly convened board meeting, notice of the general meeting of the company will be
issued, setting out the terms of the resolution to be passed as a special resolution together with
a circular explaining the reasons and effect of the proposed alteration in the objects clause.

At the general meeting which in all probability will be an Extraordinary General Meeting
(although it is possible for such business to be transacted at an Annual General Meeting), the
proposed special resolution will be passed with or without modification by the requisite three-
quarters majority.
Finally, within one month of the meeting a copy of the special resolution must be lodged with the
Registrar together with a copy of the notice convening the meeting.

Reasons for altering the objects clause

In terms of s.16 of the Companies Act, a company is entitled to alter its objects clause.
However, before it alters the clause, it is required, by the same section, to pass a special
resolution. A company can alter its objects clause for various reasons and the following are
some of them:
(i) to carry on its business more economically and efficiently; or
(ii) to enlarge or change the local area of operation; or
(iii) to restrict or abandon any of its objects; or
(iv) to amalgamate with another company; or
(v) to carry on some business which may be conveniently combined with its own; or
(vi) to increase or decrease the share capital of the company; or
(vii) to alter the name of the company, in terms of s.25 of the Companies Act.

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Ultra vires doctrine

The case of F P Holdings v PTC Pension Fund (1988). According to Tett and Chadwick on
Zimbabwe Company law:
‘… the result of the ultra vires rule ... is that if a contract is made, which is ultra vires the object
clause, it is void and cannot be ratified even if all the members agree thereto.’
Hence the fact that Eldorado Enterprises (Pvt) Ltd (EE)’s directors would not have sanctioned
such purchase if they had been aware of it, is legally irrelevant according to the case of Ashbury
Railway Company v Richie (1875).
In the Ashbury case, the objects clause gave the company power to carry on business as
‘mechanical engineers and general contractors’. The directors entered into a contract for the
financing of a certain railway in Belgium and it was argued that the words ‘general contractors’
embraced such activity. It was held that the contract was ultra vires the memorandum and even
if every member had agreed or endorsed it, was void and unenforceable.
However the doctrine of ultra vires has largely been abolished in Zimbabwean company law
through s.10 of the Companies Act [Chapter 24:03] i.e. (effect of a statement of objects) which
essentially provides that the effect of a statement of the objects of the company in its
memorandum or elsewhere, shall not be to invalidate any transaction which exceeds those
objects and which was made by the company or entered into by the company with any other
person.

It should also be noted, however, that a distinction exists between those actions which are ultra
vires the company’s powers and those ultra vires the powers of a director, but within the powers
of a company as the situation in the case of Royal British Bank v Turquand (1856). Note should
also be taken to the fact that ss.11 and 12 of the Companies Act are quite relevant to the given
set of facts.

Section 11 clearly crystalizes the position at common law. This section clearly does away with
the issue of constructive notice of all company documents to the public and even some of the
company officials and employees.
Section 12 constitutes a presumption that any person having dealings with a company or with
someone deriving from a company shall be entitled to assume among other things, that every
person described in the company’s register of directors and secretaries, or in any return
delivered to the Registrar by the company has authority to exercise the functions customarily
exercised by a director, manager or secretary of a company carrying on business of the kind

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carried on by the company (presumption of regularity).

Adherence to the Ultra vires rule

Prior to the amendment of the Company.s Act in 1993 the courts adopted a fairly strict approach
in interpreting the objects clause. The company could not do anything outside the powers given
in the memorandum . anything so done was ultra vires.

Any act done by the directors which was ultra vires (beyond the powers) of the company, would
be void and the company could not make it valid, even if every member assented to it.
Ashbury Railway Carriage Company v Riche (1875)
The position is somewhat different now and this is captured by section 10(1) of the Act
(incorporating amendment act No. 6 of 1993) which reads as follows:
.The effect of a statement of the objects of a company, whether in its memorandum or
elsewhere, shall not be to invalidate any transaction which exceeds those objects and which
was made by the company or entered into by the company with any other person,
notwithstanding that the other person was aware of the statement of the objects ..

Although the position of the courts towards agreements which exceed the objects clause has
now considerably softened in the light of section 10(1) of the Act, the remedy which Messrs
Toughtalk and Roughlife, the two aggrieved shareholders, desire to get (interdict) is provided for
under section 10(2)(a) which reads:
.without derogation from any remedy that may be available to the person concerned. (a) any
member or debenture holder of a company may, prior to the event, apply to court and may
obtain an interdict restraining the company from making or entering into any transaction which
exceeds its objects, whether stated in
its memorandum or elsewhere .. Although the ultra vires doctrine has been abolished some of
its residual effects are still being felt.

Books of accounts
Companies Act, Chapter 24:03. Section 140 requires every company to keep proper books of
account which give a true and fair view of the state of the company’s affairs. Section 140(1)
reads, ‘every company shall cause to be kept in the English language proper books of account
with respect to:

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(a) all sums of money received and expended by the company and the matters in respect of
which the receipt and expenditure takes place.
(b) all sales and purchases of goods by the company.
(c) the assets and liabilities of the company.
Although s.140 refers only to books of account, supporting vouchers will also be necessary to
give the required true and fair view.
The books of account shall be kept at the registered office of the company or at such other
place as the directors think fit and shall at all times be open to inspection by the directors.
Furthermore s.141 requires the directors to lay before each Annual General Meeting a balance
sheet and profit and loss account in respect of the previous financial year, the balance sheet
being signed on behalf of the board by two directors (s.146(3)).
As they have not kept any records James and Joseph are not in a position to comply with these
provisions. Detailed rules as to the form and content which the accounts must take are laid
down in s.142 and the paramount consideration as per s.142(1) is
that every balance sheet of a company shall give a true and fair view of the state of affairs of the
company as at the end of its financial year and every profit and loss account of a company shall
give a true and fair view of the profit and loss for the financial year.
The responsibility for the preparation and presentation of accounts falls on the directors and the
general duty of the auditor is to examine these accounts and report on them to the members.
Although s.150(2) says that every company shall at each Annual General Meeting appoint an
auditor to hold office from the conclusion of that meeting until the conclusion of the next Annual
General Meeting. Section 150(7) permits a private company to dispense with the appointment of
an auditor when it is of such a size and type that its members do not feel the necessity for an
independent check on the work of their directors. The relevant
s.(150(7)) reads:

‘A private company shall not be required to appoint an auditor if:

(a) the number of members in such company does not exceed ten and
(b) .......................................... and
(c) such company is not a subsidiary of a holding company which has itself appointed auditors
and all the members in
such company agree that an auditor shall not be appointed.
In reporting to members on the accounts, the auditor must frame his report strictly in
accordance with s.153 of the Act which provides for either an unqualified report, a qualified
report or an explanation for being unable to make a report. In order to enable the auditor to
discharge his duties efficiently, the Act gives him a right of access at all times to the books,
accounts, vouchers and securities of the company, together with the right to call for information
from the officers of the company, its subsidiaries and the right to speak at general meetings.

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A director of any company shall cease to hold office if ‘he is convicted, whether in Zimbabwe or
elsewhere of theft, fraud, forgery or uttering a forged document or perjury and has been
sentenced therefore to serve a term of imprisonment without the option of a fine or to a fine
exceeding one hundred dollars, or . . .’
If any person who is disqualified under this section from being or continuing to be a director of
any company directly or indirectly takes part in or is concerned in the management of any
company he shall be guilty of an offence and liable to a fine not exceeding one thousand dollars
or to imprisonment for a period not exceeding two years or to both such fine and such
imprisonment.

As was noted by Manyarara J. A. in Oliver John Tengende v The Registrar of Companies

(1988)
‘the object of s.173 of Chapter 24:03 is that management of companies should not be in the
hands of
unscrupulous or disreputable men and a conviction within the terms of that subsection is to be
regarded as at
least prima facie evidence that the person concerned is of such a nature . . .’
Smart Aleck’s position on the Board is now legally untenable because of the conviction that
hangs over his head. Whilst he can remain as a member or shareholder of Slack Enterprises
(Pvt) Ltd he has to relinguish his position as a board member.

Listed companies

In terms of s.3.3 of the ZSE Listing Requirements, listed companies are obliged to publish a
press announcement giving details of:
(a) circumstances or events that have or are likely to have a material effect on the financial
results, the financial position or cash flow of the company and/or information necessary to
enable holders of the issuer’s listed securities and the public to avoid the creation of a false
market in its listed securities; and
(b) any new developments in its sphere of activity which are not public knowledge and which
may by virtue of the effect of those developments on its assets and liabilities or financial position

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or on the general course of its business, lead to material movements in the ruling price of its
listed securities.
Information that is required to be published according to paragraph 3.3 must not be given to a
third party before it has
been published, although such information may be given in strict confidence to certain people,
such as the company’s
advisers, potential financiers, Government departments and the Reserve Bank.
The decision by Hombarume Company Limited to sell off its spinning division is a new
development which might have
a significant effect on the price of its shares. Accordingly, the company is bound to publish a
press announcement in
terms of this section. This announcement is commonly referred to as a cautionary statement.

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