CHAPTER 1

FORMS OF BUSINESS ASSOCIATION IN ZAMBIA

Introduction

The Company Law of Zambia is governed by a statute that has its origins in English
Company Law. The first company law of Zambia was the Companies Ordinance
modeled on the 1929 English Companies Act and it continued to exist without any far-
reaching amendments until 19941 when the then Companies Act Chapter 686 of the Laws
of Zambia was repealed and replaced by the current Act, Chapter 388 of the Laws of
Zambia. It is therefore obvious that the company law of Zambia is based on principles
of common law and doctrines of equity. The fact that it hardly underwent substantial
amendments till its repeal shows that it remained archaic for a long time, unmatched with
many changes taking place in the economic development of the country, particularly after
independence in 1964.

Since independence the basic objective of Zambia has been economic development. In
pursuing this objective it is important that law is designed in such a way that it will foster
the importance of a high rate of investment in the country’s economy. This it can do by
providing proper regulatory and enabling institutions for achieving commercial and
industrial expansion. Where an investor, local or foreign, has decided in principle to
invest in Zambia, he or she would have to choose under what legal forms he or she can
legitimately carry on his or her business. For this reason, there has to be adequate legal
framework within which investors can achieve their investment objectives.

The Development of Modern Company law in Zambia

The need to change the company law of Zambia was felt shortly after independence.
There was need for increased Government participation in corporate planning, equity and
decision making .The concept of corporate social responsibility was also gradually
gaining recognition in the country. These changes needed a reasonably adaptable
company law regime. The company law was complex and too bulky, inadequate and
1
The repeal was affected through Statutory Instrument no. 26 of 1994

1
unsuitable to meet the challenges. There was need for simplification of the Companies
Act, Chapter 686 which would not only reduce the task which would confront the lawyer
and those who were to undertake the management and administration of companies but
also result in reduction in cost which would work to the benefit of the investor. Hitherto
most students and lawyers were not so interested in company law. An attitude of apathy
towards this subject was even greater amongst ordinary business people. The new
government further felt the need for the participation of the ordinary citizen in the
economic development of the century. This fortified the desire to simplify the enabling
law.

In order to arrive at the desired degree of simplicity of Zambian company law, it was
necessary to enact a new law which would serve to enhance increased participation by the
new Government and indigenous people. The number of items dealt with in the Act
needed to be reduced for this purpose. Many of the big foreign companies preferred
operating as private companies, and private companies are generally not required to
disclose much information about themselves as are public companies. The theory that
private companies are meant for small family businesses is not valid, for fifty as a
maximum number of members is rather too large for a family business in a country like
Zambia. However, the new law has not reflected this reality either2.

Another unnecessary complexity related to the number of types of shares permissible

under English model company law principles. Zambia’s business world is not so
sophisticated as to warrant complex capital structures, most of which are not even used
at all. A reduction would simplify the returns of allotments and annual returns which the
Act required companies to submit. This would have had the effect of simplifying most
of the provisions of the memoranda and articles of association of Zambian companies.
So it was that in 1994 the Companies Act was enacted and renumbered as Cap 3 388,
abolishing the memorandum of association.
However, desirable as the above changes may be, they must always be weighed against
the raison d etre of incorporating a company namely, to protect the providers of capital.
2
The new current statute has however, retained the limit of the number of its members to fifty, but it has
strengthened disclosure provisions.
3
Chapters of the Laws of Zambia are referred to as caps for brevity

2
Oversimplification should not be the target because it may turn out to be that less
information is in fact given to prospective investors and to the Government. Hence, the
need under the contemporary Act for a public company to issue a prospectus or a
statement in lieu of prospectus to guarantee full disclosure of the business by the
company managers.4

The topics covered in this book however include some concepts common in the study of
company law as they are still the anchor of modern developments in company law.

Forms of Business Organization

A few years after independence saw increased economic participation and a proliferation
of public corporations established by Government of the Republic of Zambia to guarantee
public ownership of wheels of trade and industry. The watershed speech by the then
President5 of Zambia launched a nationalization policy which led to the reorganization of
the handling and marketing of key products of the country, for the purpose of improving
services to the people and giving economic independence to the Government in order to
achieve that purpose6. The result of Government participation also created a new sense
of awareness of opportunities for private participation among individuals either as sole
traders, partnerships or other forms of business organization. These forms of business
organization will now be discussed in brief.

The Sole Trader

This is believed to be the oldest type of business in the world. Some big international and
multinational companies began as an individual trading on one’s own account. A sole
trade is by far the simplest to establish, for business can commence just by opening the
doors of the business premises. There are hardly any legal formalities, obligations and
constraints as opposed to other forms of business. The main formality facing the sole
traders on commencement of business is registration under the Registration of Business
Names Act7 if the individual intends to trade under a name other than one’s own. Non-

4
See Ch 5 for a discussion of prospectus
5
Kenneth David Kaunda, first Republican President of Independent Zambia
6
See discussion under parastatal organizations and statutory corporations
7
Cap 389 of the Laws of Zambia

3
registration therefore, is the greatest attraction to this type of business. The other
attractions are that a sole trader is his or her own boss, making and enjoying the profits
alone, making the business decisions, hiring and firing employees as the business
demands. There is no red tape to block timely decisions.

However, a sole trader also incurs all liabilities alone, and as business grows, may fail to
cope with its demands of time and management, and may lack access to finance and skill
necessary to expand or improve business according to changing market conditions.
Furthermore, bankruptcy, illness, death, insanity or other infirmity of the sole trader may
bring an end to the business.

Partnership
An individual may seek to trade jointly with other individuals or enterprises. A
partnership provides a suitable medium for individuals bound by mutual trust and
confidence. It involves two to twenty people 8 who pool their resources together to carry
on a business in common with a view of making profit9. Co-ownership is the key
element. The sharing of profits by the members creates a presumption of a co-ownership.
The partners are jointly and severally liable without limit. The partnership is based on
agreement, which spells out such matters as capital contributions and indemnity inter se.
Other attractions apart from the pooling of resources and skills together which broaden its
capital and managerial base, are that it is easy to set up and has minimum registration
requirements, that each partner is entitled to an equal share of profit and losses save for
the capital investment proportion.

However, there are also disadvantages. Like a sole trade, a partnership lacks continuity –
the death, illness, insanity or bankruptcy of a partner may cause dissolution of the
partnership or termination unless otherwise agreed, or by operation of law. A partnership
usually has rigid and strict rules for partners to comply with. Partners are liable to the
extent that creditors can look beyond the business assets to the partners’ personal assets

8
See section 5, Companies Act Cap 388
9
Partnership Act 1890, Section 1(1). This Act is wholly imported from England and is the statute that
governs partnerships in Zambia, as she has no statute of her own on partnerships.

4
for payment of their debts. Furthermore, a partnership has high potential for conflict, as
the business is a shared entity.

Cooperative Societies
Another form of business organization is a cooperative society. By section 8 of the
Cooperative Societies Act No. 20 of 1998
“any 10 or more members shall, within a period of not more than twelve months
from the date of adoption of its by-laws… be registered as a Cooperative
Society….”
Cooperative Societies comprise members in a community whose aim is to provide
socio-economic benefit to the members by way of responding to the community needs.
Basically they provide a service to the community. Together, members have greater
ability to respond to community needs and are considered to be a sure way for
accelerated development, particularly for rural areas.

Section 2 of the Cooperative Societies Act defines a cooperative as

“an enterprise or organization owned collectively by its members and managed

for their joint socio-economic benefit and whose activities are not prohibited by
law”.
A major disadvantage is that cooperative societies suffer from government interference.
By section 4, in encouraging cooperative development, the Minister of Cooperatives is
empowered to authorize, take or approve such measures, as she/he deems necessary.
Therefore their business may be dictated by predetermined goals of government. By their
very nature of providing a service to the community, cooperative societies are not an
attractive way of associating for profit. Individual members with larger investments are
not able to enjoy greater benefits than smaller contributors.

Registered Companies
The practical alterative is the company, which is the fourth form of business in Zambia.
The law governing companies is the Companies Act Chapter 388 of the laws. A
Company is created by registration of documents such as Articles of Association. As this

5
book is about company law in Zambia, the rest of the chapters will discuss in detail the
nature of a company, mode of creation, consequences of registration, types of companies,
membership, capital shares, directors and dissolution etc. However, this will be preceded
by a brief discussion of parastatal companies and statutory corporations created by
specific Acts of Parliament.

There are others bodies which fall within the description of the company which were
created by specific statutes in the post independence era, as well as by directive to already
existing companies registered under the Companies Act, whereby companies were
required to give 51% of their shares to government.

Parastatal Companies or Organisations and Statutory Corporations and Boards

Parastatal organisations and statutory corporations are a feature of the immediate post
independence economic reforms. As they play an important part in the history of
company law or law of corporations in Zambia, an analysis of these forms of company
will be given. Both parastatal companies and statutory corporations were introduced as a
means to promote Zambian entrepreneurship and extend to the Government of Zambia
active participation in the economic sector, as well as give it control over industries
which provided essential commodities, and which would be too risk for the country and
for the poor if left in private hands. It is for the same reason that the British Government
showed social responsibility by monopolizing British Rail, Gas Corporation, British
Steel, and Posts and Telecommunications. In the case of gas for instance, almost
everyone in England uses it for heating and cooking. It would be dangerous to leave it in
the hands of private entrepreneurs, one of the dangers being that the commodity could be
pegged at a price beyond many people. This could result in many people dying from the
cold.

The Emergence of Parastatal Companies

It was during the Mulungushi Economic Reforms in Kabwe in years 1968 and 1970 that
the President of the newly independent Zambia announced that Government would take
51% shares in major companies operating in Zambia. The mood then was to make
complete the newly acquired political independence by taking control of the economy.

6
Up until then the economy had been under foreign dominance. All the major means of
production and services were owned by foreign investors and Government had no
control. The then President at his watershed speech at Mulungushi said:

“This shall be a land of equal opportunity for all. Since our emphasis is people
and all activities are centred on serving the people, there is no better alternative
under our present circumstances, in the light of bitter experience, and in view of
the peoples desire for economic self determination, than to control the resources
of the country and the means of production and distribution … A newly
independent country with a responsible government can not stand by and let its
resources be exploited for the benefit of foreigners alone. We object to have a
nation of foreigners on one hand and capitalist masters on the other hand…”10

Parastatal Company defined

Simmance in defining a parastatal company said it was “an organization which is not an
integral part of Government but an institution or agency which is wholly or mainly
financed or controlled by Government. The criterion of such public enterprise would be
ownership by Government of 51 or more of the capital shares or other forms of
Governmental participation or effective influence in all the main aspects of management
of the enterprise”.11

Thus Parastatal companies were to large extent joint ventures between the Government
holding 51% of the shares and the private sector with 49%. As the parastatal companies
were incorporated under the Companies Act, the expectation was that they would
continue to run as such and declare dividends in the conventional manner.

However, unlike companies registered under the Companies Act, parastatal companies’
financial affairs were monitored by Parliament. 12 The Auditor General audited their
books, and the Public Accounts Committee of Parliament and the Parastatal Bodies
Service Commission were established to ensure that funds on which they depended were
10
Towards Complete independence, p43 Kenneth David Kaunda
11
Simmance: The relation between Central Government and Parastatals in Zambia PA/210/71/67
12
Mulwila, JM: Parastatal Companies an the Law in Zambia PhD Thesis School of Oriental and African
Studies (SOAS) 1980.

7
spent according to the purposes for which they were allocated. There was therefore, great
interference from Government.13 By the new Act, the Chairman and Board Members and
other personnel were appointed by the line Minister based on considerations other than
business acumen and prudence. This removed parastatal companies from the ambit of
company law framework. In the case of Sebente v Namboard14 the court held that the
Parastatal Service commission did not have as much power as it wanted to exercise on
the parastatal companies. This led to its demise by 1979.

Statutory Corporations
A corporation is created either by Royal Charter or statute, or by procedure of
incorporation laid down by the Companies Act. Companies established by Royal Charter
no longer exist in Zambia since the British South Africa Company, the BSA Co. 15 Those
created by statute include ZESCO, Zambesi River Authority, TAZARA, ZANACO,
TAZAMA.
Early corporations of the commercial sort were formed under the frameworks set up by
government of states to undertake tasks that appeared too risky or too expensive for
individuals and which only states or governments could embark upon. The oldest
commercial corporation in the world, the Stora Kopparberg Mining Community in Falun,
Sweden, reportedly obtained a Charter from King Margnus Eriksson in 134716. Many
European nations chartered operations to lead colonial ventures, such as the Dutch East
India Company, and these corporations came to play a large part in the history of
corporate colonialism.17

In the United States, government chartering began to fall out of vogue in the middle
1800s. Corporate Law at the time was focused on the protection of the public interest,
and not only the interests of corporate shareholders. Corporate charters were closely
regulated by the states. Forming a corporation usually required an act of Parliament.

13
Parastatal Bodies Commission Act
14

15
Zambia became established as a British territory by the British South Africa Company of Cecil John
Rhodes under the Royal Charter granted to him by Queen Victoria of Britain in 1889. It is after Cecil John
Rhodes that the countries Northern Rhodesia (now Zambia) and Southern Rhodesia (now Zimbabwe) were
named.
16
17

8
Investors generally had to be given an equal say in corporate governance, and
corporations were required to comply with the purposes expressed in their charters.
Many private firms in the 19th Century avoided the corporate model for these reasons.18

Statutory Corporation or Organization defined

A statutory corporation may be defined as an artificial legal personality created under a

statute of particular country and whose objectives, structure appointment of board,
dissolution or winding up are found in the enabling statute itself19.

The law applicable to statutory corporations in Zambia is specifically the enabling

legislation and not the Companies Act as with other forms of corporations.
Statutory corporations or organisations are essential for the effective running of any
country because it is a universally accepted fact that the role of any government is to
provide an enabling environment for the benefit of its citizens. In addition there are
certain undertakings that are exclusively the duty of government. Therefore in all
instances statutory corporations or organizations are quasi – government entities and
usually created in order to cater for economically depressed areas which would not
ordinarily attract private investment due to their colossal capital cost with long term and
low level of returns, or for the provision of a service which has socio – economic
ramifications. Therefore it can be said that the development of statutory corporations is
directly linked to the need for government to decentralize and ease the task of service
delivery by creating bodies that are not entangled in the huge and bureaucratic
government machinery. In addition these bodies may also be created for the regulation of
certain critical sectors of the economy such as energy and revenue collection.20
The basis for establishing statutory corporations is two fold:
(i) to provide a critical service in the social and economic advancement of the
country. Typical examples in Zambia being railways (like TAZARA and
Zambia Railways) and TAZARA pipeline.

18
Andrew Carnegie formed his steel enterprises as a limited partnership while D. Rockfeller set up his oil
business as a trust to avoid the concept of public interest.
19
20
The Energy Regulation Board of Zambia, ERB and the Zambia Revenue Authority, ZRA

9
 (ii) the projects undertaken by statutory corporations are not only expensive but
often take long periods to complete. Private investors are unwilling to invest
in such expensive projects.

The above objectives can be illustrated by three examples viz TAZAMA, TAZARA and
Zambia Railways.

TAZAMA was created by Cap 455 the Zambia Tanzania Pipeline Act. Its creation is
tied in with Zambia’s land locked position and the need to have an efficient and reliable
route for petroleum for the country’s economic activities. This need became felt when in
1966 the then Rhodesian Prime Minister, Ian Smith, decreed the Unilateral Declaration of
Independence (UDI) of Rhodesia. This action caused the British government to impose
economic sanctions on Southern Rhodesia in a desperate bid to bring the rebellious
government of Ian Smith into submission. This led to the immediate closure of Zambia’s
trade route to the south and because that was the route for imports such as oil, an oil crisis
became imminent. The Zambian government’s response was aptly captured by Andrew
Sardanis when he stated:

“An airlift for fuel had to start immediately…we spent the next few years trying to
divert our imports and exports from the Southern African ports to the port of Dar
es Salaam. It was a heartbreaking slog and quite often demoralizing.
The transport of fuel and goods was costing the country enormous sums….We
needed something more permanent, like a pipeline and a railway line.
The then President of the new state of Zambia wrote to Harold Wilson, the British
Prime Minister, asking whether Britain could assist. Wilson’s reply was not very
helpful…the pipeline would cost around 45 million pounds and take three years to
build…”21

To bail Zambia out of this imminent crisis, prominent prosperous businessman, Tiny
Rowland (owner of LONRHO) offered to build and operate an oil pipeline from Dar es
Salaam in Tanzania to Lusaka or the Copperbelt in Zambia, and it was agreed that this

Andrew Sardanis, 2003. Africa Another side of the Coin Northern Rhodesia’s Final years and Zambia’s
21

Nationhood pp 174 – 180 1B Tauris and Company Limited, London

10
would be a joint venture with the Governments of the two countries. For this to happen a
statute was needed. The two countries put the relevant legal framework in place, and
Zambia enacted CAP 455 of the Laws of Zambia establishing TAZAMA pipeline as a
statutory corporation.

The circumstances that led to the construction of TAZAMA are similar to those that led
to the construction of TAZARA. Zambia being a land locked country and in observance
of the economic sanctions imposed on Ian Smith’s Rhodesia after the UDI, she had no
alternative a railway line. As an interim measure copper was airlifted to Dar es Salaam
but at an astronomical cost. Hence efforts were made for the construction on of a railway
line to the east coast of Africa. The work could not immediately begin because of the
cost and time factor. It would cost a lot of money and as long as ten years to construct. 22
In the early 1970’s the People’s Republic of China came to Zambia’s aid and constructed
the railway line in a record five years (about 1970 to 1975). This was the second joint
project between Tanzania and Zambia facilitated by a statutory corporation created under
Chapter Cap 454 of the Laws of Zambia. Both TAZAMA and TAZARA were born out
of the exigencies of UDI in Rhodesia.

Some of the statutory corporations in Zambia were initially Government departments.

With the plummeting of copper prices in the 1970s, the Zambian economy began to
decline. Since resources were scarce, the Government was not able to sufficiently fund
its departments and decided to convert the departments which were key to the economy
into statutory corporations so that they could operate on a commercial basis.

In presenting the Post and Telecommunications Corporation (PTC) Bill in 1975, the then
Minister of Power Transport and Works confirmed this state of affairs. He stressed the
importance of an efficient post and telecommunication service to the economic expansion
of the nation. He further stated that the poor copper price on the world market and rising
inflation had put the Government in a precarious financial situation and that this had
necessitated the reduction in allocations to capital projects. As the post and
telecommunications sector required massive capital investment for efficiency as well as

22
ibid

11
expansion, there was need to transform it into a statutory corporation so that it could
source funds from alternative sources23.

Another reason for transforming Government departments into statutory corporations was
to ensure the resources were ploughed back into them and remove Government
intervention in their operations. This position was confirmed by the following speech by
the Minister of Power Transport and Works in presenting the PTC Bill to Parliament:

“When the General Post Office is converted into a corporation the unfortunate
situation whereby the overall administration of the organization is vested in my
hands while the powers to utilize the profits still vest in the hands of my
honourable friend, the Minister of Planning and Finance, whose priorities may
not be the same as those of the General Post office, will come to an end”24.

Further, the Government felt that converting the departments into statutory corporations
would increase discipline as well as their efficiency. The Minister of Power Transport
and Works illustrated this point as follows:

“We are confident that when the General Post Office becomes a corporation the
present indiscipline and inefficiency will be wiped out. The corporation will
run on a commercial basis and will strive to be truly self-supporting.25

From the above, it is evident that the original idea of statutory boards was to make them
commercial entities with less Government intervention than Government departments.
However, even at this early stage it is clear that the Government was not ready to let them
run independently. According to clause 10 of the Posts and Telecommunications Act, the
Minister reserved the right to remove any member of the Board. This gave the Minister
immense powers over the Board. To date this is the problem facing statutory boards.

23
Debates of the Second Session of the Third National Assembly, 17th January-21st March 1975, Volume 38
p. 3097
24
Ibid p 3101
25
Ibid p.3104

12
In recent times, efforts have been made to reduce the power of Ministers in the
appointment of Board Members. Section 4A of the Zambia National Broadcasting
Corporation Amendment (ZNBC) Act No. 20 of 2002 empowers the Minister to
constitute an ad hoc appointments committee to recommend names of people to be
appointed to the Board. The Minister is then required to send these names to Parliament
for ratification. This may have removed the discretion of the Minister from appointing
members to the Board. It may also have been envisaged that this would be an
improvement as board members would no longer owe their allegiance to the Minister.
This law had occasion to be tested in the case of Fanwell Chembo and Others v AG 26.
In that case the applicants sought an order of mandamus compelling the Minister of
Information and Broadcasting Services to take the names recommended by the Ad hoc
Appointments Committee to Parliament for ratification. The court held that the order
could be granted. This was a landmark decision in that it affirmed that the Minister’s
powers in appointing the ZNBC Board had been restricted. The State appealed to the
Supreme Court. Thus, the future of the independence of statutory corporations from the
portfolio ministers lies in the hands of the Supreme Court of Zambia.

The functions of the Corporation are set out in section 7 as being among other things, to
serve the public interest, provide varied and balanced programming for all sections of the
population, reflect and promote Zambia’s national culture, diversity and unity, and carry
on or operate such other services including diffusion services and undertakings as in the
opinion of the Board, are conductive to the exercise of its functions under this Act.

Another example of a statutory body is the Zambia Revenue Authority, which is created
by the Zambia Revenue Authority Act:27

(a) to assess, charge, levy and collect all revenue due to the Government under such
laws as the Minister may, by statutory instrument, specify;

26
2000/HP/0512
27
Chapter 321 of the Laws of Zambia

13
 (b) to ensure that all revenue collected is, as soon as reasonably practicable, credited
to the Treasury and in this regard sections twenty-four and twenty-five shall apply
with necessary modifications;

(c) Subject only to the laws specified under paragraph (a), to perform such other
functions as the Minster may determine28.

Under Section 11(2) The Minister may give to the Governing Board such general
directives with respect to the carrying out of its functions under the Act as he considers
necessary or expedient and the Board shall give effect to such directives, but only the
Authority shall have power to give effect to the laws specified under paragraph (a) of
subsection (1) above.

The funds of the Authority consist of money appropriated by Parliament for the purpose
of the Authority; money paid to the Authority by way of grants or donations and any
funds that vest in or accrue to the Authority. Other Statutory Organisations operating at
present include the Energy Regulation Board (ERB) and the Zambezi River Authority.

In the second republic, as the country was pursuing socialist economic policies coupled
with the political philosophy of Humanism, a number of statutory boards were created to
regulate certain areas of the economy in line with the prevailing government policies at
the time, which ordinarily or in a liberal economic set up would be in the hands of the
private sector. Examples of these are the Dairy Produce Board which was tasked with the
Marketing of Dairy Produce; the National Marketing Board which was tasked with
selling and distribution of farming inputs at subsidized prices as well as the marketing of
farm produce and the Cold Storage Board which was tasked with the purchase of
livestock delivered to the board, operation of abattoirs, refrigeration and meat products.

From the foregoing account a number of common features may be condensed from
Statutory Corporations. Among the common feature are:

28
Section 11 of (1) Zambia Revenue Authority Act

14
 a. The Minister under whose portfolio the company falls enjoys extensive powers
under the enabling Act, including the appointment of the board, its dissolution and
in addition he acts as the board in its absence.
b. They are common in areas of utility such as telecommunications, electricity,
postal services.

Given the fact that the main financiers of statutory corporations is the government, the
drop in the economic fortunes of most developing countries, including Zambia, has led to
the conversion of most statutory corporations into limited companies, to enable them
source external funding from banks and other lending institutions and so as to render
them self supporting and profitable. Examples of such organizations that were converted
into limited liability companies in the 2nd Republic of Zambia include Zambia Airways
Corporation29 and the Post and Telecommunications Corporation (PTC). In recent times
we have seen the conversion of the Zambia Electricity Supply Corporation into a limited
liability company or parastatal as it were.

Common Features of Statutory Corporations may be Summarised as Follows:

1. Statutory corporations are created by statue and dissolved by statute.
2. Statutory corporations are financed by the government and are as such etc.
3. Statutory corporations deal in services that are critical to the nation’s development
such as electricity generation and supply, telecommunications and railway
transport and postal services.
4. Statutory corporations fall under specific ministries and the Minister under which
the statutory corporation falls exercises power to appoint and dissolve the board
and acts as the board in the absence of the board.
5. Loans obtained by statutory corporations are guaranteed by the government.
6. Statutory corporations have a duty to promote economic and social development.

Similarities and Differences between Statutory Corporations and Parastatals

29
Zambia Airways Corporation has, since December 1994 been placed under liquidation although the
Liquidators have not yet concluded the winding up process to date.

15
The main similarity and between statutory corporations and parastatals is that both are
controlled by Government. While statutory corporations have the direct grip and control
by government, the same is also true for parastatal companies where government has a
100% or even 51% interest in the form of shareholding.

The other important similarity is that they are both corporate bodies capable of suing and
being sued in their own right, they can own assets and have a separate legal existence
from those that own them. Examples are the Communications Authority under the
Telecommunications Act and ZANACO created under the Companies Act.

Notwithstanding the above similarities, there exist a number of factors that distinguish
these two species of entities as special purpose vehicles for the conduct of business.

Formation
Statutory corporations as their name suggests are creatures of parliamentary statute. 30
The relevant statute states what the name of the corporation shall be when it will come
into effect and when it shall commence business. All such statutory corporations and
Boards, such as TAZAMA PIPE line, TAZARA Zambia Railways, Dairy Produce Board,
NAMBOARD, were created by statutes which in most cases bore the same name as the
corporation itself.

On the other hand and in contrast to statutory corporations, parastatals are incorporated
under the Companies Act31 by following the procedures that any other company follows
as prescribed by the Companies Act. Put succinctly, a statutory corporation is subject to
an Act of parliament, while a parastatal is subject to the Companies Act in their
formation.

The Substratum of the Business Organisation

The substratum of any business organization is the purpose for which it was formed.
Insofar as statutory corporations are concerned the substratum is clearly detailed in the
empowering statute. For example the Zambia Railways Act, (though now concessioned

30
Control in the Parastatal Sector in Zambia by Ben Turok and Edited by Muna Ndulo, p230
31
As per section 6 of cap. 388. See Chapter 2.

16
for 20 years under the name Railways Systems of Zambia) clearly outlines the substratum
of the Railways as follows, `The Railways shall have a general duty so as to exercise
their power under this Act as to provide or to secure and promote provision of an efficient
and adequate system of public transport of goods and passengers by rail with due regard
to economy and safety of operation…..and further the railway shall administer their
undertaking on business principles and with due regard to the needs of the public and the
development of agriculture, commerce, industry and mining by means of cheap and
efficient transport…the railway shall at all times endeavour to produce a reasonable
surplus’.32

On the other hand and in contrast, the substratum of a parastatal is stated in its articles of
association the same way as those of a private or public limited liability company. In the
repealed Companies Act, the substratum of the company used to appear in the
memorandum of association under the subheading called the Objects clause.

Furthermore, it can be seen that while a parastatal is also expected to operate on prudent
commercial principles, profit is not the prime objective. The prime objective is to
provide affordable service to the general public as stated in the main objective of why the
parastatal body was formed. On the other hand it is trite economic theory that the main
objective of a company such as a parastatal organisation is the maximization of
shareholder wealth through profit maximization and subsequent declaration if dividend.

Organization Structure and Management

The organsiation structure of statutory corporations is prescribed by the statutes that
create them. The statutes do not only identify the Minister under whose portfolio a
corporation falls but also gives her or him immense powers in the control over the
running of the corporation including the appointment of the governing board and its
chairperson33. Most statutes of such organizations state that in the absence of a Board,
Minister can act as a Board alone until such a time when the Board is appointed. The

32
Zambia Railway s Act, section 4.
33
The term “chairperson” is used in the place of the place of the statutory term of “chairman” in order to
reflect gender neutrality.

17
statute also depicts what position shall exist in the higher echelons of management in the
organization structure34

On the other hand and in contrast to statutory corporations, parastatals were and are
companies whose control, management and organistion are dictated by the internal and
external constitutions of business entity, namely the articles of association and the
memorandum of association respectively, in the case of the United Kingdom company
law regime and by the articles alone in the case of the new Zambian company law
regime. The appointment of directors is governed by the provisions of the articles of
association the same way as it is done for a private limited company or a public limited
company and usually this is done by the company in a general meeting except where
there exists a casual vacancy. In fact, where such organizations do not have their own
articles the Companies Act provides standard articles which they are supposed to adopt as
a matter of course.35

Capital Structure
Statutory corporations do not have a capital structure comprising various classes of
equity, debentures or any other component that represents interest holding in the business
entity. They are wholly owned by government but ownership is not in the form of shares.

On the other hand the capital structure of parastatals is represented by authorized nominal
share capital,36 debt financing if any and sometimes a component of retained profits. The
types and classes of shares in the case of Zambia will be depicted in the articles, though
other jurisdictions such as the UK require such to be indicated in the capital clause of the
memorandum. It follows therefore that even where government has 100% ownership of a
parastatal, this should be in the form shares and registered with the Registrar of
Companies. This is quiet evident from the watershed speech by the first Republican
President when he addressed delegates to the UNIP National Council in 1969. There, he
charted the path for such holding companies as INDECO and ZIMCO whose majority of
the subsidiaries were to be companies where government had a share holding of 51% or
34
Legal control of statutory boards by Chuma Himonga and edited by Muna Ndulo, p211
35
Companies Act schedule 1.
36
See chapter 7

18
more.37 What this meant was that unlike statutory corporations, parastatals would have
minority shareholders who were purely private and with no relationship with government
whatsoever except in the business sense as co-shareholders.

Sources of Finance
The main source of operational funds for statutory corporations are largely monies
appropriated to them by Parliament. In addition, the resources may consist inter-alia, of
money paid for services rendered, and money paid as grants or donations, though money
sourced outside the Republic would be approved by the Minister on behalf of
Government.38
On the other hand and in contrast to corporations, parastatals raise their capital funds by
allotting shares, by borrowing from private or public lenders, by issuing debentures or by
investing retained earnings. They do not get free money such as appropriations by
Parliament as in the case of statutory corporations, though it is true to state that when it is
in the public interest, directly or indirectly, government does subsidize parastatals.39

Audits
The empowering Act authorized the Board to appoint independent auditors for statutory
corporations over and above that, the Auditor General, in exercising powers conferred
upon her or him by article 21 of the constitution can at any given time audit the accounts
of such statutory corporations.
As for parastatals the appointment of auditors is done in a general meeting pursuant to the
provisions of the articles and it is rare that the auditor general does intervene especially
when a sizeable component of shareholding is private.

Dividends40
Dividends are paid on the premise of existence of shares and business organization
having made a profit. While some statutory organizations are expected to operate on
sound commercial principles and as a consequences of that to post a surplus, to the extent
that there is no shareholding, they do not pay dividends, and it is deliberated that the
37
Towards Complete Independence, policy speech by Dr Kaunda, 1969 at UNIP National Council
38
Law in Zambia by Muna Ndulo, pp 212
39
Ibid
40
See also Chapter 7

19
excess of income over expenditure is conveniently called surplus as opposed to profit in
order to blur the overriding profit motive which characterizes parastatals.

On the other hand, parastatal organizations comprise shareholders who have invested
their money in the company and will normally expect the directors to declare a dividend
in good financial years when the company has posted a profit.

Termination of the Business Activity

Because the statutory corporation is created by statute, the entity comes to wit by statute.
It follows therefore that in the same way Parliament can also legislate for its death. This
is in contrast with parastatal companies which can only come to an end through a
procedure outlined in the Companies Act, that is to say by liquidation whether voluntary
or compulsory.41

Conclusion
While the development of statutory corporations can be traced to pre-independent
Zambia beginning from as early as 1949 when Act no 25 Cap 463 gave birth to Rhodesia
Railways, most statutory corporations in the Republic were formed after independence
and so were the parastatals. Statutory corporations in the main were made to create an
infrastructural base and provide services to the public so as to accelerate development in
the newly independent Republic. Parastatals on the other hand were created to enable
government participate in all sorts of business ranging from trading ( for example, the
former ZCBC and NIEC) to engineering (for example LENCO) in order to transform the
structure of the economy which was mainly in the hands of the settlers. This was done
through expropriation with compensation in most cases by government taking majority
shareholding in most of the enterprises.

Today while a number of statutory corporations still do exist most of those that are
commercially oriented have been concessioned such as Zambia Railways, leaving those
that provide services directly to Government and the public at large. 42 Most of these
changes came with democratization and the conditionalities imposed by the bilateral and

41
Companies Act, Part 13
42
These include Zambia Revenue Authority, NAPSA, and Bank of Zambia

20
multilateral lenders including the IMF and the World Bank who felt that these institutions
were a drain on public resources through the system of subsidies. The majority of them
were not to being run efficiently and were making losses. Today most parastatals have
been privatized with the exception of a few such as ZESCO and ZANACO which are yet
to be privatized.
There are also other companies engaged in banking, building society, insurance business
and mining, which until the privatization era were either run by State or regulated by
specific statute or both regimes. Banking business in Zambia is generally regulated by
the Banking Act, Cap…. However, all commercial banks do also carry on their business
as companies incorporated under the Companies Act Cap 388, (the Bank of Zambia Act
and the Development Bank of Zambia (D.B.Z) Act respectively. Both banks are state
agencies. The Zambia State Insurance Corporation Ltd (ZSIC) is incorporated under the
Cap. 388 and until recently monopolised the insurance business in the country under the
authority of the Insurance Act, Cap 705. The Zambia National Building Society (ZNBS)
monopolises the business of building societies under the regulations of the Building
Societies Act, Cap 412 of the Laws of Zambia. Some of these Companies are statutory
corporations while others are parastatal organizations. It depends on how they were
registered.

CHAPTER 2

NATURE OF A COMPANY

The first chapter discussed various forms of business organization in Zambia and gave a
background to development in company law reforms which gave the Zambian
Government and indigenous Zambians opportunity to participate in the economic affairs
of the country. We now turn to types of companies that may be incorporated under Cap
388, the Companies Act, hereafter called the Act.

Types of a company

21
There are two types of companies that may be incorporated under the Act, being a private
company and a public company. By section 13 a company incorporated under the
Companies Act may be a private company, or a public company with or without shares,
with limited liability, or unlimited liability.

Public Company
The Act defines public company as a company incorporated as such 43 with a share
capital.44 In other words, a public company is one whose articles state that it is a public
company and is registered as such. In addition, it must have a share capital.

Further, the articles of a public company are required to state45:

(a) the rights, privileges, restrictions and conditions attaching to each class of shares,
if there are two or more classes; and
(b) the authority given to the directors to determine the number of shares in, the
designation of, and the rights, privileges, restrictions and conditions attaching to
each series in a class of shares, if the class of shares may be issued in series.

Shares can be divided into different classes, each with its own rights as to dividends,
voting, and other restrictions, conditions and privileges. Modern company law has
invented more attractive types of company securities such as “futures” which allow
investors to speculate in or bet on fluctuations in the market price of shares or indices of
such prices46.

Thus all shares in a public company rank equally unless they are divided into different
classes or series47. That is, there is a par value to each share in a company at allotment
and the value is usually stated in the articles of association of the company.

43
section 2
44
Section 14 (1)
45
Section 14 (2)
46
subject of shares and the various type of classes and the rights attached to each class are discussed in
greater detail in ch 8
47
section 14 (3)

22
Where shares are traded on a stock exchange, the market determines the price. The Act
provides that upon being wound up, a member shall be liable to contribute only to the
amount, if any unpaid on the shares held by her and him48.

A public company has no restrictions on the maximum number of members. Any

person may subscribe for shares in a public company which may be listed on the Stock
Exchange, such as Chilanga Cement Plc, Zambia Sugar Company, Zambia American
Tobacco. Shares are therefore transferable freely.

By subsection (5) of Section 14 the articles of a public company shall not impose any restriction
on the right to transfer any shares of the company other than-
(a) a restriction on the right to transfer any shares on which there is unpaid liability;
(b) a restriction on the right to transfer shares issued to directors or other officers or
employees exercising any rights or options granted under section seventy-three, or
issued in pursuance of any scheme adopted under that section; or
(c) a provision for the compulsory acquisition, or rights of first refusal, of shares
referred to in paragraph (b), in favour of other members of the company or trustees
appointed under any scheme adopted under section seventy-three.
Section 15. (1) puts a restriction on commencement of business by a public company. It states
that a public company shall not transact any business, exercise any borrowing powers or incur
any indebtedness, except for a purpose incidental to its incorporation or to the obtaining of
subscription to, or payment for, its shares, unless the Registrar has issued it with a certificate
under this section.
By subsection 2 the Registrar shall issue a company with a certificate for the commencement of
business if, on an application made to him or her in the prescribed form by the company and
accompanied by a statutory declaration, he is satisfied that the nominal value of the company's
allotted share capital is not less than the authorised minimum, being K2,000,000 49. The terms
‘nominal and authorized’ capital are used interchangeably to denote the amount of share capital
which the company is authorized to issue, not what it has actually issued. Thus since the
minimum authorized capital is K2,000,000, the allotted share capital shall not be below that
figure.

48
section 14 (4) and section 266 (1)
49
section

23
Subsection (3) requires the statutory declaration to be in the prescribed form and to be signed by
a director or secretary of the company and to state the following:
(a) that the nominal value of the company's allotted share capital is not less than the
authorised minimum;
(b) the amount paid up at the time of the application on the allotted share capital of the
company; and
(c) the amount, or estimated amount of the preliminary expenses that have been paid or are
payable.

By Section 15 (5) the Registrar may accept the statutory declaration as prima facie evidence of
the matters stated therein.

Section 15 (4) takes cognizance of employee (or local) participation in business ventures. It
provides that a share allotted in pursuance of an employee’s share scheme shall be disregarded in
determining the nominal value of the company’s allotted share capital unless it is paid up at least
as to one quarter of the nominal value of the share and the whole of any premium on the share.

The general law is that it is unlawful for a company to give financial assistance to a
person for the purpose of purchasing its own shares or those of its holding company.
The main purpose is to preserve and not reduce the share capital of the company, and to
secure the interests of the creditors and other shareholders. This safeguard protects
secured creditors more than the unsecured, and also depends on the ranking or order of
priority for repayment.

The Companies Act however, allows a company to give financial assistance to employees
under an employee share scheme. However, not to abrogate from the rule against
reduction of share capital, the law will disregard in determining the nominal value of the
company’s allotted share capital, an employee’s share if not “paid-up at least as to the
one quarter of its nominal value and the whole of any premium on the share50”.

Consequences of contravening minimum capital requirements relating to

commencement of business51.

50
To issue shares at a premium is to issue them at a price above par or nominal value
51
Capital is discussed in detail in chapter ….

24
The Registrar’s certificate for the commencement of business issued under section 15 is
conclusive evidence that the company has complied with the requirements stipulated in
the Act and is therefore entitled to do business and exercise any borrowing powers.52

Consequences of doing business and exercising borrowing powers without the certificate
of authorization will result in the company and officer in default, being guilty of a
criminal offence, and being liable on conviction, to a fine not exceeding thirty monetary
units for each day that the company does business or remains indebted.53

Further, if a company enters into a transaction in contravention of the Act and fails to
meet its obligation thereunder within thirty days of being called upon to do so, its
directors shall be jointly and severally liable to indemnify the other party to the
transaction for any loss or damage suffered by such party by reason of the failure to
comply with those obligations.54

Private Company
The second type of company that may be incorporated under the Act is the private
company. Whereas section 13 provides that a company incorporated under the
Companies Act may be a public company, or a private company with or without shares,
with limited liability, or unlimited liability, it further provides that a private company is
of three types: (1) a private company limited by shares (2) a company limited by
guarantee; or (3) an unlimited company.

Private Company Limited by Shares

A private company is one which by its articles of association limits the number of its
members to a specified number, being a number not more than fifty. 55 In the case of a
private company limited by shares, if there are joint holders of shares, they shall be
counted as one person. Further, members who are also employees of the company shall
not be considered as members in determining numbers for the purpose of compliance
with the “fifty” statutory limitation. In effect a private company with a large workforce
52
Section 15 (b)
53
Section 15 (7). A monetary unit is…
54
section 15 (8)
55
Section 16 (1) and (4).

25
and several joint holders can have as large a membership as one hundred and this could
be used as a mode of evading compliance with annual returns required of public
companies. Private companies are usually formed to enjoy the advantages of limited
liability for family business, and are most favoured for small ventures which may even be
assimilated to partnerships and for companies which are subsidiary to other companies.

Liability of members in a private company limited by shares

By section 17, the articles of a private company limited by shares are required to state
(1)(a) the rights, privileges, restrictions and conditions attaching to each class of shares,
if there are two of more classes; and
(b) the authority given to the directors to determine the number of shares in, the
designation of, and the rights, privileges, restrictions and conditions attaching to
each series, if a class of shares may be issued in series.
(2) All shares shall rank equally apart from differences due to their being in different
classes or series.
(3) Where a private company limited by shares is wound-up, a member shall be liable to
contribute, in accordance with Part XIII, an amount not exceeding the amount, if any,
unpaid on the shares held by him.

And by section 18 (1) the company shall not transact any business, exercise any
borrowing powers or incur any indebtedness, except for a purpose incidental to its
incorporation or to the obtaining of subscription to, or payment for, its shares unless:

(18(1)(a) consideration (whether in cash or otherwise) to the value of not less than fifty thousand
kwacha, or such larger or smaller amount as may be prescribed instead, has been paid
to it for the issue of its shares; and
(b) it has furnished to the Registrar a declaration signed by one of the directors or by the
secretary, stating that the requirement of paragraph (a) has been compiled with.

(2) For the purposes of subsection (1), the value of-

(a) the goodwill of a business; or
(b) services rendered or to be rendered to the company; shall not be counted.

26
The effect of subsection 18(2) is that payment for shares may be in cash or kind, but kind
will not include the good will of a business nor services. This is because of the
possibility of over-valuing, with the result of watering down the value of shares.
However, the same consideration is not extended to property, yet property too could be
over valued to represent full paid up shares when its value is not equivalent to the par
value. The Act does not even provide for independent evaluation of the property. The
court cannot question the value of the property that is accepted by the company, as it is
trite contract law that consideration that has been accepted does not have to be adequate.56

Conversion of a private company limited by shares to company limited by

guarantee

A private company limited by guarantee may be converted to guarantee. This is possible

under section 30 which reads:

30. (1) A private company limited by shares may be converted into a company limited by
guarantee if-
(a) there is no unpaid liability on any of its shares;
(b) all its members agree in writing to such a conversion;
(c) a special resolution amending the articles to satisfy section nineteen is passed, if
the articles do not satisfy that section; and
(d) each member makes a declaration of guarantee .
Further, a private company limited by shares may be converted to an unlimited
company57.

Conversion of a private company limited by shares to a public company

Furthermore, it is possible under the Act to convert a private company limited by shares
to a public company. This has already been discussed with respect to exceeding statutory
limits of membership and offer of shares to the public in contravention of the Act.

Private companies limited by guarantee

This is a company which has no share capital and is limited by guarantee. It is a private
company which by its articles, the liability of its members is limited to such amounts as
56
See also re Wragg Limited 1897 1 Ch 796
57
see page 11 supra (chapter 1)

27
the members under take to contribute the assets of the company in the event of its being
wound up. In that event, each member undertakes to make a specific contribution to the
assets of the company for debts incurred during his or her membership, or within one
year of ceasing to be a member. There is also provision for the debts and liabilities of the
company contracted before a member ceased to be a member, as well as costs, charges
and expenses of winding up and sums necessary for adjusting the rights of
contributories58 amongst themselves.

A company limited by shares has a share capital while a company limited by guarantee
may or may not have share capital. In Zambia, companies limited by guarantee have no
share capital and are generally employed as non-profit making enterprises such as
charitable or faith based organizations, for example Gospelink limited, or other social
institutions like the David Kaunda Foundation limited. The rationale for this is that
members of a company limited by guarantee whose object is charity are able to carry on
their business without committing much money to it, except the money intended for the
charitable work. The Act provides that a company limited by guarantee shall not carry on
business for the purpose of profits for its members or for any one concerned in its
promotion or management.59 If a company limited by guarantee contravenes this
provision, the Act provides that:

19 (7) (a) those officers and members of the company who wilfully authorise or permit the
business to be carried on for that purpose shall be jointly and severally liable for
the payment and discharge of all debts and liabilities of the company incurred in
carrying on the business so authorised or permitted; and
(b) each of the officers and members referred to in paragraph (a) shall be guilty of an
offence, and shall be liable on conviction to a fine of not more than thirty
monetary units for each day on which that business is carried on.
19 (8) If the company fails to comply with subsection (4), the company, and each
officer in default, shall be guilty of an offence, and shall be liable on conviction

58
A contributory is a past and present member of a company liable to contribute to the assets of a company
upon its being wound up, the maximum liability being the amount of guarantee see section 19(1). In a
company limited by shares the maximum is the amount unpaid on the shares.
59
Section 19 (5)

28
 to a fine not exceeding three monetary units for each day that the failure
continues.

The Act provides that each subscriber to an application for incorporation as a company
limited by guarantee shall sign a declaration of guarantee specifying the amount that he
or she undertakes to contribute to the assets of the company in the event of its being
wound up.60

Further, the Act requires each subscriber to the application for incorporation, to be a
member of the company upon its incorporation. 61 Therefore a person shall become a
member of the company on approval by a resolution of the company by signing a
declaration of guarantee and delivering it to the company 62. A person shall cease to be a
member of the company by delivering to the company a signed notice in writing to that
effect.63

Within seven days of becoming or ceasing to be a member of the company limited by

guarantee, the company is required to lodge with the Registrar a notice in the prescribed
form showing such status. In the case of a notice of becoming a member, there must also
be a declaration of guarantee by the person.64

Conversion of company limited by guarantee to company limited by shares or

unlimited company

A company limited by guarantee may be converted to an unlimited company. This

provided for in section 32 which reads as follows:

32. A company limited by guarantee may be converted into a company limited by shares
or an unlimited company if-
(a) all the members agree in writing-
(i) to convert the company into such a company; and

60
section 19 (1)
61
section 19 (2)
62
section 19 (3) (a)
63
section 19 (3) (b)
64
section 19 (4)

29
 (ii) to a share capital for the company and the division thereof into
shares of fixed amounts; and
(b) each member agrees in writing to take up a specified number of shares.

An unlimited company
The Companies Act of 1994, Cap 388 introduced another type of company, the unlimited
company. This company has a share capital. However, there is no limit on the members’
liability to contribute to the assets of the company if, in the event that it is wound up, its
assets are insufficient to cover its liabilities. This means also, that the members’ liability
extends to their personal chattels. This is the oldest type of registered company in
England. The exemption from publication of an unlimited company’s accounts given by
the Companies Act of England, 1967 inter alia, made them quiet popular65. The fact of
extension of members’ liability to their personal chattels probably also made it easier for
the company to borrow money from financial institutions.

An unlimited company is one which also limits its members to fifty, but it may subject to
specified conditions, limit the number of its members to a number over and above fifty 66.
Before the current law of 1994, the former Companies Act did not provide for unlimited
Companies, in spite of being based on the British Acts (in succession since 1855) 67. The
provision permitting registration of a company with unlimited liability complicates rather
than simplify the law.

However, creditors or would be creditors should welcome this type of company as they
can pursue the directors, managers and members of the entity for their personal assets
without limit. On the other hand, members or subscribers should be worried and ensure
strict control and limitation of directors and managers powers. The Act itself makes
provision for conversion of a private company limited by shares to one that is unlimited.

Conversion of private company limited by shares to unlimited company

65
Charlesworth and Morse: Company Law, 16th ed Sweet & Maxwell 1999 at p 30. Other privileges
include return of capital to members without the consent of court; the company’s documents can provide
for it to purchase its own shares
66
Section 16 (2)
67
Southern Rhodesia Ordinance no. 2 of 1895

30
By Section 31. A private company limited by shares may be converted into an unlimited
company if all its members agree in writing to its conversion.

In the case of an unlimited company becoming limited, Professor Gower could not
express it better when he says in the case:
“it is not the members who need special safeguards but the creditors”

This possibility means that whereas creditors could pursue managers, directors and
members for recovery of their dues, they are suddenly limited to the amounts the
directors, managers and members state in the new articles.

Conversion of unlimited company to private limited company

Section 33 provides as follows:

(1) An unlimited company may be converted into a private company limited by shares or
a company limited by guarantee if-
(a) all its members agree in writing to its conversion;
(b) a special resolution amending the articles to satisfy section seventeen or
nineteen, as appropriate, is passed, if the articles do not satisfy section
seventeen and nineteen, as appropriate; and
(c) each member makes a declaration of guarantee, in the case of conversion
to a company limited by guarantee.
(2) In the case of a conversion to company limited by shares, the special resolution may
(a) increase the nominal amount of the company's share capital by increasing
the nominal amount of each of its shares, subject to the condition that no
part of the increased capital shall be capable of being called up except in
the event and for the purposes of the company's being wound-up; or

(b) provide that a specified portion of its uncalled share capital shall not be
capable of being called up except in the event and for the purpose of the
company's being wound-up.

Methods of conversion from one type of company to another

To convert from on type of company to another, provided a special resolution has been
passed and the conversion sections have been fulfilled, the company is required to lodge

31
with the Registrar within 21 days an application in the prescribed form for conversion
according to the resolution passed by the company. The application should be
accompanied by:
(a) the company's certificate of incorporation;
(b) a copy of each paragraph in the articles affected by any amendment, in
its amended form;
(c) a copy of the special resolution or written agreement by the members
referred to in the conversion section;
(d) the declarations of guarantee by each member, if the company is being
converted to a company limited by guarantee;
(e) a statutory declaration by a director and the secretary of the company
stating-
(i) that the conditions of the conversion section have been complied with;
and
(ii) that in their opinion the company is solvent;
(f) a certificate by the auditors of the company, made not more than three
months before the date of the application, that they have investigated the
affairs of the company and that the company is solvent at the date of the
certificate;

(g) certified copies, certified by a director and the secretary of the company, of
every balance sheet, profit and loss account, group accounts, directors' report
and auditors' report sent to the members of the company in the preceding
twelve months, if the company is being converted from a public company to
a private company and has been incorporated as a public company for more
than fifteen months.

Upon being satisfied that there has been compliance with the requirements of the Act, the
Registrar shall, on receiving the application:

(a) issue a replacement certificate of incorporation in the prescribed form

worded to meet the circumstances of the case and stating the date of
conversion of the company; and

32
 (b) make such entries in such registers as he considers appropriate.

On and from the date stated in the certificate as the date of conversion, the following
shall be the case:
(a) the company shall be converted into a company of the status sought;

(b) if the company is being converted from a company with share capital to a
company limited by guarantee, the shares therein shall be validly
surrendered and cancelled notwithstanding section seventy-six;

(c) the articles of the company shall be amended in accordance with the
documents lodged with the application; and
(d) where this Act requires different words to be the last words of the name
of a company of the new status, the name of the company shall be
changed accordingly.

COMPANY LAW
Separate Legal Personality

Salomon v Solomon and Co Ltd

[1897] AC 22 (HL)
Mr Salomon sold his business as a leather merchant and wholesale boot manufacturer to a
limited company with a nominal capital of 40 000 shares of ₤1 each. The only
shareholders in the company were Mr Salomon himself, his wife, a daughter and four
sons, who subscribed for one ₤1 share each. In part payment of the purchase-money
debentures were issued to Mr Salomon. 20 000 shares were also issued to him and paid
for out of the purchase-money. He was appointed managing director.

33
When a year later the company was wound up, it was found that if the amount realized
for the assets of the company would be, in the first place, applied in payment of Mr
Salomon’s debenture, there would be no funds left for payment of the ordinary creditors.

The liquidator, alleging that the company was a mere alias or agent of Mr Salomon,
claimed the vendor was liable to indemnify the company against the claims of the
ordinary creditors, and that no payment should be made on the debentures held by him
until the ordinary creditors had been paid in full. He succeeded in the Court of Appeal.
It held that the company was Mr Salomon in another form who had employed the
company as his agent. In consequence the company was entitled to be indemnified by
him.

On appeal, the House of Lords reversed.

LORD HARSBURY LC:[30]. . . It seems to me impossible to dispute that once the

company is legally incorporated it must be treated like any other independent person with
its rights and liabilities appropriate to itself, and that the motives of those who took part
in the promotion of the company are absolutely irrelevant in discussing what those rights
and liabilities are.

I will for the sake of argument assume the proposition that the Court of Appeal lays down
– that the formation of the company was a mere scheme to enable Aron Salomon to carry
on business in the name of the company. I am wholly unable to follow the proposition
that this was contrary to the true intent and meaning of the Companies Act. I can only
find the true intent and meaning of the Act from the Act itself; and the Act appears to me
to give a company a legal existence with, as I have said, rights and liabilities of its own,
whatever may have been the ideas or schemes of those who brought it into existence.
...
I observe that the learned judge (Vaughan Williams J) held that the business was Mr
Salomon’s business, and no one else’s, and that he chose to employ as agent a limited
company; and he proceeded to argue that he was employing that limited company as
agent and that he was bound to indemnify that agent (the company). I confess it seems to

34
me that very learned judge becomes involved by this argument in a very singular
contradiction. Either the limited company was a legal entity or it was not. If it was, the
business belonged to it and not to Mr Salomon. If it was not, there was no person and no
thing to be an agent at all; and it is impossible to say at the same time that there is a
company and there is not.

LORD MACNAGHTEN: [50] . . . The order of the learned judge appears to me to be

founded on a misconception of the scope and effect of the Companies Act 1862. In order
to form a company limited by shares, the Act requires that a memorandum of association
should be signed by seven persons [now two persons in England 68], who are each to take
one share at least. If those conditions are complied with, what can it matter whether the
signatories are relations or strangers? There is nothing in the Act requiring that the
subscribers to the memorandum should be independent or unconnected, or [51] that they
or any one of them should take a substantial interest in the undertaking, or that there
should be anything like a balance of power in the constitution of the company. In almost
every company that is formed the statutory number is eked out by clerks or friends, who
sign their names at the request of the promoter or promoters without intending to take any
further part or interest in the matter.

When the memorandum is duly signed and registered, though there be only seven shares
taken, the subscribers are a body corporate ‘capable forthwith’, to use the words of the
enactment, ‘of exercising all the functions of an incorporated company’. Those are
strong words. The company attains maturity on its birth. There is no period of minority
– no interval of incapacity. I cannot understand how body corporate thus made ‘capable’
by statute can lose its individuality by issuing the bulk of its capital to one person,
whether he be a subscriber to the memorandum or not. The company is at law a different
person altogether from the subscriber 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 he same hands receive the profits, the company is not in law
the agent of the subscribers are trustee for them. Nor are the subscribers as members

68
Also two person under S of Cap 388 of the laws of Zambia

35
liable, in any shape or form, except to the extent and in the manner provided by the Act.
That is, I think, the declared intention of the enactment. If the view of he learned judge
was sound it would follow that no common law partnership could register as a company
limited by shares without remaining subject to unlimited liability. . . .

. . . Among the principal reasons which induce persons to form private companies. . . are
the desire to avoid the risk of bankruptcy, and the increased facility afforded for
borrowing money. By means of a private company a trade can be carried on with limited
liability, and without exposing the persons interested in it in the event of failure to the
harsh provisions of the bankruptcy law. A company, too, can raise money on debentures,
which an ordinary trader cannot do. Any member of a company, acting in good faith is
as much entitled to take and hold the company’s debentures as any outside creditor.
Every creditor is entitled to get and to hold the best security the law allows him to
take. . .]. . . It has become the fashion to call companies of this class ‘one man
companies’. That is a taking nickname, but it does not help one much in the way of
argument. If it is intended to convey the meaning that a company which is under the
absolute control of one person is not a company legally incorporated, although the
requirements of the Act may have been complied with, it is inaccurate and misleading; if
it merely means that there is a predominant partner possessing an overwhelming
influence and entitled practically to the whole of the profits, there is nothing in that that
in can see contrary to the true intention of the Act or against public policy, or detrimental
to the interests of creditors.

Consequences of separateness

Dadoo Ltd v Krugersdorp Municipal Council69

1920 AD 530
Under certain legislation Asiatics were prohibited from owning immovable property in
the Transvaal but nothing was said as to Asiatic companies. In 1915 the company of

69
A South African case. The decision in Dadoo caused the apartheid regime to make special provision for
companies controlled by non-whites or members of disqualified groups, e.g the Group Areas Act 36 of
1966, Section 1, SV “controlling interest’, “disqualified company” , “disqualified person’.

36
Dadoo Ltd, was registered in the Transvaal, with a share capital of 150 shares, of which
one Mahomed Mamojee Dadoo held 149, and one Dindar held the other one. Both
Dadoo and Dindar were Asiatics. The court (De Villiers JA dissenting) held that the
statutory prohibition did not apply to companies even though their shares were held by
Asiatics.

INNES CJ: [550]. . . Taking the intention then [of the legislature] to be the prohibition of
ownership of fixed property by Asiatics and the prohibition of the acquisition and the
occupation of mining rights by coloured people, I come to inquire whether the transaction
complained of is a contravention of the statutes. In other words, whether ownership by
Dadoo Ltd, is in substance ownership by its Asiatic shareholders. Clearly in law it is
not. A registered company is a legal person 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 merely 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.

Macaura v Northern Assurance Co Ltd

[1925] AC 619 (HL(Ir))
The appellant, the owner of a timber estate, assigned the whole of the timber to a
company known as the Irish Canadian Saw Mills Ltd, the total amount to be paid to him
for the timber being ₤42 000. Payment was effected by the allotment to the appellant or
his nominees of 42 000 fully paid ₤1 shares in the company. No further shares than these
were ever issued. The company proceeded with cutting of the timber. In the course of
these operations the appellant became the creditor of the company for ₤19 000. Beyond
this the debts of the company were trifling in amount. The appellant insured the timber
against fire by policies effected in his own name. The timber was destroyed by fire. The
insurance company refused to pay out on the ground that the plaintiff had no insurable
interest in the timber, and was upheld in this contention by the court.

37
LORD SUMNER: [630] My Lords, this appeal relates to an insurance on goods against
loss by fire. It is clear that the appellant had no insurable interest in the timber described.
It was not his. It belonged to the Irish Canadian Saw Mills Ltd of Skibbereen, Co. Cork.
He had no lien or security over it and, though it lay on his land by his permission, he had
no responsibility to its owner for its safety, nor was it there under any contract that
enabled him to hold it for his debt. He owned almost all the shares in the company, and
the company owed him a good deal of money, but, neither as creditor nor as shareholder,
could he insure the company’s assets. The debt was not exposed to fire nor were the
shares, and the fact that he was virtually the company’s only creditor, while the timber
was its only asset, seems to me to make no difference. He stood in no ‘legal or equitable
relation to’ the timber at all. He had no ‘concern in’ the subject insured. His relation was
to the company, not to its goods, and after the fire he was directly prejudiced by the
paucity of the company’s assets, not by the fire. . . .

Disregarding the separate existence of the Corporate Entity

Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd

[1916] 2 AC 307
The plaintiff company (the Continental Tyre and Rubber Company) was incorporated in
England for the purpose of selling in England tyres made in Germany by a German
company which held the bulk of the shares in the English company. The holders (save
one) and all the directors were Germans resident in Germany.
After the outbreak of war between England and Germany in 1914, the plaintiff sued the
defendant company (the Daimler Company) for payment of a trade debt. The defendant
company alleged that the plaintiff company was in alien enemy company and that
payment of the debt would be a trading with the enemy.
The plaintiff’s action was dismissed on a point of procedure, but in the course of their
judgments four of the Lords of Appeal in Ordinary expressed themselves in favour of the
view that a company could be an alien enemy.

LORD PARKER OF WADDINGTON: [337]. . . The principle upon which the judgment
under appeal proceeds is that trading with an incorporated company cannot be trading

38
with an enemy where the company is registered in England under the Companies Acts
and carries on its business here. Such a company it calls an ‘English company’, and
obviously likens to a natural-born Englishman, and accordingly holds that payment to it
of a debt which is due to it, and of money which is its own, cannot be trading with the
enemy, be its corporators who they may. The view is that an English company’s enemy
officers vacate their office on becoming enemies and so affect it no longer, and that its
enemy shareholders, being neither its agents nor its principals, never in law affect it at all.
My lords, much of the reasoning by which this principle is supported is quite
indisputable. No one can question that a corporation is a legal person distinct from its
corporators; that the relation of a shareholder to a company, which is limited by shares, is
not in itself the relation of principal and agent or the reverse; that the assets of the
company belong to it and the acts of its servants and agents are its acts, while its
shareholders, as such, have no property in the assets and no personal responsibility for
those acts.
. . . I do not think, however, that it is a necessary corollary of this reasoning to say that
the character of its corporators must be irrelevant to the character of the company; and
this is crucial, for the rule against trading with the enemy depends upon enemy character.
A natural person, though an English-born subject of His Majesty, may bear an enemy
character and be under liability and disability as such by adhering to His Majesty’s
enemies. If he gives them active aid, he is a traitor; but he may fall far short of that and
still be invested with enemy character. . . . Voluntary residence among the enemy,
however passive or pacific he may be, identifies an English subject with His Majesty’s
foes.
. . . In the case of an artificial person what is that analogue to voluntary residence among
the King’s enemies? Its impersonality can hardly put it in a better position than a natural
person and lead to its being unaffected by anything equivalent to residence. . . .
My Lords, I think that the analogy is to be found in control, an idea which, if not very
familiar in law, is of capital importance and is very well understood in commerce and
finance. The acts of a company’s organs, its directors, manager, secretary, and so forth,
functioning within the scope of their authority, are the company’s act and may invest it
definitely with enemy character. It seems to me that similarly the character of those who

39
can make and unmake those officers, dictate their conduct mediately or immediately,
prescribe their duties and call them to account, may also be material in a question of the
enemy character of the company. . . . For certain purposes a court must look behind the
artificial persona – the corporation – and take account of and be guided by the
personalities of the natural persons, the corporators. . . .
. . . My Lords, having regard to the foregoing considerations I think the law on the
subject may be summarized in the following propositions:
(1) A company incorporated in the United Kingdom is a legal entity, a creation of law
with the status and capacity which the law confers. It is not a natural person with mind
and conscience. To use the language of Buckley LJ, ‘it can be neither loyal nor disloyal.
It can be neither friend nor enemy’.
(2) Such a company can only act through agent properly authorized, and so long as it is
carrying on business in this country through agents so authorized and residing in this or a
friendly country it is prima facie to be regarded as a friend, and all His Majesty’s lieges
may deal with it as such.
(3) Such a company may, however, assume an enemy character. This will be the case if
its agents or the persons in de facto control of its affairs, whether authorized or not, are
resident in an enemy country, or wherever resident, are adhering to the enemy or taking
instructions from or acting under the control of enemies. A person knowingly dealing
with the company in such a case is trading with the enemy.
(4) The character of individual shareholders cannot of itself affect the character of the
company. This is admittedly so in times of peace, during which every shareholder is at
liberty to exercise and enjoy such rights as are by law incident to his status as
shareholder. It would be anomalous if it were not so also in a time of war, during which
all such rights and privileges are in abeyance. The enemy character of individual
shareholders and their conduct may, however, be very material on the question whether
the company’s agents, or the persons in de facto control of its affairs, are in fact adhering
to taking instructions from, or acting under the control of enemies.

The Ultra vires doctrine

Ashbury Railway Carriage and Iron Co v Riche

40
(1875) LR 7 HL 653
The memorandum gave the company powers to make and sell railway carriages. The
directors entered into a contract to purchase a concession for constructing a railway in
Belgium. The question was whether this contract was valid or, if not, whether it could be
ratified by the shareholders. It was held that it could not be ratified by the unanimous
assent of the whole corporation.

LORD CAIRNS: [666]. . . A contract of this kind was not within the words of the
memorandum of association. In point of fact it was not a contract in which, as the
memorandum of association implies, the limited company were to be employed, they
were the employers. They purchased the concessions of a railway – an object not at all
within the memorandum of association; and having purchased that they employed, or
they contracted to pay, as persons employing, the plaintiffs in the present action, as the
persons who were to construct it. That was reversing entirely the whole hypothesis of the
memorandum of association, and was the making of a contract not included within, but
foreign to, the words of the memorandum of association. . .
The provisions under which that system of limiting liability was inaugurated, were
provisions not merely, perhaps I might say not mainly, for the benefit of the shareholders
for the time being in the company, but were enactments intended also to provide for the
interests of two other very important bodies; in the first place, those who might become
shareholders in succession to the persons who were shareholders for the time being; and
secondly, the outside public, and more particularly those who might be creditors of
companies of this kind. . .
. . . [The] mode of incorporation . . . contains in it both that which is affirmative and that
which is negative. It states affirmatively the ambit and extent of vitality and power which
by law are given to the corporation, and it states if it is necessary so to state, negatively,
that nothing shall be done beyond that ambit, and that no attempt shall be made to use the
corporate life for any other purpose than that which is so specified. . .
. . . The memorandum of association is as it were, the area beyond which the action of the
company cannot go; inside that area the shareholders may make such regulations for their
own government as they think fit. . .

41
. . . The question is not as to the legality of the contract; the question is as to the
competency and power of the company to make the contract. Now, I am clearly of
opinion that this contract was entirely, as I have said, beyond the objects in the
memorandum of association. If so, it was thereby places beyond the powers of the
company to make the contract. If so, my Lords, it is not a question whether the contract
ever was ratified or was not ratified. If it was a contract void at its beginning, it was void
because the company could not make the contract. If every shareholder of the company
has been in the room, and every shareholder had said, ‘That is a contract which we desire
to make, which we authorize the directors to make, to which we sanction the placing seal
of the company,’ the case would not have stood in an different position from that in
which it stands now. The shareholders would thereby, by unanimous consent, have been
attempting to do the very thing which, by the Act of Parliament, they were prohibited
from doing.
But, my Lords, if the shareholders of this company could not ab ante have authorized a
contract of this kind to be made, how could they subsequently sanction the contract after
it had, in point of fact been made?
. . . It appears to me that it would be perfectly fatal to the whole scheme of legislation to
which I have referred, if you were to hold that, in the first place, directors might do that
which even the whole company could not do and that then, the shareholders finding out
what had been done, could sanction subsequently, what they could not antecedently have
authorized.
...
. . . This contract, in my judgment, could not have been ratified by the unanimous assent
of the whole corporation.

Attorney-General v Mersey Railway Co

[1907] 1 Ch 81 (HL)
BUCKLEY J: [99]. . . To ascertain whether any particular act is ultra vires . . . or not the
main purposes must be first be ascertained; then the special powers for effectuating that
purpose must be looked for and then, if the act is not within either the main purpose as
described in or the special powers expressly given by the statute, the inquiry remains

42
whether the act is incidental to or consequential upon the main purpose and is a thing
reasonably to be done for effectuating it. . . . By way of illustration, let me suppose that
the main purpose founded in the statute or in the memorandum of association of a
statutory company is to establish and carry on an hotel, and that express power is given to
buy land at a particular place and to build, and that as to anything further the statute or
memorandum of association is silent. It is quite clear law that all such acts as are
reasonably necessary for effectuating that purpose are intra vires, such, for instance, as
the purchase of furniture, and linen, of provisions and of wines and spirits, the hiring of
servants, the payment of licences, the ownership probably of horses and carriages, the
maintenance and working of an omnibus which shall attend at the railway station to take
intending guests to the hotel and the like. In a large number of cases the maintenance of
a garden and pleasure grounds would be intra vires. . . . The maintenance of tennis lawns
or of a bowling green would, in many circumstances, be legitimate. Under circumstances
such as presently put a golf links might be intra vires. All these and the like will without
express mention be within the company’s powers. Then I may instance other acts as to
which it would be a question of fact in the case of the particular hotel whether it was such
an act as was reasonably incidental or consequential. If, for instance, the hotel were at
Bundoran or Rosapenna or elsewhere in the country of Donegal it might be intra vires to
lay out and maintain in good order a golf links or to acquire rights of fishing and to own
boats and supply gillies for the purpose of fishing upon the lakes. It may be that in the
particular locality custom could only be reasonably expected or obtained by offering
those attractions, and they might be as necessary as a smoking-room or a bowling green
elsewhere. If the hotel in question were the Savoy Hotel in the Strand or the Green
Central Hotel in the Marylebone Road the proposition would cease to be true. So, again,
if the hotel were situate in a place inaccessible unless special means of communication
were provided- say, at a lovely spot at the end of a Scotch loch to which there is no road,
or at a place to which there is access by road but which is not served by any coach or mail
cart service – it might be intra vires for that hotel to run a steam launch or a motor car to
bring its guests to their destination. It would in such a case be analogous to the omnibus
which the hotel in the country town sends to the railway station. The question is in each
case a question of fact. Is the particular act as to which it is in question whether it is intra

43
vires an act which in the circumstances of that particular case is incidental to or
consequential upon or reasonably necessary for effectuating the main purpose which the
statute defines.

The Turquand Rule

Royal British Bank v Turquand
(1856) 6 E & B 327, 119 ER 886
The Royal British Bank sued Turquand as the official manager of a coal mining and
railway company on a bond, signed by two directors, whereby the company
acknowledged itself to be bound to the Royal British Bank in an amount of ₤2 000.
Under the constitution of the Coalbrook Company, the directors might borrow on bond
such sums as should from time to time, by a general resolution of the company, be
authorized to be borrowed, and the defendant pleaded that there had been no such
resolutions.

JERVIS CJ: [888]. . . The deed allows the directors to borrow on bond such sums of
money as shall from time to time, by a resolution passed at general meetings of the
company, be authorized to be borrowed: and the replication shows a resolution, passed at
a general meeting, authorizing directors to borrow on bond such sums for such periods
and at such rates of interest as they might deem expedient, in accordance with the deed of
settlement and the Act of Parliament; but the resolution does not otherwise define the
amount to be borrowed. That seems to me enough. If that be so, the other question does
not arise. . . . We may now take for granted the dealings with these companies are not like
dealings with other partnerships, and that the parties dealing with them are bound to read
the statute and the deed of settlement. But they are not bound to do more. And the party
here, on reading the deed of settlement, would find, not a prohibition from borrowing, but
a permission to do so on certain conditions. Finding that the authority might be made
complete by a resolution, he would have a right to infer the fact of a resolution
authorizing that which on the face of the document appeared legitimately done.

Wolpert v Uitzigt Properties (Pty) Ltd

1961 (2) SA 257 (W)

44
Action was instituted for provisional sentence on four promissory notes for ₤1 500 each.
Each of the promissory notes bore the rubber stamp of the defendant company, and below
that the signature ‘T McAlpine,’ the name of one of its directors, followed by the word
‘director.’ The company denied liability on the ground that the notes had not been signed
by all its directors as required by its articles. The action for provisional sentence failed.

CLAASSEN J: [262]. . . In the present case the board of directors of the first defendant
were by art 47 (h) given the power:

‘To determine who shall be entitled to sign on the Company’s behalf bills, notes,
receipts, acceptances, endorsements, cheques, releases, contracts and documents’.
It is therefore clear that a single director or any other person, even the office boy, could
have been given authority to sign a promissory note on behalf of the company. Would a
third party dealing with a single director be justified, without enquiry, in assuming that
such a single director would have authority to bind the company? And would the
company in fact be bound where, as in a case like the present, it has not been proved on a
balance of probabilities that such authority has been given?
I fail to see on what principle anyone with either express or constructive knowledge of an
article such as 47 (h) can assume that if he deals with anyone who purports to action on
behalf of a company that particular person is a person who has been authorized under the
article in question. After all, all he is entitled to assume is that someone has been
appointed, but how can he assume that a specific person or persons have been appointed?

In such a case where A purports to act for the company I cannot conceive of any principle
which can debar a company from denying that A has been appointed. Why should a
company in this respect be different from an ordinary human being? Everyone knows
that any person may appoint an agent to act for him. But that does not stop the principal
denying that he had appointed a particular agent who purports to act for him. . .
. . . If a company’s official is acting within the usual authority of that type of agent the
company is normally bound and the articles are only relevant if they make it clear that he
had no actual authority. If any further formal act of internal management is required this
can be assumed to have taken place by reason of the Turquand rule. If the act is outside

45
the usual scope of authority mere knowledge that actual authority might have been
conferred on the official is not sufficient to estop the company and the consequences of
omina praesumuntur rite ac solemniter esse acta do not help the third party. He must
enquire further and either ensure that the official has actual authority or elicit some facts
which estop the company from denying it. And these further facts would, probably, have
estopped the company (unless the articles made it clear that the official could not have
had actual authority) even if they had been elicited without any actual exploration of the
articles, which therefore continued to be irrelevant.
Two questions arise:

(a) When does one deal with or contract with a company?

(b) Who are the apparent agents of a company?

In my opinion a party deals with or contracts with a company when he does so through
the following apparent agencies of the company:

(1)The board of directors. . . .

The board is ordinarily the organ of a company vested with plenary authority on matters
intra vires the company. There is therefore no difficulty in applying the Turquand rules
in cases where the board has contracted.
(2)(a) The managing director. See Bygerstaff v Rowatt’s Wharf Ltd [[1896] 2 Ch 93]
concerning which case it was said in Haughton &Co v Norhard Lowe and Wills Ltd
[[1928] AC 1]; ‘But there the agent whose authority was relied on had been acting to the
knowledge of the company as a managing director, and the act done was one within the
ordinary ambit of the powers of a managing director in the transaction of the company’s
affairs. It is I think clear that the transaction there would not have been supported had it
not been in this ordinary course, or had the agent been acting merely as one of the
ordinary directors of the company.’ In the case SA Securities Ltd v Nicholas [1911 TPD
450] the head-note says:

‘Unless the articles of association of a company restrict the powers which the
directors may delegate to a managing director, anyone dealing bonafide with the

46
 managing director is entitled to assume that he has all the power which his
position as such ostensibly would give him.’

(b)The chairman of the board of directors, where the circumstances are such that it can
be assumed that he was in a position equivalent to that of a managing director. There
seems to be no reason why a chairman should not be treated as an ordinary director. And
a party dealing with such a director without actual authority from the board or the
managing director usually does so at his peril.
(3) Any person or persons such as an ordinary director, a branch manager, a secretary, a
committee of directors or a combination of a director and secretary, who have express or
implied authority. Such implied authority can be inferred, when the official acting on
behalf of the company purports to exercise an authority which that type of official usually
has even though the official is exceeding his actual authority. . . but the company would
not be bound:
(i) If the person or persons so acting acted beyond their usual authority. If they did, the
third party may still be protected under section 4 below.
(ii) If the party knew that the official was acting beyond his actual authority.
(iii) If the circumstances are such as to put him on inquiry.
(iv) If the registered documents of the company make it clear that the official concerned
has no actual authority.

Under this heading it would, in my opinion, be irrelevant whether the third party knew
the contents of the registered documents of the company or not.

(4) Those mentioned under (3) in circumstances where they have had ostensible
authority. That is to say, they had no actual authority which such officials usually have,
but the company is estopped from denying such authority. Such estoppel operates where

(i) the company (not the official acting for the company) has represented the official
as having authority.
(ii) the party relied on such representation and
(iii) he altered his position by reason of such reliance.

47
Under this heading the third party cannot rely on the registered documents of the
company. . . . in his favour, unless he knew about them and relied on them.
In all the above cases (1) to (4) the Turquand rule can be applied so that if any one of the
enumerated agents had contracted with the third party, but there was still an act of
internal organization not completed in order to complete the necessary authority, the
company would be bound.
It is also necessary to draw attention to the fact that the position of an ordinary director
may vary from company to company. In some companies, particularly in large public
companies, he usually only attends boards meetings, and only takes part in the decisions
of the board, but he takes no part in the internal running of the affairs of the company. In
other companies again, and that is often true of private companies, the ordinary director
besides attending board meetings, also takes an active part in the day-to-day running of
the affairs of the company. If that is the case, he may also have some managerial
functions and then his implied or ostensible authority would be wider than in the case of a
director who merely attends board meetings.
Looking back to what I have written it seems to me quite clear that the agencies
mentioned under (1) and (2) above, are merely instances of agencies having express or
implied authority; because if the third party is dealing with the board of directors as a
whole or a managing director he will usually be safe, since it is usual to confer the widest
power of management on those organs, but if he deals with a single director he will not
normally be protected, because a single director usually has no authority to bind the
company.
Coming now to the facts of the present case, it is clear that McAlpine was an ordinary
director. It was not contended that he has ostensible authority. On my findings he did not
have express authority. So all that is left, is to enquire whether on the facts implied
authority can be inferred.
The mere fact that McAlpine used the company’s rubber stamp does not in the
circumstances lead to an inference that he had implied authority. No course of dealing
has been set out in the papers. The only person who could inform the court as to how it
came about that he used the stamp of the company was McAlpine, and he has remained

48
silent on the point. In terms of s 90 of the Bills of Exchange Proclamation it is express or
implied authority which entitles a person to use a company’s stamp. It cannot be argued
that because he used it, therefore he must have had express or implied authority. If he
had authority then he could have bound the company without using the stamp by merely
printing in the name of the company and signing as a director.
I therefore come to the conclusion that McAlpine did not have implied authority to bind
the company nor was it contended that he did have such authority. Provisional sentence
must therefore be refused.

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd

[1964] 1 ALL ER 630 (CA)
Kapoor, a property developer, and Hoon formed a private company which purchased
Buckhurst Park Estate. The board of directors consisted of Kapoor, Hoon, a nominee of
Kapoor’s, and a nominee of Hoon’s. The articles of the company contained power to
appoint a managing director, but none was appointed. Kapoor, though never appointed as
such, acted as managing director. He instructed the plaintiffs, a firm or architects, to do
certain work for the company, which they did. The court held that the company was
liable for their fees.

DIPLOCK LJ: The county court judge made the following findings of fact: (1) that the
plaintiffs intended to contract with Kapoor as agent for the company, and not on his own
account; (2) that the board of the company intended that Kapoor should do what he could
to obtain the best possible price for the estate; (3) that Kapoor, although never appointed
as managing director, had throughout been acting as such in employing agents and taking
other steps to find a purchaser; (4)that Kapoor’s so acting was well known to the board. .
..
The county judge did not hold (although he might have done) that actual authority had
been conferred upon Kapoor by the board to employ agents. He proceeded on the basis
of apparent authority, that is, that the defendant company had so acted as to be estopped
from denying Kapoor’s authority. This rendered it unnecessary for the judge to inquire
whether actual authority to employ agents has been conferred upon Kapoor by the board

49
to whom the management of the company’s business was confided by the articles of
association.
It is necessary at the outset to distinguish between an ‘actual’ authority of an agent on the
one hand, and an ‘apparent’ or ‘ostensible’ authority on the other. Actual authority and
apparent authority are quite independent of one another. Generally they co-exist and
coincide, but either may exist without the other and their respective scopes may be
different. . . .
An ‘actual’ authority is a legal relationship between principal and agent created by a
consensual agreement to which they alone are parties. Its scope is to be ascertained by
applying ordinary principles of construction of contracts, including any proper
implications from the express words used, the usages of the trade, or the course of
business between the parties. To this agreement the contractor is a stranger; he may be
totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if
the agent does enter into a contract pursuant to the ‘actual’ authority, it does create
contractual rights and liabilities between the principal and the contractor. . . .
An ‘apparent’ or ‘ostensible’ authority, on the other hand, is a legal relationship between
the principal and the contractor created by a representation, made by the principal to the
contractor, intended to be and in fact acted upon by the contractor, that the agent has
authority to enter on behalf of the principal into a contract of a kind within the scope of
the ‘apparent’ authority, so as to render the principal liable to perform any obligations
imposed upon him by such contract. To the relationship so created the agent is a
stranger. He need not be (although he generally is) aware of the existence of the
representation but he must not purport to make the agreement as principal himself. The
representation, when acted upon by the contractor by entering into a contract with the
agent, operates as an estoppel, preventing the principal from asserting that he is not
bound by the contract. It is irrelevant whether the agent had actual authority to enter into
the contract.
In ordinary business dealings the contractor at the time of entering into the contract can in
the nature of things hardly ever rely on the ‘actual’ authority of the agent. His
information as to the authority must be derived either from the principal or from the agent
or from both, for they alone know what the agent’s actual authority is. All that the

50
contractor can know is what they tell him, which may or may not be true. In the ultimate
analysis he relies either upon the representation of the principal, that is apparent
authority, or upon the representation of the agent, that is warranty of authority.
The representation which creates ‘apparent’ authority may take a variety of forms of
which the commonest is representation by conduct, that is, by permitting the agent to act
in some way in the conduct of principal’s business with other persons. By so doing the
principal represents to anyone who becomes aware that the agent is so acting that the
agent has authority to enter on behalf of the principal into contracts with other persons of
the kind which an agent so acting in the conduct of his principal’s business has usually
‘actual’ authority to enter into.
In applying the law as I have endeavoured to summarise it to the case where the principal
is not a natural person, but a fictitious person, namely a corporation, two further factors
arising from the legal characteristics of a corporation have to be borne in mind. The first
is that the capacity of a corporation is limited by its constitution, that is, in the case of a
company incorporated under the Companies Act, by its memorandum and articles of
association; the second is that a corporation cannot do any act, and that includes making a
representation, except through its agent.
The second characteristic of a corporation, namely, that unlike a natural person it can
only make a representation through an agent, has the consequence that in order to create
an estoppel between the corporation and the contractor, the representation as to the
authority of the agent which creates his’ apparent’ authority must be made by some
person or persons who have ‘actual’ authority from the corporation to make the
representation. Such ‘actual’ authority may be conferred by the constitution of the
corporation itself, as, for example, in the case of a company, upon the board of directors,
or it may be conferred by those who under its constitution have the powers of
management upon some other person to whom the constitution permits them to delegate
authority to make representations of this kind. It follows that where the agent upon
whose ‘apparent’ authority the contractor relies has no ‘actual’ authority from the
corporation to enter into a particular kind of contract with the contractor on behalf of the
corporation, the contractor cannot rely upon the agent’s own representation as to his
actual authority. He can rely only upon a representation by a person or persons who have

51
actual authority to manage or conduct that part of the business of the corporation to
which the contract relates.

The commonest form of representation by a principal creating an ‘apparent’ authority of

an agent is by conduct, namely by permitting the agent to act in the management or
conduct of the principal’s business. Thus, if in the case of a company the board of
directors who have ‘actual’ authority under the memorandum and articles of association
to manage the company’s business permit the agent to act in the management or conduct
of the company’s business, they thereby represent to all persons dealing with such agent
that he has authority to enter on behalf of the corporation into contracts of a kind which
an agent authorized to do acts of the kind which he is in fact permitted to do usually
enters into in the ordinary course of such business. The making of such a representation
is itself an act of management of the company’s business. Prima facie it falls within the
‘actual’ authority of the board of directors. . .

If the foregoing analysis of the relevant law is correct, it can be summarized by stating
four conditions which must be fulfilled to entitle a contractor to enforce against a
company a contract entered into on behalf of the company by an agent who has no actual
authority to do so. It must be shown70:

(1) that a representation that the agent had authority to enter on behalf of the
company into a contract of the kind sought to be enforced was made to the
contractor;
(2) that such representation was made by a person or persons who had ‘actual’
authority to manage the business of the company either generally or in respect
of those matters to which the contract relates;
(3) that he (the contractor) was induced by such representation to enter into the
contract, that is, that he in fact relied upon it; and

70
[In view of the provisions of s 35 of the English Companies Act 1985 as substituted by s 108 of the
Companies Act 1989, and s 36 of the South African Companies Act of 1973, and section of Zambia the
question whether the contract was ultra vires the company is, as a rule, no longer relevant].

52
 (4) that under its memorandum or articles of association the company was not
deprived of the capacity either to enter into a contract of the kind sought to be
enforced or to delegate authority to enter into a contract of that king to the agent.

The confusion which, I venture to think, has sometimes crept into the cases is in my view
due to a failure to distinguish between these four separate conditions, and in particular to
keep steadfastly in mind (a) that the only ‘actual’ authority which is relevant is that of the
persons making the representation relied upon, and (b) that the memorandum and articles
of association of the company are always relevant (whether they are in fact known to the
contractor or not). . . .

In each of the relevant cases the representation relied upon as creating the ‘apparent’
authority of the agent was by conduct in permitting the agent to act in the management
and conduct of part of the business of the company. Except in Mahony v East Holyford
Mining Co Ltd [(1875) LR 7 HL 869] it was the conduct of the board of directors in so
permitting the agent to act that was relied upon. As they had, in each case, by the articles
of association of the company full ‘actual’ authority to manage its business, they had
‘actual’ authority to make representations in connection with the management of its
business, including representations as to who were agents authorized to enter into
contracts on the company’s behalf. The agent himself had no ‘actual’ authority to enter
into the contract because the formalities prescribed by the articles for conferring it upon
him had not been complied with. In British Thomson-Houston Co v Federated European
Bank Ltd [[1932] 2 KB 176] where a guarantee was executed by a single director, it was
contended that a provision in the articles, requiring a guarantee to be executed by two
directors, deprived the company of capacity to delegate to a single director authority to
execute a guarantee on behalf of the company, that is, that condition (4) above was not
fulfilled; but it was held that other provisions in the articles empowered the board to
delegate the power of executing guarantees to one of their number, and this defence
accordingly failed. In Mahony’s case no board of directors or secretary had in been
appointed, and it was the conduct of those who, under the constitution of the company,
were entitled to appoint them which was relied upon as a representation that certain
persons were directors and secretary. Since they had ‘actual’ authority to appoint these

53
officers, they had ‘actual’ authority to make representations as to who the officers were.
In both these cases the constitution of the company, whether it had been seen by the
contractor or not, was relevant in order to determine whether the persons whose
representations by conduct were relied upon as creating the ‘apparent’ authority of the
agent had ‘actual’ authority to make the representations on behalf of the company. . . .

The cases where the contractor’s claim failed. . . were all cases where the contract sought
to be enforced was not one which a person occupying the position in relation to the
company’s business which the contractor knew that the agent occupied would normally
be authorized to enter into on behalf of the company. The conduct of the board of
directors in permitting the agent to occupy that position, upon which the contractor relied,
thus did not of itself amount to a representation that the agent had authority to enter into
the contract sought to be enforced, that is, condition (1) was not fulfilled. The contractor,
however, in each of these three cases sought to rely upon a provision of the articles
giving to the board power to delegate wide authority to the agent as entitling him to treat
the conduct of the board as a representation that the agent had had delegated to him wider
powers than those usually exercised by persons occupying the position in relation to the
company’s business which the agent was in fact permitted by the board to occupy. Since
this would involve proving that the representation on which he in fact relied as inducing
him to enter into the contract comprised the articles of association of the company as well
as the conduct of the board, it would be necessary for him to establish first that he knew
the contents of the articles (that is, that condition (3) was fulfilled in respect of any
representation contained in the articles ) and secondly that the conduct of the board in the
light of that knowledge would be understood by a reasonable man as a representation that
the agent had authority to enter into the contract sought to be enforced, that is that
condition (1) was fulfilled.

In the present case the findings of fact by the county court judge are sufficient to satisfy
the four conditions, and thus to establish that Kapoor has ‘apparent’ authority to enter
into contracts on behalf of the company for their services in connection with the sale of
the company’s property, including the obtaining of development permission with respect
to its use. . . .

54
I think the judgment was right, and would dismiss the appeal.

CHAPTER 2

COMPANY FORMATION

Until 1994 when Zambia enacted a new Companies Act the rules regulating formation of
companies limited by shares or guarantee closely resembled those of the UK contained in
their Companies Acts 1948 and 1967. Effectively the company comes into being on the
formal registration with the Registrar of Companies, on payment of registration fees, of
lodgment of the necessary formal documents, comprising mainly of copies of the
articles of association duly signed by initial subscribers for the shares. Any two or more
persons associated for any lawful purpose may, by subscribing their names to an
application for incorporation and otherwise complying with the requirements of the
Companies Act (hereinafter referred to as Cap 388) in respect of registration, incorporate
a company. Upon due lodgment of the necessary documents namely the proposed
articles of the association of company the statutory declaration of compliance by either
the advocate engaged in the formation of the company or a company director or secretary
a signed consent from each person named in the application as a director or secretary of
the company to act in the relevant capacity the registrar shall issue a certificate of
incorporation. If a company is to be limited by guarantee, a declaration of guarantee by
each subscriber must also accompany the application.

A statutory declaration of compliance that the requirements of the Act (Cap 388) in
respect of corporation and matters incidental thereto has been complied with must be
made by:
(i) a legal practitioner having certificate who valid practicing in the formation of
the company; or

55
 (ii) a person named in the application or incorporated as a first Director or
secretary of the company, a signed consent from each person named in the
application as a director or secretary of the company to act in the relevant
capacity
Further, section 6 (2) provides that the application is required to be in the prescribed
form, which must be signed by each subscriber specifying:

(a) the proposed name of the company

(b) the physical postal address of the office to be the registered office of the company
(c) the postal address to be the registered postal address of the company
(d) the type of company to be formed
(e) if the company is to have a share capital,
(i) the amount of share capital
(ii) the division of the share capital into shares of a fixed amount
(iii) the number of shares that each subscriber agrees to take:
(f) the particulars of at least two persons who are to be the first directors of the
company giving the following
a. forenames and surnames
b. any former and surnames
c. residential address and postal address
d. business or occupation, if any
e. nationality and national registration card number of foreign passport
number
f. any directorship held by the persons in another body corporate,
whether or not formed in Zambia, at any time during the previous 5
years
g. any local directorship held by the persons in a foreign company at
anytime during the previous 5 years.
h. Any secretaryship held by the person in another body corporate
whether or not formed in Zambia, at any time during the previous
lodging the application is also required to give their name and address,

56
 and such other information respecting the application the company and
the nature of the proposed business as the prescribed form may
require.

All documents of incorporation shall be printed or typed, and signed by each subscriber
in the presence of at least one witness attest to the signature.

Any one is eligible to subscribe to an application for incorporation except:

(a) a person under the age of 18 years
(b) an un-discharged bankrupt under the Bankruptcy Act of Zambia, Cap
(c) or under the laws of another country
(d) a person who is not of sound mind.

By section 6 (7) the incorporation of a company by a person who contravenes the above
provisions section 6 (6) does not render the incorporation invalid.

For a company having its liability limited by shares as already pointed out, the liability of
its members is limited to the amount, if any, unpaid on the shares held by them. A
company whose liability is limited by the articles limited by guarantee, the liability of its
members is limited to such amounts as the members undertook to contribute to the assets
of the company in the event of it being wound up. In that event, by each member
undertakes to make a specific contribution to the assets of the company while the person
is member, or within one year of ceasing to be a member. There is also provision for the
debts and liabilities of company contracted before the member ceased to be a member
costs, charges, and expenses of winding up, sums necessary for adjusting the rights of
contributories amongst themselves.

A company limited by shares has capital while a company limited by guarantee may or
my not have share capital. In Zambia, Companies limited by guarantee are generally
employed as non-profit making enterprises such as charitable or faith based
organizations, for example Gospelink limited, or other social institutions like the David
Kaunda Foundation limited. The rationale for this is that members of a company limited

57
by guarantee whose object is charity are able to carry on their business without
committing much to it.

A company limited by shares may be private or public. Private companies are usually
formed to obtain the advantages of limited liability for family business. This type of
company usually caters for small ventures which may even be assimilated to
partnerships, and also for companies which are subsidiary to other companies. A
statutory definition of a private company shows that it restricts the right to transfer its
shares, and limits the number of its members to fifty (not including persons who are in
the employment of the company or who have continued after such employment to be
members of the company). It is also prohibited from inviting the public to subscribe for
any of its shares or debentures. If a private company fails to comply with these statutory
provisions, it will lose the status and privileges accorded to private companies under Cap.
388.

In exercising the power conferred by Section 14 the company must do so in a general

meeting71 and that power may be exercised only if the articles allow it. Any future copy
of the company’s articles shall comply with and bear the alteration otherwise both the
company and every director of that company who knowingly and willfully permits the
default to subsist shall be liable to a fine not exceeding …….for every copy in respect of
which default is made. Section 14 (3) states clearly that a cancellation of shares under
this section shall not be deemed to be a reduction of share capital within the meaning of
the Act. In other words, such a cancellation is in fact a reduction of capital except that it
does not follow the formalities laid down under section 15 of the Act intend primarily for
the reduction of share capital. So the difference between cancellation of shares under
Section14 and the reduction of share capital under Section 15 of Cap 686 lies not in effect
(because this is the same in both cases) but rather in the procedure72.

The third situation in which alteration may be effected to the company is where the
company wishes to change its name. This is governed by Section 13 of Cap 388, and it

71
S14 (2) and (4) of Cap. 686.
72
See ibid SS 15 to 20 for the procedure in the reduction of share capital.

58
requires a special resolution to be passed to that effect, as well as approval of the Minister
of Commerce and Industry.

(i) THE ARTICLE OF ASSOCIATION

As mentioned above Section 111 of Cap 388 provides that:

“Subject to the provisions of this Act and to the conditions contained in the
memorandum of association, any company may, in general meeting from time to
time by passing a special resolution, alter all or any of the regulations of the
company contained in the articles of association or in Table A where such table is
applicable to the company, or make new regulations to the exclusion of, or in
addition to, all or any of the regulations of the company, and any regulations so
made by special resolution shall be deemed to had been originally contained in
the articles of association, and shall be subject in like manner to be altered or
modified by any subsequent special resolution”.

It is clear from this provision that so long as the company secures the passing of a special
resolution under S112 of the Act it may alter its articles of association having regard, to
the provisions of the Companies Act and also those of the articles of association.

CONCLUSION

The above discussion has given details of some statutory provisions governing certain
aspects of the internal structure of a company and its alteration. It may be said therefore
that anything else that pertains to internal corporate structure is a matter for agreement
between the shareholders inter se. It is at this juncture that entrenchment of special
provisions to suit the motives and purposes of shareholders comes into play. It is at this
point when the general principle of majority rule attains or losses its efficacy in matters
of management and control and financing of limited liability companies.

PROCEDURE FOR INCORPORATION

59
The articles are required to be delivered to the Registrar of Companies for registration 73.
On the registration of the registration of the articles the Registrar issues a Certificate of
incorporation. In the case of limited liability company the registrar must certify under his
or her hand that the Company is limited. From the date of incorporation mentioned in the
certificate of incorporation, the subscribers to the articles together with such other
persons as may, from time to time, become members of the company, shall be a body
corporate by the name contained in the articles. This means that the entity acquires for
itself a totally separate legal personality, and is capable of exercising all the powers of an
incorporated company with powers to own property, to hold land and having perpetual
succession, and a common seal74. Among documents to be tendered for registration in
the process of incorporating the company is a statutory declaration by an advocate
engaged in the formation of the company, or by a person named in the articles as a
director or secretary of the company. In this declaration the signatory avers that all the
requirements under the Act relating to incorporation of the Company have been complies
with75. The Registrar may accept such a declaration as sufficient evidence of compliance.
The language of Section 33 seems to suggest that the Registrar has discretion in deciding
whether or not to accept such a statutory declaration. At the same time, it may be
suggested that if the document is presented to the Registrar in due form he cannot have
any choice but to accept it.

The issuance of a certificate of incorporation by the Registrar of Companies is according

to S34 of Cap 388 “conclusive evidence that all the requirements of the Companies Act
in respect of registrar” have been complied with. Thus, unlike the practice in some of the
US States, France, Belgium and Italy, all English and therefore Zambia Companies are
corporations because in these countries there is no hierarchy of companies whose
incorporation is, in one way or another, defective, it would appear therefore that even if a
company were irregularly incorporated 76, or some objects which were unlawful 77, or

73
Ibid, S.32
74
Ibid, S. 34
75
Ibid, S. 33
76
See Re Barned’s Banking Co. Peels Case (1867) 2 ch. App. 674; See also Oakes v. Turquand and
Harding (1867) L.R. 2H.L. 325
77
Princess of Reuss v. Bros (1871) L.R. 5 H.L. 176

60
indeed, was not supposed to registered under Cap 388 at all 78 the subscribers would still
be deemed to have agreed to its constitution as shareholders. Thus on the face of S34 the
conclusiveness of the issued certificate of incorporation of a corporation or a company
renders any plea of any of the above-mentioned factors immaterial. It is submitted that
such position of company law on the conclusive nature of the certificate of incorporation
has been diluted by the decision of the courts in England. For example, where
registration is obtained by fraud or mistake, or induced by promoters of company, the
Registrar shall have the power to rectify such registration. This line of reasoning was
followed in the case of the Re C.L. Nye Ltd79. In that case the mortgagees solicitor had
neglected to register a charge in time; when it was presented for registration it appeared
to be in order as he had been able to insert a more recent but false date. The document
was accepted for registration and a certificate issued, but it was set aside by the court.

Thus citing some cases80 Professor Pennington81 asserts that the issue of a certificate of
incorporation does not legalise any activity which is unlawful under general law, neither
does it validate any provision of the company’s memorandum or articles which conflicts
with the general law, for example, a mandatory provision of the Companies Act. The
term “general law” is an embracing one and depending on prevailing circumstances of
each case it is possible for a member or creditor of a company to seek a remedy from the
Courts.

Besides the remedy under the general law as referred to above it is also possible to
frustrate the efforts of a company incorporated with unlawful objects by having either
member or creditor petitioning the court to wind up the company on the grounds that it is
just and equitable that it be wound up.82 In England sections 165 (b) (i) and 169 (3) of
eth 1948 Act empower the Board of Trade, after it has appointed an inspector to
investigate the company’s affairs and the latter reports adversely on the legality of the

78
Hammond v. Prentice Brothers Ltd (1920) 1 Ch. 201
79
(1969) 2 W.L.R. 1380
80
See Ayre v. Skelsey’s Adamant Cement Co. Ltd (1904) 20 T.L.R. 587, affirmed (1905) 21 T.L.R. 464;
and also Gaiman v. National Association for Mental Health (1970) 2 All E.R. (1971) Ch. 317.
81
See Pennington’s Company Law 3rd P. 36
82
See S. 137 (f) of Cap. 686, similar to S222 (f) of the English Companies Act 1948. See also Princess of
Rues v. Bros (Supra). See further below in this chapter a discussion on winding up of companies in
Zambia.

61
purposes for which it was formed, to petition the court to wind up such company under
the same ground as mentioned above. In Zambia, although section 118 of Cap 388 gives
power to the Ministry of Commerce and Industry to appoint one more competent
inspector to examine the affairs of the company and to report thereon, the Act does not
allow the Minister to act on his own initiative. He can only do so upon an application
being made to him by members holding not less than fifth of the issued share capital. It
seems therefore that, unlike the English Board of Trade, the Zambia Minister of
Commerce cannot petition the court under S 118 of Cap. 686. However, it appears that
the applicant members can use the inspector’s report as evidence admissible in any legal
proceedings in relation to any matter contained therein. 83; so that this may not only relate
to the legality of the company’s objects but also to other matter affecting them. Under
English common law it has been suggested that if a company’s certificate of
incorporation was improperly issued, the Attorney General can either lodge an
application to a Divisional Court of the Queen’s Bench Division for an order of certiorari
to quash the certificate of incorporation. 84 The rules of the law and procedure governing
the application for and issuing of the various Writes or Orders at Common law were
imported into the Zambia legal system in to, and so they still remain85.

CONSEQUENCES OF INCORPORATION (1)

Reading list number 5

Corporate Personality.

S 34

Gower 4

Legal Entity and distinct from Members

The corporation is a legal entity distinct from its members. Hence it is capable of

enjoying nights and of being subject to duties which are not the same as enjoyed or borne
83
84
Bowman v. Secular Society Ltd (1917) A.C. 406, at p.439
85
See general Professor C.P. Gupta’s Cases and Materials on the Administrative law of Zambia; unprinted
teaching materials, University of Zambia, Law School, Lusaka.

62
by its members. In other words it has a legal personality and is thus an artificial person

as constructed with a natural person.

See Salomon’s case and essay on what is a company

Limited Liability

A corporation is a separate person that its members are not as such liable for its debts.

Hence in the absence express provision to the country, the members will be completely

free from any personal liability.

However, under the Act nobody is completely absent from liability. The liability can be

limited by shares or guarantee. In the case of a company limited by shares, each member

is liable to contribute when called upon to do so the nominal value (in money or money’s

worth) of the shares held by him in so far as this has not been already paid by him.

In the case of a guarantee each member is liable to a specific amount to the assets of the

company in the event of its ……………while he is a member or 12 months after he

closes to be a member. In both cases in fact, the member without being directly liable to

the company’s creditor, is a limited guarantee of the company’s debts.

When a company incurs debts, it is the company which is liable, although it is the

members who will have ultimately contributed monies to enable the company to

discharge its debts. In a company limited by shares, the members liability will be limited

to the sum unpaid by them on their nominal shares. However, today their shares are

likely to be paid up if they will be under no further liability. If limited by guarantee the

members are under no liability till at the time of winding up.

63
In contrast, an incorporated association not being a legal person cannot be liable, so that

only officials, who act on its behalf or the individual member if officials have actual

apparent authority, are bend.

A limited company is generally preferred. It enables the liability of all the members to be

limited without on the part which they play in the management.

Property
One of the most obvious advantages of corporate personality is that it enables the

property of the association to be clearly distinguished from that of its members.

Members have no property rights to the company’s property but merely to their shares.

On change of membership, the shares will be transferred but the property will not, and

the company’s creditors can claim this property or bankruptcy.

Suing and being Sued

Next important are questions relating to legal actions. The company as a legal person can

take action to enforce its rights or be sued for breach of its legal duties.

Perpetual Succession
An artificial person cannot be incorporated by illness, mental or physical. As for Lord

Greer in STEPNEY CORP V OSOFKY (1937) 3 ALL ER 289 C.A. a corporate body has

no “soul to be saved or body to be kicked”. The death of a member leaves a company

unmoved; members may come and go but the company can go on forever. Even if a

managing director loses his sanity, this will not be cal…….to the company provided he is

quickly removed. As per Lord Gower p 76 (Principles ….) he may be the company’s

……, but lobotomy is simply operation than on a natural person.

64
The company’s con……of existence, irrespective of changes its membership, is helpful

in other directives:

1. When a member dies, he or his estate can be paid out by the company. His

personal representative or trustee sells his shares, and the purchaser takes his

place.

2. when a member sells his business to another, there are no problems e.g.

relating to the existence of the new proprietor or the validity of contract’s

(agreements) made with …….ignorant of the change in proprietorship. The

company remains the proprietor of the business. It performs the existing

contracts and retains the benefit of them, and the company continues to enter into future

agreements.

Transferable Shares
Incorporation greatly facilitates transfer of shares. Freedom to transfer, both legally and

practically, can be readily attained. The company can be incorporated with its liability

limited by shares, but these can be freely transferred in the absence of express provision

to the contrary, and in such a way that the transfer drops out while the transferee steps

into his shoes.

In a private company, there are restrictions imposed by the company’s Act. Usually,

these restrictions are so stringent that transferability is largely illusory. In a partnership,

transferability depends on express agreement and is subject to legal and practical limited

whereas in a company it exists to the fullest extent in the absence if express restriction.

65
The partnership relationship is essentially personal and in practice this may be varied also

by a private company. On the other hand the relationship between members of a public

company is, as we had seen in chapter 1. Essentially impersonal and …..a hence there is

no reason to restrict changes in membership.

CONSEQUENCES OF INCORPORATION: II

The Ultra Vires Principles

Gower Ch 5

Ashbury Ry carriage v Riche (1875) LR 7HL 653.

Anglo Overseas Agencies v Green (1961) QB1

Beir Houses v City Wall Properties (1965) 3 AER 427

(AC) – 1966 2 AER 674

Introductions ltd v Natural Provincial bank

(1968) 2 AER 1221

Charterbrigde corporation ltd v Lloyds Bank

(1962) 2 AER 1185

A company incorporation under the statute cannot effectively do anything beyond its

powers i.e. exceed its powers, expressly or impliedly conferred upon it by the statute, or

by its memorandum of association. Any “excess” activity will be ineffective, even if

agreed to by all parties.

The purpose of this (objects clause) is twofold:

(i) to protect investors in the company se that they may know those objects for

which their money is to be used.

66
(ii) to protect the creditors by ensuring that the company’s funds, to which they

must look for payments are not dispatched in unauthorized activities,

ASHBURY V RICHE.

This is the ultra-vires doctrine as applied to company’s. the term ultra-vires is also

used to describe the directors of the company when they have exceed powers

delegated to them in the Articles of association.

When a company exceeds its powers, it is not bound by its act because it lacks the

legal capacity to incur responsibility for it. Also the company can not be bound for

ultra-vires transactions by its agents (the directors) who have exceeded their

authority.

A company had been formed under the 1862 Act with the object of carrying on

business as “mechanical engineers and general constructor”. The directors entered

into an agreement for financial the construction of a railway in Belgium. There was

some evidence that this agreement was ratified by all members, but later it was

repudiated by the company. The general …of legal opinion of the time was such that

the question of ratification was not even considered.

Held (H.L) that ratification was legally impossible if the contract was beyond the

scope of the memorandum. The company was not liable since the contract was ultra-

vires the directors as well as the company, and therefore void.

67
 The articles of association define the boundaries of the powers of the directors; while

the boundary of the powers of the company itself is defused by the memorandum of

association.

It was also emphasized in that case that whatever is partly individual is the objects

expressly authorized by the memorandum of association or statute was unless

expressly prohibited, intra-vires. But subject to that limitation whatever is not

expressly v impliedly authorized must be taken to be forbidden and cannot be

undertaken even by ……consent of all the members.

Evasion of the doctrine: The doctrine of ultra-vires was salutary in its intentions and

to some extent, operations. At the time it prevented trafficking in the company’s

registration: it ensued that an investor in a gold mining company did not find himself

holding shares in fried-fish shop, and it gave those who allowed credit to a limited

company some assurance that its assets would not be dissipated in unauthorized

enterprises.

Hardship caused by the doctrine:

(1) Creditors lost money they had lent to a company on an ultra-vires borrowing.

BARONESS V RIVER DEE

(2) It was merely a nuisance in s far as it prevented the company from changing its

activities in a direction upon which all were agreed.

So means to evade it were found. Promoters simply specified in general terms the

business which the company proposed to carry on. The powers “inci…”to the business

68
were not required to be specified as these were implied by law. “Everything reasonably

incidental to the specified objects will be ultra-vires” – AG-Great East RY.

All the same, businessmen felt safer to include some 20 – 30 objects which they might

conceivably want to in future. (schedule 3 of company Act). This made it less hazardous

to enter into transactions with a company, for the likelihood of their being ultra-vires was

remote.

However, this leaves a discrepany by which modern gold mining company have power

under its memorandum association of mining a fried-fish shop (which should be alright if

the shareholders are all agreed).

BELL HOUSES Ltd CITY PROPERTIES LQR 463

The objects clause in this case included the power to carry on any other transaction or

business whatsoever, which can, be in the opinion of the board of directors, be

advantageously carried on by the company in connection with or as ….to any of the

above business or the general business of the company”.

Although this is close to saying that the company can carry on virtually any business it

chose, the court held that it was effective to empower the company to undertake any

business which the director’s bonafida thought could be advantageously carried on as

adjact to its other business, but this may allow directors to carry on business they chose.

69
Attempted ARBS on Evasion

(i)Under the Zambian Act, is it required that each of the objects specified in the

objects class should be independent and in no way anarilly or subordinate one to

another? As required by the English has.

(ii) can shareholders petition the court for the winding up of a company when the

whole substratum has disappeared, so that the court might order liquidation if it is just

a equitable to do so? RE GERMAN COFFEE CO. (1882) Ch D 169.

This affords investors a measure of protection. But also its up to the members, if they

want to continue with other specified activities, they need not petition the court.

But then, is there any remedy for a shareholder in a gold mining company who sees a

waste of assets in a fried-fish shop? Even though that business is covered by the

memorandum of association? In English courts, remedy is only available if the whole

substratum has been destroyed in all main objects have failed.

Result
All these practices frustrate the ultra-vires doctrine. It has ceased to be a protection to

anyone and has become merely a trap for the ….. third party and a nuisance to the

company itself”.

The company can change its objects easily, so long as it complies with Section 12 which

deals with the alteration of the memorandum, and the powers of the court to ensure that

the investors and creditors are agreeable to the alteration.

70
NB: if a transaction is entered into before objects are altered, and the transaction is ultra-

vires, it remains so even if the company later alters; unless the transaction is entered

again, in which case it is not ultra-vires.

But T cannot compel the Company to enter into this second transaction, in order to make

it ultra-vires.

RE JON BEAVFORTE (1953) CH 131 hardship was caused here.

Introductions Ltd V National Provincial Bank

A company formed to make ladies dresses decided to change to the manufacture of

veneered panels, and act which could not be brought within its objects cleanse, however

literally costumed. Steps to alter objects were overtaken. The company entered into a

transaction to construct a factory for the purchase of …., and for the purchase of coke,

but failed in its new enterprise and went into liquidation. The 3 contractors had no

remedy because the transaction was ultra-vires.

Remedies for those who lose under Ultra-Vires Transactions

Tracing: property can be recovered if the owner can identify it. This goes for money too.

The owner’s title is paramount.

SINCLAIR V BOUGHAM (1914) A.C 398 a big society developed its deposit branch in

to a large banking business. The society’s rules authorized unlimited borrowing power

when the society was wound up the assets were sufficient to pay in full the creditors and

the shareholders, but no the depositors. The question of priority between these two

classes arose.

71
Held (1) the borrowing power must be limited to the property objects of the society and

the carrying on of a banking business was ultra-vires, therefore the depositors

could not recover on the contract.

(2) Nor could they recover in quasi- contract for money lend and received since the

fiction of a promise would not be imputed when it would have been ultra-vires

to give it.

(3) The assets remaining after the outside creditors have been paid represented

partly monies which the depositors could trace and partly monies which the

society could trace; and subject to individual applications for tracing orders in

respect pf particular assets, the assets should be distributed pari-passu between

the 2 classes in proportion to the amounts credited to depositors and

shareholders respectively.

See also LINZ V ELECTRIC WIRE COMPANY (1948) AC 371

CLAIM AGAINST DIRECTORS or other agents with whom a T has dealt. SINCLAIR

RE DIPLOCK

Are based on the principle that these agents are quasi-trustees for him. So he has an

equitable claim against them for restitution. Whether he can claim damages depends on

nominal rules of agency.

He may also claim in deceit if authority is willfully misstated, or on a breach of implied

warrant of authority. But lack of authority can be discovered in the memo of association,

a public document unless was intentionally misled.

FIRBANK’S EXECUTORS V HUMPHREYS (1886) 18 B

72
F carried on work for a company and agreed to accept debentures in the company in lieu

of cash. The stock issued to him were in excess of the borrowing powers of the company

and was therefore workless. The directors did not know that they had made an over-

issue. Later the company went into liquidation and could not pay its unsecured creditors

but the valid debenture stock retained its nominal value.

When the plaintiffs discovered that their stock was valueless, they sued the directors to

….they personally liable for the loss.

HELD: F was justified in assuming that the director had power to do what they did; they

impliedly represented that they had authority to issue valid debentures stock; they were

therefore liable in damages for the nominal value of the stock which 7 should have

received.

See also GARRAID V JAMES (1925) CH 616

Ranking as Creditor
If your money has been paid to other creditors, then you rank as creditor to the extent that

you paid the money. The principle put into play is one of subrogation. (L330 Notes).

BARRONETS WENLOCK V RIVER DEE COMPANY (1887) 19 Q.B

The loser can participate as a creditor at the time of the winding up of the company.

Remedies of the Company

1. The company can bring an action against the directors for breach of fiduciary duty

2. The company can also employ the doctrine of tracing, i.e. may recover from the other

party if its property is still in his hands.

73
Formally it was not clear whether in a contract suit for other party could plead that the

KF was ultra-vires the company, in defence. In BELL HOUSES Ltd v CITY WALL

PROPERIES Ltd MOCATTA J at first instance held that he could. But the court of

Appeal did not express opinion on the issue “interesting, important a difficult” as it was.

However the weigh of modern authority supports the view F Mocata J.

ANGLO OVERSEAS AGENCIES V GREEN (1961) 1 Q.B 1

The Objects Clause (S12)

In enacting this provision the legislature had intended that the company’s objects should

be clearly spelt out in one or two paragraphs – hence the objects clause as per T schedule

of the Act, Cap 686. The idea was to let the promoters spell out in general terms the

nature of the company’s business to be undertaken. This involved a lot of implications

especially in regard to matters “incidental” to that business, and the courts …to be liberal

in their interpretation of the rule and agreed everything reasonably incidental to the

mentioned objects will be intra-vires. This exercise of implications did not please

businessmen and they preferred to set out in the memorandum all the ancillary (i.e.

matters incidental to) powers which they would need and the specification of all other

business to which the existing one may resort to in future.

Hence the objects clause and S12 of cap 686 contain quite a number of statements

relating to objects and ancillary powers, covering every conceivable business and all the

incidental matters which might be required to accomplish them. Thus the likelihood of

companies acting ultra-vires when one enters into a transaction with them, is quite

remote.

74
Articles of Association
The articles contain the internal regulations of a company – the prescribed registrations

which bind the members by the provisions of S28 a company limited by shares may

register its articles. A company limited by guarantee must register its articles – Table A

schedule 1.

The articles bind the company and members as if each member had entered into a

contract under seal, promising to conform to all regulations in the articles. The articles

bind members in other capacity as members. Therefore if the articles confer a right on a

person who may or may not be a member in capacity other than that of a member, he

cannot enforce such a right.

ELEY V POSITIVE GOVERNMENT SECURITY LIFE ASSURANCE COMPANY

(1876)

The articles provided that E. should be solicitor to the company and should not be

removed except for misconduct. E because a shareholder. After employing for some

time the companies eventually ceased to do so and sent their work to other solicitors. E

sued for breach of contract on the terms of the articles.

HELD: This article was either a stipulation, which would bind the members, or else a

mandate to the directors; in either case it was a matter between the directors, and

shareholder, and not between them and E, who was not a party to it. There was no

contract, which E could enforce.

75
As a general rule the articles cannot constitute a contract between the company and a

third party. But the rule is subject to qualifications with regard to directors. A director

who is appointed to office is entitled to his right.

The articles are subject to the Act and the memorandum of Association. Thus the articles

can impose conditions on the exercise of rights granted by the Act. The articles cannot

alter or vary provisions in the memorandum of association, which are required to be in

that memorandum by the Act.

Articles cannot be altered in terms of see 111 by way of special resolution. The company

cannot deprive itself of the provisions of the Act by providing hat the articles should not

be altered.

Registration
The documents necessary for registration are the memorandums of association, properly

drawn, and the articles subscribed by the promoters – 7 for a memorandum must be 2 for

a part company. Registration fees must be paid – 25n per K200 of the share capital.

Furthermore, there must be a declaration of compliance signed by a solicitor or a Director

of the company.

The notice of the registered office of the company must be filed with the Registrar. This

can be above at the time of incorporation or after incorporation.

Firs of the directors of the company may be named in the articles of association or

appointed under sec 66 of the Act (see also sec 63 (I).

76
See 63 (2) provides that there must be a formal list of persons who consent to act as

Directors. Section 34 provides that Registration shall issue a certificate of incorporation

of the company. The certificate provides conclusive evidence that the company is

incorporated and the provisions of the Act there have been complied with. The certificate

is conclusive as to the date of incorporation.

In JUBILEE COTTONS MILLS LTD V LEWIS (1924) AC (SEC 23)

JUBILEE COTTON MILLS: The Registrar issued on 8 th January a certificate of

incorporation through the memorandum of association and articles of association had

been filed in on 6th January.

HELD: That the company was validly incorporated on the dates mentioned on the

certificate and consequently a contract made in the company’s name on the following day

was binding on the company and the other party, even though at the time the certificate

had not been actually issued. That an allotment of shares made on 6th January could not

be declared void on the ground that it was made before the company was incorporated.

In COTMAN V BROUGHAM (1918) AC (Sec 23)

Lord Wrenbury said:

“It has arrived now at and point at which the fact is that the function of the memorandum

is taken to be, not to specify, not to disclose, but to bury beneath a mass of words the

object or objects of the company with the intent that every conceivable form of activity

shall be found included somewhere within its terms ….such a memorandum is not, I

think in compliance with the Act.

77
The certificate is not conclusive if a company is incorporated contrary to the Act or any

other Act e.g. if the signatures to the memorandum are less than 7 or 2, or if the

memorandum is not witnessed. Such omissions invalidate the registration. In such as

case registration can be cancelled by application to the court by writs of mandamus and

certioran.

The certificate has been held not to be conclusive as regards legality of the objects of a

company. In BOWMAN V SECULAR SOCIETY (1917) AC the secular society limited

was registered under the company Act as a registered company limited by guarantee.

The main object of the company was to promote …the principle that human conduct

should be based upon natural knowledge and not upon natural super belief, and that

human welfare in this world is the proper end of all thought and action.

The issue was that the company’s objects were illegal and contrary to the policy of the

law and the society was not a association capable of incorporation under the Act (s).

HELD: That it was not illegal in the sense of rendering the company incapable in law of

acquiring property by gift, and that a bequest upon trust for, the secular society was valid.

Lord Parker said:

“By see 1 of the Act, 1900, the society’s certificate was an association authorized to be

registered. The sec does not mean that all or any of the objects specified in the

memorandum, if otherwise illegal, would be rendered legal by the certificate”.

78
The Sec is only concerned with the conclusive validity of the objects listed in the

memorandum. If those objects are regarded as illegal, registration will be cancelled upon

application to the court.

Sec 32 – The Registration is bound to register if the documents conform with the Act.

Can therefore a company compel the Registrar to (conform) register where he has refused

to register? R V REGISTRAR OF JOINT STOCK COMPANIES

In this case a company was formed with a purpose of buying, seeing, dealing in and

turning to account only any ticket or tickets …in lottery in UK or elsewhere. In fact the

company was to be organized for the sale of tickets and chances in the Irish lottery. The

Registrar refused to register the company on the ground that its object was illegal. The

company applied for a writ of mandamus.

HELD (I): The object of the company was unlawful and that the Registrar was right

in refusing to register.

Since incorporated the company can only be destroyed by winding up. Registration …

creates a body corporate capable of exercising powers of a body corporate. Section 31

sec 10, section 30.

There is an obligation both on members and the company to observe the provisions of the

Act. But the contract is subject to the company Act.

The terms of the Directors contract can be altered especially if it is combined with the

articles of association. The company is entitled to alter its articles of association – so that

79
a Director who enters into a service contract must have such a contract separated from the

articles of association.

RE: T.N FARRER Ltd 1937: By the articles of association of a private company a

governing director who practically held the whole of the share capital was so appointed

by special resolution of the company. After he had been director for some time the

company passed a resolution for winding up and he ceased to act as such. His assignees

sought prove in the liquidation for compensation due to him for loss of office, but the

liquidation rejected the claim.

HELD: That the only contract between the company and the director was that contained

or evidenced in the articles, his employment as such was conditional on the continued

existence of the company and ceased automatically when it was wound up. But assuming

there has been a breach of contract, it was in respect of which, in the circumstances, no

damages were recoverable.

The remedy of ratification is not available with regard is a contract included in the memo

of association and articles of assignment. See SCOTT V FRANK SCOTT (1940 CH

794. It is not the function of the courts to put in terms, which were not there at the time

of registration.

80
Corporate Personality
Lifting the Veil

Courts have been compelled to leave the veil of incorporation in cases like SALOMON V

SALOMON. It is a matter of guesswork when the courts would lift the veil of

incorporation. There is no principle on the basis of which the veil can be lifted.

There are cases in which the benefits of the incorporation are not seen by the promoters

themselves.

In MACAURA V NORTHERN ASSURANCE COMPANY (1925) AC- The owner of a

limited estate sold the whole of the timber omit to a company; the purchase price to be

paid in fully paid up shares in the company. He was the sole shareholder and was also a

creditor of the company for £19,000. He insured the timber in his own name with several

insurance companies. Most of the timber was later destroyed by fire and he claimed

under the policies.

HELD: that the appellant had no insurance interest in the timber as it belonged to the

company though he was money be the company and though he owned all the shares in

the company. Whether as a shareholder or as a creditor the diameter had no insurable

interest in the timber since he was not the company. Appellant’s relation as both creditor

and shareholder was with the company, not to its goods.

81
TUNSTALL V STEIGMAN (1962) 2 2B 953

R V I C R. HAULAGE Ltd (1944) IKB 551 where the company was imputed with men’s

wear of managing director. BANKVOOR HANDELEN SHEEPVPARTY V

STAFFCORD (1931) I QB 248

Borrowing: A company can incur expenditure, which is reasonable in carrying out

business.

Note: ULTRA-VIRES

The rule applies where the activities undertaken by the company fall outside its powers.

It also applies where a company’s general and incidental powers are used or exercised for

ultra-vires purposes.

Introduction Ltd V National Provincial Bank (1970) Ca

The power to borrow as provided for in the memorandum of association could only be

exercised for legitimate activities of company

RE JON BEAUFORCE LTD (1953) CH 131

The rule of construction was used to restrict the objects of a company.

COTMAN V BROUGHAM (1918) AC 514

BELL HOUSES LTD V CIM WALL PROPERTIES (1966) 2 QB

The rule of construction used is the “ejusdem generis” rule. RE DATE COFFEE

COMPANY (1880) 20 CLD 169

DAVID DAYNE COMPANY LIMITED (1904) 2 CH 608

Recovery on the basis of a right in rem

SINCLAIR V BROUGHAM (1914) AC 390

82
If a company has lent money on inter-vires contract the money is recoverable.

RE COLTMAN (1881) 19 CH D 64

The company can claim on the basis of Quantum mercuit even if the contract is ultra-

vires the company.

CRAVEN-ELLIS V CANNOS LIMITED (1936) 2 KB 403

LIFTING THE VEIL

This involves the consideration of circumstances where the law disregards the legal

personality of the company and imposes liability on officers of the company.

This is so as an exception in the rule in SALOMON v SALOMON that a registered

company is a legal person separate from it members, and hence capable of suing and

being sued in its own name. This principle is known as the “the veil of incorporation”

which is drawn at the time of incorporation and issue of the certificate of incorporation.

In general the law will not go behind the separate personality of the company to its

members. Hence in MACAVRA v NORTHERN ASSURANCE COMPANY LTD it was

held that the largest shareholders had no insurable interest in the property of the company

However, where the corporate entity is being used to conceal or amass improper

activities, the law ought to be disregarded (in so far as corporate personality is concerned)

and liability imposed on the officers. The attitude of the courts on this is summoned up

in an American case US v MILWANKEE REFRIGITRATORS TRANSIT COMPANY

[1905] 142 Fed. Reports 247 where Judge Sanvorn said:

83
 “A corporation will be looked upon as a legal entity as a general rule. But when

the notion of legal entity is used to defeat public convenience, justify a wrong,

protect fraud or defend crime, the law will regard the corporation as an

association of persons” i.e. Visaris Limited Company.

Examination of Provisions of the Zambia Companies Act Cap 686 S 106

The veil is lifted where a company carried on a business for more than six months with

less than the statutory minimum of members (7 for a public company and 2 for a pvt) in

which every person who is a member of the company during that time and who know that

business is being carried on with membership below the minimum is severally liable for

the company’s debts contracted after those initial 6 months.

This period of 6 months is allowed so that a company may find a replacement if the

membership has fallen below the minimum, and this is supposed to take care of cases

where the fall might be as a result of death – personal representatives need to be finally

registered in order for them to be members of the company, a this takes several months

but not more than 6 to be done. Till registered, they are not members.

The fall in membership also occurs when one member transfers his shares to the rest and

this reduces the number. They may pass on these shares to a trustee.

Liability extends only to liquidated debts of the company, not to unliquidated damages.

Pennington suggests that a creditor may proceed against a member personally and that

member will be liable. That member can then claim indemnity from the other members,

84
or from the company, but this would be defeating the purpose of the section and the

penalty intended will have no effect.

Fraudulent Trading

Section 218 states that if it appears that, in the course of winding up, any business has

been carried on with intent to defraud creditors, or for any fraudulent purpose, the court,

the liquidator, or a creditor or investor (member) may declare that any persons who were

knowingly parties to the fraud shall be personally liable for all or any of the debts or

other liabilities of the company. It will be noticed that this section covers all liabilities,

contractual or otherwise. It imposes liability on the directors and members.

However, a creditor who wants to use this section to use advantage bears the burden

of proving fraud. The person so declared liable will be responsible for paying out all

debts to the extent of his liability.

SALOMON v SALOMON could be consumed as a fraudulent act, but this is not correct

because his could not per see be interpreted as having breached legal rules: he did not act

dishonestly in carrying on the business. Fraud has to be inferred from the circumstances.

In Re WILLIAM C. LEITCH BROS LTD [1932] 2 chapter 71 the company was

insolvent (had no money to carry on business buying things they could not pay for, etc.

Maugham J. gave a liberal meaning of the word “fraud” when he declared

“If a company continues to carry on business and incur debts at a time when there

is, to the knowledge of the directors, no reasonable prospect of the creditors ever

85
 receiving payment of those debts, it is, in general, a proper inference that the

company is carrying on business with intent to defraud.”

In a later case the same judge changed his attitude slightly when he emphasizes “fraud”

to mean “actually dishonesty involving, according to current notions of fair trading

among commercial real moral blame.” The ones of proof on those alleging fraud.

However, the Jenkins Canttee has recommended that such a see 218 should be offended

so as to apply to reckless, as well as to fraudulent trading.

After fraud has been uncovered, where does the money so recovered go? In whose hands

does it go? In the second case of LEACH of 1933 Eve J. held that the moneys recovered

should form part of the company’s general assets available for all credits, not merely

those whose debts were contracted during the time when the business was carried on

fraudulently. But recently the Court of Appeal in Re CYONA

DISTRIBUTORSLTD[1967] chapter 889 appears to say that this may not necessarily be

so. In this case, unlike in LEACH, the claim was made by a credit and he succeeded. It

was held that the creditor was entitled to retain the money in discharge of the debt to him.

Lord DENNING thinks that the section does not require that monies recovered must be

made available for the general body of creditors; but it may be so if the proceedings are

commenced by the liquidator. My own view is that the money recovered must be

accredited to the general assets of the company for the purposes of distribution in

winding up. Section 218 is great protection for creditors from acts of directors and

officers of the company.

86
For a person to be declared liable, he must have actively participated in the carrying on of

the company’s business with the intent to defraud. Mere inertia (doing nothing) is not

enough. In RE MAIDSTONE BLGS PROVISIONS LTD [1971] 3 AER 363, E was a

secretary of the company (so he was not engaged in the management of the company).

He was also the financial advisor of the company. In the winding up the liquidator sued

the directors and Mr. E for fraudulent trading, but he had failed to advise the directors

that the company was insolvent and therefore should stop carrying on business. For this

reason he was said to be liable. The court did not accept that view. It said there was no

cause of imputing that duty on E. In order to be a party to the carrying on of a business

of rather a person must have taken positive action, mere inertia was not enough, so that

E’s failure to give the financial advice was not enough to make him a party to the

fraudulent business. His failure should amount to negligence.

I t would appear that the creditor of the company or anybody else who is defrauded has

no right to claim directly and recover. The claim has to be made on application of the

liquidator in a winding up and if granted, then all creditors benefit from it.

However, there is case where the creditor threatened to sue the Directors, but he avoid

suit they had to pay him. When this happens, the liquidators cannot there from make an

application for those debts.

Re CYONA – so if a creditor initiated the proceedings under Section 218 he could retain

the money thereby recovered, to discharge his own debts. The liquidator can only

thereafter claim on behalf of other creditors.

87
 [This was only a suggestion, not a holding. It has to be tested – may be the other

creditors may also claim in this way, or may be the first creditor has to share with

others in which case they cannot get all that’s due to them]

CASES

RE WILLIAM C. LEITCH BROS LTD (NO. 1) [1932] AER 892

Company winding up – Fraudulent Trading - Debts incurred by company when

no reasonable prospect of payment – declaration against Directors for Personnel

liability – Distribution among members.

By a section of the Company Act of that time “if in the course of the winding up ……. If

appears that the company has carried on with intent to defraud creditors of the company

…… the court ……. May, if it thinks proper to do so declare that any of the directors

……. Who were knowing by parties to the carrying on of business in the manner

aforesaid shall be personally liable without any limitation of liability for all or any of the

debts or other liabilities of the company as the court may direct.”

If a company continues to carry on business and to incur debts at a time when there is, to

the knowledge of the directors, no reasonable prospect of the creditors even receiving

payment of those debts, it is in general, a proper inference that the company is carrying

on business “with intent to defraud” within the meaning of the section.

In this case the respondent director knew the position of the company (financial position),

but he deliberately continued to trade in the name of the company in order, he hoped, to

safeguard his own position and without any regard to the interests of the creditors.

88
Thus the court has a discretion to fix the amount of liability, and where the creditors who

have seen defrauded are known, the amount is distributed among them.

Re Maidstone BLG Provisions Ltd

Winding up – Fraudulent Trading – whether failure to give advice sufficient to constitute

secretary as a party to the carrying on of the company’s business.

P was the secretary of M Ltd. M went into voluntary liquidation. The liquidators

brought proceedings against the directors of m Ltd and also a different grounds against P,

the Secretary, alleging that the whole time the company was trading at a loss and

insolvent, P as financial advisor failed to advise the directors that the company was

insolvent and should cease to trade and thus was “knowingly a party to the carrying on of

business” of M Ltd in a fraudulent manner.

HELD

P was not liable. In performing duties pertaining to the office of secretary, he was not

concerned in carrying on business of the company. Furthermore, in order to be a party to

the carrying on of the business of the company, within the meaning of the Act, a person

must have taken some positive steps: more inertia is not enough. The far that P was also

financial adviser does not make a party to the carrying on of the company’s business. N

order to bring a person within the section, she must show that he is taking some positive

steps in the carrying on of the company’s business in a fraudulent manner.

A person in the position of the Secretary is in some other capacity, concerned with the

management of the company’s business.

89
All that was alleged against P is failure to prevent the company trading fraudulently i.e.

failed to advise directors. Whatever duty P might have owed to the company, omission

to give advice could not be regarded as amounting to a party to carrying on a business of

the company.

However, P could be liable for negligence to the directors to whom he owed a duty to

give advice but this action could not fall under this section of the Act. Silence and

omission to give advice could never make him a party ………

Section 218 (4) – imposes criminal liability for trading for trading with intent to defraud.

In addition to the statutory provision the courts have also imposed direct liability where

the corporation veil has been used to abuse corporate personality. See 1946 MLR 233

Our statute does not give any defendant of holding and subsidiary companies and how

they exist. There are two elements, which determine majority holding in a company’s

capital, and power to determine the Board of Directors. The English Act 1948 adopts a

two-fold test in trying to define holding/subsidiary company: - A company is said to be a

subsidiary of another if that other (the holding company) is a member of it and controls

the composition of its board of directors, or, if the holding company holds more than ½

its “equity share capital” (i.e. issued share capital).

However, in order to protect Ts, the courts have implied a relationship of principal and

agent where there is a holding in a subsidiary company. Thus a subsidiary is denied the

protection of the law.

90
As a general rule a shareholder of a company is not an agent in that company and the

company is not an agent of a shareholder. The law as between a holding company and its

subsidiary is not clear, though some courts have adopted the above relationship of

principal/agent. This attitude is illustrated in SMITH STONE AND KNIGHT v

BIRMINGHAM CORPORATION [1939] 4 AER 116 where the corporation sought to

acquire certain premises compulsorily. The premises were occupied by a subsidiary of

the pl. company. The subsidiary was wholly controlled by pl., it employed no separate

staff, kept no separate books, and was treated as though it were a debt of the plaintiff.

Under legislation giving the corporation. The power to make a compulsory purchase

order an occupier could not claim for compensation unless it enjoyed a tenancy for a

period longer than one year. The subsidiaries’ tenancy was a yearly one. The plaintiff

company (parent) argued that it was really the person in occupation. HELD that while

the subsidiary was a separate legal entity, it might be acting as the agent of its

shareholders, in this case the pl. company. Furthermore, the occupation of the premises

by the subsidiary company was technical only, and solely for the purposes of the parent

company. The pl. could therefore maintain a claim for compensation.

In this case ATKINSON J concluded that it was a company of fact in each case whether

that subsidiary company was carrying on the parent company’s business or its own. He

says that in determining this issue 6 points must be considered:-

(1) Were the profits treated as those of the Parent Company?

(2) Were the persons conducting the business appointed by the parent company?

(3) Was the parent company the Head and Brain of the trading venture?

91
 (4) Did the parent company govern the adventure and decide what should be done

and what capital should be embarked on it?

(5) Were the profits made by its skill and directions?

(6) Was the parent company in effectual and constant control?

If all these questions could be answered in the affirmative, then the Principle/Agent

relationship would be established.

RE F.G. (FILMS) LTD (1953) 1 WLR 483 illustrates the invocation of agency in a bid to

agency in a bid to avoid the use of corporate personality. A British company had been

formed with £100 capital, of which £90 was hold by the President of an American film,

who was one of the 3 Directors, the two being British. A film was produced in India

normally by the British company but all finance and other facilities came from the

American company. The British Board of Trade refused to recognize it as being British

“made” and therefore refused to register it as a British film. Held the British company

had acted merely as agents companies the true maker of the film was the company, which

provided funds and etc the veil of the British.

War Time

In a war situation it becomes necessary that the courts lift the veil in order to determine

the nationality of the company and hence ultimately determining enemy character. If a

company had enemy character, it could not lawfully operate within the jurisdiction. Its

assets would be frozen.

92
DAIMLER COMPANY LTD v CONTINENTAL TYRE AND RUBBER COMPANY

1916 2 AC 307 was held to be an enemy company because the members of the company

were a company incorporated in German with the largest number of shares only one

British subject resident in England held one share. Effective control was thus in German,

therefore in enemy hands.

Despite the fact that we regard registration as identifying the existence of a company

there is no point in regarding a company and when all or majority of its directors are

enemy nationals, resident in enemy territory e.g. Rhodesia, South Africa.

Separate legal entity principle is also ignored when it is used for unlawful purposes or

purposes opposed to statutory uses. See GILFORD MOTOR COMPANY v HONE

(1933) AER 109; ch P935 where a company was formed to avoid the burden of a

covenant restricting the business which could be carried in by the company’s former

managing director in competition with it (Remy’s notes p57).

Taxation

The court will investigate the residence of a company to find out about control structures.
This is important for tax purposes. The residence of a company for tax purposes is said
to be the place where its real business is carried on, and this is carried in where central
management control actually abides. This task involves the court in an inquiry which
tends to disregard the full effect of separate legal entity principle. See also Remy’s notes
on cases UNIT CONST. CO v BULLOCK AND FIRESTONE TYRE AND RUBBER v
LLEWELIN (1957) 1 AER 561 was lifted.

93
CASES ON COMPANY LAW

1. J P Karenzos v Hermes Safaris 1978 ZR 179 (Ultra vires)

2. Zambia Law Journal Vol. 1,25 – 28 1993 – 1996
3. Taw International 1978 ZR 152 (winding up of a foreign company)
4. Allen Gold Reefs of West Africa 1900 ICA 656
5. Torkington v Magee 1902 2 KB 427 at 430
6. Beatie v Beatie Ltd 1938 3 ALL ER 214 internal regulations. They form a
KT between the Co. and members only in respect of their ordinary rights
as members and not in any capacity.
7. Associated Chemicals Ltd v Hill Dellam in SCZ No. 2 of 1994
8. John Kasengele

94
 CHAPTER 3

CLASSIFICATION OF COMPANIES
The Companies Act Cap 388 of the Laws of Zambia recognizes three (3) types and
classifications of companies. These are defined in Section 13 of the Act as follows:
(a) Public Company

(b) Private Company, being a Company Limited by shares or by guarantee, or an

unlimited company.

In a company limited by shares, the liability of a member is limited to the amount, if any,

unpaid on the member’s shares.

Statutory companies
These are formed by an Act of Parliament for the undertaking of a particular type. To

find out the foundation of statutory companies one has to read the Parliamentary Bills etc.

Chartered companies
E.g. the British South African company. This is unlikely to be found again under the

Republican Government.

Registered companies

In vast majority cases today (and in all cases in Zambia) the company, whatever its

objects, will be formed under the companies Act.

Promoters decide which company they want to form. They must choose between a

limited and unlimited company (it has got a limited company in Zambia). The

disadvantage of an unlimited company is that the members are personally liable for its

95
debts, and the members are likely to be wary of it if the company intends to trade. But

there are a number of advantages ….for instance, that an ……..company can avoid giving

publicity of its financial affairs.

If the promoters decide upon a company they must decide whether it is be limited by

guarantee or by shares, and this is normally decided by the purpose for which the

company is fulfill.

If the company is intended to make and distributed profits, a share-capital will be

appropriate; if otherwise it should be dispended with, the better …formation expenses are

less. They will further decide whether the company should be put or public.

Advantages and Disadvantages of a Private Company

Advantages
(1) Only 2 (not 7) members minimum, and instead of 2 directors

(2) Can be formed more simply and cheaply

(3) Can commence business immediately on registration

(4) Not much publicity to its affairs is required

(5) All directors can be appointed by a single resolution of a general meeting

See section 4 – 7 Cap 388

Disadvantages
(1) Membership limited to 50, excluding employees and ex-employees who

become members while employed

(2) Restriction on the right to transfer shares (5(1) (a) of Cap 388.

96
(3) Cannot invite public to subscribe for its shares (5 (1) (c) ) public ad private

companies are designed to meet different economic needs.

Public – to raise capital from the public and to finance an enterprise

Private - to confer a separate legal personality on a small partnership.

In practice, even if the promoters intend the company to be a public one, they can

initially form a private one and then ……and this has advantages, which we shall see

later.

It is nevertheless advisable to know the ultimate intention of the promoters before

framing the articles of association, since in the case of the public company certain

clauses will be needed which would probably be inappropriate or inconvenient if the

company were to remain private.

It appears that a private company can only have a share capital since, if it has none, it

cannot restrict the right to transfer its shares, which is one of the essential pre-

requisites.

There are primarily 5 types of companies to choose from

(i) unlimited company not having a share capital

(ii) unlimited company having a share capital

(i) company limited by guarantee and not having a share capital

(ii) company limited by guarantee and having a share capital

(iii) company limited by shares

97
Each of these five can be divided in private or public. But the decision will naturally

flow from the nature of the enterprise and in naturally flow from nature of the enterprise

and in most cases a public or private company limited by shares will be appropriate.

Name of Company
Has to be suitable, must be stated in the memorandum of association. (see 8 (1) (a) Cap

686). Must also appear on (…85)

Company’s seal

Business letters

Negotiable instruments and

Orders for money

Must be affixed outside every office or place in which its business is carried on for this

reason, it is advisable that the name he reasonably short. Name cannot be changed easily

informally as a natural person can change his. There is a special resolution for that.

The name should not be “undesirable” as the Registrar will refuse it. The same must not

mislead or suggest patronage of the President, a Minister, a Government department, etc

National, international, imperial, this will be allowed only in exceptional cases.

The use of co-operative and Building society, is also forbidden, because they imply

registration under the co-operatives or big societies Act. Of most importance, the name

will be refused registration if it is too much like that of an existing company, unless that

company is in liquidation or signifies its consent.

98
As a result of this rule, of registration secures a de facto monopoly of cooperate trading

under that name, and as such, names which include a proper name which is not the

surname of the director will not be excepted for valid reasons. For the same reason if the

proposed name includes a registered trade mark the consent of the owner will be

required.

This is true only if no other company is in fact already registered with a name identical or

too similar: it is possible that the Registrar will allow a name to slip through which

should have been rejected on this ground.

Should this occur, the new company may change its name by the necessary procedure of

special resolution, but must do so within 6 months of registration. But then, it will carry

on the same trade, so where is the monopoly? Unless its compelled to change its

business.

Memorandum and Articles

The next step is to prepare the memorandum and articles of association. Both are

necessary, though a company limited by shares can take up the model in Table A, which

will apply automatically in the absence of other articles. In this latter case Table A will

apply even if other articles have been registered unless it is modified or exchanged. But

it will be necessary to register articles if the company is to be a private one because the

three restrictions in section 5 (cap 686) must be imposed.

In all cases full memoranda must be registered. It is only Table A that can be adopted by

reference either in whole or in part, so that all companies other than those limited by

99
shares, must register full articles, except that if they have a share capital they can adopt

Table A.

Before preparing the memo and articles, the draft…must know from the promoters:

(1) The nature of the business – important for objects … of the memo.

(2) The amount of nominal capital and the denomination of the shares into which it is

to be divided (assuming it is to have a share capital). These will have to be stated

in both the memorandum and the articles

(3) Any other special requirements, which deviate from the nominal as exemplified

by the appropriate Table of the Act.

It is far much better to exclude Table A altogether and to have self-contained articles.

Some clauses of the Table may go out of date. The distinction between the memorandum

and articles are dealt with in chapter 5.

Lodgment of Documents

The final step is to lodge certain documents with the companies Registry i.e. the

memorandum and articles, which must have been signed by 7 persons (or 2 if a private

company) whose signatures must be attested by a witness.

If the company has a share capital, each subscriber must write opposite his name the

number of shares he takes but he must not take less than one. In practice he will merely

subscribe for one share irrespective of the number of shares he eventually intends to

purchase.

100
The third document is the statement of nominal capital, and 4 th deliberation that all

requirements of the Act have been complied with. However, the declaration does not

fulfill any useful purpose since the registry staff examines carefully all documents.

The above are the only documents necessary to secure registration of a company. Others

may be filled shortly after registration i.e. a notice of situation of office, particulars of

directors and secretary, who are nominated by subscribers who may sign the nomination

when signing the memorandum.

Registration or Certificate of Incorporation

After examining the documents, the Registrar signs them and then issues a certificate of

incorporation. He has no discretion in the matter, so long as the documents are in order.

The subscribers have a right to registration enforceable by mandamo.

Effect of Registration: The Contract in the Articles

From the date of incorporation stated in the certificate the company comes into existence

as a body corporate “capable forthwith of exercising all the functions of a n incorporated

company and having perpetual succession and a common seal”.

Further more Section 10 reads that the memorandum and the articles “shall, when

registered, bind the company and the members thereof to the same effect as if they

respectively had been signed and sealed by each member…” the words “and by the

company” ought to have been added because of the fact that the incorporated company

was a separate legal entity, but they were omitted in the 1865 Act, and this oddity has

survived into the modern Acts. However, these points are clear:

101
(i) the memorandum and articles constitute a contract between the company and

each member. It is upon this contract that the shareholder advances his money

to the company and relies upon it.

However, it is a contract with varies special characteristics: it is subject to the

provisions of the company’s Act, which include alternation of the

memorandum and articles of association by means of special resolution.

The shareholder makes this contract on terms which are alterable by the other

part by a special majority voting at a general meeting, rather than as members

of a club do when they agree to be bend by rules as they get altered from time

to time. Furthermore, norminal remedies for breach of contract may not be

available – they are not usually recoverable from the company. In a number of

reported cases a member has sought to enforce a contract against the company

but it is equally clear that the company can also enforce a contract against him.

In principle then, there is no reason why all nominal contract and remedies,

including damages should not be available.

(ii) Secondly, the contract in here (S 10 quoted above) is enforceable among the

members inter-se. RAYFIELD V HANDS (1960) CH 1. This happens when

the articles of association confer on members the right of pre-emption

(purchase by one person etc. before opportunity is offered to others) or 1 st

refusal where another member wishes to seal his shares, or where there is a

duty on members to any shares of a retiring member. (RAYFIELDS V

HANDS). So, here shareholders can sue each other directly rather than

involve the company necessarily. Litigation.

102
 (iii) It is a settled ordinary principle that S10 gives the memorandum of association

and articles contractual effect only in so far as they confer rights or

obligations on the members in his capacity as member. This is true of the

contract between him and his fellow members as the contract between him

and the company.

See Gower: 1958 M.L.R. 401 and 657

So that if one is a solicitor of the company, he cannot try to enforce his contract with the

company as a member, even though he is in fact a member because the contract is

between him and the company, (as per the articles) as an outsider; not as a member.

If there was a provision that a dispute between a member and the company, must be

referred to an arbitrator, a person who is director and has a dispute with the company

cannot avail himself of the arbitrator even though he is in fact a member.

The articles cannot themselves constitute a contract in respect of an outsider except in his

capacity as a member, except if the terms in the articles are incorporated into some other

contractor. So that where the directors act for the company without express contracts, the

courts may infer from conduct a contract intended to be on the some terms as the articles

for example, in regard to tenure or remuneration. But such an inferred contract can be

altered with the alteration of articles by special resolution, which is permissible under the

Act, and when this happens the director cannot complain. Whereas if he had a direct

contract with the company, no alteration of the articles can excuse the breach of its

express terms even though the articles can still be altered by special resolution.

103
However, there is an authority for the view that each member has a general contractual

right to have his company’s affairs conducted in accordance with the provisions of its

memorandum and articles. (FOSS V HARBOTTLE).

RAYFIELD V HANS (1958 2 AER 194)

Articles of association; contract between members and directors; provision that directors

will take …..”at a fair value” shares offered to them.

Facts : The articles of association of a private company limited provided by article 11

that “every member who intends to transfer shares shall inform the directors who will

take the said shares equally between then at a fair value…”.

The qualification of directors was holding one share in the company. In April 1955, the
plaintiff, a shareholder in the company, informed the directors at the time of his intension
to transfer his shares, but the directors refused to purchase them.

Held: the directors were bound to purchase the plaintiff’s shares at a fair value (to be

ascertained by an inquiry if necessary) for these reasons:

(1) that Act 11 of the company’s Act constituted an enforceable contract between

the directors (as members of the company) and the other members of the

company, and the Plaintiff was entitled to rely on that contract without joining

the company as a partner. (i.e. without unnecessarily involving the company

in the litigation).

(2) The word “will” in act 11 did not constitute an option or choice on the part of

director’s….

The company’s articles of association is a document very inartistically drawn

by a person by a person …..VAISEY J.

104
The directors urged that S11 imposed no enforceable liability on them.

“Articles of association of a company should be regarded as a business

document and should be constined so as to give them reasonable business

efficacy …..in preference to a result which would or might prove

unworkable”.

In relation to the provision that “the memo and articles, shall when register

……the company and the members thereof to the same extent as if they

respectively had been signed and sealed by each member…” BUCKLEY ON

THE COMPANIES ACTS 13TH EDITON p53 said, “allusion is made to the

large number of apparent conflicting judicial decisions and dicta as to the

exact nature of contractual relations established by the memorandum and

articles both as between the company and the members and as between the

members inter-se”.

GORE-BROWNE states the effect as “……is to create an obligation binding

alike on the members in their dealings with the company, on the company’s in

its dealings with the members as members, and on the members, ….and even

a member can not enforce the provisions for his benefit in some other capacity

than that of members: e.g. he can not asset a night to be appointed solicitors,

secretary, director by reason of provisions contained only in the articles”.

6 HALSBURY’S LAWS 3RD EDITION p 129 paragraph 269

105
 While the articles regulate the right of members’ inter-se, they do not, it

would seem, constitute a contract between the members inter-se, but only a

contract between the company and its members, or the rights and liabilities of

members as members under the articles of association can only be enforced by

or against the members through the company.

MELISA L.J IN HICKMAN V KENT (1915 1 CH 881 p 89

“…..the articles of association are simply a contract between the shareholders

inter-se in respect of their rights as shareholders. They are the deed of

partnership by which the shareholders agree inter-se”

Held this:

There was a contract between the directors and the members, being formed by

the terms of a company’s articles. There was a contract similarly formed

between a member and member-directors to the holdings of the company’s

shares in its articles.

Private and Public Companies

PALMERS pp32 – 39

A company having a share capital may be formed as a public or a private company. In

relation to recognition of a private company, the intention of the legislator was to make

available to the small trader, the advantages of corporate trading. With this object in

view a minimum number of people was required to for this private company – only 2

persons or not 7, as in the case of a public company. Also the balance sheet did not have

to be attached to the annual return, which the private company, like another company,

106
had to return annually to the registrar. This was intended to protect the private company

against competition from financially stronger rivals.

Later years, it was found that the privilege of balance sheet secrecy was abused by some
public companies which withheld information from their shareholders by the simple
devise of creating subsidiaries as private companies and hence not disclosing their
accounts, yet carried most of their business through them. The result of course was that
shareholders in the private companies were unable to ascertain whether the subsidiaries
which were private companies made a profit, and if s what that profit was.

The provisions of the Act apply to public and private companies alike unlike otherwise

stated. A company is a public company unless it is clear from the start (its constitution)

that it is private.

The following short summary of statutory provisions apply to public companies only:

(1) Minimum number of members is 7

(2) On being granted the certificate of incorporation, it becomes a legal person

(3) It must hold a statutory meeting and the directors have to make a statutory

report to the members

(4) Must have at least 2 directors

Private Companies
FUNCTIONS: (1) to enable those carrying on a family business to avail

themselves of the advantages or corporate trading

107
 (2) where used as a subsidiary in a group of companies, to

avoid, with respect to that part of the group, the

strict requirements obligatory for public companies.

These purpose differ intrinsically, but one feature is common to all private companies;

according to its constitution members of the public can not subscribe to its finances.

The constitution of a registered company II

Reading list No. 4

PALMER pp 107 – 113

Effect and Alteration of Memorandum

Speaking generally, the memo has the same effect as if it has been duly signed and sealed

by each member as if it contained covenants on the part of each member to observe all

the provisions of the memorandum. S10 cap686.

ALTERATION: The Act provides for the alteration of the memorandum, but only in the

mode and to the extent for which express provision is made in the Act; it prohibits the

alteration of the conditions of the memorandum (S11).

The provisions of the memorandum cannot be altered if the memorandum itself prohibits

the alteration. However, there must be an alteration clause in every memorandum of

association.

108
Articles
These are commercial documents, which should be interpreted with the maximum ut res

magis valeat quan pereat which means validate if possible. JENKINS L.J HOLMES V

KEYES (1958) 2 W.L.R. 772, 783

“I think that the articles of association of the company should be regarded as a business

document and should be const….so as to give them reasonable business efficacy, where a

construction leading to that result is admissible on the language of the articles, in

preference to a result which would or might prove unworkable”.

In RAYFIELD V HANDS the articles of a private company provided “every member

who intends to transfer shares shall inform the directors who will take the shares equally

between them at a fair value…..” and the directors refused to purchase the shares of the

plaintiff in the case, basing their argument on the construction of the provision, that it did

not make it compulsory to purchase the shares. Vaisey J rejected the arguments and held

that on its proper construction, the article imposed an obligation of the defts (directors) to

purchase Plaintiff’s shares at a fair price. The language …..the 2nd argument was that the

plaintiff was a director, not members only of the articles was constructed as a mutual

obligation between the offering shareholder who was also director of the company and

the directors who had to accept the shares offered for purchase, and there was no reason

to invalidate that article.

Vaisey J also considered “the most difficulty” point whether the obligation imposed by

that provision on the directors was a corporate obligation which could only be enforced

by the company or whether it was a personal contractual which could be enforced without

109
joining the company. He decided in favour with the latter view and gave judgment for

the plaintiff.

In WELTON V SAFFREY (1897) AC 299, 315 lord Herschelle observed.

“It is quite time that the articles constitute a contract between each member and the
company”.

Foreign Companies
The term ‘foreign companies’ means what it simply says. It refers to any company,
which is incorporated outside Zambia. These are companies formed or incorporated
otherwise than in Zambia, but nevertheless carry on business in Zambia or, at least, have
dealings with persons in Zambia. In the pre-independence days the country’s minerals
potential attracted a number of foreign companies to come and invest in Zambia. Indeed
it may be admitted that it is foreign that opened up the doors to Zambia’s industrialization
process. Foreign companies still continue to play very significant role in Zambia’s
economic affairs although they now do in partnership with state corporations or
companies such as Indeco Limited, Mindeco Limited, NCCM and RCM. Because of
Zambia’s limited capital resources it is most likely that for years to come she will need to
be in partnership with foreign companies which seem to posses those resources that
Zambia requires for her economic development programmes.

Table “E” below illustrates, in part, the point being made here. It shows the major
foreign partnerships with INDECO, which today runs more than 50% of the Zambian
companies.

110
 TABLE “E”: MAJOR FOREIGN PARTNERS WITH INDECO
MAJOR FOREIGN PARTNERS COUNTRY LOCAL PARTNER
ADAM & HARVIE U.K STEEL SUPPLES LIMTED
AGIP (E.N.I. GROUP) ITALY AGIP (ZAMBIA) LIMITED
ANIC (E.N.I. GROUP) ITALY INDENI LIMITED
AMENITAL LIECHTENSTEIN KAFUE TEXILES LIMITED
BARCLAYS OVERSEAS DEVELOPMENT
BOOKWORLD U.K KAFUE TEXILES LIMTED
CORPORATION U.K Z.C.B.C. LIMITED
BOOKERS McCONNELL U.K/GERMANY GLASS PROJECT KAPIRI LIMITED
COUTINHO CARO U.K NATIONAL MILLING COMPANY LTD
CHARTER CONSOLIDATED
COMMONWEALTH DEVELOPMENT U.K CHILANGA CEMENT LTD/KAFUE
CORPORATION TEXILES LTD/KARIBA FREIGH
CONTINENTAL ORE CORP HOLDINGS LTD
DUCAN GILBEY MATHESON U.S.A ZAMEFA LTD.,
DUNLOP U.K DUCAN GILBEY METHESON (Z) LTD.,
FIAT U.K DUNLOP (Z) LTD.,
GAME ITALY LIVING MOTOR ASSEM LTD.,
I.C.I U.K KAFIRONDA LTD.,
INTERCONTINETAL HOTELS U.S.A ZAMBIA HOTEL PROP (NHC)
INTERCONTINETAL BREWERIES BERMUDA ZAMBIA BREWERIES LTD
INTERSOMER ITALY LENCO/ZAMBIAN ROAD SERVICES
KOBE STEEL LTD/LMA LTD
LONHRO JAPAN KAFUE NITROGEN CHEM LTD
PHELPS DOGE SWENSKA METALL U.K NATIONAL BREWERIES LTD
VERKEN
PLACNEZA USA/SWEDEN ZAMEFA LTD
SHELL ITALY LENCO/LUSAKA ENG. CO. LTD
SHOPRITE U.K SHELL BP (Z) LTD
SOLAGLAS INTERNATIONAL SWITERLAND KAPIRI GLASS SUPPLIES LTD
SPILLER U.K NATIONAL MILLING CO. LTD
TATE & LYLE U.K ZAMBIA SUGAR CO. LTD
TEXTILCONSULT LIECHTEIN KAFUE TEXTILES LTD
PILATUS
WOOLWORTH
BRITISH TOBCCO
SOURCE: Compiled from INDECO ANNUAL Reports 1968 to 1977.

111
N.B 1. The above list is by no means exhaustive as foreign companies operating
in other fields such as mining, and rural development have not
been listed in the above table.
2. The Table does not also mention private foreign companies operating in
the country independent of state participation e.g. I.B.M, N.C.R,
I.C.L, A.M.I, PHILLIPS, BENZ, G.E.C GENERAL MOTORS,
LEYLAND ETC.

The foreign companies can only operate in Zambia either by establishing a locally-based
subsidiary or by partnership with a state – OWNED COMPANY SUCH AS INDECO or
by having a place of business which it intends to operate. Under Cap.383 the phrase
‘place of business’ has not been defined nor qualified. It is therefore still doubtful
whether or not a foreign company is under any legal obligation to establish a “place of
business” in Zambia. It would appear not to be the case. Nonetheless, Cap. 686
contained certain provisions which require foreign companies to disclose certain
information about themselves if they intend to carry on business in Zambia.

A foreign company which establishes a place of business in Zambia is required to deliver

certain documents for registration within two months of the establishment of its place of
business. These are (i) a certified copy of its charter, statutes, or memorandum and
articles or other instruments constituting or defining the company’s constitution, and if
the copy is certified translation thereof; (ii) a list of its directors, (iii) the names and
addresses of someone or more persons resident in Zambia authorized to accept on its
behalf service of process and any notices required to be served on the company. If any
alteration is made in the documents delivered, the company must within the prescribed
time deliver to the registrar for re-registration a return containing the prescribed
particulars of the alterations. Upon registration of any documents mentioned above there
shall be paid to the registrar such fees as may be prescribed.

Every foreign company operating in Zambia must also, in every calendar year, submit to
the registrar a balance-sheet which shows a company’s share capital; liabilities and
assets, giving such particulars as will disclose the general nature of these liabilities and

112
assets and how the values of the fixed assets have arrived at. This balance sheet must be
audited. But the company need not submit its statement of profits and loss. The
exclusion from disclosing the contents of the profit and loss account shows, in a way how
old-fashioned cap. 686 is. If the foreign companies operating in Zambia are to be
properly taxed by the government, then it is imperative that tax authorities be furnished
with the information contained in the profit and loss account of each and every company,
for this shows either the profit or loss made in a given financial year of the company.
This point is pursued later in this chapter when the administration law in Zambia is
briefly discussed. Penalties are, however, provided in Cap. 686 for a breach of the above
mentioned obligations on the part of foreign companies.

Recognition of Foreign Companies

The subject of recognition of companies may be approached from two broad angles
namely:

(a) the recognition of the existence of a legal entity created under foreign law;
(b) the capacity of such recognized entity.

The fundamental point about recognition of a foreign company is not much concerned
with the extent to which such a company may participate in Zambia’s economic
activities; but rather related to Zambia’s discretion, as a sovereign state, to allow or to
refuse a foreign entity to conduct any economic activity within its territory.

The Recognition of the Existence of a Legal Entity Created Under Foreign Law

So far there has not been any adjudication over this issue by the Zambian courts. But
having regard to the way English judicial precedents have hitherto exercised the minds
Zambian judicial officers, it may be suggested that Zambian courts would be inclined to
follow English jurisprudence in this matter. According to English law the question
whether a company exists or not as a corporate body depends on the law of the place of
alleged incorporation or registration. Indeed, the administrative practice as facilitated by
the provisions of Cap. 686, has been to recognize a company as a body corporate if it is

113
duly incorporated or registered under the laws of a foreign state. The foreign company
ceases to have any corporate existence according to its personal law, the law of Zambia
will no longer regard it as a corporate personality.

In general the capacity and powers of a company are governed by its personal law. But
as Professor Gower has pointed out “if, however, this principle is carried to logical
extremes there are patent opportunities for abuse; corporations will incorporate their
companies in the country having the laxest corporations laws and then operate in the
harsher climate of other lands, shielded by a cloak of their personal law – a protection
denied to domestic concerns with which they compete. Zambia has had one such
experience during the time of nationalization of its copper industry, which is worthy
considering here for nothing else but its novelty and uniqueness. This was the enactment
of the Mines Acquisition (Special Provisions) Act.

When the then Minister of Finance, Mr. Mudenda, introduced a Bill in parliament in
relation to the above subject he mentioned inter alia that purpose of introducing the Bill
was to facilitate the indigenization of the mining industry by allowing the Zambian Anglo
American Ltd to change its incorporation from Zambia to Bermuda. Not much
opposition was registered against this motion in the House except for Mr. Mundia who
strongly attacked the Bill on the grounds that such permission to shift ZAMANGLO’s
incorporation from Zambia to Bermuda would, if granted, cause (1) unemployment for
Zambian nationals and (2) leakages of business information and secrets to another state.
Nonetheless the Bill passed into an Act of parliament whose purpose was finally stated to
be for facilitating the incorporation under the laws of Bermuda of a company hitherto
incorporation under the laws of Zambia by the name Zambian Anglo American Limited,
and to provide for matters incidental thereto.

The Act purported to give the ZAMANGLO power to become incorporated in Bermuda
by the same name. After its incorporation in Bermuda the company’s name was to be
deleted from the Zambian companies register; and immediately thereafter it was going to
be regarded as a foreign company operating in Zambia and Cap. 686 would apply to it

114
accordingly. The Act also contained the following provisions whose implications are
worthy analyzing here viz:-

“With effect from the operative date (i.e. the date of incorporation of the
company in Bermuda), but without prejudice to any right, benefit,
privilege, obligation or liability previously acquired, accrued or incurred,
the following provisions shall have effect in relation to the company, that
is to say:-

(a) the company shall be treated as a company as a company incorporated under

the laws of Bermuda but shall thereby cease or be deemed to cease to exist but
shall instead be and be deemed to be and to have at all times continued to be
the same body incorporate as the existing Company:
(b) Save as provided in section four of this Act, the provisions of the Ordinance
shall cease to apply to the Company; and
(c) Any entries or deletions in the register made by the Registrar with respect to
the company in conformity with this Act (which he is hereby authorized so to
make) shall be deemed to be made by virtue of section four and of this section
and not in exercise of any power in that behalf under any other written law,
including the Ordinance.

A number of points be inferred from both the language of this Act as quoted above the
very circumstances in which its enactment was procured. In the paragraphs that follow
below an attempt is made (a) to consider such circumstances and (b) to answer the
question: What legal effect would the provisions of the Act quoted above have vis a vis
certain provisions of Cap. 686?

In Chapter 3 of this study it was shown how ZAMANGLO and RST secured a number of
concessions and privileges from the Government of Zambia concerning, for example,
foreign exchange remittances, taxation and so on. The management, consultancy and
other service contracts also gave ZAMANGLO and RST a great number of other
privileges and rights to be enjoyed by them. Bermuda is a country renowned for its lax

115
taxation laws and an examination of Title 17, Part B of its revised Laws, 1971 shows that
companies incorporated thereunder are not as heavily regulated by statutory provisions as
those incorporated under the Zambian Cap. 686 nor the English Companies Act. This
factor and those others mentioned above together gave ZAMANGLO a comfortable
position to enable it to maximize its operations and make a big yield in Zambia. From
the nature of the remarks of the Minister of Finance in the National Assembly, it is clear
that he did not fully appreciate the implications of the Bill he was introducing. Indeed,
the silence of the majority of the Members of Parliament on this issue was clear
testimony of how little they were endowed to comprehend the technicality of the issue at
hand. The remark about such a move causing unemployment made Mundia, M.P. also
Indicated that he did not exactly grasp the substance of the subject matter but at least his
point held some water. However, what is even more surprising about this statute or Act
is the drafting side of it. The language of the Act clearly shows that the draftsman also
did not appreciate the aspects of company law he was dealing with. If he did, he would
have advised the Minister concerned that it was not necessary at all for the Zambian
Parliament to pass a law to empower a company to go and incorporate abroad much as in
legal theory the Zambian Parliament had power to do so under the doctrine of supremacy
of Parliament. It is submitted that what ZAMANGLO ought to have done was simply to
transfer its assets and liabilities to the Bermudian incorporated ZAMANGLO, and then
voluntarily wind up its operations in Zambia. Thereafter it would have, perhaps, come
back to Zambia to carry out the same business it used to do, as a fully foreign
incorporated company. Permission to use the name ZAMANGLO in Bermuda, if
necessary at all, would have been obtained through administrative procedures. This then
brings us to the second major issue. Of what effect are the provisions of the Mines
Acquisition (Special Provisions) (No. 2) Act upon some of the provisions of Cap. 686.

It appears that the provisions of the Mines Acquisition (Special Provisions) (No. 2) Act
contravened some of the provisions of eth Companies Act; especially those providing for
the winding up of companies and the striking off of companies from the register. As it
will later be shown in this chapter, Cap. 686 empowers both the court and the registrar to
wind up and strike off the companies respectively. Under the same Cap. 686 the

116
members too are also, subject to certain conditions to be fulfilled, as it will soon be
shown, empowered to wind up the company. Yet, S5 (c) of the Mines Acquisition
(Special provisions) (No. 2) Act purported to confer separate authority, from the one
already in existence under cap 686, upon the registrar with regard to ZAMANGLO’s
subsequent re-registration as a foreign company in Zambia. It s submitted that in so far
as the Mines Acquisition (No. 2) Act did not expressly provide for the winding up of
ZAMANGLO in Zambia, this Act did not supercede the provisions of the companies Act
in this regard; and consequently, ZAMANGLO could still be regarded as having
continued to exist as a Zambia Company just as it used to be before of this Act.

Assuming the above conclusion is valid one. What are its consequences? It is possible to
contend that since ZAMANGLO had still got its registered office and assets in Zambia
even after enactment of the Mines Acquisition (No. 2) Act, the Zambian registrar would
have had power to require the company to conform to all relevant provisions of Cap 686.
Thus, it would have been expected to file all the necessary documents and pay all due
statutory fees to the Republic of Zambia. Failure to comply with this would have
prompted the register strike ZAMANGLO off the register or having it compulsorily
wound up by the High Court. What should be done now?

It may be suggested here that the factors to be considered in resolving this issue are: (1)
Does ZAMANGLO still carry on its business? And (2) if so, where does it carry on its
business? According to interviews conducted by the present writer in Zambia on the
summer of 1977, ZAMANGLO was shown to be one of those companies in the country,
which simply exist on paper. The reason is that ZAMANGLO has now transferred most
its Zambian assets to another company in the Anglo American group of companies
namely, the Zambia Copper Investment Ltd, a company incorporated in Bermuda. In
essence, therefore, ZAMANGLO has no serious business to carry on in Zambia. It is
submitted therefore that if ZAMANGLO has no business to carry on in Zambia, it ought
to be wound up, for example on the ground that it has not traded for a year.
Alternatively, the registrar has the power to strike it off the register as a dormant
company.

117
On the whole, it may be submitted that the enactment of the Mines Acquisition (Special
Provisions) (No. 2) Act was a sheer waste of valuable debating time of the Zambian
National Assembly and that public funds were wasted in placing it on the statute of the
Republic of Zambia. Related to the ZAMANGLO situation examined is the question of
the proper personal law of a foreign company, which we now proceed to consider in
rather theoretical terms.

Capacity of a Foreign Company

If the law applicable to a foreign company is one of its place of incorporation, it then
follows that the questions whether the members are personally liable for the debts of the
company and, what and who constitutes its organs and agents with power to act for it are
governed by the law of the place of incorporation. In so far as the question as to who the
directors should be is concerned, that would depend on the provisions of the articles of
association of the company. In Banco de Bilbao v. Sancha. Lord Justice Clausion said:
that interpretation of these articles and the operation of them, having regard to the general
law, must be given by the lex loci contractus i.e. the law from time to time prevailing at
the place where the corporate home (domicillio social) was set up”. In this case then the
lexi loci contractus and the lex domicilli are synonymous with the law of the place of
incorporation. In any case there does not seem to be a possibility of conflict between the
two expressions above.

Internal organization of the company is generally known to be governed by the personal

law of the foreign company. According to the doctrine of plade of incorporation, the
personal law is the law under which that person was incorporated. On the other hand, the
doctrine of siege reel is founded on the view that the system of law which should be
looked at to determine whether a company exists as a legal entity is not that of the
country of incorporation but that of the country where the company has its domicile i.e.
the law of the place where the business or the management of the company is located.
Thus a foreign company operating in Zambia and having contractual relations with third
parties in Zambia will have its contracts with such other parties governed by Zambian
law; unless the contrary could be inferred from the express terms of the contract. The

118
qualification needs to be added that the general principles of the law of contract relating
to restriction on the freedom of contract apply to contracts concluded by companies.

Difference between a Corporation and a Company

A Corporation may be defined as a body of persons, in the case of Corporation
aggregated, or an office in the case of a corporation sole, which is recognized by the law
as having a personality which is distinct from the separate personalities of the members
of the body or the personality of the individual holder for the time being of the office in
question. The usual attributes of Corporations, just like other registered business
associations include the possession of a name in which they may sue or be sued and the
power to own, hold property. Another essential element in the legal concept of a
Corporation is that it has perpetual succession. Accordingly, once a liability or obligation
has become binding on a corporation, it will bind the successors even thought they are
expressly mentioned. This is unlike a partnership in which, if one of the partners dies,
the partnership dies automatic unless expressly indicated to the contrary. Another prime
characteristic of a corporation is that it is a distinct entity. That is to say, in law, the
individual cooperators or members of which it is composed are something wholly
different from the corporation itself in Solomon v. Solomon, it was expressly stated that
the liability of an individual member is not increased by the fact that he is the sole person
beneficiary interested in the property of the corporation. The stakeholders of a
corporation are generally not personally liable for any of the obligations of the
corporation whatever their character or however they may have been incurred. But in a
partnership arrangement every member is liable jointly with the other partners for all
debts and obligations of the firm incurred while he is a partner. Though the practice on
nationalization is for a corporate body o be formed which is a separate entity, however, it
is subject to a measure of ministerial control just like co-operative societies. The most
obvious and startling difference is that a public corporation has neither shareholders nor
share capital, unlike companies. Indeed, it is only nominally the it has any members for
these are appointed and removed by the minister and are the same people as the
directorate. In effect therefore, Corporations are statutory companies differing from
others in that the Companies Act does not apply to them, the whole statue law applicable

119
being contained in the Acts creating them. Additionally, the dichotomy of management
and membership which is characteristic of limited companies has no meaning in the case
of public corporations. It can issue stock and this stock is its liability but instead of being
charged on its assets, like company’s debentures it is guaranteed by the Treasury. In
effect it is the government stock, the servicing of which is made the primary liability of
the corporation for accounting purposes in order to determine whether it is truly self-
supporting. Te words of Denning L-J in Tamlin v Hannaford admirably summaries the
fundamental difference between the two types of commercial body; Companies and
Corporations.

The significant difference is that there are no shareholders to subsidize the capital or to
have any voice in its affairs. The money which the corporation needs is not raised by the
issue of shares but by borrowing and its borrowing is not secured by debentures but is
guaranteed by the treasury. If it cannot repay, the loss falls on the consolidated fund…
that is to say on the taxpayers. There are no shareholders to elect directors or to fix
remuneration….if it should make losses and be unable to pay its debts, its property is
liable to execution, but not to be wound up at the suit of any creditor.

Also as public authorities, they are subject to the normal controls of constitutions and
administrative law, to supervision by the minister who in turn is answerable to parliament
and by the courts through the controls that they exercise over administrative authorities.
Thus unlike companies there are no annual general meetings to which accounts can be
presented. As regards the revenue realized, corporations cannot distribute profits by way
of dividend but plough the whole of them back into the enterprise. The objects and
powers of these corporations are set out in much the same way as in the “objects clause”
of memoranda of association. Just like a company if a corporation exceeds its powers,
the act in question is ultra vires and void. It follows then that a name is essential to a
corporation, and in the case of one created by a special Act, the name must be expressed
in the Act or implies from the nature of it. Furthermore, an act of a corporation, done
either by direct vote or b agents authorized for the purpose, is the manifestation of the
collected will of the corporation as such can bind the corporation. However, in a
partnership, each member binds as principal. Thus by the expression of “public

120
corporation” is meant the type of body set up to operate nationalized industries or, for the
organization of other public enterprises and services. Since public utility is the primary
objective, the public are substituted for a shareholder as profit-shares and risk bearers.

Companies
A business may be incorporated as a registered company, that is, as association of
persons formed for the purpose of some business or undertaking carried on in the
company’s name. It is created b following a registration procedure carried out through
the Registrar of Companies. A registered company can be formed by two or more people
who become shareholder. This requirement can be contrasted with that of both the co-
operatives and corporations in that, in the case of the former, any ten or more persons or
two societies, may be registered as a co-operative society. In the case of the latter, there
are no shareholders for it is only nominally that it has members, for these are appointed
and removed by the minister, and are the same peoples as the directorate.

The Companies Act provides three basic types of companies, companies limited by
shares, companies limited by guarantee and unlimited companies. Under companies
limited by shares, each member holders one or more “shares” issued by the company in
return for payment. A shareholder’s liability to the company’s creditors is normally
limited to that part of the nominal value of his shares, which he has not yet paid to the
company. In a company limited by guarantee, a member, on joining, guarantees the
company’s debts, but only up to a stated figure. Lastly, in unlimited companies, each
member is fully liable for the company’s debts in the same way as members of a
partnership.

A private company cannot trade until its application for registration has been dealt with
by the Registrar of Companies and has given the company a certificate of Incorporation.
But such a process is not applicable in the case of partnerships and sole trade. The capital
base of companies is divisible into transferable shares with limited liability. This factor
distinguishes companies from both corporations and co-operatives in that they do not
have as issued share capital in nominal value and for this reason they do to have
shareholders. The rule of limited liability which says that a shareholder in a company

121
who has once paid for his or her shares in full cannot be required to pay any more into the
company even if it cannot pay its debts allows the shareholders in a company to leave the
company’s creditors unpaid. However, directors, and in some cases members, may have
personal liability of they have continued to trade and incur debts when the company was
unable to pay its existing debts. This puts the directors and the members in a striking
similar position to that of sole traders and partners. Another fundamental characteristic
of companies is that they have a separate and district legal personality from the members
which constitute it. As a corporate person the company is entitled to own and hold
property as distinct from its members. This attribute is also the case with corporations
and co-operatives. As a natural consequence of the corporation and transferability of
shares, the company, just like corporations, has perpetual succession. It was held, in R.F.
Perumal v H. John that as a separate legal entity, the property of the company is not
owned by the members who own shares but by the company. Debts of the company are
debts of this artificial legal person and not of the people running the company or owing
shares in it. In Tunstal v Steigma it was held that in consequences of a company being an
entity separate and distinct from its shareholders, the life of the company is not measured
by the life of any member. Accordingly a company has an independent life in the sense
that it continues to exist without regard to the death of the individuals involved in its
cooperate affairs. Even the death of all its members does not end the company. Thus a
shareholder cannot be held liable for the acts of the company even though he holds
virtually the entire share capital. Similarly the shareholder cannot bind the company by
their acts; they are not its agents. In Solomon v Solomon, it was held that as soon as the
company was duly incorporated, it became, in the eyes of the law, a separate and distinct,
as well as independent person……….. the company is not in law the agent of the
subscribers or trustee for them. They are as the subscribers as members liable in any
shape or form, except to the extent and manner provided by the Act.

A company cannot do anything beyond its powers and any act beyond such powers is
ultra vires and void and cannot be ratified even by the assent of the whole body of
shareholders; Ashbury Rail Case. Thus the “object clause” in the memorandum of
association informs the members in what kind of business their capital may be used and

122
secondly, informs persons dealing with the company what its powers are; Cotman v
Broughtman. Statutory corporations are also bound to do only that which they are
authorized directly by the statute creating them. However, a sole trader is not in any way
restricted in the rights and powers of the kind of business to engage in. In addition, the
company’s act requires all companies, public and private to appoint editors, an expense
which is not forced upon sole traders or partners. Apart from that, formal meetings,
called Annual General Meetings must be held by a company at specified intervals. In
conclusion, therefore, those who run companies will have to spend sometime in ensuring
that the business is carried on in such a way as to comply with legislation. The Sole
trader and partner have a much less complicated legal environment to their advantage.

Statutory Corporations
A statutory corporation is defined as ay artificial person created under the statute of the
state, organized for the purpose set out in the application for corporate existence. An
example of a statutory corporation in Zambia would include amongst others ZNBC and
ZESCO. The main orientation of setting up statutory corporations if the provision of
affordable services to the nation and generates revenue for the state.

In terms of formation statutory corporations are a creature of statute law. The

management and control under of a statutory corporation is done by a Board of Directors
which is usually appointed in most cases by the ministry under which such corporation
has been formed.

In terms of identity a corporation exists as a distinct legal person or entity with the
capacity to sue and be sued.

Advantages of a Statutory Corporation

1. One of the most outstanding advantages of a statutory corporation is its
insulation to liability provided by the corporation form. This entails that

123
 creditors cannot look beyond the assets of the business. Thus shareholder’s
assets are from interference in an event of loss in the business.
2. There is centralized management in the hands of skilled labour.
3. Corporations enjoy a continued existence in the eyes of the law and the life
span of a shareholder has no life bearing effect on the life of the business.
This principle has been illustrated in the case of PETROGRASKY
MEDJUNRODNY KOMMERCHESKY BANK v NATION CITY BANK OF
NEW YORK, where the defendant Bank refused to pay the balance of the
money the plaintiff Bank was owed arguing that due to the confiscation of
plaintiff’s assets during the Russia Bolsheviks revolution by the state the
plaintiffs ceased to exist as a juristic person. The court stated, inter alia, that
the presumption of continuance of corporate personally must tilt the balance.
In the court’s view the corporation survived in such a sense and to such a
degree that it could still be dealt with as a person at law in lands t did not
recognize the Bolsheviks. This potential for perpetual existence therefore
creates stability in a business.
4. Transferability of shares – in a corporation there is capability to access re-
capitalization resources by selling and buying shares.

Disadvantages of a Corporation

1. Corporations are subject to Governmental or political abuse due to the nature of

regulatory control imposed on the state.
2. Taxation is usually high on incomes corporation usually owing to the size of the
business run and also taxes on the dividends paid to the shareholders.

Companies
Companies created and registered under the Companies Act are another form of
corporations. By law the business name of a company should be registered as provided
under the Registration of Business Names Act Cap 389 of the laws of Zambia.

124
The most important characteristic of a company is that it is “incorporated” and so has
legal personality. Thus a company owns its property and can enforce legal rights and
owing duties can be enforces against it.

This principal was stated in the case of Salomon v Salomon where despite being the main
shareholder in the business, a creditor was treated as a separate entity distinct from the
legal personality (entity) of the company.

The company as a legal person can take action to enforce its legal right and can be sued
for breach of its duties according to section 22 of the Companies Act.

Advantages
Like a co-operation, which in a sense companies are, in a company there is insulation of
liability to assets of shareholders. Companies also enjoy continued existence even at the
death of the shareholder. In a company shares can be floated and transferred. This
enables the company access new capital. Companies also benefit from centralized
management.

Disadvantaged
The usual disadvantages of a company is that, usually taxes are high. Further
management of the company may not do the best and lead the company into losses
because they are simply employees and not shareholders with a primary aim of getting
remuneration.

Statutory Corporations
Statutory corporations are a creature of statute. The objectives, appointments of the
board dissolution, the winding up are found in the Act itself. For instance, the creation of
the ZAMBIA – TANZIANIA PIPELINE is embodied in Cap 455 of the Laws of Zambia.
The fundamental objectives are firstly, to provide a service, which has socio and
economic ramifications for instance, a railway line. Secondly, it is an expensive project
and will take a long time to be functional and private investors rarely lend money or

125
invest large amounts in something that will take long to yield any money hence, the
reason why they should be government run entities.

The main features of statutory corporations are that firstly, the minister under whose
portfolio the company falls ahs extensive powers, he/she appoints the board which
operates these corporations and dissolves the board and acts as the board in absence of
the board. The board usually consists of 5 – 10 members.

Secondly, most of the statutory corporations are given financial assistance from
government. In this sense they are publicly owned since they are funded from public
funds either to a large extent or a minimal extent. Because of this form of funding, they
are limited in their operations as most are liable to public accountability. Thirdly, while
corporations must make a profit, they carry with them the duty to promote other
developmental aspects, like the Railway assisting in the development of agriculture.
Finally, statutory bodies are common in the areas of utilities like electricity, water,
transport, which are critical to a nations development.

Comparisons & Contrasts

Commencement: sole traders and partnerships are easy to organize and can commence
business merely by opening the doors of the premises. In both cases, if the organization
is not using the name of its proprietor(s), but using a business name, then the organization
must comply with the requirements of the Registration of Business Names Act.

On the other hand, companies cannot trade until its application for registration has been
dealt with by the registrar of companies and has given the company a certificate of
incorporation. A statutory corporation will only commence after an Act of parliament
creating it has been passed.

Capital: all businesses need money to being trading, some kind of start-up finance. Sole
traders must either put in enough of their own money if they have it or put in what they
have and try to borrow the rest. Partners are in the same position. Similarly, a co-
operative if financed by the members. Pursuant to Section 16 of the Co-operative

126
Societies Act, the financing comes from the capital of its members, the reserves fund and
any additional funds are provided for by the by-laws. The shareholders of the company
contribute money, which makes up the capital of the company.

In contrast, government finances statutory corporations. They are funded by proceeds of

any levy upon the public. They also get monies payable to the corporation from monies
appropriated by parliament.

Company
The other form of carrying on a business is by a registered company. The law relating to
companies is found in the Companies Act Cap 389 of the Laws of Zambia. They are
called registered companies because they are brought into existence by registration of
documents of which the most important is called a memorandum of association with a
public official, the Registrar of Companies - under any the promoters choose so long its
legal and not similar to the name of an existing company.

One important characteristic of a registered company is that it is incorporated and so has

legal personality distinct from its shareholder, directors and employees as established in
the case of Salomon and Co Ltd v Solomon in which it was stated that if you register a
company and a Certificate of Registration has been issued, the company becomes a legal
entity and it wears a legal personality and can sue and be sued in its own name.

Further illustration of the separate legal status of a company and its shareholders is
provided by Lee v Lee’s Air Farming Ltd where Lee who was founder, principal
shareholder, managing director, and chief pilot of a company, had been killed while
engaged on the business of the company. The Privy Council held that Lee and the
company were distinct legal persons. Consequently, Lee could enter into a contract of
employment with the company and his widows could therefore claim compensation
under a government scheme, which was limited to widows’ employees.

Thus, the effects of separate legal personality are many. Apart from being able to sue and
be sued, a company has perpetual succession, as it does not die on the death of

127
shareholders. Other effects of a company being a separate legal personality is that the
shareholders, directors and its employees are not liable for criminal pr tortuous acts or
debts of the company.

Be it as it may, there are drawbacks associated with a company’s separate legal

personality. For instance, since a company can own property in its own right, its
members have no director interest in the property of the company and hence they cannot
pledge or insure such property as shown in the case of Macura v Northern Assurance
Company Limited in which the Plaintiff who was the principal shareholder in a company
which he had formed to take over his timber prior to the incorporation of the company
when the timber was destroyed by fire. The House of Lords held that since the plaintiff
no longer owned the property, he could not have a valid policy of insurance thereon, nor
could the company claim the benefit of the policy because it was not a party to the
contract of insurance.

Statutory Corporation
Another way of doing a business is through a statutory corporation. According to D.
Davidson in his book Business Law, “a statutory corporation is an artificial person
created under the statute of a nation”.

L.B Gower in the Principles of Modern Company Law described a statutory corporation
as the type of body set up to operate nationalized industries or for the organization of
other public enterprises and services.

Statutory corporations may be classified as commercial corporations designed to run an

industry or public utility according to commercial principles, although subject to a
measure of ministerial control. And other statutory corporations are classified as social
service corporations designed to carry out a particular social service on behalf of the
government. A statutory corporation is usually under the control of the Minster whose
portfolio they fall. Examples of such entities in Zambia include the University of

128
Zambia. Zambia Electricity Supply Cooperation and Zambia National Broadcasting
Cooperation.

One of the characteristics of a statutory corporation is its insulation from liability

provided by the corporation form. This means creditors of the corporation cannot
normally reach the personal assets of shareholders to pay the corporation’s debts.
Furthermore, statutory corporations have a centralized management; a corporation’s
management functions are vested in a small group of persons possessing management
expertise. And as regards, the financial resources of the statutory corporations, they
consist of money appropriated by parliament, money paid for services rendered by the
corporation, grants and donations from business partners and assets or real property,
which enables the corporation to borrow from banks.

And further to that, corporations enjoy continued existence or perpetual succession in the
eye of the law even on the death of its officer’s directors or shareholders or indeed
change of government under which it was created. In Tamlin v Hannaford, Lord
Denning stated that in the eye of the law corporation is its own master is answerable as
fully as any other person or corporation.

It suffices to mention that statutory bodies are more subject to governmental control and
hence subject of political abuse. They also tend to be bureaucratic and very rigid
organizations.

Comparison and Contrast of Characteristics of Business Associations

(a) Commencement of business

The sole trader and partnership can commence business merely by opening the
doors of the premises. These two business associations would only require to
register in compliance with provisions of the Registration of Business Names Act.
Cooperatives commence business only after registering with the Registrar of
Cooperatives as provided for under section 8 of the Co-operative Societies Act.

129
 As for a company, it cannot trade until its application for registration has been
dealt with by the Registrar of Companies and he has given the company a
certificate of Incorporation under a business name in compliance with provisions
of the Companies Act. Statutory corporations unlike other business associations
commence business after parliament has passed an Act of Parliament providing
for the creation and operation of the corporation.

(b) Capital
All businesses need money to being trading. Sole traders must either put in
enough of their own money if they have it or borrow from say banks by pledging
some security like person house of the sole trader or house of the partners. As for
Section 16 of the Corporative Societies Act enacts that the capital of a corporative
comes from the capital of its members, the reserve fund and any additional funds
as provided for by the by-laws. A company raises its nominal capital through
paid up capital and uncalled capital by shareholders. A company may also raise
money by borrowing often from a bank.

The financial resources of a statutory corporation consist of money appropriates

by parliament; money paid for services rendered by the corporation; grant and
donations from business partners and assets or real property which enables the
corporations to borrow from banks.

(c) Liability of the Proprietor

A sole trade is liable for the debts of the business to the extent of everything he
owns. Even his private possessions may be ordered to be sold to pay the debts of
the business. In a partnership, partners are jointly and severally liable for the debs
of the firm. They can be sued by a creditor who hasn’t been paid individually or
severally. The liability extents to the private assets of the partners. As for
cooperatives, once registered it becomes a body corporate and the members of the
cooperative are not liable for the debts, criminal or tortuous acts of the
cooperative.

130
 Similarly, in a company, since it has independent legal personality independent
from its shareholders, the role of limited liability means that the shareholders and
directors of a company cannot be held liable for the debts of a company. And just
like cooperatives and companies, statutory co operations insulate liability of
shareholders to pay for the corporation’s dents because of the corporate form
these business associations take.

(d) Continuity
The death or bankruptcy or insanity of a sole trader brings the organization to an
end. In partnership the death, bankruptcy, or retirement of a partner can lead to
the firm closing down business. The business can only continue if there is an
expression in the partnership agreement whereby the sole partner will have to find
money to buy out the shares of the deceased. Unlike the sole proprietorship and
partnership, a cooperative by virtue of being body corporate has perpetual
succession. Similarly a company has perpetual succession since it is a legal entity
with independent existence from the shareholders. And just like a cooperative
and a company, a statutory corporation has perpetual succession in the eye of the
law even on the death of its officers, directors or shareholders or indeed change of
government under which it was created.

(e) Publicity and External Control of the Undertaking

Little or no publicity attaches in law to the affairs of sole traders and partnerships.
Their paper work and administration is a matter for them to decided, subject, in a
partnership to anything that the partnership agreement may say.

Unlike in sole proprietorship and partnership, in a cooperative the paper work,

administration, policies and by-laws are subject to approval by the Registrar of
Cooperatives there by provision of government intervention.

Similarly for companies, a considerable degree of publicity attaches as companies

must file their accounts annually to the Registrar of Companies. Just like
cooperatives and companies, a high degree of publicity attaches in statutory

131
 corporations since the Minister who replaces the shareholders does so not for his
personal enrichment but as guardian of the public and in particular of the tax
payer and user and is in turn responsible to parliament. In Tamlin v Hannaford,
Lord Denning stated that there are other people who have also a vital interest in
the corporation’s affairs. All those who use the service which it provides, and all
those whose supplies depend on it in short everyone in the land is concerned in
seeing that it is properly run.

(f) Termination
in sole proprietorship, the sole trader can decide to close the business. The
business can also come to a close upon the death, insanity or bankruptcy of the
sole trader. As for partnership, partners can agree to dissolve the partnership.
Furthermore, the death, bankruptcy or withdrawal of any partner or a court may
dissolve the partnership. A cooperative may wind up as provided for under
Section 81 of the Co-operative Societies Act if registration was obtained by fraud,
if it exists for an illegal purpose, if upon being given notice by the Registrar
continues to contravene the provisions of its by-laws and the Act, or if the number
of members falls below the requisite number of ten or upon passing a special
resolution to cancel the registration of a co-operative society; or if it is no longer
in operation of the business.

In conclusion, the foregoing are the usual forms of business associations. Thus
depending on the intention and propose of the business to be established and depending
on suitability as regards the characteristics of wither of the sole proprietorship;
partnership, cooperative, company or statutory body, business may be commenced.

Personal Liability of Owners

Just like a sole trader who has unlimited personal liability for the obligations of the
business, in a General Partnership, there is unlimited personal liability of partners for the
obligations of the business. They are jointly and severally liable for the debts of the firm.
The liability extents to the personal property of the partners. Even the estate of a
diseased partner is liable for the debts of the firm incurred after his retirement if the

132
firm’s existing customers were not informed about the retirement. This can be contrasted
with the position relating to General partnership, Companies or Corporations, and
Cooperatives Societies.

A limited partnership is a general partnership I all respects except that the statute
provides that partners have no personal liability for firm obligations that exceed the
assets of the general partnership. However, partners in a limited partnership have full
personal liability for claims arising from their own misconduct.

The position of a limited partnership to some extent is similar to that of

Companies/Corporation and cooperative societies. Unlike both sole trader and
partnership, the liability of shareholders as well members of a cooperative society is
limited. Both a company and a cooperative society are corporate bodies, meaning they
are legal persons separate from their members. In the case of a registered company by
shares the limited liability is conferred by section 266 (1) of the Companies Act. In a
similar manner sections 13 and 15 of the cooperative Societies Act limits the liability of a
member only to the extent of the amount remaining unpaid on his shares or on his
membership fees, as the case may be.

An incorporated company is an entity distinct from its members and as a result, there is
generally no personal liability of shareholders or members for the obligation of the
corporation or business.

The notion that a company is an entity independent of its shareholders is deeply

ingrained. The business is conducted in the company’s name. The company itself enters
into contracts, borrows money, sues and may be sued in its own name and otherwise
conducts its business much as though it were a real, flesh and blood person. It may own
real estate in its own name free and clear of claims of the spouses of shareholders or other
claims of creditors. However, the assets of the corporation are subject to seizure by
corporate creditors and the shares of stock of the corporation are subject to seizure by
personal creditors. The principle that a company is legal person having a juristic distinct
from and independent of the individual person whole for the time being its members was

133
judicially recognized by the House of Lords in the famous case of Salomon v Salomon &
Co Ltd. The House of Lords held that the existence of the company is quite independent
and distinct from its members. Lord Macnaghten observed in this case:

“The company is at law a different person altogether from the subscribers

to the memorandum; and that though it may be that after incorporation
the business is precisely the same as it was before, and the same person
are mangers, and the same person receive the profit, the company is not in
law an agent of the subscribers or trustee from them. Nor are the
subscribers, as members liable, in any shape, or form, except as provided
by the Act”.

According to the Companies Act, the liability of members for debts of the company is
limited to the amount unpaid on their shares, and this is so no matter how heavy the
losses the company might have suffered. No shareholder can be called upon to pay more
than the nominal or face value of shares held by him, in case of a company with limited
liability. Thus by virtue of this characteristic, the personal property of the shareholder
can not be sized for debts of the company, if he holds fully paid up shares. Although a
limited partner has no personal liability, a privilege similar to that enjoyed by
shareholders and members in a cooperative society, the partnership is in no form a
separate legal entity.

In the United States, for example reification of an incorporated company or corporation

as an “artificial person” with many of the rights and privileges of individuals has led to
the corporation being given some of the constitutional protections available to flesh-and-
blood individuals. As described by Justice Sandra Day O’Connor:

“In the words of Chief Marshal, a corporation is ‘an artificial being, invisible,
intangible, and existing only in contemplation of law.’…On the other hand, a
corporation has a First Amendment right to freedom of speech, Virginia Pharmacy
Bd. v Virginia Citizens Consumer Council, Inc. 425 U.S 748 (1976), and cannot have
its property taken without just compensation, Penn Central Transportation Co. v New
York City, 438 U.S. 104 (1978). A corporation is also protected from unreasonable
searches and seizures, Marshall v Barlow’s, Inc., 436 U.S. 307 (1978), and can plead
former jeopardy as a bar to a persecution, United States v Martin Linen Supply Co.,

134
 430 U.S. 564 (1777). Furthermore, a corporation is entitled to due process,
Helicopters Nacionales de Colombia v Hall, 466 U.S. 408 (1984), and equal
protection, Metropolitan Life Ins. Co. v Ward, 470 U.S. 869 (1985), of law.”

Commencement of Business & Key Document for Formation

A sole proprietor can commence by simply opening the doors and also obtaining license
under planning and other regulations available for business purpose. In the case of a
partnership, there is no legal requirement that the agreement should be in writing. To the
contrary, the parties are at liberty to either make a written or oral agreement. In extreme
cases, the law will imply the partnership from the conduct of partners. A good example
is the case Fens Ton v John Stone, in which despite the fact that the parties did not,
wither in writing or orally, agree to be partners, the court inferred a partnership
relationship from the circumstances of the case. Similarly in re Vannoy, an association
was found to be a partnership where individuals joined together to derive a profit from
their activities even in the absence of any written agreement and partnership property was
held in names of individual partners while no special documents are required, if it is
using not the names of the proprietor (s) but a business, just as the case with partnership,
it will be required to register under the Registration of Business Names Act. A limited
partnership will require a Limited Partnership Certificate and a Limited Partnership
Agreement where real estate is to be contributed as partnership property or the agreement
includes a term of more than one year, a written agreement may be necessary to comply
with the statute of frauds.

In sharp contrasts a sole trader and partnership, neither a company nor a cooperative
society can validly commence its business merely by opening the doors to its premises.
A company to commence its business must be registered under the Companies Act
Chapter 388 of the Laws of Zambia, and the Registrar must have issued a certificate of
incorporation. This is what Marsh and Souls by analogically describe a certificate of
incorporation as “the company’s birth certificate”. A public company is required to have
at least a share capital prescribed by the Companies Act minimal value of which at least
quarter has been paid plus the whole of any premium. There are no such similar
requirements in partnership. The key documents that are articles of incorporation, by-

135
laws. Organizational Board resolution, Stock certificate. A statutory corporation while
similar to other corporations in much respect is a creature of a statutory instrument and
there has to be one to that effect.

(c) Publicity & Management of business

The plans, profits and other vital facts of these organizations are not open to the general
public. The law attaches very little, if any, publicity to the affairs of both sole and
partnership. This is not so with affairs of a company as well as those of a cooperative
society for they are subject to considerable publicity. Companies are required to send a
copy of their accounts to the Registrar of companies. The cooperative societies are also
required to submit to the minister annual reports of the society. In addition, cooperative
societies are mandated to keep a copy of the Co-operative Societies Act, its by-laws and a
list of its members open to inspection, free to change, at all reasonable times at the
registered office of the society. Unlike the other forms of business associations, a
cooperative society is subject to considerable control and supervision by the minister and
the Registrar.

A sole proprietor manages the business on his or her behalf. The position is quite similar
with the partnership. According to section 24 (5) of the partnership’s Act of 1890 “every
partner may take in the management of the partnership business”. This therefore means
that, the governors are the general partners and the Partnership Act does the governing.
With sole proprietorship is that a partner is allowed to do only that which is necessary for
carrying on in the business of the kid carried on by the firm.

BIBLIOGRAPHY

Card, R Law for Accountancy Students. 5th Ed, (1994), London: Butterworths.
Davidson, D.V. Business Law: Principles and cases. 2nd Ed (1984) Boston:
DWS Kent Publishing Company
Gower, L.C.B., The Principles of Modern Company Law. 3rd Ed. (1969) London

136
 Stevens and Sons
Kapoor S.K. Law of Contract (1999). Allahabad: Central Law Agency
Pride, W. Business Law: Organizations (1999): Houghton Muffin.

CHAPTER 3

Legal relationship arising from the memorandum and articles

Hickman v Kent or Romney Marsh Sheep-Breeders’ Association

[1915]1 Ch 881

137
A provision in the company’s articles of association required disputes between the
company and any of its members to be referred to arbitration. The plaintiff member
sought to sue the company without submitting his dispute to arbitration. The court held
that the company could enforce the arbitration clause.

ASTBURY J: [900]. . . I think this much is clear, first, that no article can constitute a
contract between the company and a third person; secondly, that no right merely
purporting to be given by an article to a person, whether a member or not, in a capacity
other than that of a member, as, for instance, as solicitor, promoters, director, can be
enforced against the company; and, thirdly, that articles regulating the rights and
obligations of the members generally as such do create rights and obligations between
them and the company respectively. . . .

Eley v Positive Government Security Life Assurance Co Ltd

(1876) 1 ExD 88
Clause 118 of the articles of association of the defendant company provided that the
plaintiff should be solicitor to the company, and that he should transact all the legal
business of the company, for the usual fees and charges. The plaintiff acted as solicitor to
the company for some time, but ultimately the company ceased to employ him. The
plaintiff brought an action against the company for breach of contract. His action failed.

LORD CAIRNS LC: [89]. . .Articles of association, as is well known, follow the
memorandum, which states the objects of the company, while the articles state the
arrangement between the members. They are an agreement inter socios, and in that view,
if the introductory words are applied to article 118, it becomes a covenant between the
parities to it that they will employ the plaintiff. Now, so far as that is concerned, it is res
inter alios acta86, the plaintiff is no party to it. No doubt he thought that by inserting it he
was making his employment safe as against the company; but his relying on that view of
the law does not alter the legal effect of the articles. This article is either a stipulation

86
Res inter alos acta alteri nocere non debet – a transaction between strangers should not prejudice another
party . . . an admission generally binds only the party making it [Beswick v Beswick (1968) AC 58]

138
which would bind the members, or else a mandate to the directors. In either case it is a
matter between the directors and shareholders, and not between them and the plaintiff.

Alteration of constitution
Sidebottom v Kershaw, Leese and Co Ltd
[920] 1 Ch 154 (CA)
The defendant company, a private trading company, passed a resolution to alter its
articles of association by providing that the directors (who held the majority of the
shares) should have power to require shareholders who carried on business in competition
with the company to transfer their shares, at their fair value, to the directors. The
plaintiff, who held a minority of the shares and carried on a competing business, brought
action for a declaration that the resolution was invalid.

WARRINGTON LJ: [170]. . . Now it is quite plain that an article providing for the
compulsory sale by a member of the company of his shares is good if it is contained in
the original articles; that is to say that it is a regulation of the company within the
meaning of the statute. If that be so, and of such an article could be a regulation of the
company within the meaning of the statute, then it is equally plain that it is one of the
things which may be introduced by an alteration effected by special resolution. . . . [T]hat
leaves as the only question to be decided whether the power itself was exercised bona
fide for the benefit of the company. In the present case the object of the article was to
enable this private trading company to get rid as a shareholder of any member who was
either carrying on a business in direct opposition or who was a director of any company
carrying on a business in direct competition. . . . Now, looking at it from the point of
view of the ordinary business man engaged in trade, might he not quite well take the view
that it would not be to the advantage of this private company – which is, after all, in many
respects like a private firm, although not so in law – or rather that it would be to the
disadvantage of this private company that one of its members should be carrying on a
business in direct competition, or be a director of a company carrying on business in
direct competition? That membership of the company gives some opportunities,
possibly, according to the constitution of this body, not very great opportunities, of
getting behind the scenes and knowing what the company is doing, there can be no doubt,

139
and it might be greatly to the disadvantage of the company that knowledge so acquired
should be exercised by a competitor. Therefore it is desirable that, if there was reason to
suppose that it would be exercised, they should have power to remove that competitor
from his advantageous position of shareholder. If that be so, and there being in this case
no suggestion of fraud, it seems to me that the only inference one can draw is that the
company were, in passing this special resolution, acting bona fide for the benefit of the
company at large. It may be that a particular course may be to the disadvantage of some
individual shareholder; but, notwithstanding that, it might still be for the benefit of the
company at large that that course should be pursued. But it is then said that this step was
taken with the special object of ridding the company of a particular shareholder, whose
name is given in the affidavits, who was known to be a competitor, and that for that
reason the resolution was not passed bona fide. I am entirely unable to follow that. I
have no doubt that the fact that there was this competitor, and probably the knowledge
that he was doing harm to the company, awoke the directors to the disadvantage in which
they were placed by having such a man as one of their shareholders;. . . but that is a very
different thing from saying that they passed this resolution with the mala fide and
dishonest intention of getting rid of a shareholder whom they did not wish to remain in
the company.

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd

[1920] 2 Ch 124
By altering its articles the company empowered the majority of shareholders to compel
any member to sell his shares at a price to be fixed from time to time by the directors to a
person (whether a member or not) determined by the directors. The court held that the
company could not confer such power on the majority.

PETERSON J: [137]. . . Having regard to the decision in . . . Sidebottom v Kershaw,

Leese and Co Ltd [1920] 1 Ch 154 (CA)], it appears that a resolution altering the articles
in such a way as to enable the shareholder to compel a shareholder who is actively
interested in a competing firm to transfer his shares would be valid on the ground that it
was an alteration which was bona fide for the benefit of the company. But in this case
the resolution which was passed went much further than the protection of the company

140
from action by shareholder which could be properly considered to be detrimental to its
interests. The resolution as passed enables the majority of the shareholders to compel
any member. . . to transfer his shares, although there may be no complaint of any kind
against his conduct and it cannot be suggested that he has done, or contemplates doing,
anything to the detriment of the company. It is an unrestricted power which authorizes
the majority, if they think proper, or if they consider it in their own interests to require the
transfer of his shares by any shareholder other than the Briton Ferry Company. It is true
that the directors may offer the shares to any person, whether a member of the company
or not; but having regard to the way in which the board is constituted, no one can doubt
that if the majority desired to acquire the shares, the directors would offer the shares to
the remaining shareholders.
. . . As drawn, the resolution authorizes the majority at their will and without any reason,
other than the desire to get into their hands the whole of the shares in the company, to
expropriate the shares of the minority. . . .
...
. . . In my view it cannot be said that a power on the part of the majority to expropriate
any shareholder they may think proper at their will and pleasure is for the benefit of the
company as a whole. To say that such an unrestricted and unlimited power of
expropriation is for the benefit of the company appears to me to be confusing the interests
of the majority with the benefit of the company as a whole. In my opinion the power
which, in this case, has been conferred upon the majority of the shareholders by the
alteration of the articles of association in this case is too wide and is not such a power as
can be assumed by the majority. . . .

[The new article was accordingly declared to be invalid.]

John Shaw and Sons (Salford) Ltd v Shaw

[1935] 2 KB 113 (CA)
GREER LJ: [134] . . . A company is an entity distinct alike from its shareholders and its
directors. Some of its powers may, according to its articles, be exercised by directors,

141
certain other powers may be reserved for the shareholders in general meeting. If powers
of management are vested in the directors, they and they alone can exercise these powers.
The only way in which the general body of the shareholders can control the exercise of
the powers vested by the articles in the directors is by altering their articles, or if
opportunity arises under the articles, by refusing to re-elect the directors of whose actions
they disapprove. They cannot themselves usurp the powers which by the articles are
vested in the directors any more than the directors can usurp the powers vested by the
articles in the general body of shareholders. . .

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame

[1906] 2 Ch 34 (CA)
By the articles of association of a company the general management and control of the
company were vested in the directors, subject to such regulations as might be made by
extraordinary resolution. At a general meeting of the company a resolution was passed
by a single majority of the shareholders for the sale of he company’s assets on certain
terms, directing the directors to carry the sale into effect. The directors were of the
opinion that a sale on those terms was not for the benefit of the company and declined to
carry the sale into effect. It was held that they could be compelled to do so.

COZENS-HARDY LJ: [45]. . . If you once get clear of the view that directors are mere
agents of the company, I cannot see anything in principle to justify the contention that the
directors are bound to comply with the votes or the resolution of a simple majority at an
ordinary meeting of the shareholders. I do not think it true to say that the directors are
agents. I think it more nearly true to say that they are in the position of managing
partners appointed to fill that post by mutual arrangement between all the shareholders. . .

142
 CHAPTER 4

ARTICLES OF ASSOCIATION

A company’s constitution is the Article of Association. The articles proclaim the name
of the company and define the purpose for which the company is formed, the capital with
which it is formed and in general terms its powers to do anything necessary or reasonably
incidental to the main purpose. The articles of association are so basic to the formation
the company that if a company does not have any of its own, it is presumed to have
adopted the Standard Articles in the first Schedule of the Act. Therefore the company is
able to do only what it is expressly or impliedly authorized to do by the Articles. Where
a company opts to provide its own articles, the Standard Articles shall nevertheless be
applicable where its provisions have not have been modified or excluded by the
companies own registered articles.87 Where a provision in the articles is inconsistent with
the Act or any other written law, the provision is invalid to the extent of the
inconsistency.88

The articles of association must state inter alia the name of the company, with the letters
“PLC” in the case of a public company, or with “limited” as the last word of the name in
the case of a company limited by shares or guarantee; and that the liability of the
members is limited; the nature of business of the company; the physical address being the
registered office of the company, the postal address being the registered postal address of
the company, the amount of share capital divided into shares of fixed amount; a
subscription clause in which each subscriber writes opposite her or his name the number
of shares taken89. The subscribers must take at least one share each.

The articles of a company take the format of paragraphs numbered consecutively 90. The
articles of association also regulate the conduct of the company and may restrict the
business the company may carry on91. It contains provisions which relate to voting rights

87
Section 7 (5)
88
Section 7(3)
89
Section 6
90
Section 7(6)
91
Section 7(1) and (2)

143
of the shareholders, the procedure for the appointment and dismissal of the directors and
the secretary and the auditors, and the distribution of dividends, profits and assets. These
are very important and receive serious treatment in the drafting of articles. Further there
are detailed provisions for the procedure for the calling of meetings, the issuance of
authorized capital, the transfer of shares and the alteration of the articles of association 92.
There are also certain statutory provisions which are mandatory, for example, the holding
of both statutory and annual general meetings93.

Standard Articles
The Articles of association regulate such matters as of membership, shares, share capital
and rights and variation of rights, the transfer of shares, transmission or forfeiture of
shares, the holding and conduct of general meetings, directors, secretary, company seal,
dividends and winding up issues. The First Schedule provides a model of the standard
articles. It is usual for companies to simply provide that

“The Company adopts the Standard Articles prescribed by the Companies Act in its
First Schedule, unless otherwise stated,”

or to simply reproduce the Standard Articles as its own, with the necessary adjustments,
for instance as to name, capital, nature of business, registered office and postal address
directors duties or management of the company and classes of shares.

The Articles as a Contract

As the articles regulate the conduct of the company and provide the company’s rules and
regulations about the life of the company, membership inter se and with directors, it is
also a contract document. The articles spell the terms of the contract, and the company
and the members are the parties to that contract. The effect of this position is that
members can enforce the provisions of the articles, as members. There are a few cases
which have dealt with the issue of suing to enforce provisions of the articles, from which
various principles of law have…94

92
Sections 7(1) and (2)
93
Section 8
94
Blake and Bond: Company Law 5th ed Swot Series Blackstone Press Limited (1996)

144
In Foss v Harbottle95it was held that where a wrong is done to the company, only the
company and not a member was the proper plaintiff. In Eley V Positive Government
Security Life Assurance Company Limited 96where a member sued qua97 solicitor, it was
held that he is in the same position as a person suing qua outsider, that is that he is not
privy to the contract created by the articles between members interse and the action will
fail.

The articles form a statutory contract, they can only be amended by special resolution.
The articles are a special type of contract. They have statutory force and as such there is
a statutory procedure for amendment. The procedure is that articles can only be amended
by special resolution, and this requirement is a special protection for members so that, for
instance, their rights are not varied easily. The protection is also intended for minority
shareholders as elucidated in Foss v Harbottle98 .

Amendment of Articles of Association

A company may amend its articles if it passes a special resolution approving the
amendment with respect to the following:
(a) its capital, whether that means increasing or maintaining or
reducing it;
(b) the business of the company and;
(c) the change of name of the company.

Section 8 of the Act provides that the objects of the company as stated in the articles may
only be altered with the authority of a special resolution in the general meeting, which
requires ¾ majority,99. The other provisions of Section 8 to which the company’s right to
alter the objects is subject to are as follows:
(a) The amendment of the Articles may be for any of the following purposes :
- to carry on its business more economically or more efficiently; or
- to attain its main purpose by new or improved means; or

95
(1843) 2 Hare 461
96
(1876) 1EXD 88
97
“qua” means in “her/his capacity as”
98
(1843)2 Hare 461
99
(1843) 2 Hare 461

145
 - to enlarge or change the local area of its operations; or
- to carry on some business which under existing circumstances may conveniently
or advantageously be combined with the business of the company; or
- to restrict or abandon any aspect of its business specified in the articles.
(b) For the alteration to take effect the company must within 21 days of the
special resolution lodge a copy of the resolution with the Registrar of
Companies together with a copy of each paragraph of the articles affected by
the amendment, in its amended form100. The articles in their amended form
are effective from the day they are lodged with the Registrar of Companies or
such later date as may be specified in the resolution. A company which fails
to comply with the amendment requirements mentioned above is in default
and each officer responsible for the default shall be guilty of an offence and
liable to a fine not exceeding three monetary units for each day that failure
continues101. As share capital is the subject of chapter 7 it shall not be
considered in this chapter.

Change of Name

The other situation in which amendment may be effected to the company is where the
company wishes to change its name. This requires a special resolution to be passed to that
effect102.

The company must notify the Registrar of Companies within 21 days after the date of the
special resolution by filing the prescribed form stating that the company intends to
change its name to the new name specified in the resolution.

The Registrar shall thereafter notify the company of its decision to accept the name, or
reject it if, in his or her opinion, the new name would be likely to cause confusion with
the name of another company already in existence, or is otherwise undesirable.103

100
Section 156 (3)
101
Section 8(2)
102
Section 40
103
Section 40(3)

146
If the new name is accepted, the company is required to lodge with the Registrar within
21 days of acceptance, the Company’s Certificate of Incorporation and a copy of the
resolution, whereupon the Registrar shall enter the new name in the Register in the place
of the former name. A replacement certificate of incorporation is thereafter issued
reflecting the new name.104

The effect of the change of name

A change of name does not affect

(a) the rights or obligations of the company.

(b) the proceedings, if any, that could have been continued or commenced against it
by its former name. Any such legal proceedings may be continued or commenced
against the company by its new name.105

The Registrar may also require change of the name of a company and so direct if in her/
his opinion, the name is likely to cause confusion with the name of another company or is
otherwise undesirable.106 When this directive is given, the company is required to comply
within fifty days or such longer period as the Registrar may allow. If the company does
not comply with this directive, the Registrar shall register the designating number 107 of
the company, together with the word “limited” if it is a private company limited by shares
or by guarantee, or “PLC” if it is a public company 108, as the name of the company. He
shall then issue a new certificate of incorporation for the company worded to meet the
circumstances of the case. 109
As in the case of change of name at the request of the
company, the rights or obligations of members or any legal proceedings shall not be
affected by the change. Any such legal proceedings may be continued or commenced
against the company using its new name.110

104
Section 40(4) and (5)
105
Section 40(7)
106
Section 41(1)
107
“designating number” by section 2, means the number assigned to a company or foreign company by the
Registrar for the purposes of identification.
108
Section 41(2) and section 37 (1) and (2)
109
Section 41(2)
110
Section 41(3)

147
The Demise of the Memorandum of Association
Prior to the 1994 (Companies) Act, Cap. 388, Chapter 686 made the memorandum of
association, the fundamental constitution without which no company could be
incorporated. The memorandum of association indicated the objects which the company
would pursue, and the powers expressly conferred upon it were intended to achieve those
objects. It stated the extent of its powers, so that anything else done by the company
outside the authorized objects was ultra vires, i.e. outside its powers; it was something it
was legally incapable of doing. Not even the members of the company in a general
meeting could unanimously ratify an ultra vire act. (In Ashbury Railway Carriage and
Iron Co. Ltd v Riche).111

Doctrine of “ultra vires”

The ultra vires doctrine was a common law doctrine based on the premise that a company
could only perform those acts for which it is incorporated, in order to safe guard the
interest of both the investors and its creditors. Once a company was registered, it had the
following powers:
(i) power to do such things as are necessary for attaining the stated objects;
(ii) Power to do those things which “may fairly be regarded as incidental to or
consequential upon those things which the legislature has authorized”
(iii) Powers to do those things allowed by the Act or other statute or law.

Writing on the objects clause in the Memorandum of Association Professor Gower stated
that the statement of the objects clause served to ensure:

“that an investor in a gold mining company does not find himself holding shares
in a fried fish shop.”

Any act that was not authorized by the objects clause, or which exceeded the limits of its
powers would be ultra vires, that is, without any legal effect.

In an effort to circumvent the stringent ultra vires doctrine, there developed a practice of
cluttering the memorandum of association with too many objects, so much so that a
111
(1875) LR 7 HL 653

148
company could do anything under the sun to avoid running into the ultra vires problem.
This compromised the protection which the doctrine was intended to give to share
holders, creditors and others dealing with the company. A court could unexpectedly
invalidate an apparently ultra vire transaction, as in Re-Introductions112 when it was held
that an objects clause enabling the company to borrow money or to give guarantees could
only create a power, because the most apparent result of exercising the clause would be to
the company’s disadvantages rather than advantage.

Thus, in 1994, Parliament in Zambia reviewed the usefulness of the memorandum of

association and legislated against it in preference for the Articles of association. Further
it was observed that some of the provisions in the Memorandum of Association were
duplicated in the Articles. The question was whether the existing two-document method
of incorporation should not give way to a single, simpler, less cumbersome process, in
which the necessity to set out in numbered paragraphs copius objects should not be
dispensed with. It was considered unnecessary to list the objects of the company, which
was the single most important reason for the memorandum of association was considered
adequate as it set out the rules by which the company was operated.

Thus the current Act in Section 22(1) provides: that

“A company shall have, subject to this Act and to such limitations, rights,
powers and privileges of an individual.”

This means that anything that an individual can do, a company can do: it can own
property, it can borrow money with or without giving security, and enter into any
business it pleases. There is no need any more for all those objectives in the
Memorandum of Association. The company can do what it likes. The only restrictions
on what it can do are those placed on it by the members. If they wish, they can forbid it
in the articles from, for example: mortgaging or charging its property without a specific

112
(1969)

149
approval of a general meeting; or from entering a particular kind of business; or from
entering any business other than a specific kind. Such restrictions in the articles are
biding on the company.113

Removal of the “ultra vires” principle

In spite of any such restrictions, the demise of the memorandum of association spelt
doom for the doctrine of ultra vires. This is pronounced by section 23: which reads:

“No act of a company, including a transfer of property by or to a company, shall

be invalid by reason only that the act or transfer is contrary to its articles or to this
Act.”

A third party who deals with a company is entitled to assume that the company has the
power to do anything it wishes. If the officers of the company cause it to act in
contravention of its articles, the members can take action against those officers; but the
interest of the third party are not affected, unless, of course, the third party actually knew
of the restrictions.

The demise of the memorandum of association not only spelt doom for the ultra vires
doctrine, it similarly dealt a death blow to another closely related doctrine, of
constructive notice.

Doctrine of Constructive Notice

The memorandum of association had the effect that once it was lodged with the Registrar
of companies at incorporation, all third parties dealing with the company were deemed to
know the objects for which it was incorporated. A third party would be unable to enforce
a contract against the company if it was ultra vires the objectives of the company. By
section 24 of the current Act, no person dealing with a company shall be affected by, or
presumed to have notice or knowledge of, the contents of a document concerning the
company by reason only that the document has been lodged with the Registrar or is held
by the company and is available for inspection. The knowledge of the objects of a
company or any restrictions shall not therefore be imputed on a third party. For the third
113
Section 22(1)

150
party’s action to fail, he or she must have had actual knowledge of the company’s
restriction or lack of authority. Even in such a case, the Act allows the shareholders to
ratify a contract which it lacks capacity to make by passing a special resolution. The
resolution makes the contract good for all purposes. In this respect, the Act is similar to
the British Companies Act of 1985. There are four consequences under that Act which
can be identified.

(i) Once a company has ratified an ultra vires transaction by special resolution, a
shareholder cannot obtain an injunction to prevent the transaction from being
performed, provided the ratification does not amount to fraud on the minority
by those in the control of the company. If it does, minority shareholders may
exercise a right of action under the exceptions to the rule in Foss v Harbottle.
(ii) The outsider or third party dealing with the company is relieved of the
obligation to know the restrictions on the company merely by reason of
registration of the articles with the Registrar of Companies. The contract is
good for all purposes, unless the outsider knew of the lack of capacity and the
shareholders refused to ratify the transaction.
(iii) Ratification of a transaction will not relieve the people in control of the
company, and they can still be liable for breach of duty, unless by a separate
special resolution they are relieved.
(iv) For the company to ratify a transaction which is ultra-vires the directors, it
must itself have the capacity to transact. How can the agent (Board of
Directors) be performing an act on behalf of the principal (the company) if the
principal had no authority to authorize in the first place? Thus, for the
company to ratify the ultra vires transaction of the directors, by special
resolution, it must first ratify its own contractual capacity by special
resolution.

This argument connects to the “alter ego theory” that whatever is done by the directors or
controllers of the company is for the benefit of the company; the Board of Directors or
other authorized people must act and think for the company. Even in this theory, where

151
one is a majority shareholder as in Salomon v Salomon & Co. Ltd114, it may be difficult to
conclude whether his actions and thoughts were actions and thoughts of the company.
Each case has to be determined on its own ment.

CHAPTER 5

PROMOTERS
A promoter is one who undertakes to form a company and takes the necessary steps,
register it and set it going. But whether or not a person is a promoter depends on what he
or she does to accomplish certain objectives of the company. The term is not defined in
the Act, but it includes people acting in a purely professional capacity, such as lawyers.
Usually, promoters are the first directors of the company they get incorporated. When
taking steps to register and set up a company, a promoter undertakes decisions, enters
into pre-incorporation contracts and does all kinds of acts and transactions on behalf of or

114
(1897) AC 22.

152
in connection with the company to be formed. It is important to know the promoter of a
company in order to establish liability for the acts undertaken, for the company is not yet
in existence and cannot therefore be bound by the promoter’s decisions when it comes
into existence, unless the company adopts them. In Kelner v Baxte115r it was held that a
company cannot ratify a contract made by a promoter prior to its incorporation, that the
promoter cannot contract as an agent for a non-existing principle, and that the contract
would have to be entered into again after incorporation. As aptly ruled by Harman J in
Rover International Ltd v Cannon Film Sales Ltd 116. “If somebody does not exist they
cannot contract”

A company or the company to be incorporated may have several promoters, all involved
in various ways such as issuing a prospectus, drawing up the articles of association, and
taking the steps necessary for the incorporation and actually registering the company, e.g.
through loans, hiring or purchasing real property, or equipment and machinery, or leasing
or hiring them.

Liability of a promoter generally

A promoter has a fiduciary duty in relation to the company to be incorporated. This
means that her she must act in utmost good faith. This is the principle of uberrimal fidei,
which requires full disclosure of all facts and surrounding circumstances which could
influence a third party in deciding whether or not to transact with the promoter. The
promoter will be liable to the third party for misrepresentation.

A promoter will be liable to the new company under contract if the company adopted the
contract on the basis of misrepresentation, deceit or negligence. The liability to the
company is based on the breach of the fiduciary duty, which the promoters owe to the
company during its promotion. Equity does not allow the promoter to take advantage of
the privileged position with regard to the unborn company. The promoter must disclose
any personal interest in any transaction and not make secret profit. This calls for full

(1866) LR 2174
115

(1987) I WLR 1597 at 1599. See also Newborne v Sensolid (Great Britain) Ltd (1954); Cortonic v (UK)
116

Ltd v Denozie 1991 B.C.L.C 721, CA; Badgerhill Properties Ltd v Cottel (1991) BCLC 805 CA

153
disclosure. The promoter must disclose any property received by virtue of being a
promoter. A promoter must not divert to himself or herself benefits offered to the
company to be incorporated, or take advantage of potential investors.

In Omnium Electic Palaces v Bainies117 it was held that where a promoter acquires
property for himself with the intention of reselling it to the company, his only duty is to
disclose. But if he was buying for the company, he cannot subsequently change his mind
and purport to be a vendor instead of a trustee.

And in Re Contributories of the Rosemount Gold Mining Syndicate 118 in liquidation,

Bristow J stated that:

It was well established that promoters stand in a fiduciary relation to the

company, which they promote. They are not merely its parents, but they are its
creators. They fashion and mould it according to their will. They endow it with
powers or limit its activities in any manner they think fit. And they cannot
complain if the law makes them (as it does) the guardians and protectors of its
infant life. The duties and obligations which this position of trust places on
promoters imposed by the plainest dictates of common honesty as well as by well
settled principles of company law….include the duty of not making a secret profit
at the company’s expense.

And in Erlanger v New Sombrero119 it was held that the duty to disclose cannot be
avoided by setting up a company with a board of directors which cannot and does not
exercise independence and intelligent judgment on the transaction.

Remedies
A promoter who breaches the duty to disclose in a pre-incorporation contract can have
the contract rescinded unless one of the bars to rescission has become operative, such as
affirmation; lapse of time; intervening third party rights; inability to make restitutio in
integram; and the court’s discretion to award damages in lieu of rescission.

Breach of fiduciary duty may also result in liability to account and/or imposition of a
constructive trust i.e. a trust imposed by equity regardless of the express or presumed
intentions of the parties, in the interest of conscience and justice where one obtains an
advantage by acting unconscionably, fraudulently, or inequitably as usually happens
between principal and agent.120
117
1914 1 Ch 332
118
1904 T.H 169
119
(1878) 3 App Cas. 1218 H.L.
120
Keech v Sandford (1726) Sel Cas Ca 261; IDC Group v Clark (1992) 8 EG 108

154
Pre Incorporation Contracts
The Companies Act in Section 28 puts personal liability for a pre-incorporation contracts
on the promoter and entitles him or her to the benefits;

28. (1) If a person purports to enter into a contract not evidenced in writing in the
name of or on behalf of a company before it comes into existence, the person
shall be bound by the contract and entitled to the benefits thereof.

(2) If a person purports to enter into a contract evidenced in writing in the name
of or on behalf of a company before it comes into existence, the person shall be
bound by the contract (in this section called “the relevant contract”) and entitled
to the benefits thereof except as provided in this section.

(3) The company may, not later than fifteen months after its incorporation, adopt
the contract by an ordinary resolution, and upon the adoption, subject to
subsection (4) –

(a) the company shall for all purposes be bound by the contract and entitled
to the benefits thereof as if the company had been in existence at the date
of the contract and had been a party thereto; and
(b) the person who purported to act in the name of or on behalf of the
company shall cease to be bound by or entitled to the benefits of the
contract.

(4) Subject to subsection (5), whether or not the relevant contract is adopted by
the company, the other party to the contract may apply to the court for an order
fixing obligations under the contract as joint or joint and several, or apportioning
liability between or among the company, and upon such application the court
may make any order it thinks just and equitable.

(5) Subsection (4) does not apply if the relevant contract expressly provides that
the person who purported to act in the name of or on behalf of the company
before it came into existence shall be in any event be bound by the contract nor
entitled to the benefits thereof.

Public issue of shares

This is covered by Part VI of the Act. A company may issue its securities 121 to the public
in various ways. One way is directly offering them to the public. The other is doing so
through selling to a issuing house which then invites the public to subscribe to them for a
commission. The usual form of offer of securities to the public is by prospectus. The
former Companies Act, Chapter 686 defined the term prospectus as:

121
Shares or debentures

155
 “any prospectus, notice, circular, advertisement or other invitation offering to the public
for subscription or purchase of any shares on debentures of a company 122”.

In other words a prospectus is an invitation by a company to the public offering them to

subscribe or purchase shares or debentures of the company. The invitation may take the
form of a notice, circular, newspaper advertisement or any other document containing an
offer of shares or a debenture for sale to the public.

The Act, Cap 388 does not define the term prospectus, but provides for it in section 119
as follows:

119. (1) In this part, an “invitation to the public” to acquire shares or debentures of a
company means an offer of, or invitation to make an offer for, shares or
debentures of a company other than one –

(a) made to fifteen or fewer persons; or

(b) made –
(i) to fifty or fewer persons; or
(ii) holders, debenture holders or employees;

on the basis that a person who accepts the invitation may not renounce or assign
the benefit of any shares or debentures to be obtained thereunder in favour of any
other person.

(2) For the purpose of this Part, the issue of any kind of application form for
shares or debentures of a company shall be deemed to be an invitation to acquire
those shares and debentures.

120. (1) Where a company allots or agrees to allot any of its shares or debentures to a
person with a view to the public’s being invited to acquire any of those shares or
debentures, then, for the purposes of this Act –

(a) an invitation to the public so made shall be deemed to be made by the

company as well as by the person who in fact made it; and
(b) a person who acquires any of the shares or debentures in response to the
invitation shall be deemed to be an allotee from the company of those
shares or debentures.

(2) Where a company allots or agrees to allot any of its shares or debentures to a
person and an invitation to the public is made in respect to any of the shares or
debentures –

122
Section 2. Cap 686

156
 (a) within six months after the allotment or agreement to allot;
or
(b) before the company has received the whole of the consideration in
respect if the shares or debentures;

it shall be presumed that the allotment or agreement to allot was made by the
company with a view to an invitation to the public being made in respect of those
shares or debentures.

Thus a public company may invite members of the public who wish to derive an income
from their capital or achieve capital growth to invest in the company. The term public
includes any section of the public whether selected as members or debenture holder, as in
Re: South of England Natural Gas and Petroleum Co. Ltd123 where an offer of shares
contained in a prospectus headed “For private circulation only”, and three thousand
copies of it sent only to shareholders in certain gas companies was held to be an offer of
shares to “the public”. Excluded from the prospectus requirement are those mentioned in
Section 119 (1) being offers made to fifteen or fewer people; or made to fifty or fewer
persons or holders, debenture holders or employees.

There is no standard or prescribed form for a prospectus. The Act requires a copy of
every prospectus to be registered before it is issued. The copy must be signed by every
person named therein as a proposed director of the company or if already incorporated by
each director or his agent authorized in writing. The prospectus must also be dated, and
the date shown on the prospectus is presumed to be the date of publication of the
prospectus until the contrary is proved. Apart from these two statutory formalities, every
prospectus shall state on the face of it that a copy has been filed for registration.

The prospectus has no relevance to private companies incorporated in Zambia. It is

implicitly prohibited from inviting the public to subscribe for shares or debentures 124.
Section 122 provides as follows:
122. (1) In this section, "company" includes a company proposed to be formed

(2) A person shall not make an invitation to the public to acquire shares in a
company unless-
123
1911/ 1 Ch 573
124
Section 122 (2)

157
 (a) the company is a public company and the invitation complies
with this Division; or
(b) the invitation is supervised by the court.
(3) A person shall not make an invitation to the public to acquire debentures in a
company unless-
(a) all of the following conditions are satisfied:
(i) the company is a public company;
(ii) the debentures are created by deed under the common
seal of the company in favour of trustees for the debenture
holders; and
(iii) the invitation complies with this Division; or

(b) the invitation is supervised by the court.

(4) A person shall not make an invitation to the public to acquire equity shares in
a company unless all the equity shares in the company already issued and all
those to which the invitation relates carry an unrestricted right to vote at general
meetings of the company and, on a poll, a constant number of votes which, in
proportion to nominal value, is the same in the case of every share.

(5) Subsection (4) shall not prohibit an invitation to acquire equity shares that do
not comply with that subsection if-
(a) the rights making them equity shares are expressed by the terms
of issue to be conditional upon the exercise by the holder of an option;
and
(b) the shares will comply with that subsection if the option is
exercised.
(6) Subsection (4) shall not prohibit an invitation to acquire equity shares that do
not comply with that subsection if the shares are issued, and the invitation made,
in fulfillment of an obligation entered into by the company before the
commencement of this Act.
(7) If a person acquires shares or debentures in a company as a result of any
invitation to the public in contravention of this section, he shall be entitled to
recover compensation for any loss sustained by him from any person making the

158
 invitation, and where a person making the invitation was a body corporate, from
any officer in default.
(8) If an invitation to the public is made in contravention of this section, each
person making the invitation and, where such a person is a body corporate, each
officer in default, shall be guilty of an offence, and shall be liable on conviction
to a fine not exceeding two thousand monetary units or to imprisonment for a
period not exceeding two years, or to both.

And by Section 123:

123. (1) Subject to this section, a person may invite the public to acquire shares or
debentures of a public company or of a public company proposed to be formed
only if-
(a) within six months prior to the making of the invitation there was
registered by the Registrar a prospectus relating to the shares or
debentures that complies with this Division;
(b) every person to whom the invitation is made is supplied with a true copy
of the prospectus at the time when the invitation is first made to him; and

(c) every copy of the prospectus states on its face that it has been registered
by the Registrar and the date of registration.
(2) An invitation published in a newspaper or magazine advertisement that summarises
the contents of a prospectus shall be deemed to satisfy paragraph (b) of subsection (1) if
the advertisement-
(a) does not contain or accompany any kind of application form for shares or
debentures;
(b) states with reasonable prominence where copies of the full prospectus
may be obtained, the fact that it has been registered and the date of
registration; and
(c) is in terms previously approved in writing by the Registrar.

It is not obligatory that a public company has to issue a prospectus on or with reference to its
formation. Where it is issuing the prospectus must be signed by every person who is named
therein as a director or a proposed director of the company or by his agent authorized in writing,

159
in the form and containing the particulars set out in Schedule four the of the Act. Sometimes, the
directors have knowingly made false statements in a prospectus with intent to induce persons to
become shareholders:125 For such reasons it is required that a prospectus or a statement in lieu of
a prospectus must be complied with strictly and with scrupulous accuracy.

Contents of Prospectus
Section 124 provides the contents of a prospectus. It reads as follows:
124. (1) A prospectus shall not be lodged with the Registrar unless-
Contents of prospectus
(a) it does not contain any untrue or misleading statement;
(b) it contains all information that prospective purchasers of the shares or debentures
and their advisors would reasonably expect to be provided in order to make a decision on
purchase; and
(c) either-
(i) it deals with the matters and provides the reports specified in the Fourth Schedule;
or
(ii) the invitation concerned is an invitation made only to existing members or
debenture holders of the company (whether or not an applicant for shares or debentures
will have the right to renounce in favour of other persons).

An expert126 may be consulted or instructed with regard to the issuing of a prospectus and
its content127. Where that is the case, the prospectus must include a signed statement by
the expert signifying consent to the issuance of the prospectus and must be lodged with
the Registrar. The Act also provides for the withdrawal of the expert’s consent before
publication of the prospectus128. As an expert is a person with special knowledge,
members of the public may be induced to take up securities on reliance on the expert
statement. Thus if the expert’s statement was based on information provided by say, the
directors on managers or even workers of the company, which turns out to be false,
incorrect or misleading, the expert is required to withdraw his consent immediately and
notify the Registrar so as to put a stop to the issuing of the prospectus129, otherwise the
expert shall be legally responsible for any loss or damages suffered b those who rely on
it.

"expert" includes an engineer, valuer, accountant, assayer, and any other person whose
profession or calling gives authority to a statement by the person on the subject matter
concerned;
Hence for the purpose of liability, no prospectus for company securities in a company or
a proposed company shall be registered unless it discloses and is signed by the people
issuing it. Liability is based on: (a) the names as directors or proposed directors of the
125
R v Bishirgian 1936/1 ALL ERr. 586.
126
Section 2 of the Act defines expert as an engineer, values, accountant, assayer, and any other person
whose profession or calling gives authority to a statement by the person on the subject matter concerned.
127
Section 125
128
Section 125 (4)
129
Section 125 (5)

160
company130 and (b) any other person making the invitation, or his or her agent131,
authorized in writing. The reference to an agent envisages an invitation to the public by
the company or body corporate in which case not fewer than two directors must sign, as
well as a firm or partnership in which case not fewer than half the partners or their agents
authorized in writing must sign on behalf of the firm or partnership132.

A prospectus may be published in any language, with a translation in English in

accordance with paragraph 49 of the fourth schedule of the Act133.

The Act requires the prospectus to state at the top of that document that a copy has been
lodged with the Registrar and that the Registrar assumes no responsibility as to its
contents.134 For statutory provision on over-subscription, the Act provides that:

127. (1) A company shall not accept or retain subscriptions to a debentures issue in
excess of the amount of the issue disclosed in the prospectus unless the prospectus
specifies-Over-subscription in debenture issue
(a) that the company expressly reserves the right to accept or retain over-
subscriptions; and
(b) a limit, expressed as a specific sum or money, on the amount of over-
subscriptions that may be accepted or retained, being an amount not exceeding twenty-
five per centum above the amount of the issue as disclosed in the prospectus.
(2) Subject to the Fourth Schedule, where a company specifies in a prospectus relating to
a debenture issue that it reserves the right to accept or retain over-subscriptions-
(a) the prospectus shall not contain any statement of, or reference to, the asset
backing for the issue, other than a statement or reference to the total tangible assets and
the total liabilities of the company and of its guarantor companies; and
(b) the prospectus shall contain a statement or reference as to what the total assets and
total liabilities of the company would be if over-subscriptions to the limit specified in the
prospectus were accepted or retained.

The copy is required to be accompanies by a statutory declaration by a director and

secretary of the company stating that the prospectus conforms with the Act135. Upon
registering the prospectus, the Registrar is required to issue a certificate stating that the
prospectus has been registered.

By Section 128. (1) Where a prospectus states or implies that application has been
or will be made for permission for the shares or debentures offered in the prospectus to be
listed for quotation on the official list of a stock exchange, then, subject to subsection (8),
no allotment of shares or debentures shall be made on an application made pursuant to

130
Section 126 (2) (a)
131
Section 126 (2) (b)
132
Section 126 (3)
133
Section 49 (2)
134
Section 126 (6)
135
Section 126 (7)

161
the prospectus except in accordance with this section.

(2) An allotment may be made-

(a) if the permission has been applied for in the form required by the stock exchange
before the third day on which the stock exchange is open after the date of issue of the
prospectus; or
(b) if the permission has been granted before the determination day.
(3) If, on the determination day, the conditions of subsection (2) are not satisfied, the
company shall, within fourteen days after the determination day, repay without interest
any money received from any applicant in pursuance of the prospectus.
(4) If the company fails to repay money in accordance with subsection (3), the directors
shall, in addition to the liability of the company but subject to subsection (5), be jointly
and severally liable to repay that money with interest at the ruling bank rate from the end
of that period of fourteen days.
(6) A director shall not be liable under subsection (4) if he proves that the default in the
repayment of the money was not due to any misconduct or negligence on his part.
(7) The company shall, for so long as the conditions of subsection (2) are not satisfied,
keep in a separate bank account all money received in pursuance of a prospectus.
(8) A condition purporting to require or bind an applicant for shares or debentures to
waive compliance with any requirement of this section shall be void.
(9) The Registrar may, on the application of the company made before the determination
day, by notice in the Gazette provide that this section shall not apply to the allotment of
the shares or debentures.
(10) For the purposes of this section, a statement in a prospectus to the effect that the
articles comply with, or have been drawn up so as to comply with, a condition imposed
by a stock exchange shall, unless the contrary intention appears, be deemed to imply that
application has been, or will be, made for permission for the shares or debentures offered
by the prospectus to be listed for quotation on the official list of the stock exchange.

(11) For the purposes of this section, where a stock exchange grants the permission
subject to a condition, the permission shall be deemed to be granted if and when the
directors of the company give to the stock exchange a written undertaking to comply with
the condition.
(12) For the purposes of this section, the determination day is, subject to subsection (12),
the day forty-two days after the day of issue of the prospectus.
(13) If, before the day referred to in subsection (11), the stock exchange notifies the
applicant for the permission that a later day, being a day not more than three months after
the day of issue of the prospectus, will be the determination day, the determination day is
that later day.

Liability over Prospects

There is a duty imposed on those issuing a prospectus, as they hold out to the public great
advantages which will accrue to them if they take shares or debentures in the company or
proposed undertaking.

Civil Liability

162
The duty is to make a true statement136 to state every material fact137 within their
knowledge, the existence of which might in any degree affect the nature, or extent, or
quality or the privileges and advantages which the prospectus holds out as inducement to
buy shares or debentures; and to state any of the particulars and set out any of the reports
required by the Act. Any breach of this provision puts liability on the responsible people
to pay compensation to any people who suffer loss by reason of the untrue statement or
omission138

Thus there must be full disclosure in the prospectus or statement in lieu of prospectus, of
the securities offered, particulars of the company’s business, or proposed business, the
assets and financial standing, and correct reflection of its potential, and the true names
and addresses of the promoters, directors, creditors and auditors as the case may be
depending on whether the company is already registered or not.

Failure to disclose any of the matters prescribed or to conform with any of the
requirements or a prospectus or a statement in lieu in form or content, the directors or any
other persons responsible for issuance of the prospectus may incur personal liability,
unless they successfully rely on the defences set our in the Act, such as that they were not
aware of the existence of any omitted fact, or that non-compliance arose from an honest
mistake of fact or that they relied on a report made by an expert, or public official record
or extract thereof, and that throughout the material time they had reasonable ground to
believe that the information was true ad correct.139
From the provisions of the Act referred to above neither a prospectus nor a statement in
lieu applies to private companies. It would not be proper to disclose all the stated details
with relation to private companies. The essence of being private is that the companies are
free from intrusion of their affairs and publication of any such information would be
tantamount to invasion of privacy. Members of a private company are close-knitted
family or friends who depend on mutual honesty integrity and respect.

(b) Criminal Liability

The Act provides for offence of misstatement or omission in a prospectus. By Section
130:
(1) Where any prospectus, advertisement or circular published in relation to any
invitation to the public to acquire shares or debentures of a company contains any untrue
statement or omits truthfully to state any of the matters which, under this Act, it is
required to state, any person who authorised the publication of the prospectus,
advertisement or circular shall be guilty of an offence, and shall be liable on conviction to
a fine not exceeding seven thousand monetary units or to imprisonment for a period not
exceeding seven years, or to both.
(2) It is a defence to a charge under subsection (1) that-
(a) the untrue or omitted statement was immaterial; or
(b) the person had reasonable ground to believe and did believe, up to the time of
publication of the prospectus, that the statement was true.
136
Section 129 (1) (a)
137
Section 129 (1) (b)
138
Section 129 (1) and (2)
139
Section 129 (3)

163
(3) For the purposes of this section, a person shall not be regarded as having authorised
the publication of a prospectus by reason only of his having given the consent required by
section one hundred and twenty-five, and the Registrar shall not be regarded as having
authorised the publication of an advertisement or circular by reason of his having given
the certificate referred to in section one hundred and twenty-six.

The director, manager, promoter or any other person accused of misstatements or

omissions has the two defences under subsection 3 2 (a) and (b). The accused must prove
both the materiality and the absence of reasonable belief, and this is in contrast to the
requirement under the law of evidence that puts the onus on the State. In the terms of the
Companies Act, the accused must discharge the burden while in the latter, the accused
must be given benefit of doubt and be acquitted if the State fails to do so beyond
reasonable doubt.

Limitation of Liability
The Act does not envisage an action against the company or person or persons who
authorized the issuance of the prospectus. Action can only be brought against directors,
managers and promoters and any other who authorized the issuance. Similarly, only
people who rely on the misinformation or misrepresentations in a prospectus or statement
in lieu to their detriment can bring action against the directors, managers and promoters.
The company that ratifies a pre-incorporation contract and ratifies the promoters’ actions
bears the liability. In the absence of ratification, the promoters would be personally
liable.

Other Reliefs and Remedies

The Act has elaborate provisions for other reliefs and remedies regarding misstatements
and omissions in a prospectus. Suffice to say in spite of the numerous provisions
exonerating directors, managers and promoters, the Act has improved the chances of an
investor who subscribes for shares on faith of untrue statements. The investor or other
plaintiff can allege but do not have to prove the allegation provided that they can show
that they are contemplated by the prospectus and the Act. The burden to prove the
allegation is on the defence or the accused.

Cases
Non-existent Company cannot have an agent
Re Metal Constituents Ltd, Lord Lurgan’s case (1902) 1 Ch 707 at 709
Omnium v Bains 1914 (Sargant J) I Ch 332
Erlanger v New Sombrero Phosphate Co. 1978 3 AC 1218
Gluckstein v Barnes 1900
Smith and Youngson (Pvt) Ltd v Dubie Bros 1959 (1) R & N 351 per Clayden A.C.J
Derry V Peer 1889 14 A.C 337 (Hl)
Hedley Byrne & Co Ltd V Heler & Partners Ltd 1964 Ac 465 (Hl)
Innocent Misrepresentation
Re Metal Constituents Ltd, Lord Lurgan’s case (1902) 1 Ch 707 at 709

164
 McConnel. Wright (1903 1 Ch 546
(Measure of damages)
Limitation of liability
Caparo Industries Plc v Dickman 1990 2 AC 605 HL
Possfund Custodian Trustee S Ltd v Diamond 1996 2 B.C.l.C 665 (lightman J).

CHAPTER 5

PRE-INCORPORATION CONTRACTS

The common-law rule

McCullogh v Fernwood Estate Ltd
1920 AD 204
Action based on a contract of sale entered into between the plaintiff and one A on behalf
of a company to be formed.

INNES CJ: [207]. . .Grotius divides all unauthorized agreements for the benefit of third
persons into two classes – those made with principals in favour of third persons, and
those made with agents purporting to act on behalf of third persons. Both are valid, and
both, if duly accepted or ratified, are enforceable by the third person concerned. The
division seems satisfactory; for it is exhaustive and founded on principle. There may be
difficulty, however, in ascertaining whether a particular transaction falls under one class
or the other, especially where the third person was not in being at the date of the
agreement, a position with which Grotius in the passage referred to does not deal. Yet
the enquiry is of importance, because the rule that there can be no ratification by a
principal not in existence at the date of the transaction is recognized by our law as well as
by the law of England. . . The English doctrine as laid down in Kelner v Baxter (1866)LR
2 CP 174. . . seems clear. A company cannot ratify a contract made for its benefit before
it was formed; nor can it adopt such contract by resolution. A new agreement on
identical lines is necessary. The result may sometimes be unfortunate, but follows

165
logically from an application of the doctrine that a principal not in being at the date of an
agreement, and therefore not in a position to be bound by it then, cannot ratify it
thereafter. Now the rule of English law that there must in every contract be consideration
moving from the promise, prohibits any agreement for the benefit of and enforceable by a
third person, except one made by an agent on his behalf. And such an agreement cannot
be entered into on behalf of a non-existent principal. But by our law, as already
explained, it is possible to contract independently for the benefit of a third person; it is
not necessary to do so as agent. Such a contract when duly accepted by the person for
whose benefit it was made may be enforced by him. I know no reason in principle why
this right of acceptance should be confined to cases where the third person was in being
at the date of contract. There is nothing in the authorities which points to such a
conclusion. The sole test is whether the offer is open. And I cannot see why by our law a
man should not himself stipulate in favour of his unborn child, or of the company which
he is engaged in bringing into existence, leaving it to the beneficiary in due time to
decide whether or not he will accept the benefit offered. . . .

In either case the name is to be entered on the Register of members 140 generally there is,
subject to both Exchange control regulations and the trades licensing Act 141, no
140
S. 41 of Cap. 686.
141
,under the provision of these two Acts non-Zambians may find themselves discriminated against on
certain grounds which parliament has provided for e.g. Trading licences for certain goods cannot be given
to individuals or other legal persons who are not Zambian citizens or established residents. These
provisions were acted to facilitate the implementation of the 1968 Mulungushi Economic Reforms – see

166
discrimination based on nationality or social status, amongst the membership of a
company. In Zambia, although there is no statutory restriction to the effect that a body
corporate may not be a member of a company, which is its holding company, it is
nonetheless part of Zambian Common Law and practice that a holding company cannot
be a member of its subsidiary company.142 The rationale of this rule is to prevent
monopolies by precluding cross-share holdings, a practice which tends to restrict the
circulation and distribution of wealth in a given society.

Under the Companies Act of Zambia there is also no restriction on the ground of
nationality as to who may be appointed director of the company. However, the deliberate
policy of the Zambian government is to appoint Zambian nationals to posts of director in
most companies in which it owns share equity. Act leaves it to the majority of the
shareholders in a company to decide how many directors are to be appointed. This is so
irrespective of whether the company is public or private 143. Nor is there a limit to the
number of directorships a person may hold in different companies.

Certain restrictions are imposed o the appointment and advertisement of directors in

Zambia. The first of these restrictions is the one which provides that unless the proposed
director or his agent has, before the registration of the articles or the publication of the
prospectus or the filling of statement in lieu of prospectus, (a) signed and filed with the
Registrar a consent in writing to act as such director; and (b) either signed and filed with
the Registrar a contract in writing to take from the company and pay for his qualification
shares (if any), he shall not be capable of being appointed director of a company by the
articles, and shall not be named as a director or proposed director of a company in any
prospectus or statement in lieu therefore 144. It must be noted that this restriction does not
apply to private companies145. The other restriction is that a person who has not attained

Chapter 4 of this study.

142
The relationship between holding and subsidiary companies in Zambia is discussed in Chapters of this
work.
143
See S. 67 of Cap. 686.
144
Ibid S. 63 (1)
145
Ibid, S.63 (3)

167
the age of twenty-one shall not be competent either to be appointed or to act as a director
of a company146.

Although there is no direct statutory provision restricting the appointment of an

undischarged bankrupt, or any person convicted offence in connection with the
promotion, formation or management of a company, the practice in Zambia is,
nonetheless, that articles of most companies contained these prohibitory measures in
order to preserve the goodwill of the companies.147

However, where share qualification is required the directors must take up such shares
within the prescribed two months’ time limited otherwise the person concerned shall be
liable to a fine not exceeding K10.00 for every day between the expiration of the said
period and the last day on which it is proved that he acted as a director 148. It is important
to note, however, that the acts of a director are considered valid even where there is a
defect in his appointment or qualification. 149 It would appear that this provision was
inserted primarily to evade the constructive notice doctrine of the company’s public
documents so that outsiders need not inquire into the validity of the director’s
appointment before hey could deal with him150.

146
Ibid, S. 64
147
See Chapter 13 of this study
148
S. 65 of cap. 686 See also Morris v. Kanssen (1949) 1 All E.R. 586; (1946) A.C. 459 – the facts are
given here below.
149
S. 66 of Cap. 686. in Morris v. Kanssen (1946 Supra the facts were briefly as follows: K and C were
the first directoes of a company. Difference arose between them, and C and S entered into a scheme to
deprive K of his directorship. To this end, C and S falsely claimed that S had been appointed a director and
made an entry into the company’s minute book to this effect. No general meetings of the company were
held for two years and during this period, C and S, purporting to act as directors, appointed M a director,
and the three of them then proceeded to allot shares to themselves. K sued for rectification of the share
register. C, A and M tontended, inter alia, that their actions had been validated by S143 of the Companies
Act 1929 (now S180 of the English 1948 Act; and similar of Cap.686). K’s action succeeded Lord Simons
said inter alia:-

“ …There is, as it appears to me, a vital distinction between (a) an appointment in which there is a
defect or, in other words, a defective appointment, and (b) no appointment at all. In the first case, it is
implies that some act is done which purports to be an appointment but is by reason of some defect
inadequate for the purpose; in the second case, there is not a defect; there is no act at all. The section does
not say that the acts of a person acting as director shall be valid notwithstanding ht is afterwards
discovered that he was not appointed a director….”
150
See the rule in Royal British Bank v Turquand (1856) 6 ExB 327. See also Hahlo’s approach to this rule
– A Casebook on Company Law (1970) pp 418 – 441. See also R.S Nock in (1967) 30 M.L.R. at 708.

168
MINORITY PROTECTION

The substantive aspects of this subject will be tackled in a later chapter of this thesis.
Here, it may suffice to point out that subsequent to state participation in most industries
in Zambia, the foreign investors found themselves in minority shareholding position vis a
vis the host state or state-owned companies. Under these circumstances it is imperative
that the minority shareholder, especially a foreign investor, would be interested to know
how the law would safeguard his interests and rights while operating in Zambia as
minority shareholder. The protection being referred to here is the one from apparent
abuse by those who have predominant interest in a given company. The Zambian
Companies Act has certain provisions, which impose some restraints or limitations on
how the majority shareholders may exercise their powers in relation to the minority
shareholders. Viewed from this perspective, a discussion of minority protection under
company law then assumes a wider spectrum than I usually the case. We therefore,
proceed to consider these statutory limitation on majority power under five sub-headings:

(i) ALTERATION OF THE COMPANY’S CONSTITUTION

At the beginning of this chapter the statutory conditions and limitations upon
which the memorandum and articles of a company may be altered were examined.
It may suffice to assert the point that most of the rights of members of a company
are conferred upon them because of their investment in the company’s capital.
Hence, any variation of the shareholders rights is subject to certain conditions,
which must be fulfilled before such variation may be carried out. The fact
therefore that the companies Act allows a given number of the holders of issued
capital to object to any variation of members’ rights, the fact that the court’s
approval of the variation of these rights and contents of the memorandum is also
required, shows how the legislature is determined to protect minorities from abuse
of corporate power. Thus, before it can confirm any alteration to the
memorandum of association, the court must satisfy itself that sufficient notice of
the alteration has been debenture holders, creditors entitled to object and to any

169
 persons or class of persons whose interests will, the opinion of the court, be
affected by the alteration.

With regard to alteration of the company’s articles it has already been pointed out
in the present chapter that the protective strength of the words contained in S111
of cap 686 resides in its subordination of majority power to other provisions of
Cap. 686 as well as well as those contained in the memorandum of association. If
the majority shareholders tend to overlook this point, the minority shareholder
would have the right to challenge their decision or action on this matter. Thus, as
noted earlier on the shareholders’ liability to the company cannot be increased
without his consent. Neither can the majority alter the articles in such a manner
that the effect would be to deny the minority his right to demand a poll at the
general meetings.

(ii) NOTICE AND ATTENDANCE OF COMPANY MEETINGS

At meetings members get the opportunity to air their views on issues affecting their
interest either as individual shareholders or as a class of them. It is therefore important
that members who are entitled to attend and vote at such meetings are given due notice;
and where appropriate, they are reminded or informed of their right to appoint a proxy.
Where it has, for any reason, become impracticable for the company to call or conduct
meetings in the manner provided for under the Act or the articles of association, the High
Court of Zambia has the power to order meetings. It can even impose conditions upon
which such meetings would be held. The fact that both articles and Cap 686 strictly
regulate the summoning and conducting of company meetings in itself affords the
minority shareholders a chance of protecting themselves.

(v) MINORITY PROTECTION UNDER THE ‘OPPRESSION’ PROVISION

OF THE COMPANIES ACT

170
 A provision similar to S 210 of the English companies Act 1948 does not exist
under Cap. 686. For this reason virtually nothing can be said about it, except,
perhaps to mention that in other African jurisdiction where this provision exists
the tendency has been to adopt the English provision word by word. It may
suffice to suggest that it is high time the Zambian legislature followed suit in
adopting a provision similar to S210 if it has to maintain the confidence of
minority foreign investors.

On the whole the question of minority oppression in Zambia has not been a
frequent feature of business life. This may be attributed to the fact that the
management of most public companies has been entrusted to foreign minority
shareholders who, at the moment, are in passion of the necessary management
skills. Thus, under the various management and consultancy agreements the
minority shareholders managed to secure for themselves considerable powers;
enough to ‘opppross’ the majority if they so wished. The case of the Zambian
copper mines as this whole study will show is quite in point.

NATIONAL AIRPORTS CORPORATION LIMITED

Supreme Court
NGULUBE, CJ, SAKALA AG DCJ, AND LEWANIKA, JS
1st AUGUST, 2000 AND 18TH OCTOBER 2000
(SCZ Judgment No. 34 OF 2000)
Company Law – Third party – Whether affected by want of authority of a reprehensive of
a company.
Employment Law – non-consensual substitution of the contract – Effect.
Contract – Breach – Damages – measure of damages
The appellant company was desirous of employing a Managing Director.

171
The short listed candidates were interviewed and it appears that during such exercised the
sort of remuneration package expected and that to be offered were discussed.

The position was offered to the first respondent in a letter dated 6 th August 1996, written
on behalf of the appellant by the second respondent who was at the time the Chairman of
the Board of Directors of the appellant company. Consequently, the first appellant was
offered a two year contract to run from 1st September 1996, to 30th August 1998. the first
respondent worked for four months and a few days until 14 th January 1997, when his
contract was terminated quite summarily. The learned trial Judge found for the first
respondent in respect of the claim for breach of contract and awarded him damages. The
appellant appealed.

Held:
(i) Any outsider dealing with a company cannot be connected with any alleged
want of authority when dealing with representative of appropriate authority or
standing for the class or type of transaction.
(ii) The employer did repudiate the contract and it was not wrong for the
Managing Director to reject a non-consensual substitution of the contract for
the worse.
(iii) Where a contract breaker has a contractual option to terminate the contract,
the court should assess the damages on footing that the party in breach would
have exercised the option to terminate.

Case referred to:

1. Zambia Bata Shoe Company Limited v Vunmas Limited (1994) Z.R 136
2. Royal British Bank v Turwuand [1856] Z.R 218
3. Kabwe v BP Zambia Limited (1995 – 1997) Z.R218
4. Shindler v Northen Raincoat Company [1960] 2 ALL ER 239. 5
5. Yetton v Eastwoods Froy Limited [1966] 3 ALL ER 353
6. Abrahams v Performing Rights Society [1995] 1 CR 1028
7. Mobil Oil Zambia Limited v Patel (1989) Z.R 12

172
 8. Dunlop Pneumatic Tyre Company Limited v New Garage and Motor
Company Limited [1915] AC 79
C.L Mundia of C.L Mundia and Company for the appellant.
L.P Mwanawasa, SC, of Levy Mwanawasa and Company for the respondent
NGULUBE, CJ, delivered the judgment of the court

The facts of the case may be briefly stated: The appellant company was desirous of
employing a Managing Director. The short listed candidates were interviewed and it
appears that during such exercise the sort of remuneration package expected and that to
be offered were discussed. The position was offered to the first respondent in a letter
dated 6th August 1996, written on behalf of the appellant by the second respondent who
was at the time the Chairman of the Board of Directors of the appellant company. The
first respondent was offered a two-year contract to run from 1 st September 1996, to 30th
August 1998. The letter set out a number of terms and conditions including a salary of
four thousand US dollars per month. The contract as set out in that letter – which the first
respondent accepted-provided for termination by three moths notice on either side and
then went on to provide:-
“if employer terminates the contract prematurely for reasons other than
incompetence or willful neglect of duty, all the benefits under the contract shall be
paid if the contract had run the full term.”

The first respondent commenced work on 1st September 1996, and on the authority of the
Chairman, he was reimbursed or paid various other expenses and allowances not set out
in his letter of appointment. He worked for four months and a few days until 14 th January
1997, when his contract was terminated quite summarily by the appellant through a letter
dated 8th January 1997, written by the Corporation Secretary on the instructions of the
Board of Directors exclusive of the second respondent who resigned at about that same
time. The letter of 8th January 1997, was entitled ‘Nullification of Contract’ and went on
to declare the contract contained in the letter of 6 th August 1996, a nullity. It also asked
the first respondent to stop working with immediate effect ‘until further notice.’ The
evidence on record showed that this turn of events coincided with a change that had

173
occurred at the supervising government minister and that it was the new Minister who
directed that changes be made. As a result, the Chairman – the second respondent –
resigned in protest and the reconstituted Board caused the letter of nullification to be sent
in which it was alleged that the former Chairman had offered the Managing Director a
package of terms and conditions which was fundamentally different from the package
approved by the Board of which the candidates had allegedly been apprised and which
would not exceed a gross of seventy-two thousand dollars per annum.

One argument against the finding of liability for breach of contract alleged that the court
below was wrong to find that there was any breach at all by any alleged counter offer of
terms after binding contract had already been accepted. The upshot of the argument was
that the first respondent must have been aware from the interview what package the
appellant company was prepared to offer and that accordingly the former Chairman had
no authority to offer the different package which he did allegedly after further
representations by the Managing Director. There were many submissions about the
Chairman’s alleged want of authority and attempts were made to distinguish the case
from the principle and the position discussed in cases like Zambia Bata Shoe Company v
Vinmas Limited (1) and the famous Royal British Bank v Turquand (2). The principle in
those cases is now confirmed by our Act so that an outsider dealing with a company
cannot be concerned with any alleged want of authority when dealing with representative
of appropriate authority or standing for the class or type of transaction. Mr. Mwanawasa
was on firm ground when he resisted Mr. Mundia’a arguments on these grounds. The
Managing Director was still an outsider at the time of the job interview and when he
made further representations (if any at all) to the former Chairman who was undoubtedly
a person of the right standing to write a letter of employment of a Managing Director on
behalf of the company.

Having examined all the written submissions and also taking into account the oral
submissions, we come to the inescapable conclusion that the learned trial Judge was not
in error when he found for the Managing Director on the issue of liability. There was
quite clearly the plainest breach of contract after the new Minister’s intervention which

174
resulted in an attempt to ‘nullify’ the contract already being performed and already just
over four months old. The employer did repudiate the contract and it was not wrong for
the Managing Director to reject a non-consensual substitution of the contract for the
worse. We are fortified in holding this view by similar approach taken by the courts in
such cases as our own Kabwe v BP (Zambia) Limited (3) (where the salary of a senior
employee was reduced unilaterally); and the English cases of Shindler v Northern
Raincoat Company Limited (4) and Yetton v Eastwoods Frog Limited (5) (where
Managing Directors were offered lower status alternative employment by the employers
in breach.)

What has truly exercised our minds was the quantum and measure of damages, one of the
issues raised in this appeal. This is in view of the provision for termination by three
months’ notice which was coupled in the same breath with an apparently contradictory
limitation of the grounds for termination and the stipulation in default that all the benefits
to be paid as if the contract had run its full term. Did the provision mean notice could
only be given on one of the stated grounds? Did the provision amount to liquidation
damages being prescribed? We have considered the arguments and submissions. We
have also considered the authorities, including the Shindler case where there was an
implies engagement on the part of the company not to terminate the Managing Director’s
ten-year contract other than on a few limited grounds, as in this case. The requirements
of mitigation were applied there in computing the damages after the contract had been
technically wrongfully terminated in some other way available under the Articles of
Association. We have borne in mind that the action here was for damages for wrongful
termination which were ordered below to be computed ‘as if the contract had run the full
term.’ We are aware that damages on such a footing can be defeated if the sum thereby
stipulated can be held to be liquidated damages, a genuine pre-estimate of damages the
parties themselves intended should govern the contract in the case of termination in
breach. We are equally aware that, on the other hand, the courts refused to implement the
intention of the parties if the sum is held to be a penalty. Of course, we have not
forgotten that Mr. Mwanawasa argued very warmly that parties to a contract should be
free to oust a requirement for the mitigation of damages just as they should be free to oust

175
the law of penalties. He submitted that since parties enter into contracts with their eyes
wide open, none of them should be heard to complain that the bargain is or has become
onerous or unconscionable. He argues that the courts should not intervene, whatever
their views. Needless to say, Mr. Mwanawasa’s plea files in the teeth of equitable
intervention by the courts, which is now too entrenched to require or to permit fresh
debate. However, there are rules or guidelines which have been evolved over time and
which can still be further developed for distinguishing liquidated damages from penalties.
The facts here which are to be borne in kind were that the Managing Director only
worked for four months under a contract which could have been terminated by three
month’s notice; the contract floundered because the employer tried to substitute it with
one involving less money, the complainant who was highly qualified found alternative
employment within months; and finally, the award as framed would give the Managing
Director the rest of the money he would have earned under the remainder of the two year
contract. In our research, we came across the case of Abrahams v Performing Rights
Society (6) mentioned in paragraph 485 of the McGregor On Damages, 16 th Edition
which supports the payment of liquidated damages equal to the stipulated notices period’s
payment in lieu irrespective of amount and without requiring proof of actual damages or
any mitigation. There, the contract provided for the giving of two years’ notice or the
payment of salary in lieu of notice and the plaintiff was held to be entitled to the full
amount as a contractual debt. In the case at hand, there was provision for the giving of
three months’ notice coupled with a curious fetter on the employer’s ability to terminate
by specific incompetence and willful neglect only, grounds which were not applicable
when there was termination by repudiation in the attempt to substitute an unacceptable
contract. We have no doubt that on an ordinary reading of the provisions concerned, it
was not suggested that the employer could only give three months’ notice to terminate if
there was incompetence or willful neglect. Termination for cause stipulated is one thing
and terminating by notice quite another. Admittedly, the notice clause was not invoked
but, as we reaffirmed in Mobil Oil Zambia Limited v Patel (7), where the contract-
breaker had a contractual option to terminate the contract, the court should assess the
damages on the footing that the party in breach would have exercised the option. In this
case, the damages should relate to the period of three months of salary and perquisites

176
and any other accrued benefits such as gratuity over that period. We find and hold the
phrase invoked so as to pay damages as if the contract had run its full course offends the
rules which were first pronounced as propositions by Lord Dunedine in Dunlop
Pneumatic Tyre Company Limited v New Garage & Motor Company Limited (8),
especially that the resulting sum stipulated for is in effect bound to be extravagant and
unconscionable in amount in comparison with the greatest loss that could conceivably be
proved to have followed from the breach. This part of the appeal has to succeed and the
damages directed to be assessed as we have indicated and not as ordered below.

Before we conclude, we should mention that there was an unsuccessful counter claim
below over which Mr. Mundia sought to make submissions in his heads of arguments.
This was not covered by the memorandum of appeal and we can not entertain it. In sum,
the appeal succeeds to the extend only that we have varied the quantum to be assessed
below as damages for breach of the contract. Because of the way the issues were
presented and the outcome, it is only fair that each side bears its own costs.

SIMBEYE ENTERPRISES LIMITED & INVESTRUST MERCHANT BANK (Z)

LIMITED
V
IBRAHIM YOUSUF
CHIRWA, MUZYAMBA AND CHIBESAKUNDA, JJS
26TH OCTOBER 2000 AND 2ND NOVERMBER, 2000
(SCZ JUDGMENT NO. 36 OF 2000

Civil Procedure – Joinder of Plaintiff – Conditions for Joinder.

This is an appeal against a refusal by the High Court to join the first appellant as second
plaintiff to the originating summons issued out of the Principal Registry on 9 th February
199, between the second appellant as plaintiff and the respondent as defendant, for the
removal of a caveat placed on Plot 16835, Lusaka.

177
Held:
(i) No person shall be added as a plaintiff without his consent signified in writing
or in such other manner as may be authorized.
(ii) The rule applies only where the application is made either by a plaintiff to join
another person as a co-plaintiff or by another person to join the other as a
plaintiff.
(iii) It has been the practice of the Supreme Court to join any person to the appeal
if the decision of the court would affect that person or his interest. The
purpose of the rule is to bring all parties to disputes relating to one subject-
matter before the court at the same time so that disputes may be determined
without the delay, inconvenience and expense of separate actions and trials.

N. Mutti (Mrs) of Lukona Chambers for the second appellant

M. Mutemwa of Mutemwa Chambers for the second appellant
A.D. Adams, SC, appearing with M.A.A Yousuf of Adams & Company for the
respondent.
MUZYAMBA, JS delivered the judgment of the court.
This is an appeal against refusal by the High Court to join the 1 st appellant as second
plaintiff to the originating summons issued out of the Principal Registry on 9 th February
1999, between the 2nd appellant as plaintiff and the respondent as defendant, for the
removal of a caveat placed on Plot 16835, Lusaka. For convenience, we shall refer to the
2nd appellant as plaintiff and the respondent as defendant and the 1 st appellant as
application for that is what they were in the court below.

178
 CHAPTER 6

MEMBERSHIP OF COMPANY

A member is anyone who has subscribed to the articles of the company and has not
given any notice in writing of ceasing to be a member. A member includes a
stockholder151. Although a company or a body corporate has legal personality of its own
and may own property in its name, for the purpose of membership, it shall not be a
member of itself or of a body corporate which is its holding company152. However, a
company may, in the capacity of personal representative or trustee, be a member of itself
or a body corporate which is its holding company unless it or the holding company or
subsidiary of either of them has a beneficial interest in the membership 153. Further, a
company may be a member of itself or a body corporate which is its holding company by
way of security for the purpose of a transaction entered into in the ordinary course of
business which includes the lending of money, but in that case it shall have no right to
vote at meetings of the holding company or of any class of members thereof154.

These restrictions do not, however, apply to subsidiaries which were members of their
holding companies at the time of the commencement of this Act in 1994, nor from
continuing to be such a member155; provided that the subsidiary would not156:
(a) have a right to vote at meetings of the holding company or any class of members
thereof
151
Section 45 (1). See also section 19
152
Section 46 (1)
153
Section 46 (2)
154
Section 46 (3)
155
Section 46 (5)
156
Section 46 (6) (a) (b) and (c)

179
 (b) acquire further shares in the holding company except upon a general issue of fully
paid bonus shares, if the holding company is a company with a share capital;
(c) as a member, increase any interest in, or liability in relation to, the holding
company, if the holding company is a company limited by guarantee.

For the purpose of section 46, a company is deemed to be a member of a body corporate
if a nominee of the company is a member157.

Private Company Exceeding Membership

A private company’s membership is limited to a maximum of fifty. If such a company
fails to comply with the provisions of its articles on the number of its members, the
company, and each officer and member in default shall be guilty of an offence and shall
be liable on conviction to a fine not exceeding five hundred monetary units158.

Registration of Members
Every company must maintain a register of its members and enter therein the following
particulars159:
(a) the full name and address of each member of which it has received notice;
(b) the occupation of the member, if the member is an individual;
(c) the fact that the member is a body corporate or an unincorporated association, as
the case may be, if the member is not an individual;
(d) the date on which the company received the notice;
(e) if the company has share capital-
(i) the shares held by each member with the share numbers (if any); and
(ii) the amount paid or agreed to be considered as paid on the shares of each
member;
(f) the amount that each member has guaranteed in his declaration of guarantee, if
the company is limited by guarantee;
(g) the date on which the company received notice of any person's ceasing to be a
member.

157
Section 46 (7)
158
Section 47
159
Section 48 (1)

180
A company which has a membership of over fifty must maintain a register which
contains an index of the names of the members in a form that enables the account of each
member to be readily found.160

Consequences of failure to comply

If a company fails to company with the register of membership provisions, it shall be
guilty of an offence, and shall be liable on conviction to a fine not exceeding ten
monetary units for each day that the failure continues 161. The Act provides further that if
failure to comply with the mandatory register of membership provisions is due to the
default of an agent charged with maintaining the register, the agent shall be guilty of an
offence, and shall be liable on conviction to a fine not exceeding ten monetary units for
each day that the failure continues162.

Inspection of Membership Register

Any member of the company is entitled to inspect the register and the index of the names
of the members of the company or other persons163 during business hours at the
company’s registered records office164. If the inspection is by a member, a director,
auditor of the company, or by the Registrar or his delegate it shall be free of charge165.

If the inspection is by any other person the company may make a charge not exceeding
one monetary unit, or such large amount as may be prescribed for each inspection.166

By ordinary resolution, the company may restrict the hours during which the register or
other record shall be available for inspection, provided that it is available for inspection
during not less than two hours in any working day.167 Any person entitled to do an
inspection is also allowed to make copies of the whole or part of the company register or
other record.
160
Section 48 (2)
161
Section 48 (3)
162
Section 48 (4)
163
Section 49 (1)
164
Section 193 (1)
165
Section 193 (2) a
166
Section 193 (2) (b)
167
Section 193 (3)

181
The doctrine of constructive notice was founded on the fact that company documents of
registration, the articles (and the memorandum prior to 1994) are public documents and
open for inspection to anybody wishing to deal with the company. Thus failure to inspect
was fatal as such a person was deemed to have (constructive) notice of the contents of
such documents. The doctrine of constructive notice was mostly used with respect to the
objects clause and the ultra vires doctrine.168

Rectification of Register
A company is required to rectify any error in its register of members. If a company fails
to rectify any error, or if an error in the register causes loss to a person, the aggrieved
member or person may apply to court for an order that the register be rectified and that
the company compensate the member or person for the loss 169. On hearing the
application, the court may decide any question of title or right to be entered or removed
from the register, as well as decide, generally, any question necessary or convenient to be
decided for rectification of the register.170The order of rectification must be lodged with
the Registrar within twenty-one days after its being made 171, failure to which the
company, and each officer in default, shall be guilty of an offence and shall be liable on
conviction to a fine not exceeding three monetary units for each day that the failure
continues.172

Importance of Register
The register of members is prima facie evidence of membership of the company 173 it is
important in that it gives information on who the members of a company are, and the
extent of their liability. The register is the only document that shows members title to
shares, in contrast to the share certificate which is merely an acknowledgment on the part

168
Re Jon Beauforte Ltd (1953) Ch 131; Ashbury Ry Carriage Co. Ltd v Riche (1875) LR 7 H.L. 653. Bell
Houses Ltd v City Wall Properties Ltd (1966) 2QB 656; Cabaret Holdings Ltd v Meeance Sports & Radio
Club Inc. (1982) NZLR 673
169
Section 50 (1)
170
Section 50 (3)
171
Section 50 (4)
172
Section 50 (5)
173
Section 55 See also Magaba Nyerienda v Savoy Hotel

182
of the company that at the time the certificate was issued, the person named therein was
duly recorded in the register.174

Branch Registers
The Articles of a company may provide that the company will keep a part of its register
of members being the part relating to members resident in a specific foreign country or
countries, at specified places in the foreign country or countries. 175
Any entry in a
branch register must be transmitted to the company’s registered records office as quickly
as practicable, and shall maintain there, as part of its register of members, a duplicate of
the branch register176. The company must lodge with the Registrar particulars of the
branch and notify him or her of any change of address or any other change such as
discontinuance, and the notice must be made within twenty-one days after the initial
keeping of the register in that office or the change as the case may be.177

Regulations relating to inspection of the register of a company shall apply to branch

registers178, or as early as is practicable and with any appropriate modifications 179 except
that the advertisement before closing the register shall be published in a newspaper
circulating generally in the country where the branch keeps its register. 180 Failure to
comply with these requirements will result in the company, and each officer in default,
being guilty of an offence which, if proved, being liable to a fine not exceeding ten
monetary units for each day that the failure continues.181 If an instrument of transfer of
any share is registered in a branch register, it shall be deemed to transfer the property
situated outside Zambia and, unless executed in any part of Zambia, shall be exempt from
any duty chargeable in Zambia182

174
Re Baku Consolidated Oilfields Ltd (1994) I.B.C.L.C 173 See also discussion on share certificates in
Chapter ……
175
Section 51 (1)
176
Section 51 (3)
177
Section 51 (4)
178
Section 48 and 49, supra
179
Section 53
180
Section 51 (5)
181
Section 51 (6)
182
Section 52

183
Trusts need not be registered in Member’s Register
No notice of a trust, express implied or constructive, need to be registered in the
companies register of members, or to be lodged with the company or the Registrar183.
Neither is the company bound to see to the execution of any trust whatsoever, in respect
of any of its shares.184 And whether or not the company has received notice of any trust
relating to a share, a receipt given by a member in whose name a share stands in the
register of members shall be valid and entitle the holder to a dividend or other money
payable in respect of the share. Upon payment of such dividend or money by the
company to the holder of the receipt, the company shall be discharged from further
payment with respect to that dividend or payment.185

183
Section 54 (1)
184
Section 54 (2)
185
Section 54 (3)

184
 CHAPTER 7
SHARE CAPITAL
Capital of a company which has shares is dealt with in Part IV of the Act. Capital is, in
commercial usage, the net worth or value of assets of a business, less its liabilities i.e.
what the business owes its creditors. In company law, the capital of a company is the
total amount which the shareholders of the company have contributed or are liable to
contribute as payment for their shares186. As aptly put by Chadwick and Volpe187

“the word capital has been used in two related but separate senses. Firstly the
amount of tangible and intangible assets which form the profits making vehicle
of the enterprise and secondly, the individual’s share of the assets, which
determines the amount of profit he receives, and if the enterprise is dissolved,
his share of those assets”.

Shares do not have to be paid for by money, but with assets such as equipment, tools and
machinery.
Share capital may be nominal capital that is, the amount of money which the company is
authorized to raise, hence it is also known as authorized capital. When the shares are
actually issued or allotted one may talk of issued share capital or allotted share-capital,
and conversely, of unissued or un-allotted share capital. If all or some of the issued
shares have been paid for, the amount is called paid up capital. If not fully paid for, the
balance on the shares is uncalled capital. There is also reserve capital188, which the
company may resolve to call up only on liquidation.

Shares may be issued at a premium that is, for more than their nominal value, and extra
value is kept in a share premium account. The nominal value of shares therefore,

186
Curson: Dictionary of law 4th Edition Pitman Publication House
187
Zimbabwe Company Law, Tett and Chadwick 2nd Edition 1986
188
This should be distinguished from reserve fund which is essential cash in hand for emergencies

185
indicates the maximum a member has to contribute to the company’s liability. Otherwise
the company’s worth is better indicated by the market price of its shares.

Par Values
The shares are invariable denominations for any sum unit: K1000, K5000, K1,000,000
etc…. This makes up the nominal share capital. Cap 388 uses the word “FIXED” amount
to refer to par values.
Of what significance is the par value of shares in Zambia were liability of members is
limited?
(i) sharing of dividends amongst holders
(ii) determination of liability of members, which is limited to the amount of shares
unpaid by them.
(i) depending on the articles of association of a company par value of
shares has some bearing on the rights of voting by members.
(ii) Determining the reliability of distribution at the time of liquidation.
Ultimately par value enables the company to ensure that it receives the valid assets.

Section 18 of the Act provides for minimum share capital for a private company. It
provides as follows:
18. (1) A private company limited by shares shall not transact any business, exercise any
borrowing powers or incur any indebtedness, except for a purpose incidental to its
incorporation or to the obtaining of subscription to, or payment for, its shares, unless-

(a) consideration (whether in cash or otherwise) to the value of not less than
fifty thousand kwacha, or such larger or smaller amount as may be
prescribed instead, has been paid to it for the issue of its shares; and

(b) it has furnished to the Registrar a declaration signed by one of the

directors or by the secretary, stating that the requirement of paragraph (a) has
been compiled with.
(2) For the purposes of subsection (1), the value of-
(a) the goodwill of a business; or
(b) services rendered or to be rendered to the company;
shall not be counted.

186
 (3) Where a new amount is prescribed for the purposes of subsection (1), a private
company that satisfied this section immediately before the new amount was prescribed
shall be deemed to continue to satisfy it.

The Act through Statutory Instrument no 99 of 1998 prescribes the following minimum
capital required at registration:

1. Registration of a company: 2.5 percent of the nominal capital shall be paid as

registration fees but in no case shall the nominal capital be less than:
(a) for a private company K2,000,000.00
(b) for a public company K10,000,000.00
(c) for a financial institution insurance company K500,000,000.00
(d) for a bank K1,000,000,000.00
2. Registration fee of an increase of capital after the first registration of a company
shall be 2.5 percent for every K2,000,000.00 or part thereof.

Raising Capital
Only public companies can raise money from the public by the sale of their shares. The
private company is essentially restricted to institutional sources e.g. Banks, Assurance
companies since it cannot offer its shares to the public.
Few companies are able to secure from their own funds or from the sources of members
the capital necessary for expansion. Therefore it is common for public companies to
invite the public to subscribe for shares or debentures in the company.
Capital is raised in the following ways:-

1. By issuing shares directly to the public. Courts insisted that shares could only be
treated as paid up to the extent of the value actually received by the company in
cash or in kind. The statutory provision, limiting the liability of the members to
the amount unpaid on their shares, was taken to mean that shares cannot be issued
at a discount, and consider them as being fully paid. If a share is worth K5,000
one cannot issue it at K2,000.

187
This golden rule was established in Ooregum Gold Mining Company of India v Rope 189

(1892) AC 125: H.L – the memorandum provided that the shares might be divided into
different classes and issued with such preference, privilege, or guarantee as the company
might direct. The company needed money and its shares stood at a discount. It was held
that under the company’s Act a company had no power to issue shares at a discount; that
the issue was ultra-vires the company, and the allotters were liable to pay full amount
unpaid on the shares.

If the directors do authorize the issue of shares which are not fully paid up, they will be
liable to the company, i.e. the company can claim the unpaid capital from the directors
personally. Payment for shares must be in legal tender, cheques, negotiable instruments,
cash. The company must be able to use the instrument of payment to recover the money.
Gower says that the efficacy of the ruling that shares must be paid in full and not at a
discount, has been somewhat reduced by the fact that the law recognizes that payment
may be made in kind e.g. property or services. Instead of cash and that the company’s
valuation of the consideration would be taken to be conclusive unless inadequacy appears
on the face of it, or fraud is evident. The reason why it is said that the efficacy of the rule
is reduced is because where payment is made otherwise than in cash, it is possible to
“water down” the shares by transferring to the company property (or services) which is
actually worth less than the nominal value of the shares.

In Re Wragg Limited190 Wragg and Martin carried on business as coach proprietors. They
formed a private company to take over the business for the price of £46,3000 payable to
them in cash, debentures and fully paid up shares, and agreement was executed and
registered. The property was transferred to the company, which paid cash and allotted
debentures and shares to the vendors as agreed. Subsequently, the company went into
liquidation and the liquidator contended that the business was worth far less than the
price paid. He took out a summons for and declaration that the shares were improperly
issued as fully paid up without payment or consideration, and that Martin and Wragg
should pay the amounts unpaid.
189
(18920 AC 125 HL
190
1 Ch 796 CA

188
It was held that in the absence of fraud the court would not inquire into the adequacy of
the consideration. Provided the contract was registered as required by the Act, a
company could buy property at any price it thought proper and the parties evaluation
would be conclusive of fully paid up shares; nothing further was payable on the shares as
they had been paid for in money’s worth. Unless there is evidence of bad faith in over
valuing the property.

In Tintin Exploration Syndicate Limited v Sandys 191 the company was allotted shares in
consideration for the property it was given. There was no written contract. The court
considered that they could not hold the shares as fully paid up at all. If there had been a
written contract that would have been a prima facie evidence of paid up shares.

Share Premiums
The public must be informed about the issued as well as nominal capital of the company
to avoid misleading. But there is nothing to stop a company from issuing its shares at a
price exceeding their nominal par value i.e. at a premium.

The general rule is that a company is prohibited from paying dividends out of its nominal
capital. But with regard to sums raised over and above the nominal par value (i.e. at
premium such could be taken to be part of the distributable surplus which the company
could share to shareholders by way of dividends. When there is share-premium it means
that there is more money coming in than nominal capital. The two, nominal capital and
share capital would constitute the value of the undertaking. So they are both protected to
the same extent as share capital to which the creditors look for their payments.

There is a share premium account to which premium must be paid. Share premium
account may also be used to write off preliminary expenses incurred in the formation of a
company or through publicity, payment of clerks etc.

191
1947 (177) LT 412

189
It could be used in providing a premium payable on the redemption of debentures. It can
be used also to pay redeemable preference shares.

Maintenance of Capital
A company may not diminish its reserve fund. It is limited to the extent that the Act does
authorize the reduction of share capital in certain circumstances. The General Principal
has 5 rules under it:
(1) A company may not purchase its own shares, and to maintain capital you
cannot because you lose your own capital.
(2) A company cannot use its own capital to enable somebody else to purchase its
own shares.
(3) It cannot issue shares at a discount.
(4) As far as the company cannot return issued shares to shareholders except in
winding up.
(5) Dividends must not be paid out of issued share capital.

In so far as purchase of its own shares is concerned, authority is Trevor Whitworth192.

There the company went into liquidation. A former shareholder claimed from the
company the balance of the price of his shares which he had sold to the company before
the liquidation and which were not wholly paid for. The transaction was authorized by
the articles. Nonetheless, the claim was dismissed. Persons dealing with the company
were said to be entitled to assume that the company would expand its capital only on its
specified objects.

The effect of allowing a company to purchase its own shares would be that the amount
paid upon the shares would be returned to the shareholders and if the company continued
to hold the shares, be permanently withdrawn from its trading capital.
Lord Watson:

192
ibid

190
 “If the shares are purchased with a view of being resold, that is simply a
speculation with the funds of the company. If they are purchased with a view of
their being retained by the company, that is a permanent withdrawal of the money
invested in them from the trading capital of the company.”

The effect is that the company cannot become a member of itself. The judge does
distinguish the situation when the directors redeem the shares of a holder or the
shareholder surrenders shares in the lien of forfeiture. The shareholder is relieved from
future calls. He is not taking money out of the company.

(1) Forfeiture – affects only the nominal shares

(2) Surrender – distinguishes them from a situation when the company pays back
to the shareholders the money he has paid to the company. If the company
continues to hold that money, it can be paid from the capital of that company.
This is inconsistent with the provision that a copy cannot become a creditor to
itself. Both paid up capital and nominal capital are diminished if these shares
are purchased by the company from the shareholders.

Even though a company cannot purchase its own shares or be a member to itself, shares
or shares of its members can be held by a trustee. The shares held by trustees are
acquired by means other than purchase. E.g. if transferred to trustees by will, as in Kirby
v Williams193 where a partnership business was sold to a company and was paid for by
the issue of shares credited as fully paid i.e. equivalent to the value of shares paid in iv.
The partners were overpaid. So they transferred to the trustees the shares equivalent to
the over payment.

Held
It was valid even though the trustees concerned may be reacquired in certain
circumstances to on the shares of the company. These shares being transferred
did not involve any diminishing or reduction of the shares. If an operation does not affect
that interest then its in order.
193
(1929) 2ch 441

191
The 5 excepts: the company may reduce its capital with the consent of the court. SS 15-
23 lay down the precedent.
A company may purchase its own shares under a court order e.g. where it is required to
receive oppressed minority shareholders. The Act authorities the court to order this
purchase and allow the company to continue. The shares may be surrendered to the copy
and that would entail.

Capital Structure
The company’s shares structure can be rationalized by capitalizing the sums in the share
premium account i.e. avail itself of the money in order to function. It can also resort to
its reserve fund for the same purpose. The company may decide to increase its business
using undistributed profits, bring its issued capital in line with the capital by issuing
bonus shares existing shareholders to the value of the additional capital. Lastly, the
company may decide to reduce its capital.

Alteration of Share Capital

This is provided for in Division 43 of part IV of the Act. By section 74(1):
A company may, unless its articles provide otherwise, by special resolution alter its share
capital as stated in the certificate of share capital by doing any of the following:

(a) increase its share capital by new shares of such an amount as it thinks expedient;
(b) consolidating an dividing all or any or its share capital into shares of a larger
amount than it existing shares;
(c) converting all or any of its paid up shares into stock, and re-converting that stock
into paid up shares of any denomination;
(d) subdividing its shares, or any of them, into shares or smaller amounts than is
stated in the certificate of share capital;
(e) canceling shares which, at the date of the passing of the resolution, have not been
allotted to any person, and diminishing the amount of its share capital by the
amount of the shares so cancelled.

192
Where shares are subdivided under this section, the proportion between the amount paid
and the amount, if any, unpaid on each reduced share shall be the same as it was in the
case of the share from which the reduced share is derived.
A cancellation of un-allotted shares under this section shall be deemed not to be a
reduction of share capital for the purposes of this Act.
Where a company has made any alteration referred to in subsection (1), it shall within
one month after so doing lodge with the Registrar-

(a) a notice in the prescribed form specifying, as the case may be, the shares
increased, consolidated, divided, subdivided, converted, redeemed or cancelled or
the stock reconverted; and
(b) a copy of the resolution authorizing the alteration.

Where an alteration under this section alters a particular stated in the company’s
certificate of share capital, the Registrar shall issue a replacement certificate of share
capital worded to meet the circumstances of the case.
If a company fails to comply with subsection (4), the company, and each officer in
default, shall be guilty of an offence, and shall be liable on conviction to a fine not
exceeding ten monetary units for each day that failure continues.

The liability of members of a limited company is limited to the nominal value of their
shares. The creditors of the company look up to its capital for repayment of their debts.
Hence a company wishing to alter its capital must comply with the statutory
requirements.

Reduction of Share Capital

A reduction of share capital diminishes creditors security. To protect the creditors, the
Act imposes conditions which must be complied with in spite of a special resolution
passed in a general meeting in favour of a reduction.

Dividends
A dividend is the company’s net profit. It is usually distributed or paid out to share
holders in proportion to their shareholding. It is to profit in the form of a dividend that all

193
those who invest in the company look to as their gain or reward. If the company does not
declare a dividend and pay it out to shareholders, it may accumulate and be paid by
issuing bonus shares to the shareholders. The effect of this is that paid up capital is
reduced while conversely the unpaid capital is increased by a similar amount. Any
alteration of a company’s share-capital can be made after a special resolution, and the
special resolution must be lodged with Registrar within twenty-one days of the said
special resolution. Reduction of shares capital is specifically provided for by section 76
it states:
(1) Subject to confirmation by the court, a company may, if so authorised by its articles,
by special resolution reduce its share capital in any way, and in particular, without
prejudice to the generality of the foregoing power, may- Special resolution for
reduction of share capital
(a) extinguish or reduce the liability on any of its shares;
(b) either with or without extinguishing or reducing liability on any of its shares,
cancel any paid-up share capital which is in excess of the wants of the company; or
(c) either with or without extinguishing or reducing liability on any of its shares, pay
off any paid-up share capital which is in excess of the wants of the company;
and may, if and so far as is necessary, reduce the amount of its shares accordingly.
(2) A special resolution under this section is in this Act referred to as “ a resolution for
reducing share capital”.
Section 76(1) therefore gives some of the modes by which a company may reduce its
capital. Various other ways are open to the company. It may reduce capital by returning
company assets to shareholders, or by canceling capital neither lost nor unrepresented by
available assets, by buying its own shares, among other. 194 The examples below are
illustrative.
A company’s articles therefore must authorize a reduction of its share capital, and if a
special resolution is passed for that purpose, an application to court must be made for an
order to that effect. A company may wish to sell its assets or otherwise reduce capital in
order to buy out a retiring member of the company or pay a deceased member’s personal
representatives his/her share of the capital but has not got sufficient dividends from

194
In re Rhodesian Pulp and Paper Industries Limited (1959) (1) R and N 73

194
which to pay. The directors of a company may thereafter decide the amount (a) that is to
be paid out as dividends and that which has to be ploughed back into the company’s
capital redemption reserve funds, or (b) paid as bonus to members. Once profits have
been recapitalized, in any of these ways, they cease to be profits and become share
capital or undistributable reserves195.
Creditors may object to reduction even after the company has passed a special resolution
to do so. By section 77:
77. (1) If a company has passed a resolution for reducing share capital, it
shall, within twenty-one days after the making of the resolution, apply to the
court for an order confirming the reduction.
(2) If the proposed reduction of share capital involves either diminution of
liability in respect of unpaid share capital or the payment to any shareholder
of any paid-up share capital, subsection (5) and (6) shall apply to the reduction
unless the court directs otherwise.
(3) In giving a direction under subsection (2), the court may direct that
subsections (5) and (6) shall not apply to a specified class or classes of
creditors.
(4) If subsection (2) does not apply, subsection (5) and (6) shall not apply
unless the court directs that they shall apply.
(5) Every creditor of the company who at the date fixed by the court is entitled
to any debt or claim which, if that date were the commencement of the
winding-up of the company, would entitle the creditor to benefit from the
distribution under the winding-up, shall be entitled to object to the reduction.
(6) The court shall settle a list of creditors so entitled to object, and for that
purpose shall ascertain, ad far as possible without requiring an application
from any creditor, the names of those creditors and the nature and amount of
their debts or claims, and may publish notices fixing a day or days after which
creditors not yet entered on the list will lose their right to object it they have
not presented a claim to be entered on the list.

195
Paul Davies: Gower’s Priniciples of Modern Company Law 6th Edition Sweet and Maxwell (1997)

195
 (7) If a creditor entered on the list whose debt or claim is not discharged or
has not been determined does not consent to the reduction, the court may, if it
thinks fit, dispense with the consent of that creditor, on the company’s
securing payment of his debt or claim by appropriating-

(a) the full amount of the debt or claim, if the company admits the full
amount of the debt, or claim, or, though not admitting it, is willing to
provide for it; or
(b) an amount fixed by the court after the like inquiry and adjudication
as if the company were being wound-up by the court, if the company
does not admit and is not willing to provide for the full amount of
the debt or claim, or if the amount is contingent or not ascertained.
A creditor who does not object to the reduction of capital must give consent to the
reduction. The company may, in the alterative, settle such a creditor’s debt, or ensure
that the creditor’s debt is secured.

Powers of Court in a Reduction

78. (1) The court, if satisfied with respect to every creditor of the company who is
entitled to object to the reduction, that-
(a) his consent to the reduction has been obtained;
(b) his debt or claim has been discharged or determined; or
(c) his debt or claim has been secured;

May make an order confirming the reduction on such terms and conditions as it
thinks fit.
(2) The order may require the publication of a notice of the reduction in capital
on the issue of the replacement certificate of share capital under section
seventy-nine.
(3) Where the court makes any such order it may, if for nay special reason it
thinks it proper so to do, make an order-

196
 (a) directing that the company shall, during a period specified in the
order, add to its name as the last words thereof of the words “and
reduced”; or
(b) requiring the company to publish as the court directs the reasons for
the reduction or such other information in regard thereto as the
court may think expedient with a view to giving proper
information to the public.
(4)Where a company is ordered to add to its name the words “and reduced”,
those words shall, until the expiration of the period specified in the order, be
deemed to be part of the name of the company.
It is evident that creditors rights are well protected by ‘statute as the special resolution
alone does not’ determine the issue.
The creditors interest are particularly affected if the company intends to reduce the
liability of the shareholders with respect to paid up shares. If the company intends to
reduce the share capital by returning money to the shareholders, Section 17 gives
creditors of the company, whose debtors or claims will be provable in a wind up, the right
to object to a proposal reduction. The creditor is entitled to oppose the reduction of
capital in the High Court. Section 17 (2) requires the court to settle the list of creditors
who are entitled to object e.g. by publishing a notice in the newspapers. Those creditors
who are omitted by the officers of the company can come up and claim.

The company may agree to pay off the creditor and extinguish his right to object.

The court can only confirm a reduction if satisfied that debts have been repaid or
creditors have consented to the reduction.

Security may also be used to dissipate consent of creditors who may not consent, to make
sure that the company secures that reduction. If not, Sections 17 (3) (a) and (b) may
apply

(3) (a) The court may dispense with the consent of a creditor, by appropriating the full
amount he claims, to be settled by the company to that creditor or (3) (b) if the company

197
neither admits the debt or refuses to settle it, the court may fix an amount after an inquiry
and adjudication as if the company were being wind up by the court.

Section 22 imposes penalties for directors who conceal a creditor or misrepresents the
amount owed: fine not exceeding K200 or to imprisonment without option of a fine for a
period not exceeding 12 months, or both such fine a such imprisonment.

In so far as shareholders’ rights are concerned, the court supervises the winding up. The
various classes of shareholders – ordinary and preference – have the rights which they
would have in a winding up of a company i.e. if the company were to be liquidated. If
they have equal rights with regard to distribution, then where there is a reduction because
of the loss on assets, the loss falls upon the shareholders equally.

If there are preference shareholders with preferential rights to be paid first when
dividends are being distributed, they have no such rights with respect of capital. In a
reduction in the distribution of capital, preferential rights are the same as those of
ordinary shareholders.

But if in a winding up preferential rights of preferential shareholders in respect of share

capital, then only shareholders will suffer, on the loss of reduction i.e. the loss must first
fall on the ordinary shareholders.

Only after the paid up value of the ordinary shares have been extinguished will the
preference shares be reduced.

If the company capital is repaid because its surplus to the company’s needs, it must be
returned to the preference shareholders who have priority; unless otherwise stated,
preference shareholders will be entitled to premiums on their shares.

Section 18 – If satisfied that every creditor has consented to the reduction or has had his
debt discharged or secured, in approving the reduction the court seeks to ensure that the
class of reduction is fair and equitable.

198
Modes of Reduction of Capital
By extinguishing liability of members;

(1) Reduction may be effected by extinguishing or reducing liability of the

shareholders on the unpaid shares in respect of their shares. E.g. on a nominal
value of K5000 on a share, liability for the unpaid K5000 may be reduced to
K2000, but it cannot be credited as fully paid as that would diminish.
(2) By canceling any paid up share capital which is lost or is unrepresented by
available assets. E.g. when the value of the net assets (all the value assets –
building, stock in trade, etc) and try to balance that with the paid up capital –
the value of these assets will be less than the paid up capital.
e.g. Because the company has sustained a trading loss and most of its monies
have been expanded in trying to make profit, but profit ha not in fact been
paid. One ends up with more paid up capital than available assets.
OR
The market value may have dropped considerably e.g. from K5000 a share
(value) to K2000. The effect will be that the paid up capital will not be
represented by available assets.

Re: Floating Dock Company v St Thomas ltd196 (1895)I ch 691

Where a company intends to reduce its capital because it has had a loss of finance,
it has to be proved that there is a permanency in the loss i.e. there should be no
likelihood of recovery. There has got to be prima facie proof of permanence of
loss. This takes into account the danger that certain companies may allege they
have had a loss, and thus claim a reduction in capital.

(3) By paying off any paid up share capital to the shareholders which is in excess of
the needs of the company. This may occur, say, in cases where the company has
sold part of its business undertaking and the monies or shares received in that sale
are distributed among its members.

196
(1895) 1 CH 691

199
 Because it has sold its assets, it remains with a higher share capital which is not
represented by the assets. So the company resolves to reduce the share capital.

(4) By payment in kind the capital may be distributed in kind; rather than being paid
in cash, they are paid in form of shares or bonds197. Ex Parte. WESTBURN
SUGAR REFINERIES198, held and Ex Parte Mine Elect (Bulawayo) (Pvt)
Limited199 agreed inter alia, that whether the court will exercise its discretion and
confirm the reduction depends on three questions.

(1) Whether the interests of creditors have been safeguarded.

(2) Whether it is in the interest of shareholders.
(3) Whether it is in the Public interest
Bonds are documents acknowledging indebtedness issued e.g. by Lusaka City
Council, or local government or central government.

In a case where the capital has been repaid in kind, if the amount is more than
what the shares would have cost, this will not alter the value of the assets
distributed or share for the agree.
e.g. a company makes a reduction of capital makes itself insolvent.

Purpose of paying in kind

May be to borrow capital on issued shares. This makes it easier to borrow money
with interest, and repay it by share capital. Especially preference shares
Reduction of reserve capital will have been created by a transfer of profits
returned in the company, or may be added to by the company resolving that the
unpaid up capital can only be paid at the time of winding up. So the company
may200
(i) write off losses of assets against reserve capital

197
Bonds are documents acknowledging indebtedness issued e.g. by Lusaka City Council, or Local
Government or central government
198
(1951) Ac 625; 1951 1 All ER 881 (HL)
199
(1962) R& N . 43
200
Barrow Haematic Steel Company [1900] 2 ch 846

200
 (ii) if the reserve capital is insufficient to balance the books, then they will
proceed to
(insert columns)

Cases on Instances of Reduction of Share Capital

BRITISH AMERICAN TRUSTEE AND FINANCE CORPORTAION LTS (AND
REDUCED) v COUPER [1894] AER, 667201

A company carried on business in United Kingdom and the United States of America and
a partisan of its investments and some of its shareholders were in the States. Differences
having arisen between the Directors in England and the American Committee, it was
agreed that the American shareholders should take over the American investments upon
the terms that the copy should cease to carry on business in America and that the capital
of the company should be reduced by the cannot of the shares held in America.

A special resolution for carrying out this agreement was passed and confirmed. All the
creditors of the company had either been paid as assented to the arrangement.

Held:

The arrangement was not ultra-vires the company, and should be sanctioned by the court.
Facts
The appellant company presented a petition praying that a special resolution passed and
confirmed at ordinary general meetings of the corporation be confirmated by the court.
The resolution provided for the modification of the conditions of the memorandum of
association by a reduction of the capital from ₤2,000,000 divided into 188,600 ordinary
shares of ₤10 each, and 114,000 general founders shares of ₤1 each (of which there had
been issued 63,109 ordinary and 72,298 general founders shares) to 1,691,737 divided
into 160,767 ordinary shares of ₤10 each and 84,067 general founders shares of ₤1, and
that the remainder of the capital, namely the 27,833 ordinary shares numbered as therein
mentioned, be paid off (the capital thereby represented being in excess of the wants of the

201
1894 All ER 667

201
company) and that such last mentioned ordinary and general founders, shares respectively
and all liabilities thereon be wholly extinguished. The country had carried on business in
the United States of America and a portion of its investments were in that country.

The statute allowed reduction of capital. It did not prescribe the manner in which the
reduction is to be effected. Nor is there any limited of the power of the court to confirm
the reduction if it is satisfied that all the credits entitled to object to the reduction have
either consented or been paid or secured.

Of course, a scheme where certain shareholders receive a part of the assets of the
company as equivalent to their shares therein, such shares being cancelled, is a mode of
effecting a reduction in the capital of the company.

In Trevor v Whitworth202 Lord Macnaughten said that a company is prohibited from

purchasing its own shares, except under certain stringent conditions. “When Parliament
sanctions the doing of a thing under certain conditions and with certain restrictions, it
must be taken that the thing is prohibited unless their prescribed conditions and
restrictions are observed. Can reduce its capital if it is in excess of the wants of the
company, so long as this does not involve with diminution of any liability in respect of
unpaid capital, or the payment to any shareholder of any paid up capital. It follows that if
the operation be effected by payment of capital to any shareholder, all the prescribed
conditions must be followed.

PAYMENT OF CAPITAL TO ANY SHAREHOLDER IS JUST AS MUCH

REDUCION OF SHARECAPITAL, AND JUST AS DETRIMENTAL TO THE
INTERESTS OF CREDITORS AS PAYMENT OF THE SAME AMOUNT AMONG
ALL THE SHAREHODLERS RATEABLY

It is none-the-less a payment off of capital, because the shareholders to whom the

payment is made renounces in return the right to participate in the joint stock of the
company.

202
(1887) 12 AC 409

202
The ratio decidendi was in part therefore that a company which paid away its assets for
the purchase of its own shares did thereby reduce its capital, and that not in a manner
authorized by the legislature.

In Re Denver Hotel Company203 Lindley J. said if a transaction is really a purchase by the

company of its own shares from one shareholders only, then the court cannot sanction it.
The purchase by the company involves the possession by the company of sufficient assets
to pay for the shares bought, and the capital represented by such shares would not be lost
nor unprepresented by available assets. The capital might be in excess of the wants of the
company. But this should not be consumed to enable a company to prefer one
shareholder to another of the same class by buying up his shares; we cannot regard Lord
MacNanghten’s judgment in Trevor v Whitwork204 as intimating that such a transaction is
within the statute. His remarks were made to enforce his view that, apart from the
Company Act, it is ultra-vires for a limited company to buy its own shares, even if its
articles or memo expressly authorize it to do so. He was not contemplating preferring
one shareholder to another of the same class as himself.

Re Charteley –Whitfied Colliery Ltd 205

This was a coal mining company with 47 shareholders. It was nationalized under statute,
which provided for the vesting of its assets in the National Coal Board subject to payment
of compensation, which would be assessed by a tribunal. This was such a long process it
would take years before the shareholders could get their compensation.

However, the company upon losing its principal business had no intention of being
liquidated. It was going to another business of digging clay; manufacturing tiles, drain
pipes, etc. Normally in a winding up, preference shareholders have priority over the
capital of the company, but they do not participate in its surplus assets.

The company passed as special resolution as per its articles or memo, to reduce its capital
and pay off the preferred shareholders. This is the preferred shareholders objected to, on

203
(1893) 1 Ch 495
204
(1948) 2 All ER 593
205
See also Lord Herschell, below

203
the basis that the ordinary shareholders would benefit particularly from the money the
company would make by the reduced activities.

It is a recognized principles that the court, in confirming a reduction by the payment off
of capital surplus to a company’s needs, will require that those entitled to priority in a
winding up are paid off first. This practice is accepted by courts and businessmen as
being fair and equitable. This practice does not cease to be fair or equitable just because
a large preferred shareholder does not like it.

CASES ON SHARE CAPITAL

Maintenance of share capital: Purchase of own shares

Trevor v Whitworth
(1887) 12 App Cas 409
A company having gone into liquidation, a former shareholder claimed from the
company the balance of the price of his shares which he had sold to the company before
the liquidation and which were not wholly paid for. The claim was dismissed.

LORD HERSCHELL: [416]. . . Let me now invite your Lordships’ attention to the facts
of the present case. The company had purchased, prior to the date of liquidation, no less
than 4 142 of its own shares; that is to say, considerably more than a fourth of the paid –
up capital of the company had been either paid, or contracted to be paid, to shareholders,
in consideration only of their ceasing to be so. I am quite unable to see how this
expenditure was incurred in respect of or as incidental to any of the objects specified in
the memorandum. And, if not, I have a difficulty in seeing how it can be justified. If the
claim under consideration can be supported, the result would seem to be this, that the
whole of the shareholders, with the exception of those holding seven individual shares,
might now be claiming payment of the sums paid upon their shares as against the
creditors, who had a right to look to the moneys subscribed as the source out of which the
company’s liabilities to them were to be met. And the stringent precautions to prevent
the reduction of the capital of a limited company, without due notice and judicial

204
sanction, would be idle if the company might purchase its own shares wholesale, and so
effect the desired result. . . .

What was the reason which induced the company in the present case to purchase its
shares? If it was that they might sell them again, this would be a trafficking in the shares,
and clearly unauthorized. If it was to retain them, this would be to my mind an indirect
method of reducing the capital of the company. The only suggestion of another motive
(and it seems to me to be a suggestion unsupported by proof) is that this was intended to
be a family company, and that the directors wanted to keep the shares as much as
possible in the hands of those persons, whom the directors thought they would like to be
amongst this small number of shareholders. I cannot think that the employment of the
company’s money in the purchase of shares for any such purpose was legitimate. The
business of the company was that of manufacturers of flannel. In what sense was the
expenditure of the company’s money in this way incidental to the carrying on of such a
business, or how could it secure the end of enabling the business to be more profitably or
satisfactorily carried on? I can quite understand that the directors of a company may
sometimes desire that the shareholders should not be numerous, and that they should be
persons likely to leave them with a free hand to carry on their operations. But I think it
would be most dangerous to countenance the view that, for reasons such as these, they
could legitimately expend the moneys of the company to any extent they please in the
purchase of its shares. No doubt if certain shareholders are disposed to hamper the
proceedings of the company, and are willing to sell their shares, they may be bought out;
but this must be done by persons, existing shareholders or others, who can be induced to
purchase the shares, and not out of the funds of the company.

Maintenance of share capital: Issue of shares at a discount

Ooregum Gold Mining Company of India Ltd v Roper

[1892] AC 125 (HL)
LORD HALSBURY LC: [133] My Lords, the question in this case has been more or less
in debate since 1883, when Chitty J decided that a company limited by shares was not
prohibited by law from issuing shares at a discount. That decision was overruled, though

205
in a different case, by the Court of Appeal in 1888, and has now come to your Lordships
for final determination.

My Lords, the whole structure of a limited company owes its existence to the Act of
Parliament, and it is to the Act of Parliament one must refer to see what are the powers,
and within what limits it is free to act. Now, confining myself for the moment to the Act
of 1862, it makes one of the conditions of the limitation of liability that the memorandum
of association shall contain the amount of capital with which the company proposes to be
registered, divided into shares of a certain fixed amount. It seems to me that the system
thus created by which the shareholder’s liability is to be limited by the amount unpaid
upon his shares, renders it impossible for the company to depart from that requirement,
and by any expedient to arrange with their shareholders that they shall not be liable for
the amount unpaid on the shares, although the amount of those shares has been, in
accordance with the Act of Parliament, fixed at a certain sum of money. It is manifest
that if the company could do so the provision in question would operate nothing.

I observe in the argument it has been sought to draw a distinction between the nominal
capital and the capital which is assumed to be the real capital. I can find no authority for
such a distinction. The capital is fixed and certain, and every creditor of the company is
entitled to look to that capital at his security.

It may be that such limitations on the power of the company to manage its own affairs
may occasionally be inconvenient, and prevent its obtaining money for the purpose of its
trading on terms so favourable as it could do if it were more free to act. But, speaking for
myself, I recognize the wisdom of enforcing on a company the disclosure of what its real
capital is, and not permitting a statement of its affairs to be such as may mislead and
deceive those who are either about to become its shareholders or about to give it credit.
I think . . . that the question which your Lordships have to solve is one which may be
answered by reference to an inquiry: What is the nature of an agreement to take a share in
a limited company” and that that question may be answered by saying, that it is an
agreement to become liable to pay to the company the amount for which the share has
been created. That agreement is one which the company itself has no authority to alter or

206
qualify, and I am therefore of the opinion that, treating the question as unaffected by the
Act of 1867, the company were prohibited by law, upon the principle laid down in
Ashbury Co v Riche [2 Law Rep. 7 H.L. 653], from doing that which is compendiously
described as issuing shares at a discount.

Reduction and variation of Share capital

M Dalley & Co v Sims

(1968) 120 CLR (HC of Australia)
A company was run by the managing director ‘as if it were her own business’, with ‘no
more than perfunctory attention to the requirements of the articles or of the Companies
Acts’. An issue of bonus shares was proposed, for the implementation of which a
resolution in general meeting to increase capital was required. No notice of a general
meeting was given, and no meeting was held, but proceeding as though the capital had
been increased, the company on the managing director’s instructions issued the bonus
shares and allotted them as a gift to one of its employees. The court held that the issue
was invalid.

BARWICK CJ: [614]. . . [W]ithout valid increase in the amount of the company’s
nominal capital, there could not have been a valid bonus issued. I am unable to agree
with the learned judge that the purported increase in capital was validated by the
acquiescence or approbation of all the shareholders. My reasons for not agreeing with
the conclusion that there was an effective increase of the capital of the company are, first,
that though undoubtedly all the active shareholders both agreed in advance to the steps
which ought to have been taken to increase the capital of the company and subsequently
acquiesced in the company being treated as if the capital has been duly increased, I do not
think that the evidence linked all the shareholders with that agreement or that
acquiescence; and, secondly that in any case I entertain some doubt as presently advised

207
as to whether the lack of a resolution duly passed to increase the capital can be overcome
by acquiescence on the part of all the shareholders.

CAPTIAL STRUCTURE

Under Cap 686 there is no specified minimum or maximum share capital that any
company incorporated thereunder is expected to rise. This position of Zambian company
law may be criticized, on one hand, for its potential to encourage an atmosphere whereby
sham business associations may be formed just to take advantages of the limited
liability concept. But on the other hand, this position of the law, perhaps, deserves praise
for its remarkable contribution to the realization of the Biblical parable of the talents 206 by
the Zambian business community whereby those who invested big capital and worked
hard have always been rewarded; while those who put in little have either received an
equivalent of whatever they invested therein or else even the little they had have been
taken away by creditors in a winding up. But to this rather general rule of flexibility in
the amount of share capital, there is one apparent exception affecting the public
companies under Cap. 686. This exception is, however, indirect since there is no
requirement for a minimum capital in terms. Neither can it be argued that it is a
statutory minimum, which is in issue, but rather the amount stated in the prospectus as
the minimum amount, which in the opinion of the directors must be raised by the issue of
the shares in order to commence business207. However, under S76 of Cap. 686 no
allotment of share of given public company is allowed unless the stated minimum
subscription or the sum payable on application for the shares so offered to the public has
been paid received by the company.

206
See generally the synoptic of the New testament
207
S. 78 of Cap. 686

208
The minimum subscription is to be reckoned exclusively of any amount payable other
than cash and the amount payable on the application of each share shall not be less than
five per centum of the par value of the shares. If the conditions specified above are not
fulfilled in the expiration of forty days after the first issue of the prospectus all money
received from applicants for shares must be repaid to them without interest if not repaid
within forty-eight days of the first issue of the prospectus. Where a public company has
failed to raise this minimum subscription it will have no choice but to wind up even
before starting business. The directors would normally be liable if there is default in the
repayment of the money for the shares as stipulated under Cap. 686. A director will,
however, however, be exonerated from liability if he prove that the default in the
repayment of the money was not due to any misconduct or negligence on his part. Any
agreement to waive compliance with the above stated conditions shall be void. Where
having share capital has not issued a prospectus on or with reference to its formation or
where such a company has issued prospectus but not proceeded to allot any of its shares
offered to the public for subscription it is prohibited to allot its shares unless certain
conditions prescribed under the Act are fulfilled. Such a company, apart from supplying
certain particulars required by Cap. 686, must also, before the first allotment of its shares
or debentures, have delivered a statement in lieu of prospectus signed by every person
who is named therein as a director or by his agent authorized in writing to the registrar
for registration.

A public company having a share capital cannot commence business or exercise any of
its borrowing powers if it has failed to raise the minimum subscription named in its
prospectus. It can only commence its business or borrow money after having satisfied
the following statutory conditions:-

(a) shares held subject to the payment of the whole amount thereof in cash have been
allotted to an amount less in the whole than the minimum subscription; and
(b) every director has paid to the company on each of the shares taken or contracted
to be taken by him and or which he is liable to pay in cash, a proportion equal to

209
 the proportion payable on application and allotment on shares offered for public
subscriptions; and
(c) there has been delivered to the Registrar for registration a statutory declaration by
the Secretary or one of the directors in the prescribed form, that the aforesaid
conditions have been complies with.

Similar conditions as above must be fulfilled in connection public companies having

share capital, which have not issued any prospectus before they can commence business.
Paragraph (a) above is however replaced by a provision requiring the delivery of a
statement in lieu or prospectus to the Registrar. The declaration required to be made
under paragraph (c) Supra relates to all requirements under both paragraphs (a) and (b)
above. Commencement of business is ultimately dependant on the delivery of a
certificate by the Registrar, certifying that the company is entitled to commence
business. A private company, on the other hand, can start business immediately on
incorporation. It is not required to fulfill obligations imposed by S78 of Cap. 686. If any
company commences business or exercise borrowing powers in contravention of this
section, every person who is responsible in contravention of this section, every person
who is responsible for the contravention shall be liable to a fine not exceeding K100 for
every day during the contravention continues. It is submitted that this provision is
intended to lift the veil of incorporation of the company by shifting the obligations arising
therefrom from the company as such to the individuals who are behind the management
or “ownership” of it and are responsible for the breach. It may be suggested that the
reason for this is to prevent the floatation of ‘sham’ companies, which might fail to raise
the necessary capital to meet their financial commitments.

A company registered under cap. 686 has power to issue different classes of shares or
obtain loan capital. While it is usual to issue shares for cash in Zambia, the company
may, however, issue shares as fully paid and in consideration of services of works
rendered by the person on whom they are issued. In Zambia the common law position
that a company cannot subscribe for its own shares or give financial assistance to other

210
persons to purchase its shares still remains unshaken by any legislative act. Neither can a
subsidiary company own shares in its holding company.

Dividends are declared by the company in a general meeting. Where dividends are so
declared the mount may, however, that the so-called ‘recommendation’ of the directors is
in practice mandatory in so far as the directors seem to have a final say in deciding how
much ought to be distributed as dividends. Dividends are to be paid out of profits and not
otherwise. The directors have been empowered, where the articles do not provide
otherwise to pay from time to time the members such interim dividends as appear to the
directors to be justified by the profits of the company. The directors may set aside part of
the profits as reserves or carry forward any such profits, which they may not think
prudent to divide. A shareholder is not entitled to any interest on undistributed dividends
as against the company.

It is common to insert a provision for capitalization profits in the articles of association of

most Zambian companies. It is normally provided that any meeting declaring a dividend
can resolve that dividend to be paid wholly, or partly by distributing specific assets such
as paid up shares or debentures in the company or any other company. Further they
usually provide that any undivided profits available for dividends may be capitalized and
distributed among the shareholders on the footing that they become entitled thereto as
capital and any undivided profits may be applies in paying up in full unissued shares or
debentures of the company or towards payment of an amount unpaid on any issued shares
or debentures. In the absence of such express provision dividends cannot be paid
otherwise than in cash. The usefulness of the provision for capitalization is that it enables
the company in determining whether the monies distributed are to be regarded as capital
or income.

Transfer and Transmission of Shares

From the above sub-heading it is apparent that shares or other interest of a member in a
company are regarded as movable property. But their transferability is always regulated
in the manner provided in the articles of the company. Where shares are specified in a

211
share warrant they are transferable by delivery of the warrant. The bearer of such share
warrant may, if the articles so provided, be deemed to be a member of the company,
either to the full extent or for any purposes defined in the article. In the former case an
instrument of transfer must be executed by or on behalf of the transferor and the
transferee. Once this is done the transferor remains the trustee of the shares until the
name of the transferee is entered on the register when the latter acquires legal title or
interest in them. The articles regulate the conditions of registration of a transfer. No
transfer may, however be registered unless a proper instrument of transfer has been
delivered to the company. A certificate under the common seal of a company specifying
any shares held by a member shall be prima facie evidence of the title of the member to
the shares. It may be recalled that in case of a private company the right to transfer
shares is limited by the articles. Conditions may be imposed by the articles with
reference to transfer of shares. For example, the consent of the directors or any number
of them may be necessary to obtain before any transfer of shares can be affected. This,
therefore, becomes a condition precedent.

Finally, one may mention the transfer of shares by operation of law i.e. by death or
bankruptcy of a member. In the case of death of a member, for example, two situations
may be anticipated:

(iv) if the deceased member is a joint-holder of a share or shares it is the surviving

joint-holder who becomes entitled to the share or shares;
(v) if the deceased is the sole shares-holder his executor or administrator (i.e.
personal representative) is entitled to his share or shares.

Such transmission of shares is governed by the same rules as to registration as transfer

inter-vivos.

212
Types of Capital

1. Share capital: it may be the authorized or nominal capital, which sets a

sealing to the total amount to be raised by the company.

A company which is limited by shares, or by guarantee and which has a share capital,

must set out in its memorandum the amount of shares capital with which it is to

be registered and the division of that capital into shares of a fixed amount. The

amount of capital may be increased or reduced.

2. The issued capital:- is that part of the normal/authorized capital of the company
which has been issued t the shareholders. i.e. it is the nominal value of the shares
which have been allotted by the company. Shares may be allotted for cash or for
consideration other than money. They latter may be assets acquired by company in
exchange of shares or services rendered.

3. The paid-up capital:- is that part of the issued capital which has been paid up by
the shareholders: e.g. a company may have a nominal capital of K20,000 of which
K15,000 is issued capital, and of the issued capital merely K8,000 is paid up. (The
uncalled capital “is that part of the issued capital which has not been paid up –
K7,000 in the above example. It can be called up, by the company from the
shareholders at any time otherwise agreed).

1. The Reserve capital (or reserve liability) is that part of its uncalled capital which a

limited company has by special up except in the servant and for the purpose of

being wound up. The reserve capital is available for the creditors, on the winding

up. Reserve capital is different from reserve fund or cash-in-hand of the

company meant for emergencies.

213
Tutorial

1. Shares may not necessary have t be in money form. They can be assets e.g.

machinery, goods blgs etc.

2. S 8 (3) (a) provides for authorized capital, which sets a ceiling up to which a

company can raise its nominal/authorized capital. This ceiling should not be

exceeded. However, there is room for avoidance i.e. one can always make an

infatuated value upon the shares to be sold.

Are companies in Zambia allowed to issue shares, which are not fully aid up? S 76 – it

appears that all shares have got to be fully paid up. In Zambia issued share capital is

equivalent to paid-up capital. This applies to public companies only. It seems the

notions of paid up capital and uncalled up capital are applicable only is private

companies. Reserve capital in Zambia is only of academic interest.

SHARE CHAPITAL

Capital of a company which has shares is dealt with in Part IV of the Act. Capital is, in
commercial usage, the net worter or value of assets of a business less its liabilities i.e.
what the business owes its creditors. In company law, the capital of a company is the
total amount which the shareholders of the company have contributed or are liable to
contribute as payment for their shares. 208 As aptly put by Chadwick and Volpe 209 “the
word capital has been used in two related but separate senses. First, the amount of
tangible and intangible assets which form the profit making vehicle of the enterprise and
208
Curson: Dictionary of law 4th edition Pitman Publishing House
209
Zimbabwe Company Law Tett and Chadwick 2nd edition 1986

214
secondly, the individual’s share of the assets, which determine the amount of profit he
receives, and if the enterprise is dissolved, his share of those assets” shares do not have to
be paid for money, but with assets such as equipment, tools and machinery.

Share capital may be nominal capital that is, the amount of money which the company
authorized to raise, hence, it is also known as authorized capital. When the shares are
actually issues, or allotted, one may talk of issued share capital or allotted share-capital,
and conversely, of unissued or unalloted share capital. If all or some of the issued shares
have been paid for, the amount is called paid up share capital. If not fully paid for, the
balance on the shares is uncalled capital. There is also reserve capital210, which the
company may resolve to call up on liquidation.

Shares may be issued at a premium that is, for more than their nominal value, and the
extra value is kept in a share premium account. The nominal value of shares therefore,
indicates the maximum a member has to contribute tot eh company’s liabilities.
Otherwise the company’s worth is better indicated by the market price of its shares.

Section 18 of the Act provides for minimum share capital for a private company. It
provides as follows:
18. (1) A private company limited by shares shall not transact any business,
exercise any borrowing powers or incur any indebtedness, except for a
purpose incidental to its incorporation or to the obtaining of subscription
to, or payment for, its shares, unless- Minimum capital for private
company limited by shares

(a) consideration (whether in cash or otherwise) to the value

of not less than fifty thousand kwacha, or such larger or smaller
amount as may be prescribed instead, has been paid to it for the
issue of its shares; and

210
This should be distinguished from reserve fund which is essential cash in hand for emergencies.

215
 (b) it has furnished to the Registrar a declaration signed by
one of the directors or by the secretary, stating that the
requirement of paragraph (a) has been compiled with.
(2) For the purposes of subsection (1), the value of-
(a) the goodwill of a business; or
(b) services rendered or to be rendered to the company;
shall not be counted.
(3) Where a new amount is prescribed for the purposes of subsection (1),
a private company that satisfied this section immediately before the new
amount was prescribed shall be deemed to continue to satisfy it.

The Act through Statutory Instrument no 99 of 1998 prescribes the following minimum
capital requirement at registration:
1. Registration of a company: 2.5 percent of the nominal capital shall be paid as
registration fees but in no case shall the nominal capital be less than:
(a) for a private company K2,000,000.00
(b) for a public company K10,000,000.00
(c) for a financial institution insurance company K5,000,000.00
(d) for a bank K1,000,000,000.00

2. Registration fee of an increase of capital after the first registration of a company shall
be 2.5 percent of every K200 or part thereof.

The law before its repeal and replacement in 1994 under section 8 and 132 provided for
third schedule of prescribed forms comprising:
(a) Memorandum of Association
(b) Summary of Capital and Shares

Capital structure
The company’s share structure can be rationalized by capitalizing the sums in the share
premium account i.e. avail itself of the money in order to function or continue to

216
function. It can also resort to its reserve fund for the same purpose. The company may
decide to increase its business using undistributed profits, bringing its issued capital in
line with the capital by issuing bonus shares to existing shareholders to the value of the
additional capital. Lastly, the company may decide to reduce its capital.

Alteration of share capital

This is provided for in Division 4.3 of Part IV of the Act. By Section 74 (1)

74. (1) A company may, unless its articles provide otherwise, by special resolution
alter its share capital as stated in the certificate of share capital by doing any of
the following: Alteration of share capital

(a) increasing its share capital by new shares of such an

amount as it thinks expedient;
(b) consolidating and dividing all or any of its share capital
into shares of a larger amount than its existing shares;

(c) converting all or any of its paid up shares into stock, and
re-converting that stock into paid up shares of any denomination
(d) subdividing its shares, or any of them, into shares of
smaller amounts than is stated in the certificate of share capital;
(e) cancelling shares which, at the date of the passing of the
resolution, have not been allotted to any person, and diminishing
the amount of its share capital by the amount of the shares so
cancelled.
(2) Where shares are subdivided under this section, the proportion between the
amount paid and the amount, if any, unpaid on each reduced share shall be the
same as it was in the case of the share from which the reduced share is derived.

(3) A cancellation of un-allotted shares under this section shall be deemed not to
be a reduction of share capital for the purposes of this Act.
(4) Where a company has made any alteration referred to in subsection (1), it
shall within one month after so doing lodge with the Registrar-

217
 (a) a notice in the prescribed form specifying, as the case
may be, the shares increased, consolidated, divided, subdivided,
converted, redeemed or cancelled or the stock reconverted; and

(b) a copy of the resolution authorising the alteration.

(5) Where an alteration under this section alters a particular stated in the
company's certificate of share capital, the Registrar shall issue a replacement
certificate of share capital worded to meet the circumstances of the case.

(6) If a company fails to comply with subsection (4), the company, and each
officer in default, shall be guilty of an offence, and shall be liable on conviction
to a fine not exceeding ten monetary units for each day that the failure continues.

The liability of members of a limited company is limited to the nominal value of their
shares. The creditors of the company look up to its capital for repayment of their debts.
Hence a company wishing to alter its capital must comply with the statutory
requirements.

(i) Dividend
A dividend is the company’s net profit. If the company does not declare a dividend, it
may accumulate and be paid by issuing bonus shares to the shareholders. The effect of
this is that paid up capital is reduced while conversely the unpaid capital is increased by a
similar amount. Any alteration of a company’s share-capital can only be made after a
special resolution, and the special resolution must be lodged with the Registrar within
twenty-one days of the said special resolution. Reduction of share capital is specifically
provided for by section 76 it states:
(2) A special resolution under this section is in this Act referred to as "a
resolution for reducing share capital".

Creditors may object to reduction even after the company has passed a special resolution
to do so. By section 77:
77. (1) If a company has passed a resolution for reducing share capital, it shall,
within twenty-one days after the making of the resolution, apply to the court for

218
an order confirming the reduction. Creditors may object to reduction in capital

(2) If the proposed reduction of share capital involves either diminution of

liability in respect of unpaid share capital or the payment to any shareholder of
any paid-up share capital, subsections (5) and (6) shall apply to the reduction
unless the court directs otherwise.
(3) In giving a direction under subsection (2), the court may direct that
subsections (5) and (6) shall not apply to a specified class or classes of creditors.

(4) If subsection (2) does not apply, subsections (5) and (6) shall not apply
unless the court directs that they shall apply.
(5) Every creditor of the company who at the date fixed by the court is entitled
to any debt or claim which, if that date were the commencement of the winding-
up of the company, would entitle the creditor to benefit from the distribution
under the winding-up, shall be entitled to object to the reduction.
(6) The court shall settle a list of creditors so entitled to object, and for that
purpose shall ascertain, as far as possible without requiring an application from
any creditor, the names of those creditors and the nature and amount of their
debts or claims, and may publish notices fixing a day or days after which
creditors not yet entered on the list will lose their right to object if they have not
presented a claim to be entered on the list.
(7) If a creditor entered on the list whose debt or claim is not discharged or has
not been determined does not consent to the reduction, the court may, if it thinks
fit, dispense with the consent of that creditor, on the company's securing payment
of his debt or claim by appropriating-
(a) the full amount of the debt or claim, if the company
admits the full amount of the debt, or claim, or, though not
admitting it, is willing to provide for it; or
(b) an amount fixed by the court after the like inquiry and
adjudication as if the company were being wound-up by the
court, if the company does not admit and is not willing to
provide for the full amount of the debt or claim, or if the amount
is contingent or not ascertained.

219
 A creditor who does not object to the reduction of capital must give consent to the
reduction. The company may, in the alterative, settle such a creditor’s debt, or ensure
that the creditor’s debt is secured.

78. (1) The court, if satisfied with respect to every creditor of the company who is
entitled to object to the reduction, that- Order confirming reduction and powers
of court in making such order
(a) his consent to the reduction has been obtained;
(b) his debt or claim has been discharged or determined; or
(c) his debt or claim has been secured;
may make an order confirming the reduction on such
terms and conditions as it thinks fit.
(2) The order may require the publication of a notice of the reduction in capital
on the issue of the replacement certificate of share capital under section seventy-
nine.
(3) Where the court makes any such order it may, if for any special reason it
thinks it proper so to do, make an order-
(a) directing that the company shall, during a period
specified in the order, add to its name as the last words thereof
the words "and reduced"; or
(b) requiring the company to publish as the court directs the
reasons for the reduction or such other information in regard
thereto as the court may think expedient with a view to giving
proper information to the public.
(4) Where a company is ordered to add to its name the words "and reduced",
those words shall, until the expiration of the period specified in the order, be
deemed to be part of the name of the company.

220
Exercise: DISTINCTION BETWEEN ALTERATION AND REDUCTION

Sections 14 – 21; 50; 42 – 45 of Table A.

(insert columns)

Cases on Instances of Reduction of Share Capital

BRITISH AMERICAN TRUSTEE AND FINANCE CORPORTAION LTS (AND

REDUCED) v COUPER [1894] AER, 667

A company carried on business in United Kingdom and the United States of America and

a partisan of its investments and some of its shareholders were in the States. Differences

having arisen between the Directors in England and the American Committee, it was

agreed that the American shareholders should take over the American investments upon

the terms that the copy should cease to carry on business in America and that the capital

of the company should be reduced by the cannot of the shares held in America.

A special resolution for carrying out this agreement was passed and confirmed. All the

creditors of the company had either been paid as assented to the arrangement.

Held:

The arrangements was not ultra-vires the company, and should be sanctioned by the

court.

Facts

The appellant company presented a petition praying that a special resolution passed and

confirmed at ordinary general meetings of the corporation be confirmated by the court.

The resolution provided for the modification of the conditions of the memorandum of

221
association by a reduction of the capital from ₤2,000,000 divided into 188,600 ordinary

shares of ₤10 each, and 114,000 general founders shares of ₤1 each (of which there had

been issued 63,109 ordinary and 72,298 general founders shares) to 1,691,737 divided

into 160,767 ordinary shares of ₤10 each and 84,067 general founders shares of ₤1, and

that the remainder of the capital, namely the 27,833 ordinary shares numbered as therein

mentioned, be paid off (the capital thereby represented being in excess of the wants of the

company) and that such last mentioned ordinary and general founders, shares respectively

and all liabilities thereon be wholly extinguished. The country had carried on business in

the United States of America and a portion of its investments were in that country.

The statute allowed reduction of capital. It did not prescribe the manner in which the

reduction is to be effected. Nor is there any limited of the power of the court to confirm

the reduction if it is satisfied that all the credits entitled to object to the reduction have

either consented or been paid or secured.

Of course, a scheme where certain shareholders receive a part of the assets of the

company as equivalent tot heir shares therein, such shares being cancelled, is a mode of

effecting a reduction in the capital of the copy.

In TREVOR v WHITWORTH (1887) Lord Macnanghten said that a company is

prohibited from purchasing its own shares, except under certain stringent conditions.

“When Parliament sanctions the doing of a thing under certain conditions and with

certain restrictions, it must be taken that the thing is prohibited unless their prescribed

conditions and restrictions are observed. Can reduce its capital if it is in excess of the

222
wants of the company, so long as this does not involve with diminution of any liability in

respect of unpaid capital, or the payment to any shareholder of any paid up capital. It

follows that if the operation be effected by payment of capital to any shareholder, all the

prescribed conditions must be followed.

PAYMENT OF CAPITAL TO ANY SHAREHOLDER IS JUST AS MUCH

REDUCTION OF SHARECAPITAL, AND JUST AS DETRIMENTAL TO THE
INTERESTS OF CREDITORS AS PAYMENT OF THE SAME AMOUNT AMONG
ALL THE SHAREHODLERS RATEABLY

It is none-the-less a payment off of capital, because the shareholders to whom the

payment is made renounces in return the right to participate in the joint stock of the

company.

The ratio decidendi was in part therefore that a company which paid away its assets for

the purchase of its own shares did thereby reduce its capital, and that not in a manner

authorized by the legislature.

In RE DENVER HOTEL COMPANY [1893] 1 chapter 495 Lindley J. said if a

transaction is really a purchase by the company of its own shares from one shareholders

only, then the court cannot sanction it. The purchase by the company involves the

possession by the company of sufficient assets to pay for the shares bought, and the

capital represented by such shares would not be lost nor unprepresented by available

assets. The capital might be in excess of the wants of the company. But this should not

be consumed to enable a company to prefer one shareholder to another of the same class

by buying up his shares; we cannot regard Lord MacNanghten’s judgment in TREVOR

as intimating that such a transaction is within the statute. His remarks were made to

223
enforce his view that, apart from the Company Act, it is ultra-vires for a limited company

to buy its own shares, even if its articles or memo expressly authorize it to do so. He was

not contemplating preferring one shareholder to another of the same class as himself.

RE CHARTELEY – WHITFIED COLLIERY LTD [1948] 2 AER 593

This was a coal mining company with 47 shareholders. It was nationalized under statute,

which provided for the vesting of its assets in the National Coal Board subject to payment

of compensation, which would be assessed by a tribunal. This was such a long process it

would take years before the shareholders could get their compensation.

However, the company upon losing its principal business had no intention of being

liquidated. It was going to another business of digging clay; manufacturing tiles,

drain pipes, etc. Normally in a winding up, preference shareholders have priority over

the capital of the company, but they do not participate in its surplus assets.

The company passed as special resolution as per its articles or memo, to reduce its capital

and pay off the preferred shareholders. This is the preferred shareholders objected to, on

the basis that the ordinary shareholders would benefit particularly from the money the

company would make by the reduced activities.

It is a recognized principles that the court, in confirming a reduction by the payment off

of capital surplus to a company’s needs, will require that those entitled to priority in a

winding up are paid off first. This practice is accepted by courts and businessmen as

224
being fair and equitable. This practice does not cease to be fair or equitable just because

a large preferred shareholder does not like it.

RE: HOLDERS INVESTMENT [1971] 2 AER 287

Are companies in Zambia allowed to issue shares, which are not fully aid up? S 76 – it

appears that all shares have got to be fully paid up. In Zambia issued share capital is

equivalent to paid-up capital. This applies to public companies only. Having considered

the provisions of the Act, a comment on capital is appropriate.

Raising Capital

Only public companies can raise money from the public by the sale of their shares. The

private company is essentially restricted to institutional sources e.g. Banks, Assurance

companies since it cannot offer its shares to the public.

Few companies are able to secure from their own funds from the sources of members the

capital necessary for expansion. Therefore it is common for public companies to invite

the public to subscribe for shares or debentures in the company.

Capital is raised in the following ways:-

2. By issuing shares directly to the public. Courts insisted that shares could only be

treated as paid up to the extent of the value actually received by the company in

cash or in kind. The statutory provision, limiting the liability of the members to

225
 the amount unpaid on their shares, was taken to mean that shares cannot be issued

at a discount, and consider them as being fully paid. If a share is worth K5,000

one cannot issue it at K2,000.

This golden rule was established in OOREGUM GOLD MINING COMPANY OF

INDIA v ROPER (1892) AC 125: H.L – the memorandum provided that the shares might

be divided into different classes and issued with such preference, privilege, or guarantee

as the company might direct. The company needed money and its shares stood at a

discount. It was held that under the company’s Act a company had no power to issue

shares at a discount; that the issue was ultra-vires the company, and the allotters were

liable to pay full amount unpaid on the shares.

If the directors do authorize the issue of shares which are not fully paid up, they will be
liable to the company, i.e. the company can claim the unpaid capital from the directors
personally. Payment for shares must be in legal tender, cheques, negotiable instruments,
cash. The company must be able to use the instrument of payment to recover the money.

Gower says that the efficacy of the ruling that shares must be paid in full and not at a

discount, has been somewhat reduced by the fact that the law recognizes that payment

may be made in kind e.g. property or services. Instead of cash (S76/2) and that the

company’s valuation of the consideration would be taken to be conclusive unless

inadequacy appears on the face of it, or fraud is evident. The reason why it is said that

the efficacy of the rule is reduced is because where payment is made otherwise than in

cash, it is possible to “water down” the shares by transferring to the company property (or

services) which is actually worth less than the nominal valve of the shares.

226
In RE WRAGG LIMITED 1 CH 796 C.A

Wragg and Martin carried on business as coach proprietors. They formed a private

company to take over the business for the price of £46,3000 payable to them in cash,

debentures and fully paid up shares, and agreement was executed and registered. The

property was transferred to the company, which paid cash and allotted debentures and

shares to the vendors as agreed. Subsequently, the company went into liquidation and the

liquidator contended that the business was worth far less than the price paid. He took out

a summons for and declaration that the shares were improperly issued as fully paid up

without payment or consideration, and that Martin and Wragg should pay the amounts

unpaid.

It was held that in the absence of fraud the court would not inquire into the adequacy of

the consideration. Provided the contract was registered as required by the Act, a

company could buy property at any price it thought proper and the parties’ evaluation

would be conclusive evidence of fully paid up shares; nothing further was payable on the

shares as they had been paid for in money’s worth. Unless there is evidence if bad faith

in over-valuing the property.

In TINTIN EXPLORATION SYNDICATE LIMITED V SANDYS 1947 (177) L.T. 412

the company was allotted shares in consideration for the property it was given. There

was no written contract. The court considered that they could not hold the shares as fully

paid up at all. If there had been a written contract that would have been a prima facie

evidence of paid up shares.

227
Par Values

Usually shares are invariable denominations of any sum unit: 10n, 50n, K1 etc…. This

makes up the nominal share capital. S8 (3) (a) cap 686 uses the word “FIXED” amount to

refer to par values.

Of what significance is the par value of shares in Zambia where liability of members is

limited?

(i) sharing of dividends amongst holders

(ii) determination of liability of members, which is limited to the amount of shares

unpaid by them.

(ii) depending on the articles of association of a company par value of shares has

some bearing on the rights of voting by members.

(iii) Determining the reliability of distribution at the time of liquidation.

Ultimately par value enables the company to ensure that it receives the valid assets.

Share Premiums

The public must be informed about the issued as well as nominal capital of the company

to avoid misleading. But there is nothing to stop a company from issuing its shares at a

price exceeding their nominal par value i.e. at a premium.

The general rule is that a company is prohibited from paying dividends out of its nominal

capital. But with regard to sums raised over and above the nominal par value (i.e. at

premium such could be taken to be part of the distributable surplus which the company

228
could share to shareholders by way of dividends. When there is share-premium it means

that there is more money coming in than nominal capital. The two, nominal capital and

share capital would constitute the value of the undertaking. So they are both protected to

the same extent as share capital to which the creditors look for their payments.

There is a share premium account to which premium must be paid share premium

account may also be used to write off preliminary expenses incurred in the formed of a

company or through publicity, payment of clerks etc.

It could be used in providing a premium payable on the redemption of debentures. It can

be used also to redeemable preference shares.

Maintenance of Capital

A company may not diminish its reserve fund. It is limited to the extent that the Act does
authorize the reduction of share capital in certain circumstances. The General Principal
has 5 rules under it.

(6) A company may not purchase its own shares, and to maintain capital you

cannot because you lose your own capital.

(7) A company cannot use its own capital to enable somebody else to purchase its

own shares.

(8) It cannot issue shares at a discount.

(9) As far as the company cannot return issued shares to shareholders except in

winding up.

(10) Dividends must not be paid out of issued share capital.

229
In so far as purchase of its own shares is concerned, authority is TREVOR v

WHITWORTH [1887] 12 A.C. 409. There the company went into liquidation. A former

shareholder claimed from the company the balance of the price of his shares which he

had sold to the company before the liquidation and which were not wholly paid for. The

transaction was authorized by the articles. Nonetheless, the claim was dismissed.

Persons dealing with the company were said to be entitled to assume that the company

would expand its capital only on its specified objects.

The effect of allowing a company to purchase its own shares would be that the amount

paid upon the shares would be returned to the shareholders and if the company continued

to hold the shares, be prematurely withdrawn from its trading capital.

Lord Watson:

“If the shares are purchased with a view of being resold, that is simply a

speculation with the funds of the company. If they are purchased with a view of

their being retained by the company, that is a permanent withdrawal of the money

invested in them from the trading capital of the company.”

The effect is that the company cannot become a member of itself. The judge does

distinguish the situation when the directors redeem the shares of a holder or the

shareholder surrenders shares in the lien of forfeiture. The shareholder is relieved from

future calls. He is not taking money out of the company.

230
 (3) Forfeiture – affects only the nominal shares

(4) Surrender – distinguishes them from a situation when the company pays back

to the shareholders the money he has paid to the company. If the company

continues to hold that money, it can be paid from the capital of that company.

This is inconsistent with the provision that a copy cannot become a creditor to

itself. Both paid up capital and nominal capital are diminished if these shares

are purchased by the company from the shareholders.

Even though a company cannot purchase its own shares or be a member to itself, shares

or shares of its members can be held by a trustee. The shares held by trustees are

acquired by means other than purchase. E.g. if transferred to trustees by will, as in

KIRBY v WILLIAMS [1929] 2 ch 441 where a partnership business was sold to a

company and was paid for by the issue of shares credited as fully paid i.e. equivalent to

the value of shares paid in iv. The partners were overpaid. So they transferred to the

trustees the shares equivalent to the over payment.

Held

It was valid even though the trustees concerned may be reacquired in certain

circumstances to on the shares of the company. These shares being

transferred did not involve any diminishing or reduction of the shares. If an operation

does not affect that interest then its in order.

231
The 5 excepts: the company may reduce its capital with the consent of the court. SS 15-

23 lay down the precedent.

A company may purchase its own shares under a court order e.g. where it is required to

receive oppressed minority shareholders. The Act authorities the court to order this

purchase and allow the company to continue. The shares may be surrendered to the copy

and that would entail

Reduction of Share Capital

We have noted that share capital is a fund where creditors look up for the payment of

their credits.

A reduction of capital diminishes this creditors’ security. To protect the creditors the law

imposes conditions, which must be complied with to ensure that creditors are not

defrauded by the company’s assets being distributed among the members or the

company-releasing shareholders from the liability in section 7.

The scheme of reduction must be fair as between members of the shareholders i.e.

preference and ordinary shareholders.

A company may reduce its share capital by special resolution. The reduction must be

confirmed by the High Court. The Act provides three modes of reduction though the list

is not exhaustive.

232
Modes of Reduction
(3) see 15 (1) (a) reduction may be affected by extinguishing or reducing liability

of the shareholders on the unpaid shares in respect of their shares. E.g. you

have a nominal value of 50n on a share. Liability for the unpaid 50n may be

reduced to 25n, as K1 reduced to 75n.

what cannot be done is diminishing the liability for the unpaid 50n or 75n i.e.

reducing by crediting it to the creditors as being fully paid up.

RE: DEVELOPMENT COMPANY OF CENTRAL WEST AFRICA [1902] 1 ch 547.

(4) By canceling any paid up share capital which is lost or is unrepresented by

available assets. E.g. when the value of the net assets 9all the value assets –

building, stock in trade, etc) and try to balance that with the paid up capital –

the value of these assets will be less than the paid up capital.

e.g. Because the company has sustained a trading loss and most of its monies

has been expanded in trying to make profit, but profit ha not in fact been paid.

You end up with more paid up capital than available assets.

OR

The market value may have dropped considerably e.g. from K2 a share (value)

to 2n. The difference will appear – the paid up capital will not be represented

by available assets. To secure the balance the company will

RE: FLOATING DOCK COMPANY v ST. THOMAS LTD (1895) I ch 691

233
 Where a company intends to reduce its capital because it has had a loss of finance,

it has to be proved that there is a permanency in the loss; no likelihood of

recovery. There has got to be prima facie proof of permanence of loss. This takes

into account the danger that certain companies may allege they have had a loss,

and thus claim a reduction in capital.

(3) Paying off any paid up share capital to the shareholders which is in excess of the

needs of the company. This may occur, say, in cases where the company has sold

part of its business undertaking and the monies or shares received in that sale are

distributed among its members.

Because it has sold its assets, it remains with a higher share capital which is not

represented by the assets. So it resolves to reduce the share capital.

The capital may be distributed in kind; rather than being paid in cash, they are

paid in form of shares or bonds. EXP. WESTBURN SUGA REFINERIES [1951]

A.C. 625.

Bonds are documents acknowledging indebtedness issued e.g. by Lusaka City

Council, or local government or central government.

(4) In a case where the capital ahs been repaid in kind, if the amount is more than

what the shares would have cost, this will not alter the value of the assets

distributed or share for the agree.

e.g. a company makes a reduction of capital makes itself insolvent.

234
(5) Purpose of paying in kind

May be to borrow capital on issued shares. This makes it easier to borrow money

with interest, and repay it by share capital. Especially preference shares

Reduction of reserve capital will have been created by a transfer of profits

returned in the company, or may be added to by the company resolving that the

unpaid up capital can only be paid at the time of winding up. So the company

may

(iii) write off losses of assets against reserve capital

(iv) if the reserve capital is insufficient to balance the books, then they will

proceed to

RE: BARROW HAEMATIC STEEL COMPANY [1900] 2 ch 846

The Position of Creditors in a Reduction

The creditors interests are particularly affected if the company intends to reduce the
liability of the shareholders with respect to paid up shares. If the company intends to
reduce the share capital by returning money to the shareholders, Section 17 gives
creditors of the company, whose debtors or claims will be provable in a wind up, the right
to object to a proposal reduction. The creditor is entitled to oppose the reduction of
capital in the High Court. Section 17 (2) requires the court to settle the list of creditors
who are entitled to object e.g. by publishing a notice in the newspapers. Those creditors
whoa re omitted by the officers of the company can come up and claim.

The company may agree to pay off the creditors and extinguish his right to object.

The court can only confirm a reduction if satisfied that debts have been repaid or

creditors have consented to the reduction.

235
Security may also be used to dissipate consent of creditors who may not consent, to make

sure that the company secures that reduction. If not, Sections 17 (3) (a) and (b) may

apply

(3) (a) The court may dispense with the consent of a creditor, by appropriating the full

amount he claims, to be settled by the company to that creditor or (3) (b) if the company

neither admits the debt or refuses to settle it, the court may fix an amount after an inquiry

and adjudication as if the company were being wind up by the court.

Section 22 imposes penalties for directors who conceal a creditor or misrepresents the

amount owed: fine not exceeding K200 or to imprisonment without option of a fine for a

period not exceeding 12 months, or both such fine a such imprisonment.

In so far as shareholders’ rights are concerned, the court supervises the winding up. The

various classes of shareholders – ordinary and preference – have the rights which they

would have in a winding up of a company i.e. if the company were to be liquidated. If

they have equal rights with regard to distribution, then where there is a reduction because

of the loss on assets, the loss falls upon the shareholders equally.

If you have preference shareholders with preferential rights to be paid first when

dividends are being distributed, they have no such rights with respect of capital. In a

reduction in the distribution of capital, preferential rights are the same as those of

ordinary shareholders.

236
But if in a winding up preferential rights of preferential shareholders in respect of share

capital, then only shareholders will suffer, on the loss of reduction i.e. the loss must first

fall on the ordinary shareholders.

Only after the paid up value of the ordinary shares have been extinguished will the

preference shares be reduced.

If the company capital is repaid because its surplus to the company’s needs, it must be

returned to the preference shareholders who have priority; unless otherwise stated,

preference shareholders will be entitled to premiums on their shares.

Section 18 – If satisfied that every creditor has consented to the reduction or has had his

debt discharged or secured, in approving the reduction the court seeks to ensure that the

class of reduction is fair and equitable.

CARRUTH v I.C.I. LTD [1937] AC 707

SHARES

Definition:
A share was defined by farewell J. in Borland’s Trustees v Steel Brother211s when the
judge explained the twofold character of a share in these words:
“A share is interest of a shareholder in the company, measured by a sum of
money, for the purpose of liability in the first place and of interest in the second,
but also consisting of a series of mutual covenants entered into by all the
shareholders inter se”

211
(1901) 1Ch 279 at 288

237
By this definition, a share cannot properly be likened to a sum of money; it is an interest
of the holder in the company, measured for the purposes of liability and dividend, by a
sum of money.

Becoming a shareholder, and effect

A person becomes a shareholder by subscribing to the articles of a company and having a
share or shares allotted to the person. This gives the shareholder a right to a specified
amount of the share capital of the company, carrying with it certain rights and liabilities
while the company is a going concern, and in its winding up.

The share in the company is personal property or estate, freely transferable by the holder
in the manner provided by the company articles.

By virtue of share holding into certain covenants with other shareholders inter se, as well
as with the company. Borland enunciates the contract created by the articles of
association as “one of the original incidences of a share”

The Act provides that a share or other interest of a member 212 in a company is personal
estate and movable property, freely transferable by a written transfer in a manner
provided by the articles of the company or by the Act.213 And analyzing Borland further,
it is measured by a sum of money representing the person’s possible indebtedness or
liability to the company or the creditors depending on whether or not he or she has paid
in full for his or her shares. The value of shares usually their market price although
shares with controlling votes may be worth more.

Classes of shares
There is an initial presumption of law that all shares confer equal rights and impose equal
liabilities. The rights may be stated as being (a) the right to share in dividends (b) the
right to return of share capital on a winding up or authorized reduction of capital (c)
attendance at meetings and voting unless there is indication to the contrary.
212
See Chapter …..on membership
213
Section 57 (1)

238
Types of shares
Thus the articles of association may provide for the issue of shares with the same rights,
or different rights on the holders. There are two basic types of classes:

(a) Ordinary shares: these are shares in which all shares have equal rights, there is no
preference. They constitute the residuary class in which is vested everything after
the special classes, if any, have been satisfied. They confer a right to the equity in
the company or in so far as members can be said to own the company, the
ordinary shareholders are its proprietors. They bear the lion’s share of the risk in
bad years and take the lion’s share of the profits, after the directors and managers
have been remunerated, in good years.

(b) Preference shares: these shares carry preferential rights, i.e. they have priority to
be paid first or to be the ones to be paid a dividend if the dividend declared is
insufficient to pay all classes of shares. At a winding up, they are also repaid first
from the capital of the company, while ordinary shareholders stand the risk of not
being paid at all. They may have peculiar privileges in voting, or other aspects.
There are also various classes within preference shares. There may be first,
second and third in rank. They may also vary according to whether the company
is a going concern or in liquidation. These preference shares may be
distinguished from those not so privileged, generally called ordinary or deferred
shares.

Cumulative shares
While a company is a going concern, a dividend may not be declared. A dividend is
usually at a fixed rate and is paid out of the profits made by the company. In the year that
it is not declared, it is carried forward. When a dividend is subsequently declared, the
cumulative share must be paid first before a dividend is paid on the other shares. It is
however paid without interest as no interest is payable on it.

239
The privilege to be paid first may be based on a presumption which can be rebutted by
words indicating that a preferential dividend for a year is to be payable only out of the
profits of that year. If so, a dividend once passed is lost forever. Moreover, arrears of
cumulative dividends are prima facie not payable in a winding up unless previously
declared. Here too, this presumption can be rebutted by the slightest indication to the
contrary.

Non Cumulative Shares

If the preference share is non-cumulative, or is to be paid yearly or out of the net profits
of each year, it is said to be non-cumulative. It means, for instance, if a profit is not
declared in one year nothing is carried forward.

Non-participating
This type of a preference share means that once a specified rate has been paid, the share
cannot participate in the surplus profits after paying ordinary shares, unless the articles
expressly provide otherwise, such as conferring on them the right to participate equally
with ordinary shareholders in the surplus.

Redeemable preference shares

These are preference shares that can be redeemed out of the profits or out of freshly
issued shares. The Act provides that such shares can be redeemed at the option of the
company, the shareholder, or either the company or shareholder.214

The Act has an elaborate provision on this type of share, and is hereunder wholly quoted
for its full effect.

214
Section 59 (1) (a) – (c)

240
59. (1) The articles of a company may provide for the issue of shares which are to be
redeemed, or are liable to be redeemed at the option of- Redeemable shares
(a) the company;
(b) the share-holder, or
(c) either the company or the shareholder.
(2) No redeemable shares may be issued at a time when there are no issued shares of the
company which are not redeemable.
(3) Redeemable shares shall not be redeemed unless they are fully paid.
(4) The terms of redemption shall provide for payment on redemption.
(5) Redeemable shares may be redeemed only out of distributable profits of the company
or out of the proceeds of a fresh issue of shares made for the purposes of the redemption.

(6) Any premium payable on redemption shall be paid either-

(a) out of distributable profits of the company; or
(b) out of the company's share premium account (including any sum
transferred to that account in respect of premiums on a fresh issue made
for the purposes of the redemption).
(7) The manner and terms of the redemption shall be as provided by the articles.

(8) Where shares are redeemed

(a) the shares shall be deemed to be cancelled on redemption;

(b) the amount of the company's issued share capital shall be diminished by
the nominal value of the shares redeemed; and
(c) the amount of the company's authorised share capital shall not be
affected.
(9) Without prejudice to subsection (8), where a company is about to redeem any shares
under this section, it may issue shares up to the nominal amount of the shares to be
redeemed as if those shares had never been issued.
(10) Subject to subsection (11), for the purposes of this Act, shares issued by a company-
(a) up to the nominal amount of any shares which the company has
redeemed under this section; or

241
 (b) in pursuance of subsection (9), before the redemption of shares which the
company is about to redeem under this section;
shall be regarded as issued in place of the shares redeemed, or about to be
redeemed, under this section.
(11) Shares issued under subsection (9) shall not be regarded as issued in place of the
shares about to be redeemed unless those shares are redeemed within one month after the
issue of the new shares.
(12) If a company redeems any redeemable shares, it shall, within fourteen days after
doing so, lodge a notice of the redemption in the prescribed form with the Registrar.

(13) If a company fails to comply with subsection (12), the company, and each officer in default,
shall be guilty of an offence, and shall be liable on conviction to a fine not exceeding three
monetary units for each day that the failure continues.

Shares

Farewell J defined a share in BORLAND’S TRUSTEE V STEEL (1901) CH 279 as

“……the interest of a shareholder in the company measured by a sum of money for the

purpose of liability in the first place, and of interest in the second, but also consisting of a

service of mutual covenants entered into by ale the shareholders inter se in accordance

242
with” S7 and S8 (3) of cap 686 “ The contract contained in the Articles of Association is

one of the original incidents of the share. A share is not a sum of money…., but it is an

interest measured by a sum of money and made of various rights contained in the

contract, including the right to a sum of money of a mere or less amount.

In short a share is a right to a specified amount of the share capital of a company,

carrying with it certain rights and liabilities while the company is a going concern and in

its winding up.

The shares or other interests of any member in a company are personal estate transferable

in he manner provided by its articles and are not of the nature of the real estate.

The definition says that a share can not properly be likened to a sum of money ….but it is

an interest if the holder in a company, measured, for the purposes of liability and

dividend, by a sum of money. BORLAND’S TRUSTEES V STEEL BROS (1901) of

par-less shares.

Preference Shares

There is an initial presumption of law that all shares confer equal rights and impose equal

liabilities. Normally the rights are of three types:

1. Right to share in dividends

2. Return of capital on a winding up (or authorized reduction of capital)

3. Attendance at meetings and voting unless there is indication to the contrary all

shares will confer the like rights to all three.

It is not, not however necessary that equal and privileges should be attached to all shares

some may be …………..either as to capital or as to dividend, or as to both, or may have

243
peculiar privileges in the matter of voting or in other respects. These are called

“preference” shares as distinguished from those, which are not so privileged, generally

called “ordinary” or “deferred” shares. Preference shareholders can only be paid

dividends out of profits only. However, it may be provided that arrears be payable in

subsequent years when profits are available. If this is the case, shares are said to be

cumulative.

Or it may be provided that if the dividend is once passed it is lost for all time. If this is

the case the shares are non- cumulative.

As a general rule, preference, dividends are presumed to be cumulative, so that any

unpaid arrears accumulate and must be paid in a later year before the payment of any

ordinary dividends. But this presumption can be rebutted by any words indicating that a

preferential dividend for a year is to be payable only out of the profits of that year. If so a

dividend once passed is lost forever.

Canons of Construction

1. Prima faci all shares rank equally if; some are to have priority over others, there

must be provisions to this effect in the memorandum of association or regulations

under which they are issued.

244
2. If, however, the shares are expressly dividend into separate classes (thus

accessorily contradicting) the presumed equality) it is a question of construction

in each case what the rights of each class are.

3. If nothing is expressly said about the rights of one class in respect of either (a)

dividends (b) return of capital or (c) attendance of meetings or voting, them,

prima faci, that class has the same rights in that respect as the other shareholders.

Hence a preference as to dividends will not imply a preference as to capital or

vice versa.

4. where shareholders are entitled to participate in surplus capital on a winding up,

prime facie they participate in all surplus assets and not merely in that part which

does not represent undistributed profits that might have been distributed as

dividends to another class.

5. if however, any rights in respect of any of these maters expressly stated that

statements presumed to be exhaustive so far that matter is concerned. Hence, if

shares are given a preferential dividend, they are presumed to be non-participating

as regards further dividends, and if they are given a preferential right to a return of

capital, they are presumed to be non-participating in surplus assets. The same

clearly applies to attendance and voting; if they are given a vote in certain

circumstances (e.g. if their dividends are in arrears) it is implied that they have no

vote in either circumstances – inclusio unius exensio alterius. The onus of

rebutting this presumption is not lightly discharged and the fact that shares are

expressly made participating as regards either dividends or capital as regards the

other – indeed it was been taken as evidence to the contrary.

245
 6. if a preferential dividend is provided for it is presumed to be cumulative. This

presumption can be butted by any words indicating that the preferential dividends

are to be payable only out of profits of that year.

7. it is presumed that even preferential dividends are payable only if declared.

8. hence arrears even of cumulative dividend are prima faci, not payable in a

winding up unless previously declared. But this presumption may be rebutted by

the slightest indication to the contrary. When arrears are payable the presumption

is that the they are to be paid provided there are surplus assets available whether

or not these represent accumulated profits which have been distributed by way of

dividend, but they are payable only to the date of the commencement of the

winding up.

Ordinary Shares

Ordinary shares contribute the residenary class in which is vested everything after the

special rights of other classes, if any, have been satisfied. They confer a right to the

equity in the company or in so far as members can be said to own the company the

ordinary shareholders are its proprietors.

They bear the lion’s share of the risk in bad years and take the lion’s share of the profits,

after the directors and managers have been remunerated, in good years.

If the company’s shares are of one class, then they must be ordinary shares. Every

company must have at least one ordinary share in addition to, say debentures and

preference shares.

246
Ordinary shares may be divided into classes A,B and C etc ordinary shares – “A” shares

may not have voting rights but C and B may have – there are called equity shares.

Shares may be of different nominal value, or an exceptional circumstances some may be

fully paid and other not.

Deferred Shares – a share which is given no right of participation until all others have

received a certain return is known as deferred share.

DEBENTURE – Gower defines a debenture as a “name applied to certain types of

documents evidencing an indebtedness which is normally, but not necessarily secured by

a charger over property”. The term debenture is not applied to the indebtedness itself but

to the document evidencing it.

The company may, instead of issuing individual debentures, evidencing separate and

distinct debts, may create the loan fund known as DEBENTURE “STOCK” - divisible

among a class of lenders each of whom is given a debenture stock certificate evidencing

the aliquot parts of the whole loan in which he is entitled.

In law, a debenture holder is a creditor and is entitled to all remedies of a creditor to

obtain payment of the sums due to him whether or not the company has made any profits.

This puts a debenture-holder in a superior position against shareholders who should only

be paid out of profits.

There are however, certain similarities between debentures and shares:

247
 1. A shareholder once he has paid his money cannot get it back for the company. A

debenture holder may also not get his money back if the terms of the debenture

were that money was to be paid back only at the time of winding up or that only

interest could be paid back.

2. The return on a share depends or the profits of the company – if a debenture is

seemed on a floating charge, repayment may also depend on the profits of the

company.

3. sometimes the terms of debentures may allow the shareholders to participation in

appointing the directors of the company.

Differences between Debenture and Shares

1. The shareholder is not a member of the company

2. debentures may be issued at a discount

3. interest a specified rate may be paid out of capital in case of debentures,

4. a company may purchase its own debentures

Becoming a Shareholder

To become a shareholder is to become a member in a company with shares.

Shares may be acquired by subscription to the memorandum S14. The names of the

subscribers to the memorandum would be entered into the register S43. every company

must maintain a register of shareholders. The names of the shareholders and addresses,

their date of registration as members and the shares – S55.

248
The subscriber to the memorandum automatically becomes a member and holder of

shares for which he has signed – even if the company omits to fulfill its duty put him in

the register or to all of the shares company circumstance.

The subscriber becomes a member and a shareholder except:

(1) where the company fails to allot him the shares he signed for allots all the

shares to other persons

(2) S 11 of the Exchange control registered provides that except with the

permission of the minister no person shall (a) issuing security (b) or do

any act which involves is in association with, or i.e preparatory to, the

issuing outside Zambia of any security which is registered or to be

registered in Zambia to any person outside Zambia or to a nominee of any

such person. The object of this regulation is to prevent people not resident

in Zambia from acquiring securities – thus a subscriber to a memorandum

may not become a member unless the minister consents.

(3) Shares may also be acquired by allotment. This follows nominal rules of

offer and acceptance. The acceptance to allotment of shares is a duty

director. The offer is made by a member of the public by filling in the

form …….the number of shares he intends to take/subscribed for. The

issue of the form by the company is merely an invitation to treat.

Sometimes the company makes a director offer to the public by publishing

a prospectus. The decision to except (by the directors) the offer by the

public is known as allotment, the allotment takes legal effect when the

letter of allotment is possible. The allotment becomes a shareholder when

249
 his name has been registered in the Registration of members – till this

time, he merely has contractual rights to become a share holder.

S76: power is allot lies with the directors. This power must be exercised in the interests

of the company. This section imposes a restriction on the exercise o the powers of

allotment. Directors cannot allot unless the circumstances subscription stipulated by the

articles or memorandum has been paid. If the articles or memorandum do not stipulate…

subscription, then the minimum is subscription for the whole of the capital, i.e before a

company can allot it must have received in payment of money equal to the minimum or

the whole of the share capital offered for subscription.

Another restriction refers to the amount of the nominal amount of share capital. The act

requires not less than 5% of the nominal amount. The intention is to ensure that the

company has the capital which it can use as security for borrowing money from financial

institutes. The company cannot trade, allot, or borrow money until these are satisfied.

If these conditions are not met within 40 days the directors are under a duty to repay the

subscribers their money. Given further 7 days after expiration of the 40 days.

The person to whom shares are allotted is issued with a share certificate by the company

(S54 and Table A:- 7 and 8). (See also for future of shares, table A 25 – 36).

S 53 does not give the company the right to transfer the certificate to the transfer.

There is evidence to show that the transfer cannot ….the transfer to register. LYLE and

SCOTT v SCOTT (1959) AC 763 per Viscount Simmons.

250
Re-emphasis that once there is not registered the kk between him and no remains valid

and binding. He inars a risk, and if he cannot rescind the kk, and he cannot sue to get his

money back from ror unless the kk itself can e.g. by undue influence and fraud.

LONDON FOUNDERS ASSOCIATION V CLARKE (1888) 20 GBD GBD– a three

who is not registered can re-sell his or transfer his sell or sellers share-certificate because

since has is registered he has not go …himself. He can also use the instrument of transfer

and his own.

At a loss if marked value has fallen, or at a profit value increased.

Apart from sell, the shares can be given company as gift, mortgage or transferred to

shares. There has to be a transfer by instrument to the donce mortgage or trustees, and

these have a right he apply to the company to be registered as members.

The company has a lieu over the shares either for the unpaid shares, or if the company

articles so say for other debts of the company.

Personal representatives, for they slep into the shares of the shareholder when they get

letter of probate, in case it any not be registered for as members, but can go ahead as pers.

Representatives of the deceased. But can apply if they want to be registered.

(Here there are lots of irritating rules to watch out for)

PURPOSE FOR HOLDING SHARES AND TITLE TO RECEIVING DIVIDENDS

Primary object of a commercial company is to make profits. From the profits so even, to

pay dividends to shareholders, so that one pays dividends if one has made profits, i.e.

Dividend presuppose profits. A dividend is a share in the profits of the company.

251
NB: nothing said in the company’s act above dividend except in schedule A.

Company does not say how profits are ascertained and paid.

S 107 – c. l rule that no divided shall be paid to …member of the company accept for

profits accumulated for the business of such a company.

VERNER V GENERAL AND COMMERICAL INVESTMENT TRUST (1894) 2 CH

239 Lord Justice LINDLEY

In effect the rule in S107 is a consequence of the principle that capital must be

maintained and it means the company ,ay not use monies raised by the issue of shares

(share capital) or by borrowing (loan capital)to pay a divided. In the former case (share

capital) it will be unlawful return of capital to shareholders. in later case (loan capital) it

could be fraud and the creditors because the company will be put in a position in which it

is less able to pay its debts, so apart from share capital and loan capital, any other money

can be paid by way of dividend – there are problems and differences related to the

……..and payment of dividends in varies company. Basically, the three methods of

computing profits according to Professor Pennington:

1. Gross earning minus expenses in which profits will be said to equal minus

expenses. Also exchange losses in either periods.

2. Surplus, or earned surplus method where profit is equal to gross earnings minus

expenses and minus losses in earlier periods, i.e. subtract or provide for losses in

earlier periods.

3. Balance sheet surplus method – where profits is equal to the value of the

company’s assets minus liabilities, minus share capital, minus capital reserves,

252
 minus accrued past losses. ……being that the net assets of the company must be

equally in value with share capital before the company can declare a dividend.

The Act itself is silent on these matters. So it is up to the directors to determine

and depend on the accounts for the best accounting method.

It’s a question of opinion whether an item has to come under debited account or capital

account. They have to insure the with respect to dividend that there is honesty and good

faith on the part of the directors and their accounts. So that in essence whether a ……is a

business matter subject to S107 and also the payment of dividends is a matter for the

directors, subject to the ……vote in a general meeting then the general meeting acts only

on the recommendation of the board of directors. From the terms of S107 it seems that

payment of dividends as such is not only limited tot eh current year, because it provides

that dividends may be paid out of profits accumulated from the business of the company.

So from a prima faci point of view one can determine what falls under what account

current, trading or revenue.

RAW MATERIALS IN A MANUFACTURING TRADE

RATES FOR OFFICES

TAX REVENUES IN FUTURE

STOCK IN TRADE

DISTRIBUTOR OF MACHINERY AND VEHICLES

CAPITAL ACCOUNT

Plant machinery

Transport vehicles

253
Fixed Assets as …on land or other pieces of land.

Depreciation and Wasting Assets

Grounded machinery – mines – get exhausted. The graph from the mining will go down

till it reaches zero. Motor vehicles determinate rapidly. Is there legal obligation of the

company computing its assets make provision for the depreciation of capital assets.

Problem is e.g. where you have assets increasing in value – land and blg purchases –

where value increases beyond the share capital, can it just take part of the profits and put

in the share capital and leave the balance for distributing of dividends. They ought to

realize the assets first. Cts are very contagious in this area. It is believed that generally,

the court will not insist on provision of depreciation.

The Right to Attend and Repot at Meetings

A shareholder is entitled to attend general meetings of the company under the

memorandum of articles stipulated otherwise.

In consequence a shareholder is entitled to receive notices of the meeting. This right

extends even to non-holding shareholders i.e. with no rights attached to the then. RST

exception/handout (see).

Either according memorandum and articles or the specific forms of issue of particular

shares may …be voting or non-voting. In between these two categories there may be

non-voting shares specifying entitlement to vote e.g. when the particular rights of shares

are in issue. E.g. ……..of capital.

254
Voting

May be exercised directly in person or by way of proxy i.e. an agent appointed by a

member or debt shareholder to vote on his behalf at a meeting at which the member is

entitled to vote. The word also refer tot eh director appointing such an agent.

NB: S110 in the court is empowered to order that a member present in person or by proxy

shall be deemed to constitute a meeting where it has been presumed impracticable to call

a meeting. This checks ……..meetings, because those intend to hold or meeting may

seek court’s permissible so that they may constitute a quorum.

Under the agreement to terminate management kk for NCCM, managers managed to

extract special agreement outside the majority shareholders right to constitute a quorum.

Under S110. Effect - if majority shareholder where there is a dispute, say on investment

on mining company, and the minority decides (e.g. where 2 members) not to attend the

meeting only the majority with the ….to the court to constitute a quorum, which can

make an order.

A proxy need not be a member of the company. Voting may be slow of hands or by poll.

A show of hands – S113/ Table A Article 57. Unless the articles provides otherwise,

voting of all members present is by show of hands i.e. each member present has 1 vote

irrespective of the number of shares he holders.

If the articles to provide that the proxies may vote on a shoe of hands each person present

is counted even though he holders more than one to other members. So that of one

255
appoints a proxy who is non-member, and is also appointed by B,C and D, that proxy

can only vote once.

ERNEST V LOMA GOLD MINES LIMITED (1897) 1 CH 1

A poll is voting is which every member has one vote for each share he holds. A vote by

poll may be held when demanded (i.e. held only on demand) by a member or a proxy or

the chairmen of the meeting. The rights of either of either these depend on the articles.

Table A is not compulsory, but quorum is whether articles may provide for a prohibition

of poll voting, this …… way the power of the shareholders.

Table A 57 stipulate that a poll may be demanded either before on a declaration – the

result on a share of hands.

Table A provides in 57 – a poll must be demanded by at least three members. But since

table A is not compulsory, articles may state minimum. Once demanded, a chairman

must agree to a poll, and he must direct now the poll is to be conducted – some have fully

paid, others not fully paid, etc. So chairman has a discretion to adjourn meeting to a later

time.

Proxy may be directed specifically to voting in a particular company. One way …., i.e

instructed to vote for A and not vote for B and D. in both cases, the chairman has an

independent casting vote.

There is also a provision to the effect if the chairman demands a poll or if the demand by

a member relates to a 9 of the adjourned of a with the poll forthwith. (this limits to

distortion). The duty of the chairman is to ……(census that a decision which is taken on

256
a show of hands appears that a poll the decision might be negative, he must demand a

poll.

He must exercise his power to demand a poll if he has reason to believe that the result of

a poll would be different from a decision taken in a show of hands. The real sense of the

meeting means its against the resolution.

SECOND CONSOLIDATED TRUST LIMITED CEYLON AMALGAMATED TEA

AND RUBBER ESTATES LIMITED 1943 2 AER 567

On a shoes of hands the resolution is passed and decision taken.

Problems Relating to Resolutions and Amendment to Resolutions

Three types Ordinary Extra-ordinary and special ………. One requires simple majority –

ordinary resolution ¾ majority – extra-ordinary resolution ¾ majority but notice of at

least 21 days. If during the meeting an amendment is proposed for the meeting, the

quorum has to decide whether or not the amendment should be allowed. Improper

refusal by the chairman results in the resolution being declared void.

If one has a special resolution requiring 21 days notice, it can not be amended in the

meeting as such.

The general proposition is that amendments are permissible only if they fall within the

scope of the notice ……the meeting. In so far as table A article 51 is concerned all

business transacted before a meeting shall be deemed especial business i.e. which is

transacted at an extra-ordinary, and all business which transacted an ordinary meeting

etc. With the exception of: (1) resolution sanctioning of the accounts balance sheets,

257
election of directors and other officers replacing those retiring and fixing renumartion of

the auditors.

A notice to the effect that a particular meeting ….to consider special business is required

to state the resolution to the be passed in such a way as to fairly state the purpose of

which the meeting is convened. So that shareholders may make up their minds whether

or not to attend and the consequences. These meetings are not obligatory.

It would seem that e.g. an amendment there is little scope for amendment, unless there is

specific provision in the notice concerning the meeting for possible amendments.

BETTS AND COMPANY V MACNAGHTEN (1910) 1 CH 430

Meeting was convened to pass with such amendments as should be determined. A

resolution meeting three named persons as directors – during the course of th meeting –

amendment was moved to select other addition members. Court held resolution was

valid because the resolution made provision for amendments.

In those cases where e.g. no specific provisions for amendment, the amendment proposed

to …made must be within the resolution. Must not alter the nature of the business. Must

not make any shareholders who did not attend, to wish that he had attended. E.g. if a

notice stipulates that the undertaking of a company is to be sold to B company, and

subsequently the resolution is that A will enter into voluntary winding up: an amendment

to the affect that a company is to enter into voluntary winding up, disregard what was in

the resolution, this will alter the nature of the business of the meeting.

258
Appointment of liquidators does not require any resolution as such. But if a liquidator is

handed in the resolution, he can be substituted for another because this cannot change the

liquidator itself.

JOHN PAUL MWILA KASENGELE & OTHERS

ZAMBIA NATIONAL COMMERCIAL BANK LIMITED

SUPREME COURT
CHIRWA, MUZYAMBA & LENWANIKA, JJS
8TH MARCH, 2000 & 16TH MAY, 2000
(SCJ JUDGMENT NO. 11 OF 2000.)
Company Law – Shareholders – enjoy overriding authority over a company’s affairs.
This is an appeal against a decision of the Industrial Relations Court that the appellant be
paid terminal benefits in accordance with shareholders directive dated March 1995. The
undisputed facts of the case were that the appellants were employed by the respondent: a
subsidiary of ZIMCO and wholly owned by government, the Minister of Finance being
the sole shareholder. The appellants were retired on various dates but between 18 th
March 1995, and 30th November 1996.

On 28th March 1995, the Minister of Finance the late Ronald Penza wrote to the Director-
General Mr. Bwalya, with a copy to the President of the Republic of Zambia, Mr. F.T.J.
Chiluba that at its 87th Meeting of ZIMCO Board of Directors held at State House on
August 26th 1994, it was decided that the allowances be merged with salaries and that the
decision be implemented without further delay. Upon their retirement the appellants
were paid terminal benefits not based on the Minister’s directive but on ZIMCO
conditions of service then applicable. The appellants then filed a compliant in the court
below which was unsuccessful.
The appellants appealed.

Held:

259
 (i) shareholders enjoy as a matter of right overriding authority over company
affairs, even over wishes of the Board of Directors and Managers.
(ii) Inability to pay has never been and is not a defence to claim. It is not a bar to
entering in favour of a successful litigate.

Cases referred to:

1. Bank of Zambia v Chibote Meat Corporation Limited, SCZ Judgment No
14 of 1999.
2. Re: Pan Electronics (1988 – 1989) Z.R 19
3. Van Boxtel v Kearney (1987) Z.R 63
M.L Mukande of M.L Mukande & Company for the appellants. C.D Mabutwe
of Mabutwe & Associates and A. Siwila, Legal Counsel, Zambia National
Commercial Bank Limited for respondent.
MUYAMBA, JS, delivered the judgment of the court.
This is an appeal against a decision of the Industrial Relations. The
appellants’ compliant is that they be paid terminal benefits in accordance with
the shareholders’ directive, date 28th March, 1995.

The undisputed facts of this case were that the appellants were employed by the
respondent, a subsidiary of ZIMCO and wholly owned by government, the Minister of
Finance being the sole shareholder. The appellants were retired on various dates but
between 18th March 1995, and 30th November 1996.

On 28th March 1995, the Minister of Finance the late Ronald Penza wrote to the Director-
General Mr. Bwalya, with a copy to the President of the Republic of Zambia, Mr. F.T.J.
Chiluba that at its 87th Meeting of ZIMCO Board of Directors held at State House on
August 26th 1994, it was decided that the allowances be merged with salaries and that the
decision be implemented without further delay. Upon their retirement the appellants
were paid terminal benefits not based on the Minister’s directive but on ZIMCO
conditions of service then applicable. The appellants then filed a compliant in the court
below which was unsuccessful.

260
The appellants appealed. There was evidence in the court below and the court found as a
fact that employees at ZIMCO Headquarters benefited from the Minister’s directive and
got terminal benefits on merged salaries and allowances.

In dismissing the appellants complaint this is what the court below had to say at page 32
of the record:- “in this case we are satisfied that by its omission, on the merger, the
respondent fully complies with the ZIMCO directives and hence had no authority or
ability to go ahead with the merger. We agree with the respondent that what they paid
the complainants was what was due to them on the conditions existing at that time.”

There are five grounds of appeal viz:

1. The trial court recognizes the fact that ZIMCO Board of Directors at its 87th Board
Meeting did resolve to merge allowances with salaries unconditionally. It
therefore follows that the court below erred in law and in fact by taking into
account conditions attached to the ZIMCO Board resolution by ZIMCO
Management.
2. The lower court recognizes that payment of terminal benefits based on the merger
were effected at ZIMCO Headquarters. The lower court erred in law and in fact
by failing to hold that this changed the ZIMCO conditions of service which were
applicable throughout the ZIMCO group of companies. Consequently, the
holding company and subsidiary companies being one entity payment of terminal
benefits should have been effected in subsidiary companies too and that not doing
so is discriminatory to employees serving in subsidiary companies.
3. The court below erred in law and in fact by recognizing the conditions attached to
the ZIMCO Board of Directors’ resolution by ZIMCO management in the
absence of evidence that ZIMCO management has power to alter or vary or
change resolutions from its Board of Directors when to the contrary the
complainants did adduce evidence that the role of ZIMCO Management was to
implement Board resolutions by passing information to the Subsidiary Companies
using circulars.

261
 4. Through their periods of service the appellants were enjoying the allowances
which they now seek to recover. The lower court misdirected itself by departing
from the current juridical trend which emphasized that all allowances payable to
an employee during the employees’ period of service ought to be incorporated
into the employees salary for purposes of computing terminal benefits, i.e.
redundancy or retirement packages.
5. The lower court misdirected itself by holding that the respondent has no ability to
pay and yet the respondent during the same period embarked on an ambitious
programme of modernizing its information technology systems and spent a
colossal K12 billion which was not even budgeted for, and act which goes to
show that the respondent was financially sound and could have managed to pay
the complainants either at once or in small groups.

We propose to treat grounds 1 and 2 as 1, and deal with it first and depending upon what
we say on this ground then turn to other grounds.
On this ground Mr. Mukande argued that the ZIMCO Board of Directors had no powers
to alter or qualify the Shareholder’s decision to merge salaries with allowances. That all
employees in ZIMCO and its subsidiary enjoyed the same conditions of service and
therefore that since those at ZIMCO Headquarter were paid merged salaries and
allowances other employees should also be paid merged salaries and allowances. That to
decide otherwise would be discriminatory.

For the respondent it was argued by Mr. Mabutwe and Mr. Siwila that ZIMCO Board of
Directors were competent to give guidelines to the subsidiaries of Zimco and that in so
doing they were not watering down the Shareholders decision. That all subsidiaries were
directed by the Board to implement the shareholder’s decision to each Subsidiary’s
ability to pay. That the respondent’s Board of Directors did not approve payment of
merged salaries and allowances as the respondent has no pay and in so doing it was
merely complying with Zimco Board’s guidelines. In response to questions and
comments by the court both Mr. Mabutwe and Mr. Siwila conceded that the alleged
guideline would or did not create an absurdity in that employees of subsidiaries with

262
ability to pay got or would get better and higher benefits than those in subsidiaries
without ability to pay, as in the instant case where Zimco employees at the headquarters
got more than the appellant and yet the conditions of service were uniform.

We have considered the evidence on record, the judgment of the court below and the
arguments by learned Counsel on both sides. The letter of 28th March 1995 reads as
follows:

28th March

Mr. R.L Bwalya

Director-General
ZIMCO

LUSAKA

Dear Mr. Bwalya,

RE: INCORPORATION OF ALLOWANCES INTO THE BASIC SALARY

I write in connection with the above, particularly with relevance of the minutes of the 87 th
Meeting of the Board of Zambia Industrial and Mining Corporation Limited held at State
House on Thursday 26th August 1994. Reference is also made to minute No. 16/94
Section 41 and 42 to your letter of February 16 th 1995, addressed to all Chief Executives
of Zimco subsidiary companies.

I have also made reference to your letter of 30th January 1995, addressed to Mr. A.
Adamson, Secretary to the Cabinet and the Secretary to the Cabinet’s letter of 13 th
January 1995, to the Chief Accountant of Zimco. In this letter I have advised President
Chiluba in his capacity as Chairman of Zimco that the demand to integrate basic salary
and benefits is contained in the minutes of the 87 th Board Meeting. The President has
agreed and accordingly directed to have this matter implements without any further
delay.

263
Yours sincerely

……………………………..
Ronald Penza, MP
MINISTER OF FINANCE

cc. Mr. F.T.J Chiluba President

State House

LUSAKA

In arguing the appeal on behalf of the appellant, Mr. Forrest Submitted that the Act under
which the appellant was brought speak of “married” women and therefore that is was
competent for the court to order sharing of matrimonial property during the subsistence
of a marriage between parties. The respondent did not address us on this issue except to
say that at the time of hearing the appeal he had resumed cohabitation with the appellant.
The fact the marriage between the parties is still subsisting is therefore a common cause.

We have considered Mr. Forrest’s argument and Section 17 of the Married Women’s
Property Act 1882, hereinafter referred to as the Act. The relevant parts of the Section
read:
“In any question between husband and wife as to the title or possession of property either
party may apply by summons or otherwise in a summary way to any Judge of the High
Court of Justice in England or Ireland and the Judge may make such order with respect to
the property in dispute.”

It is quite clear that this Section relates to property in dispute between husband and wife.
Indeed a question or dispute may arise between husband and wife as to who owns what
property and whether or not such property is a matrimonial property. In these
circumstances the Section or Act would apply. In the instant case, there is no dispute as
to ownership of the properties in question. The Act does not therefore apply. The matter
does not end here. The question that still remains unanswered is whether or not there
can be a share of matrimonial property when the marriage between the parties, is still
subsisting. When man and woman join in (Holy) matrimony they become one body, one

264
flesh and during the subsistence of their marriage they acquire and own property jointly
and indivisibly and until the marriage is put asunder, none of them should be heard to
say he owns this or that property. It necessarily follows that the court is not competent to
order distribution or share matrimonial property between the parties where a marriage is
still subsisting. This is so even where the parties are on separation. To hold otherwise
would not only be striking a death nail in a principle which is sacrosanct but also be
opening a Pandora box in this era of greed for wealth. This would inevitably lead to
unstable marriages. Had the learned trial Judge addressed his mind to this issue, we
have no doubt that he would have come to the same conclusion.

For the foregoing reasons, the appeal fails. It is dismissed with costs to be agreed upon
failing which to be taxed.

ZAMBIA CONSOLIDATED COPPER MINES LIMITED

AND
NDOLA LIME COMPANY LIMITED
V
EMMANUEL SIKANYIKA & OTHERS

NGULUBE, CJ, SAKALA AND CHIRWA, JJS

7TH MARCH 2000 AND 6TH JUNE 2000
(SCZ Judgment No. 24 of 2000)
Company Law – Charges of shareholders – Effect
Employment Law – Unilateral Variation – Basic conditions of service – Effect thereon
The respondents were unionized employees of the appellant which is a wholly-owned
subsidiary of the first appellant. The workers launched proceedings in the Industrial
Relations Court against their employer and the holding company requesting for a
declaratory relief that they are entitled to payment of terminal benefits prior to
transferring their contracts of employment to those that would buy the second appellant
under the privatization programme.

Held:

265
 (i) a change of ownership of shares cannot result in the corporate entity becoming
a new employer; it will be still the same employer and will be bound by the
contracts of employment.
(ii) While a contract of employment – just like any other contract – can be varied,
any unilateral variation to an important term which is non-consensual and
which is unacceptable to the workers would justify the aggrieved workers
treating the same as repudiation and breach of contract by the employer which
terminated the employment and which warrants the payment of repudiation or
other terminal benefits, as appropriate.

Cases referred to:

1. Salomon v Salomon [1897] AC 22
2. Marriot v Oxford & District Cooperative Society Limited No. 2 [1970] 1
QB 186
3. Kabwe v BP Zambia Limited (1995 – 1997) Z.R 218
P. Chamutangi, Legal Counsel of ZCCM Limited for the appellant
L.K Mbaluku (Mrs.) of L.K Mbaluku & Company for the respondents.

NGULUBE, CJ, delivered the judgment for the court.

The respondents are unionized employees of the second appellant which is a wholly-
owned subsidiary of the first appellant. The workers launched proceedings in the
Industrial Relations Court against their employer and the holding company requesting for
a declaratory relief that they are entitled to payment of terminal benefits prior to
transferring their contracts of employment to those that would buy Ndola Lime Limited,
their employer, under the privatization programme. The workers likened their position to
that of their counterparts working for the first appellant whose assets in the various
divisions were being sold to buyers who had or had formed their own companies which
would therefore literally be their new employers. The appellants resisted the claims
arguing that there could be no parallel between the position of the workers in the first
appellant which would cease to exist and those in the second appellant which would
continue in existence having only changed the shareholders.

266
The Industrial Relations Court determined that, although the two appellant companies
were separate legal entities but since they shared some of the staff who all enjoyed the
same conditions of service, they were in substance and in truth exactly the same thing and
the question I the action would be dealt with by treating the two companies as the same
company in different tunics. The Court considered the two companies to be one
commercial entity so that the sale of the shares in the second appellant would mean that it
would cease to be the alter ego of the first appellant. That being the case, it was the
finding of the Court that the declaration do issue that the complainants were entitled to be
paid terminal benefits whenever ZCCM will have sold its shares in Ndola Lime Limited
because the workers were in fact ZCCM employees though employed by the subsidiary
and in keeping with the payment of terminal benefits effected in relation to other direct
ZCCM employees.

The action was a truly quia timet action. The workers feared what would happen to their
accrued benefits when new shareholders bought Ndola Lime Limited and opted to treat
the company as then becoming a new employer so that the previous employment should
be treated as at an end and terminal benefits be paid regardless whether there would
actual termination of employment or not. In effect and in essence, the Industrial
Relations Court agreed with the workers. Of course the Court has not suggested that it is
ZCCM to pay the terminal benefits. The appellants have lodged this appeal and have
advanced a number of grounds.

The central question arising in the appeal concerned the finding that the two appellants
were in essence one company so that the sale of shares would warrant the payment of
terminal benefits to the employees prior to entering upon what would amount to new
contracts of employment with new employers. The grounds of appeal included those that
criticized any finding of fact used to justify the finding that the companies were one
commercial entity and in fact one in essence. Thus, the first ground of appeal alleged
error in the finding that the workers in Ndola Lime enjoyed ZCCM conditions or that
even ZCCM employees were transferred to work for Ndola Lime. The heads of

267
argument relied upon asserted that there was no evidence on record to support the finding
that employees were transferred from ZCCM to Ndola Lime. This submission flew in the
teeth of the evidence of the appellants’ own witness Jacob Njovu who swore the affidavit
in support of the respondents’ answer to the complaint and who deposed how he had been
seconded.

The other rounds of appeal were more relevant and concerned the separate identity of the
companies at law and the different consequences between mere sale of shares in contrast
with the sale of assets leading of ZCCM ceasing to exist as the employer for the affected
workers. We were treated to elaborate submission and arguments both in their written
heads of argument and in oral submissions on both sides on the legal consequences of
incorporation and the relationship between a shareholder and the company and indeed
between a holding company and a subsidiary company. We had to revisit Salomon v
Salmon (1) and various later decisions and texts. We were taken through the authorities
and reference materials dealing with the situations when it would be necessary or
permissible or warranted to lift the veil of incorporation. Ultimately, we were puzzled
what was the need or point of lifting Ndola Lime’s corporate veil when no order was
intended or could be made against ZCCM itself such as they should come and do the
actual paying of the claimed terminal benefits at the future time envisaged. Under the
terns of the judgment below, the employer Ndola Lime would still be the one to pay.
The point with something in it was whether on the facts and in the circumstances, it was
appropriate to treat the sale of shares as altering the employer and bringing about new
contracts with new people. We heard learned submissions. Mr. Chamutangi maintained
that the employer would still remain the same corporate entity. Mrs. Mbaluku on the
other hand drew attention to the information that had been circulated and which had
triggered the workers’ apprehension. In this regard, she pointed out some of the circulars
on record which suggested that there was no guarantee the new shareholders would
maintain the same terms and threat that the employees might suffer loss of accrued
benefits caused them to be apprehensive. The declaration was required to put the minds
of the employees at rest.

268
We have given this matter due consideration. We must affirm right away that a change
of ownership of shares cannot result in the corporate entity Ndola Lime becoming a new
employer, they will still be the same employer and they will be bound by the contracts of
employment which they already have with each of their workers individually and
collectively. We must also dispel the notion held by some that new shareholders are at
liberty to breach with impunity existing contracts of employment without sanction or
redress for the employees: while a contract of employment – just like any other contract
can be varied, any unilateral variation to an important term which is non-consensual ands
which is unacceptable to the workers would justify the aggrieved workers treating the
same as a repudiation and breach of the contract by the employer which terminates the
employment and which warrants the payment of redundancy or other terminal benefits, as
appropriate. This is the principal which is established by such cases as Marriot v Oxford
& District Cooperative Society Limted (2) and Kabwe v BP (Z) Limited (3). The adverse
alteration to the important conditions is what brings about the termination. In the case at
hand, there is no such terminating event, only apprehensions that it may occur in future.
The attempt to make a change of shareholding itself a terminating event cannot be
entertained and terminal benefits cannot be paid for employment, which has not
terminated. The litigation based on future apprehensions was premature in the absence of
an actual terminating event. If any futuristic declaration could have been competent, it
should have been one that said that the employers must come and pay terminal benefits
should they try to alter in an unacceptable way any of the important terms accrued or
being enjoyed.

It follows from what we have been saying that this appeal is allowed and the declaration
that terminal benefits be paid merely upon sale of shares is set aside. Since this quia
timet action was provoked by some unhelpful statements in circulars publicized by the
employers and emanating from the authorities, there will be no order for costs here and
we do not disturb any order in that regard which were made below.

269
 ZAMBIA CONSOLIDATED COPPER MINES LIMITED
V
RICHARD KANGWA & OTHERS
NGULUBE, CJ, SAKALA AND CHIRWA, JJS
7TH MARCH 2000 AND 6TH JUNE 2000
(SCZ Judgment No. 24 of 2000)
Land Law – Sale of houses – to sitting tenants
Company Law – Shareholders – Powers of - Over the company’s affairs
Civil Procedure – Industrial Relations Court – Unfettered by legal niceties

This is an appeal from the Industrial Relations Court. The case arose from a decision of
the appellants not to extend the sale of houses to “sitting tenants” who are employees of
wholly-owned subsidiary companies, preferring instead to sell some of housing units
occupied by the respondents to direct employees and other who were not even the “sitting
tenants”. That is to say, there were not persons in occupation and residence.

Held:
(i) Sale of houses to “sitting tenants” across the country in local authorities and
public institutional houses was the brainchild and decision of the government.
It is mistaken to talk about political directives and ignore the governments
other more relevant character and capacity as the shareholder with the
controlling interest.
(ii) The Industrial Relations Court is mandated to do substantial Justice unfettered
by legalistic niceties and appeals lie to the Supreme Court on a point of law or
point of mixed law and fact.

Cases referred to:

270
 1. Bank of Zambia v Chibote meat Corporation SCZ Judgment No. 14 of
1999
2. Van Boxtel v Kearney (1987) Z.R 63
3. Re Pan Electronic (1988 – 1989) Z.R 19
P. Chamutangi, Legal Counsel of ZCCM Limited for the appellant
L.K Mbaluku (Mrs.) of L.K Mbaluku & Company for the respondent.

National milling company limited

V
Grace simataa and others

NGULUBE, CJ, SAKALA AND CHIRWA, JJS

7TH MARCH 2000 AND 6TH JUNE 2000
(SCZ Judgment No. 21 of 2000)
Employment – Employers unilateral variation-basic Conditions of Service-effect thereof
Company law-shareholders – effect

The appellant was, prior to its privatization one of the subsidiary companies in the
ZIMCO group of Companies which were parastatals. The respondents were employees
of the appellant who were employed under what were known as ZIMCO Conditions of
Service for non-unionized workers.

Meanwhile, the appellant company got privatized whereby the shareholding went to new
owners. The appellant notified the workers that it had moved away from the ZIMCO
conditions of service and would have use its own. The salaries were increased but few
months later the respondents were declared redundant. The respondents were paid
redundancy benefits in accordance with the statutory instrument number 99/94 in force
on Minimum Wages and conditions of the Employment Act because the appellant’s
conditions were in this respect far below the statutory minimums. It was also common
cause that the statutory instrument was in certain respects inferior to the ZIMCO revised

271
package which guaranteed to the eligible employees twenty four months pay plus a
months’ pay for each completed year of service.

The respondent felt short-changed and launched proceedings in the High Court claiming
to be given the separation packages awarded to them under the ZIMCO conditions. The
learned trail judge agreed with the respondents, finding that the appellant has changed the
conditions of service for worse and without the consent of the affected employers. The
appellant appealed.
Held:
(i) if an employer varies in an adverse way a basic condition or basic conditions of
employment without the consent of the employee, then the contract of
employment terminates and the employee is deemed to have declared redundant
or early retired as may be appropriate – as the date of the variation and the
benefits are to be calculated on the salary applicable.
(ii) The alteration of a basic condition if consensual and probably beneficial would
result in bring about a replacement contract different from the former.
(iii) Change of ownership of shares did not result in the appellants becoming a new
employer; they were still the same employer and they were bound by the
contracts of employment they already had with each one of their workers
severally and collectively.

Legislation referred to:

1. Constitution of Zambia Cap 1 Article 124
2. Privatization Act Cap 389 Section 39

Cases referred to:

1. Kabwe v BP Zambia Limited (1995 – 1997) Z.R 218

2.Marriot v Oxford & District Cooperative Society Limited No. 2 [1970] 1 QB

186
3. Williams Porter and Company Limited [1937] 2 ALL ER 361
P. Matibini and M. Nchito of MNB Legal Practitioners for the appellant.

272
 S Sikota of Central Chambers for the respondents

Ngulube, CJ, delivered the judgment of the court

The appellant was, prior to its privatization, one of the subsidiary companies in the
ZIMCO group of companies, which were parastatals. The respondents were employees
of the appellant who started work in the parastatal days and were employed under what
were known as ZIMCO conditions of service for non-unionized workers, being
conditions laid down by the parent company and which had to be implemented by the
boards of directors in the subsidiaries. Among the conditions of service were provisions
to cater for redundancy and the payment to be made in such eventuality to employees
who had served for not less than five years. In addition to payment in lieu of notice and
the payment of any other contractual terminal benefits, there was to be redundancy pay
ranging from six months’ to thirty-six months’ basic salary depending on the length of
service in the range of five years to thirty years or more. For the purposes of this
judgment, the foregoing will be referred to as the original ZIMCO redundancy benefits.
By a circular letter of 26th July 1993, ZIMCO revised the compensation package for
redundancies so that the eligible employees would receive twenty-four months’ pay plus
one months’ salary for each completed year of service, a fixed repatriation allowance;
three months’ pay in lieu of notice; four months rent free continued occupation of
company accommodation or housing allowance; and a long service gratuity for those who
had served for ten or more years. In the same circular, ZIMCO made it clear that
subsidiary companies with a superior separation package would continue to apply such
better packages. Again by a circular letter of 25 th January 1995, ZIMCO called upon its
subsidiaries to take heed and implement the contents of Statuary Instrument No. 99 of
1994, made by the Minister of labour under the Minimum Wages and Conditions of
Employment Act, with liberty to the subsidiaries to pay or ward even better terms than
the Government-prescribed minima if they were able to do so.
The provisions of this Statutory Instrument are relevant to this case and applied
until the government repealed and replaced it with a later one with which we
need not concern ourselves here. This Instrument provides that the minimum
wages and conditions of employment ‘shall be as indicated in the schedule’ and

273
 went on to provide for among other things a repatriation benefit equal to the
current costs of traveling by public transport (as opposed to the fixed repatriation
allowance set by ZIMCO and redundancy benefits of ‘at least one months’
notice’ and redundancy pay, ‘of not less than two months basic pay for each
completed year of service.’

Meanwhile, the appellant company got privatized whereby the shareholding has
gone to new owners. The appellant notified the workers that it had moved away
from ZIMCO conditions and would have and use its own; the salaries were
increased but a few months later, the respondents were declared redundant. The
appellant’s own new conditions were, on the issue of redundancy, a replica of the
original ZIMCO redundancy benefits. Ultimately, the appellant did not follow its
own conditions which were in this respect far below the statutory minima but
instead opted to pay the redundancy benefits in accordance with the Statuary
Instrument in most respects except for the repatriation benefit where they
followed the ZIMCO revised package of 26th July, 1993. it was common cause
that the Statutory Instrument was in certain respects inferior to the ZIMCO
revised package which guaranteed to the eligible employees twenty-four months’
pay for each completed year of service.

Taking PW1 who served for fifteen years as an example, the Statutory Instrument
gave thirty months’ pay while the ZIMCO package awarded thirty-nine months’
pay. There were also other perks like housing or an allowance in lieu which were
better under the ZIMCO package.

The workers felt short-changed and launched proceedings in the High Court claiming to
be given the separation packages awarded to them under the ZIMCO conditions. The
employer resisted the claim, arguing that it had the right to change the conditions and
adopt its own and to opt to pay the package prescribed by the Statutory Instrument which
was better than that applicable under the contractual new conditions. The learned trial
judge agreed with the workers, finding that the appellant had changed the conditions of

274
service for worse and without the consent of the affected employees. The learned judge
rejected an ingenious attempt to argue that the conditions formulated by ZIMCO which
became the conditions followed by the parties somehow automatically ceased to bind
upon privatization. It was pointed out that the change of shareholders and management
did not change the employer who continued to be the corporate entity National Milling
Company. The learned trail judge concluded, citing our decision in Kabwe BP (Z)
Limited (1) that any conditions that are introduced which are to the detriment of the
workers do not bind the workers unless they consent to them. Of course, Kabwe did not
specifically formulate any proposition in those terms, it having been concerned with an
adverse downward alteration to a fundamental condition – namely the salary – which the
employee had for a while already began to enjoy. The thrust of the holding in the Kabwe
case, which cited with approval the decision in Marriot v Oxford and District Co-
operative Society Limited (2), was that if an employer varies in an adverse way a basic
condition or basic conditions of employment without the consent of the employee then
the contract terminates and the employee is deemed to have been declared redundant or
early retired – as may be appropriate – as at the date of the variation and the benefits are
to be calculated on the salary applicable then. That was a situation where – as in the
Marriot case – an employee agreed to the new terms and the adverse change to an
essential term amounted to a termination of the contract of employment by the employer.
As a corollary, it is possible to have adverse changes, and it frequently happens – for
instance as part of a survival plan or plan to avoid or mitigate job losses – that such
changes are accepted by the workers and become consensual so that no actual termination
or repudiation of the contract of employment results from the mere alteration of one or
more basic conditions. It follows also that changes to non-essential, non-fundament or
non-basic terms may attract wholly different considerations.

Several grounds and arguments were advances before us. Under the first ground of
appeal, it was submitted that the court below in error to have held the respondents’
redundancy benefits were supposed to have been paid pursuant to the revised ZIMCO
conditions. It was said the court erred because a the material time the appellants had
already long introduced new conditions for permanent and pensionable staff. It was

275
pointed out that following the previous dissolution of ZIMCO and the subsequent
privatization of the appellant, the conditions of service were changed and this was
explained to the workers. The witnesses for the complainants had testified that
following the change, the salaries had been enhanced, which was clearly not a change for
the worse and the respondents had enjoyed such increased salaries for a period of seven
months before the redundancies. It was argued that the workers had acquiesced in the
new conditions where the redundancy provisions were the same as the original ZIMCO
provisions so that there was nothing wrong when the appellant opted to use the higher
formula under the Statutory Instrument even if it was in some respects less favourable
than the revised ZIMCO conditions. It was submitted that because of acquiescence, the
respondents ought to have been estopped from claiming the accrued revised ZIMCO
terms after they had enjoyed the enhanced salaries and after they had failed at the
opportune time to elect to be declared redundant or retired.

Under the second ground of appeal, it was submitted that the learned trial judge had
wrongly applied the Kabwe case (1) where there was a non-consensual reduction to the
salary, a basic condition, while here the same basic condition had been increased and
accepted by the workers. Counsel submitted that a redundancy benefit cannot be a basic
condition of service, that it was a contingent condition which may or may not happen.
Under the third ground, it was submitted and argued that the court below was wrong to
find that the conditions of service had bee altered to the detriment of disadvantage of the
workers when in an important aspect, that of the salary, the conditions had changed for
the better.

In response, Mr. Sikota pointed out that most of the workers never actually got sight of
the new conditions which were promised so that there was no question of the respondents
consenting or acquiescing to any disadvantageous alterations tot eh conditions. It was
further pointed out that acquiescence had not been pleaded and that in any case, the
conditions of service comprise much more than just a salary, even if this has been
enhanced. Mr. Sikota suggested that the conditions dealt with in the Statutory Instrument
No. 99/94 be regarded as the important conditions of service. In that respect, it was

276
submitted that after the promulgation of the Statutory Instrument, it was not tenable to
argue that the workers could acquiesce to something illegal which was the effect of the
introduction of new conditions which were below an existing statutory minimum. The
submission was that the purported changes to the redundancy provisions in the new
permanent and pensionable conditions would therefore have been void and initio.
Counsel further submitted that acquiescence to the reduced redundancy benefits could not
be inferred from acceptance of the enhanced salary when the workers did not know about
the reduction and accordingly when they did not have “full notice” of the new conditions
within the dicta in Re William Porter and Company Limited (3), a case relied upon by the
appellants. It was submitted that no estopped could arise when the workers had not
accepted the new conditions and when the redundancies supervened even before some of
them could have sight of the new conditions.

In answer to the argument that a redundancy benefit Is not a basic condition, Mr. Sikota
submitted that there was nothing in the Kabwe case and the other cases limit what was
basic only to the salary so that the principle should apply, whether or not the condition
was contingent upon something else happening, as in a redundancy. We were requested
to look at all the surrounding circumstances, including the economic realities and the
prevalence of the much dreaded redundancies in the country leading to the Statutory
Instrument having to deal with the subject. It was suggested that the matters dealt with in
the statutory instrument should be regarded as the basic conditions. In response Mr.
Matibini argued that minimum conditions are not necessarily basic conditions with Mr.
Nchito pointing out how absurd it would be if even the provision for a funeral grant
which is in the Statutory Instrument could be called a basic condition.

We have considered the matters raised and argued in this case. We can affirm
immediately that the change of ownership of the shares did not result in the appellant
becoming a new employer, they were still the same employers and they were bound by
the contracts of employment they already had with each one of their workers severally
and collectively. We affirm also that just as in the case of any other contract, a contract
of employment can be varied for better or for worse with a variety of consequences,

277
depending on whether or not the variation is consensual or accepted or rejected. In the
case to which the principles in the Kabwe case and the Marriot case apply, the unilateral
changes were adverse and unacceptable to the employee who became entitled to treat the
breach by the employer as terminating the contract and warranting the payment of
redundancy or other terminal benefits as appropriate. Those cases dealt with changes to a
basic condition and the issue which arose here was whether a redundancy benefit could
be such a basic condition. I n the first place, the reference to basic condition must surely
be to a fundamental or essential term, one affecting the essential character of the bargain
and the breach of which would justify the innocent party to treat the contract as
repudiated or rescinded by the party in breach. The alteration of a basic condition if
consensual and probably beneficial would result in bringing about a replacement contract,
different from the former. It is thus necessary to look at the nature of the condition
breached and the consequences of such a breach in order to determine whether a
condition is basic or one that is relatively minor and not crucial to the contract.
Variations to non-basic conditions even if unilateral and disadvantageous would not
affect the essential viability of the contract and would in all probability not discharge it or
justify the innocent party to treat the breach as effecting a termination by repudiation or
rescission or otherwise. In the next place, we consider that it is necessary to distinguish
the position in this case and that in the cases where the innocent party has the opportunity
to make an election whether to treat the breach as a repudiation by the other party which
terminates the contract or not. In this regard, we do not agree with Mr. Mabtiini that the
respondents here had any such opportunity to elect, what with the breach or repudiation
complained of only being known upon the termination by the redundancy itself. Since
the breach of the previous existing redundancy terms relate to the package to be received
and played no role in brining about the actual termination of the employment contract,
the arguments about whether or not this was a basic condition were, in the event
unnecessary and a red herring. In the same category fall the arguments about
acquiescence when there was no prior and real opportunity to the affected workers to
affirm the contract with those precise variations. The position would have been
otherwise if the evidence was that clear notice had been given covering the alterations
and that the workers with full knowledge had opted to continue in employment in the

278
knowledge that their terminal benefits would be on a reduced package if the separation
came by way of redundancy. In this regard, we accept that a person leaving employment
the arrangements for terminal benefits – such as pension, gratuity, redundancy pay and
the like – are most important and any unfavourable unilateral to the disadvantage of the
affected workers and which was not previously agreed is justifiable and in this
connection it is unnecessary to place a label or non-basic on it. It is no wonder that in the
pubic service for example the constitutional of the land itself saw fit in Article 124 to
protect benefits of public workers which may not be altered to the disadvantage of an
employee. Equally in the case of the parastals being privatized, it is not surprising that eh
legislature anticipated that there would be redundancies some companies could not
manage on their own so that the Privatization Revenue Account could be resorted to in
supporting redundancy payment schemes: See Section 39, Privatization Act Cap. 386.

When all I said and done, the learned trail judge was on firm ground and we affirm him.
The appeal is unsuccessful. Costs follow the event and will be taxed if not agreed.

SHARES, SHAREHOLDERS AND MEMBERS

Classification of shares
Borland’s Trustee v Steel Brothers & Co. Ltd
[1901] 1 Ch 279

FARWELL J: [288] . . . A share is the interest of a shareholder in the company measured

by a sum of money, for the purpose of liability in the first place, and of interest in the
second, but also consisting of a series of mutual covenants entered into by all the
shareholders inter se. . . . The contract contained in the articles of association is one of
the original incidents of the share. A share is not a sum of money settled in the way
suggested, but is an interest measured by a sum of money and made up of various rights

279
contained in the contract, including the right to a sum of money of a more or less amount.
...

Preference shares
In re National Telephone Co.
[1914] 1 Ch 755

SARGANT J: [774]. . . [It] appears to me that the weight of authority is in favour of the
view that, either with regard to dividend or with regard to the rights in a winding-up, the
express gift or attachment of preferential right to preference shares, on their creation, is,
prima facie, a definition of the whole of their rights in that respect, and negatives any
further or other right to which, but for the specified rights, they would have been entitled.
...

Webb v Earle
(1875) LR 20 Eq 556
The directors in accordance with the articles and with the consent of a general meeting,
issued 10 per cent preference shares. It was held that if the profits of one year could not
meet the dividend in full, the deficiency could be paid out of subsequent profits.

JESSEL MR: [560]. . . When you look at the resolution, articles, and letter together, it
clearly means this, that the dividend on the preference shares is to be paid out of the
dividend declared, if there is one, in other words, that the right is restricted to this, that it
is to be paid out of what is declared so far as it will go, and that the preference
shareholders cannot get any more, and that they cannot get it when there is no dividend
declared. The are to have it if there is anything to pay; but it does not mean that if there
is not enough to pay one half year they are not to have it the next half year, or the third or
fourth or fifth half year. . . .
It really comes to nothing more than that. The preference shareholders are to have a
dividend of ₤10 per cent per annum, but it is to be paid as on preferential capital, that is,
so far as the profits shall extend; there is nothing to prevent them going to the profits of a
subsequent period when they are sufficient to make it up. . . .

280
[In Buenos Ayres Great Southern Railway Co Ltd v Preston [1947] Ch 384; several years,
made in one year sufficient profits to pay the full dividends on preference shares.
However, the directors considered that it would be unwise to pay such dividends and
decided to transfer the profits to reserve. The court held that they had power to do so.
Said Romer J: The preference shareholders were not given a contractual right to be paid a
preference dividend out of the balance on profit and loss account in each year but only
out of the profit which are available for dividend.’]

Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Co Ltd

[1949] AC 462; [1949] 1 All ER 1068 (HL)
A coal-mining company had been nationalized and its assets transferred to the National
Coal Board. It was the intention of the company ultimately to go into voluntary
liquidation. In the meantime, it proposed to reduce its capital by returning their capital to
the holders of preference shares, which would be extinguished thereby. Article 141 of
the company’s articles of association provided that the company might convert any
undivided profits into capital and distribute it among the ordinary shareholders. Articles
159 and 160 stated that in the event of a winding-up the preference stock ranked before
the ordinary stock. The preference shareholders objected to the scheme on the ground
that it deprived them of the opportunity of sharing in a distribution of surplus assets on
the liquidation of the company. They contended that the reduction was unfair and
inequitable and ought not to be confirmed by the court. The Scottish Court of Session
(Lord Cooper dissenting) and the House of Lords (Lord Morton of Henryton dissenting)
rejected this contention, and confirmed the reduction.

VISCOUNT MAUGHAM: [480] . . . my conclusion is that taking these articles together

it is reasonably clear that subject to the payment to the preference shareholders of their
capital and their preferential dividends if any not yet paid. . . the whole of the reserve
funds and other assets of the company, including the proceeds of sale of the capital
assets, are appropriated to the ordinary shareholders and in that sense belong to them to
the exclusion of the preference shareholders . . .

281
LORD SIMONDS: [488] It will be seen, my Lords, that, even making an assumption
favourable to the appellants, I reject their first plea. But it is perhaps necessary, in case
there should be a division of opinion which would make this a decisive issue, that I
should shortly examine the assumption. It is clear from the authorities, and would be
clear without them, that, subject to any relevant provision of the general law, the right
inter se of preference and ordinary shareholders must depend on the terms of the
instrument which contains the bargain that they have made with the company and each
other. . . . Reading the relevant articles, as a whole, I come to the conclusion that articles
159 and 160 are exhaustive of the rights of the preference stockholders in a winding up.
The whole tenor of the articles, as I have already pointed out, is to leave the ordinary
stockholders masters of the situation. If there are ‘surplus assets’ it is because the
ordinary stockholders have contrived that it should be so. . . .

Debentures and other loan funds

Coetzee v Rand Sporting Club

1918 WLD 74

WARD J: [76] . . . I am not aware that the word ‘debenture’ has been defined precisely.
Bowen LJ says in English and Scottish Mercantile Investment Co v Brunton [1892] 2 QB
700 at 712: ‘It seems that there are three usual forms of debenture. . . . The first is a
simple acknowledgment, under seal, of the debt; the second an instrument acknowledging
the debt, and charging the property of the company with repayment; and the third
instrument acknowledging the debt, and charging the property with repayment and
further restricting the company from giving any prior charge.’ It does not follow that
there may not be other forms, but it is not necessary to go into that. I think the word
imports an acknowledgement of debt. It is derived from debentur mihi with various
forms of acknowledgment commenced. . . .

Allotment and issue of shares

Nicol’s case: Tufnell & Ponsonby’s case

(In re Florence Land and Public Works Co)

282
(1885) 29 ChD 421
CHITTY J: [426]. . . There is no difference, as has been often pointed out, between a
contract to take shares and any other contract. What is termed ‘allotment’ is generally
neither more nor less than the acceptance of the company of the offer to take shares. To
take the common case, the offer is to take a certain number of shares, or such a less
number of shares as may be allotted. That offer is accepted by the allotment either of the
total number mentioned in the offer and or less number, to be taken by the person who
made the offer. This constitutes a binding contract to take that number according to the
offer and acceptance. To my mind there is no magic whatever in the term ‘allotment’ as
used in these circumstances. It is said that the allotment is an appropriate of a specific
number of shares. It is an appropriation, not of specific shares, but of a certain number of
shares. It does not, however, make the person who has thus agreed to take the shares a
member from that moment; all that it does is simply this – it constitutes a binding
contract under which the company is bound to make a complete allotment of the specified
number of shares, and under which the person who has made the offer and is now bound
by the acceptance is bound to take that particular number of shares. . . .

In re White Star Line Ltd

[1938] Ch 458; [1938] 1 All ER 607
CLAUSON LJ: [476]. . . The reported authorities establish. . . that a payment is an
effective payment in money’s worth if the consideration given by way of payment is
something which is bona fide regarded by the parties to the payment as fairly
representing the sum which the payment is to discharge. . . but if the consideration given
by way of payment is a mere blind or clearly colourable or illusory. . . the so-called
payment is ineffectual for the purpose. The question whether the consideration is
colourable is one of fact in each case. . . .

The Offer and Transfeer of Shares

283
Public Offers

Nash v Lynde
[1929] AC 158
VISCOUNT SUMNER: [169]. . . “The public”, in the definition section. . . is of course a
general word. No particular numbers are prescribed. Anything from two to infinity may
serve: perhaps even one, if he is intended to be the first of a series of subscribers, but
make further proceedings needless by himself subscribing the whole. The point is that
the offer is such as to be open to any one who brings his money and applies in due form,
whether the prospectus was addressed to him on behalf of the company or not. A private
communication is not thus open. . . .

S v National Board of Executors Ltd

1971 (3) SA 817 (D)
HARCOURT J: [818] The accused were charged on several counts relating to the issue of
a prospectus in contravention of sections of the Companies Act, 46 of 1926, [inter alia
section 84 bis, the equivalent of section 144(a) of the 1973 Companies Act of South
Africa) ] as amended. From the State evidence it appeared that they had issued a certain
brochure, worded “strictly private and confidential” and “for information of addressee
only”, containing an invitation to the addressees to apply for shares or debentures in a
certain proposed project involving the building of a block mainly for medical
practitioners on a certain site. There were only two persons to whom allotments were
thereafter made which were not addressees, and there was no evidence as to how it came
about that they had applied for shares and debentures. In an application for the discharge
of the accused at the close of the case for the State.
. . .Early in May, 1968, the National Board caused a document in the form of a brochure
to be prepared which outlined the scheme and gave considerable details relative to a
proposed issue, said in the document to be “ by private placing”, of R2, 3 million first
mortgage debentures and 1, 15 million ordinary shares of R1 at par. The front cover of
this brochure, which comprised some ten pages and was enclosed in a cover, was entitled:
“Strictly private and confidential

284
 for information of addressee only
Durban Medico Holdings Limited
Issue by private placing of
R2 300 00 8 ¾ per cent first mortgage debentures and
1 150 000 ordinary share of R1 at par.”

Beneath this legend there appeared an artist’s impression of the proposed building next to
an existing building on portion of the site which was already erected and let to a building
society. The front cover also contained, in prominent print, the name of the first accused.
The evidence shows that some 660 of these documents were printed and delivered to the
first accused. It was established by the evidence of one Basson, the managing director of
Durdoc Ltd., which he caused between 235 and 240 of these brochures to be sent
individually to all doctors practising in Durban including the shareholders in Durdoc Ltd
who then numbered some 125 doctors. . .
. . . Thus the real question at issue in this application is whether the invitation to apply to
subscribe for shares and/or debentures was one which

“can properly be regarded , in all the circumstances, as not being calculated to

result, directly or indirectly, in the E shares or debentures becoming available
for subscription or purchase by persons other than those receiving the offer or
invitation”. . .

. . . Finally on the law, and leaving over for the moment the question of onus for later
consideration, there are three further matters to be mentioned. The first is that the
defence was content to argue the application on the conceded assumption (favourable to
the prosecution) that the word “calculated” properly bore the meaning of “likely” and not
the permissible meaning of “intended”. This seems to me to be a proper concession but it
is unnecessary to decide the point; I shall assume it for the purposes of my decision. . .
. . . The defence urged that there were many factors which, taken cumulatively, showed
that the invitation to subscribe for debentures and shares expressly contained in the
brochure was such that it was not calculated to result in such securities being available
for subscription by persons other than those receiving the invitation. It was not

285
contended that any single factor was alone conclusive or that they were of equal cogency.
The following is a summary, not necessarily in order of importance or cogency, of the
more important factors urged by the defence:

(i) The front cover bore the prominent legend that the brochure was

“strictly private and confidential for the information of addressees only”.

A similar statement, namely , “strictly private and confidential: not for publication”

was considered as a considerable factor in concluding that an offer was not made to the
public in the case of Sherwell v Combined Incandescent Mantles Syndicate Ltd, (1906) 23
TLR 482, despite the fact that a thousand copies of the offer has been distributed.
This case was, of course, before the enactment of section. 55 of the English Act but this
does not in my view deprive the decision of all relevance.

(ii) This cover and an interior page of the brochure which gave particulars of Durban
Medico expressly, prominently and in terms described the proposed issue as an “issue
by private placing” of the described debentures and shares.

(iii) In regard to transferability after issue, it was expressly stated in the brochure that
“until such time as they are fully paid, transfers of the debentures and ordinary shares
will be subject to the prior approval of the directors”.

Thus the securities were not to be free negotiable for at least three years.

(iv) The further indication was given that even after the shares and debentures were
fully paid up the securities would become freely transferable but that, even then, the
feasibility and desirability of applying for a quotation on the Johannesburg Stock
Exchange would be examined only in regard to the debentures; inferentially no such
feasibility and desirability would be considered in regard to the share which would
thus not become freely transferable on such Exchange within the reasonably
foreseeable future, if at all.

286
(v) It was also stressed that shares to be issued would be unlikely to attract the casual
speculator in view of the above factors and in view of the further fact that shares
would only be issued to successful applicants in the ratio of multiples of 500 shares
for ever R1 000 debentures applied for, which debentures were repayable only in
1996.

(vi) Full payment for the securities was spread over a considerable period of time,
namely, some nine months for shares and three years for the debentures. Counsel
urged that this fact would cause those issuing the shares to be concerned with, and
satisfied of, the creditworthiness of applicants before considering allotting the
securities to them. This, although not per se excluding indiscriminate allotment,
world in all probability encourage consideration of applications only from persons
and institutions previously chosen as recipients of the brochure because of their
known financial stability.

(vii) A most important factor was claimed to be that the project clearly envisaged a
long-term investment and the evidence disclosed that the persons or institutions to
whom and to which the brochures were sent were institutional investors (such as
pension funds and insurance companies) which would obviously be interested in
such long term investment; the doctors of Durban who wanted preferential rights to
accommodation while in practice and also the entail rights to accommodation while
in practice and also the advantage of a financial stake and consequent indirect
financial advantage in the proposed medical centre for long periods (as evidenced
by the renewable leases of five years duration) and selected clients of National
Board interested in such long term investments. In this regard it is not without
significance that in covering letters accompanying the brochures addressed to
certain of these clients it is clear that the invitation was suggested as a suitable
alternative investment to replace proposed investments in mortgage bonds (usually
long-term investments) which National Board has not been able to place.

(viii) Closely linked to this last factor was the fact that the police investigations
disclosed no evidence at all of the subsequent transfer of any debentures or shares at

287
 any time after allotment, that is, in over three years. This was claimed, with some
substantial justification in my judgment, to be a not inconsiderable indication that
the persons and institutions to whom and to which the brochure was sent and who
or which were allotted shares were, in fact, interested in long-term investment and
that they had continued to hold the securities as such an investment.

(ix) There was no evidence at all that any of the persons or institutions who or which
accepted the invitation contained in the brochure were persons or institutions other
than the recipients to whom or to which the brochures were sent. As has already
been noted there were only two persons (Butt and Kalmanson) concerning whom
there was no evidence that the brochures “had or had not been sent”. These two
persons were not called as witnesses and there was no suggestion that they were not
available; their address in the form of a numbered post office box is reflected in the
list of allocations as being in Johannesburg. There is also no evidence that any
recipient attempted to assign to a third party the rights contained in the brochure. In
fact, as emphasized by the defence, the evidence shows that where it was desired
that persons other than the recipient should have the right to apply for the securities
(as in the case of the Cohen and Swinton families) steps were taken to ensure that
they become individual recipients of additional brochures.

(x)There is no evidence that allotments were indiscriminately made to third persons

other than those to whom the brochure had been sent. In truth the evidence
established that the proposed allotment put forward by National Board was
carefully scrutinized and criticized in detail and provision was made for a variation
where it was believed that an injustice had been done to one who had made
application but to whom no allotment was proposed. This action was apparently
carefully taken at a meeting of the board of directors of Durban medico attended b y
representatives of Durdoc Ltd who had a clear and apparent concern to see that
third parties should not receive allotments to the prejudice of the recipients of the
brochure who had applied to subscribe.

288
(xi) Allied to this last-mentioned factor is the fact that the amount and value of the
securities available for allotment to recipients of the brochure was limited and not
large particularly in relation to the number of recipients of the brochure. In this
regard it is not without significance that thirty-two individual Durban doctors
applied for and were allotted shares and debentures and one insurance company,
perhaps somewhat optimistically, applied for the total of the securities on offer after
the reservation of the securities. . . .

Liability for untruths in prospectus

Directors of Central Railway Co of Venezuela V Kisch

(1867) LR 2 HL 99
LORD CHELMSFORD LC: [113] . . . The alleged representations are contained in a
prospectus, the object of which was to invite the public generally to join the proposed
undertaking. In an advertisement of this description some allowance must always be
made for the sanguine expectations of the promoters of the adventure, and no prudent
man will accept the prospects which are always held out by the originators of every new
scheme, without considerable abatement.
But although, in its introduction to the public, some high colouring and even
exaggeration, in the description of the advantages which are likely to be enjoyed by the
subscribers to an undertaking, may be expected, yet no misstatement or concealment of
any material facts or circumstances ought to be permitted. In my opinion, the public, who
are invited by a prospectus to join in any new adventure, ought to have the same
opportunity of judging of everything which has a material bearing on its true character, as
the promoters themselves possess.
. . . [T]he appellants say that even admitting the prospectus to be open to the objections
which are made to it, the respondent has no ground of complaint, because he had an
opportunity of ascertaining the truth of the representations contained in it, of which he
did not choose to avail himself; that he was told by the prospectus that ‘the engineer’s
report, . . .together with maps, plans, and surveys of the line, might be inspected, and any
further information obtained, on application at the temporary offices of the company’;
and in his letter of application he agreed to be bound by all the conditions and regulations

289
contained in the memorandum and articles of association of the company, which, if he
had examined, would have given him all the information necessary to correct the errors
and omissions in the prospectus.
But it appears to me that when once it is established that there has been any fraudulent
misrepresentation or willful concealment by which a person has been induced to enter
into a contract, it is no answer or his claim to be relieved from it to tell him that he might
have known the truth by proper inquiry. He has a right to retort upon his objector, ‘You,
at least, who have stated what it untrue, or have concealed the truth, for the purpose of
drawing me into a contract, cannot accuse me of want to caution because I relied
implicitly upon your fairness and honestly.’
[The respondent was held entitled to rescind the contract entered into by him to take up
shares in the company.]

Standard Bank of SA Ltd v Ocean Commodities Inc

1980 (2) SA 175 (T)
Prior to June 1975, when they were still residents of Rhodesia (now Zimbabwe), the
Harris brothers (second and third respondents) had dealt in certain shares listed on the
Johannesburg Stock Exchange. At that time the share dealings of the second and third
respondents were subject to the Rhodesian Exchange Control Regulations. The
Rhodesian Exchange Control authorities granted them permission to deal in the shares
provided that the shares were lodged with the first appellant, the Standard Bank of South
Africa Ltd, and held by it to the order of the Standard Bank Bulawayo. The first appellant
caused the shares to be registered in the name of its nominee, Standard Bank Nominees
(Pty) Ltd, the second appellant. The share certificates were registered in the second
appellant’s name and held by the first appellant. No contractual relationship existed
between the second and third respondents and either the first or the second appellant.
In June 1975 the second and third respondents moved to South Africa. During the latter
half of 1975 they sold their interest in the shares to the first respondent. The first
appellant advised the second and third respondents that it intended to transmit the share
certificates to the Standard Bank Bulawayo. The respondents applied for an order

290
directing the two appellants to deliver the share certificates together with share transfer
forms to the first respondent.
Holding that prior to their transaction with the first respondent, the second and third
respondents had been the beneficial owners of the shares while the second appellant had
held them as their nominee, the court granted the order prayed for.
KING J: [180]. . . Six fundamental legal principals are of the utmost importance in this
matter.
Firstly, an owner, in our law, is prima facie entitled to possession of his property and the
onus is on a person disputing that right to prove that it has a better right to possession. . . .
Secondly, a shareholder in a company has a conglomeration of incorporeal rights against
a company.
Thirdly, the manner in which incorporeal rights are transferred is by way of cession. On
completion of the contract of cession, provided the necessary intent it present to pass
ownership, the cessionary will become the owner of the incorporeal rights. There is no
necessity as between cedent and cessionary that there be delivery of any document which
might evidence those rights. Thus, while at one time it was necessary before ownership
in the rights of a shareholder could pass to another person that there be the delivery of a
share certificate with a share transfer form signed in blank, this is no longer necessary in
our law. Vide, Moosa v Lalloo 1956 (2) SA 237 (D) at 238-9 and cf Labuschagne v
Denny 1963 (3) SA 538 (A).
Fourthly, provided there is the necessary intent for ownership to pass between two parties
ad in the case of a corporeal there is a delivery, ownership will pass. As aforesaid, in the
case of an incorporeal, delivery inter parties as between cedent and cessionary is not
necessary and, on completion of the contract of cession coupled with necessary intent for
ownership to pass, it will pass whether or no there is an underlying valid causa. . . .
Fifthly, property rights are governed by the lex situs. In this matter one is more
concerned with the law of property than with the law of contract.
. . . . if foreign currency regulations restrict the right of a person to dispose a property in
South Africa, they will not be applied, not because they are fiscal in nature but simply
because they are subject to South African law and no other law. The lex situs of the

291
shares in question is the place where the share registers of the various companies are
kept.
Sixthly, our courts will not recognize the laws of an unrecognized state. . . .
...
There is an important legal difference between immovable property and movable
property whether corporeal or incorporeal. In regard to immovable property, a court
cannot go behind the register. In respect of registered shares, a court can go behind the
register to ascertain in the identity of the true owner. The fact, therefore, that the shares
are registered in the name of Standard Bank Nominee does not mean that it is the actual
owner or that one cannot look behind the register to ascertain the identity of the true
owner. . . .Further, an agreement for the sale of shares does not mean that the seller must
procure registration of the transfer into the name of the purchaser. The seller’s duty is
completed when he had done all in his power to put the transferee in a position to demand
transfer from the company.
. . . Until registration of transfer, however, the transferor or his nominee is a trustee of
the shares for the transferee. The trustee must act according to the instructions of the
transferee who becomes the beneficial owner of the proprietary rights in respect of the
shares by means of the conclusion of the contract of cession. The true owner of the
proprietary rights can, therefore, demand of the person in whose name the share is
registered that he does all things necessary to enable the owner to approach the company
for registration of the shares into his name.
...
On the facts Standard Bank Nominees were holding as nominees for the Harrises and, in
my view, the onus was on the appellants to establish any contract which would have
entitled them to the possession of the share certificates over and above the rights of the
owner thereof. . . .
...
[As to the effect of the Rhodesian currency exchange regulations, the learned judge
said:]. . . essentially the appellants’ contention was that the Harris brothers as Rhodesian
citizens became bound by instructions emanating from the Rhodesian Reserve Bank and
that they accepted the restrictions imposed on them thereby. The regulations and

292
instructions, while they might be binding on Rhodesia citizens, cannot be binding on non-
Rhodesian citizens. The shares in question were acquired and registered in the name of
Standard Bank Nominees after the Harrises ceased to be Rhodesian citizens. In this
regard, the Harrises were granted emigrant status on 20 May 1975 and arrived in the
Republic of South Africa on 7 June 1975. A foreign law will not be recognized so as to
give it extra-territorial jurisdiction or effect. The consequence flowing from this is that
form the time the Harrises ceased to be Rhodesian residents any law imposed on them
because they were Rhodesian citizens other than any contractual arrangement ceased to
be operative.
...
I, therefore, conclude that Ocean Commodities is entitled to an order for delivery of the
certificates and share transfer forms signed in blank. . . .
[Nestadt J concurred, De Villiers J dissented. Affirmed on appeal 1983 (1) SA 276 (A) ]

Share premium
Henry Head & Co Ltd v Ropner Holdings Ltd
[1952] Ch 124; [1951] 2 All ER 994
HARMAN J: [126]. . . Accordingly, there was issued in the aggregate to the shareholders
in the two companies the entire authorized capital of the holding company, which was ₤1
759 606. That did not, however, do anything more than represent the aggregate of the
nominal value of the shares of the constituent companies. The real value of the shares
was, if the valuation was right, approximately ₤5 000 000 in excess of that sum. The
issuing company has therefore acquired for its shares assets worth between six and seven
millions, if that valuation be, as I think I must suppose it to be for these purposes, a true
reflection of the value of the assets acquired at the time of their acquisition. When the
balance sheet of the holding company appears for the year ended 31 March 1949, one
finds on the left-hand side the issued capital set out, and below that, under the words
Capital Reserve, Share Premium Account (less formation expenses), rather over ₤5 000
000. On the other side is stated the value of the shares in the subsidiary companies as
valued in the way I have mentioned, and they are valued at rather under ₤7 000 000.
When the consolidated balance sheet is looked at, a rather more express statement is

293
found, namely: share premium account, being the excess of the value of the net assets of
subsidiary companies at the date of acquisition over the book valued of the investments
(less formation expenses); and that is what this ₤5 000 000 figure is.
The directors have been advised that they are bound to show their accounts in that way,
and, not only they, but the plaintiffs, who are large shareholders, regard that as a very
undesirable thing, because it fixes an unfortunate kind of rigidity on the structure of the
company, having regard to the fact that an account kept under that name, namely, the
share premium account, can only have anything paid out of it by means of a transaction
analogous to a reduction of capital. It is, in effect, as if the company had originally been
capitalized at approximately ₤7 000 000 instead of ₤1 750 000.
The question which I have to determine is whether the defendants were obliged to keep
their account in that way. That depends purely on s 56 of the Companies Act 1948 [s 76
of the South African Companies Act of 1973]. . . [Under that section] the share premium
account can be distributed in the same restricted way and with the same leave of the court
as if paid-up share capital was being returned to the shareholders.
...
It is with a sense of shock at first that one hears that this transaction waste issue of shares
at premium. Everybody, I suppose, who hears those words thinks of a company which,
being in a strong trading position, wants further capital and puts forward its shares for the
subscription of the public at such a price as the market in those shares justifies, . . . and
the 10s or ₤4 above the nominal value of a share which it acquires as a result of the
transaction is no doubt a premium. That is what is ordinarily meant by the issue of shares
at a premium. The first words of subsection (1) are: ‘Where a company issues shares at a
premium.’ If the words had stopped there, one might have said that the subsection merely
refers to cash transactions of that sort, but it goes on to say ‘whether for cash or
otherwise’.
What ‘otherwise’ can there be? It must be a consideration other than cash, namely, goods
or assets of some physical sort. Continuing, the subsection contains the words ‘a sum
equal to the aggregate amount or value of the premiums on those shares shall be
transferred to an account, to be called “the share premium account”. Apparently, if the
shares are issued for a consideration other than cash and the value of the assets acquired

294
is more than the nominal value of the shares issued, you have issued shares at a premium;
I think that counsel for the plaintiff company was constrained to admit that, in the
ordinary case, that was so. This subsection at least has that much result; but he says,
where the issuing company be drawn somewhere. It cannot apply, he says, where the
issuing company has no assets at all other than the assets which it will acquire as the
price of the issue of share. ‘Premium’ (he argues) means something resulting from the
excess value of its already existing assets over the nominal value of its shares. I am much
attracted by that. I have every desire to reduce the effect of this section to what I cannot
help thinking would be more reasonable limits, but I do not see my way to limiting it in
that way. It is not stated to be a section which only applies after the company has been in
existence a year, or after the company has acquired assets, or when the company is a
going concern, or which does not apply on the occasion of a holding company buying
shares on an amalgamation. Whether that is an oversight on the part of the legislature, or
whether it was intended to produce the effect it seems to have produced, it is not for me
to speculate. All I can say is that this transaction seems tome to come within the words
of the section, and I don not see my way to holding as a matter of construction that it is
outside it. If that is so, the inevitable result is that the action must fail.
[Harman J in his judgment refers to the necessity to obtain leave of the court to a
reduction of capital. Under the 1973 Act leave of the court is only required in special
cases.]

295
 CHAPTER 8

DEBENTURES

A company may raise money by borrowing by means of debentures 215, or by issuing

shares. In the case of borrowing by debentures, the company may create a fixed or
floating charge over its property216 in order to secure the sum borrowed, and there is an
undertaking to repay on an ascertainable date and to pay interest at a fixed rate. A
debenture may be secured, or unsecured217.

A debenture is defined by the Companies Act as including “a unit of a debenture stock,

and bonds and any other securities of a company whether constituting a charge on the
assets of the company or not218”simply stated, a debenture holder is a person who has lent
money tot eh company and is a secured

Thus the word “debentures” includes debenture stock, which is “borrowed money
consolidated into one mass for the sake of convenience.” The debenture stock is
generally secured by a trust deed and the debenture stockholder is entitled to a stock
certificate instead of a debenture. The difference between the debt secured by debentures
and the debenture stock is similar to that between shares and stock, like stock, the
debenture stock is transferable in fractional amounts although some specified minimum
amount maybe fixed by the trust deed. In practice, the debenture stock gives a right to an
215
Section 86 (1)
216
Section 86 (2)
217
Ibid
218

296
annuity rather than repayment of a loan although the debenture stockholder may, in
defined events, be entitled to lump sum in lieu of further annual payments.

Types of debentures

Debentures may be any of the following types:

(i) Registered debentures, i.e. payable to the registered holder
(ii) Bearer debentures, i.e. payable to bearer. They are negotiable instruments like
warrants
(iii) Redeemable debentures, i.e. issued on the terms that the company shall
redeem them in accordance with some agreed procedure. Such redeemed
debentures may, subject to the articles or a decision of the company, be-issues
or the company may issue other debentures in their place (s. 90(1)). On re-
issue of redeemed debentures, the person entitled to them will have the same
priorities as if the debentures had never been redeemed (s.90(2));
(iv) Perpetual debentures; these are made “irredeemable or redeemable only on the
happening of a contingency, however remote, or on the expiration of a period,
however long ….” (s.89). Thus perpetual debentures may be issued on
condition that it shall not be redeemed except on the winding up of the
company or at some date later than that appearing on the contract as the
redemption date. Such a condition is valid notwithstanding any rule of equity
to the contrary.
(v) Convertible debentures i.e. debentures which may be converted into shares.

The debenture
The standard form of a debenture consists of two parts namely, the terms of the debenture
and the indorsed conditions.

The terms of the debenture

This may take the following form:
The XYZ Company Limited

297
Issue of K250,000 of debentures of K100 each carrying interest at 5 per cent per annum.

Dentures
1. The XYZ Company Limited (hereinafter called “the company”), will, on the
……..day of …………, or on such earlier day s the principal moneys hereby
secured become payable in accordance with the conditions indorsed hereon, pay
to A.B. of …………………………. or other the registered holder for the being
hereof the sum of K100.
2. The company will, during the continuance of this security, pay to such registered
holder interest thereon at the rate of 5 per cent. Per annum by half-yearly
payments on the (1st) day of June and (1st) day of December in each year, the first
of such half-yearly payments or a proportionate part thereof, calculated from the
date of issue of this Debenture to be made on the (1st) day of June next.
3. The company hereby charges with such payments its undertaking and all property,
present and future, including its uncalled capital for the time being.
4. This debenture is issued subject to and with the benefit of, the conditions indorsed
hereon, which shall be deemed to be incorporated herewith.
Given under the common seal of the company this …………..day of …………….

The common seal of the above named company was affixed hereto in the
presence of:
………………………………………
………………………………………
………………………………………

Comments
Clause 1 provides for the repayment of the money borrowed on a specified date. It is not
necessary for the clause to state any consideration since the instrument is a deed, but if it
is under hand only, the consideration should be stated. Where the debenture is perpetual,
no date is specified. Instead, reference is made to the indorsed conditions, which makes
it perpetual. Since the sum is payable to the registered holder, the company is relieved of

298
the trouble of taking notice of various assignors but is concerned only with the person
whose name is on the register.

Clause 2 provides for the payment of interest during the continuance of the security. The
interest may, of course be payable quarterly.

Clause 3 charges the company’s property with the debenture. The charge normally
covers all the property of the company including fixed floating assets and even uncalled
capital where the company has power to charge it.

Clause 4 makes the conditions a part of the contract. The debenture is usually under seal
in accordance with the articles but it need not be, for it may quite properly be under hand
and it is created on the date of its execution.

The indorsed conditions

The conditions are indorsed either at the back or on the face of the debenture and may
include the following provisions:

(1) That the debenture is one of a series of debentures issues to secure a

specified sum, that they are all to rank pari passu, and that the charge is to
be a floating security. Where there is a trust deed, this is referred to and
the date of execution, the parties and the charges conferred by the trust
deed are recited.
(2) That the company will redeem the debenture (provided it is not perpetual).
(3) That the company will keep a register of debenture holders at its registered
office in compliance with section 103. Every registered holder is entitled
to inspect the register and take copies of extracts (s. 104).
(4) That the registered holder or his personal representative will be
exclusively entitled to the benefit of his debenture and that the company is
not bound to enter in the register notice of any trust or recognize any trust
unless so directed by the court.

299
 (5) That every transfer of the debenture must be in writing and delivered at
the registered office of the company together with adequate evidence of
title or identity.
(6) That no transfer will be registered during a specified number of days
(usually 14) immediately proceeding the days fixed for the payment of
interest.
(7) That in the case of joint registered holders the principal moneys and interest
will be deemed owing to them jointly
(8) That the principal and interest will be paid free of any equity between the
company and the debenture holder.
(9) That the company may at any time give notice to the debenture holder to
pay off the debenture after the expiration of a specified time.
(10) That the principal money will become immediately payable where there is
default as to interest or the company is being wound up or distressed or
execution is levied on the company’s property, or a receiver is appointed,
or the company ceases to carry on business.
(11) That the money owing will be paid at the company’s office or at its
banker’s
(12) The power of the debenture-holder to appoint a receiver and manager of
the property charged.
(13) The procedure for giving notice to the registered holder
(14) That the company will keep insured the property subject to the charge.

The trust deed

The debenture may be accompanied by a trust, which is treated as a part of the debenture.
Its main provisions are as follows:

(1) A covenant by the company to pay the debenture holders the principal money and
interest.
(2) A legal charge on the freehold and leasehold property of the company and a
floating charge over the rest of the undertaking and property of the company.

300
 (3) The events on the happening of which the security is to become enforceable e.g.
default in the payment of principal or interest, or the winding-up of the company,
or the appointment of a receiver.
(4) Power for the trustees to take possession of the property charges when the
security becomes enforceable and to carry on the business of the company and
sell the property charges for the purpose of paying the money due while the
balance is paid to the company.

COMPANY LAW AND PRACTICE

(5) Power for the trustees to concur with the company in any dealings with the
property charged.
(6) Covenant by the company to keep a register of debenture holders.
(7) Covenant by the company to insure the property of the company and to keep it in
repair.
(8) Provision for holding meetings of debenture holders
(9) Powers for the trustee to appoint a receiver when security becomes enforceable.
(10) Provision as to serving notices on the debenture holders.

The debenture trust deed ensures that the enforcement of the rights of the debenture
holders can more easily effected for, instead of individuals or large number of debenture
holders acting to enforce the rights, the trustees, who usually paid, ensure that the
interests of all debenture holders are protected. They can promptly take action on the
happening of the specified events. They are given the power to appoint a receiver or
even to enter into possession of the property and carry on the business of the company if
necessary.

On the other hand, the trust deed usually provides that the company may exercise certain
powers over the mortgaged property with the consent of the trustees. For example, they
may sell, exchange or lease the property thus enabling the company to use the property to

301
advantage for the purpose of its business without prejudicing the interests of the
debenture holders.

A debenture stock is generally constituted by a trust deed. There is usually no direct

contract between the company and the stockholder who is a beneficiary although his
interest is recognized and will be protected by the court. The stockholder is given a stock
certificate instead of a debenture.

The trustees for debenture holders or debenture stockholders are in a fiduciary position
like other trustees. They, therefore, cannot purchase the debentures without making full
disclosure, and any provision in a trust deed or any contract secured by a trust deed is
void in so far as it would have the effect of exempting a trustee thereof from or
indemnifying him against liability for breach of trust where he fails to show that decree
of care and diligence required of him as trustee (s. 88 (1)). He may, however, be released
from liability by the debenture holders or in pursuance of a provision in the trust deed on
the agreement of at least three-fourths in value of the debenture holders present and
voting at a meeting summoned for the purpose (s. 88 (2)). He may also be protected if he
was trustee of the debenture before the Decree (s. 88 (3)).

ISSUE OF DEBENTURES
Debentures are issued according to the provision of the memorandum and articles of
association. If they are issued to the public, they must comply with the requirements of
section 39, that is, a prospectus must be issued.

Unlike shares, debentures are not part of the capital of the capital of the company and so
may be issued at a discount, but when any commission, allowance has been paid to any
person in consideration of his subscribing or agreeing to subscribe for any debentures of
the company or procuring subscriptions for debentures, the particulars of the amount or
the rate per cent of commission, discount, or allowance so paid must be sent to the
Registrar for registration although an omission to do so will not invalidate the issue (s. 94
(9)).

302
The company’s power to issue debentures cease on winding-up, but the company can
allot the rest of a series issued before winding-up.

An agreement to issue debentures on the advance of money will operate in equity to

make the lender of the debentures. Such an agreement may create an equitable charge
and, therefore, registrable and a debenture issued in an irregular manner has been held to
be an agreement to give a debenture, but not an agreement to give a future contingent
charge.

A contract with a company to take up and pay for debentures of the company may be
enforced by an order for specific performance (s. 91), thus creating an exception to the
general rule that specific performance will not be decrees in respect of a contract to lend
money, because damages provide adequate remedy for the breach.

Register of debenture holders

The company is not bound to keep a register, but this is usually done. Unlike the
provision of section 86 for the English Companies Act 1948, the Decree does not make
any provisions about where to keep the register, but it provides for inspection and the
taking of copies (s. 87). The debenture-holders may, subject to any restrictions impose
by the company, inspect the register without a fee while other persons may do so on
payment of K10. Failure to permit inspection or allow a copy to be taken is punishable
with a fine, and the court may compel an immediate inspection (s. 87).

CHARGES SECURING A DEBENTURE

Although it is possible to create an unsecured debenture, i.e. a debenture, which contains
no charge of the company’s property (otherwise known as “naked debenture”), the
normal mode of creating a debenture is by charging the property of the company through
the debenture or the trust deed or both. Such debentures may be secured on the fixed
assets or the floating assets of the company or both. Where the charge is secured on the
fixed assets, it is a “fixed” or “specific” charge and where it is secured over the floating

303
assets it is a “floating” charge. Debentures which are secured on fixed charges are often
described as “mortgage debentures.”

Fixed charges
A fixed or specific charge is a mortgage of specific property of the company such as land,
interests in land, ship and other such property. The charge may be a legal or equitable
mortgage. Such charges operate in general as ordinary mortgages by and to individuals.
“A specific charge….is one that without more fastens on ascertained and definite
property or property capable of being ascertained and definite….”

Where the company is being wound-up, the debenture holder whose debenture is secured
by a fixed charge ranks as a secured creditor. Furthermore, the company cannot dispose
of the property free of the charge without the consent of the holder of the charge.

Where a series of debentures is issued secured by a fixed charge, it is necessary to have a

trust deed by which trustees are appointed and the fixed charge vested in them. This will
obviate the necessity of getting all debenture holders to join in effecting a transfer
whenever any single debenture is to be transferred.

Floating charges
A floating charge is an equitable charge on the undertaking of the company including all
its property present and future. In the words of Lord Macnaghten in Government Stock v
Manila railway.

“A floating security is an equitable charge on the assets for the time being of a
going concern. It attaches to the subject charges in the varying condition it
happens to be from time to time. It is of the essence do such a charge that it
remains dormant until the undertaking charged ceases to be a going concern, or
until the person in whose favour the charge is created intervenes…”

304
In a later case, the same judge described a floating charge as,

“ambulatory and shifting in its nature, hovering over and so to speak floating with
the property which it is intended to affect until some event occurs or some act is
done which causes it to settle and fasten on the subject of the charge within its
reach and grasp.”

A major advantage of a floating charge is that the company may in the ordinary course of
business realize the property so charged without the consent of the debenture holders, but
in certain circumstances which are usually stated in the debenture, the charge attaches to
the property as a fixed charge, the circumstances include the appointment of a receiver or
other enforcement of the charge or the winding-up of the company or on its ceasing to
carry on business. In that event, the floating charge is said to “crystallise.” Until such
crystallization, the company may even sell its undertaking if so authorized by its
memorandum and may create legal mortgages and equitable charges in priority to the
floating charge.

The company may also charge the property even though, like the company’s stock-in-
trade. It may be constantly changing in the course of business. This will be impossible in
the case of an unincorporated body, for a mortgage of chattels must be registered under
Bills of Sale Act 1878 and 1882, and in so doing, the chattels must be specified. Section
17 of the Bills of Sale Act 1882 exempts registered companies from its operation.

On the other hand, the debenture holder has the disadvantages that the floating charge
may be postponed to a fixed charge and that it may be invalidated under section 301,
namely, that where a company is being wound up, a floating charge on the undertaking or
property of the company created within three months of the commencement of wining up
will be invalid unless the company was solvent immediately after the creation of the
charge, except as to the amount of any cash paid to the company since the creation of,
and in consideration for the charge together with interest on that amount at 5 percent per
annum.

305
Priority of charges
Where a company has created a floating charge, it cannot create another floating charge
over the same property ranking in priority or pari passu with the original charge unless
the original charge authorized it. Since the company can deal with the charges property
in the ordinary course of business, it can create a later fixed legal or equitable charge over
the floating charge unless the floating provided otherwise.

As regards competing floating charges, no problem arises, for priority will be according
to the date in the absence of a contrary provision. Where a fixed charge follows a
floating charge, the fixed charge will have priority over the floating charge unless:
(i) the fixed legal charge has notice that the charge expressly provides that eth
company shall not create a mortgage or charge having priority to ranking pari
passu with the floating charge;
(ii) a fixed equitable mortgage obtains the title deeds with notice of the same
prohibition.
In addition to the fixed assets, which may have priority over floating charges, the
following also have priority:
(i) The rights of an execution creditor where before the crystallization of the
floating charge:
(a) the goods are sold by the sheriff;
(b) the sheriff is paid off to avoid sale , or
(c) the creditor obtains a garnishee order absolute
(ii) A landlord’s distress for rent levied before crystallization of the floating
charge.
(iii) The rights of the vendor of goods under a hire-purchase agreement
(iv) Unsecured but preferential debts winding-up (s. 27).

When a floating security on the company’s assets becomes fixed, it constitutes a charge
upon all the assets then belonging to the company and has priority over any subsequence
equitable charge and other unsecured creditors.

306
Transfer of debentures
A registered debenture is transferred in the manner prescribed in the conditions indorsed
thereon. Usually, this requires that the transfer should be in writing, that it be delivered
at the registered office of the company with a specified fee such as K25 and that the
company may require evidence of title or identity. It is unlawful to transfer a debenture
unless a proper instrument of transfer has been delivered to the company.

Section 82 (1) provides that:

“every company shall, within two moths after all the allotment of its shares,
debentures or debenture stock and within two months after the date on which a
transfer of any shares, debentures or debenture stock is lodged with the company,
complete and have ready for delivery the certificate of all shares, the debentures
and the certificates of all debenture stock, allotted or transferred unless the
conditions of issue …..otherwise provide.”

Default is punishable with a fine (s. 82 (3)).

If the company refuses to register a transfer of debentures, it must within two months
after the date of lodging the transfer send to the transferee notice of the refusal (s. 80 (1)),
and if it fails to do so, it is liable to a fine (s. 80 (2)).

Since the registered debenture is a chose in action and not negotiable, it is subject to
equities so that the transferee takes subject to any claims which the company may have
against any prior holders. But as noted earlier this can be, and usually is, avoided by
express provision in the indorsed conditions. For example, the debenture may provide
that:

“if this debenture remains registered in the name of the transferor the transferee
will be recognized as having become entitled to the benefit of this debenture free from
any equities, set-off or cross-claims which, but for this provision, the company will be
entitled to set up against the transferor”.

307
A transferee is not entitled to the benefit of such a provision unless he is a registered
holder of the debenture.

Remedies of debenture holder

The following remedies are available to a debenture holder:

Recovery of principal and interest

Whether the debenture is a secured or an unsecured one, if there is default in the payment
of the principal and interest, the debenture holder may sue to recover the principal and
interest as for any other debt, and after judgment, he may levy execution.

Petition for winding-up

The debenture holder may present a petition for winding-up as a creditor of the company
if the company is unable to pay the principal and/or interest which , as a debt will be a
ground for winding up under s. 209 (e), but where a premium payable on redemption is
outstanding, this will not be a ground for winding-up petition unless the debenture so
provides.

Debenture holders’ action

Where the debenture is one of a series, one of the debenture holders may bring a
debenture holders’ action against the company on behalf of all other debenture holders of
the same class as himself. In the action, he may claim for:
(i) a declaration that the debentures are a charge on the assets of the company;
(ii) the enforcement of the trust deed if there is one;
(iii) accounts and inquires as to what there are, what prior claims exist and what is
due to the debenture holders;
(iv) enforcement of the debentures by sale or foreclosure;
(v) appointment of a receiver and manager

308
The assets realized in the action is applied to the payment of the debenture holders after
payment of costs, e.g. of the realization, of the receiver and the plaintiff. These costs and
expenses are paid in priority to the preferential creditors, but not where the creditor’s
property is comprised in a fixed charge.

Sale
The power of sale may be exercised in the following circumstances:
(i) if there is power in the debenture or trust deed. Where there is a single
debenture, it will normally contain a power of sale to be exercised by the
receiver. Even where there is no express power, the implies power of sale by
a mortgagee under section 19 of Conveyancing Act 1881 may be exercised
provided that default has been made for three moths after the requisite notice
for payment, or some interest is in arrear for two months, or there has been a
breach of some other terms of the debenture. Where there is a trust deed,
there will normally be an express power of sale. A sale of the company’s
business operates to determine the contracts of service of employees.
(ii) On the order of court following a debenture holder’s action. Where an order
is made, the sale is generally carried out under the direction of the court and
the purchase money paid into court. The court may, in special circumstances,
authorize sale out of court.

Foreclosure
Foreclosure may be claimed and granted in a debenture holder’s action. The effect of the
order is the same as for any mortgage and the foreclosure may extend to the uncalled
capital of the company. An order will not be made unless all the debenture holders of
every class are parties to the action, but the court may order sale instead of foreclosure if
it considers it just to do so.

Valuation of security and proving for balance on winding up

Where the debenture is secured, the debenture holder is in the same position as any
secured creditor of the company, and, therefore, on winding-up, he may value his security

309
and if it is insufficient, he may prove for the balance like any unsecured creditor. He may
pay his cost out of the proceeds and then pay the principal and interest up to the date of
the payment.

Appointment of receiver and manager

A receiver may be appointed by the debenture holders if there is power in the debenture
to do so, or by the court in a debenture holders’ action.

A manager may also be appointed for the purpose of carrying on the company’s business.

RECEIVERS
Appointment
As indicated above, a receiver may be appointed by the debenture holders if there is
power in the debenture to do so, and if not, by the court on application by the debenture
holders.

Appointment by debenture holders

The debenture holders may appoint a receiver if the debenture authorizes them to do so.
The debenture may, e.g. provide that:

“at any time after the principal moneys hereby secured become due or after the
security constituted by the trust deed…becomes enforceable, the registered holder
of this debenture may, from time to time, with the consent in writing of the
holders of the majority in value of the outstanding debentures of the same series,
appoint by writing any person….to be a receiver……..of the property………”

When a receiver is appointed by a debenture holder or mortgagee, in pursuance of a

power in the debenture, the appointment cannot be challenged by minority shareholders.
The receiver appointed by the debenture holders should normally be an agent of the
debenture holders, but a debenture usually provides that the receiver shall be deemed to

310
be the agent of the company, so that neither the debenture holder nor trustees will be
liable for his acts. Unless the debenture provides otherwise, the receiver is personally
liable on the contracts entered into by him in the course of the performance of his
functions but he is entitled to be indemnified out of the assets (s 337(2)). If the company
is wound up, the receiver ceases to be the agent of the company but does not thereby
become agent of the debenture holders.

A receiver or manager appointed by debenture holders may apply to the court for
directions in relation to the performance of his functions. (s. 337(1)).

Appointment by court
The court may, on application, appoint a receiver in the following circumstances:
(i) if the principal money or interest is in arrear; or
(ii) if the security is in jeopardy e.g. where a judgment creditor has levied
execution or where the company has closed down all or an important branch
of its business or if the company proposes to declare dividend from a reserve
fund thus leaving the debentures insufficiently secured or if owing to disputes
among the directors, they are unable to administer the company effectively.

Where the receiver is appointed by the court, no action can be brought against him or in
respect of the property in his hands without the leave of court and since he is an officer of
the court, any interference with him as such is a contempt of court.

The receiver appointed by court is the agent if the court and is personally liable on his
contracts. He is entitled to indemnity in priority to the debenture holder, but he must give
security for the safety of the assets in his hands.

The court may appoint a receiver to replace one appointed by the debenture holder if e.g.
the first appointment was, in the view of the court, not for the benefit of all the debenture
holder; or

311
 (iii) if the company is being wound up.

Who may be appointed receiver

Any suitable person may be appointed, but a body corporate cannot be so appointed and
if it acts as such, it is liable to a fine of K200 (334). Similarly, any person who is
insolvent cannot be appointed as a receiver unless he was appointed before October 1,
1968 (s.334). When a company is being wound up by the court, the official receiver may
be appointed receiver (s.336).

Notice of appointment
When a receiver or manager is appointed, the person who so appoints or obtains the order
for the appointment must give notice of the appointment to the Registrar (s 101(1)).
Notice must also be given when the receiver or manager ceases to act. (s. 101 (2)).
Where the receiver is appointed by the holders of debentures by a floating charge, he
must forthwith give notice to the company (s. 340 (1)).

Publication of appointment
Where a receiver or manager has been appointed, every “invoice, order for goods or
business letter issued by or on behalf of the company or the receiver or manager or the
liquidator of the company shall contain a statement that a receiver or manager has been
appointed” (s. 388 (1) and failure to do so is punishable with a fine (s.338 (2)).

Effect of the appointment of a receiver

When a receiver is appointed, the floating charges crystallize and become fixed charges
and so the company can no longer deal with the assets without consent of the receiver.

On the appointment of the receiver, the directors’ power of controlling the company
ceases and the servants are automatically dismissed but the receiver may employ them.
With regard to a receiver appointed by the debenture holders and who is an agent of the

312
company, it has been held that there is no good reason why such appointment should
determine the contract of the employees.

A receiver appointed on behalf of the company’s debenture holders is entitled to take

possession of all assets comprised in their security and his right prevails over that of a
judgment creditor who has taken goods in execution but not actually sold them.

Duties
Statement of company’s affairs
Following the notice of appointment given by the receiver to the company under section
340(1) (a), the company must within 14 days (or any longer period allowed) make out
and submit to the receiver a statement of the affairs of the company in the form specified
in section 341 (1) and verified by affidavit as required by section 341 (2)-(6).

The receiver must, within two months of receipt of the statement, send:
(i) to the Registrar, a copy of the statement and his comments thereon and also a
summary of the statement together with any comments he may make thereon;
(ii) if appointed by the court, to the court, a copy of the statement together with is
comments;
(iii) to the company, a copy of his comments, if any, and if he does not comment, a
note to that effect;
(iv) to any trustees of the debenture and to very debenture holder whose address
he is aware of, a copy of the summary of the statement of affairs (s. 340(1)
(c)).

Abstract of receipts and payments

The receiver must, within 2 months (or any longer period allowed) after the expiration 12
months from the date of his appointment and of every 12 months thereafter and within
two months after he ceases to act as a receiver or manager, send:
(i) to the Registrar;
(ii) to any trustee for the debenture holders; to the company; and

313
 (iii) to all debenture holders whose addresses he is aware of, - an abstract in the
prescribed form showing his receipts and payments during the period of 12
months or during the period from the end of the period to which the last
preceding abstract related up to the date of his ceasing and aggregate amount
of his receipts and payments during all preceding period since his
appointment(s. 340(2)). The period of two months mentioned above may be
extended by the court in the case of an appointment by the court and by the
Commissioner where the appointment was made by the debenture holders (s.
340(3)(b)).

In other cases, where a receiver or manager is appointed under the powers contained in
the debenture, the receiver or manager must, within one month after the expiration of the
period of six months from the date of his appointment, and one month after he ceases to
act as receiver or manager, deliver to the Registrar, for registration, an abstract in the
form prescribed under section 342 (1).

Preferential payments
Where a receiver is appointed on behalf of holder of debentures secured by a floating
charge, or possession is taken by or on behalf of those debenture holders of property
subject to the charge, if the company is not being wound up, the preferential debts under
a winding-up must be satisfied before any payment is made to debenture holders for their
principal and interest (s. 92 (1)). Fixed charges, on the other hand, are not subject to the
preferential debts.

Remuneration
Where a receiver is appointed by the court, his remuneration is fixed by the court and this
may be varied on an application by the liquidator or receiver (s. 339).

Where he is appointed under power in the instrument, his remuneration is fixed by

agreement, but where the company is being wound up, the remuneration may be fixed by

314
the court on application by the liquidator (s. 339 (1)) and may be varied by the court on
application by the liquidator or receiver (s.339(3)).

Mangers
We have noted above that with the appointment of a receiver, the directors’ powers of
controlling the business of the company is suspended. If therefore, it is intended to
continue the business of the company, a manager may be appointed but, in practice, the
receiver is appointed as receiver and manager. Very often, the purpose of such
appointment is t carry on the business with a view to selling it. Where he is appointed by
the court, the appointment is for a limited time, usually for three months and if he acts
beyond that period without an order of the court, his expenses will not be allowed.

Notice of the appointment of a manager must be given to the Registrar within seven days
(s. 101 (1)) and when the manager ceases to act as such, he must give notice to the
Registrar (s. 101 (2)).

If the manager, in carrying on the business of the company required to borrow money on
the security of the company’s property, the court may authorize him to do so and such a
charge will have priority over all the debentures so that the lender will have priority over
all debenture holders but not over the manager’s rights of indemnity.

The power of the court over the remuneration of managers is the same as for receivers (s.
339).

Registration of charges
All charges created by a company on its property must be registered in the company’s
register with the Registrar of Companies.

Registration in company’s own register

315
Every limited company must cause to be kept at the registered office of the company a
register of charges into which must be entered all charges specifically affecting the
property of the company and all floating charges on the undertaking or any property of
the company. The register should show:
(i) a short description of the property charged;
(ii) the amount of the charges; and
(iii) except in the bearer securities, the names of the persons entitled thereto (s.
103).
Failure to comply with this is punishable with a fine not exceeding K100.

In addition to the register of charges, every company must keep at the registered officer a
copy of every instrument creating a registrable charge (s. 102). Both the copies of the
instruments so kept and the register of charges should be open during business hours for
at least two hours a day for inspection, free of charge in the case of members and
creditor, and on payment of a fee not exceeding K10in other cases (s. 104). The
company may, however, impose such reasonable restriction on the right of inspection as
it deems fit. Refusal of inspection is punishable with a fine of K4 for every say during
which the refusal continues (s. 104 (2)) and in any case, the Federal Revenue Court may,
by order, compel an immediate inspection of the copies of or register (s. 104 (3)).

Registration of charges with registrar

What charges must be registered?
Section 94 (1) provides that where a company cerates on its property after December 7,
1922 any of the charges specified in section 94(1) (a)-(f), or after a date specified by the
Commissioner any of those specified in section 94 (2) (g)-(i), the company must, within
30 days of eh creation, deliver to the Registrar for registration certain prescribed
particulars of the charges.

The specified charges are as follows: (s. 94 (2));

(i) a charge for the purpose of securing any issue of debentures.
(ii) A charge on uncalled share capital of the company.

316
 (iii) A charge created or evidenced by an instrument which, if executed by an
individual, would require registration as a bill of sale under the (English) Bill
of Sale Act 1878 and 1882 or the Bills of Sale Law 1959 of the Western and
Mid-Western States.
(iv) A charge on land, wherever situated, or any interest therein, but not including
a rent-charge or other periodical sum issuing out of land. It has been held that
a charge order on company land obtained by a judgment creditor does not
require registration; but a lieu over the title deeds of land, for example, by a
solicitor of a company for his costs is registrable and so also is a contract for
sale of land to a company if the vendor wants to rely on his lieu for unpaid
purchase money.
(v) A charge on books debts of the company. These are debts owing to the
company and properly accounted for in its books. Such charges include a
charge upon hire-purchase agreements and a charge on future book debts, but
where, like a guarantee insurance policy, the debt will not be entered in the
books before liability is incurred or the amount ascertained, the charge is not
in respect of a book debt and therefore, not registrable. Where a negotiable
instrument has been given to secure the payment of any book debts, the
deposit of the instrument to secure an advance to the company will not be
treated as a charge on book debts (s. 94 (6)).
(vi) A floating charge on the undertaking or property of the company
(vii) A charge on calls made but not paid
(viii) A charge on a ship or any share in ship
(ix) A charge on goodwill, on a patent or a licence under a patent, on a trademark
or a copyright or a licence under a copyright.

Particulars required for registration

These are:
1. The instrument, if any, creating the charge
2. In the case of series of debentures ranking pari passu;
(i) the total amount secured by the whole series

317
 (ii) the dates of the resolutions authorizing the issue 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 (s.
94(8));
(v) Where more than one issue of debentures is made date and amount
of each issue; but an omission will not affect the validity of the
debentures issued (s. 94(8)); and
(vi) When any commission, allowance or discount has been paid for
subscribing for the debentures, the particulars as to the amount or
rate percent of the commission, discount or allowance so made (s.
94(9)).
3. In the case of other charges:
(i) the date of the creation and if the charge existed before the company
acquired the property, the date of acquisition;
(ii) the amount secured don the charge;
(iii) short particulars of the property; and
(iv) the persons entitled to the charge (s. 97(1)).

When a charge comprises property situated in Zambia but requires registration elsewhere
in Zambia other than the Company Registry, e.g. the registration of a mortgage of land at
the State Land Registry, it is sufficient if, instead of the original instrument, a true copy
of the instrument creating the charge duly certified by the secretary of the company is
delivered to or received by the Registrar of Companies for registration; and a reference in
any enactment to the date of execution of an instrument for the purpose of computing the
time within which registration elsewhere is to be effected, is to be construed as a
reference to the date of presentation of a copy of the instrument to the Registrar under the
Decree and time is computed accordingly. The Registrar may, however, require the
original for inspection (s. 94 (3)).

318
Sometimes a company registered in Zambia may create a charge on property situated
outside Zambia. If the charge is created outside Zambia, it is sufficient compliance with
section 94 (1) if a duly verified copy of the instrument is delivered to the Registrar within
30 days from the time when the instrument if dispatched by post would ordinarily have
reached the Registrar (s. 94(4)).

Where the charge is created in Zambia on property situated outside, the instrument may
be for registration notwithstanding that further proceedings may be necessary to make the
charge valid under the law of the country in which the property is situated (s. 94(5)).

Who may send particulars for registration?

It is the duty of the company to send the particulars for registration to the Registrar, but
registration may be effected on the application of any person interested therein (s. 95 (1)),
and that person is entitled to recover from the company the amount of the fees which he
properly paid for the registration (s. 95(2)). Failure to send particulars for registration is
punishable with a fine (s. 95(3)).

Charges on property acquired by the company

Where a company acquires property, which is subject to a registrable charge, the
company must cause a certified copy of the instrument together with the particulars of the
charge (as above) to be delivered to the Registrar for registration within 30 days (s. 96
(1)). If the charge is on land and is registered under some other enactment before the
land is acquired by the company, it is sufficient if a duly certified copy of the charge is
delivered to the Registrar (s. 96 (3)).

Register of charges
The Register
The register is required to keep a register with respect to each company of all registrable
charges affecting the property of the company and into which payment of the prescribed
fees are entered the specified particulars (s. 97 (1)). The register is open to inspection on
payment of a fee not exceeding K10 (s. 97 (3)).

319
Certificate
When the charge is registered, the Registrar must issue a certificate of the registration and
this is conclusive evidence of compliance with the requirements of registration (s. 97 (2))
but it is conclusive only that the requirements as to registration have been complied with
and not as to the contents of the charge.

Memorandum of satisfaction
Where the debt secured by the charge has been paid or that part of the property charge
has been released or has ceased to form part of the company’s property, the Registrar
may enter on the register a memorandum of satisfaction. (s. 99).

Rectification of register
The Federal Revenue Court may rectify an omission or misstatement of particulars of a
charge or memorandum of satisfaction if it was accidental or due to inadvertence, or
some other sufficient cause or is a nature not prejudicial to the company or creditors, or if
it is just and equitable to do so (s. 100)

Extension of time to register

The Federal Revenue Court may extend the time for registration in any of the
circumstances in which the register may be rectified (s. 100)

Effect of non-registration
Failure to register the charge as required will render void against the liquidator and any
creditor of the company (s. 94 (1)) but the obligation to pay the debts is not thereby
discharged. If a document submitted for registration as a charge contains a charge on
particular property, then once a registration certificate is issued, the charge cannot be
avoided as against the grantees for non-compliance with the requirements as to

320
registration, even if the company which submitted the documents has misstated the
charge or the Registrar considering it judicially has misunderstood it.

Furthermore, once a debenture has been registered on its creation, it need not be re-
registered on the occasion of each subsequent increase in its amount.

321
 CHAPTER 8

DIRECTORS
The management of the business of a company is entrusted to the directors. Section
203…….defines “directors” as including “any person occupying the position of director
by whatever name called.”

Section 204 provides that every company registered must have at least two directors and
other companies must have at least one director, but a company cannot have as sole
director who is also the secretary to the company, or as secretary, a corporation the sole
director of which is sole director of the company (s. 171).

Appointment(sect 206)
The appointment of directors is governed by the articles. They may be appointed e.g. in
accordance with Article 75 of Table A which provides that “the number of the directors
and names of the first directors shall be determined in writing by the subscribers of the
memorandum of association or a majority of them. “it has been held that the correct
procedure would be for the subscribers to the Articles of association to meet and for a
majority of them to sign a document at the meeting determining the number of directors
and the names of the first directors but if a meeting is not called, then all the subscribers
must sign the appointment unless the articles otherwise provides.

On the other hand, the first directors may be named in the articles, but such appointment
will not be valid in the case of a public company unless before the registration of the
articles, each of the proposed directors has signed and delivered to the Registrar a consent
to act as director; and either;
(i) signed the articles for his qualification shares if any; or
(ii) taken up the qualification shares and paid for them; or

322
 (iii) signed and delivered to the registrar an undertaking to take them from the
company and pay for them, or
(iv) signed and delivered to the Registrar a statutory declaration that the
qualification shares are registered in his name.

Similarly, if the first directors are named in the prospectus or statement in lieu of
prospectus, the proposed directors must comply with the above requirements before the
issue of the prospectus or statement in lieu of prospectus (s. 172(1)).

Subsequent appointments
These are governed by the articles, which may provide that at the first annual general
meeting of the company, all the directors shall retire from office, and the annual general
meeting in every subsequent year. One-third of the directors for the time being shall
retire. The Article may provide that the company may, at a meeting where a director
retires as above, fill the vacant office by electing a person thereto. If no appointment is
made, the retiring director, if he offers himself for re-election shall be deemed to have
been elected unless (a) someone else is elected, or (b) at such meetings, it is expressly
resolved not to fill the office, or (c) a resolution for the re-election of such director is put
to the meeting and lost. If it is desired to elect at a general meeting a person other than a
retiring director, at least three days and not more than 21 days before the meeting, a
notice in writing, signed by a member qualified to attend and vote must have been left at
the registered office of the company stating his intention to propose such a person for
election. The person being proposed must also deliver at the registered office a written
notice of willingness to be elected (Art.92).

The company in general meeting may increase or reduce the number of directors (Art.
93) and may be given power to appoint a person to replace a director removed from
office (Art. 96). On the other hand, the board of directors may be authorized to appoint
directors to fill causal vacancies or as an addition to the existing directors to make up the
maximum number prescribed and such directors will hold office only until the annual

323
general meeting when they may be re-elected by the company (Art. 94). If the directors
fail to exercise the power, the company may do so.

Sometimes, the articles may appoint a person a director for life in which case no re-
election is necessary. They may also give power to some particular person to nominate a
director. This is common with subsidiary companies and family companies.

If the articles authorize a director to assign his office to another, such assignment is not
effective unless approved by a special resolution (s. 195).

Except in the case of a private company, the appointment at a general meeting of two or
more directors must be voted on individually unless a resolution to the contrary has been
agreed without any vote against it; a resolution moved in contravention of this provision
is void (s. 174).

Persons who may not be appointed

Any person may be appointed a director and this includes a corporation, but in two cases,
certain persons are prohibited from holding the office of directors. These are:

An insolvent person

If an insolvent person acts as a director or in any way takes part in the management of a
company, he is liable to a fine of K1,000 or to imprisonment for six months to two years
or both (s. 178 (1)).

Fraudulent person

Where a person is convicted by a High Court of an offence in connection with the

promotion, formation or management of a company; or has been guilty of fraud or breach
of duty in relation to his duty to the company, the court may disqualify him for not more

324
than five years from being a director, or otherwise taking part in the management of a
company (s.179 (1)).

Qualification of directors
Although the Act does not require a share qualification for directors, the articles may do.
Article 77 provides that:

“the shareholding qualification for directors may be fixed by the company in

general meetings, and unless and until so fixed no qualification shall be required.”

Where the articles impose a share qualification, every director who is required to hold
such share qualification must do so within two months of his appointment or such shorter
period as the articles may fix (s. 173 (1)). Share warrants do not count for the purpose of
director’s share qualification (s. 173 (2)). If the director fails to acquire the number of
shares required, his office becomes vacant (s. 176 (3)) and a person vacating office in this
case cannot be re-appointed until he has obtained the qualification (s. 173 (4)). In
addition, he is liable to a fine for every day during which he acts as director after having
failed to obtain the qualification shares (s. 173 (5)). Qualification shares may be obtained
by transfer and not necessarily allotment from the company.

Limitation as to age
As a general rule, no person above the age of 70 may be appointed as director of a public
company or a private company which is a subsidiary of a public company unless the
articles otherwise provide or his appointment was made or approved by the company in
general meeting of which special notice has been given (s. 176).

A person who is appointed director for the first time at a time when he has attained the
age of retirement under the Decree or under the articles, must give notice of his age to the
company (s. 177 (2)) and if he fails to do so or acts as director when the appointment is

325
terminated or is invalid, he is liable to a fine of K10 for each day during which the default
continues (s.177 (2)).

Executive special or alternate directors

Sometimes the articles give the directors or the company power to appoint executive,
special or alternate directors. In practice, the “executive” or “special” director is an
employee of the company whose status has been raised to that of a director but who
continues essentially as such employee, e.g. a sales director. The status is usually limited
by the articles but she/he may eventually be elevated to full directorial” status. The
“alternate” director is appointed by a director to act in absence. The power must be
provided in the articles and details of the relation between the director and his “alternate”
director, the remuneration and other matters should be clearly stated. While the powers
of an “executive” or “special” director may be limited as to take them out of the
definition of “director” under section 395, an “alternate” director will be within the
definition.

Validity of acts of directors

Subject to the provisions of section 171, the act of a director, manager or secretary is
valid notwithstanding any defect that may afterwards be discovered in his appointment or
qualification but this section will not validate an invalid appointment nor will it apply
where no appointment has been made at all.

REGISTER OF DIRECTORS AND SECRETARIES

Every company must keep at its registered office a register of its directors and secretaries
(s. 191(1)) which contain the following particulars.

The directors and in the case of an individual:

(i) the present forename and surname;
(ii) any former forename and surname;
(iii) the usual residential address;
(iv) the occupation; if any;

326
 (v) particulars of any directorships held by him/her in companies other than those
of which the company is the wholly-owned subsidiary, or which are the
wholly-owned subsidiaries either of the company or another company which
the company is the wholly owned subsidiary; a company is deemed to be the
wholly-owned subsidiary of another if it has no members except that other and
that other’s wholly-owned subsidiaries and its or their nominee
(vi) in the case of a company to which section 176 applies, his date of birth (s.
191(2)(a)).

In the case of a corporation, its corporate name and registered or principal office (s. 191
(2) (b)).

The secretary (or secretaries where there are joint secretaries) and in the case of
individuals:
(i) the present forename and surname;
(ii) any former forename and surname; and
(iii) the usual residential address (s. 191(3) (a)).

In the case of a corporation, its corporate name and registered or principal office (s. 191
(3) (b)).

The company must within 14 days of the appointment of the first directors send to the
Registrar a return in the prescribed form (Form C.O.7) containing the particulars
specified in the register. It must also notify the Registrar within 14 days of any change
among its directors or of its secretary or in any particulars contained in the register (s.
191 (4) and (5)).

The register is open to inspection free to any member of the company and on payment of
a fee of not more than K10,000 to other persons (s. 191 (6)). If inspection is refused, a
fine of K10,000 may be imposed and the court may compel an immediate inspection.

327
REGISTRATION OF DIRECTOR’S SHAREHOLDINGS
Every company is required to keep a register which shows in respect of each director of
the company the number, description and amount of shares or debentures of the company
or its subsidiary or holding company or a subsidiary of the company’s holding company,
which are held by or in trust for him or of which he has a right to become the holder (s.
186 (1)). The register must also show the date of, and consideration for, any dealings
with the director’s holding.

The register is kept at the registered office of the company and is open to inspection
during business hours to members and debenture holders for a period beginning 14 days
before and ending three days after the annual general meeting, but any person acting for
the Minister of Commerce and Trade may inspect it at any time (s. 186 (5)). The register
must be produced at the commencement of the annual general meeting and remain open
and accessible during the meeting to any person attending the meeting (s. 186 (8)).

Default in complying with the section is punishable with a fine and, in addition the court
may compel an immediate inspection of the register.

PARTICULARS OF DIRECTORS IN TRADE CATALOGUE, ETC.

Every company must, in all trade catalogues, trade circulars showcards and business
letter on or in which the company’s name appears and which are issued by the company
to any person in Zambia, state in legible characters:

(i) in the case of a director which is a corporation, the corporate name; and
(ii) in the case of an individual the following particulars:
(a) the present forename, or the initials thereof, and the present surname;
(b) any former forenames and surnames;
(iii) the nationality (s. 192 (1)).

The commissioner for Trade may, however, grant an exemption from these obligations.

328
VACATION OF OFFICE
This may arise from causes such as death, appointment of liquidator, a disqualification,
resignation, retirement or removal.
Disqualification
The articles may provide that a director shall vacate the office in the event of certain
occurrences. Article 87 provides that:

“The office of a director shall be vacated if the director;

(i) ceases to be a director by virtue of sections 173 or176
(ii) becomes bankrupt or makes any arrangement or composition with his
creditors generally; or
(iii) becomes prohibited from being a director by reason of any order made
under section 179
(iv) becomes of unsound mind, or
(v) resigns the office by notice in writing to the company; or
(vi) shall for more than six months have been absent without permission of the
directors from meetings of the directors held during that period.”

In the case of absence from meetings, he/she will only be disqualified if his/her absence
was voluntary. In Re London and Northern Bank, Macks Claim, it was held that a
director who lived in Belfast and was ill and therefore unable to travel to London to
attend meetings had not vacated the office.

Where the office is vacated due to failure to obtain the qualification shares within two
months (s. 173) and, at a general meeting, a motion is tabled that he/she should be
elected, but a poll is demanded and he/she is appointed, his/her appointment dates from
the declaration of the poll and not the date of voting.

A director who is disqualified by any of the events specified in the articles automatically
ceases to hold office and the directors cannot waive it. He/she, therefore, cannot act as a
director and if he attempts to do so, he/she may be restrained by injunction. Indeed, a

329
director who acts while not entitled is liable to a dine (s. 173 (5)) and, in any case, is not
entitled to remuneration as director for the period of disqualification although he/she may
sue for any other services rendered.
Resignation
The article may provide for resignation as in Article 87 (e) of Table A. If there is no
provision, the director can resign on giving reasonable notice. Where he/she has
resigned, he/she cannot withdraw the resignation, and if the articles provide for
resignation in writing as in Article 87 (e), the company may nevertheless, in a general
meeting, accept a verbal resignation instead.

Retirement
Section …..provides that a director of accompany, subject to the section, shall vacate the
office at the conclusion of the annual general meeting commencing next after he/she
attains the age of 70 years. The Articles 88 – 92 of Table A make detailed provisions for
retirement. They provide. Inter alia, that at the first annual general meeting, all the
directors shall retire and at the annual meeting in every subsequent year, one third (to the
nearest number) shall retire and the directors to retire are those who have been longest in
office but where directors were appointed on the same day, those to retire will be decided
by lot (Art. 89). A retiring director may be re-elected (Art. 90). Where directors retire as
above, the company may at the same meeting fill the offices, but as indicated above, if a
person is so appointed, the retiring director is deemed to have been re-elected unless the
meeting resolves not to fill the vacancy or a resolution to re-elect the director has been
moved at the meeting and lost (Art. 91). No person other than a director retiring at the
meeting may be eligible for election at the general meeting unless recommended by the
directors; but he/she may become eligible if not less than three nor more than 21 days
before the date appointed for the meeting, there has been left at the registered office of
the company a written notice signed by a member qualified to attend and vote at the
meeting stating his intention to propose such person for election and also a written notice
by that person of his willingness to be elected (Art. 92).

330
Where a director’s place is not filled, he/she may continue as director until he/she retires
by rotation and this is so even if at the meeting the retiring directors are not re-elected.

Removal
A company may by ordinary resolution remove a director before the expiration of this/her
period of office notwithstanding anything in the articles or in the agreement between the
company and the director (s. 175 (1)), but this power does not extend to the removal of a
director of a private company holding office for life on the commencement of the decree
whether or not subject to an age limit under the articles or otherwise.

The procedure as to removal is as follows:

(i) a general meeting is summoned
(ii) an ordinary resolution is prepared for the purpose
(iii) special notice is given to the company of the resolution
(iv) on receipt of the notice the company will forthwith send a copy to the director
concerned who will be entitled to be heard on the resolution at the meeting (s.
175 (2)).
(v) The director may make a representation in writing to the company and request
that this be notified to members
(vi) The company will then give notice of the meeting to the members together
with notice of the resolution and of any representation made by the director.
If a copy of the representation is not sent because it is received too late or
because of the company’s default, the director may (without prejudice to
his/her right to be heard orally) require that the representations be read out at
the meeting. Any aggrieved person is entitled to apply to the court to stop the
circulation of the presentation, and if the court is satisfied that this procedure
is being abused to secure needless publicity for famatory matter, it may order
that copies of the presentation should not be sent out or read at the meeting (s.
175 (3)).

331
A special notice is also required where some other person is to be appointed in place of
the director so removed (s. 175 (2)). If the vacancy created by the removal of the director
is not filled at the meeting where he/she was removed, it may be filled as a causal
vacancy (s. 175 (4)). A person appointed to replace a removed director is to be treated
for the purpose of determining the time of retirement as director as if he/she had become
director on the day on which the person in whose place he/she is appointed was last
appointed a director (s. 175 (5)).

The removal of a director does not deprive him/her of any compensation or damages
payable to him/her in respect of the termination of his/her appointment as director, or of
any appointment, e.g. as managing director, terminating with that as director and nothing
in the section derogates from any power of removal of the director which may exist apart
from the section (s. 175 (6)). The director must however mitigate the damages as far as
possible. In Hutchful v H.K Biney, H, variously described as Managing Director and
General Manager of second defendant company was removed in purported exercise of
powers granted under the articles which authorized the Governing Director, inter alia “to
remove any director, however appointed, and at any time.” There was never an express
contract with H. as Managing Director or General Manager. It was held, following
James v Thomas H. Kent & Co. Ltd., that a contract terminable by reasonable notice will
be implied. The court distinguished Read v Astoria Garage Ltd. where the appointment
and removal of the Managing Director were made under the articles so that there was no
room for any implied term.

On appeal to the Supreme Court, it was held that while H.K Biney could, as Governing
Director, remove the appellant in accordance with Article 12(a) of the Articles of
Association of the company, he could not do so as the General Manager as he purported
to have done, for such power was ultra vires the General Manager.

POSITION OF DIRECTORS
Directors have been described as trustees and as agents. But it does not matter what they
are called for as Jessel M.R observed in Re Forest of Dean Coal Mining Co. …their true

332
position …is that they are merely commercial men managing a trading concern for the
benefit of themselves and all other shareholders in it. As directors, they are in a position
of trustees, because it is to the directors that the whole business of the company is
entrusted, all the monies paid for the business of the company.
As trustees
As trustees, they control the company’s property to be applied for the purposes specified
and in the interest of the company and the English Limitations Act has been held to apply
to them as trustees. They are trustees of their powers and must exercise them bona fida
and for the benefit of the company and not into their own interest. In Piercy v S. Mills &
Co. Lt., there were two directors and they had power to issue shares. Although the
company did not need to issue new shares, the directors issued new shares to themselves
and some of their supporters to ensure that they could control the company and thus by
their majority votes prevent the appointment of three new directors provided for in the
articles. The appointment of these new directors would have the two existing directors a
minority on the board. It was held that the allotment of shares was not in the interest of
the general body of shareholder but in the personal interest of the two directors and,
therefore, void.

Directors must observe good faith towards shareholders and “directors who use their
powers as to obtain benefit for themselves at the expense of the shareholders, without
informing them of the fact, cannot retain those benefits, and must account for them to the
company, but where the directors have acted wrongly provided the acts are not ultra
vires, the acts can be ratified by the company.

The directors are trustees for the company and not for the individual shareholders, nor for
the third parties who have contracted with the company. This rule was established in the
case of xxxxxxxxx

On the other hand directors are not strictly accountable as other trustees and it has
therefore been said that they are not quasi trustees. In Re City Equitable Fire Insurance
Co Ltd. Romer J. observed as follows:

333
 “It has sometimes been said that directors are trustees. If this means no more than
that, directors in the performance of their duties stand in a fiduciary relationship
to the company, the statement is true enough. But if the statement is meant to be
an indication by way of analogy of what those duties are, it appears to me to be
wholly misleading.”

As agents
We have seen earlier that directors may for certain reasons be described as the organ of
the company. They are also in some circumstances agents of the company by whom it
acts. When they act within the scope of their authority and on behalf of the company,
they, like other agents, incur no personal liability, but if they exceed their authority, they
may become liable for breach of warranty.

Fiduciary duties
The primary duty of directors is the management of the affairs of the company. They are
managers rather than servants of the company and owe a fiduciary duty to the company,
first, to exercise their powers bona fida for the purpose for which they are conferred and
for the benefit of the company as a whole and, secondly, not to put themselves in a
position in which their duties may conflict with their personal interests.

Exercise of power for the benefit of the company

To be in the interest of the company, the exercise of the power must be inter vires.
Where a decision of the directors is bound to benefit some members while affecting
others adversely, the directors will have to consider what is fair between the two. Even a
nominee director’s duty as director is to the company, not to the person whose nominee
he is, and an agreement between him and that person cannot absolve him from this duty.

Conflict of interests
The “director must not, without the consent of the company make any profit of his
position in the company, beyond his agreed remuneration.” In Regal (Hastings) Ltd. v

334
Gulliver, R. Ltd owned a cinema and wanted to buy two other with a view to selling the
three of them together. For this purpose they formed a subsidiary A.B Ltd to buy the two
cinemas. The directors subscribed for some of the shares in A.B Ltd so as to provide
adequate capital for the purpose. The cinemas were purchased and the shares in both R.
Ltd and A.B Ltd were sold at a profit. It was held that the directors could not retain their
profit from the shares bought by them since the shares were obtained by them through
their position as directors.

The director is precluded from dealing on behalf of the company with himself and from
entering into arrangements in which he has a personal interest conflicting, or may
conflict, with the interest of those whom he has a fiduciary duty to protect unless the
company affirms or adopts his acts, provided that such affirmation or adoption is not
brought about by unfair or improper means. If in breach of this duty he enriches himself
unjustly, he cannot keep the money, and the company may be=ring an action for
restriction to recover the amount involved.

Similarly, a director cannot, without the consent of the company, accept from a promoter
any gift either during or after the promotion.

In view of the position and duties of the directors, various rules are made to ensue that
there is no conflict of interest. These rules relate to:
(i) contract with the company,
(ii) loan tot eh director,
(iii) payment for loss of office, and
(iv) disclosure of director’s emoluments

Contract with company

The general rule is that director cannot make, or be interested in a contract with the
company unless affirmed by it, but this rule may be modified by the articles. For
example, Article 83 of Table A permits a director to be interested directly or indirectly in
a contract with the company provided he declares the nature of his interest in accordance

335
with section 190 which provides that “it shall be the duty of a director of a company who
is in any way, whether directly or indirectly, interested in a contract or proposed contract
with the company to declare the nature of his interest at a meeting of the directors of the
company” (s. 190(1)). If he is interested in a proposed contract, the declaration must be
made at the meeting of the directors at which the question of entering into the contract
was first considered, and where the director becomes interested after the contract is made,
the declaration must be made at the first meeting of the directors held after the director
becomes so interested (s. 190(2)). It is sufficient for the purpose of the section for the
director to give general notice to the directors of the company that he is a member of a
specified company or firm and is to be regarded as interest in any contract which may
subsequently be made with that company or firm, provided the notice is given at a
meeting of the directors or that reasonably necessary steps are taken to ensure that it is
brought and read at the next meeting after it is given (s. 190 (3)).

Failure to give notice of the director’s interest will make the contract voidable at the
instance of the company.

Voting by director interested in contract

The articles usually make provisions for this. For example, Article 83 (2) of Table A
provides as follows:

“A director shall not vote in respect of any contract or arrangement in which he is

interested, and if he shall do so, his vote shall not be counted, not shall he be
counted in the quorum present at the meeting, but neither of the these prohibitions
shall apply to:

(a) any arrangement for giving any director any security or

indemnity in respect of money lent by him to or obligations
undertaken by him for the benefit of the company; or
(b) any arrangement for the giving by the company of any security to
a third party in respect of debt or obligation of the company for

336
 which the director himself had assumed responsibility in whole
or in part under a guarantee or indemnity or by the deposit of a
security; or
(c) any contract by the director to subscriber for or underwrite shares
or debentures of the company; or
(d) any contract or arrangement with any company in which he is
interested only as an office of the company or as holder of shares
or other securities;
and these prohibitions may at any time be suspended or relaxed to
any extent, and wither generally or in respect of any particular
contract, arrangement or transaction, by the company in general
meeting”.

The articles may enable a director, subject to the exceptions as to auditors and secretary,
to hold another office of profit in the company in addition to that of director without the
contract of the other service being subject to the provisions of Article 83 (2) and (3). In
particular, a director may act by himself or his firm in a professional capacity (other than
that of auditor0 for the company and be entitled to remuneration for such services as if he
were a director (Art.83 (5)).

Loan to the director

A company cannot make a loan to a director of the company or a director of its holding
company, or enter into any guarantee or provide any security in connection with a loan to
such a person by any other person (s. 181) but these prohibitions do not apply to the
following:

(i) anything done by a subsidiary, where the director is its holding company; or
(ii) anything done to provide such a person with funds to meet expenses which are
incurred by him on behalf of the company or in the performance of his duties
provided that the company at a general meeting had approved the expenditure
or where such approval is not given before or at the next annual meeting, the

337
 loan is repaid (or the obligation discharged) within six months after the
meeting (181(2));
(iii) anything done in the course of its ordinary business by a company whose
ordinary business includes money lending and guaranteeing of loan.

It may be mentioned that if the loan is made in contravention of section 181, the
transactions may be illegal so that neither the borrower nor the company can sue on it,
but this is not always so.

Payment for loss of office

It is unlawful for a company to pay a director a compensation for loss of office or as
consideration for or in connection with his retirement from office, unless particulars of
the proposed payment and the amount are disclosed to members of the company and the
proposal approved by the company (s. 182). Disclosure must be to all members including
those who have no right to attend the meeting and vote while the payment is still being
proposed.

It is unlawful to pay compensation to a director for loss of office or retirement in

connection with the transfer of the whole or part of the undertaking or property of the
company unless particulars of the proposal and the amount are disclosed to members of
the company and approved by the company (s.183 (1)). Where a payment is made in
contravention of the section, the amount received by the director is deemed to have been
received in trust for the company (s. 183 (2)).

Section 184 (1) deals with payment of compensation to directors for loss of office or in
consideration of retirement where the whole or part of the shares of a company is being
transferred to any person as a result of:
(i) an offer made to the general body of shareholder; or
(ii) an offer made by or on behalf of some body corporate with a view to the
company becoming its subsidiary or a subsidiary of its holding; or

338
 (iii) an offer made by an individual with a view to his obtaining control of at least
one third of the voting power of the company; or
(iv) any other offer which is conditional on acceptance to a given extent.
In any of the cases, if any payment is to be made to a director of the company by way of
compensation for loss of office or as consideration for or in connection with his
retirement from office, the director must do all that is necessary to ensure that particulars
of the proposed payment together with the amount are included in or sent with any notice
of the offer made for their shares which is given to any shareholders.

Failure to comply with the above requirement is punishable with a fine (s. 184 (2)).
Furthermore, any money received by the director in contravention of the section is
deemed to be received by him in trust for persons who sold the shares as a result of the
offer made.
He cannot even deduct his expenses (s. 184 (3)).

The liabilities of a person deemed to hold money in trust under sections 183 (3) and 184
(3) cannot be avoided by making some other arrangements to benefit the director in lieu
of the compensation or by paying him in excess of the value of his shares in the company
(s. 185).

Disclosure of director’s emolument

In order further to ensure that directors do not abuse their position for personal advantage
as against other shareholder, section 187 (1) requires that the accounts to be laid before
the company in general meeting must show, inter alia,
(i) the aggregate amount of emoluments of the directors as required in s. 187 (2);
and
(ii) the aggregate amount of pensions of directors or past directors as required in
s. 187 (3); and
(iii) the aggregate amount of any compensation to directors or past directors for
loss of office as required in s. 187 (4)

339
These amounts must include all relevant sums paid by or received from the company, its
subsidiaries or other person unless exempted (s. 187 (5)). Where the account fails to
make the required disclosure, the auditors must in their report, as far as possible, give the
required particulars (s. 187 (8)).

Duty of care
The common law duties of care owned by a director to the company are summarized by
Romer J. in Re City Equitable Fire Insurance Co. Ltd. In that case, a company had lost
sums of money owing to the fraud of its managing director. It was sought to make the
other directors liable in negligence for leaving the managing director without any control.
After agreeing with the observation of Neville J. in Re Brazilian Rubber Plantations and
Estates Ltd. that the care which a director is required to take is “reasonable care” to be
measured by the care an ordinary man might be expected to take in the circumstances on
his own behalf, Romer J. proceeded to state three “general propositions that seem to be
warranted by the reported cases.” He said:

“(1) A director need not exhibit in the performance of his duties a greater decree of skill
than may reasonably be expected from a person of his knowledge and experience. A
director of a life insurance company, for instance, does not guarantee that he has the skill
of an actuary or of a physician. In the words of Lindley M.R.: “If directors act within
their powers, if they act with such care as is reasonably to be expected from them, having
regard to their knowledge and experience, and if they act honestly for the benefit of the
company they represent, they discharge both their equitable as well as their legal duty to
the company’ (Lagunas Nitrate Co. v Lagunas Syndicate [1899] 2 Ch. 392, at p 435). It
is perhaps only another way of stating the same proposition to say that directors are not
liable for mere errors of judgment.

(2) A director is not bound to give continuous attention to the affairs of his company. His
duties are of an intermittent nature to be performed at periodical board meetings, and at
meetings of any committee of the board upon which he happens to be placed. He is not,

340
however, bound to attend to all such meetings, although he ought to attend whenever, in
the circumstances, he is reasonably able to do so.

(3) In respect of all duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other official, a director is, in the
absence of grounds for suspicion, justified in trusting that official to perform such duties
honestly”.

He also discussed the duties of the director in signing cheques, namely, that where he
signs a cheque that comes before him in the usual practice of the company for a specific
purpose, he is not bound to ensure that the cheque is applied for the specified purpose,
but he must ensure that there is a resolution of the board authorizing the cheque and that
there is an authority for each individual cheque.

Liability for breach of duty

Where there is a breach of the duty of care, the director will be liable to the company for
any loss sustained. Action may be brought by the company to restrain him from
committing or continuing the breach, and if the breach has been committed, proceedings
may be taken for damages or compensation, for restoration of the property of the
company, if traceable, for rescission of the contract in question, or for an account of any
profits made. In addition the director may be dismissed summarily.

A director being an officer or the company (s. 395 (1)) will, however, be relieved of
liability for negligence, default or breach of duty or breach of trust if the court is satisfied
that he has acted honestly and reasonably having regard to all the circumstances of the
case (s. 388 (1)) and even if the acts were ultra vires the company, provided the director
reasonably believes them to be intra vires, but a director of a company who deals with
legal matter without seeking advice at all and prefers to deal with the matters himself
without proper consideration cannot be said to have acted reasonably.

341
Any provision whether contained in the articles or in any contract with a company for
exempting or indemnifying any officer or employee of the company from liability for
negligence, default, breach of duty or breach of trust is void (s. 196) unless such act was
done by him at a time when the provision for exemption or indemnity was in force (196
(a)).

A director is not liable for the acts of his co-directors if he has no knowledge of them nor
taken part in them. Neither is he liable for not discovering the fraud of his co-directors
where there are no circumstances to put him on inquiry, nor for the acts of the board at a
meeting which he did not attend. Where directors are held liable for a default and one of
them has paid, he is entitled to contribution from the others who were parties to it.

POWERS OF DIRECTORS

Subject to any provisions of the decree as to certain powers that must be exercised by the
company at general meetings (e.g. alteration of the memorandum and articles of
association), the power of the directors and in relation to those of the company are
regulated by the Articles. Article 80 of Table A provides that:
“The business of the company shall be managed by the directors, who….may
exercise all such powers of the company as are not, by the decree or by
regulations, required to be exercised by the company in general meeting, subject,
nevertheless, to any of these regulations, to the provisions of the decrees and to
such regulations, being not inconsistent with the aforesaid regulations or
provisions, as may be prescribed by the company in general meeting; but no
regulation made by the company in general meeting shall invalidate any prior act
of the directors which would have been valid if that regulation had not been
made.”

The effect of this article is to create a division of power so that if the directors exercise
the powers given by the articles, the general meeting cannot set it aside. If the general
meeting wishes to exercise such powers, it must alter the articles, but even this cannot be

342
done retrospectively. The directors may, of course, be removed from office. In Bamford
v Bamfor, it was held that:

“A company cannot by ordinary resolution dictate to or overrule the directors in

respect of matter entrusted to them by the articles. To do that, it is necessary to
have resolution.”
The directors may be permitted by the articles to delegate some of their powers or to
appoint a managing director to whom they may entrust any of their powers, but unless the
articles so provide, they cannot do so. They may be authorized by the articles to appoint
attorney and as we have seen earlier, the directors may be authorized to exercise all the
borrowing powers of the company subject to any restrictions as to amount as may be
imposed.

The powers of the directors cease when, on winding-up of the company, a liquidator is
appointed.

REMUNERATION OF DIRECTORS
The remuneration of directors is, as a rule, regulated by the articles, but unless the articles
so provide, they are not entitled to remuneration for services since they are not servants
of the company. “Directors have no right to be paid for their services, and cannot pay
themselves or each other, or make presents to themselves out of the company’s assets,
unless authorized so to do by the instrument which regulates the company or by the
shareholders at a properly convened meeting.” A director may, of course hold some
other position as servant of the company e.g. secretary or managing director in which
case he is entitled to salary for these services.

Article 76 of Table A provides that:

“The remuneration of the directors shall from time to time be determined by the
company in general meeting. Such remuneration shall be deemed to accrue from

343
 day to day. The directors may also be paid all traveling, hotel and other expenses
properly incurred by them in attending and returning from meetings of the
directors or any committee of the directors or general meetings of the company or
in connection with the business of the company.”

If remuneration is provided for by the company, it becomes a debt due from the company
to the directors for which the latter may sue and is payable not only out of profits but also
out of capital. A provision in the articles that directors shall receive certain remuneration
cannot be directly enforced against the company, but if the directors have accepted office
on the basis of the articles, the provision becomes binding on the company.

Where the director’s remuneration is fixed “at the rate of KX per annum, “he is entitled
to be paid a proportionate part of the year for which he had served, but if he is to be paid
“the sum KX per annum,” he is not entitled to part of a year. There is, however, a doubt
as to the validity of this proposition in that the Apportionment Act 1870 provides that all
salaries and other periodical payments in the nature of income shall accrue from day to
day and be apportioned in respect of time accordingly. This has been held to apply to
directors’ remuneration. The doubt may be removed by appropriate provisions in the
articles as in Article 76 of Table A.

Where, as in Article 107, a director is to be paid remuneration as the board of directors

may determine, and the company goes into liquidation before the board has so
determined, the director is not entitled to any remuneration. Nor are directors entitled to
preferential payments of fees in winding-up since they are not servants of the company.

Directors may by resolution forego their fees and it is binding on them and on the
company if the company is party to the agreement, but if the company is not a party, the
directors may rescind the resolution and claim their fees.

344
A company is prohibited from paying a director remuneration free from income tax
unless the contract for such payment was made before the commencement of the decree
(s. 180).

The remuneration of directors must be stated in the prospectus and disclosed in the
account laid before the company in general meeting. Similarly, any payment for loss if in
office must be approved and disclosed.
PROCEEDINGS OF DIRECTORS
As a general rule, the directors of a company must act as a board unless the articles
otherwise provide. The convening of the meeting and the procedure for holding it are
usually regulated y the articles. For example, Article 97 of Table A provides as follows:
“The directors may meet together for the dispatch of business, adjourn, and
otherwise regulate their meetings, as they think fit. Questions arising at any meeting
shall be decided by a majority of votes. In case of an equality of votes, the chairman
shall have a second or casting vote. A director may, and the secretary on the requisition
of a director shall at any time summon a meeting of the directors. It shall be necessary to
give notice of a meeting of directors to any director for the time being absent from
Zambia.”

Except above, proper notice of meeting must be given to every director and if this is not
done, the proceedings at the meeting are void.

Quorum
The quorum is usually fixed by the articles. For example, Article 98 of Table A provides
that “the quorum necessary for the transaction of the business of the directors may be
fixed by the directors, and unless so fixed shall be two.” The quorum is that number of
directors “qualified to act who must be present at a meeting to enable them to act as
board,” so that where three directors attend the meeting requiring a quorum of two but
two or them were disqualified from voting, it was held that the decision of the board at
the meeting was void. Sometimes, owing to deadlock, it may be impossible for a meeting
to be held and any purported exercise of the power of the directors by only one of them is

345
void unless the articles otherwise provide. If the number of directors is reduced below
the number fixed as the quorum, the director or directors cannot act unless the articles
otherwise provide as they do in Article 99. Where no quorum is fixed by the articles, the
number of directors who usually act will be sufficient.

Although a meeting of the board is generally required for a decision, a resolution in

writing signed by all the directors entitled to receive notice of a meeting of the directors
is as valid as if it had been passed at a board meeting duly convened and held.

In order too facilitate the work of the board, the articles may provide as in Art.101, for
the delegation of any of its powers to committees of the board whose proceedings are
regulated by the articles (Arts. 102-103).

The appointment and tenure of office of the chairman of the board is also regulated by the
articles.

The articles may validate the acts of the directors notwithstanding that it is afterwards
discovered that there was some defect in the appointment of any of them or at any of
them was disqualified as a director (Art. 104).

The decisions of the board take the form of resolutions. Section of 138 of the decree
requires minutes of the meeting of directors to be kept and these may take the form of
loose leaf book or bound book (s.383 (1)). If directors fail to keep minutes of their
deliberations in board meetings, they cannot complain of inference drawn from the
records even if this differs from what they allege to be right.

If the minutes are signed by the chairman of the meeting at which the proceedings were
held, or by the chairman of the next succeeding meeting, it will be evidence of the
proceedings (s. 138 (2)) but an unrecorded resolution if duly passed may be proved by
other evidence.

346
MANAGING DIRECTOR
As appointment of a managing director involves a delegation of the powers of the
directors, the later cannot appoint one unless the articles so provide or the company so
authorizes. The articles however, usually make provisions for such appointment. For
example, Articles 106-108 of Table A provide for the appointment, duties, powers and
remuneration of a managing director.

The managing director usually has a contract of service with the company and though his
appointment may be terminated under section 175, the company will be liable to damages
if such removal is in breach of the contract of service, and unlike other directors, he is a
servant of the company for the purpose of preferential payment of his salary in a
winding-up of the company.

The managing director is usually given very wide implied or usual powers. It has been
held that although there is no inherent distinction between the different directors as to
their duties and liabilities the chairman of the board and the managing directors may, by
the articles of association and must, by their special access to and connection with the
detailed machinery of control, be expected to be better informed than other directors on
the affairs of the company.

SECRETARY
Section 169 provides that every company have a secretary. The Secretary is usually
appointed by the directors although he may be named in the articles. Article 109
provides, for example, that:

“the secretary shall be appointed by the directors for such term, at such
remuneration and upon such conditions as they may think fit; and any secretary so
appointed may be removed by them.”

Any suitably qualified person may be appointed as secretary but a sole director cannot be
appointed (s. 169 (10)); neither can a corporation the sole director of which the sole

347
director of the company or the sole director of a corporation is the sole director of the
company.

In modern company practice, the position of the secretary has become more and more
important. His/her position was examined in Panorama Developments (Guildford) Ltd v
Fidelis Furnishing Fabrics Ltd. In that case, it was contended that the position of the
secretary still remained as stated by Lord Eshe M.R in Barnett, Hoars & Co. v South
London Tramways Co., namely, that:

“A secretary is a mere servant; his position is that he is to do what he is told, and

no person can assume that he has any authority to present anything at all…”

In his judgment, Lord Denning M.R, referred to this statement of the law and then said:

“But times have changed. A company secretary is a much more important person
nowadays than he was in 1887. He is an officer of the company with extensive
duties and responsibilities. This appears not only in modern Companies Act, but
also by the role, which he plays in the day-to day business of companies. He is no
longer a mere clerk. He regularly makes representations on behalf of the
company and enters into contracts on its behalf, which come within the day-to day
running of the company’s business. So much that he may be regarded as held out
as having authority to do things on behalf of the company. He is certainly entitled
to sign contracts connected with the administrative side of a company’s affairs,
such as employing staff, and so forth. All such matters now come within the
ostensible authority of a company’s secretary.”

In addition to his normal administrative duties, he has special duties in respect of

meetings, books and returns and these are set out below.

Before the meting

348
 (i) To summon meetings at the instance of the board of directors by issuing
notices to all those who are entitled to receive them.
(ii) To prepare the agenda in consultation with the chairman
(iii) To provide the chairman with particulars for, or prepare the outline of, any
speech which he is to deliver
(iv) To get together all reports, documents and correspondence which are likely to
be needed at the meeting and to arrange them in the order of business as
disclosed by the agenda. These may include:
(a) correspondence,
(b) reports
(c) copies of memorandum and articles
(d) the register of members
(e) all proxies lodged and the list of such proxies
(f) the minutes book,
(g) register of directors’ shares, and debenture holdings,
(h) Copies of the accounts laid before the annual general meetings together
with all annexed reports, say, for the previous three years.

At the meeting
(i) to attend in good time and ensure that adequate arrangements are made for
the meeting
(ii) to bring the documents in (iv) above
(iii) when the meeting is declared open, to read the notice convening the
meeting
(iv) to take notes at the meeting. Exact wording of resolutions should be
taken down and confirmed, if necessary
(v) to assist the chairman as and when necessary

After the meeting

(i) to write up the minutes

349
 (ii) to carry out any instructions given by the meeting, e.g. writing letters,
dispatching reports, registering transfers, delivering certificates, etc
(iii) to file any necessary returns, e.g. special extraordinary resolutions, annual
list, and return of allotments
(iv) to send a copy of the minutes to every member or other persons entitled.

Books
To ensure the proper keeping of the statutory and other books of the company, e.g.
register and index of members, register of directors and secretaries, register of charges
and account books.

Returns
To file all necessary returns with the Registrar.
Where a thing is required or authorized to be done by or to the secretary and the office is
vacant, or there is no secretary to do it, the thing may be done by or to any assistant or
deputy secretary or in the absence of these by or to any officer authorized by the
company (s. 169 (2)). But if a thing is to be done by or to a director and the secretary, it
is not satisfied if it is done by or to the same person acting both and as, or in the place of,
the secretary (s. 170).

The secretary is an officer of the company (s. 395) and his position is the same as that of
a director in respect of loans made to him by the company (s. 181), provision in articles
for relief or indemnity from liability (Art. 110), relief from liability by the court under
section 388 and the contents of the register of directors and secretaries (s. 191).

His removal is subject to his contract of service and the general principles of law in
respect of servants but the appointment of a receiver and manager and the making of an
order for winding-up of the company or the commencement of a voluntary winding-up
will terminate his appointment as of other servants.

MEETINGS OF THE COMPANY

350
The procedure of the meeting of the company depends on the type of meeting being held.
It may be a meeting of all the shareholders or of a class of shareholders. Some meetings
are mandatory while others are left to the discretion of the company and they may be
regulated by the decree or the articles or both.
There are three types of general meetings, namely, the statutory meetings, annual general
meetings and extraordinary general meetings.

STATUTORY MEETING
Every public company limited by shares or by guarantee and having a share capital must
hold a statutory meeting (s. 122 (1)). This must be held within a period of not less than
one month or more than three months from the date at which the company is entitled to
commence business. The purpose of the meeting is to give members an opportunity of
having a first progress report from the directors and promoters. Failure to hold the
meeting is a ground for winding-up (s. 209 (b)).

The directors must at least 14 days before the meeting (or any shorter period agreed by all
the members entitled to attend and vote), forward a report called the “statutory report” to
every member (s. 122 (2)). The report must state the following:

(i) the total number of shares allotted, the extent to which they are fully or partly
paid up in cash and the consideration for which they are allotted;
(ii) the total amount of cash received by the company in respect of all the shares
allotted;
(iii) an abstract of the receipts and payments of the company, the balance in hand, and
the estimated amount of the preliminary expenses;
(iv) the names, address and descriptions of the directors, auditors and managers, if
any and secretary of the company;
(v) the particulars of any contract the modification of which is to be submitted to
the meeting for its approval, together with the particulars of the modification
or proposed modification (s 12 (3)).

351
The report must be certified by at least two directors and the number of shares allotted,
the cash received in respect of such shares and the receipts and payments of the company
on capital account must be certified by the auditors, if any (s. 122 (4)).

A copy of the statutory report must be delivered to the Registrar for registration after
copies have been sent to members. Failure to deliver the report to the registrar may be
ground for winding-up the company (s. 209 (b)).

At the commencement of the meeting, a list showing the names, descriptions and
addresses of members of eth company, and the number of shares held by them
respectively must be produced and remain open and accessible to all members throughout
the duration of the meeting (s. 122 (6)).

The members present may discuss any matters relating to the formation of the company
or arising from the statutory report but no resolution of which due notice has not been
given may be passed (s. 122 (7)).

Failure to comply with the provisions of section 122 is punishable with a fine (s. 123).

ANNUAL GENERAL MEETING

The company’s annual general meeting must be held in each year and not more than 15
months should elapse between the date of one annual general meeting and the next; but if
a company holds its first annual general meeting within 18 months of its incorporation, it
need not hold it in the year of its incorporation or in the following year (s. 124)). Thus, if
a company was incorporated on September 1 1972, it may hold its first annual general
meeting in February 1974,

The meeting is called by the directors and the business to be transacted is regulated by
both the decree and the articles. The business includes:

352
 (i) the appointment of auditors (s. 152) and fixing of their remuneration (Art.
52).
(ii) in the declaration of a dividend, if any (Art. 52);
(iii) the consideration of the accounts, balance sheets and the reports of the
directors and auditors (Art. 52);
(iv) the election of directors in place of those retiring (Art. 52).
(vi) special business, that is, any other business (Art. 52)

If default is made in holding the annual general meeting, the Registrar may, on the
application of any member, call, or direct the calling of, a general meeting and give such
directions as he thinks fit including direction that one member of the company present in
person or by proxy shall be deemed to constitute a meeting (s. 124 (2) and (3)).

Failure to hold the annual general meeting in accordance with section 124 (1) or to carry
out the directions to hold one under section 124 (2) is punishable with a fine (s. 124 (5)).

EXTRAORDINARY GENERAL MEETING

Any general meeting other than an annual general meeting is an extraordinary general
meeting (Art. 48). Such meetings are usually convened by the directors (see Art. 49) to
deal with urgent matters, which cannot await the next general meeting.

Section 125 provides that notwithstanding anything its articles, the directors of the
company must, on requisition, convene a meeting. The requisition is to be made as
follows:

(i) in the case of a company having a share capital, by members holding not less
than one-tenth of the paid up capital carrying voting rights at general meeting;
or

353
 (ii) in the case of a company having no share capital, by members representing
not less than one-tenth of the total voting rights of all members having a right
to vote at general meetings.

The requisition must state the object of the meeting and be signed by the requisitionists
and deposited at the registered office of the company. If the directors do not within 21
days of the deposit of the requisition call the meeting, the requisitonists, or any of them
representing more than one half of the total voting rights of all of them may, themselves,
convene a meting which must be held within three months. Any reasonable expenses
incurred by the requisitionists in convening the meeting shall be paid by the company and
deduced from any remuneration due to any of the directors in default (s. 125 (3) and (5)).

Furthermore, unless the articles otherwise provide, any two or more members of the
company holding not less than one-tenth of the issued share capital, or if the company has
no share capital, not less than five percent in number of members of the company, may
call a meeting (s. 127 (b)).

Finally, where it is impracticable, for any reason, to call or conduct a meeting of the
company, the court may, on its own motion, or on application of a director or a person
entitled to vote at such meeting, order a meeting to be called, held and conducted as the
court may direct, and the court may give such ancillary or consequential directions as it
deems fit, including the direction that one member of the company present in person or
by proxy shall be deemed to constitute a meting (s. 128). In Re El Sombrero Ltd., two
out of three members of a company whose quorum is two deliberately refused to attend
the meeting. The third member gave special notice of his intention to move an ordinary
resolution to remove the directors at the next extraordinary meeting. He then applied to
the court to call a meeting under section 135 of the English Companies Act 1948 and
direct that one member should form a quorum. It was held that in the circumstance, the
application should be granted. The ancillary and consequential directions are, however,
confined to those that will enable the meeting to be held. For example, in Paul Iro v
Robert Park & Ors. the first respondent, a director and shareholder of a company, applied

354
under section 128 for an order empowering the applicant to call, hold and conduct a
meeting of the company and for ancillary and consequential directions empowering him
to direct, manager and run the affairs of the company, to appoint additional directors and
to appoint auditors. It was alleged that the first respondent and the appellant were the
founders and only directors and shareholders of the company but this was contradicted by
the affidavit of the 3rd-6th respondents. It was further alleged that the appellant absconded
with company money and it had been impossible to get in touch with him owing to the
civil war, that meetings could not be held, and that the business of the company could not
be effectively run. The trial court made the order sought but, on appeal, the Supreme
Court held:

(i) that while section 128 empowers the court to make an order for the holding of
the meeting, it requires that ancillary and consequential directors be given to
enable the meeting to be held
(ii) that the consequential orders made were ultra vires the court and invalid in
that they are matters for the meeting to consider, and
(iii) that the company ought to have been joined in the application

MEETINGS OF THE CLASSES OF SHAREHOLDERS

The meetings of classes of shareholders are regulated by the articles. Article 4 of Table
A provides for the holding of a general meeting of holders of a class of shares for the
purpose of varying the rights attached to the class of shares. The regulations of the
company as to is general meetings apply to class meetings, but the quorum is two
persons, at least, holding one third of the issued shares of the class. If all the shares in the
class are held by one person, he is entitled to do what a meeting of that class could do
under the articles.

NOTICE OF THE GENERAL MEETINGS

355
Proper notice of every general meeting must be given to members unless the articles
otherwise provide. Such notice must contain the requisite information. Sufficient time
must be allowed and the notice must be properly served.

Nature of notice

This I usually regulated by the articles. For example, Article 50 of Table A provides that
it “shall specify the place, the day and hour of meeting and, in case of special business,
the general nature of that business…..”

All business transacted at an extraordinary meting is special business (Art. 52). With
regard to the annual general meeting, the declaration of a dividend, the consideration of
the accounts, balance sheets and the reports of the directors and auditors, the election of
directors in the place of those retiring and the appointment and the fixing of the
remuneration of the auditors are all ordinary business. Any other business is special
business. The notice convening a meeting at which any special business. The notice
convening a meeting at which any special business is to be transacted must state the
nature thereof, otherwise the notice is irregular and the special business cannot be dealt
with. For example, in Baillie v Oriental Telephone Co. Ltd., it was held that notice of a
resolution at an extraordinary general meeting authorizing a director to retain certain
remuneration without specifying the amount was insufficient.

The notice of a special resolution or of an extraordinary resolution must specify the

intention to propose the resolution as a special resolution (s. 134 (2)) or an extraordinary
resolution (. 134 (1)) as the case may be.

Every notice calling of a company having a share capital must contain a reasonable
prominent statement that a member entitled to attend and vote is entitled to appoint a
proxy or, where allowed, one or more proxies to attend and vote instead of him, and that
a proxy need not also be a member.

356
Length of notice

Section 126 provides that notwithstanding any provisions in its articles, a company
cannot call a meeting (other than an adjourned meeting) by a shorter notice than the
following:
(i) for an annual meeting and a }
meeting for passing a special resolution }21 days

for a meeting other than a general }(a) in the case of a limited company
meeting }– 14 days;
or a meeting for the passing of a }(b) in the case of an unlimited
special resolution } company – 7 days

The notice is exclusive of the day on which it is served and of the day for which it is
given (Art. 50). A meeting called by a notice shorter than that required under section 127
or the articles may, however, be deemed to be duly called if its is so agreed:

(i) in the case of the annual meting, by all the members entitled to attend and vote
there, and
(ii) in the case of other meetings, by a majority in number of the members holding
not less than 95 percent in nominal value of the shares giving a right to attend
the meeting and to vote (s. 126 (3) and s. 134 (2)).

At common law, if all the members agree, a decision may be taken even though no
formal meeting is held. Thus in Parker and Cooper Ltd v Reading, it was held that there
is nothing in the authorities “to prevent all cooperators from arranging to carry out an

357
honest intra vires transaction entered into for the benefit of the company, even if they do
not meet together in one room or place, but all of them merely discuss and agree to it one
with another separately…..”

It is now usual for the articles of a private company to provide as in table A, Part II,
Articles 5 that:

“Subject to the provisions of the Decree, a resolution in writing signed by all the
members for the time being entitled to receive notice of and to attend and vote at
general meetings…shall be as valid and effective as if the same had been passed
at a general meeting of the company duly convened and held.”

The reference to the provisions of the decree is to section 134 (1) and (2) which requires
a special resolution and an extraordinary resolution to be passed “at a general meeting.”

Service of notice

Section 127 (a) provides that in so far as the articles of a company do not make
provisions for service of notice, notice of the meeting should be served on every member
in the manner in which notices are required to be served by Table A. The relevant
Articles of Table A are 130-133, which are as follows:

130. A notice may be given by the company to any member either personally or by
sending it by post to him or to his registered address, or (if he has no registered
address within Zambia) to the address, if any, within Zambia supplied by him to
the company for the giving of notice is sent by post, service of the notice shall be
deemed to be effected by properly addressing, prepaying, and posting a letter
containing the notice, and to have been effected in the case of a notice of a meeting
at the expiration of 24 hours after the letter containing the same is posted, and in
any other case at the time at which the letter would be delivered in the ordinary
course of post.

358
131. A notice may be given by the company to the joint holders of a share by giving
the notice to the joint holder first named in the register of members in respect of
the share.
132. A notice may be given by the company to the persons entitled to a share in
consequence of the death or bankruptcy of a member by sending it through the
post in a prepaid letter addressed to them by name, or by the title of representatives
of the deceased, or trustee of the bankrupt, or by any like description, at the
address, if any, within Zambia supplied for the purpose by the person claiming to
be so entitled, or (until such an address has been so supplied) by giving the notice
in any manner in which the same might have been given if the death or bankruptcy
had not occurred.

133. (1) Notice of every meeting shall be given in any manner hereinbefore
authorized to :
(a) every member except those members who (having no registered address
within Zambia) have not supplied to the company an address within
Zambia for the giving of notice to them;
(b) every person upon whom the ownership of a share devolves by reason of
his being a legal personal representative or a trustee in bankruptcy of a
member where the member but for his death or bankruptcy would be
entitled to receive notice of the meeting; and
(c) the auditor for the time being of the company.
(2) No other person shall be entitled to receive notices of general meetings.

Failure to give notice of a general meeting to every person entitled will render any
resolution passed void unless it is saved by the articles; for example, Article 51 provides
that “the accidental omission to give notice of a meeting to, or the non-receipt of notice
of a meeting by, any person entitled to receive notice shall not invalidate the proceedings
at that meeting.” This, however, does not apply where no notice has been sent to a
particular member and unless the omission is accidental the provision of the Article will

359
not avail the company. For example, in Ososanya v J.A O. Obadeyi, it was held that
where notice of a meeting was published in the Gazette as required by law, a member
cannot be heard to complain that he was not aware of it taking place; and if at the meeting
held pursuant to such notice decisions are taken which affect or are likely to affect the
absent person’s interest, the fact that he was not aware that such a matter would be
discussed at the meeting will not in itself afford him ground for complaint.

CIRCULATION OF MEMBERS’ RESOLUTIONS AND STATEMENTS

Section 133 enables members to have their resolutions or statements circulated to other
members through the machinery of the company.
The section provides that:

(i) any number of members representing not less than on-twentieth of the total voting
rights of all members then entitled to vote, or
(iii) any number of members not less than one hundred holding shares on which
there has been average of, at least K200 per member,

may request the company to circulate their resolution or other statements. If such
members, by written requisition, require the company to do so, it must:

(i) give notice of such resolution to every member entitled to receive notice of
the annual general meeting provided the resolution is one which may properly
be moved and intended to be moved at that meeting, and
(ii) circulate to every member entitled to receive such notice any statement of not
more than 1,000 words relating to any proposed resolution or the business to
be dealt with at the meeting (s. 133 (1) and (2)).

The notice and statements are served on members in the manner in which notices of
meetings are served by the company an should be served by the company and should be

360
served with the notice of the meeting if this is practicable, but if not, as soon as
practicable thereafter (s. 133 (3)).

The requisition must be signed by the requsitionists and deposited at the registered office
of the company not less than six weeks before the meeting where the requisition requires
notice of a resolution and one week in other cases. The requisitionists must also tender
with the requisition a sum reasonably sufficient to meet the company’s expenses on the
circulation of the resolutions and statements (s. 133 (4)). The company is, however, not
bound to circulate the statement if, no application of the company or other aggrieved
person, the court is satisfied that the rights are being abused to secure needless publicity
for defamatory matter (s, 133 (5)).

Sometimes, the directors have a new project to put before the meeting and in addition the
notice of meeting; they send a circular explaining the project. Members who oppose such
projects may have an opportunity under section 133 to put across their own case in the
form of counter circulars.

The circulars of the board must not misrepresent the fact or mislead the members,
otherwise a resolution passed as a result of such circulars may be set aside.

RESOLUTIONS REQUIRING SPECIAL NOTICE

In certain cases, the decree requires special notice of a resolution. These are:
(i) Resolution for the appointment, as auditor, of a person other than a retiring
auditor or providing expressly that a retiring auditor shall not be reappointed
(s. 153);
(ii) Resolution for the removal of a director before the expiration of his period of
office, or to appoint some other person instead of the director so removed (s.
175); and

361
 (iii) Resolution for appointing or approving the appointment of a director who has
attained the age of 70 (s. 176).

Such a resolution will not be effective unless:

(a) notice of the intention to move it has been given to the company not less
than 28 days before the meeting at which it is moved; and
(b) the company has given notice of its members in the manner, and at the
time of giving them notice of the meeting; or if that is not practicable, the
company has given them notice by newspaper advertisement not less than
21 days before the meeting (s. 135).
(c)
If a meeting is called after the notice has been given to the company for a date 28 days or
less after the notice will be deemed to have been properly given.

PROCEEDINGS AT MEETINGS

All members of a company who hold shares carrying voting rights are entitled to attend
and vote at the meeting of the company. Where a company is a member of another, the
former may authorize some person to represent it at the meeting of the latter (s. 132) and
such representative is not a proxy but in the position of a member.

The proceedings are largely regulated by the Decree and the articles and the details of the
conduct of the meeting are decided by the meeting itself under the direction of the
chairman.

Quorum

362
The quorum is the minimum number of persons that must be present at a meeting before
business can be transacted (Art. 53). This is generally fixed by the Articles. For
example, Article 53 of table A requires three members for a quorum in a public company
and Table A Part II Article 4 requires two members for a private company. Where the
articles do not make any provisions, two members in a private company and three in the
case of a public company will form a quorum (s. 127 (c)). It is sufficient if the quorum is
present a the beginning of the meeting even if it does not continue to the end but if the
number is thereby reduced to one, there will be no meeting since one person cannot in
normal circumstances constitute a meeting. In exceptional circumstances, however, one
person may constitute a meeting as where he holds all the shares in his class or where the
Registrar (s. 124 (2)) or the court (s. 128) directs that a meeting be held by one person.

The quorum of members must be personally present unless the articles provided that they
may be present or by proxy. A person may be present at the meeting as two persons for
the purpose of a quorum. Thus he can be present as a shareholder and also as a trustee of
some shares, which give him the right to vote. Article 54 provides that:

“If within half an hour the time appointed for the meeting, a quorum is not
present, the meeting, if convened upon requisition of members shall be dissolved;
but in any other case it shall stand adjourned to the same day in the next week, at
the same time and place, or to such other day and such other time and place as the
directors may determine, and if at the adjourned meeting, a quorum is not present
within half an hour from the time appointed for the meeting, the members present
shall be a quorum.”

Chairman

The articles usually stipulate who is to be chairman. Articles 55 and 56 provide that the
chairman, if any, of the board of directors shall preside as chairman and if there is none,
or he is not present within 15 minutes of the meeting, or is unwilling to act, the directors
present may elect one of their number as chairman, and failing this, the members present

363
may choose one of their members to be chairman. Where the articles do not make
provision, the members present may elect any member as a chairman (s. 127 (d)). The
duty of the chairman is to ensure the orderly and proper conduct of the meeting. It is an
important and difficult position requiring greater tact and firmness, and a fair sense of
judgment. He must be quite familiar with the regulations of the company and ensure that
legal advice is readily available to him at the meeting. He cannot adjourn a meeting at
will unless there is disorder. If he improperly adjourns the meeting, the members may
elect another chairman and carry on with the business. Articles may provide for
situations in which he may adjourn a meeting, but unless the articles so provide, he is not
bound to adjourn the meeting even if the majority so wish.

364
CHAPTER 9

DIRECTORS AND SECRETARY

Directors

The management of the business of a company is entrusted to the directors. Section 2

read with section 203 of the Act defines directors as a person appointed by the company
to direct and administer the business of the company, whether or not he is called a
director and “directors” means the directors acting collectively as their decisions have to
be by resolution; and where a document is required to be signed by directors, the majority
may sign it.
Any person who holds himself or herself out, or knowingly allows himself or herself o
be held out as a director of the company, though not appointed director, shall be deemed
to be a director and shall be liable both civilly and criminally for acts and omissions of
duty. The Act provides that:

203. (1) For the purposes of this Act, any person who is appointed by the members of a
company to direct and administer the business of the company shall be deemed to be a
director of the company, whether or not he is called a director. The directors of a
company
(2) In this Act, unless the context otherwise requires-
(a) a reference to "the directors" is a reference to the directors acting
collectively;
(b) where a decision of the directors is required for them so to act, the
decision shall be made by resolution of the directors;
(c) a requirement that a document be signed by the directors shall be read as
a requirement that a majority of the directors sign the document.

365
 (3) A person, not being a duly appointed director of the company, who holds himself out,
or knowingly allows himself to be held out, as a director of the company-
(a) shall be deemed to be a director for the purposes of all duties and
liabilities (including liabilities for criminal penalties) imposed on
directors by this Act; and
(b) shall be guilty of an offence, and shall be liable on conviction to a fine
not exceeding five hundred monetary units.
(4) A person, not being a duly appointed director of a company, on whose directions or
instructions the duly appointed directors are accustomed to act shall be deemed to be a
director for the purposes of all duties and liabilities (including liabilities for criminal
penalties) imposed on directors by this Act.
(5) If a company-
(a) holds out a person; or
(b) allows a person to hold himself out;
as a director of the company, knowing that the person is not a duly
appointed director, the company shall be guilty of an offence, and shall
be liable on conviction to a fine not exceeding five hundred monetary
units.
(6) No limitation upon the authority of a director of a company, whether imposed by the
articles or otherwise, shall be effective against a person who does not have knowledge of
the limitation unless, taking into account his relationship with the company, he ought to
have had such knowledge.
(7) For the purposes of this section, a person shall not be considered to be a person in
accordance with whose directions or instructions the directors of a company are
accustomed to act, by reason only that the directors of the company act on advice given
by him in a professional capacity.

Every company shall have at least two directors, and if it carries on business for more
than two months with only one director; the company and each officer in default, shall be
guilty of an offence, and shall be liable on conviction to a fine not exceeding ten
monetary units for every day that it carries on business with only one director.

A company may however escape liability under this provision as any officer who is held
out as director without necessarily being appointed as such shall be deemed to be

366
director, and shall be liable only for wrongful acts or omissions while performing duties
in the business of the company219.

The Act requires every company to have a secretary220. It provides that:

205. (1) A company shall have a secretary.
(2) The persons named in the application for incorporation as the first secretary or joint
secretaries of a company shall, on the incorporation of the company, be deemed to have
been appointed as such for a term of one year.
(3) Unless the articles provide otherwise, the secretary, other than the first secretary,
shall be appointed by the directors for such a term as they think fit.
(4) A secretary shall be appointed on such remuneration and other conditions as the
directors think fit, and may be removed by them, subject to his right to claim damages
from the company if removed in breach of contract.
(5) The secretary may be a body corporate.
(6) Two or more persons may act jointly as the secretary of a company.
(7) The secretary of a company shall be-
(a) resident in Zambia, if an individual;
(b) incorporated in Zambia, if a body corporate.
(8) Anything required or authorised to be done by or to the secretary may, if the office is
vacant or there is for any other reason no secretary capable of acting, be done by or to
any assistant or deputy secretary or, if there is no assistant or deputy secretary capable of
acting, by or to any officer of the company authorised generally or specially for that
purpose by the directors.
(9) If a company carries on business for more than two months without a secretary or in
contravention of subsection (7), the company, and each officer in default, shall be guilty
of an offence, and shall be liable on conviction to a fine not exceeding ten monetary units
for each day after that period of two months that the business is carried on.

Tet and Chadwick221 in their book Company Law in Zimbabwe refer to authorities on the
term director and conclude that there is no magic in the term. They quote Gower’s
Company Law (with suitable adaptation) to read:
219
Section 204
220
Section 205
221
Company Law in Zimbabwe, 2nd edition page 107

367
 “The terms ‘director’ or ‘managing director’ are not terms of law but of business,
usefully summing up a number of operations and functions familiar to the
commercial world by which a company is generally managed.”

A new term has recently come in to describe position of a director with respect to the
functions he or she performs in the company, and that term is Chief Executive. It is
similarly not a legal term but one which describes the position of its holder in commercial
circles, and greater weight is attached to the acts taken or decisions made by the title
holder than by other directors. Jessel M.R. said various directors positions in Re Forest
of Dean Coal Mining Company222 that:

“….it does not matter much what you call them so long as you understand what
their true position is, which is that they are really commercial men managing a
trading concern for the benefit of themselves and all other share holders in it.”

And where there is a decision to be made by directors, and through a resolution, it

matters, even less whether one is director, managing director or Chief Executive.

Secretary
Similarly important in the management of the business of a company is the position of
secretary. Every company must have one, and this could be an individual or a body
corporate, that is a company or corporation.

The position of secretary must be occupies by a Zambian, who resides in Zambia, and
may be occupies by two or more persons who act jointly as the secretary of the company.
A company which operates for more than two months without a secretary commits a
crime and each officer in default shall be liable on conviction to a fine not exceeding ten
monetary units for each day that business is carried on.

205. (1) A company shall have a secretary.

222
(1878) 10 ch 450, 452. see Tet and Chadwick opcit, at page 107

368
 (2) The persons named in the application for incorporation as the first secretary or joint
secretaries of a company shall, on the incorporation of the company, be deemed to have
been appointed as such for a term of one year.
(3) Unless the articles provide otherwise, the secretary, other than the first secretary,
shall be appointed by the directors for such a term as they think fit.
(4) A secretary shall be appointed on such remuneration and other conditions as the
directors think fit, and may be removed by them, subject to his right to claim damages
from the company if removed in breach of contract.
(5) The secretary may be a body corporate.
(6) Two or more persons may act jointly as the secretary of a company.
(7) The secretary of a company shall be-
(a) resident in Zambia, if an individual;
(b) incorporated in Zambia, if a body corporate.
(8) Anything required or authorised to be done by or to the secretary may, if the office is
vacant or there is for any other reason no secretary capable of acting, be done by or to
any assistant or deputy secretary or, if there is no assistant or deputy secretary capable of
acting, by or to any officer of the company authorised generally or specially for that
purpose by the directors.
(9) If a company carries on business for more than two months without a secretary or in
contravention of subsection (7), the company, and each officer in default, shall be guilty
of an offence, and shall be liable on conviction to a fine not exceeding ten monetary units
for each day after that period of two months that the business is carried on.

Appointment of Directors
The first directors of the company are those named in the application for incorporation 223,
and shall be deemed to have been appointed by the company upon its incorporation.224
Their term of office is valid for one year or up to the first annual general meeting,
therefore the company may decide by resolution 225. The company shall also devise a
rotation system of retirement of directors from office 226 where by those who have served
longest retire first. While the Act requires a minimum of two directors, a company may
223
Section 206 (1)
224
Section 206 (2)
225
ibid
226
Section 206 (4)

369
increase this number to suit its operations 227. It also has authority to reduce the number of
directors.228

The Act further provides that at all annual general meetings held by the company, other
than the first annual general meetings, one third of directors shall retire, 229
starting with
those who have served longest230. A person to fill the position of a retiring director may
be appointed by ordinary resolution.231 A retiring officer is eligible for reappointment.232
There is no restriction as to the number of such reappointment. One could therefore
‘remain’ in office for a long time, particularly one who is a founder or has the most
investment in the company. All matters absent directors appointments other than those
relating to the first directors, are to be regulated by the Act unless the articles provide
otherwise.233

If a director is not appointed to replace a retiring director, and the retiring director offers
himself for re-appointment and qualifies for re-appointment, the retiring director shall be
deemed to have been re-appointed unless it is expressly resolved that the position shall
not be filled in order to decrease the number of directors; or a resolution for re-
appointment is put and lost234.

The Act also provides for appointment of a director at any other time should there be
fewer directors than are provided for in accordance with the Act. 235 The person so
appointed shall remain in office until the next annual general meeting, but shall not be
taken into account in determining the number of directors to retire. 236 At that annual
general meeting, the person shall be eligible for re-appointment. 237 Where a director’s
office becomes vacant otherwise than by the one third retirement scheme provided in

227
Section 206 (4)
228
ibid
229
Section 206 (5)
230
Section 206 (6)
231
Section 206 (7)
232
Section 206 (8)
233
Section 206 (3)
234
Section 206 (9)
235
Section 206 (10)
236
Section 206 (11)
237
Section 206 (12)

370
section 206 (5), the company may be ordinary resolution, appoint a replacement who
shall retire on the day on which the person replaced would have retired.238

Remuneration of Directors
Directors have a right to be remunerated for performing their duties as managers of the
company and of carrying the burden and responsibility of running the company. The
remuneration is determined by the company by ordinary resolution. 239 The remuneration
shall accrue from day to day.240 Moreover, the company may by ordinary resolution pay
traveling allowances, sitting allowances, and other expenses properly incurred by them in
the course of or in connection with the business of the company.241

Qualifications for appointment as Director

The Companies Act provides for the qualifications in a negative form. A person shall
not qualify for appointment, continue to holder the office of director if the person is242
(a) a body corporate
(b) an infant* or any other person under legal disability
(c) removed or restrained by court order on account of misconduct 243
(d) an undischarged bankrupt or adjudged bankrupt

It is criminal to contravene this provision and upon conviction the erring officer or
director shall be liable to a fine not exceeding five hundred monetary units or to
imprisonment for up to six months, or to both. 244 The contravention does not, however,
invalidate any transaction entered into by the company. 245 The person appointed as

238
Section 206 (13)
239
Section 206 (14)
240
Section 206 (15)
241
Section 206 (16)
242
Section 207 (1) and (2)
*18
243
e.g. upon conviction of an indictable offence in connection with formation, promotion or management or
a company; fraud; persistent breach of company legislation; or conduct that makes the person unfit to be
concerned in the management of a company. See Charlesworth & Morse Company Law 16the edition - G.
Morse, Sweet & Maxwell.
244
Section 207 (3)
245
Section 207 (6)

371
director must consent in writing.246 The articles of a company may contain additional
restrictions or qualifications regarding eligibility to be appointed director.

Several important aspects arise from the provision. They are intended to put or keep in
office only reputable individuals with a clean record. Another company may not
therefore be a director. Minors, people with mental disabilities and other legal disability
have in law, no capacity to enter into binding contracts or to be responsible for their
actions. They cannot be held liable for their acts and omissions on account thereof. They
have no capacity to be committed to their duties of utmost good faith and trust. Other
jurisdictions require that a person should own shares in the company in order to qualify
for appointment as director. The purpose is to ensure that they avoid transactions which
would put their own money at risk. The eligible people therefore are those who have
taken or within two months of appointment take ‘qualification shares’247

65. (1) Without prejudice to the restrictions imposed by section sixty-three, it shall be the
duty of every director who is by regulations of the company required to hold a specified
share qualification, and who is not already qualified to obtain his qualification within two
months after his appointment, or such shorter time as may be fixed by the regulations of
the company.
(2) The office of director of a company shall be vacated if the director does not within
two months from date of his appointment, or within such shorter time as may be fixed by
the regulations of the company obtain his qualification, or if after the expiration of such
period or shorter time he ceases at anytime to hold his qualification, and a person
vacating office under this section shall be incapable of being reappointed director of the
company until he has obtained his qualification.
(3) if after the expiration of the said period or shorter time any unqualified person acts as
a director of the company; he shall be liable to a fine not exceeding ten kwacha for every
day between the expiration of the said period or shorter time and the last day on which it
is provided that he acted as a director.

246
Section 207 (5)
247
Section 65 of the former Companies Act, Cap 686

372
The current Act does not contain such a provision presumably in order to provide a
complete separation of ‘proprietors’ and managers.248 The articles of a company may
however require directors to take up qualification shares. The Act provides as follows:

209. (1) Unless the company's articles otherwise provide, a director need not be a member of
the company or hold any shares therein. Directors' share qualification

(2) Where the articles require a director to hold a specified share qualification, a person
appointed as a director shall obtain his qualification within two months after his
appointment or such shorter period as may be fixed by the articles.
(3) If a company amends its articles so as to introduce or increase the requirement of a
share qualification, every director holding office at the date of the amendment shall
obtain his qualification within two months after the amendment or such shorter period as
may be fixed by the articles.
(4) A director who-
(a) fails to comply with subsection (2) or (3); or
(b) ceases to hold the specified share qualification, at any time after so
complying;
shall cease to hold office.
(5) A person who ceases to hold office under subsection (4) shall not be re-appointed as
a director of the company until he has obtained his qualification.

The other important aspect from the appointment and qualification of a director is that
such a person must consent in writing. 249 This provision protects the members and
investor s more than the directors themselves as it augments their sense of commitment to
perform their duties with utmost good faith.

The Act requires that more than half of the directors of a company including -
(a) the managing director, if the company has a managing director; and

(b) at least one executive director, if the company has executive directors;
shall be resident in Zambia.

248
Gower’s principles of Modern Company Law: P Davis 16th edition Sweet & Maxwell at page 181
249
Section 207 (5) cit

373
 (2) Any contravention of subsection (1) which continues for more than two
months shall constitute grounds for winding-up of the company by the court on
the application of the Registrar.

CHAPTER 8

OFFICE –BEARERS

Company secretary
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd
[1971] 2 QB 711; [1971] 3 All ER 16 (CA)
The secretary of the defendant company had fraudulently ordered ‘self –drive’ cars from
the plaintiff, a car hire company, on various dates, falsely stating that they were wanted
by the defendant company for business purposes. In fact the defendant company knew
nothing about the transactions. Both the trial court and the Court of Appeal held that the
defendant company was liable to the plaintiffs for the amount of the hire.
LORD DENNING MR: [716] . . . [Counsel for the company] says that the company is
not bound by the letters which were signed by Mr Bayne as ‘Company Secretary’. He
says that, on the authorities, a company secretary fulfils a very humble role; and that he
has no authority to make any contracts or representations on behalf of the company. He
refers to Barnett, Hoares & Co v South London Tramways Co [1887] 18 QBD 815 at
817] where Lord Esher MR said:

‘A secretary is a mere servant; his position is that he is to do what he is told, and

no person can assume that he has any authority to represent anything at all. . . .’
...
But times have changed. A company secretary is a much more important person
nowadays than he was in 1887. He is an officer of the company with extensive duties

374
and responsibilities. This appears not only in the modern Companies Acts, but also by
the role which he plays in the day-to-day business of companies. He is no longer a mere
clerk. He regularly makes representations on behalf of the company [717] and enters into
contracts on behalf which come which the day-to-day running of the company’s business.
So much so that he may be regarded as held out as having authority to do such things on
behalf of the company. He is certainly entitled to sign contracts connected with the
administrative side of a company’s affairs, such as employing staff, and ordering cars,
and so forth. All such matters now come within the ostensible authority of a company’s
secretary. Accordingly I agree with the judge the Mr R L Bayne, as company secretary,
had ostensible authority to enter into contracts for the hire of these cars and, therefore, the
company must pay for them. Mr Bayne was a fraud. But it was the company which put
him in the position in which he, as company secretary, was able to commit the frauds. So
the defendants are liable. I would dismiss the appeal accordingly.

375
 CHAPTER 9

POSITION – DUTIES OF DIRECTORS

See notes on appointment and dismissal of directors.
Directors give the physical existence of the company. The director as such owes
fiduciary duties to the company and to the shareholders. As director he is in a position of
trustee, because it is to the directors to which the whole business of the company is
entrusted, all the monies paid for the business of the company. Distinguish between
director and trustee.

Property in law is vested in the company. Trustee property is vested in the trustee.
Directors have to take risks in order to make profits: cannot be held liable for business
loses in the course of business.

Directors act as a board: the trustee may act individually. The fiduciary duties of the
directors as such are ….. to the company alone by virtue of their position. That rule was
a decision in the case of PERCIVALE V WRIGHT (1902) 2 CH 421 – Question was
whether the directors who were purchasing shares from a particular shareholder ought to
have disclosed the fact that there were negotiations with another group of share holders
and were offering a higher price than the other shareholder. Held: no such duty to the
particular shareholder, but to the company.

Because the director owes fiduciary duties, he is consequently bound to exercise in good
faith in his dealing with the company and on behalf of the company. The director is duty

376
bound to act in the interests of the company and the body, not individual of shareholders
…all. Interest of the present and future should be taken into account.

Lee Berens Company

Fiduciary duties are owed by the directors to the company. If a company is holding and a
subsidiary has its own directors, the directors of the holding company do not owe any
duty to the subsidiary as such. Because of the problem in the PERCIVIAL – WRIGHT,
directors do not owe any duties to the shareholders.

Should they take advantage of material they acquire by the virtue of their being directors
of holding company, and used that information to take advantage of shareholders or
subsidiary company itself.

JENKINS committee criticized this rule and its emphatic limitation of the duty laid by
….it is likely to be abused. If directors owe the duty to the company alone, no one can
sue them and proposed an amendment to be liable to anybody (compensation) who
suffers loss, unless of case that person knew that there was ….with directors. No
provision so rule in ….applies. These duties also apply to those officers who act on
behalf of the company e.g. secretary. So that the directors are bound not to take improper
advantage of the company. Directors and other officials will be liable to the company for
breach of duties.

Directors must exercise their powers bona fida – commercial world and commercial
consideration, if they exercise on power in good faith, it is what they themselves consider
to be the interest of the company as they themselves.

VOL. 29, 30, 31 MLR BY PROFESSOR WILEIAMBURG WEDDERPEN 1966/7/8

Directors are not to do any act which is ultra-vires the company, or illegal. Or they may
view personal liability of the company should suffer loss from such illegal acts.
Directors must not pay dividends out of capital or they will be liable to the company.
Directors are under a duty not to make secret profits by the use of their power without
company’s consent, they are liable to make good those profits to the company.

377
Boston Deep Sea Fishing Company V Ansell (1888) 39 Ch D 339
A director “A” of a company entered into a contract to build mineral boards on behalf of
“B” company and paid “A” a commission, but the commission was not disclosed to the
company.

A was also a shareholder in the slip-building company, and c limited (where he was
director) paid dividends and a bonus to a particular shareholder who ….these fishing
smacks, who emphasized it (C Limited) to supply ice.

“A” thought it fit to employ (C limited) to supply ice (“A” was also a shareholder in C
limited) for B limited. C limited paid a bonus to “A” the directors. The courts held that
“A” the director of B limited was under an obligation to B company to disclose …and the
bonus which he earned by reason of the company fact that the smacks were owned by the
bonus he had to account for the bonus and dividend to B company.

Without the consent of the company any profits made during the course of his business
must be accounted for. The board may except from duty to account by ratifying the act
of the director.

REGAL HASTINGS (LIMITED GULLIVER (1942) 1 AER (1967) 2 AC 134

E limited company owned a cinema. The directors decided to buy 2 others, and there
subsequently and resell the whole undertaking. They formed a subsidiary company to
buy the 2 cinemas. Unfortunately, R limited did not have sufficient money or provide all
the capital for the subsidiary which was required to buy the cinemas. So capital was split
between the directors in L limited and R limited itself, i.e. directors bought shares in the
subsidiary.

R limited’s shares and the shares of the subsidiary were sold, at a profit. So the directors
in the process made a profit out of the whole scheme. Question was whether the directors
because of their fiduciary relationship to the company had entered in the course of their
management into a transaction in which they used the position and knowledge possessed
by them by virtue of their officer as directors. If because of their officer they got benefits

378
from such a scheme, made profits in the process, they are liable to account for the
company.

Find whether profits and subsequent sale were acting as directors? Held knowledge
acquired by virtue of their position was employed for improper monies, i.e. to make
profits for themselves.

JENKINS: what ought to be the ……is whether company HARM was done to the
company. If no harm, why should they act for profits made. If this had been there
concern of the court in Hestings case, the directors would have gone through because no
harm was done to the company. Directors may have asked members to ratify this action.

Powers conferred on the directors by memorandum and articles must be used for proper
purposes, i.e. for those purposes for which hey are conferred and for the benefit of the
company.

Example of proper purposes – where the directors use their power to issue new shares of
the company to new members, in order to protect their own positions in the company, this
is an improper use. This is …when the directors want to get control over the
shareholders in the company.

Hogg V Cramphorn Limited (1966) 3 AER 1920

The directors had power under the articles A dispose the shares of the company to such
persons, on such persons and conditions and at such times as they might think fit.

The directors then ….there was someone offering to buy the shares held by the
shareholders of the company. He wanted to control the company by getting the majority
of the shares sold to them.

The directors in good faith believed that of this prospective bidder would not be in the
interest of the company. So they derived a scheme to forestall this bid. They issued new

379
shares to certain trustees to be held for the benefit of the employee of the company, and
each share had 10 votes attached to it. One of the shareholders was an associate of the
prospective bidder. So he challenged the action. The courts held the issue of shares with
multiple voting rights as such was ultra-vires the directors of the company, even though
they were made bona fida i.e. in the interests of the company.

The act came to hold that the whole transaction depended on the company itself to allow
or disallow multiple shares. Pursuing purpose of the issue. Was to ensure control of the
company by the directors and supporters. The effect was to deprive the majority if the
shareholders their constitutional power to have their views prevail in the company, i.e.
directors might have seen that the majority shareholders would not be opposed to the sell
to the bidder.

The power to issue shares – a fiduciary power must always be exercised in good faith. So
issue had to be set aside by the court. It is always open for the company to ratify the acts
of directors, by the general meeting, but those shares must not participate in the voting.

Also there was no question of personal benefit by the director. So that the purposes
…..by the grant of powers are those contemplated by the memorandum and articles.
Such powers contemplated by misuse of directors fiduciary powers away whether proper
or general; the director’s powers should be designed to achieve the company’s objectives.

A transaction resulting for such a transaction therefore (1) can be voided (2) valid, if
ratified by company at a general meeting.

Bell Houses and City Hall

The breath of such clauses make it difficulty for a shareholders to be
Decision of the directors should not be made negligently
Discretion must be exercised in the interest/benefit of the company.
Should not delegate their powers to the directors and

380
Power of the Company in a General Meeting to qualify or ratify as long as there is no
fraud and the minority e.g. conferred on benefit by the majority ..the expense of the
majority; expropriation and seeing the assets of the company.

Fraud on the minority: unfairness or unquestionable conduct by majority over minority.

Acquisition of shares of others by other shareholders must conform to the company as a
whole.

If the interests of the minority are disregarded then there is no conformity to the std.
Cook V Deeks (1916) 1 Ac 554
1. A breach of fiduciary duties must not in favour of the majority and against
minority.
2. An exercise of the majority power as such must be bonda-fida in the interest of
the company because a whole.

Negligence
In the exercise of powers of management and exercise of their duties, they have a duty to
exercise skill and care. The std of reasonable care is not rigorous.

Re City Equitable Hire Insurance Company Limited 1925 Ch 407

Lord Romer “A directors …not exhibit in the performance of his duties a ….and degree
of skill than any reasonably can be expected from a person of his knowledge and skill…

The directors heavily rely on the advice, information and conduct of others, within the
company. So the directors being non-profit, the std of his reasonable care is that of a
person of his knowledge and experience.

Negligence is/may be one of the …powers or grand, which may be used to attack the act
of directors under the very breed object clause as in BELL HOUSES.

Enforcement of Directors Duties

381
FOSS V HARBOTTLE – the rule in this case essentially governs this area. That the
duties owed to the company are primarily enforced by the company, so that the proper
plaintiff, in…is not the individual….shareholder but the company except in certain
circumstances. The shareholder is limited to his personal rights as a member as under
S10/30 cap 686 – the contract between a member and the company.

1. the circumstances in which the shareholder may ….the directors of the company
are those circumstances in which the directors are perpetrating a illegal or
altra….the company activity: here the general meeting cannot ratify the activity.
2. if the directors are perpetrating a fraud on the company of course the directors
being the …….are in control of the company and will not allow the company to
initiate action – in these circumstances the company allows the shareholders to
take the action see COOKS V DEEKS………to protect the interests of the
company.

So there may be circumstances in which particular activities requires special resolutions

which require a definite majority, the shareholders may initiate action e.g. to have the
company rescind the action to be taken.

Why Foss v Harbottle says is to prevent multiplicity of action/shirks by so many

shareholders purporting to act in the interests of the contract. The right of the individual
shareholder is not available in those circumstances in which the action concerned may be
ratified by the company. He has to get the authority of the company.
The shareholder can only initiate action in the interests of the company as such by way of
what is known as derivative representative action, he s no enforcing a person right as
such, though SS10/30 the contract.

Entitled the shareholder to require that the affairs of the company be managed properly.
Otherwise the D.R.A is a right of the shareholder to protect the rights of other
shareholders now. He has no join the company as plaintiff, and the directors are the
defendants.

382
The test is that the irregularity must be sure that it cannot be ratified. Read against in
which the action was permitted by the court, through the court did order that the general
meeting of the company be given the opportunity to ratify the fact that ratify what
directors did.

The directors ratification may be possible should not prevent shareholder not test the case
in the court.

BAMFORD VOL 31 MLR 680

Summary of rules and principles operating in this area of law
Vol 30 MLR HOGG

383
CHAPTER 9

LEGAL POSITION OF DIRECTORS

Cohen v Segal
1970 (3) SA 702 (W)
BOSHOFF J: [706] The directors of a limited company are the creatures of statute and
occupy a position peculiar to themselves. It has often been said that they are really
commercial men managing a trading concern for themselves and all other shareholders in
it. They occupy a fiduciary position towards the company and must exercise their powers
bona fide solely for the benefit of the company as a whole and not for an ulterior motive.

They may not advance their own interests at the expense of the company.

Directors are from time to time spoken of as agents, trustees or managing partners of a
company, but such expressions are not used as exhaustive of the powers and
responsibilities of those persons, but only as indicating useful points of view from which
they may for the moment and for the particular purpose be considered, points of view at
which, for the moment, that they belong to the category, but that it is useful for the
purpose of the moment to observe that they fall, pro tanto, within the principles which
govern that particular class.

Contractual relationship with company

Ross & Co v Coleman
1920 AD 408
Under the articles of association of defendant company the plaintiff and four other
persons were appointed directors and were entitled at their option to hold office for five
years. The articles further provided that the directors should receive a salary of ₤480 per
annum and that one-half of any surplus remaining on the working of any one year after
payment of a dividend at the rate of 8 per cent should be payable to the directors who

384
should divide it amongst themselves in such manner as the majority of them might
decide. There was an article to the effect that ‘no articles herein contained or hereafter
made shall at any time, or upon any pretext, be rescinded, altered or added to, except by
special resolution’.

In January 1919 a special resolution was passed deleting the clauses of the articles
referring to the payment of directors and substituting a provision that the remuneration of
directors should from time to time be settled by the company at its annual general
meeting. The plaintiff resigned his directorate on the ground that the defendant company
had broken its contract with him and sued for damages. His action failed.

INNES CJ: [418] . . . Articles of association are, in themselves, merely an agreement

between the shareholders inter se – that agreement being, generally speaking, subject to
amendment at the will of a specified majority, expressed in the prescribed manner. But
when a shareholder is appointed to, and accepts the office of director, the intention both
on his part and on the part of the company must be that his position – his rights and his
obligations – shall be regulated by the articles. They are incorporated by implication into
the contract. They regulate the terms on which the director undertakes to serve, and the
benefits to which he becomes entitled. . . . [Plaintiff’s counsel] admitted that, broadly
speaking, any article could be altered, save where the alteration amounted to a breach of
contract – in other words that no amendment of the articles could justify such a breach.
That is no doubt so; but in the words of Lord Macnaghten (British Equitable Assurance
Co Ltd v Baily[1906] AC 35 at 36) ‘the simple question is, what was the contract’. The
machinery for alteration was there, operative to the knowledge of the parties in respect of
the entire matter of directors’ remuneration. Was there anything in their agreement
which prohibited any change during the plaintiff’s period of service? Express prohibition
there was none, and I can see no sufficient ground for implying a prohibition. When an
article has been duly amended, the further operation of that article upon existing rights
cannot be excluded unless the intention of the contracting parties to preserve such rights
intact is beyond doubt. Here the plaintiff was given the option of remaining a director for
five years (clause 75); during that period he could not be removed by special resolution
(clause 84); nor was he under any obligation to retire (clause 86). But I find nothing in

385
the articles which shows that during his period of service he was to enjoy fixity of
remuneration. A director is entitled to such benefits as the articles may specify; the
articles are subject to amendment; and any agreement as between the company and the
director, that those benefits shall remain undiminished under all circumstances, must very
clearly appear, if it is to be given effect to. The general rule, as pointed out by Lindley
MR (Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA)), is that existing rights
founded or dependant upon alterable articles are limited as to their duration by the
duration of the articles which confer them. I can see nothing in this case which takes it
out of that principle. And in my opinion, it was competent for the shareholders . . . to
alter, as the circumstances of the company might require, the remuneration assigned to
the directors (Including the original directors). It follows that the claim for damages
founded on diminution of remuneration after the date of alteration was rightly disallowed.
...

DIRECTORS: FIDICIARY DUTIES

Conflict of interest

Robinson v Randfontein Estates Gold Mining Co Ltd

1921 AD 168
By the beginning of the century large mineral interests in the farms Randfontein,
Uitvalfontein and Waterval were held by a number of associated companies, all members
of the Robinson group, of which the Randfontein Estates Gold Mining Company Ltd, the
plaintiff, was the principal or parent company250. The defendant was the chairman of the
board of directors of the plaintiff company.

The plaintiff company’s interest in the farm Waterval took the form of a lease of the
mineral rights. The defendant, as director of the plaintiff company, would have preferred
to purchase the farm for the company, but he could not come to terms with its owner.
Later the defendant, through an agent, bought an undivided half-share of Waterval for
₤60 000 and sold it soon after ₤275 000 to the Waterval Trust Company a concern
formed by the plaintiff company for the purpose of acquiring and holding, for a brief

250
In Zambia this would be the holding company while others are subsidiary companies.

386
space, the farm Waterval. All its shares were held by the plaintiff company and the price
of ₤275 000 was paid to the defendant by draft on the plaintiff company. The court held
that the plaintiff company was entitled to claim from the defendant the profit of ₤215 000
made by him on this transaction.

INNES CJ: [177]. . . Where one man stands to another in a position of confidence
involving a duty to protect the interests of that other, he is not allowed to make a secret
profit at the other’s expense or place himself in a position where his interests conflict
with duty. The principle underlies an extensive field of legal relationship. A guardian to
his ward, a solicitor to his client, an agent to his principal afford examples of persons
occupying such a position. As was pointed out in Aberdeen Railway Co v Blaikie Bros
[(1854) 2 Eq Rep 1281 (HL) ], the doctrine is to be found in the civil law (Digest
18.1.34.7), and must of necessity form part of every civilized system of jurisprudence. It
prevents an agent from properly entering into any transaction which would cause his
interests and his duty to clash. If employed to buy, he cannot sell his own property; if
employed to sell, he cannot buy his own property; nor can he make any profit from his
agency save the agreed remuneration; all such profit belongs not to him, but to his
principal. There is only one way by which such transaction can be validated, and that is
by the free consent of the principal following upon a full disclosure by the agent. In such
a case the special relationship quoad that transaction falls away and the parties deal at
arm’s length with one another. The general doctrine is clear enough; but the remedies
available to a principal who discovers that he has purchased his agent’s own property
depend upon considerations of some nicety. Obviously he is not bound by the contract
unless he chooses; he may elect therefore either to repudiate or confirm it. But, if he
wishes it to stand and also claims the resulting profit, he must show that such profit arises
from transactions completely covered by the prohibitive operation of the relationship…
Now the question of the remedies available against a director who, without due
disclosure, disposes of his own property to his company has been dealt with in a number
of comparatively recent English decisions. . . It is clear from these decisions that, in every
such inquiry, regard must be had to the relationship in which the director stood to the
company when he acquired the property. The test is not what honour would dictate, but

387
what the law will allow. And that depends upon his duty to the company at the date of
acquisition. If he was under no obligation at that time to acquire the property for the
company, instead of for himself, then his non-disclosure would entitle it to repudiate the
sale and restore the original position because, as already explained, the transaction could
not bind the company without its free consent. It could affirm the contract, but only by
an acquiescence in its terms. The acquisition being untainted by any breach of duty, the
company’s only claim to subject matter would be based on the contract. It could not seek
to retain the property at a price reduced by a deduction of the director’s profit. For that
would amount to a new contract between the parties. When, however, the director’s
default extends further than non-disclosure, when a breach of duty attended the original
acquisition, then the company may, if it chooses, retain the property purchased and also
demand a refund of the profits. . . The test is expressed, for the most part, in terms
peculiar to the English law; but the principle which underlies it is not foreign to our own.
For it rests upon the broad doctrine that a man, who stands in a position of trust towards
another, cannot, in matters affected by that position, advance his own interests (e.g. by
making a profit) at that other’s expense. An examination of what is involved in the
remedy explains its principle. The director, in the case assumed, intends to acquire the
property for himself alone; he has no idea of acquiring the equitable ownership for the
company. No such animus enters into the transaction. His sole object is to secure the
dominium in order to resell to the company at a profit. But the law refuses to give effect
to that intention; it treats the acquisition as one made in the interests of the company.
That can only be because it was a duty of the director to acquire the property for the
company, if he acquired it at all. Its acquisition for himself would, under the
circumstances, be a breach of faith which the courts will not allow him to set up . . . But,
even if the relationship between the defendant and the company could not be fitly
described as one of agent and principal, I should still hold that it was fiduciary. I had
occasion in Hull v Turf Mines Ltd (1906) TS 68) to remark upon the anomalous and
undesirable positions which arise in the working of the group system. It is a system
much in vogue in the Transvaal, and it exists in the present instance under the new
regime as it did under the old. It involves the management and direction of the policy
and affairs of the various companies by some controlling authority through nominee

388
directors. Whether the control is exercised by a man who is himself a director or by
someone outside makes little difference in principle. In either case the system is
peculiarly liable to abuse. Unless the board is moulded to the will of the controlling
authority the system cannot work. An independent set of directors would be fatal. Hence
the temptation to deprive the nominees of all discretion until, as in the present case, they
are completely under the thumb of the controlling authority and it is practically
impossible for them to exercise an independent judgment. There may be something to be
said for that position from the point of view of administrative efficiency. But it carries its
own danger. Power thus obtained involves a corresponding responsibility. A man, who
procures the election of a board of directors under circumstances which make it
impossible for them to exercise an independent judgment, must in my opinion, observe
the utmost good faith in his dealings with the company, which he has, of set purpose,
deprived of independent advice. The duty to do so arises from the circumstances which
he has chosen to bring about. And it is wholly inconsistent with the obligation of good
faith that the defendant should have made for himself these profits by the method which
the evidence discloses. That being so, he ought not to be allowed to retain them –
whether he can accurately be described as an agent of the company when he acquired the
property or not . . .

Regal (Hastings) Ltd v Gulliver

[1942] 1 ALL ER 378 (HL)
Regal (Hastings) Ltd owned a cinema. The directors decided to acquire two other
cinemas with a view to the sale of the undertaking of the company as a going concern.
For this purpose they formed a subsidiary company (‘Amalgamated’) with a capital of
₤5,000 in ₤1 shares. The owner of the two cinemas offered them a lease but required a
personal guarantee of the rent by the directors unless the paid-up capital of the subsidiary
company was ₤5 000. As the directors wished to avoid giving the guarantee, Regal
(Hastings) subscribed for 2 000 shares in the subsidiary at par and the remaining 3 000
shares were taken at par by the directors and their friends, Regal (Hastings) being unable
to take more than 2 000 shares. Ultimately the sale of the three cinemas was carried
through by the sale of all the shares in the company and the subsidiary. The shares in

389
‘Amalgamated’ which had been taken by the directors were sold by them at a profit of ₤2
16s 1d per share. Regal successfully sued them for this profit.

LORD RUSSELL OF KILLOWEN: [385] We have to consider the question of the

respondents’ liability on the footing that, in taking up these shares in Amalgamated, they
acted with bona fides, intending to act in the interest of Regal.

Nevertheless, they may be liable to account for the profits which they have made, if while
standing in a fiduciary relationship to Regal, they have by reason and in course of that
fiduciary relationship made a profit. . . .

. . . The rule of equity which insists on those, who by use of a fiduciary position make a
profit, being liable to account for that profit, in no way depends on fraud, or absence of
bona fides; or upon such questions or considerations as whether the profit would or
should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to
obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did
for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or
benefited by his action. The liability arises from the mere fact of a profit having, in the
stated circumstances, been made. The profiteer, however honest and well-intentioned,
cannot escape the risk of being called upon to account.

. . . My Lords, I have no hesitation in coming to the conclusion, upon the facts of this
case, that these shares, when acquired by the directors, were acquired by reason and only
by reason of the fact that they were directors of Regal, and in the course of their
execution of that office.

. . . The directors standing in a fiduciary relationship to Regal in regard to the exercise of

their powers as directors, and having obtained these shares by reason and only by reason
of the fact that they were directors of Regal and in the course of the execution of that
office, are accountable for the profits which they have made out of them. . . . It was
contended. . . that it was impossible for Regal to get the shares owing to lack of funds,
and that the directors in taking the shares were really acting as members of the public. I
cannot accept this argument. . . . The suggestion that the directors were applying simply

390
as members of the public is a travesty of the facts. They could, had they wished, have
protected themselves by a resolution (either antecedent or subsequent) of the Regal
shareholders in general meeting. . . .

LORD MACMILLIAN: [391] The sole ground on which it was sought to render [the
defendants] accountable was that, being directors of the plaintiff company and therefore
in a fiduciary relationship to it, they entered in the course of their management into a
transaction in which they utilized the position and knowledge possessed by them in virtue
of their office as directors, and that the transaction resulted in a profit to themselves. . . .
The issue thus becomes one of fact. The plaintiff company has to establish two things: (i)
that what the directors did was so related to the affairs of the company that it can properly
be said to have been done in the course of their management and in utilization of their
opportunities and special knowledge as directors; and (ii) that what they did resulted in a
profit to themselves.

LORD PORTER: [394] My Lords, I am conscious of certain possibilities which are

involved in the conclusion which all your Lordships have reached. The action is brought
by the Regal Company. Technically, of course, the fact that an unlooked for advantage
may be gained by the shareholders of that company is immaterial to the question at issue.
The company and its shareholders are separate entities. One cannot help remembering,
however, that in fact the shares have been purchased by a financial group who were
willing to acquire those Regal and the Amalgamated at a certain price. As a result of
your Lordships’ decision that group will, I think, receive in one hand part of the sum
which has been paid by the other. For the shares in Amalgamated they paid ₤3 16s 1d
per share, yet part of that sum may be returned to the group, though not necessarily to the
individual shareholders by reason of the enhancement in value of the shares in Regal – an
enhancement brought about as a result of the receipt by the company of the profit made
by some of its former directors on the sale of Amalgamated shares. This, it seems, may
be an unexpected windfall, but whether it be so or not, the principle that a person
occupying a fiduciary relationship shall not make a profit by reason thereof is of such
vital importance that the possible consequence in the present case is in fact as it is in law
an immaterial consideration.

391
That the shares were obtained by the defendants by reasons of their position as directors
of Regal is, I think, plain. The original proposition, when the formation of the subsidiary
company was suggested, was that the whole of the shares should be issued to the Regal
company, partly for cash and partly for services rendered, and this proposition was
discussed and accepted at board meetings of that company. It was only afterwards, when
the necessity for finding ₤5 000 cash arose, that the issue to any one other than the
company was considered, and then the directors turned to themselves. . . .

In these circumstances, it is to my mind immaterial that the directors saw no way of

raising the money save from amongst themselves and from the solicitor to the company,
or, indeed, that the money could in fact have been raised in no other way. The legal
proposition may, I think, be broadly stated by saying that one occupying a position of
trust must not make a profit which he can acquire only by use of his fiduciary position,
or, if he does, he must account for the profit so made.

Directors, no doubt, are not trustees251, but they occupy a fiduciary position towards the
company whose board they form. Their liability in this respect does not depend upon
breach of duty but upon the proposition that a director must not make a profit out of
property acquired by reason of his relationship to the company of which he is director. It
matters not that he could not have acquired the property for the company itself-the profit
which he makes is the company’s even though the property by means of which he made it
was not and could not have been acquired on its behalf.

Industrial Development Consultants Ltd v Cooley

[1972] 2 ALL ER 162252
The defendant, an architect, had been managing director of the plaintiff company, which
offered comprehensive construction services, such as engineering, architecture and
project management services. Following his appointment, the defendant had sought to
obtain design and supervision contracts for the plaintiff company from the Eastern Gas
Board in connection with four depots the latter planned to build. The Eastern Gas Board
indicated to the defendant that they were not prepared to do business with the plaintiff
251
See Romer J in Re City Equitable Fire Insurance Co. Ltd (1925) 1 Ch 47 (page 26)
252
Also 1972 1 WLR 443

392
company but that they were prepared to engage the defendant personally. Thereupon, the
defendant resigned his appointment with the plaintiff company, on the pretext of ill-
health, and accepted the work from the Eastern Gas Board. The defendant was held
liable to account to the plaintiff company for all benefits accruing under the contract with
the Eastern Gas Board.

ROSKILL J: [173] The first matter that has to be considered is whether or not the
defendant was in a fiduciary relationship with his principals, the plaintiffs. Counsel for
the defendant argued that he was not because he received this information which was
communicated to him privately. With respect, I think that argument is wrong. The
defendant had one capacity and one capacity only in which he was carrying on business
at that time. That capacity was as managing director of the plaintiffs. Information which
came to him while he was managing director and which was of concern to the plaintiffs
and was relevant for the plaintiffs to know, was information which it was his duty to pass
on to the plaintiffs because between himself and plaintiffs a fiduciary relationship
existed.

Therefore, I feel impelled to the conclusion that when the defendant embarked on this
course of conduct of getting information on 13 June, using that information and preparing
those documents over the weekend of 14-15 June and sending them off on 17 June, he
was guilty of putting himself into the position in which his duty to his employers, the
plaintiffs, and his own private interests conflicted and conflicted grievously. There being
the fiduciary relationship I have described it seems to me plain that it was his duty once
he got the information to pass it to his employers and not guard it for his own personal
purposes and profit. He put himself into the position when his duty and his interests
conflicted.

Does accountability arise? It is said: ‘Well, even if there were that conflict of duty and
interest, nonetheless, this was a contract with a third party in which the plaintiffs never
could have had any interest because they would have never got it.’ That argument has
been forcefully put before me by counsel for the defendant.

393
The remarkable position then arises that if one applies the equitable doctrine on which the
plaintiffs rely to oblige the defendant to account, they will receive a benefit which on Mr.
Smettom’s evidence at least it is unlikely they would have got for themselves had the
defendant complied with his duty to them. On the other hand, if the defendant is not
required to account he will have made a large profit as a result of having deliberately put
himself into a position in which his duty to the plaintiffs who were employing him and
his personal interests conflicted. I leave out of account the fact that he dishonestly
tricked Mr. Hicks into releasing him on 16th June although counsel for the plaintiffs urged
that that was another reason why equity must compel him to disgorge his profit. It is said
that the plaintiffs’ only remedy is to sue for damages either for breach of contract or
maybe for fraudulent misrepresentation. Counsel for the plaintiffs has been at pains to
disclaim any intention to claim damages for breach of contract save on one basis only and
he has disclaimed specifically any claim for damages for fraudulent misrepresentation.
Therefore, if the plaintiffs succeed they will get a profit which they probably would not
have got for themselves had the defendant fulfilled his duty. If the defendant is allowed
to keep that profit he will have got something which he was able to get solely by reason
of his breach of fiduciary duty to the plaintiffs.

When one looks at the way the cases have gone over the centuries, it is plain that the
question whether or not the benefit would have been obtained but for the breach of trust
has always been treated as irrelevant.

In one sense the benefit in this case did not arise because of the defendant’s directorship;
indeed, the defendant would not have got this work had he remained a director.
However, one must. . . look at the passages in the speeches in Regal [Regal (Hastings)
Ltd v Gulliver [1942] 1 All ER 378 (HL) ], having regard to the facts of that case to
which those passages and those statements were directed. I think counsel for the
plaintiffs was right when he said it is the basic principle which matters. It is an
overriding principle of equity that a man must not be allowed to put himself in a position
in which his fiduciary duty and interests conflict 253. The variety of cases where that can
happen is infinite. The fact there has not previously been a case precisely of this nature
253
emphasis added

394
with precisely similar facts before the courts is of no import. The facts of this case are, I
think, exceptional and I hope unusual. They seem to me plainly to come within this
principle.

Cook v Deeks
[1916] 1 AC 554 (PC)
The stock of the Toronto Construction Co, a company carrying on the business of railway
construction contractors, was held in equal shares by one Cook, one GS Deeks, one GM
Deeks and one TR Hinds, who also constituted the board of directors. The company
carried out several large construction contracts for the Canadian Pacific Railway Co.
When Messrs Deeks and Mr. Hinds learned that a new contract was coming up, they
obtained this contract in their own names, to the exclusion of the company and formed a
new company, the Dominion Construction Co to carry out the work. At a general
meeting of shareholders of the Toronto Construction Co resolutions were passed owing to
the voting power of GS Deeks, GM Deeks and TR Hinds, approving the sale of part of
the plant of the Toronto Construction Co to the Dominion Construction Co, and a
declaration was made that the Toronto Construction Co had no interest in the new
contract with Canadian Pacific Railway Co.

In an action by Cook against Messrs Deeks and Mr. Hinds, the Privy Council held that
the benefit of the contract belonged properly to the Toronto Construction Co and that the
directors could not validly use their voting power as shareholders to vest it in themselves.

LORD BUCKMASTER LC: [559] . . . The management of Messrs Deeks and Hinds of
the affairs of the construction company was eminently satisfactory; but so far as railway
construction was concerned the whole of their reputation for the efficient conduct of their
business had been gained by them while acting as directors of the Toronto Construction
Co. In 1911, and probably at an earlier date, the three defendants had settled that they
would no longer continue business relationships with the plaintiff. It is unnecessary to
seek the cause of the quarrel, or to determine whether they had good reason for the
opinion that they had formed. There was nothing to compel them to work with or for the
plaintiff, and it is impossible to see that they were bound to continue their relationship

395
with him by any legal or moral consideration. They were, however, involved with him in
different reciprocal duties, by reason of their relationship in connection with the Toronto
Construction Co, and if they desired freedom to act, without regard to the restrictions that
those relationships imposed, it was necessary that they should terminate their position as
directors and shareholders in the company and place it in dissolution. This they could
easily have accomplished owing to the fact that they held three-fourths of the share
capital. It is suggested that they might also have resolved at a general meeting of the
company that the company should no longer continue the work. This would have been
all but equivalent to a resolution of voluntary liquidation; but even this step was not
taken. While still retaining their position as directors, while still actually acting as
managers of the company, and with their duties to the company of which the plaintiff was
a shareholder entirely uncharged, they proceeded to negotiate with Mr. Leonard for the
new Shore Line contract, in reality on their own behalf, but in exactly the same manner as
they had always acted for the company, and doubtless with their claims enforced by the
expeditious manner in which they, while acting for the company, had caused the last
contract to be carried through. . .

Two questions of law arise . . . The first is whether, apart although from the subsequent
resolutions, the company would have been at liberty to claim from the three defendants
the benefit of the contract which they had obtained from the Canadian Pacific Railway
Company; and the second, which only arises if the first be answered in the affirmative,
whether in such event the majority of the shareholders of the company constituted by the
three defendants could ratify and approve of what was done and thereby release all claim
against the directors. . .

It is quite right to point out the importance of avoiding the establishment of rules as to
directors’ duties which would impose upon them burdens so heavy and responsibilities so
great that men of good position would hesitate to accept the office. But on the other
hand, men who assume the complete control of a company’s business must remember
that they are not at liberty to sacrifice the interests which they are bound to protect, and,
while ostensibly acting for the company, divert in their favour business which should
properly belong to the company they represent.

396
Their Lordships think that, in the circumstances, the defendants TR Hinds and GS and
GM Deeks were guilty of a distinct breach of duty in the course they took to secure the
contract, and that they cannot retain the benefit of such contract for themselves, but must
be regarded as holding it on behalf of the company.

There remains the more difficult consideration of whether this position can be made
regular by resolutions of the company controlled by the votes of these three defendants. .
If, as their Lordships find on the facts, the contract in question was entered into under
such circumstances that the directors could not retain the benefit of it for themselves, then
it belonged in equity to the company and ought to have been dealt with as an asset of the
company. Even supposing it be not ultra vires of a company to make a present to its
directors, it appears quite certain that directors holding a majority of votes would not be
permitted to make a present to themselves. This would be to allow a majority to oppress
the minority. . . In the same way, if directors have acquired for themselves property or
rights which they must be regarded as holding on behalf of the company, a resolution that
the rights of the company should be disregarded in the matter would amount to forfeiting
the interest and property of the minority of shareholders in favour of the majority, and
that by the votes of those who are interested in securing the property for themselves.
Such use of voting power has never been sanctioned by the courts. . .

The Maintenance and exercise of an unfettered discretion

Coronation Syndicate Ltd v Lilienfeld and the New Fortuna

1903 TS 489
SOLOMON J: [496]. . .No doubt there are certain cases in which a court would make an
order upon directors to convene a meeting of shareholders. Where, for instance, there are
statutory provisions requiring directors to call meetings at certain times, and the directors
in disregard of their duties refuse to obey these provisions, a court of justice might be
invoked for the purpose of compelling the directors to do their duty. Or where the
articles of association provide that upon requisition of shareholders the directors shall call
a meeting, and the directors refuse to respond to such a requisition. . . But the present
case is a very different one. Here the directors of a company have bound themselves by

397
contract with a third person, who is not even a shareholder, to call a meeting and to
submit and support certain proposals for increasing the capital of the company.

It appears to me that there is a very great difference in principle between the case of a
shareholder binding himself by such a contract and the directors of the company
undertaking such an obligation. The shareholder is dealing with his own property, and is
entitled to consider merely his own interests, without regard to the interests of the other
shareholders. But the directors are in fiduciary position, and it is their duty to do what
they consider will best serve the interests of the shareholders. If, therefore, they have
bound themselves by contract to do a certain thing, and thereafter have bona fida come to
the conclusion that it is not in the interests of the shareholders, that they should carry out
their undertaking, I do not think that the court would be justified in interfering with their
discretion and compelling them to do what they honestly believe would be detrimental to
the interests of the shareholders. . .

The duty to act legally, honestly and within their powers

S v De Jager
1965 920 SA 616 (A)
HOLMES JA: [622] I turn now to the appeal by the first appellant (De Jager) in respect
of his conviction on count1.

It alleged the theft of several sums of money by De Jager from FGG over the period
January 1961 to June 1962. the trial court held that De Jager was a director of FGG; that,
in conspiracy with a co-director, Shaban, he caused payments totaling R22 665 to be paid
out of FGG’s funds; that such payments were unauthorized and were for his own
purposes and not for the benefit of FGG, and constituted theft. The payments and their
nature were admitted, but the defence was that there was no theft because De Jager was
entitled to a credit of R25 000 in his loan account against which he was entitled to draw,
and this exceeded that R22 665 which he had caused to be paid out. In this regard De
Jager said in evidence that on 5 th June 1961 Shaban sold to FGG his shares in National

398
Castor Industries Ltd for R50 000, and that by way of payment, it was agreed that the
loan account of each of them in FGG was to be credited with R25 000. The trial court
did not believe De Jager and found that no such sale ever took place. The correctness of
that finding is the first issue in the appeal.

According to the minute book of FGG, De Jager, Shaban and one Shapero were directors
until 3rd June 1961 when they resigned and Strydom and Webb became the new directors.
They were the puppets of De Jager and Shaban respectively. To support his evidence of
the sale, De Jager relied on a document, (exhibit 261), which was found by the police
among the papers of the FGG. It purports to reflect the minutes of an extraordinary
general meeting of FGG held on 5th June 1961 under the chairmanship of Strydom. It
records, inter alia, the passing of a resolution to buy from De Jager and Shaban their
shares in National Castor Industries Ltd for ₤25 000.

The trial court regarded this document as a sham. It was not in the minute book. And the
court held that Strydom, a humble Railway pensioner who was De Jager’s “stooge”, did
not preside at any meeting on 5th June 1961 or vote for the “resolution” referred to in the
document.

Now it seems clear, on the evidence, that the ostensible resignation of De Jager and
Shaban as directors and the appointment of the puppet directors on 3 rd Junes 1961 was a
sham, and, de jure, can be disregarded. Indeed, this was common cause in argument in
this court. De Jager and Shaban continued to control the company and occupies the
position of directors and fell within the definition of “director” in s 229 [now s 1 of the
Companies Act of 1973] of the Companies Act. . .

The next submission was that in any event there was in law no theft from FGG because
the beneficial shareholders were Shaban and De Jager, who must be taken to have agreed
to the abstractions, and therefore in effect the company was a consenting party. Reliance
was placed on the decision in R v Jona 1961 (2) SA 301 (W). In that case the sole
beneficial shareholder and director of a private company had abstracted various amounts
for his own purposes and was charged on 20 counts of theft from the company. The trial

399
court acquitted him of theft. One of the reasons was that, on all the evidence, there was
reasonable possibility that the accused bona fide believed that he had the right to take the
moneys in the circumstances, especially as he was the sole beneficial shareholder and
director. I can find no fault with that reasoning. . .

Another ground for the acquittal was that in law there could be no theft because the
owner (the company) acting through the sole beneficial shareholder and director (the
accused), consented to the abstractions. . . The learned judge said [at 317]:

“Now in this case all the shareholders in Continental – all the shareholders being
De Jona himself – all the directors (all the directors being Dr. Jona himself) knew
perfectly well that the money was being taken, consented to the money being
taken. And the company, as such in this case, as represented by the whole of its
directorate and by the whole of its shareholders, agreed to Dr. Jona taking money
out of the company. In my view it can never be said in a case such as that that
there is theft”.

In the present case FGG was a public company which, according to the evidence, was
formed with the object of acquiring shares in and taking an interest in the spheres of
banking, insurance, and general finance, with a view to being established as a deposit-
receiving institution. It was given permission to operate as such by the Registrar of
Banks. De Jager was a director. He abstracted company funds (not in the nature of
salary) for his own purposes, not for the benefit of the company.

. . .[I]t is argued that it cannot be theft because the company consented inasmuch as the
beneficial shareholders, De Jager and Shaban, must have been agreeable to the payments.
. . . In my view [this] contention cannot succeed. It involves the proposition that De
Jager, in his capacity as shareholder, could be a party to the company’s agreeing to be
despoiled by him in his capacity as director. It also in effect gives a general right to the
company to distribute its assets to shareholders. This offends against certain principles of
company law basic to the concept of limited liability as introduced by Parliament – at any
rate in regard to companies limited by shares, as this one was, namely:

400
 (a) The company is a separate legal persona, owning the assets.
(b) The directors manage the affairs of the company in a fiduciary capacity to it.
(c) The shareholders’ general right of participation in the assets of the company is
deferred until winding-up, and then only subject to the claims of creditors.

Neither shareholders nor directors nor the company itself can violet the foregoing,
whatever the memorandum or articles may say.

. . . The appellant’s contention is an attempt to have it both ways. On the one hand he
would retain the advantage of limited liability as a shareholder. On the other hand he
would seek to absolve himself from the fiduciary duty which a director owes to the
company, helping himself to its assets via its supposed consent to which he was a party.
To allow this would be to avoid basic legal consequences of incorporation as a company.
To combine in substance the common-law advantages of individual ownership with
statutory benefits of limited liability without regard to fiduciary duties as director – this
would not be company law at all.

For these reasons I hold that De Jager cannot be heard to say that the fact that he and
Shaban were sole beneficial shareholders enabled him as director to use company funds
for his own purposes.

As to whether De Jager has a bona fida belief that he could do this, in R v Milne and
Erleigh (5) 1950 (4) SA 604 (W) Centlivres CJ said:

“indeed it is difficult to imagine that any person of ordinary intelligence would

believe that he had power to despoil a company in relation to which he stood in a
fiduciary capacity.”

. . . [I]n my view the trial court correctly found the first appellant (De Jager) guilty of the
theft of R22 665 on count 1, and the appeal against the conviction fails.

RUMPFF JA (dissenting): [617]. . . Fraud may be committed on creditors or on

shareholders or on the company by directors, or directors may steal from the company or

401
the majority of shareholders may commit fraud on the minority but I am not aware of any
provision whereunder the shareholders of a company commit theft when the company
(through a resolution of the shareholders) disposes of its assets in a manner which is not
ultra vires the memorandum. There is also, in my view, no duty on the shareholders
when they meet as shareholders to act in the interests of the company. They can decide
what they like – within the objects of the memorandum – and when they decide, the
company has decided.

Directors: Duty to Act with Care and Skill

In re City Equitable Fire Insurance Co Ltd

[1925] 1 Ch 407
An investigation of a company’s affairs in the course of winding-up disclosed a shortage
in the funds of over ₤1 200 000. This shortage was due mainly to the deliberate fraud of
the managing director, Bevan, for which he was convicted and sentenced. The liquidator
sought to make the other directors, all of whom had acted honestly through out, liable for
negligence.

In dealing with the duties of directors, the learned judge in the court a quo made the
following remarks:

ROMER J: [426]. . . It has sometimes been said that directors are trustees. If this means
no more than that directors in the performance of their duties stand in a fiduciary
relationship to the company, the statement is true enough. But if the statement is meant
to be an indication by way of analogy of what those duties are, it appears to me to be
wholly misleading. I can see but little resemblance between the duties of a director and
the duties of a trustee of a will or of a marriage settlement. It is indeed impossible to
describe the duty of directors in general terms, whether by way of analogy or otherwise.
The position of a director of a company carrying on a small retail business is very
different from that of a director of a railway company. The duties of a bank director may
differ widely from those of an insurance director, and the duties of a director of one
insurance company may differ from those of a director of another. In one company, for
instance, matters may normally be attended to by the manager or other members of the

402
staff that in another company are attended to by the directors themselves. The larger the
business carried on by the company the more numerous, and the more important, the
matters that must of necessity be left to the managers, the accountants and the rest of the
staff. The manner in which the work of the company is to be distributed between the
board of directors and the staff is in truth a business matter to be decided on business
lines. . . emphasis added

There are. . . one or two. . . general propositions that seem to be warranted by the
reported cases; (1) A director need not exhibit in the performance of his duties a greater
degree of skill than may reasonably be expected from a person of his knowledge and
experience. A director of a life insurance company, for instance, does not guarantee that
he has the skill of an actuary or a physician. In the words of Lindley MR; “if directors
act within their powers, if they act with such care as is reasonably to be expected from
them, having regard to their knowledge and experience, and if they act honestly for the
benefit of the company they represent they discharge both their equitable as well as their
legal duty to the company:’ see Lagunas Nitrate Co v Lagunas Syndicate [899] 2 Ch 392
at 435.254 It is perhaps only another way of stating the same proposition to say that
directors are not liable for mere errors of judgment. (2) A director is not bound to give
continuous attention to the affairs of his company. His duties are of an intermittent
nature to be performed at periodical board meetings, and of any committee of the board
upon which he happens to be placed. He is not, however, bound to attend all such
meetings though he ought to attend whenever, in the circumstances, he is reasonably able
to do so. (3) In respect of all duties that, having regard to the exigencies of business, and
the articles of association, may properly be left to some other official, a director is, in the
absence of grounds for suspicion, justified in trusting that official to perform such duties
honestly.

. . . A director who signs a cheque that appears to be drawn for a legitimate purpose is not
responsible for seeing that the money is in fact required for that purpose or that it is

254
ff directors act within their powers, if they act with such care as is reasonably to be expected from them,
having regard to their knowledge and experience, and if they act honestly for the benefit of the company
they represent they discharge both their equitable as well as their legal duty to the company:’ see Lagunas
Nitrate Co v Lagunas Syndicate [899] 2 Ch 392 at 435.?

403
subsequently applied for that purpose, assuming, of course, that the cheque comes before
him for signature in the regular way having regard to the usual practice of the company.
If this were not so, the business of a large company could not be carried on. In the case
of an insurance company, for instance, the cheques to be signed at the board meeting
would often include cheques in payment of insurance claims. If a claim appears to have
been examined into and passed by the manager or other proper official for the purpose, a
director who signs the necessary cheque in payment of the claim (the cheque being
brought before him in the customary way) cannot be expected to investigate the whole
matter over again, for the purpose of satisfying himself that the claim is well founded. A
director must of necessity trust to the officials of the company to perform properly and
honestly the duties allocated to those officials. In many large companies - it was so in the
case of the City Equitable - it is the duty of the manager to pay the salaries and wages of
the staff. For that purpose cheques are drawn by the directors in his favour, the exact
amounts required being calculated by him. So long as there is nothing suspicious about
the amount, the directors are justified in trusting him to calculate it correctly, and to use
the proceeds of the cheque for the purpose for which it was drawn. . . .

. . . Before any director actually signs, or at any rate parts with a cheque signed by him,
he should satisfy himself that a resolution has been passed by the board, or committee of
the board, as the case may be, authorizing the signature of the cheque. In the case where
a cheque has to be signed between meetings, he must, of course, obtain the confirmation
of the board subsequently to his signature. . . .

. . . It is the duty of each director to see that the company’s moneys are from time to time
in a proper state of investment, except in so far as the company’s articles of association
may justify him in delegating that duty to others. . . . If the shareholders had desired to
leave hundreds of thousands of pounds of the company’s money under the sole control of
Bevan, they would have done so. But the shareholders had preferred to have associated
with Bevan a board of six or seven other directors, and it was not for these other directors
to leave Bevan to discharge one of the most important of the duties that had been
entrusted by the shareholders to the board as a whole, however reasonable and however
safe it might have seemed to the directors to do so. Still less would it be permissible to

404
leave the control of the company’s temporary investments to the general manager. It is
not any part of the function of a manager of an insurance company to decide upon the
method of investment of the company’s cash resources. His advice and assistance will no
doubt be sought. But the responsibility for the ultimate decision as to investment must
rest with the directors or, when the articles permit, with a committee of the directors. . . .

. . . The list of investments which, in my opinion, the directors should have obtained in
connection with and for the purposes of the balance sheet in each year would have been a
list that showed in detail all the investments that were lumped together in the balance
sheet under general headings, in order that the directors might form some idea for
themselves as to whether the total sum brought in as the value of the investments under
each general heading was justified for the purpose of the balance sheet and of the
dividend that they were recommending . . . .

. . . Having regard to the high reputation that Bevan possessed in the City of London and
elsewhere it is not difficult to understand how the respondent directors allowed
themselves to be satisfied with the assurances given by him fortified by the certificate of
the auditors. As it turned out, the respondent directors were being tricked and defrauded
by Bevan and so were the auditors themselves, and neither these directors nor the
auditors received from the officials of the company the protection and assistance that they
were entitled to expect. For the moment, however, I am only concerned with the
respondent directors, and though, I feel considerable sympathy with them in being
surrounded by officials whom events have shown to be unreliable, and in being led by a
chairman whom events have shown to be a daring and unprincipled scoundrel, I also feel
bound to express my opinion that in the particular matter that I am now considering they
did less than the law required of them. When presenting their annual report and balance
sheet to their shareholders, and when recommending the declaration of a dividend,
directors ought not to be satisfied as to the value of their company’s assets merely by the
assurances of their chairman, even as distinguished and honourable as Bevan appeared at
the time to be, nor with the expression of the belief of an auditor as competent and
trustworthy as Mr Lepine was and still is. As I have already stated, a list of the
company’s assets should have been prepared, and this was never done. . . .

405
. . . But it is not the duty of a director of such a company as the City Equitable to see in
person to the safe custody of securities. That is one of the matters which the directors
must almost of necessity leave to some official who is at the office daily, such as the
manager, accountant or secretary.

Fisheries Development Corporation of SA Ltd v Jorgensen

1980 (4) SA 156 (W)
The Fisheries Development Corporation (plaintiff) sued the defendants as sureties for
loans made by it to the International Fishing Corporation (Pty) Ltd (‘Ifcor”), which was
insolvent and under a winding-up order. All the shares in Ifcor were held by the
Fisheries Development Corporation, and servants of the Fisheries Development
Corporations had served as its nominees on Ifcor’s board of directors. One of the
defences put forward by the defendants was that the Fisheries Development Corporation,
through its nominees, had conducted the business of Ifcor recklessly, in such a manner as
to cause prejudice to the defendants, in consequence whereof the defendants were
discharged from liability.

Judgment was given for the plaintiff, the court holding that there is no general obligation
on a creditor, in respect of matter beyond the principal debt, to exercise due care to
preserve the value of the surety’s right of recourse against the assets of the debtor.

MARGO J [as to ‘nominee’ directors]: [163] A director is in that capacity not the servant
or agent of the shareholder who votes for or otherwise procures his appointment to the
board (the position of ‘nominee’, though referred to in the plea, would not seem to have
the legal consequences alleged by the defendants). The director’s duty is to observe the
utmost good faith towards the company, and in discharging that duty he is required to
exercise an independent judgment and to take decisions according to the best interests of
the company as his principal. He may in fact be representing the interests of the person
who nominated him, and he may even be the servants or agent of that person, but, in
carrying out his duties and functions as a director, he is in law obliged to serve the
interests of the company to the exclusion of the interests of any such nominator,

406
employer or principal. He cannot therefore fetter his vote as a director, save in so far as
there may be a contract for the board to vote in that way in the interests of the company,
and as a director, he cannot be subject to the control of any employer or principal other
than the company.

[As to the duty of care and skill. . . The extent of a director’s duty of care and skill
depends to a considerable degree on the nature of the company’s business and on any
particular obligations assumed by or assigned to him. . . . In that regard there is difference
between the so-called full-time or executive director, who participates in the day to day
management of the company’s affairs or of a portion thereof, and the non-executive
director who has not undertaken any special obligation. The latter is not bound to give
continuous attention to the affair of his company. His duties are of an intermittent nature
to be performed at periodical board meetings, and at any other meetings which may
require his attention. He is not, however, bound to attend all such meetings, if he has
reasonable grounds for believing such to do so. . . . Of course if he has reasonable
grounds for believing such to be necessary, he ought to call for further meetings.
Nowhere are his duties and qualifications listed as being equal to those of an auditor or
accountant. Nor is he required to have special business acumen or expertise, or singular
ability or intelligence, or even experience in the business of the company. . . . He is
nevertheless expected to exercise the care which can reasonably be expected of a person
with his knowledge and experience. . . . A director is not liable for mere errors of
judgment. . . . In respect of all duties that may properly be left to some other official, a
director is, in the absence of grounds for suspicion, justified in trusting that official to
perform such duties honestly. He is entitled to accept and rely o the judgment,
information and advice of the management, unless there are proper reasons for querying
such. Similarly, he is not bound to examine entries in the company’s
books. . . .Obviously, a director exercising reasonable care would not accept information
and advice blindly. He would accept it, and he would be entitled to rely on it, but he
would give it due consideration and exercise his own judgment in the light thereof.
Gower (at 602 et seq) refers to the striking contrast between he directors’ heavy duties of
loyalty and good faith and their very light obligations of skill and diligence.

407
Nevertheless, a director may not be indifferent or a mere dummy. Nor may he shelter
behind culpable ignorance or failure to understand the company’s affairs. . . .
[On the facts, the courts held that the plaintiff’s nominees had not acted recklessly or
even negligently.]

DIRECTORS: CONDUCT TOWARDS MEMBERS OF THE COMPANY

The right to deal in shares
Percival v Wright
[1902] 2 Ch 421
Certain shareholders wrote to the secretary of the company asking if he knew anyone
disposed to purchase shares. Negotiations took place and eventually the chairman of the
company and two other directors purchased the shares of the plaintiffs at ₤12 10s per
share. The plaintiffs subsequently discovered that, prior to and during their own
negotiations for sale, the chairman and the board had been approached by a third party
with a view to the purchase of the entire undertaking of the company at prices which
represented considerably over ₤12 10s per share. In the event the negotiations with the
take-over bidder proved abortive.

The plaintiffs asked to have the sale of their shares to the chairman and the other two
directors set aside on the ground that the defendants as directors ought to have disclosed
the negotiations with the take-over bidder when treating for the purchase of the plaintiffs’
shares. Their action was dismissed with costs.

SWINFEN EADY J: [425]. . . Directors must dispose of their company’s shares on the
best terms obtainable, and must not allot them to themselves or their friends at a lower
price in order to obtain a personal benefit. They must act bona fide for the interests of the
company.

The plaintiffs’ contention in the present case goes far beyond this. It is urged that the
directors hold a fiduciary position as trustees for the individual shareholders, and that,
where negotiations for sale of the undertaking are on foot, they are in the position of
trustees for sale. The plaintiff admitted that this fiduciary position did not stand in the

408
way of any dealing between a director and a shareholder before the question of sale of the
undertaking had arisen, but contended that as soon as that question arose the position was
altered. No authority was cited for that proposition, and I am unable to adopt the view
that any line should be drawn at that point. It is contended that a shareholder knows that
the directors are managing the business of the company in the ordinary course of
management, and impliedly releases them from any obligation to disclose any
information so acquired. That is to say, a director purchasing shares need not disclose a
large casual profit, the discovery of a new vein, or the prosper of a good dividend in the
immediate future, and similarly a director selling shares need not disclose losses, these
being merely incidents in the ordinary course of management. But it is urged that, as
soon as negotiations for the sale of the undertaking are on foot, the position is altered.
Why? The true rule is that a shareholder is fixed with knowledge of all directors’ powers,
and has no more reason to assume that they are not negotiating a sale of the undertaking
than to assume that they are not exercising any other power. . . . The contrary view would
place directors in a most invidious position, as they could not buy or sell shares without
disclosing negotiations, a premature disclosure of which might well be against the best
interest of the company . . . .

. . . There is no question of unfair dealing in this case. The directors did not approach the
shareholders with the view of obtaining their shares. The shareholders approached the
directors, and named the price at which they were desirous of selling. . . .

Prohibition on insider dealing

Diamond v Oremuno
248 NE 2d 910 (1969) (NY Court of Appeals)
The directors of a company, MAI, knowing that because of an increase in expenses,
profits had fallen drastically, sold their shares on the market at $28 a share, before the
information was made public. Subsequently the shares dropped to $1. The court decided
that by virtue of their common-law fiduciary duties, the directors were liable to the
company for the difference, although the company was not the party who had suffered
the loss.

409
FULD CJ: [912] It is well established, as a general proposition, that a person who
acquires special knowledge or information by virtue of a confidential or fiduciary
relationship with another is not free to exploit that knowledge or information for his own
personal benefit but must account to his principal for any profits derived therefrom. . .
This, in turn, is merely a corollary of the broader principle, inherent in the nature of the
fiduciary relationship that prohibits a trustee or agent from extracting secret profits from
his position of trust.

In support of their claim that the complaint fails to state a cause of action, the defendants
take the position that, although it is admittedly wrong for an officer or director to use his
position to obtain trading profits for himself in the stock of his corporation, the action
ascribed to them did not injure or damage MAI in any way. Accordingly, the defendants
continue, the corporation should not be permitted to recover the proceeds. They
acknowledge that, by virtue of the exclusive access which officers and directors have to
inside information, they posses an unfair advantage over other shareholders and,
particularly, the persons who had purchased the stock from them but, they contend, the
corporation itself was unaffected and, for that reason, a derivative action is an
inappropriate remedy.

It is true that the complaint before us does not contain any allegation of damages to the
corporation but this has never been considered to be an essential requirement for a cause
of action founded on a breach of fiduciary duty. . . This is because the function of such
an action, unlike an ordinary tort or contract case, is not merely to compensate the
plaintiff for wrongs committed by the defendant but, as this court declared many years
ago, ‘to prevent them, by removing from agents and trustees all inducement to attempt
dealing for their own benefit in matters which they have undertaken for others, or to
which their agency or trust relates.’

Just as a trustee has no right to retain for himself the profits yielded by property placed in
his possession but must account to his beneficiaries, a corporate fiduciary, who is
entrusted with potential valuable information, may not appropriate that asset for his won

410
use even though, in so doing, he causes no injury to the corporation. The primary
concern, in a case such as this, is not to determine whether the corporation has been
damaged but to decide, as between the corporation and the defendants, who has a higher
claim to the proceeds derived from the exploitation of the information. In our opinion,
there can be no justification for permitting officers and directors, such as the defendants,
to retain for themselves profits which, it is alleged, they derived solely from exploiting
information gained by virtue of their inside position as corporate officials.

411
DIRECTORS
A company’s business is managed and directed by a group of people called directors. It
is directors who give the company its physical existence. By section 203 of the Act 255,
any person who is appointed by the members of the company to direct and administer the
business of the company shall be deemed to be a director of the company, whether or not
he is called a director. It is clear therefore that the exact title by which a manager of a
company is called is immaterial, and the trend today is to refer to heads of companies as
Chief Executive, Chairman, or Governor.256 Tate and Chadwick, adapting Bowen J.’s
dictum in Whaley Bridge Calico Printing Co. v Green and Smith 257 stated that the terms
‘director’ or ‘ managing director’ are not terms of law but of business, usually summing
up a number of operations and functions familiar to the commercial world by which a
company is generally managed.258

The Act also provides in Section 203 (2) that unless otherwise stated,

(a) a reference to "the directors" is a reference to the directors acting

collectively;

(b) where a decision of the directors is required for them so to act, the
decision shall be made by resolution of the directors;
(c) a requirement that a document be signed by the directors shall be read as a
requirement that a majority of the directors sign the document.
Subsequent subsections provide as follows:

(3) A person, not being a duly appointed director of the company, who holds
himself out, or knowingly allows himself to be held out, as a director of
the company-

(a) shall be deemed to be a director for the purposes of all duties and
liabilities (including liabilities for criminal penalties) imposed on
directors by this Act; and
255
Section 203(1)
256
The term Governor is now used with respect to Banks, particularly the Bank of Zambia
257
(1880) 5 QBD 109, 111
258
Zimbabwe Company Law by Tett and Chadwick 2nd ed. 1986 Academic Books, Zimbabwe

412
 (b) shall be guilty of an offence, and shall be liable on conviction to a fine
not exceeding five hundred monetary units.
(4) A person, not being a duly appointed director of a company, on whose
directions or instructions the duly appointed directors are accustomed to
act shall be deemed to be a director for the purposes of all duties and
liabilities (including liabilities for criminal penalties) imposed on directors
by this Act.
(5) If a company-
(a) holds out a person; or
(b) allows a person to hold himself out;
as a director of the company, knowing that the person is not a duly
appointed director, the company shall be guilty of an offence, and shall
be liable on conviction to a fine not exceeding five hundred monetary
units.
(6) No limitation upon the authority of a director of a company, whether
imposed by the articles or otherwise, shall be effective against a person
who does not have knowledge of the limitation unless, taking into account
his relationship with the company, he ought to have had such knowledge.

(7) For the purposes of this section, a person shall not be considered to be a
person in accordance with whose directions or instructions the directors of
a company are accustomed to act, by reason only that the directors of the
company act on advice given by him in a professional capacity.

By section 204 of a company which carries on business for more than two months with
one director shall be guilty of an offence and shall be liable on conviction to a fine not
exceeding ten monetary units for each day that the default continues after the said period
of two months.

Appointment of Directors

413
The appointment of directors is provided for by section 206, which also provides that the
company’s articles could govern matters concerning directors appointment, rotation,
retirement, replacement, remuneration, vocation and matters relating to the directors
traveling to company meetings or otherwise in connection with the business of the
company.

The Act provides that the first directors of a company shall be those named in the
application of incorporation, and they shall hold office until the end of the first annual
general meeting when other directors shall be appointed. 259 Matters relating to the office
of the directors shall be decided by ordinary resolution of the general meeting.

Eligibility of Persons to be Directors

By section 207 the following shall not be eligible for appointment as director

(i) a body corporate

(ii) an infant
(iii) a person under other legal disability
(iv) a person restrained by a court order from so acting
(v) an undischarged bankrupt

A person shall lose the portfolio upon being adjudged bankrupt or being removed by
order of court from the office of trust on account of misconduct. The articles of a
company may provide further restrictions on the appointment or continuation in office of
its directors260. However, the Act requires that whosoever is appointed as director of a
company must consent in writing to be so appointed261.

Residential Requirement
Another mandatory qualification is that at least one of the directors, or where a company
has more than 2, more than half of the directors, including the managing director, and at
least one executive director, where these exist, shall be resident in Zambia. 262 If this

259
Section 206 (2)
260
Section 207 (4)
261
section 207 (5)
262
Section 208 (1)

414
provision is contravened, for more than two months, this shall constitute a ground for
winding up.263
This provision serves the purpose inter alia of empowering indigenous Zambians to
participate in business and ensure that a Zambian is involved in a foreign company
operating in Zambia for security reasons and /or reasons of an economic nature making it
necessary for an indigenous person to hold high office in a foreign company.

Directors Share Qualifications

Section 209 (1) provided that:

209. (1) Unless the company's articles otherwise provide, a director need not be
a member of the company or hold any shares therein.
(2) Where the articles require a director to hold a specified share
qualification, a person appointed as a director shall obtain his qualification
within two months after his appointment or such shorter period as may be
fixed by the articles.
(3) If a company amends its articles so as to introduce or increase the
requirement of a share qualification, every director holding office at the
date of the amendment shall obtain his qualification within two months
after the amendment or such shorter period as may be fixed by the articles.

(4) A director who-

(a) fails to comply with subsection (2) or (3); or
(b) ceases to hold the specified share qualification, at any time after so
complying; shall cease to hold office.
(5) A person who ceases to hold office under subsection (4) shall not be
re-appointed as a director of the company until he has obtained his
qualification.

Vacation of Office

Section 208 (2); Section 248 is also couched in the same terms.
263

415
This may arise from causes such as death, appointment of liquidator, a disqualification,
resignation, retirement or removal. In the case of resignation, the Act provides

210. (1) A director may resign his office by notice in writing to the company.

(2) In addition to the other circumstances specified in this Act, an office of

director shall become vacant if the director-
(a) is absent from meetings of the directors held during a period of six
months, without the consent of the directors;
(b) holds any office of profit under the company, except that of
managing director or principal executive officer, without the consent
of the company by ordinary resolution; or
(c) is directly or indirectly interested in any contract or proposed
contract with the company and fails to declare his interest as required
by this Act.
(3) The articles of a company may provide for the termination or vacation
of office in circumstances additional to those specified in this Act.

Article 58 of the Standard Articles provides that:

58. In addition to the circumstances in which the office of a director becomes

vacant by virtue of the Act, the office of a director shall become vacant if the
director makes any arrangement or composition with his creditors generally.

In the case of absence from meetings, he/she will only be disqualified if his/her absence
was voluntary. In Re London and Northern Bank, Macks Claim264, it was held that a
director who lived in Belfast and was ill and therefore unable to travel to London to
attend meetings had not vacated the office.

264

416
In the case of removal of a director, he/she does not deprive him/her of any compensation
or damages payable to him/her in respect of the termination of his/her appointment as
director, or of any appointment, e.g. as managing director, terminating with that as
director and nothing in the section derogates from any power of removal of the director
which may exist apart from the section (s. 175(6)). The director must however mitigate
the damages as far as possible. In Hutchful v H.K. Biney265, H, various described as
Managing Director and General Manager of second defendant company was removed in
purported exercise of powers granted under the articles which authorized the Governing
Director, inter alia “to remove any director, however appointed , and at any time.” There
was never an express contract with H. as Managing Director or General Manager. It was
held, following James v Thomas H. Kent & Co. Ltd.266, that a contract terminable by
reasonable notice will be implied. The court distinguished Read v Astoria Garage Ltd.267,
where the appointment and removal of the Managing Director were made under the
articles so that there was no room for any implied term.

On appeal to the Supreme Court, it was held that while H.K Biney could, as Governing
Director, remove the appellant in accordance with Article 12(a) of the Articles of
Association of the company, he could not do so as the General Manager as he purported
to have done, for such power was ultra vires the General Manager.

Position of Directors
Directors have been described as trustees and as agents. But it does not matter what they
are called for as Jessel M.R observed in Re Forest of Dean Coal Mining Co….268 their
true position ….is that they are merely commercial men managing a trading concern for
the benefit of themselves and all other shareholders in it. As directors, they are in a
position of trustees, because it is to the directors that the whole business of the company
is entrusted, all the monies paid for the business of the company.

As Trustees

265
266

267
268

417
As trustees, they control the company’s property to be applied for the purposes specified
and in the interest of the company and the English Limitations Act has been held to apply
to them as trustees. They are trustees of their powers and must exercise them bona fide
and not for the benefit of the company and for their own interest. In Piercy v S. Mills &
Co. Lt269., there were two directors and they had power to issue shares. Although the
company did not need to issue new shares, the directors issued new shares to themselves
and some of their supporters to ensure that they could control the company and thus by
their majority votes prevent the appointment of three new directors provided for in the
articles. The appointment of these new directors would have made the two existing
directors a minority on the board. It was held that the allotment of shares was not in the
interest of the general body of shareholder but in the personal interest of the two directors
and, therefore, void.

Directors must observe good faith towards shareholders and “directors who use their
powers as to obtain benefit for themselves at the expense of the shareholders, without
informing them of the fact, cannot retain those benefits, and must account for them to the
company, but where the directors have acted wrongly provided the acts are not ultra
vires, the acts can be ratified by the company.

The Directors are trustees for the company and not for the individual shareholders, nor
for the third parties who have contracted with the company. This rule was established in
the case of……….

On the other hand directors are not strictly accountable as other trustees and it has
therefore been said that they are not quasi trustees. In Re City Equitable Fire Insurance
Co. Ltd270. Romer J. observed as follows:

“it has sometimes been said that directors are trustees. If this means no more
than those directors in the performance of their duties stand in a fiduciary
269
(1920) 1 Ch 77. See also Lee Panavision Ltd v Lee Lighting Ltd (1991) BCC 620. And in Howard Smith
Ltd v Ampol Petroleum (1974) AC 821 the House of Lords held that it might in some circumstances be
proper to issue shares for purposes other than the raising of capital for the company, but it would be
“unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the
purpose of destroying an existing majority or creating a new majority which did not previously exist.”
270
(1925) Ch 407

418
 relationship to the company, the statement is true enough. But if the statement
is meant to be an indication by way of analogy of what those duties are, it
appears to me to be wholly misleading.”

As agents
We have seen earlier that directors may for certain reasons be described as the organ of
the company. They are also in some circumstances agents of the company by whom it
acts. When they act within the scope of their authority and on behalf of the company,
they, like other agents, incur no personal liability, but if they exceed their authority, they
may become liable for breach of warranty.

Fiduciary duties
The primary duty of directors is the management of the affairs of the company. They are
managers rather than servants of the company and owe a fiduciary duty to the company,
first, to exercise their powers bona fide for the purpose for which the are conferred and
for the benefit of the company as a whole and, secondly, not to put themselves in a
position in which their duties may conflict with their personal interests.

Fiduciary duty as a common law duty of care and skill was established in the case of Re
City Equitable Fire Insurance Co and is famous for the proposition by Romer J that:

“a director need not exhibit in the performance of his duties a greater degree
of skill than may reasonably be expected from a person of his knowledge
and experience”

Foster J in Dorchester Finance Co v Stebbing (1989) BCLC 498 distinguished Romer J’s
proposition in Re City Equitable Fire Insurance Co as relating to the duty of care and
skill, and said that this was different from the duty of diligence, where a director was
required to exercise “such care as an ordinary man might be expected to take on his own
behalf”. Thus Romer J’s test is objective while Foster J’s is subjective, yet the line
separating them is very thin. It seems to be settled now that both elements of the duty of
care are to be assessed objectively, that is that an assessment of what the director should
have done or known is to be based on what should have been done by a ‘reasonably

419
diligent person having both (a) the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the same functions as are carried out by
that director in relation to the company and (b) the general knowledge, skill and
experience that that director has. Liability of the directors, therefore, will depend on the
knowledge and skill of a particular director as well as his or her experience and his or her
functions and these are bound to vary from one director to another, and will depend on
whether or not one is a professional, or an executive or non-executive director.

Exercise of Power for the benefit of the Company

To be in the interest of the company, the exercise of the power must be inter vires.
Where a decision of the directors is bound to benefit some members while affecting
others adversely, the directors will have to consider what is fair between the two. Even a
nominee director’s duty as director is to the company, not to the person whose nominee
he is, and an agreement between him and that person cannot absolve him for this duty.

Conflict of interests
Directors, as trustees or agents, must account to the company for any profits made by
virtue of their office. Usually directors come into possession of an opportunity or
information which should be used for the company’s benefit, but which they use for their
own benefit and make a profit. A “director must not, without the consent of the company
make any profit of his position in the company, beyond his agreed remuneration.” In
Regal (Hastings) Ltd. v Gulliver, R. Ltd 271 owned a cinema and wanted to buy two others
with a view to selling the three of them together. For this purpose they formed a
subsidiary A.B Ltd to buy the two cinemas. The directors subscribed for some of the
shares in A.B Ltd so as to provide adequate capital for the purpose. The cinemas were
purchased and the shares in both R. Ltd and A.B. Ltd were sold at a profit. It was held
that the directors could not retain their profit from the shares bought by them since the
shares were obtained by them through their position as directors.

The director is precluded from dealing on behalf of the company with himself and from
entering into arrangements in which he has a personal interest conflicting, or may

271
(1942) 1 All ER 378

420
conflict, with the interest of those whom he has a fiduciary duty to protect unless the
company affirms or adopts his acts, provided that such affirmation or adoption is not
brought about by unfair or improper means. If in breach of this duty he enriches himself
unjustly, he cannot keep the money, and the company may be ring an action for
restriction to recover the amount involved.

Similarly, a director cannot, without the consent of the company, accept from a promoter
any gift either during or after the promotion.

In view of the position and duties of the directors, various rules are made to ensure that
there is no conflict of interest. These rules relate to:

(i) contract with the company,

(ii) loan to the director,
(iii) payment for loss of office, and
(iv) disclosure of director’s emoluments

Contract with company

The general rule is that director cannot make, or be interested in a contract with the
company unless affirmed by it, but this rule may be modified by the articles. Section 218
permits a director to be interested directly or indirectly in a contract with the company
provided he or she declares the nature of his or her interest in accordance with the section
which provides that a director who is interested in any contract or proposed contract of
the company shall declare the nature and extent of his interest at a meeting of the
directors or shareholders of the company”.272 If he is interested in a proposed contract,
the declaration must be made at the first meeting of the directors at which the question of
entering into the contract was first considered, and where the director becomes interested
after the contract is made, the declaration must be made at the first meeting of the
directors held after the director becomes so interested.273 It is sufficient for the purpose of
the section for the director to give general notice to the directors of the company that he

272
Section 218 (4)
273
Section 218 (5)

421
is a member of a specified body corporate or firm274 or specifies the nature and extent of
interest275 and states that he is to be regarded as interested in any contract which may,
after the date of the notice, be made with that body corporate or firm.276 The declaration –

“shall be a sufficient declaration of interest in relation to any contract so made

unless, at the time the question of confirming or entering into any contract is first
taken into consideration by the company, the extent of his interest in the body
corporate or firm is greater than is stated in the declaration.”

Failure to give notice of the director’s interest will make the contract voidable at the
instance of the company, and the director shall be liable on conviction to a fine not
exceeding five hundred monetary units.277

Voting by director interested in contract

The articles usually make provisions for this. For example, articles may provide as
follows:
“ A director shall not vote in respect of any contract or arrangement in which he
is interested, and if he shall do so, his vote shall not be counted, no shall be
counted in the quorum present at the meeting, but neither of the these
prohibitions shall apply to:

(a) any arrangement for giving any director any security or indemnity in
respect of money lent by him to or obligations undertaken by him for the
benefit of the company; or

(b) any arrangement for the giving by the company of any security to a third
party in respect of debt or obligation of the company for which the
director himself had assumed responsibility in whole or in part under a
guarantee or indemnity or by the deposit of a security; or

(c) any contract by the director to subscriber for or underwrite shares or

debentures of the company; or

(d) any contract or arrangement with any company in which he is interested

only as an office of the company or as holder of shares or other
securities;

274
Section 218 (7) (a)
275
section
276
Section 218 (7) (b)
277
Section 218 ( 7) (c)

422
 and these prohibitions may at any time be suspended or relaxed to any extent,
and wither generally or in respect of any particular contract, arrangement or
transaction, by the company in general meeting”.278

The Act provides that:

(8) Subject to this section and the articles, where a contract or arrangement in
which a director is interested is considered at a meeting-

(a) the director shall not be counted in the quorum required for that business;
and
(b) the director shall not vote in respect of that business. 279

Loan to the Director

The Act prohibits loans by companies to director. A company cannot make a loan to a
director of the company or a director of its holding company, or enter into any guarantee
or provide any security in connection with a loan to a director.

219. (1) This section shall apply to the following companies:

(a) a public company;

(b) a company related to a public company;

(c) a company in a prescribed class of company.

(2) A company to which this section applies shall not-

(a) make a loan to a director of the company or of a related body

corporate;

(b) enter into any guarantee or provide any security in connection with a
loan made by any other person to a director of the company or of a
related body corporate; or

(c) subject to this section-

(i) make a loan to; or

278
Section 218 (10)
279
Section 218 (8)

423
 (ii) enter into any guarantee or provide any security in connection
with a loan made by any other person to;

a body corporate in which a director or directors of the company,

or their nominees, hold shares having in total one-fifth or more
of the value of its issued share capital.

(3) This section shall not prohibit a company from making a loan to a
related body corporate, or entering into a guarantee or providing
security in connection with a loan made by any other person to a
related body corporate.

(4) This section shall not prohibit a company whose ordinary business
includes the lending of money, or the giving of guarantees in
connection with loans made by other persons, from making a loan to,
or entering into a guarantee or providing security in connection with, a
director or a body corporate referred to in paragraph (c) of subsection
(2)-

(a) if the prior approval of the company has been given at a general
meeting at which the purposes of the expenditure and the amount
of the loan, or the extent of the guarantee or security, were
disclosed; or

(b) on condition that the loan shall be repaid, or the liability under the
guarantee or security shall be discharged, within eighteen months,
if approval is not given by the company within twelve months at a
general meeting at which the purposes of the expenditure and the
amount of the loan, or the extent of the guarantee or security, are
disclosed.

(5) A company may advance to director of the company or of a related body

corporate funds to meet expenditure incurred or to be incurred by him
for the purposes of the company or for the purposes of enabling him
properly to perform his duties as an officer or employee of the company,
provided that the total amount advanced to such persons does not exceed
one per centum of the assets of the company less the liabilities of the
company as shown in the last audited balance sheet of the company.

(6) If a company fails to comply with this section-

(a) the company, and each officer in default, shall be guilty of an

offence, and shall be liable on conviction to a fine not exceeding five
hundred monetary units; and

424
 (b) the directors who authorised the making of the loan or the entering
into the guarantee or the providing of the security shall be jointly and
severally liable to indemnify the company against any loss arising
therefrom.

(7) This section shall not apply in relation to a loan, guarantee or security
made or provided before the commencement of this Act.

Payment to Directors for Loss of Office

It is unlawful for a company to pay a director a compensation for loss of office or as
consideration for or in connection with his retirement from office, unless particulars of
the proposed payment and the amount are disclosed to members of the company and the
proposal approved by the company280. Disclosure must be to all members including those
who have no right to attend the meeting and vote while the payment is still being
proposed.

It is unlawful to pay compensation to a director for loss of office or retirement in

connection with the transfer of the whole or part of the undertaking or property of the
company unless particulars of the proposal and the amount are disclosed to members of
the company and approved by the company by an ordinary resolution281. Where a
payment is made in contravention of the section, the amount received by the director is
deemed to have been received in trust for the company.282

Disclosure of Director’s Emolument

In order to ensure that directors do not abuse their position for personal advantage as
against other shareholders, the former Act required that the accounts be laid before the
company in general meeting showing, inter alia,

(i) the aggregate amount of emoluments of the directors and

(ii) the aggregate amount of pensions of directors or past directors; and
(iii) the aggregate amount of any compensation to directors or past directors for
loss of office 283
280
Section 222 (1)
281
Section 222 (2)
282
Section 222(3)
283
in accordance with Cap 686 Section 187

425
These amounts were required to include all relevant sums paid by or received from the
company, its subsidiaries or other person unless exempted. Where the account failed to
make the required disclosure, the auditors must in their report, give the required
particulars. Report as much detail as possible. The current Act does not have an
equivalent provision.

CHAPTER 10

GENERAL MEETING

The General Meeting is composed of shareholders and other persons such as auditors,
trustees in bankruptcy a representatives of deceased members representing bankruptcy
members.

1. Statutory meeting (sec 108) to be held within 6 months after the date of
commencement of business by the company.
2. Animal General Meeting (S109) Table A Act 47. Held every year and not
more than 15 months after holding the last proceeding general meeting.
Ordinarily it considers and resolves questions relating to dividends

426
 accounts, balance sheets, reports of directors and auditors and elect
directors.
3. Extra Ordinary Meeting (article 49 Table A) This is any other meeting
which is not a statutory meeting or annual general meeting. It is convened
at the disoretion of the company. (Table A article 49 (a) members entitled
to requisition the extraordinary meeting must hold at least 1/5 of the issued
share capital.

S11D – Provision for the court to order the holding of such meeting in circumstances
in subsec.1

In general, the meeting has power under the Act to constitute of board of directors and to
alter the memorandum of association and the objects.

Resolutions
2. Ordinary resolution passed in an ordinary general meeting by a simple majority –
minimum notice for convening such meeting and resolutions is 7 days sec. 113.
3. Extraordinary resolution S112, 113 - minimum notice is also 7 days. Substance
must be indicated to the shareholders in the notice. Resolution must be passed by
a majority of 3/4. When the notice is given and there is an intention to pass a
resolution, the shareholders must be told.
4. Special resolution Notice must also be given to the shareholders. Minimum
notice to come within 21 days and there must be a special majority of 3/4. It is
also possible for 95% holders of the nominal value shares of the company to
agree during a general meeting to pass a particular resolution as a special
resolution even at less than 21 days notice S112 (2).
The resolution must be annexed to every copy f the articles of association issued after the
resolution has been passed. Special resolutions are the methods used to amend the
articles. That is why they must be annexed. One or more of these instruments can be
regarded as supreme authority to the subject matter of the constitution. Members in
general meetings may ratify acts of the directors which are ultra-vires the powers of the

427
directors but intra-vires those of the company – may send out a circular with signatures
of all members.

PARKER COOPER LIMITED V READING (1926) CH975 – no meeting was needed,

but members signed a circular, ratifying a debenture granted by the directors outside their
powers, through intra-vires the company.

It would appear such informal ratification applies only to matters that require ordinary
resolutions not those that can be passed at a general meeting. i.e. excluding special
resolution/extra-ordinary resolutions.

BOARD OF DIRECTORS – who are charged with the responsibility of running the
company – the Act does not define what is meant by directors and does not talk of a
board. The English Act have described a director as any person appointed as such under
the Act, to carry out functions in the Articles of association SS 63-68 and Table A.

Minimum age of directors is 21 years. The Act does not stipulate the minimum number
of directors text books on English law say minimum is 1 in a private company and 2 in a
public company.

The number may be stated in the Articles of association or subscribed even though there
is no authority in the memorandum to appoint directors – this is perfectly valid.

On application for registration on list of persons who have agreed to act as directors (S63
(1)(a) must sign by hand or authorized agents, the memorandum of association and must
be subscribers of shares, and must indicate the numbers of shares he has beside his name,
the amount of his share qualification/shares (but need not be members of the company in
which case no qualification shares must be held.

Qualification shares, if provided for, must be taken with 2 months of appointment. If not
the appointment should be terminated. See case.

428
If a director office ceases to hold qualification shares, he should automatically vacate
office – there we penalties for unqualified people centre as directors. See Article on
disqualification of directors.

SS 80-87 Rotation of directors – all retire at the first annual general meeting, though
eligible for re-election 1/3 retire at every annual general meeting.

How a Company’s Agents are Appointed

Since a company is an artificial person one may wonder how it appoints its agents – the
basic point here being that agency involves a principal. It is easy in case of un-
incorporated companies because there, natural persons appoint other natural persons as
their agents. But it is difficulty in case of incorporated companies. Authenticate the acts
of the company; but this was not good enough because someone had to affix the seal; and
should that somebody affix the seal without lawful authority by the company, the latter
would not be bound. Hence a new idea was found whereby decisions of the majority of
the members of the company in general meetings were to be taken as being the acts of the
company itself. HARDWICKE F.C IN A-G V DAVY (1741) said: it cannot be disputed
that wherever a certain number are incorporated, a majority part of them may do any
corporate act, so if we summoned, and private do appear, a majority of those that appear
may do a corporate act…it is not necessary that every corporate act should be under the
seal of the corporate.

However, since it is not easy for day-day decisions to be taken in general meetings, this
rule has got to be supplemented and so in practice there is provision to appoint a Board of
Directors to which all powers of management are delegate. Director can, in term, sub-
delegate to a committee or a managing director.

All these things are to be founded in the company’s constitution. Thus authority to
exercise the company’s constitution. Thus authority to exercise the company’s powers is
delegated not to individual directors nor to the members; but to the board of directors.

429
But sub-delegation of powers by the Board can be done to individual officers (e.g. M.D.)
Therefore there is agency relationship as between the company and the board and the
officers; but there is nothing between the members or between the members themselves;
unlike in partnership where each members is an agent of the other.

The Board of Directors

Every registered company has got to have directors. According to Act 69 of Table A of
the Act, the number of the directors and the names of the first directors shall be
determined in writing by a majority of the subscribers of the memorandum. Each
director has got to hold or least one share in the company. Among the things that can
disqualify a director from his post are (Act 78 of Table A).

(a) See 65 of the Act – taking the shares within 2 months

(b) If he happens to happens to hold any other office of profit under the company
except that of managing director or manager;
(c) Because bankrupt; or
(d) Becomes lunatic or of unsound mind; or
(e) Is concerned or participates in the profits of any contract with company.

However, a director can be a member of any other company while he still acts as
directors of the very company.

Therefore, in Zambia directors can be members of the company because the definition of
members in S41 of the Act includes every subscribers tot eh memo of the company and
whose name is entered on the Register of member of the company.

It appears that a director need not be a natural person: another company can be appointed;
and this practice is quite useful in that it enables a holding company to maintain complete
control of …..subsidiary company – though the Jenkins committee recommended the
abandonment of it in England.

430
Division of Powers between the General Meeting
The Board:-
The …to be considered is which, as between the Board of Directors and the General
Meeting really speaks as a company? The notion all along till the end of the 19th
Centaury, has been that the General Meeting was the company while directors were
merely agents, and subject to the control of the company in General Meetings. But in the
cease of AUTOMATIC SELF-CLEANSING-FILTER SYNDICATE V
CUNNINGHAME (1906) 2 CH D 34 The C.A ruled that the division of powers between
the board and the General Meeting (in case of incorporated companies) depended on the
construction of the articles of association and where powers have been rested in the
Board the general meeting could not interfere with their exercise. In this case the
relevant article has rested all management powers of the company into the directors so
long as such powers were not, by statute or the articles, expressly required to be exercised
by the company in general meeting. In actual fact the directors had refused to carry out a
sale agreement adopted by an ordinary resolution in a general meeting. The C.A held
that the directors were entitled to do so. This case indicates the relationships between the
Board and the General Meeting is based on the contract as outlined in the articles of
association. The directors and other officers are elected in accordance with the articles ad
are, therefore, deemed to be subject with the duties of the directors if the latter have
matter That are reserved to them by the Articles (this is the notion of Article 72 of table
A) of association unless they are acting contrary to the Act or the Articles.

In SHAW & SONS (Salford) Limited v SHAW (1935) 2 KB – in which a resolution of

the general meeting disappointing the commencement of an action by the directors was
held to be a military, Lord Greer expressed the modern doctrine as follows:

“A company is an entity distinct …from its shareholder and directors. Some of its
powers may, according to its articles, be exercised by the directors; certain others
may be reserved for the shareholders in general meeting. If powers of
management are vested in the directors, they and they alone can exercise these
powers. The only way in which the general body of the shareholders can control

431
 the exercise of the powers vested by the articles, in the directors is by altering
their articles, by re…..to re-elect the directors whose action they disapprove.
They cannot themselves usurp the powers which by the articles are vested in the
directors any more than the directors can usurp the powers vested by the Articles
in the general body of the shareholders”

This means that the modern doctrine is the idea whereby, in certain cases, the Board of
Directors speaks as company and others the General Meeting does so, all depending on
the articles of association. But generally the board acts as the company in those matters
that are reserved for it by the articles and these are many. Therefore, both the general
meeting and the board may be the company; or alternatively, both organs rather than
agents of the company.

Summary
According to article 72 of Table A of cap 686 members in a General Meeting cannot pass
directors on how the company’s affairs are to be managed; neither can they overrule any
decision of the directors made in course of conducting its business. This is equally
applicable to matters not specifically delegated to the directors but upon which they have
acted. The directors are only precluded from acting upon those matters that are expressly
reserved for the General Meeting; otherwise they can do anything so long as such acts are
not ultra-vires the articles nor the provision of cap 686.

NB
It has been held quite a number of cases that if for some reason the Board fails to exercise
powers vested in them, the general meeting may do so. On this ground action by general
meeting has been held legally effective where there was a deadlock on the Board, where
an effective quorum could not be obtained etc. And in MARSHALL’S VALVE GEAR
COMPANY V WARDLE & COMPANY (1909) 1 Ch D it seems to be the law that even
though the general meeting cannot prevent the directors from conducting business in the
name of the company, it still can commence proceedings on behalf of the company if the
directors fail to do so.

432
The whole thing is now a tie since the phrase used is “for any reason” if the directors fail.
The directors are bound to fail to exercise their powers; and the result is that the general
meeting can always take action if the directors happen to resolve against a certain issue:
consequently, or ultimately discretion powers will be, thus, reverting from the directors to
the members. Our act seems to be silent on this issue and therefore we shall be directed
by common law.

Generally speaking, the Board may refer any matter to the general meeting either to ratify
what the directors have done or to decide themselves on action to be taken – provided
that the act to be ratified is intra-vires the powers of the company. The general meeting
is in such maters, expected to act with full knowledge and bonafida in the interests of the
company. In BAMFORD V BAMFORD (1969) 2 WLR 1107 It was observed that any
act of the directors which is voidable because e.g. it is in breach of their fiduary duties,
can be ratified by the company in a general meeting if the act is within the powers of the
company. Thus ratification may be effected where the Board purported to act in matters
which were outside their powers but within the powers of the general meeting.

The case in point is GRANT V U.K. SWITCHBACK RYS (1888) 40 CH D 135

The Managing Director (M.D)

By virtue of Act 73 of Table A of cap 686 the Directors are empowered to appoint one or
more of their number to the office of managing director for such period and on such
terms as they shall think fit. While holding such office the managing director can not be
retired by say of rotation but the determination of his tenure could be affected of the
company in general meeting resolves to bring his term of office to an end; or equally, if
due to any reasons mentioned in article 78 of Table A (ante) he cease to be a director.

Subject to the Articles, the powers and duties of a managing director depend upon his
contract with the company. This appointment is quite powerful and in delegating its

433
powers to the managing director, the board should be careful to avoid “over –
delegation”. In CADDIES V HOLDSWORTH COMPANY LIMITED (1955) 1 AER
Caddis was appointed and managing director of the defendant company. The service
agreement provided that he should perform the duties and exercise the powers in relation
to business of the company and the business of its existing subsidiary companies which
might from time to time be assigned to or vested in him by the directors. Later the
directors resolved that cadduis should confine his attention to a particular subsidiary
company. He sued for damages for the breach of contract.

The House of Lords held that this was not a breach of contract the service agreement, not
with standing that he was thereby deprived of any managerial functions in relation to the
company employing him. This point illustrates the point that the managing director may
be appointed on terms that he shall only perform such duties as are from time to time
assigned their orders and further instructions.
Wrongful dismissal of a managing director would mean the company paying a large
amount to him by way of liquidated damages. This was so in SHINDALER V N.
RAINCOAT COMPANY LIMITED (1960) Where S was appointed managing director
of N company limited (1960) a subsidiary of L. Company, for 10 years. (The articles of
N limited provided that the managing director appointment should be automatically
determined if he ceased to be a director or if the company in a general meeting resolved
to terminate his appointment). M company bought the shares in L. Company and at a
general meeting of N. company limited resolutions were passed removing S from office
as director and terminating his service agreement. S sued for damages for wrongful
dismissal.

Held
S succeeded. He was an implied term of service agreement that N. company would do
nothing of its own motion to put an end to the state of circumstances which enabled S to
continue as managing director.

434
The Secretary
His functions are purely administrative and cannot, normally bind the company by
entering into a contract on its behald; except perhaps on matters of employing people as
members of staff of the company. E.g. clerical staff. But the secretary ensures that the
documentation system of the company is in order, that returns are made to the company’s
Registry and that the company’s registers are properly maintained. He keeps the minutes
and resolutions of the Board and the company’s seal can only be affixed to any document
in the presence of or at least 2 Directors and the Secretary. (Article 77 of Table A).

The secretary cannot act as director at the same time. He is appointed by the Board.

Liability of the Company for the Acts of its Organs and Officers
This topic has to do with the examination of the relationship that exists, in terms of duties
and liabilities, between the company and its officials on one hand, and Ts (third parties)
on the other. Both Qs of agency and vicarious liability are featured here.

We have already ascertained that the powers of the company are in the memorandum of
association and exercisable either by the board of directors or the general body of
shareholder as the case may be. These powers are delegatable.

The Rule in Turquand’s Case

This concerns certain aspects of the law of agency. For the purpose of this topic it is
enough to say that the principal is liable if the agent is doing:
(i) what he is actually authorized to do – i.e. actual authority” of the agent.
Dipleck J.K defined actual authority as a relationship between P and A created
by the consent to which they alone are parties. It means authority given to A
by P through a specific resolution of the board or the general meeting.
(ii) Apparent (or ….) authority – this is a legal relationship between P and
contractor created by a representation made by P to T, intended to be and in
fact is acted upon by the contractor that the A has authority to enter on behalf
of P into a contract of a kind within the scope of the apparent authority as such.

435
If A possesses either of these authorities, his acts on behalf of the company bind the
company unless they are ultra-vires – the company.

The problem that arises is to what extent is the person dealing with the company bound to
verify whether A with whom he is transacting is acting within the scope of his authority?
T will be, in this case, alleging that he has acquired rights against the company as a result
of transacting with the responsible agencies of the company. The real question being, is
T dealing with the company obliged to ensure that all internal regulations of the company
have been complied with as regards the exercise and obligation of authority?

In the famous case of ROYAL BRITSH BANK V TURQUAND (1856) this question
was negatively answered for the purpose of allowing business to be conveniently carried
out rather than asking every one who dealt with the company to go and examine its
internal machinery in order to make sure that he was dealing with the company officials
who possessed actual authority.

Under the registered deed of settlement the board directors were authorized to borrow on
bond such sums as should from time to time be authorize by a resolution of the company
in a general meeting. The board borrowed money from the bank on bond bearing the
company’s seal. It was held that even if no resolution had in fact been passed by the
company in a general meeting, the company was nevertheless bound.

The case simply indicates that it is possible for the court to ….the Ts to assume that the
directors might have had authority to borrow the money – the rationale being one of
commercial convenience as stated earlier.

In other words, the TURQAND case says that where a person deals with a company and
contracts in good faith, he is entitled to think that X is empowered by the company and he
is not bound to inquire whether or not X has such authority i.e. whether rules of internal

436
management have been adhered to; unless he has actual knowledge of X’s non-adherence
to such rules.

An elaboration of the rule in TURQUAND is in MAHONY V EAST HOLYFORD

MINING COMPANY (1875) L.R (see post) Dr. has been found, however, that there is
need to place certain limitations on the scope of the TURQUAND rule, because the mere
fact that somebody purports to act on behalf of a company cannot warrant an imposition
of liability an on the company.

Thus, the present law is set out thus:- Limitation 1 countes that person dealing with the
company is presumed to have constructive notice of its public documents and any act
which is ultra-vires or contra bonus these documents will not bind the company unless
subsequently ratified by the company.

Ts are deemed to have constructive notice of things that the company cannot do as
provided in its public documents whether or not they read such documents. It appears
that “public documents” now do not just refer to the memorandum and articles alone but
also to other documents filed at the Registry, such as special resolutions, particulars of
directors, and charges.

The Jankins Committee, however, recommended the abolition of this rule, as it is not
useful to the Zambian businessmen.

Limitation 2
Connotes that if upon having checked the public documents, everything appears to be
regular, a T is entitled to assume that internal regulations and organization of the
company have been adhered to, unless if he (T) has knowledge tot eh country or
suspicious circumstances do exist which urge him to make an inquiry.

The MAHONY CASE is quite in point here: The Company’s bank had received what
purported to be a formal copy of a resolution of the Board authorizing the payment of

437
cheques signed by any two of the three named directors and countersigned by the named
secretary. This copy was itself signed by the secretary. The Bank paid out cheques
accordingly. But the company was already heading for liquidation.

The liquidator sought to recover the money paid out by the Bank. On inquiring it turned
out that neither the directors nor the secretary had ever been formally appointed and no
formal company or directors meeting had ever been convened. The H.L held that the
liquidator could not recover. According to the articles, which the Bank was taken to
know, the directors were to be nominated by the subscribers of the memorandum and
cheques were to be signed in such a way as the Board might determine. The Bank
received a formal notice in the ordinary and prescribed manner. This is all the Bank was
supposed to look for; anything beyond this would have meant it looking into internal
management of the company.

What the H.L seems to suggest is that so long as T’s have inspected the articles and the
memorandum, they will be affected with or taken to have notice of all that is contained in
these documents. Thus, in the case above, it was found that the transaction was …..since
the money was said out bona fide and the company’s officers acted in accordance with
the provisions of the articles of the company. They were people in lawful offices and T’s
who deal with them in good faith should be protected under the law and therefore, they
need not inquire into the appointments of directors or any other officers as such.

Limitation 3
Connotes that a T who deals with a company through an officer (e.g. managing director)
who purports to exercise a power which that sort of officer would usually have, is entitled
to hold the company liable for the officer’s acts, even though the officers have not been
so appointed or is exceeding his actual authority. But where the officer exceeds his
actual authority the company would not be held liable if:

(a) a T knows that the officer has not been so appointed r has no actual authority;
(b) the circumstances are such as to urge him (T) to make an inquiry;

438
 (c) the public documents have stated that the officer has no actual authority, or
could have no authority unless a resolution has been passed which requires
filing as a public document has been done.

Where this rule applies it does not matter whether public documents have been checked.
This rule gives protection to T’s only in circumstances when the agent is acting within
the scope of his actual/usual authority as conferred upon him by the company – i.e. where
the officer has been properly appointed. However, even if the officer has not been
properly appointed, or if his usual authority has been taken away from him, the T still be
protected unless one of the conditions (a) (b) (c) is established. The same thing applies
where the T deals with either de jure or de facto Board of directors, unless public
documents show, without any reservations, that the Board has no power to act in the
matter.

A good illustration of this point is FREEMAN & LOCKYER & BUCKHUST PARK
PROPERTIES (MANAGAL) LIMITED (1964) 2 QB where the C.A held that a director
who assumed powers of the Managing Director, with the company’s approval, (although
he had never been so appointed) bound there’s by entering into a contract with the
plaintiff architects. The act of engaging architects was within the ordinary ambit of the
authority of an Managing Director of a property company and the plaintiff did not have to
inquire whether the person with whom they were dealing was properly appointed, it was
sufficient for them that under the articles there was in fact power to appoint him and that
the board of directors has allowed him to act as such.

It appears then, that the limitation on the requirement to make inquiry may result in a
company being bound by acts of its officers who have neither actual nor apparent
authority – so that a controversy as to whether constructive notice has any useful note to
play arises. Does it operate negatively, acting only negatively as a shield rather than as a
sword? So as T has to have actual notice in order to bind the company. DIPLOCK L.J.
in the above case summarizes the law by placing the basis of the rule in TURQUARND
case on the doctrine of Esloppel, i.e. where you have a person acting than office, no being

439
validly appointed but performing r being held to perform office duties, he says, there
must be for conditions to be fulfilled in order to bind the company:

(i) a representation must have been made to a T as a contractor, purporting that the
(agent) had authority to enter on behalf of the company into a contract of the kin;
(ii) The represent must have been made by a person with actual authority to
manage the company’s business general or in respect of matters to which the
particular contract relates;
(iii) the T (contractor) must have been include by and relied upon, the
representation to enter into the contract; and ;
(iv) that under the memorandum or articles of association of a company, the
company has not been deprived of the capacity either to enter into a contract
of the kind sought to be enforced or to delegate authority to enter into a
contract of that kind to the agent.

Therefore, T’s must ensure that they are dealing with officers who hold high posts in the
company, authority one, not Branch Managers etc, for a T is more secure if he deals with
a company director rather than a dubious sectional manager in the company, because
once one gets below the director level, the position because more problematical.

Limitation 4
Connotes that where on officer purports to exercise an authority which, in fact that sort of
officer would not usually have, the T will not be protected if the officer exceeds his
actual authority, unless the company has held him out as having authority to act in the
matter and T has relied thereon, i.e. unless T knows of the company is stopped. Even if
the company’s memorandum or articles or any other public documents may create an
estoppels the company still not be estoppels unless knows of the company’s estoppels.
Even if the company’s memorandum or articles or any other public documents many
creates an estoppels, the company will not be estoppels unless T knows of the company’s

440
estoppels as contained in the public documents and has actually relied up it, and therefore
registration at the Registration does not constitute notice.

The difference between limitations 3 – 4 is that rule 3 applies where the agent is acting
within the usual authority of that sort of officer, whereas rule 4 imposes liability only if
the company has held out the officer as having authority greater than the normal. But
both are based on estoppels.

Limitation 5
Connotes that a T who brings himself within the protection of rules 3 and 4 will not lose
his case simply because he happens to deal with an officer who, though ostensible, has
not been properly appointed. On the other hand, that officers must at least have been held
out in some way as an authorized officer of the company by either the board of directors
or the general meeting of members.

MAHONY’S CASE is quite clear on this matter. Also in FREMAN & LOCKYER’S
case it appears that the directors knew that one of their number was holding himself out
as Managing Director the company was bound by the directors act.

Limitation 6
Connotes that if a document purporting to be sealed by or signed on behalf of the
company is proved to be a forgery, the company will not be bound. But where an officer,
acting within his actual, usual or apparent authority, genuinely shows that document was
not a forgery and if through actual usual or apparent authority it can be shown that such a
transaction will be binding on the company, the company will be bound if the officer,
nonetheless had acted fraudulent or committed forgery. i.e. in other words, if where the
document is a forgery it cannot bind the company unless some official acting within his
authority has warranted it is genuine. Therefore if an official who has no such authority
warrants, the company work not be bound.

441
Can a director be an outsider (i.e.) Lord Denying in HELY-HUTCHINGSON V BRAY
HEAD LIMITED (1968) 1 QB (or director does not act in his capacity as director, and
therefore the company can be bound. Read: 1967 30 M.L.R. by note.

The raising of capital, what does it means? It means money evaluation of the business. It
includes furniture copy rights, land, patents, trade secrets or the good will and connection
of a going concern. It is the evaluation of the assets of the company in money terms –
assets represent profit sources of the company.

Grower says that capital is the net worth of a business, i.e. the amount by which the value
of assets exceeds liabilities. Assets may be either fixed or floating. In a single
accounting year (period) fixed assets are normally assumed to be constant. Fixed assets
include land in general. Floating (circulating or current) assets are those which are
turned over in the course of business of a company. E.g. goods in store, stock-in-trade.
These determine the annual profit.

Whether an asset is fixed or floating depends on the prevailing nature if business and not
on the invariable nature of the assets.

Before creditors can give credit to a company (and see whether it can pay back) they first
look at the capital of the company to see whether it can payback. Once capital is put in
business, the law ensures that it is maintained in that company.

(iii) Disclosure of Corporate Information

As this subject will be discussed further in a later chapter of this work, only those
aspects of corporate information that shareholders are expected to know or be
informed about will be mentioned here. Thus, apart from the right to attend and
vote at general meetings of the company, it is possible for a shareholder in
Zambian company to have ample information about the affairs of the company.
But this possibility does not present itself as a result of direct provisions in Cap.
686 relating to disclosure of corporate information for such are, by large, non-

442
existent. The chance for the shareholders to have available information about the
company’s accounts and the auditor’s report is only available where Table A has
been adopted as being the company’s articles of association or a similar model
adopted. This being the usual practice in Zambia it may therefore be asserted
that, generally, the shareholder in such companies has a right to have a copy of
every balance sheet and the directors’ report accompanying it showing the state of
the company’s affairs, and the amount which they recommend for dividend
payment, and for a reserve fund. This copy must be sent to every shareholder
seven days before the date general meeting.

Not only is the shareholder entitled to the balance sheet as explained above but is
equally entitled to a profit and loss account copy during the general meeting. So
at any rate a member of a company which has adopted table A for its articles is
sure of having access to such vital documents at the general meeting. It is either
they are sent to him or he can demand for then while attending the general
meeting. It must be noted however that although reg. 107 to 109 of Table A
requires the director’s report to be annexed to the accounts statements in so far as
it is material for the appreciation of the company’s affairs by its members, the
directors have been given tremendous discretion under Reg. 106 and at what
times and places, and under what conditions the accounts and books of company
shall be opened for the inspection of members who are not directors. This is a
very wide discretion which may be used against minorities, for example, under
the disguise of business secrecy the exposure of which, the directors might
contend, would prove harmful to the business of the company or that of its
subsidiaries.

Again, for those companies which adopt Table A for their articles provision is
made for the appointment of auditors to audit the accounts of the company. The
only weakness in the provisions relating to auditing of company accounts seems
to be that the company or the directors need not appoint independent auditors.
Thus reg. 113 of Table A provides that the auditors may be members of the

443
company….. But one would have thought that if members are to be fully
protected there is need to appoint an independent auditor. It is submitted that it is
not enough that reg. 113of Table A prohibits directors and other officers of the
company from being appointed auditors during the continuance of their term of
office. The Zambian legislature would do better by requiring companies to
appoint independent auditors as its counterpart in the U.K has done. The present
state of Cap. 686 with regard to information about company accounts and auditing
is not conducive to sound business management. The Act itself does not say
anything about the obligation of companies to keep books of accounts let alone, as
to how they should do that. The little that Table A provides about accounts does
not seem to deter directors and majority shareholders from the possibility of
flouting the desires and interests of minorities by making it difficulty for the latter
to have full information about the company’s financial position. What is required
therefore is to insert provisions in Cap 686 for fuller disclosure of corporate
information including accounts.

Apart from disclosure of information relating to accounts as seems above, there is

another major form of disclosure of company information: this is through
publicity. The word ‘publicity’ is here used to simply refer to the obligation
imposed on incorporated companies to file with the registrar certain information
relating to, for example, the company’s capital, directors, resolutions and powers.
The purpose of filling such information is, of course to enable all interested
parties including shareholders to have knowledge of the company’s affairs as well
as internal arrangements. It is therefore pertinent that interested parties are given
the right to inspect the company’s documents; and where irregularities appear the
interested party should be afforded the right to make a complaint to that effect to
appropriate authorities. It is now proposed to examine how Cap. 686 has
endeavoured to achieve this objective.

444
(iv) Inspection of Company Documents and Investigation of Company Affairs
The absence of statutory provision relating to accounts as described above may be
said to make folly of the provision under Cap. 686 where any person may inspect
the documents kept by the registrar on payment of the prescribed fee or require a
certificate of incorporation or a copy or extract of any document to be certified by
the registrar. Yet, this is a highly protective provision if only the companies can
be aware of the importance and need t furnish the registrar with more information
about themselves than they do at the moment. It is equally important that such
information if files within the time prescribed. Neither the registrar nor the
company can refuse any person to inspect documents which are kept by them. If
they did, process for compelling the production of any document kept by the
registrar or the company may issue from the court. This is otherwise a very
powerful provision for minority shareholders. But its effectiveness has been
diluted by the amount of discretion which directors and the majority of
shareholders in general meeting exercise and enjoy in this regard.

Closely related to the above is the power of the Minister to appoint one or more
competent inspectors to investigate the affairs of the company on the application
of members holding not less than 1/5 of the issued share-capital. The applicants
must show good cause for requiring such investigation. Similarly, any company
has power to appoint inspects to investigation the affairs of the company if the
company declares by a special resolution that its affairs ought to be investigated
by an inspector appointed by itself. The inspector makes the report to the
company in the general meeting, and not to the Minister as in the first instance. It
is suggested that for the purpose of speeding up the process of inspection of
company affairs the power given to the Minister under S118 of Cap. 686 be
transferred and vested into the Registrar of Companies. Such a move would
remedy two restraints namely (1) minimizing the bureaucratic process of having
to refer almost everything to the Minister, and (2) relieving the Minister from
acting on hear-say information in such matters since he is not directly responsible
for receiving and assessing company information as furnished at the registry of

445
 Companies; it is the Registrar who does that, and the Minister is usually inclined
to simply rely and act on the information about a certain company as given to him
by the Registrar. In addition the Registrar should be empowered to move the
court where he has reasonable cause to believe that the provisions of Cap. 686 are
not being complied with or is of the opinion that the documents submitted to him
do not disclose a full and fair account of the matters to which they purport to
relate. But he should be able to move the court only after having called upon the
company to furnish him with further information. If the company fails to do, or if
it does but the Registrar feels that unsatisfactory state of affairs is disclosed he
should report to court.

CHAPTER 10

GENERAL MEETINGS

General meeting as company’s supreme organ

Barron v Potter
[1914] 1 Ch 895
According to the articles of association of the British Seagumite Co Ltd, a private
company, the number of directors was to be not less than two or more than ten. The
articles also stated the quorum of directors was to be two, unless otherwise fixed by the
directors.
Early in 1914 there were two directors only, Potter, the chairman and managing director,
and Barron. The conduct of the company’s business was at a standstill as Barron refused
to attend any board meeting with Potter.
On 21 February Potter sent to Barron a notice requesting him to attend a board meeting at
the company’ office on 24 February. This notice, however, was not received by Barron
until a later date.
Barron happened to arrive by train at Paddington Station on 23 February, and was met on
the platform by Potter, who according to his evidence, seeing Barron alight from the
train, walked by his side along the platform and said to him. ‘I want to see you, please’.

446
Barron replied, ‘I have nothing to say to you’. Potter then said, ‘I formally propose that
we add the Reverend Charles Herbert, Mr William George Walter Barnard, and Mr John
Tolehurst Musgrave as additional directors to the board of the British Seagumite Co Ltd.
Do you agree or object?’ Barron replied, ‘I object and I object to say anything to you at
all’. Potter then said, ‘In my capacity as Chairman I give my casting vote in their favour
and declare them duly elected’. He continued to walk Barron a few steps and then said,
‘That is all I want to say. I thank you. Good day’.
The company in general meeting then purported to appoint an additional director.

WARRINGTON J: [901]. . . [1]n my opinion . . . there are no directors’ meeting at all for
the reason that Canon Barron to the knowledge of Mr Potter insisted all along that he
would not attend any directors’ meeting with Mr Potter or discuss the affairs of the
company with him, and it is not enough that one of two directors should say ‘This is a
directors’ meeting’ while the other says it is not. Of course if directors are willing to hold
a meeting they may do so under any circumstances, but one of them cannot be made to
attend the board or to convert a casual meeting into a board meeting, and in the present
case I do not see how the meeting in question can be treated as a board meeting. . . .There
was therefore no board meeting at which Canon Barron was present. Mr. Potter was
alone present, so that there was no quorum, and I must hold that the three additional
directors named by him were not validly appointed.
The question then arises, Was the resolution passed at the general meeting of the
company a valid appointment? The argument against the validity of the appointment is
that the articles of association of the company gave to the board of directors the power of
appointing additional directors, that the company has accordingly surrendered the power,
and that the directors alone can exercise it. It is true that the general point was so decided
by Eve J in Blair Open Hearth Furnace Co v Reigart [(1913) 108 LT 665], and I am not
concerned to say that in ordinary cases where there is a board ready and willing to act it
would be competent for the company to override the power conferred on the directors by
the articles except by way of special resolution for the purpose of altering the articles.
But the case which I have to deal with is a different one. For practical purpose there is no
board of directors at all. The only directors are two persons, one of whom refuses to act

447
with the other, and the question is, What is to be done under these circumstances? . . . If
directors having certain powers are unable or unwilling to exercise them – are in fact a
non-existent body for the purpose - there must be some power in the company to do
itself that which under other circumstances would be otherwise done. The directors in
the present case being unwilling to appoint additional directors under the power conferred
on them by the articles, in my opinion , the company in general meeting has power to
make he appointment. . . .

Proceedings at meetings and powers of the chairperson

National Dwellings Society v Sykes
[1894] 3 Ch 159
CHITTY J: [162]. . . A question of some importance has been mooted in this case, with
regard to the powers of the chairman over a meeting. Unquestionably it is the duty of the
chairman, and his function, to preserve order, and to take care that the proceedings are
conducted in a proper manner, and that the sense of the meeting is properly ascertained
with regard to any question which is properly before the meeting. But, in my opinion, the
power which has been contended for is not within the scope of the authority of the
chairman, namely to stop the meeting at his own will and pleasure. The meeting is called
for the particular purposes of the company. According to the constitution of the
company, a certain officer has to preside. He presides with reference to the business
which is there to be transacted. In my opinion, he cannot say, after that business has been
opened, ‘l will have no more to do with it; . . . I declare the meeting dissolve, and I leave
the chair’. . . . The meeting by itself. . . can resolve to go on with the business for which it
has been convened, and appoint a chairman to conduct the business which the other
chairman, forgetful of his duty or violating his duty, has tried to stop because the
proceedings have taken a turn which he himself does not like.

448
Voting rights
Pender v Lushington
[1877) 6 ChD 70
The chairman at a general meeting of a company in breach of the company’s articles
rejected as invalid certain votes which were cast. An action was brought by a shareholder
whose vote was rejected, on behalf of himself and all others who had voted with him,
naming the company as co-plaintiff, against the directors for an injunction to restrain
them from acting on the footing of the votes being bad. Two of the grounds on which
their case was based were, that the policy which was supported by the assenting
shareholders was adverse to the interest of the company, and that their own votes had
been improperly rejected by the chairman. The court rejected the first ground but
accepted the second one.

JESSEL MR: [75]. . . In all cases of this kind, where men exercise their rights of
property, they exercise their rights from some motive adequate or inadequate, and I have
always considered the law to be that those who have the rights of property are entitled to
exercise them whatever their motives may be for such exercise –that is as regards a court
of law as distinguished from a court of morality, if such a court exists. . . . [A] man may
be actuated in giving his vote by interest entirely adverse to the interests of the company
as a whole. He may think it more for his particular interest that a certain course may be
taken which may be in the opinion of others very adverse to the interest of the company
as a whole, but he cannot be restrained from giving his vote in what way he pleases
because he is influenced by that motive. There is. . . no obligation on a shareholder of a
company to give his vote merely with a view to what other persons may consider the
interest of the company at large. He has a right, if he thinks fit, to give his vote from
motives or promptings of what he considers his own individual interests.
This being so, the arguments which have been addressed to me as to whether or not the
object for which he votes were given would bring about the ruin of the company, or
whether or not the motive was an improper one which induced these gentlemen to give
their votes, or whether or not their conduct shows a want of appreciation of the principles
on which this company was founded, appear to me to be wholly irrelevant. . . .

449
. . . But there is another ground on which the action may be maintained. This is an action
by Mr Pender for himself. He is a member of the company, and whether he votes with
the majority or the minority he is entitled to have his vote recorded - an individual right
in respect of which he has a right to sue. That has nothing to do with the question like
that raised in Foss v Harbottle [(1843) 2 Hare 461, 67 ER 189] and that line of cases. He
has a right to say, ‘Whether I vote in the majority or minority, you shall record my vote,
as that is a right of property belonging to my interest in this company, and if you refuse
to record my vote I will institute legal proceedings against you to compel you’. What is
the answer to such an action? It seems to me it can be maintained as a matter of
substance, and that there is no technical difficulty in maintaining it. . . .

Remuneration and other benefits

In re Richmond Gate Property Co Ltd
[1964] 3 ALL ER 936
The appellant was joint managing director of the respondent. Under article 9 of the
company’s articles 108 of Table A of the English Companies Act applied, which is in
these terms:
‘A managing director shall receive such remuneration (whether by way of salary,
commission or participation in profits, or partly in on way and partly in another) as the
directors may determine’.
After a short life the company went into a members’ voluntary liquidation. No
remuneration for the directors had been determined. The applicant lodged proof for ₤400
as remuneration due to him as managing director either under contract or under a
quantum meruit. The liquidator’s rejection of the claim was upheld by the court.

PLOWMAN J: [337]The effect of art 9 of the articles, coupled with art 108 in Table A,
coupled with the fact that the applicant was a member of the company, in my judgment,
is that a contract exists between himself and the company for payment to him of
remuneration as managing director, and that remuneration depends on art 108 of Table A

450
and is to be such amount ‘as the directors may determine’; in other words, the managing
director is at the mercy of the board, he gets what they determine to pay him, and, if they
do not determine to pay him anything, he does not get anything. That is his contract with
the company, and those are the terms on which he accepts office.
Since there is an express contract with the company in regard to the payment of
remuneration, it seems to me that any question of quantum meruit is automatically
excluded.

CHAPTER 12

THE WINDING UP OF COMPANIES

As indicated earlier on, a company is an artificial person. It cannot die but it can cease to
exist by being dissolved and struck off the register of companies. The dissolution of a
company, which is called winding up or liquidation, deemed to commerce at the time of
the presentation of petition for the winding up on which an order for winding up is made.
It appears that during the process leading up to winding up, the company still exists.

There are some statutory reasons for a company to be wound up. In Zambia the most
prominent appears to be that of when the creditors or, indeed, the company itself may
seek to minimize the loss by closing down the business and selling all its assets. But it is
also possible to wind up a company or companies within a group with a view to
streamlining the operations of that group. Thus a company which has many subsidiaries,
two of which deal in the manufacture of trousers and zips respectively, may wish to
combine these two operations with a view to increasing efficiently and reducing waste.
In this case the group may feel that one or both of the companies would have to be wound
up and a new subsidiary established. The winding up procedure may also be used to

451
resolve a deadlock between the directors of a company. This use of the winding up
procedure is snot pertinent in regard to those companies, which are run and organized as
partnerships.

There are two ways of winding up a company in Zambia:

(1) by the court, or
(2) voluntarily

WINDING UP BY THE COURT

A company may be wound up by the High Court if:

1. the company has by special resolution resolved that the company be wound up by
the court
2. the company has failed to commence its business within a year from its
incorporation, or suspends its business for the space of a whole year.
3. the number of members is reduced in the case of a private company below two,
or, in case of any other company below seven.
4. the company is unable to pay its debts;
5. default is made in holding the statutory meeting
6. the court is of opinion that it is just and equitable that the company should be
wound up.

Any application to the court for winding up must be by petition which may be presented
by the company, or anyone or more creditors, contributories of the company or by all or
any of these parties together or petition for the compulsory winding up even though the
company is already in voluntary liquidation. It must be noted that a contributor cannot
petition the court to wind up the company under Section 196

452
Under the English Winding Up Rules of 1929 very petition for winding up must be
advertised seven clear days before it is heard. These rules are applicable to Zambia by
virtue of Statutory Instrument No. 16 of 1965. a fee of K10.00 is payable on every
petition for winding up. This requirement has undoubtedly helped to minimize the
number of frivolous and vexatious brought.

Winding up of companies is quite common in Zambia. For this reason it is now proposed
that we examine the grounds for winding up of companies in the country. Unlike in
Kenya and Uganda, the Zambian Act does not provide for winding up of companies
incorporate outside but operating here.

Company’s Resolution to Be Wound up by Court

The resolution passed for the purpose of winding up a company, must be a special
resolution. This means that general meeting of which not less than twenty-one days’
notice is given must be convened. The notice of meeting must specify the intention to
propose the resolution as a special resolution. But a majority in number of the members
having the right to attend and vote at any such meeting, being ninety-five (95%) percent
in normal value of the shares giving that right, or, in the case of a company not having a
share capital together representing not less than ninety-five (95%) percent of the total
voting rights as that meeting of all the members, may agree to propose and pass the
resolution at a meeting of which less than twenty-one (21) days’ notice has been given.

At any meeting at which a special resolution to wind-up the company is to be passed, a

declaration of the chairman that the resolution is carried is, unless a poll is demanded,
conclusive evidence of eth fact without proof of the number or proportion of the votes
recorded in favour of or against the resolution.

In computing the majority on a poll demand on the question that a special resolution be
passed, reference must be made to the number of votes cast for and against the resolution.

453
A copy of the resolution must be printed and forwarded to the Registrar of Companies
within thirty days of its confirmation. Failure to do this will cause the company to incur a
penalty of up to four (4) kwacha per every day after the expiration of such thirty days
during which the copy is omitted to be forwarded; and every director and manager of the
company who knowingly and willfully authorizes or permits such default incurs a penalty
similar to that incurred by the company. The terms “knowingly” and “willfully” in the
Act suggest that the liability of the director or manager is not automatic.

Failure to commence business within a year from date of incorporation or

Suspension of business for one year
An application to the court for winding – up under this clause must, of course be by
petition. It is, however, possible for a company’s dissolution to be effected by the
removal of that company’s name from the Companies Register. Under Sec. 225 of the
Companies Act the Registrar of companies may remove a defunct company from the
Register. This will be possible where the company is not carrying on business or in
operation.

There appears to be two major differences between Section 137 (b) and 225. Winding –
up under the former provision will be possible only after a year of business inactivity and
only by petition of the company, creditors or contributors acting singly or as a group.
The period of one year need not expire in the case of Sec. 225 and a petition is certainly
unnecessary.

Before removing a company from the register, the Registrar must send to the company by
post a letter inquiring whether the company is carrying on business or in operation. The
Registrar must then wait for a reply for at least two months. If no reply has come at the
end of that period a registered letter must be dispatched by post, referring to the first
letter, and stating that no answer thereto has been received. The second letter must

454
contain a warning that is no answer is received to it within two months from the date
thereof a notice will be published in the Gazette with a view to striking the name of the
company off the register.

The Registrar may go ahead with the Gazette publication in one or two situations; if he
receives an answer confirming the business inactivity or if he does not receive an answer
within two months of the second letter. A notice must then be sent to the company
advising it that unless cause is known to the contrary, the company will be dissolved by
being struck off the register.

The Registrar may also issue a notice under Section 225 (3) where a company is being
wound up and he has reasonable cause to believe either that no liquidator is acting or that
the affairs of the company are fully wound up, and the returns required to be made by the
liquidator have not been made for a period of six consecutive months after notice by the
Registrar demanding the returns has been sent by post to the company, or to the liquidator
at his last known place of business.

At the expiration of the three months in the notice, the Registrar may strike the company
off the register but must publish notice in the Gazette to this effect. The company is then
deemed to be dissolved and this does not absolve directors, managing officers, and other
members of the company of any liabilities they may have incurred.

It is therefore clear from sub-section (6) Section 225 that the fact of inactivity is not fatal
to an action for restoration.

A letter or notice under Sec. 225 may, where the registered office of the company is not
known, be addressed to the case of some directors or officer of the company and if the
Registrar does not known the names and addressed of directors or officers, to the persons
who subscribed to the memorandum address mentioned in the memorandum.

455
A company, which cease to be active in its field of operations but becomes a holding
company holding shares in other companies engaged in the active pursuit of the objects
for which the first-named company was incorporated, is not considered to have
suspended its business for a whole year.

Reduction of member below legal minimum

This clause represents one logical consequence of the fact a minimum of two persons is
necessary to constitute a private company and that a minimum of seven persons is
required to form a public company.

Elsewhere in the Companies Act it is provided that if a company carries on business

when the number of its members in the case of a private company is less than two or in
the case of any other company is less than seven, for a period of six months after the
number has been so reduced, every person who is a member of such company during the
time that it carries on business after six months, and is cognizant of the fact that it is
carrying on business with fewer members than the legal minimum, is liable for the
payment of the whole debts of company contracted during such time, and may be sued
for the same, without the joinder in the action or suit of any other member.

Inability to Pay Debts

This is the most common ground for petition. S138 of the Companies Act stipulates the
cases in which a company is to be deemed to be unable to pay its debts. It must be
proved “to the satisfaction of the court that the company is unable to pay debts, before a
company can be deemed to have failed to pay its debts. The fact that the petitioner has
made repeated applications for payment, and that the company has neglected to pay,
affords cogent evidence that it is unable to pay its debts. Virtually the only answer open
to the company is to show that the debt claimed is not owed by it; in which case a
winding-up petition is not proper mode of enforcing it. Where the debt is undisputed the
company cannot say it is able to pay its debts but has chosen not to pay its debts but has
chosen not to pay the particular debt. Where it is established that the company owes a

456
debt, but the precise amount of the debt is presently unknown, the court will make a
winding-up order without requiring the creditor to quantity his debt precisely.

Default in Holding the Statutory Meeting

Every company is required to hold a general meeting of its members within six months
after the date at which that company was entitled to commence business. This meeting is
known as the statutory meeting. Failure to hold this meeting makes the company liable to
a penalty of up to ten kwacha a day for every day after the expiration of six months until
the meeting is held. Every director and manager who knowingly authorizes such default
incurs a similar penalty to the company.

Where a petition is presented to the court for winding-up under the above clause, the
court may, instead of directing that the company be wound-up, give directions for a
meeting to be held or make such order as may be just.

The “Just and Equitable” Clause

In English, this clause has been the cause of considerable litigation.. Thus winding up
orders have been made on the grounds that the substratum of the company was gone; that
there was complete deadlock; that the petition was excluded from all participation in the
business that in the case of a small private company, the company was in substance a
partnership and the facts would justify the dissolution of a partnership.

An important recent decision concerning the application of the “just and equitable”
principle took place in the Zambian case of Lusaka Meat Supplies Limited and others Vs.
Szeftel

Lusaka Meat Supplies Limited had five shareholders. It was originally formed for the
purpose of carrying on a business carried on by respondent who at the time owned the
majority of shares. The five shareholders were the respondent, his wife, spent the
company’s money lavishly and hindered the progress of the business.

457
After these serious family differences, the appellants decided to exclude the respondent
from further participation in the running of the business or the handling of the company’s
funds.

The respondent then brought an action that the company be wound up under the “just and
equitable” clause. The trail judge found that it would be just equitable to wind-up the
company.

The decision was reversed on appeal and Doyle C.J who delivered the judgment of eth
Supreme Court, was quite critical of the manner in which the trial judge had handled the
case. He criticized the judge for delivering a “totally inadequate judgment” and for not
giving “proper reasons”.

Doyle CJ was satisfied that when the company was first formed, it was intended that it
should be respondent’s company and that the respondent treated it as such. According to
His Lordship, the real question was whether the action of the appellants in excluding the
respondent from further participation in the business was necessitated by the respondent’s
misconduct. After reviewing the respondent’s conduct question was answered in the
affirmative. His Lordship went on to say that the company could and was indeed
continuing to carry on its affairs. The respondent was found to have been solely
responsible for the situation, which had arisen. Thus the Supreme Court ruled that the
respondent could not succeed in his claim for a winding-up order under the “just and
equitable” provision.

Although the case was decided less than a year after Ebrahimis (A.P.) v. Westbourne
Galleries Ltd and others, the Zambia Supreme Court made no reference at all to this or
other cases.

That a company may be wound up under the “just and equitable” clause where there is a
complete deadlock has been established for a long time. There was a tendency to think
that a company would up wound up under the “just and equitable” clause only if its

458
structure was analogous to that a partnership. But in 1973, the House of Lords ruled in
Ebrahimis case that the words “just and equitable” enable the court to subject the exercise
of legal rights to equitable considerations through the force of the words themselves, and
not because the company’s structure is in any way analogous to a partnership. In that
case the structure of the company resembled that of a partnership. The petitioner was
expelled as director by the other directors. The expulsion was lawful in the sense that he
ceased in law to be a director. But it did not follow that in removing the petitioner; the
respondent did not do him wrong. They did faith which partners owe to each other.
Of course Mr. Ebrahim had to prove his case in order to obtain the winding-up order.
Through no fault of his, Ebrahim’s status was admonished and he was placed at the
mercy of the other two directors. It is this case that Mr. Szeftel failed to prove.

On the facts, the Szeftel case was probably decided correctly. But it is submitted that the
overriding question should not have been whether there was a total deadlock; the
question should have been whether it was just and equitable to grant a winding-up order
to the petitioner.

Voluntary Winding-Up
A company may be wound-up voluntary whenever the period (if any) fixed for the
duration of the company by its articles expires or whenever the event (if any) occurs,
upon the occurrence of which it is provided by the articles that the company is to be
dissolved, and the company in general meeting has passed a resolution requiring the
company to be wound-up voluntarily; or whether the company has passed a special
resolution requiring the company to be wound-up voluntary or whenever the company
has passed an extraordinary resolution to the effect that it has been proved to its
satisfaction that the company cannot by reason of its liabilities continue its business, or
that it is advisable to wind-up the same. Thus, an ordinary resolution in general meeting
will suffice where wind-up is a consequence of defluxion of time.

Notices of any special resolution or extraordinary resolution passed for winding-up a

company voluntarily must be given by advertisement in the Government Gazette.

459
A winding-up is deemed to commence at the time of the passing of the resolution
authorizing such winding-up. All transfer of share or stocks except transfers made to or
with the sanction of the liquidation, or any alteration in the status of the members of eth
company taking place after the passing of the resolution to winding-up is void. However,
the company’s corporate state and its corporate powers continue until the affairs of the
company are wound-up.

Consequences of Winding-Up
Upon its winding-up the property of the company must be applied in satisfaction of its
liabilities, in the legal order or their preference and, subject thereto, must, unless it is
otherwise provided by the regulations of the company, be distributed among the
members, according to their rights and interest in the company.

The company in general meeting has a duty to appoint liquidators for the purpose of
winding-up the affairs of the company and distributing its property. Who is appointed
liquidator appears to be a matter purely for the company to decide. The company may
also fix the remuneration to be paid to the liquidator(s).

After the powers of the directors cease when the liquidator is appointed. But the
liquidator(s) or the company in general meeting may sanction the continuance of such
powers.

Where several liquidators are appointed every power given by the Act may be exercised
by such one or more of them as may be determined at the time of their appointment, or in
default of such determination, by any number not less than two.

The liquidators may exercise all powers given by the Companies Act to the official
liquidator. They may also exercise the powers given to the court of setting the list of
contributories. Where they do this, person named as contributories. The list therefore is

460
not conclusive evidence of liability but it is reasonable to assume that the onus of proving
that the name person is not liable is on the names person himself.

461