COMPANY LAW NOTES

CHAPTER 1

A GUIDE TO THE COMPANIES ACT (24:03)

Acts of Parliament are generally very difficult to comprehend. However when one is
equipped with the necessary skills to understand how the Companies Act operates, it
becomes easy to read and understand them .The basic truth with all Acts is as follows;

1. Statutes are drafted in a way which is only peculiar to them.

2. The language used in statutes is intended to cover almost every eventuality; hence
sometimes it is all encompassing.

3. The expressions used are often archaic and not used in ordinary conversation.

4. The language used is not intended for the “unlearned” layman. It should be
appreciated that every profession has its own way of communicating peculiar to it.

What is the Companies Act?

The Companies Act is a statute like the Road Traffic Act, the Banking Act, and the
Traditional Beer Act etc. It is a statute passed by Parliament with a specific purpose
which is to regulate companies, their registration, formation, management and
dissolution.

The present Companies Act was passed on the 22nd of November 1951 and became
operational the following year. It has been amended several times so it important to

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obtain an up to date copy of the Act. It is also important to keep abreast of various
judicial decisions, not only from Zimbabwe, but also from South Africa and England.

Definition of a company

A company is a registered corporation with limited liability formed with the intention
of benefiting its members. Nkala and Nyapadi (1995) at page 8-9 define a company as
“…..a corporate with one or more persons formed for a lawful purpose of carrying on
business that has for its object the acquisition of gain by that association, and which
has been incorporated under the Companies Act or any other law whose liability is
limited by shares or by guarantee.”

The main reason for forming a company is to provide the means of raising sums of
money from a number of investors who are referred to as shareholders. The application
of this large amount of money is left in the hands of a few directors, who are normally
shareholder themselves. Shareholders invest their monies in shares to guard against
personal liability. Theoretically shareholders are not interested in the day to day
running of the company but in the return of investment when a dividend is declared.in
the event that the company fails and finds itself in debt, the shareholders will not
attract personal liability because of the concept of limited liability. A company is
through incorporation a separate and distinct entity from its members or owners and as
such it can be sued in its own name. It becomes a legal persona or a juristic person as
opposed to a natural person. It assumes corporate personality. It is this aspect or status
which distinguishes a company from other business entities.

The Companies Act defines a company as follows “company means a company limited
by shares or a company limited by guarantee as in section 8 described or an existing
company.” This definition is not helpful, unless one already knows what a company is.

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 CHAPTER 2

LEGAL PERSONALITY

Upon registration, a company acquires a juristic personality. A juristic person is a body

or association, other than a natural person, that is endowed by law with the capacity
to have rights and duties apart from its members. (Hahlo SA company law) Juristic
persons are not only companies but other statutory bodies such as parastatals and
“Universitas” which we will examine at a later stage. For now we will explore the
juristic or legal personality of a registered company.

A company has a separate legal existence from its members. As a juristic person, a
company is in other words, an entity apart from its members. It has capacity to own
property apart from its members. Its debts and liabilities are not the debts and
liabilities of its members. A company has what is referred to as “perpetual succession”
which means that its existence and identity is not affected by a change in its
shareholding or control. A company is therefore a distinct legal person, an artificial
person or simply a body corporate.

A company is a person apart, but nevertheless a person all the same. It is a person
without a soul hence a renowned author, one Ellison Kahn has described it in these
terms:

“A company has neither a body that can be kicked, nor a soul that can be damned”.
From these statements, we can deduce that a company is a persona legally and not
naturally created. It is therefore a legal fiction, an abstraction.

Many years ago, the principle of legal personality was established in the leading case of
SALOMON V SALOMON CO. A.C 22. 1897, the facts of which briefly were as follows:

Mr. Salomon was a leather merchant, trading as a sole trader. He decided to sell his
business to a limited company he had formed for that purpose. The only shareholders
in the company were Mr. Salomon himself, his wife, a daughter and four sons. In part
payment, Mr. Salomon was issued with debentures. The company failed and was put
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under liquidation. It was found out that the amount realized from the assets of the
company would be, insufficient to pay all the creditors. Being a secured creditor, Mr.
Salomon demanded satisfaction of his debt first. The liquidator alleged that the
company was a mere sham, an alias or mere agent of Mr. Salomon. The appeal Court
ruled that Mr. Salomon and the company were two separate persons. Said Lord
Halsbury LC

……………………. “It seems to me to me impossible to dispute that once a company is

legally incorporated it must be treated like any other independent person with rights
and liabilities appropriate to it, 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”

Lord Macnaghten who agreed with this view also had to say,

“When the memorandum is duly signed and registered, through there be only seven
shares taken, the subscribers are a body corporate capable 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”.

He went on to illustrate in vivid terms that:

“The company is at law a different person altogether from the subscribers to the
memorandum, and, though it may be that after incorporation, the business is precisely
the same as it was before, and the same persons are managers and the same hands
receive the profits, the company is not in law the agent of the subscribers or trustee
for them. Nor are the subscribers as members liable, in any shape or form, except to
the extent and in the same manner provided by the Act”.

The Appeal Court went on to explain briefly the reasons why people would think of
forming a company.

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 Said the court:-

“Among the principal reason which includes people 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, trade can be carried on
with limited liability, without exposing the persons interested in it in the event of
failure to the harsh provisions of bankruptcy law. A company, too, can raise money on
debentures as any outside creditor”.

So much for Salomon V Salomon Comp. Another interesting case which

followed the Salomon decision was that of Macaura V Northern Assurance Co. Ltd
[1925] A.C.619

In that case, Macaura was a commercial farmer. He took out an insurance policy with
Northern Assurance Company to cover his timber. Subsequently, he sold the timber to
a company in which he was the majority shareholder. However, he did not transfer the
insurance policy to the company. The timber was destroyed by a fire and Macaura
claimed on the policy.
The court held that Macaura was not entitled to indemnity because he had no
insurable interest in the timber, which in any event, did not belong to him but to the
company. Said the court,
“It (the timber) was not his. He stood in no legal or equitable relation to the timber at
all. He had no concern in the subject insured”.
The gravamen of this important case is that a company owns a property in its
name, as distinct from its members. No member therefore can purport to insure the
company’s property because it belongs to the company, and the company alone.

In the case of Lee V Lee Air Farming Ltd [1961] A.C. 12, Lee was a commercial
farmer. He converted his farming business into a company. He was then employed by
the company as its chief pilot. One day, while piloting the aircraft, he was killed in a
crush. His widow claimed for compensation. The question before the court was
whether Lee was a “Worker” for purposes of workmen’s compensation. The Privy
Council held that he was a worker even though he was the controlling shareholder in
the company. It was said by the court, “Just as the company and the deceased were

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separate legal entities so as to permit of contractual relationship being established
between them so also were they separate legal entities”.

The final case we are going to study on legal personality is from South Africa. It is also
quite interesting, following as it did in the footsteps of Salomon V Salomon (supra).
This is the case of DADOO LTD V KRUGERSDORP MUNICIPAL COUNCIL [1920] AD 530.
There was provision in a statute whose effect was to prevent people Asian extraction
forming a company and carrying out business in a certain prohibited area. Dadoo and
his colleagues who were Asians formed a company and operated in the area. The
municipality sought to prevent them from operating arguing that they were Asians. It
was held by the court that no law had been breached. Essentially, the reasoning of the
court was that, even though the company had been formed by Asians, it was not Asians
itself since a company has no race or colour.

Even though most of the leading cases we have examined are English, it should be
noted that since ancient Roman times, jurists and Romans law recognized some form of
legal personality which involved inter alia perpetual succession, a separation from the
body’s members and the ability to participate in legal transactions.

The Companies Act itself recognizes the juristic personality of a company. It provides
in section 9 that
“A company shall have the capacity and powers of a natural person of full
capacity in so far as a body corporate is capable of exercising such power”

A company is therefore “veiled” or clothed with legal personality which technically

prevents people from seeing what is behind the façade. There are however situations
where the court has thrown aside the concept of legal personality and looked to see
what lay behind the façade. This is called lifting or piercing the corporate veil. It forms
the substance of the next discussion topic.

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EFFECTS AND ADVANTAGES OF INCORPORATION

The incorporation of a company is the birth of the corporation and from the date of
incorporation separate legal personality is created. Incorporation has consequences
which flow from it. These are;
 A corporate name in which the company can be subject to legal obligations or
acquire legal rights.
 It acquires perpetual succession in that it continues to exist despite changes in
membership.
 Contractual capacity-it obtains capacity and powers of a natural person.
 Legal persona-the company becomes a person in the eyes of the law.
 Limited liability-this is the biggest benefit of incorporation. The liability of
members is limited to the unpaid balance due on his shares. The debts and
obligations incurred in the course the company business are those of the
company, and the members are not legally responsible to the company’s
Creditors.
 Property-the company upon incorporation is enabled to own, occupy and acquire
or dispose of property.

PIERCING THE CORPORATE VEIL

We have observed that in the landmark decision in Salomon V Salomon Co Ltd the
House of Lords ruled that a company is a juristic person. However, the House of Lords
was not oblivious to that corporate personality principle. Following are the common
law exceptions to the Salomon principle. Examiners love the topic on legal personality
hence the need to examine the extent, to which “the ghost of Salomon still rules us
from the graves,” to use a phrase from an examination.

1)Fraud situation

2)Abuse of corporate principle

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3)Agency situation

4)Where a company is seen as an economic entity

5)Where state interests are concerned

6)Where the company is seen as only a myth or a mere sham

It is important to discuss these situations in turn.

(I) ABUSE OF THE CORPORATE PRINCIPLE

There are situations where the court is of the opinion that the corporate
principle has been abused or has been used simply to hide from the eyes of
equity. In such circumstances, the court will disregard the Salomon principle
and hold that the company and its members are one and the same. The locus
classicus is the case of Gilford Motors Ltd V Horne Co.Ltd. The brief facts of
that case were that there was a contract in restraint of trade which was to the
effect that, Horne, on leaving the employ of Gilford Motors would not solicit
or take away the latter’s customers. Horne subsequently left employment with
Gilford Motors and proceeded to form his own company. Through that
company, Horne was soliciting his former employers’ customers. Gilford
Motors was not impressed and sued Horne’s company. Horne argued that he
was not in breach of the covenant in restraint of trade because it was not him,
but his company which was soliciting and in any event, he and the company
were two distinct personalities. The court came to the conclusion that this was
a shear case of abuse of the corporate principle. Horne was using the company
to evade an equitable obligation.

It is clear from this case that Horne was obviously, using the Salomon case as a
precedent .However, the court refused to accept the argument because the
legal personality principle was never misused.

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Another case is that of JONES V LIPMAN. In that case, there was a contract of
sale of a house. The seller realized that the prices were going up and he
sought to avoid the contract. He therefore decided to sell the house to a
company he had formed. When the dispute came to court, it was held that the
company was just a little house built by the seller to avoid the yews of equity.

We have to consider also the case of RE BUGLE PRESS LTD to finish off the
discussion of abuse of the corporate principle. In that case, the directors of
the company had fallen out with third director. These directors held over 90%
of the shares of the company. They then formed a company for the purposes
of taking over the business of the first company (in which they held 90% of the
shares).Their intention was therefore to exclude the third director. In
pursuance of their plan, they applied for a take-over scheme. The court
refused to sanction their intention and held that this was highly improper. The
directors had built a little house around themselves. There was no need for
the plaintiff to knock. He only needed to shout and the walls of Jericho would
come tumbling down!

2) FRAUD SITUATION

Where there is a fraud, the court will not hesitate to lift the corporate veil.
Fraud situations are similar to situations where the corporate principle is
abused. It is recommended that these be studied ‘mutatis mutandis’.

3)THE AGENCY CONSTRUCTION SITUATION

These are situations when the court may be prepared to consider a company
an agent of another.

In the case of SMITH,STONE&KNIGHT V BURMINGHAM CORP, a holding company

owned some business premises but did not carry on business there. Its
subsidiary company did. Birmingham Corporation wanted to compulsorily
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acquire the land. The holding company demanded compensation. The
corporation argued that the holding company was not carrying on business on
the premises and therefore suffered no loss. As the subsidiary company, it was
not entitled to compensation because the land did not belong to it. (The
corporation’s argument was clearly that either way, none of the two
companies could claim compensation! The court decided that the holding
company was entitled to compensation because even though it was not
carrying on business at the premises, subsidiary company was doing so as an
agent.

4) STATE INTERESTS

The court can regard a company as an enemy where the majority shares are
held by an enemy company or by nationals of an enemy country, especially
where the two countries are at war. The leading case is that of DAIMLER CO LTD
V CONTINENTAL TYRE&RUBBER CO(GREAT BRITAIN)LTD[1916]2 AC 307
The plaintiff company i.e. Continental Tyre and Rubber Company were
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. Except for one shareholder, the rest including 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, i.e. Daimler Company for the payments of a
trade debt. The defendant company alleged that the plaintiff company was an
alien enemy company and that payments of the debt would amount to trading
with the enemy. Although the plaintiff’s actions were dismissed on a
procedural issue, the court agreed with the argument that a company could be
an alien enemy.

STATUTORY EXCEPTIONS TO THE VEIL

Other than the common law or judicial exceptions to the corporate veil, the
legislature was provided for the situations where some of the characteristics
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of a company may be ignored. The Companies Act is fraught with situations
where the legislature is prepared to ignore the veil. A veil of them are
considered hereunder:-

(1)Section 32 provides for the personal liability of a member where the

business of the company is carried on with no members. It states that :-
‘If a company has no members and carries on the business for more than six
months without members, any person who knowingly causes it to do so shall
be liable, jointly and severally with the company , for all debts incurred by
it under after the six months have elapsed’

(2)Section 318 creates personal liability for the directors and other persons
fraudulent conduct of company business. Specifically , the section provides
as follows:-

(1)if at any time it appears that the business of a company was being
carried on-

(a)recklessly, or

(b)with gross negligence; or

(c)with intent to defraud any person of for any fraudulent purposes, the
court may ,on the application of the Master, or liquidator or judicial
manager or any creditor of, or contributory company, if it thinks it proper
to do so, declare that any of the past or present directors of the company
or any other person who were knowingly parties to the carrying on of the
business in the manner or circumstances aforesaid shall be personally
responsible, without limitation of liability, for all or any of the debts or
other liabilities of the company as the court may direct’’

(3)In terms of section 113 (4) (b) any officer of the company who signs a
cheque or promissory note on behalf of the company and the name of the

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 company and the name of the company is mentioned in legible form, that
officer shall be liable to injured third parties.

(4)In terms of section 143, a holding company and a subsidiary company may
be treated as one economic unit. A consolidated balance sheet and profit
and loss account is usually presented in the form of group accounts. The
parent subsidiary relationship therefore becomes essentially a matter or
mere organization. See also S.144-Obligation to lay group accounts before
holding company.

In the case of Little Woods Mail Order Store V I.R.C. 1969.1. WCR 1241, the issuer that the
court had to decide was whether a wholly owned subsidiary company was regarded
as a separate and independent entity from the parent company for the purposes of
group account. It was held that:-

“The doctrine laid down in Salomon V Salomon has often been supposed to cast a
veil over the personality of a limited company through which the courts cannot see.
But that is not true. The courts can and often draw aside the veil. They can and
often do pull off the mask. The look to see what really lies behind. The legislature
has shown the way with group accounts and the rest, and the courts should follow
suit. I think we should look and see it as it really is, the wholly owned subsidiary. It
is a creature, a puppet in point of fact and it should be so regarded in point of law.”

(5)In terms of the Criminal Procedure and Evidence Act, if any offence has
been committed for which a corporate body may be liable to prosecution,
any director etc. shall also be liable unless it can be shown he was not party
to the offence. (This will be dealt with in some detail in some detail in the
Section on delicts, crimes forgeries etc.)
(6)In terms of the Income Tax Act, the Commissioner of Taxes is empowered
to disregard the corporate form and tax members individually.

(7)Section 58 and 59 of the Companies Act provides for personal liability for
directors, both civilly and criminally for misstatements in the prospectus.
(This will be discussed in some detail later on under “Prospectus”).
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(8)Section 115 of the Companies Act provide for personal liability for failure to
keep a register and index of members.

Please study the following sections as well :-101,66,65 and 67

CHAPTER 3

FORMATION OF THE COMPANY

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 Section 7 provides that ,

“Any one or more persons associated for the lawful purpose, may , by
subscribing their names to the memorandum of association and other wise
complying with the requirements of this Act in respect of registration , form
an incorporated company………………………….”

It is therefore clear that, in terms of section 7 the minimum number of

members is one, but the maximum will depend, as we will see later on, on
whether the company is a private or public company. The persons wishing
to form a company can only do so if their intended business is lawful. In
addition, they must subscribe to a memorandum which is the external
constitution of the company and governs the relationship between the
company and the outside world.

Forming a company is one of the many options which a person wishing to go

into business can exploit. Before we look into the quintessence of a
company, let us explore the other forms of business, other than companies.

SOLE TRADER

In this case, a person “goes solo” and operates on her own. She does not
form a company but just goes into business. The trader and the business
have no limited liability which means that the trader is personally liable for
the debts and liabilities of the business. There is no legal personality hence
this is considered a risky form of business.

PARTNERSHIP

This is an unregistered association of two or more persons but not exceeding twenty
(section 6(I) of the Companies Act. The intention of the partners must be to benefit
from each other from the joint venture; hence their intention must be to make a
profit. They contribute in many ways; it could be money, skill or labour. There is no
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 limited liability and the partners are jointly and severally liable. This is also a risky
form of business.

TYPES OF COMPANIES

When a person decides to form a company, he must choose between public companies,
private companies, companies limited by guarantee or cooperative companies.

PRIVATE COMPANY

This type of company is suitable for establishing a small business with few
shareholders, usually a family business. The members are usually involved in the
daily management of the business. The decision to form a private company depends
on the amounts and source of share capital. The minimum number of members is
one and the maximum is fifty(50).A private company, unlike a public company can
commence business as soon as it is registered(Section 114).The company may
appoint directors of its own choice , even those who do not hold any shares in the
company. A private company does not have to appoint an auditor if its members do
not exceed ten. It does not have to file with the Registrar of Companies copies of its
balance sheets, auditors and directors reports. It does not have to issue prospectus,
neither is it under an obligation to hold a statutory meeting.(See the section on
company management)

Please read the following sections:-123(3) (b); 124 (1) and33.

It must also be noted that the public cannot subscribe to shares in a private company,
and further, transfer of shares is restricted. It is a company suitable where there is
no large capital base.

PUBLIC COMPANY

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Section 2 (The Interpretation Section) defines a public company as “any company that
is not a private company”. This is fine as long as we know what a private company
is.
A promoter who wishes to form a company with a large share capital is likely to form a
public company. There are no restrictions imposed on a public company as regards
transferability of shares, subscription by the public to the shares and the size of
membership.

COMPANY LIMITED BY GUARANTEE

This is a company created for a charitable purpose. Section 26 states that the
association must exist for purposes which are in the interest of the public. It is not
intended to generate profit for its members. It prohibits the payment of any
dividend to its members. A company limited by guarantee enjoys all the privileges
of a company and must also comply with the provisions of the Act.

Please read Sections 25, 26.

COOPERATIVE SOCIETY

We mention this type of business to make sure the students appreciate its
difference from a cooperative company. Unlike a cooperative company, the society
is not formed In terms of the companies Act but in terms of the Cooperative Society
Act. This is a small enterprise catering for people with limited financial means. Its
object must include the promotion of economic and social interests of its members
in accordance with government policy .A cooperative society is therefore an
association of persons who have voluntarily come together to promote the economic
and social interests. It is a legal person with limited liability. At least ten people can
form it but there is no maximum.
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 UNIVERSITAS

This is a common law corporation. It is a legal fiction .It is a legal person with
capacity to acquire rights or obligations separately from its members. It also has
perpetual succession. The members must draw up a constitution. Examples are the
Church, burial society, football club etc.

STATUTORY CORPORATION

These are basically parastatals created in terms of an enabling statute and

answerable to a relevant minister. They have no shareholders but are financed by
the government. Examples are Air Zimbabwe, ZESA, ZBC, and NRZ.

THE COMPANY PROMOTER

A person who floats or forms a company is called a promoter.

The promoter of a company is the one who is responsible for its formation.
He decides the scope of its business of its business activity; he negotiates,
if necessary, for purchase of an existing business; he instructs solicitors to
prepare the necessary documents; he secures the services of directors; he
provides the registration fees and carries out duties involved in the
formation of the company.
It is important to distinguish the promoter from other professionals whom
he engages to handle certain aspects of the promotion business which
require special skills which for example, accountants, legal practitioners, or
business consultants possess. These are not promoters but hired
professionals.

A promoter is defined in Section 2 as follows:-

“…………………………….in relation to a prospectus, means any person who is

party to the preparation of the prospectus but does not include any person
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by reason of his acting in a professional capacity for persons engaged in
procuring the formation of a company”

The term promoter is not a term of law, but a business term. The definition
in Section 2 is not exhaustive because it excludes other persons who should
be promoters and includes those who should not be promoters.
Promoters include those people who convert their one man business into
companies such as Mr. Salomon (in Salomon V Salomon).They would also
include those who acquire shares in other companies or issuing houses who
underwrite company shares, those who require services of directors and
those who acquire property for a company yet to be formed. It would
appear that under the Act, the most important function of the promoter is
in the preparation of the prospectus.

DUTIES OF THE PROMOTER

The promoter’s relationship with the company is a fiduciary one. The

promoter has a duty of the utmost good faith to his company.
The duty of good faith can be divided into two:-

(1)Duty not to make secret profits

(2)Duty to disclose

DUTY NOT TO MAKE SECRET PROFITS

The promoter must not make a secret profit from the floatation of the
company. This does mean he should not make a profit. It only means
that he must be honest with his company and shareholders. This was
established in the leading case of EMMA SILVER MINING CO.V LEWIS 1879 4
CPD 396
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In that case, it was held that although a promoter has a duty not to
make a secret profit, it does not mean he cannot gain from the flotation.
The principle is that he must be honest with his company and the
shareholders, both present and in the future. Briefly, the facts were that
the plaintiff mine in USA was a property of certain persons. They wanted
to sell it and they knew that it was not making a profit at all. It was
certainly not a good investment .A company was then formed in the UK
for purposes of purchasing the mine. The defendant, Lewis was given a
very liberal remuneration for promoting the new company. The mine
failed and it claimed against Lewis. It was held that any person who
knows that monies they are to receive are secret profits when they are
in a fiduciary relationship with the company would have breached this
duty.

In the case of ERLANGER V NEW SOMBRERO PHOSPHATES, the facts in brief

were that there was a derelict mine. A company was formed to purchase
that mine. They however disclosed this fact to the board of directors.
The Board however comprised of the nominees who were described by
the court as “puppets”. The mine failed and there was a claim for those
profits made. The promoters argued that they made full disclosure to the
Board of Directors. It was held that the promoter must make full
disclosure to an independent board capable of exercising an independent
discretion. It is his duty to furnish his company with that independent
board of Directors.

The question usually asked is:-Where is disclosure made? It is made in

the prospectus.

In the case of RE CONTIBUTORIES OF THE ROSEMONT GOLD SYNDICATE 1905

T.H. 169, it was held as follows:-

“It is well established that promoters stand in a fiduciary relationship to

the company they promote .They are not merely its parents but they are
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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.
They cannot complain if the law makes them, as it does, the guardians
and protectors of its nascent life”.

The fiduciary duty is imposed by the plain dictates of common honesty as

well as by settled principles of common law. The promoter can make an
honesty profit-what the law seeks to prevent is the cheating of
shareholders.
In this case of GLUCKSTEIN V BARNES, a promoter failed to disclose a profit
that he had made by buying a mortgage at a discount .He was liable to
disgorge that profit to the company.

REMEDIES FOR BREACH OF PROMOTER’S DUTIES

These are governed by the ordinary rules of contract .The following are
some of them :-

1) Rescission of Contract

If the promoter does not disclose material facts, the company can
elect to rescind the contract. Rescission is conditional upon the
company’s ability to restore to the promoter what he gave or
expended under the contract.(Restitutio in integrum)

2) Damages

The company can sue for damages in lieu of rescission. This is

described as equitable compensation for the breach of duty.

3) Accounting for profits

Promoters are called to account for their activities vis the profits they
made.
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 4) Promotion expenses

The promoter is entitled to bona fide expenses reasonably incurred

during flotation of the company. The Articles of Association usually
empower directors to pay promotion expenses.

THE PROSPECTUS

If a promoter wishes to form a private company he does not need to issue a

prospectus. This is because s29 of the Act it is a legal requirement that the articles
of a private company must prohibit any invitation to the public to subscribe or
debentures of the company.

A prospectus is defined in Section 2 as “any prospectus notice,

circular, advertisement or other printed invitation to the public for
subscription or purchased any shares or debentures of a company”

The definition is clearly quite encompassing. As can be seen from this definition, a
document does not have to be described as a ‘prospectus’; if it is issued for the
purposes for which a prospectus is published, it shall be deemed to be a prospectus.
The very nature of the definition of a prospectus shows that it has no relevance to a
private company. This is because a private company is not allowed to invite the
public to subscribe to its shares. The prospectus must be in writing and, it would
appear, must be in English. The prospectus must satisfy the matters outlined in the
Fourth Schedule in respect of date of incorporation, address of the company,
number of directors, names and addresses of directors, name and address of
auditor, number and amounts of shares and debentures, details of the company
property and so on.

The promoter’s concern is to raise sufficient capital for his new company .He
therefore needs to issue a prospectus.(if he is promoting a new company)

21
The temptation to lie or to mislead the public into believing that the new company will
benefit him tremendously is always present hence the legislature provided for civil
and criminal liability for misstatements in the prospectus.

Section 58 provides as follows:-

“(1) Subject to this section , where a prospectus invites people to

subscribe for shares or debentures of a company , the following
persons shall be liable to pay compensation to all persons who
subscribe for any shares or debentures on the faith of the
prospectus for the loss or damage they may have sustained by reason
of an untrue statement included therein, that is to say-
(a)Every person who is a director of the company at the time of the
issue of the prospectus, and
(b) Every person who has in writing authorized himself to be named
and is named in the prospectus as a director of as having agreed
to become a director , either immediately or after an interval of
time, and
(c)Every person who is a promoter of the company, and
(d)Every person who authorized the issue of the prospectus”

It is clear that the intention of the legislature was to protect

potential shareholders from unscrupulous promoters who
misrepresented the facts in the prospectus.
Section 59 provides for criminal liability for misstatements in the
prospectus .It says ,

(1)Where a prospectus issued after the 1st of April 1952, included

any untrue statements any person who authorized the issue of
the prospectus shall be guilty of an offense and liable to a fine
not exceeding one thousand dollars or to imprisonment for a
period not exceeding two years or both such fine and
imprisonment unless he proves either that the statement was
immaterial or that he had no reasonable grounds to believe and
22
 did ,up to the time of the issue of the prospectus, believe that
the statement was true”

Further protection of the subscribing public is found in Section

64(1) which provides as follows:-
“ It shall not be lawful for any person to go from the house to
house , or farm to farm, offering shares or debentures for the
subscription or purchase to the public or any member of the
public”

The Act also makes it an offence to invite people to subscribe to

shares verbally or otherwise, unless such invitation is
accompanied by prospectus. The intention of the legislation
clearly is to frustrate dishonest promoters who invite people
without using a prospectus.

A prospectus amounts to a contract between the shareholders

and those who issued it; hence there are civil liabilities for mis-
statements.

The prospectus also is an invitation to submit offers by

completing and returning the relevant forms .Only after a
person has signed the forms and has been accepted does he
become registered as a shareholder.

CONTENTS OF A PROSPECTUS

The matters that have to be set-out are set out in Section 54.It is not necessary to
repeat the section to the text suffice it to say that it is important that a prospectus
complies with the section with strict and scrupulous accuracy. It must therefore be
a fair representation of the matters specified in Parts I and II of the fourth
schedule(Section 54(1))

23
PRE-INCORPORATION CONTRACTS

Before a company is formed, the promoter needs to enter into contracts with third
parties for the benefit of the new company. The promoter may not want to attract
personal liability but would wish that his new company should benefit from these
contracts. The legal problem that the company would not yet be in existence .In
English law , the position appears to be that no one can enter into contracts on
behalf of a non-existing company, hence accompany cannot be bound by contracts
entered into before it was formed. Effectively, in English law, one cannot be an
agent of a company that has not yet been formed. This means that the company
cannot rectify such contracts when it is formed, Under Roman –Dutch law, it is
possible for a contract to be formed to benefit a third party provided the third party
rectifies the contract. This is by operation of the doctrine of Stipulatio alteri.

The rules relating to pre-incorporation contracts are intended to

protect the company when it is formed from debts incurred by a
speculative promoter. It is in this regard that common law lays
down fiduciary duties of the promoter that he has to act in good
faith and must not make a secret profit etc. He must therefore
exercise due care and diligence .A prudent promoter will
therefore strive to do only those things, and to enter only into
those contracts that ultimately benefit his company and will not
bring it down.
The Act is awake to the problem of pre-incorporation hence
Section 47 provides that:-
“ Any contract made in writing by a person professing to act as
agent or trustee for a registered shall be capable of being
ratified or adopted by or otherwise binding upon and
enforceable by such company after it has been only registered
as if it had been duly formed, incorporated and registered at the
time when the contract was made, if –

24
 (a)The memorandum on its registration contains as one of the
objects of such company the adoption or ratification of or
acquisition of rights and obligations in respect of such
contract; and
(b) The contract or a certified copy thereof is delivered to the
Registrar simultaneously with the delivery of the
memorandum in terms of section twenty-one”.

We can conveniently summarize the requirements under this section as follows :-

(1)The contract must be in writing.

(2)The person making the contract must profess to be the agent or trustee. This
means that he must behave in such a manner as to show that he is acting for a
company yet to be formed and not for his own personal benefit.

(3)The memorandum, must contain as one of its objects the ratification or adoption
of pre-incorporation contract.

(4)The original copy or a certified copy must be lodged with the Registrar together
with the memorandum of association, and

(5)Finally, the contract must be legally enforceable’

Having discussed the prospectus pre-incorporation contracts, we now turn to discuss in

some detail the memorandum of association.

THE MEMORANDUM OF ASSOCIATION

The memorandum is the most important document of all the documents that have to
be lodged with the Registrar. Every company must have a memorandum and no
certificate of incorporation will be issued in the absence of a memorandum.
25
The memorandum is the constitution of the company .It is the company’s Charter.
Essentially the Memorandum is a statement which shows the powers of the company
to the outside world. A memorandum of association should be distinguished from the
Articles of Association.

Articles of Association deal with the relationship between the company and its
shareholders and the relationship between shareholders inter se. The memorandum
on the other hand deals with the relationship between the company and the outside
world.
The memorandum defines the limit or extent of the company’s powers i.e. what the
company may or may not do.

Section 8 deals with the memorandum of association.

The drafting should always ensure that the following clauses are contained in the
memorandum:-

(1)Name Clause

(2)Objects clause

(3)Limitation of liability Clause

(4)Capital Clause

(5)Subscription Clause

NAME CLAUSE

The company must have the word “limited” as its last word if it is a public
company e.g. Bloggs Ltd. If it is a private company then it should have the words
(Private) as the penultimate word e.g. Mutsa (Pvt) Ltd.

26
This is to warn those doing business with the company that the liability of its
members is limited.

In choosing the name for his new company, the promoter must comply with the
provisions of section 24.He may not choose a name that is identical to that of
another company, a misleading name, a name likely to cause offence suggestive
of blasphemy or indecency or undesirable for any other reason, or that which
suggests that the company enjoys state patronage. The discretion of the Registrar
to refuse a name is very wide indeed.

The promoter must therefore apply for a name reservation so that if the name he
has chosen is unacceptable, he can change it.

Where there are two similar names, there must be intention to deceive before a
company is prevented from using a similar name. In the case of BON MARCHE (PVT
LTD V LE BON MARCHE AND OTHERS SC 68/84(A Cyclostyled judgment).

Bon Marche (Harare sued Le Bon Marche in Bulawayo arguing that the name used
was similar to its own and deceived customers. It was held (Dumbutshena CJ, as
he then was) that there ought to be evidence of intention to deceive not a mere
likelihood.

This brings us to the delict of Passing-off which essentially is an unfair trade

practice. In this case, one person misrepresented that his business is that of
another. This is unfair in that it misleads customers and clients with some
prejudicial consequences.

The company may change in its name in terms of Section 25.a special resolution
is required before the Registrar can enter the new name.

The company is under an obligation In terms of section 133 to display its name at
all times at its registered offices. Failure to do so is a punishable offence.

THE OBJECTS CLAUSE

27
This is the most important clause in the memorandum of association. The powers
of a company to set out in the objects clause. There is no statutory limit as to
the number of objects that may be pursued by a company. The objects are those
things which a company intends to pursue e.g. general and mechanical
engineering business. Anything which is out of the objects clause beyond the
powers of the company and therefore ultra vires. The objects clause can be
changed by a special resolution (section 16).A company may wish to change its
objects in order to diversify or even limit those objects. This is a result of various
economic factors which mere the scope of Economics than law.

ULTRA VIRES DOCTRINE

Ultra vires mean beyond the powers. The doctrine has been changed by the Act,
to the extent that it now plays only a residual role, and is now almost
nonexistent. The doctrine effectively meant that everybody who dealt with the
company was supposed to know the limits of the company’s powers because the
memorandum of association is a public document that can be inspected at the
company’s Head Office or at the Registrar‘s Office. This is called the doctrine of
constructive notice. This doctrine has been done away with by section 11 which
provided that –

“No person shall be deemed to have notice or knowledge of the contents of a

company’s memorandum, articles or other document by reason only of the fact
that the memorandum, articles or document has been registered by the Registrar
or Is available for inspection at the company’s registered office”.
In addition , Section 9 provides as follows :-
“A company shall have the capacity and powers of a natural person of full
capacity so far as a body corporate is capable of exercising such powers”.

A company is allowed to exceed its stated objects. All transactions that exceed
the objects of the company are not invalidated by that fact alone. This is in
terms of section 10 which provides that-

28
“The effect of a statement of the objects of a company, whether in its
memorandum or elsewhere, shall not be to invalidate any transaction which
exceeds those objects and which was made by the company or entered into by
the company with the other person, notwithstanding that the other person was
aware of the statement of the objects”

Basically therefore, as regards third parties, a company has unlimited contractual

capacity just like a natural person of full capacity. However, members of the
company are at liberty to apply to court to restrain the company from doing
those things which are beyond its stated powers. (The restraining order is called
a Interdict).This is in terms of Section 10(2).To that extent, the doctrine still
exists among the members an d the company itself, but not as between the
company and outsiders.

THE LIMITATION OF LIABILITY CLAUSE

This clause must be included in the memorandum of the company, whether the
company is limited by shares or by guarantee.

S.7 (1)(a) is to the following effect-

“A company having the liability of its members limited by the memorandum to

the amounts, if any, unpaid on the shares respectively held by
them…………………………………”

Such a company is called a company limited by shares. If the company has issued
100 shares to a member at $1-00 each and the member has paid the company the
full $100-00, he will have no further liability to the company or its creditors, but
if he paid only $50-00 or half the issue price, his shares are described as partly
paid shares and he will be liable for the balance of $50-00 when the company
makes a call for payment in full.

29
 (from Nkala &Nyapadi Company law in Zimbabwe Idea used with full
acknowledgment).The effect of the limitation of liability clause is that the
shareholder will only be liable to contribute towards the payment of the
company’s debts and liabilities, including the expenses of winding-up to the
extent only of the unpaid shares he holds.
Unlimited liability may however be incurred by an officer where he took part in a
transaction which is ultra vires resulting in the company suffering loss (section
10(2)(b).See also Section 315.

CAPITAL CLAUSE

Section 8 (1) (v) makes provisions for the capital clause. It states that the
memorandum must state

“the amount of share capital with which the company proposes to be registered and
the division thereof into shares of a fixed amount”

We can illustrate the effect of this section in this manner:-

Share Capital-$30 000

Divided into-30 000 shares

Of $1 -00 each.

(Nkala&Nyapandi with acknowledgement)

THE SUBSCRIPTION CLAUSE

This is often referred to as the association clause. This is a statement by the

subscribers that they wish to form a company. They must therefore, in terms of
30
section 8(3) sign in their own handwriting and state their names opposite the
number (in words) of shares they take e.g. Marwei Joromia 300.

THE ARTICLES OF ASSOCIATION

The articles amount to a contract between the shareholders and the company
and also between the shareholders inter se. They are referred to as the internal
document of the company as opposed to the memorandum which is intended for
the outside world. The articles determine the rights of the shareholders which
are enforceable in the courts. They are only enforceable as the members’ rights;
hence outsiders cannot enforce these rights. Articles are provided for by section
17.They must be signed by the subscribers to the memorandum. If the articles
are inconsistent with the memorandum, the articles are subordinate so that the
conflicting provisions will be void to the extent of the inconsistency.

Articles constitute a contract between the company and its members and also
between members qua member. Only a member can enforce the provisions of the
articles. In the case of HICKMAN V KENT ROONEY SHEEP BREEDERS ASSOCIATION, the
facts were briefly as follows:-

The articles of KRSBA provided inter alia that the differences between the
association and members shall be referred to an arbitrator appointed by the
parties in difference. It was held articles can neither constitute a contract
between the company and an outsider nor give individual member special
contractual rights beyond those of members generally. The plaintiff could
therefore not enforce these rights.

Another interesting case is that of ELEY V POSITIVE GVT SECURITY LIFE ASSURANCE.
The articles of association contained a clause to the effect that one Eley should
be the solicitor (lawyer) of the company and transact all its legal business. These
Articles had been drafted before the company had been formed. The Articles
were then registered when the company was incorporated. Eley was not
appointed Solicitor by any resolution but continued to act in such capacity.
31
Subsequently, the company stopped employing him and he brought an action. He
purported to rely on the articles of Association. It was held that there was no
contract between Eley and the company because Eley was not a member even
though he subsequently became one.

CHAPTER 4

MAJORITY RULE AND MINORITY PROTECTION

The general rule in company law is that the minority are bound by the decisions
of the majority. If a member has a contract with the company, that contract as
evidenced by the articles of association can be altered by the majority and his
rights therein changed.

The minority is not supposed to complain, the rationale being that when he
joined the company, he had knowledge that its rules might be changed or altered
in future by the majority vote. It has been said that-

“The law looks upon companies as autonomous democracies in which the minority
has to abide by the will of the majority. If the wrong complained of is a wrong
done to the company, then the minority shareholder as a rule cannot seek
redress”
(Nkala, Nyapadi)
32
This is because the wrong has been done to the company and to the company
alone. The company is a legal persona. It can sue and be sued in its own name,
therefore the decision to remedy the wrong complained of lies with the company.
The company is the plaintiff. This is called the rule in FOSS V HARBOTTLE 1843 2
HARE 46 .In that case , a minority shareholder brought an action to court
alleging that the company’s property was being misapplied, sold and wasted by
some directors. His prayer was that the directors should be ordered to make good
the loss done by the company. The minority brought an action on behalf of itself
and all other members of the company except the directors. It was held that

“……………………….it cannot be competent to individual shareholders to sue in the

manner proposed by the plaintiff……………………..’
The court was basically saying that the proper plaintiff is the company in its
corporate form. The harm had been done to the company and to the company
alone. It was therefore up to the company to seek redress. The Judges gave their
ratio decided in the following manner.

(1)Judges are unwilling to interfere in the internal affairs of companies. The

rationale for this is that, it is not for the courts to manage company’s affairs.
That duty is best left to the directors and the majority shareholders in a
general meeting. The general meeting is the company’s parliament where
corporate decisions are taken.

(2)The minority cannot complain of a wrong done to the company as a whole or

of any internal impropriety

(3)Without such a rule there would be futile actions by the directors and
shareholders

(4)Even if the minority were allowed to institute litigation, the result will be a
vicious circle in that the majority would get its wishes anyway.
33
The courts realize that the majority view dominates in the use of the
company’s name and in a legal action; the minority would be in a dilemma.
The situation was summed up by one Judge,-
“If directors do acts which perhaps because the lack of a quorum or because
their appointment is defective or they are actuated by improper motive, they
can make full disclosure to the majority shareholders and obtain absolution
and forgiveness of their sins. If the acts are not ultra vires, then all will seem
alright”.

A similar case to Foss V Harbottle is that of MaCOUGALL V GARDNER (1875)ICLD

13
The articles of association of a company provided for the taking of a poll at a
general meeting of the company if so demanded by five shareholders. At a
general meeting, the chairman, in breach of the articles, declined to take a
poll. One of the shareholders brought proceedings on behalf of himself and all
other shareholders except the directors, against the directors and the
company, seeking a declaration that decisions taken at the meeting were
invalid and an injunction to restrain their implementation. The action failed.
The words of MELLISH, LJ are illustrated of the court’s attitude at the time-

“In my opinion, if the thing complained of is a thing which in substance the

majority of the company are entitled to do, or if something has been done
illegally which the majority of the company are entitled to do legally, there
can be no use in having litigation about it, the ultimate end which is only that
a meeting has to be called, and then ultimately the majority gets its wishes. Is
it not better that the rule should be adhered to that if it is a thing which the
majority is the masters of, the majority in substance shall be entitled to have
their will followed? Of course, if the majority are abusing their powers, and
are depriving the minority of their rights, that is an entirely different thing
and there the minority are entitled to come before this court to maintain their
rights……………(25)
34
 EXCEPTIONS TO THE RULE IN FOSS V HARBOTTLE

1) Where the majority have not acted bona fide in the interests of the
company as a whole. In this case, there is a heavy burden on those who
want to prevent the alterations since it is the majority which is best placed
to decide what the best interests of the company are.

It is an accepted principle in company law that shareholders in casting their

votes do not owe each other a duty of care,
neither do they owe this duty to the company. As a result, a majority vote can rectify
a breach of duty by the directors. However, decided cases show that where minority
shareholder can show evidence of malice or positive harm of discrimination, the courts
may interfere.

Let us consider some of the more illustrative decided cases.

SIDEBOTTOM V KERSHAW LEASE & Co

The defendant was a private company. It passed a resolution to alter its

articles of association by providing that directors who had a majority shares
should have the power to require shareholders who carried on competing
business with the company to transfer their shares at a fair value to the
directors. Sidebottom held minority shares and carried on competing
business. He appealed the resolution claiming that it was not in the best
35
interest of the company and discriminated against the minority. It was
held, considering the nature of the company under the circumstances,
majority power was used bona fide the company.

In EDWARDS V HALLIWELL (1950)2 AER 1064 (CA)

The constitution of a trade union provided that contributions were not

altered until a ballot vote of the members had been taken and a two –thirds
majority obtained. A meeting of the Union, without taking a ballot, passed
a resolution increasing the contribution of members. Two members of the
union were not impressed and they sued the executive to declare the
resolution invalid. Their action succeeded.

In BROWN V BRITISH ABRASIVE Co

The company needed more capital. The majority shareholder with 98% of
the shares was willing to provide the capital provided that they could buy
up the 2%minority shareholders. The minority shareholders were unwilling
to sell. The majority then proposed to alter the articles so as to provide for
compulsory acquisition of the shares. It was held that this was not bona fide
the company; it was plain abuse of majority power because the alteration
was not going to result in increased capital.

In the case of DAFEN TIN PLATE V LIANETHY

By altering the articles, the majority were empowered to compel any

member to sell his shares at a price to be fixed from time to time by the
directors. A minority shareholder did not agree with the alteration. It was
held that the company could not confer such power to the directors. said
the Judge-

“ as drawn , then resolution authorizes the majority at their will without

any reason other than desire to get into their hands the whole of the shares
of the company, to expropriate the shares of the minority………………..”.
36
 (5)Where the minority can prove that the majority can prove that the majority
is perpetrating a fraud on the minority. The minority will then be allowed to
enforce a company’s action. The minority seek to enforce the company’s
action because the company has refused to do so or is prevented from doing so
by the majority. The minority must prove that-
(i) The wrong has been done to the company but the company is
prevented from rectifying the situation by the majority.
(ii) That he has clean hands(the first law of equity)
(iii) That the majority would benefit from the act complained of.

A fraud on the minority means inter alia a breach of the directors duties
of good faith and where there is voting for the company resolutions that
are not in the interests of the company. It should also be where there is
expropriation of the minority’s property.

(6)Where a minority seeks to enforce individual or class rights.(where those rights

are being
infringed or varied, the members of that particular class must accept the
variation)

(7)Where an act requires special procedure e.g. special resolution (see Edwards
V Haliwell(Supra)

STATUTORY MINORITY PROTECTION

1) Oppression of the Minority

An application may be made in terms of section 196 (1) which provides as

follows-
“A member of a company may apply to court for an order in terms of section
one hundred and ninety eight on the ground that the company’s affairs are
being or have been conducted in a manner which is oppressive or unfairly

37
 prejudicial to the interests of some part of the members, including
himself………………………….”.

2) Variation of rights attaching to shares

Where there are different classes of shares and it is intended that a class of such rights
be varied by a majority decision in a general meeting, the holders of not less than
15% of the issued shares of that class who did not agree to the variation may apply
to court for such variation to be cancelled.(Section 91)

3) The Minister’s Application

The Minister is empowered in terms of Section 197 to make an application to

court if it –

“………………….appears to him that the company’s affairs are being or have been
conducted in a manner which is oppressive or unfairly prejudicial to the interests
of some part of the members…………………….”

4) The shares of a dissenting minority may be compulsorily acquired in take-over

bids and mergers if 90% of the majority agrees. However the minority are entitled
to lodge an application objecting to this.(Section 194)

5) A company may wound-up if it appears just and equitable that it should be so

wound-up. The just and equitable ground which is wide indeed has been
interpreted to include oppression of the minority.(Section 206(g))

THE ACTIONS WHICH MAY BE USED BY THE MINORITY(PROCEDURAL ASPECTS

OF MINORITY PROTECTION).

These may be conveniently be listed as follows-

(1)Personal Action or personal Claim

38
 (2)Representative Action or Claim

(3)The Derivative Action

THE PERSONAL CLAIM

In this case, the shareholder makes a claim in his own name against the company to
enforce his rights. He may bring the action to restrain the company from engaging in
acts that are ultra vires its stated objects. He can also bring this action to enforce
his rights to vote.

In addition, the shareholder is at liberty to utilize this action to enforce a right

to a dividend or any other right that accrues to him in terms of the articles.
This claim is therefore enforced in an individual capacity for a wrong done to
him personally or for a breach of duty which is owed to him personally.

REPRESENTATIVE ACTION

In this case, a minority seeks to enforce class rights. Representative actions are
permissible only where a group of persons have the same interests or a common
grievance.

Where a minority feels that they are oppressed, they can institute a representative
action. The general rule is that, if class rights are varied, then the class of
shareholders affected must accept variation. In this case of LIVANOS V
SWARTZBERG & ORS1962 (4) SA 395 it was held that were oppressive conduct is
alleged by a minority, it must be conduct that is harsh, unfair or burdensome.

If the conduct complained of affects all the members in the same manner but
happens only to prejudice a particular member, it will not be oppressive and
he cannot be heard to complain.
In the case of ALLEN V GOLD REEFS LTD the court said that there is no
fiduciary duty on members to act in the interests of the minority.
39
Allen held fully up and unpaid shares in the company. Under the articles, the
company had a lien for all debts and liabilities of any member to the company
upon all shares not being paid up. By a special resolution, the company altered
the articles so as to omit the words,
“NOT BEING FULLY PAID”. This created a lien over Allen’s
fully paid up shares as well. Allen sought an order to declare the alteration
oppressive.
The declaration of the court which has been criticized severely was that the
company had power to alter the articles. Any regulation to deny the company
this power is not valid. The shareholders were being treated in a similar
manner. The mere fact that Allen happened to be the only member of that
class who was unhappy did not make the alterations oppressive. The court
added that there was oppression, but not selective oppression.

3) THE DERIVATIVE ACTION

If the minority can prove that the majority are perpetrating a fraud on a
minority, then the minority can institute an action against the company. With
this action, the minority sues in the name of the company for a wrong done to
the company cannot get redress in a general meeting.
The minority in this case seeks to enforce the company’s action because the
company has refused to do so or if prevented from doing so by majority.

The minority does not in fact sue for its own benefit, but for the benefit of
company which cannot do so.

The shareholder sues in the name of the company but the company is made a
nominal defendant so that it can be bound by the decision of the court.

The purpose of the derivative action is to allow the court to interfere and
remedy a wrong done to the company. In order to succeed, the minority must
prove the following:-

40
(1)The wrong has been done to the company and the company would have
institute action but is unable, or is being prevented from doing so.

(2)That the majority would benefit from the act complained of.

(3)That he has clean hands i.e. he is not party to the fraud. (This is the first
law of equity)

In the case of ATWOL V WEATHER, the owners of a derelict mine formed a

company and sold it Merryweather company. The shareholders sought to
rescind the contract. An action was brought to court. The majority voted to
discontinue the action. It was alleged that the majority had put minority
property into their pockets. Atwol, a shareholder started a new action in his
name and all the other minority shareholders except for the fraudulent ones.
This action succeeded. The court said that, with the derivative action, the
company must be made a nominal defendant and the minority can use the
company’s name without authorization.

LIMITATIONS OF THE DERIVATIVE ACTION

1) It is limited in ambit and scope. It is limited only to cases of illegality, ultra

vires and fraud.

2) It is extremely expensive, especially to a minority shareholder who lacks

resources to pursue action.

3) If anything is recovered from the action, the money goes into the company
coffers and the minority may get nothing.

41
 CHAPTER 5

CAPITAL

Introduction

For a company to operate, it requires capital. The promoter of the company

must therefore decide on the capital his company would require for it to
operate.

Definition

Capital refers to the assets of the company. It therefore includes the cash
injected into the company, land, buildings, furniture, machinery, goodwill,
patents, copyright and trade secrets.
In the case of NEW STATE AREAS V C.I.R 1946 AD 610, Capital was described
as –

“…………………….the income producing machine……………………..”(627)

Here we are concerned mostly with share capital which may be divided into
shares having a value, or it may consist of having no par value.

Section 8(1)(4) requires a capital clause in the Memorandum of association

which must state inter alia the amount of share capital with which the
company proposes to be registered and the division thereof into shares of a
fixed amount.

42
Before we move on to discuss capital in some greater detail, it is perhaps
important that we define and explain a few common expressions relating to
capital.

1)Nominal capital

This is the capital with which the company is registered e.g. a company
registered with a share capital of $100 000. It is therefore invariably referred
to as the company’s registered capital or the authorized share capital

2)Issued capital

A company with a nominal capital will need to issue shares. The part that is
issued is called issued capital. The remaining is called unissued capital.

3)Paid up capital

The company may have the only part of its issued capital paid-up and the
remaining being unpaid. The part that is paid in full is called the paid-up
capital while the unpaid will obviously be called the unpaid capital.

RAISING OF CAPITAL

A company obtains the finance it requires from two main sources, namely
(1)external equity
(2)internal equity
The most common method of raising capital in a company limited by shares is
by allotment of shares. In this case, subscribers agree to buy the company’s
shares in money i.e. by paying cash. They may also pay by way of services or
money’s worth.

Payment in cash

43
This means payment in cash, by cheque or some negotiable instrument. The
company and the subscriber may reach an agreement whereby the company
issues the subscriber with shares as a way discharging a debt owed by him by
the company.

In the case of REHARMONY &MONTAGUETIN & COPPER MINNING(SPAGOE’S CASE, a

shareholder was held to have paid for his shares in cash when a debt he was
owed by the company was cancelled in exchange for shares of an equivalent
value allotted to him by a company.

Payment in consideration other than cash

A company may buy property or goods from a person and instead of being paid
in cash, the seller may agree to be issued with shares. It is also possible to
make a profit by selling property to a company in exchange for fully paid
shares.

A person may perform services for the company and instead of payment in
cash, he is issued with shares. Since it is difficult to assess what shares would
be equivalent to the services rendered, this is left to agreement of the
parties. The caught might however intervene where the company fails to
assess the money value of such services.

RAISING OF CAPITAL BY EXTERNAL MEANS

A company can raise capital for its operations by borrowing. Money raised in
this way is called Loan capital .A Company can borrow from banks or
individuals who become debenture holders. Those who lend money to the
company are called creditors and they enjoy certain rights at winding-up
depending on whether they are secured or not.

ISSUING OF SHARES AT PREMIUM

44
Usually, the nominal value of shares bears no relevance to their real value.
The actual price of shares is fixed arbitrarily, bearing in mind the economics
and market involved. This is because shares with a small nominal value are
sooner grabbed than those with a higher nominal value since they are easily
marketable.

A company is under no obligation to issue its shares at their real value. It can
therefore issue them at a price higher than their nominal value. This is called
issuing at a premium. Money raised in this way does not constitute profit but
forms part of the company’s capital. It appears separately in the company’s
balance sheet in an account the Share Premium Account.

It is sometimes necessary for the company to take measures which will enable
it to operate even if the public does not subscribe to all its shares. Companies
usually resort to underwriting. In this case the underwriter agrees and
becomes obliged to take certain number of shares if the public does not
subscribe to all of the company’s shares. This means that if all the shares are
taken, the underwriter will not be obliged to take any shares anymore. The
underwriting contract, must in terms of section 60 , together with an affidavit
sworn to by the underwriter that he will be able to carry out his obligation be
submitted to the Registrar of Companies.

The under writer is further obliged to furnish the company with the affidavit
within seven days of a request being made to him. If he fails to furnish such an
affidavit, he will be guilty of an offence .It is also an offence for the
underwriter to swear to an affidavit without reasonable ground or belief that
he would be in apposition to carry out his obligation in terms of the
underwriting contract when called upon to do so.

Because the business of underwriting is obviously risky, the underwriting is

usually entitled to a commission. A company can only pay such a commission if
its articles allow it to do so. This is in terms of section 72.

45
The advantage of underwriting is that it ensures that the minimum share
capital subscription is made up, even if all the shares are not taken by the
public.

For a new company, underwriting e enables the new company to raise the
operating capital it requires.

MAINTAINANCE OF CAPITAL

Introduction

The rules relating to maintenance of capital are designed to protect creditors.

This is because if the company is in financial difficulties, the creditors will be
paid from the capital of the company. The company as a general rule may
therefore not reduce its capital because metaphorically speaking; it is the
heart and very soul of the company.

Rules of maintenance of capital

There are rules that regulate the company’s general financial behavior. The
rules pertain to the company’s power or otherwise to purchase its own shares,
payment of commission and alteration of the share capital by reduction. The
rules will now be considered in some detail.

1) Payment of commission

A company may pay commission to any person who subscribes to any of its
shares e.g. when it pays a commission to an underwriter. It can only do this
if this if its articles permit so. The commission payable must not exceed 5%
of the price of which the shares were issued or the amount or rate
authorized by the articles, whichever is less. This is in terms of section 72.

2) Discounts
46
 Section 72(2) Provides that the company shall apply any of its shares or
capital money to pay any commission, discount or allowance tom any
person except as provided for by section 72(1).

A case in point is that of OOREGUM GOLD MINING CO OF INDIA V ROPER

A company issued shares at a price of one pound each. The company

decided that among those who subscribed to its shares it would offer a
discount of 15 shillings. It was held that unless specifically authorized by
the articles, a company has no power to offer such a discount.

3) Purchase of its own shares

The purpose of issuing shares for subscriptions is to enable the company to

commence operation. If the company purchases its own shares, or assist a
person financially to purchase its shares, this would not help it to raise
capital at all .A company is prohibited in terms of section 73 to offer
financial assistance for the purchase of its shares or its holding company’s
shares unless the company is authorized by a special resolution and if it can
still pay its debts after rendering such assistance. A decision to render
financial assistance may be set aside by the court which may order any
officer who took part in the transaction to compensate the company for any
loss resulting from such a transaction.(see Section 73(2)(a) and (b))
There have been several attempts to circumvent the requirements of
section 73 by devising complicated schemes.

In the case of WALLENSTEINER V MOIR, the court had this to say,

“……the transactions are extremely complicated but the end result is clear.
You look to the company’s money and see what has become of it. You look
to the company’s shares and see into whose hands they got. You will soon
see if the company’s money has been used to purchase the shares……’

47
 A company previously was not allowed to purchase its own shares. It could
render financial assistance subject to exceptions. It is now allowed in terms
of section 78 to purchase its own shares. It has to be authorized by the
articles to do this.

4) Alterations of the Company’s Share Capital

A company may increase its share capital by special resolution as provided

for in section 87.The registrar must be notified of this alteration. It is an
offence to fail to do this.

5) Reduction in Share Capital

A company may find it necessary to reduce its share capital. This may be
necessitated by losses made by the company or the company may find itself
with more resources than it needs. Reduction of share capital is governed
by section 92.
A company requires to be authorized by its Articles and by a special
resolution for it to reduce its registered share capital. The company may
therefore reduce its registered share capital in any way including the ways
listed in section 92.
Reduction must be confirmed by the court order to verify whether such
reduction is justified for creditor’s protection

SHARES

Nature of a share

48
A share may be described as a form of intangible corporeal movable
property. It is an interest which a person has in a company and this interest
comes with rights and obligations in terms of the Companies Act and the
Articles of Association.
A share is measured by a sum of money.

Shares may be of different classes as regulated by the articles of

association. The shareholder, even if he is the sole trader shareholder has
no proprietary interest in the company’s property. A company is allowed to
create different types of shares, the most common shares being the
ordinary and preference shares.

Ordinary shares

These are, as their name suggests, ordinary shares which do not confer with
any special rights or obligations. They are the most common and most
numerous.

Ordinary shares determine who controls the company and are therefore
regarded as the most important class of shares. The dividends for the
ordinary shareholders are not fixed, unlike that of the preference
shareholders.

The fact that the dividend payable is not fixed has an advantage where the
company realizes a huge profit. However, ordinary shareholders are paid
last after preferential shareholders and creditors have been paid up on
winding up. The ordinary shares are considered the most risky shares as a
result.

Founder members usually get ordinary shares and the articles of the
company would usually require that whenever a fresh issue is made, it
should be made to ordinary shareholders first. These new shares are usually
offered at a lower price than they would to outsiders

49
Preference shares

These shares offer preference their holders in respect of rights e.g. voting,
dividend etc. They have preferential rights attached to them in regards to
dividend and the repayment of capital of liquidation.

Preferential shareholders are entitled to preferential dividend of a

percentage e.g. 12.5%.When the dividend has been declared, they are paid
a 12.5%of it before any other shareholders are paid. This is a contractual
right in terms of the articles.

Participating and non-participating preference Shares

A company may be allowed by its articles to create participating and non-

participating shares. With participating preference shares, the holders may
be allowed to participate with the other shareholders in the remaining
dividend after they have been paid their fixed percentage. Non-
participating preference shareholders do not enjoy this right.

Cumulative and Non-cumulative Dividend

Any deficiency in one year may be expressly or impliedly made non-payable

out of the profits of the subsequent year. This means that, conversely, if
the dividend or profit in a particular year is insufficient or no dividend is
declared, the dividend of that year will not be paid, but will be carried over
to the next year. Where the dividend payable is carried over into the next
year, or the subsequent year, it is described as cumulative dividend. If it is
not, it is non-cumulative.

REDEEMABLE PREFERNCE SHARES

Section 76 provides that a company may, if authorized by its articles issue

shares which are redeemable at the option of the company or shareholder

50
concerned. Such shares are called redeemable shares .They can only be
issued if they are fully paid.

In terms of section 77, these shares can be redeemed only out of profits or
out of the proceeds of a fresh issue of shares made for the purpose of
redemption.

Redemption of shares means that all the shares redeemed are treated as
cancelled and the amount of the company’s share capital shall be
diminished by the nominal value of those shares.

Redemption however shall not be taken as reducing the amount of the

company’s authorized share capital. This is in terms of Section 77(4)

DEFERRED SHARES

These are lesser shares; the holders of which are paid after all the other
shareholders, including ordinary shareholders have been paid. The payment
of their dividend is therefore postponed or deferred until all the other
shareholders have been paid. They are to ordinary share what ordinary
shares are to preference shares. They carry large voting rights but are
considered risky. They are usually founder members’ shares e.g. promoters.

DEBENTURES

The company is usually authorized by its memorandum to borrow money for

its operations. (See Article 78 Table A first Schedule).
The company authorizes this by issuing debentures. Section 106(1) gives the
company the righjt6 to issue debentures.
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Section 2 of the act defines a debenture as including debenture stock or
bonds. In simple terms however, a debenture is really an acknowledgement
of debt and comes in the form of a document.

A debenture may be secured by either movable or immovable property of

the company and such security must be stated in the document. If the
debenture binds movable property, then it may be registered as a notarial
bond. If it binds immovable property, it may accordingly be registered by
means of a mortgage bond.

(Nkala and Nyapadi, Company law in Zimbabwe, with full

acknowledgement)

CHAPTER 6

COMPANY MANAGEMENT

Introduction

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A company, as was observed earlier on, is a legal persona with a distinct
personality from its own members. It is by legal fiction, supposed to run its
own affairs without looking up to any person to help it do so.
However, a company is in reality only an abstraction with no physical
existence. It can only function if there are officers of the company who
have to run it and conduct its business activities. The people are the
company directors. Shareholders theoretically are not interested in the day
to day running of the business of the company but are interested only in
their return on investment. Directors therefore are the stewards who are
entrusted with the running of the company.

DIRECTORS

Directors once appointed to do so at their own peril and must undertake

the obligations imposed on them by the Act and the articles, and the
common law.

It is not enough, neither is it a defence for a director to say that he was

only appointed as a formality to fulfill the legal requirements.

Every company must have not less than two directors, other than alternate
directors, at least one of whom shall be ordinarily resident in Zimbabwe.
See Section 169(1).

Section 2 defines a director as including any person occupying the position

of director or alternate director of a company by whatever name he may be
called. This means that, any person whose functions are effectively those of
directing a company is a director, even though he may be called for
instance, the chief executive officer, manager, official or superintendent.

In addition, every person signing the memorandum of the company is

deemed to be a director of the company until other directors have been
appointed.
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APPPOINTMENT OF DIRECTORS

The articles of association usually provide for the appointment of directors.

The shareholders exercise the power to appoint directors in a general
meeting. It is also possible for the articles to give the power to appoint
directors to the directors themselves.

Subscribers to the memorandum or a majority of them appoint the first

directors and determine their number, which in any case may not be less
than two. This will be set out in the list submitted to the Registrar in terms
of Section 17(4).These people will hold office until the appointed directors
in a general meeting. The general meeting will decide what happen to the
first director’s i.e. whether they will retire or continue to hold office.

Table A of the first Schedule, article 74-108 deals with the directors.
Article 90 deals with rotation of directors and provide that the meeting i.e.
the first annual general meeting of the company, all directors shall retire
from office.

WHO MAY BECOME A DIRECTOR

Section 173 lays down the persons who are disqualified from becoming
directors. It provides as follows:-

“(1) Any of the following persons shall be disqualified from being

appointed a director of a company-
a) A body corporate
b) A minor or any other person under legal disability.

Provided that a woman married in community of property may be a

director if her husband gives her written consent and that consent is
lodged with the Registrar;
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c) Save with the leave of the court, an un-rehabilitated insolvent;

d) Save with the leave of the court, any person who at any time been
convicted, whether in Zimbabwe or elsewhere, of theft, fraud, forgery
or uttering a forged document or perjury and has been sentenced
therefore to as term of imprisonment without the option of a fine or to a
fine exceeding one hundred dollars.

e) Any person who is the subject of any order under this act is disqualifying
him as a director

f) Save with the leave of the court, any person removed by a competent
court from an office of trust on account of misconduct”.

This list is obviously not exhaustive. The articles may in terms of section
173(4) also lay down further disqualification such as foreigners or
directors of other companies.

The case Tengende v Registrar of Companies is illustrative of the

stance which the courts adopt when dealing with the issues of
disqualification .In that case, the court said that even where a person
has a string of previous convictions, he will not be disqualified by that
fact alone. The court will look at the whole character of the person to
determine whether he has been rehabilitated, said the judge in that
case.

“In my view, what must be scrutinized herein is the applicant`s whole

character whether it can be said that his word is his bond. In this regard,
the petitioner’s obvious lack of candour or tendency to deceive casts a
great deal of doubt on whether he is truly reformed character, one to be
trusted with the honest management of the company.”

55
 Certain people are disqualified from behind directors because it must be
ensured that the company is run by capable, responsible and honest
people. The office of director is one of trust. He has a fiduciary
relationship with the company hence the demand for the utmost
integrity.

ALTERNATE DIRECTORS

It is not always possible for the substantive director of a company to act in that
position. He may be on leave, on holiday in another country or he could be ill. This
does not mean that the company will go without a director.an alternate is usually
appointed. The definition of a director in Section 2 includes an alternate director.
He is only however a substitute director or one appointed to act in the place of the
absent substantive director.

An alternate director can only be appointed to act in the place of the absent
substantive director. An alternate director can only be appointed if the articles
permit such an appointment. A company must have not less than two directors in
terms of Section 169(1).However, alternate directors are not included in reckoning
the number of directors of a company.

An alternate director is bound to comply with all the duties of a director becomes
even though he is not counted as a director for purposes of Section 169, he is
nevertheless a director by virtues of the definition of a director in section 2

THE BOARD OF DIRECTORS(BOD)

The board of directors consists of the various directors of the company. This is where
directors sit (in a room called the Boardroom) to discuss the affairs of the company. This
is where meetings of directors are held. Usually there are executive and non-executive
directors although they may be called by various names such as Managing Director (MD),
Chief Executive etc.

Let us consider briefly the offices of these types of directors.

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EXECUTIVE DIRECTORS

Executive directors or Management Executives are officers of the company with a

service contract. They work full time for the company hence they are often referred
to as full time directors.

The executive director has knowledge of the company and is usually in that position
because of his expertise. He is very powerful and important in the administration
and day to day running of the company .The executive director is almost invariably
referred to as the Managing Director or Chief Executive officer. The MD is also
provided for in article 108-110.

There is a difference between an ordinary manager and the Managing Director,

although the difference still is a grey area. A director is under the control of the
BOD. He occupies an office which is statutory hence the legal essential to the
company. His powers and duties are defined by law. The ordinary manager on the
other hand is merely an employee and is not a legal requirement for a company. He
is engaged by the Directors for his services hence he is a worker albeit higher up the
hierarchy. (Managers of course dislike to be described in this way!)

NON-EXECUTIVE DIRECTORS

These are essentially statutory directors. They are rather formalities to fulfill the legal
requirements. In large companies, there are usually quite a number of the non-
executive directors. As their name suggests, they do no not work full time for the
company unlike the executive directors. Sometimes they are employed elsewhere on
a full time basis and may even be non-executive directors for several other
companies.

Indeed, some of them have “little relevant knowledge” of the companies they direct.
(Nkala & Nyapadi) .They therefore rely heavily on the MD hence they have been
described as “guinea pig” directors. Their powers , and rights which they exercise in

57
 the BOD is determined in the General Meeting which is the “ultimate organ of
corporate control”

REMUNERATION OF DIRECTORS

Payment for the services of directors depends on the articles and their service
contracts, if any. It should be realized that directors are not servants of the
company like ordinary employees.

Therefore, the mere fact that one is a director does not imply that he must be paid for
it. In the absence of a provision regulating payment of the directors, the payment
will be in nature of a gratuity. Managing Directors are usually paid a salary with
some percentage of the profits. In terms of article 109 of the Table of the first
Schedule, the MD is entitled to a salary, commission or participation in the profits as
the directors may determine.

Please study Section 177 which deals with the loans to directors and section 172 which
deals with the share qualification of directors.

POWERS OF DIRECTORS

These powers are provided in the articles of association and the Articles of the
Companies act together with the common law.

Article 81-88 deal with the power and duties of directors.

The BOD can act in any manner it wishes as long as it does not exceed its powers as
granted in the articles. The shareholders have no control over directors can in terms
of their granted powers. If the BOD does anything that displease the shareholders,
then the powers of directors may be restricted by alteration of the articles as
58
 founded for in Section 16.The directors may also be removed from office by
resolution of which special notice is required before the expiration of his period of
office in terms of Section 175(1)
Articles 81 table A gives the directors’ powers to run the company subject only to the
regulation of the general meeting.

In the case of Shaw v Shaw, it was held that the company in a general meeting cannot
resolve to override the powers of directors when they have been properly exercised.

The company had resolved in a general meeting to discontinue an action which had
been instituted by the directors in a court of law. The court said that some powers
maybe exercised by the directors and others by the shareholders in a general
meeting. The directors however, are the only ones who can exercise the powers of
management if such powers are vested in them by the articles. The shareholders
may, if they are unhappy with the directors alter the articles of association, refuse
to re-elect them or simply remove them from office. The guiding principle however
is that there should be no interference with the directors unless the articles
specifically state that the directors will be subject to the general meeting

DUTIES OF DIRECTORS

This is a favorite examination topic, judging by the questions that have been set over
the years regarding this area. We therefore exhort our students to try to master this
area as much as possible to avoid disappointment.

The duties of the directors can be divided into the following:-

1) Fiduciary duties
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 2) Duty to exercise powers bona fide the company’s interest

3) Not to make secret profits

4) Not to have personal interests conflicting with the company’s

interests

5) Duty to disclose (Equitable disclosure)

6) Duty of care and skill

7) Duty to act intra vires

8) Duty to exercise an independent discretion

FIDUCIARY DUTIES

These are derived from the law of agency and trust. Directors occupy a position of
power and trust in the company. They have a duty to act solely for their company
and to protect its rights.

Directors have a greater duty of good faith than the ordinary agent in that directors act
for a company which has no real existence but is only a legal fiction. It can
therefore not act on its own.

Directors are expected to exhibit honesty and integrity. They owe a fiduciary duty to
the company and to the company alone. They do not owe any duty of care to the
individual shareholders. This was decided in the important case of PERCIVAL V
60
 WRIGHT. In that case the secretary of a company received enquiries from certain
shareholders who wished to sell their shares to any person willing to buy them. The
directors bought the shares themselves even though they had been approached by a
certain person who wanted to buy them at higher price than the one paid by the
directors.

The directors did not disclose this fact to the shareholders. When the shareholders
discovered this, they sought to have the sale set aside. The court came to the
conclusion that the directors did not have any duty to disclose such information to
the shareholders. The directors had nit approached the shareholders, instead the
shareholders had approached the directors wishing to sell the shares.

It has been said that a director has a duty to promote the interests of his company but
not to take away business from it. In the case of HORCAL V GATLAND, the facts briefly
were as follows:-

A company director by the name of Gatland was close to retirement. The BOD decided
to award him a golden handshake. After the decision had been taken, Gatland
received a phone call from a customer who wanted to do business with the
company. Gatland converted the business to his own use. The company only came to
know of this when the irate customer rang to complain about the shoddy job.

The company sued Gatland for the profits and the golden handshake payment. The
court ordered Gatland to pay the profits but not the golden handshake. The
reasoning of the court was that the decision to award the payment was taken before
Gatland diverted the contract. There were evil thoughts but not evil deeds.

This was reiterated in the case of INDUSTRIAL DEVELOPMENT CONSULTANCY V COOLEY

where a company director pretended to be ill so that he could be away from work
and take some business contracts intended for the company. The court said that he
was in breach of his fiduciary duties.

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However even though directors owe a duty to the company, they do not owe that duty
to the shareholders, hence directors are enjoined to act in the interests of the
company and not their own selfish interests. The question then is :-

What are the interests of the company?

It has been decided that the interests of the company are the interests of the
shareholders.
The directors must act in good faith. They must not be motivated by any ulterior
purpose. The court will not however usurp the powers and functions of directors
since it is not concerned with financial wisdom neither is it concerned with the
commercial wisdom of the directors. Given the choice, the court will therefore, in
determining whether a particular act is for the benefit of the company enquire into
whether a reasonable person would believe such acts to be in the interests of the
company.

Directors must be careful to engage in activities which will result in a conflict of

interest with the company. As a general rule, directors may not compete with the
company. A director may obtain no other advantage from his office other than that
which he is entitled by way of a director’s remuneration or fees. If a director
obtains any additional advantages, these will be regarded as secret profits and the
director will accordingly be in breach of his fiduciary duties. The duty to act in good
faith for the company is so fundamental that it cannot be contracted out of. If the
articles or the service contract purport to free the director from this duty, such a
provision will be a complete nullity and of no force or effect.

In the case of ROBINSON V RANDFONTEIN ESTATES GOLD MINING CO., the company wanted to
buy a piece of land. The owner however was not willing to sell on the terms
proposed by the company. Robinson who was chairman of the company then entered
into negotiations personally with the seller and managed to buy the piece of land for
R120 000.He then resold the land to the company for R550 000 hence making a
profit on the speculation. The court held that he had used his position as director to
make a profit.

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The court had this comment to make,

“Where one man stands to another position of confidence involving a

duty to protect the interests of the other , he is not allowed to make
a secret profit at the other’s expense or place himself in a position
where his interest conflicts with his duty.”
As long as one is a director, the duty not to make secret profits
subsists, hence in the case of ATLAS ORGANIC FERTILIZERS V PIKKEWYN
GHWANO, a director gave notice of his intention to leave the company.
He wanted to go and direct another company he was going to join.
During the period he was serving notice, he enticed the employees of
the company he was leaving to leave the company as well and join his
new company. The court decided that his intentions were not bona
fide the company’s interest. He was still a director of the company,
and until he formally left, he owed the company a fiduciary duty.

DUTY OF DISPLINE

Section 186(1);(2) provides for this duty in the following terms:-

1) …….it shall be the duty of a director of a company who is in a way,

whether directly or indirectly, interested in a contract or proposed
contract with the company to declare the nature and full extent of
his interest at the meeting of the directors.

2) In the case of a proposed contract, the declaration required by

this section to be made by a director shall be made at the meeting
of the directors at which the question of entering into the contract
is first taken into consideration or , if the director was not at the
date of that meeting interested in the proposed contract, at the
next meeting of the directors held after he became so interested,
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 and in a case where the director becomes interested in a contract
after it is made, the said declaration shall be made at the first
meeting of the directors becomes so interested”

It is clear from the wording of this section that disclosure must be made to the Board
of Directors.

Directors are not prohibited from being interested in any contract with the company,
but for the purposes of transparency, they must make an equitable disclosure of
their interest.

Article 85 restricts members from voting on matters where they have an interest. It
states

(2)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, nor shall he be
counted in the quorum present at the meeting…………..’’

If the company has not adopted article85, or if the matter falls within one of the
exceptions provided therein, the directors may of course vote.

DUTY TO EXERCISE AN INDEPENDENT DISCRETION

The duty is closely related to the duty of directors to act in the interest of the
company and the company alone .The directors shall be independent of external
influence and should not dance to the tune of any person other than the company.

Indeed, directors maybe nominees, but when it comes to directing the company, their
duty to exercise an independent discretion comes above everything else. They
should therefore have unfettered discretion. They should not be dummies puppets
or stooges of any person.

In the case of SvSHABAN, a judge did not mince his words when he said the following;

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 ‘’I want to destroy the idea that puppets can be lawfully employed
in our company system.by that I mean, persons placed on board
who pretend to have taken part in resolution of which they know
nothing . Our law does not know the complete puppets that
pretend to take part in the management of the company whilst
having no idea what it is to which he parts his signature. It is
utterly foreign to the basic concepts of our law and the courts will
punish it as a fraud, the more when entire boards consist of
puppets manipulated from outside by persons who are ostensibly
unconnected with company.
Great words those need we say more?

DUTY OF CARE AND SKILL

Directors have a duty to display reasonable care and skill in the execution of their
duties. As decided cases show, this duty is not heavy or onerous.

In the case of RE CITY EQUITABLE FIRE & INSURANCE CO LTD the company had experienced
serious short falls. The MD was convicted of fraud. The liquidators sought to make
other directors liable in negligence for failing to detect the frauds. The court held
as follows :-

“….. a director need not exhibit in the performance of his duties a

greater degree of skill that may be reasonably expected from a
person of his knowledge and experience. A director of an insurance
company for instance does not guarantee that he has the skill of an
actuary or a physician”.

Directors should act with such skill and care as is reasonably

expected of them having regard to their knowledge and
experience. They are not liable for mere errors of judgment.

65
 In the case of RE DENHAM &COMPANY for instance, a director had
recommended the payment of dividend out of capital. He was not
liable because he was only a country gentleman and not an
accountant!

The extent of this duty will also depend on the nature of the company’s business
operations, having regard to the exigencies of business and the articles of
association , some duties may be left to other officials and a director may be
justified in trusting that the official to perform his duty honestly.

In the case of DOVEY V METROPOLITIAN BANK OF ENGLAND AND WALES, a director delegated
the task of drawing up accounts to others. It was held that he was entitled to rly ion
those accounts in recommending the payment of a dividend which was in fact made out
of capital.

The duties of care and skill are light compared to those of loyalty and good faith but
the directors “may not be indifferent or be mere dummies”.

NOTE:-Examiners tend to require candidates to explain and discuss

both the common law and statutory duties of the directors. That
should be easy.

66
 CHAPTER 7

COMPANY MEETINGS AND RESOLUTIONS

Introduction

Meetings are very important in a company. They have to be held periodically to map
out strategies and to discuss the operations of the company. The general meeting
has therefore been described as the company’s parliament. Because it has no
physical existence, the company need to have decisions made for it by the
directors and the members .The control of the company is thus divided into three
authorities namely:-

1) Shareholders in a general meeting (GM)

67
 2) Board of Directors(BOD)

3) Managing Director(MD)

Generally shareholders are not involved in the management of the company but are
interested in the financial returns of their investment. Control of the company is
therefore, as we saw earlier on, left in the hands of the directors. However, there
are times when collective action is required and the BOD may not take drastic steps
without the blessing of a general meeting.

PURPOSE OF THE MEETINGS.

The general meeting provides the forum for the members to hear and discuss the
progress of their company. This is their opportunity to grill their directors about the
manner of their operation of the company and the stewardship entrusted to them by
the shareholders .It has been said that the general meeting is the ultimate organ of
corporate control. The BOD is checked by the general meeting and asked to account
for its actions. It is in the general meeting that resolutions are passed and where
directors are elected and removed.

There are basically four types of meetings and these are the following :-

1) Statutory meeting

2) Extraordinary General Meeting

3) Annual General Meeting

4) Class Meeting

THE ANNUAL GENERAL MEETING(AGM)

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It is a requirement of every company in terms of section 125(1) to hold a general
meeting .The section states:-
“(1)……..every company shall ……hold general meetings to be
known and described in the notices calling such meetings as
annual general meetings of that company.”
The requirements of section 125 are peremptory and so are
the times for holding the meeting which are provided for in
subsection (2) thereof-

“Annual general meetings of a company shall be held-

a) In the case of the first meeting, within a period of

eighteen months after the date of the incorporation of
the company concerned, and

b) Thereafter, within not more than six months after the end
of every ensuing year of that company, and

c) Within not more than fifteen months after the date of the
last preceding meeting of that company”.

It is an offence in terms of subsection (7) to fail to hold the annual general meeting.

The purpose of calling a general meeting is to discuss matters prescribed by the Act
and those in Article 52.A company can deal with the declaration of a dividend,
consideration of financial statements and appointment of directors. There is no
limitation on matters that may be discussed in the meeting. Article 47 deals with
the convening of meetings.

THE EXTRAORDINARY GENERAL MEETING

Urgent matters usually arise in the company. To wait for the AGM might be too late.
The remedy lies in calling for an extraordinary general meeting of the
69
 members .Extraordinary general meetings are all general meetings that are not
annual general meetings.(article 48)

In terms of section 126, these meetings are mainly by requisition.

(1)On the requisition of members of a company holding at

the date of the deposit of the requisition not less than
one-twentieth of such of the paid-up capital of the
company as at the date of the deposit carries the right
of voting at the general meetings of the company,
notwithstanding anything in its Articles, shall within
twenty-one days of the deposit of the requisition, issue
a notice to members convening an extraordinary
meeting of the company……”

When such a requisition has been made, the directors

have a mandatory duty to convene the meeting. If the
directors decline to convene the meeting, then the
members themselves are at liberty to do so. The
expenses incurred by the members in convening the
meeting are paid by the company from the monies due
as fees or remuneration to the directors. In addition, it
is an offence to fail to convene an extraordinary
general meeting if such has been requisitioned.

If there were no extraordinary general meetings, the

directors would run the company unscrupulously
without interference from the members in between
general meetings (AGMs). Extra -ordinary meetings
therefore keep them on their feet.

THE STATUTORY MEETING

Section 124(1) provides as follows :-

70
 (1)Save in the case of a private company, every
company shall, within a period of not less than one
month and not more than three months from the
date at which it is entitled to commence business,
hold a general meeting”.

It is clear that this Section exempts a private company from holding a statutory
meeting which is compulsory for other companies. The purpose of this meeting is to
enable the members to discuss the affairs of the company; the members are
afforded the opportunity to discuss any matters relating to the company’s formation
and the way forward. This is because section 124(7) provides as follows:-

“The members of the company present shall be at

liberty to discuss any matter relating to the
formation of the company or arising out of the
statutory report….”

The directors of the company would have furnished the members with the statutory
report before the meeting. This report will include inter alia , the total number of
shares allotted, the amount received from such allotment, particulars of the
company’s reports and expenses, names and addresses of auditors , managers,
secretary and directors of the company.

The members will discuss the statutory report, and as mentioned before, any other
business. If the directors fail to produce the report, they will be guilty of an offence
in terms of Section 124((9).In addition, failure to hold a statutory meeting can result
in the company being wound up at the petition of any member.

EFFECT OF IRREGULAR CONVENING OF MEETING.

A meeting must be properly convened. Notices must be sent out to members of the
intention to hold meetings. The periods for convening meetings are specifically
pounded for in section 127.Unless the members agree, any meeting called by shorter
71
 notice will be void. The courts however tend to adopt’ a common sense” approach
in dealing with irregularities in the convening of meetings. Sometimes certain
members may not be given notices because they are inaccessible, failure to give
them notice will not necessarily be sufficient grounds to declare the meeting void.

In the case of AFRICA ORGANIC FERTILIZERS V PREMIER FERTILIZERS, the court has this to
say,

“now if every shareholder must have notice if a

general meeting no matter in what part of the world
he may be may happen to be, it is almost
inconvenient construction because a company cannot
without serious injury to itself delay the transaction
of important business until every shareholder in
every part of the world has had notice of the
meeting at which the business is to be discussed….”

THE BUSINESS OF THE MEEETING

PROXIES

It may happen that a member is unable to attend a meeting personally, but at the
same time he is desirous of registering a vote. In such circumstances, he will have to
appoint a proxy. Then proxy is a person who acts in the place of the absent
member. A proxy is an agent who is duly authorized to attend and vote at a
meeting. Because he is an agent, the member is at liberty to revoke the
appointment at any time. The agency will also come to an end upon the death,
insolvency or legal incapacity of the member. The appointment and voting by
proxies is provided for in terms of section 129(1).a company can be a member of
another company (but cannot be a director) and it can theoretically exercise all the
powers and rights of a member of a company.

72
However, a company cannot show hands in voting on a show of hands (because it has
no hands) neither can it n address the meeting (because it has no mouth!)It can
therefore only act through persons properly appointed to represent it. In terms of
Section 131(1), a corporation which is a member or creditor of another corporation
can by a resolution of its directors authorize such a person as it sees fit to act as its
representative at any company meeting. A person so appointed will be entitled to
exercise the same powers on behalf of the company which he represents as that
company could exercise if it were an individual member, creditor or debenture
holder.

QUORUM

A quorum is the minimum number of members present required for business to be

transacted. In terms of Section 128(10(c), two members personally present may be a
quorum hence proxies are excluded. A single person, even if holding proxies for
many other persons cannot constitute a meeting. However there are some
exceptions which are as follows :-

1) Where it is not practicable to call a meeting in the normal manner, the court
may mero motu or on the application of any director or member order a meeting
to be called and may also order that one member of the company present
constitute a meeting. This is in terms of section 128(2)

2) The registrar may order that one member shall form a quorum –Section 125(5)

3) The directors may fix the quorum for a board meeting at one.

4) Where a company has one member.

5) In terms of Article 54, one member can form a quorum if a quorum is not present
within half an hour from the time the appointed for the meeting.

CHAIRMAN AT MEETINGS
73
The chairman is responsible for conducting the proceedings. He is there to ensure
that there is order and must also ensure that the proceedings are carried
regularly. The members present must elect the chairman to chair the meeting.

Article 52 also provides that the chairman of the BOD, if any, shall preside as
chairman at every general meeting. If he is unwilling to act as chairman, then the
members shall elect one of their numbers to be the chairman.

RESOLUTIONS

When members resolve to do something, such a decision is called a Resolution. It

is an expression of the intention of the meeting. Three types of resolutions exist,
namely :-

1) Special resolution.

2) Ordinary resolution

3) Written resolution

ORDINARY RESOLUTION

This requires a simple majority of those voting either personally or by proxy.an

ordinary resolution other than a special resolution. It is used for all matters
which do not need a special resolution.

Fourteen days (14) notice is required for a meeting at which an ordinary

resolution is to be passed. This period is seven days for a private company

SPECIAL RESOLUTION

74
In terms of section 133(1), this is a resolution passed by a majority of not less
than three fourths of the members present. A special resolution is quite as it is
required for drastic steps such as

1) Alteration of the articles in terms of section 16

2) Alteration of the memorandum

3) Alteration of the share Capital or variation of the share structure.

4) Change of the company’s name

5) Removal of directors and auditors

6) Winding up by the court

It should be noted that this list is by no means exhaustive, but what we

have highlighted are some of the important situations where a special
resolution is required. A special resolution must be lodged with the
Registrar, if it is not, it will be of no effect or force.

WRITTEN RESOLUTION

Written resolutions apply only to private companies.

Section 134 provides as follows:-

“(1) in the case of a private company , a resolution in writing signed by all

the members for the time entitled to attend and vote on such resolutions
at a general meeting , being body corporate, by their duly authorized
representatives, shall be as valid and effective for all purposes as if the
same had been passed at a general meeting of the company duly converted
and held, and if described as a special resolution shall be deemed to be a
special resolution”
75
NOTE
Please study Section 132-137 in your Acts

VOTING

As general rule, members of the company are entitled to vote. The articles
may however restrict voting in any class of shares.

Generally, every member is entitled to one vote in respect of each share

held by him, or each twenty dollars of stock he holds (Section 128(1) (e).

Voting may be on a poll or by show of hands.at common law, voting is by

show of hands, unless the articles specify otherwise.

When shareholders vote, they owe each other no duty of care, neither do
they owe a fiduciary duty to the company, they vote as they wish.

Directors who are also shareholders are exempted from their duties when
they vote in a general meeting. It has been held that directors are no
different from the rest of the shareholders when voting in a general
meeting.

It would however appear that the fact that members owe nobody a duty of
care is not absolute if the decision of CLEMENS V CLEMENS is anything to go
by. In that case, the court held that although the members owe the
company no duty of care, they must exercise their powers for a proper
corporate purpose .It will be improper if the vote is exercised primarily to
injure other members.

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 CHAPTER 8

THE COMPANY IN TROUBLE

JUDICIAL MANAGEMENT

Judicial management means that the substitution of the company directors with a
judicial manager duly appointed by the court.

Judicial management must be distinguished from winding up.

These two processes are fundamentally different in both purpose and effect. Although
in both instances the company will be experiencing problems, these two remedies
are different.

Winding up is concerned with the dissolution of the company and the extinction of its
legal personality. Judicial management on the other hand is intended to save the
company from collapse. It is therefore an alternative remedy to winding up. The
court has discretion whether or not to put a company under judicial management.
Judicial management is only granted in circumstances where a winding up order may
cause unnecessary prejudice to the shareholders and creditors of the company. It

77
 has been said that judicial management is like a “half-way house between life and
death of a company”.

However, it does not follow that before a company can be wound-up, it must be placed
under judicial management. Judicial management is essentially intended and
designed to enable accompany suffering from a temporary problem or setback due
to mismanagement or some viability problem to become a successful concern once
again. The company is therefore taken over by the judicial manager whom is
supervised by the master of the High Court. His aim is to rejuvenate the company
once more and give it a new lease of life.

In deciding whether to wind up a company or to place it under judicial management,

the court will be guided by the principle of whether there are grounds or certainty
of success. The disadvantage of judicial management is that it affects the credit
worthiness of the company.

CIRCUMSTANCES IN WHICH A PROVISIONAL JUDICIAL MANAGEMENT ORDER MAY BE

OBTAINED

There are basically two stages in judicial management proceedings-the provisional

stage and the final stage. The court if satisfied will grant a provisional order which
may or may not be confirmed on the return date.

Section 300 provides that a provisional judicial management order may be granted if it
appears to the court –
(i) “that by reason of mismanagement or for any other cause the
company is unable to pay its debts and has not become or is
prevented from becoming a successful concern and

(ii) That there is reasonable probability that if the company is placed

under fiduciary management it will be enabled to pay its debts or
meet its obligations and become a successful concern, and

(iii) That it would be just and equitable to do so”

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INABILITY TO PAY DEBTS

This is also a ground for winding up the company. In terms of section 205 , it provided
as follows:-

“a company shall be deemed to be unable to pay its debts;-

a) If a creditor by cession or otherwise , to whom the company is

indebted in a sum exceeding one hundred dollars then due, has
served on the company a demand requiring it to pay the sum so
due by leaving the demand at its registered office and if the
company has for three weeks thereafter neglected to pay the sum
or secure or compound for it to the reasonable satisfaction of the
creditor, or

b) If the execution or other process issued, on a judgment , a decree

or order of any competent court in favor of the creditor, against a
company is returned by the Sherriff or messenger with
endorsement that no assets could be found to satisfy the debt or
that the assets found were insufficient to do so , or

c) If it proved to the satisfaction of the court that the company is

unable to pay its debts and , in determining whether a company is
unable to pay its debts, the court shall take into account the
contingent and prospective liabilities of the company”

Basically, the fact that a creditor has demanded payment without

success will be prima facie evidence that the company is unable to
pay its debts, as amplified in the above cited section.

MISMANAGEMENT OF THE COMPANY

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The courts have a history ok keeping their distance where management of the company
is concerned. Judges appreciate that they are not sufficiently equipped to run the
affairs of the company. They are reluctant to usurp the functions of the directors. A
judicial manager will therefore only be appointed if there is something manifestly
illegal, oppressive or fraudulent. The court will not interfere, for instance where
there is just animosity between the directors. The court will also not interfere if the
management complained of can be remedied using the company machinery.

INABILITY TO MEETING ITS OBLIGATIONS

The inability could be as a result of mismanagement. This however does not necessarily
mean inability to pay debts. It could just be failure to timeously perform
contractual obligations.

PREVENTED FROM BEING A SUCCESSFUL CONCERN

Under this heading, it has to be satisfactorily shown that there is a possibility that the
company can operate successfully if given an opportunity to do so. If it is only to
buy time, the court will not grant the application. The purpose of this remedy not to
delay the obvious death of a terminally ill company. Failure to become a successful
concern can be a result of mismanagement as well or where the company is plagued
with labour unrest or litigation.

THE JUST AND EQUITABLE GROUND

Under this ground, the court attempts to strike balance between the interests of the
members and those of the creditors. The creditors are obviously not interested in
the sustenance of a company which has no prospects of survival. The members
would want therefore grant the application under this ground if the eventual result
will be beneficial to both creditors and shareholders.

APPLICATION FOR JUDICIAL MANAGEMENT ORDER

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The court has discretion whether or not to grant the order sought (Section 229(1) (a)
(b).The people who are competent to apply for judicial management can also apply
for winding up.

When an application is made, a copy of that application shall be filed with the Master
of the High Court who will report to the court on any circumstances justifying the
postponement or dismissal of the application(section 299(2).The order granted
provisionally will provide in terms of Section 301(1)(c) inter alia that:-

“……………all actions and proceedings and the execution of all writs,

summonses and other processes against the company be stayed and
not proceeded with or without leave of the court”
The rationale for the provision is to protect the company from law
suits during the time of the order to give the best opportunity to
survive.

APPOINTMENT OF THE PROVISIONAL JUDICIAL MANAGER

In terms of Section 302(1) (b) (i), the Master shall without delay appoint a provisional
judicial manager. The provisional judicial manager will take custody of the company
property upon his appointment. The custody would have hitherto in the hands of the
Master. He is appointed in the same manner as a liquidator in terms of Section
272.The duties of the provisional judicial manager are itemized in Section 303 and
these are to :-
(a)Assume the management of the company and re3cover and take
possession of all the assets of the company, and

(b) Within seven days after his appointment lodge with the
Registrar , under cover of the prescribed form, a copy of his
letter of appointment as provisional judicial manager, and

(c)Prepare and lay before the meetings convened…..a report

containing
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 i) An account of the general state of affairs of the company,
and

ii) A statement of the reasons why the company is unable to

pay its debts or is probably unable to meet its obligations
or has not become or, is prevented from becoming a
successful concern, and

iii) A statement of the assets and liabilities of the company,

and

iv) A complete list of creditors of the company , including

contingent and prospective creditors, and of the amount
and nature of the claim of each creditor, and

v) The considered opinion of the provisional judicial manager

as to the prospects of the company becoming a successful
concern and the removal of the facts and circumstances
which prevent the company from becoming a successful
concern”.

On the return day in terms of section 305, the court may after considering the
evidence and “if it appears that there is a reasonable probability that the company
concerned, if placed under judicial management, will be enabled to become
successful concern and that it is just and equitable to grant such an order, or it may
discharge the provisional judicial management order or make any other order that it
thinks just”.

If the court discharges the provisional order, then the company has no hope of
surviving and it may as well be just wound up. If it confirms the provisional judicial
order, then the company will be put under judicial management and the final
judicial manager will be appointed.
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Let us return to consider the duties of the final judicial manager which are provided in
Section 306.He exercise these duties subject to the memorandum and the articles
and his duties are like those of the liquidator.

Please study section 306it is too long to be reproduced to the text.

Further study section 308 which provides for the remuneration of the final judicial
manager and finally, study Section 314 which deals with the cancellation of the final
order.

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 CHAPTER 9

LIQUIDATION OF THE COMPANY

Winding up

We noticed at the beginning that upon registration, a company becomes a legal

personality. That personality comes to an end at the dissolution of the company.
During its life, the company would have acquired rights and incurred liabilities.
These have to be dealt with before the company is finally dissolved. The process of
ascertaining and realizing the assets and applying them to the payment of creditors
and distribution of the residue to the members is called winding up or liquidation.
Winding up therefore is just a process.

Dissolution spells the death of the company and its legal personality is extinguished.
The concepts of dissolution and winding up
, even though they are used synonymously, are not interchangeable and should not be
confused. These two concepts should, in addition not be confused with de-
registration.

De-registration does not terminate the existence of the company. It simply deprives it
of its legal personality but will continue as an association whose members are
personally liable for its debts.

Winding up is essentially an administrative process which involves the handing over of

the company’s affairs to a liquidator. Directors are therefore relived of their duties
of directing the company.

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During the process of winding up the company retains its legal personality which is only
extinguished at dissolution.

There are two procedures for winding up of a company as provided for in section 199
which provides as follows :-

Modes of winding up

The winding up of a company be either –

a) By the court, or

b) Voluntary.

Winding up by the court is also called compulsory winding up. In this case, the
company is wound up by the court following a petition by various persons specified
in the Act.

Where the company is wound up voluntarily, this follows an application by the

company itself following a special resolution.

COMPULSORY WINDING UP

Section 206 sets out the circumstances in which the company may be wound up by the
court as follows:-
“ a company may be wound up by the court –

a) If the company has by special resolution resolved

that the company be wound up by the court,

b) If default is made in lodging the statutory report or

in holding a statutory meeting

85
 c) If the company does not commence its business
within a year from its incorporation or suspends its
business for a whole year;

d) If the company cease to have members;

e) If seventy-five per Centrum of the paid –up share

capital of the company has been lost or has become
useless for the business of the company

f) If the company is unable to pay its debts;

g) If the court is of the opinion that it is just and

equitable that the company should be wound up”.

These grounds itemized in this Section will now be considered in turn.

DEFAULT IN LODGING STATUTORY REPORT OR HOLDING STATUTORY MEETING

The petition for winding up under this ground should not be presented before the
expiration of fourteen days (14) after the last day on which the meeting ought to
have been held. The idea is to give the directors an opportunity to remedy the
wrong or put right the default.(section 207(1)(ii0

In terms of Section 208(3), the court has the discretion and may instead of making a
winding up order direct that the statutory report should be delivered or that the
meeting should be held.

FAILURE TO COMMENCE BUSINESS WITHIN A YEAR

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Under this ground, the court can order the winding up of a company for failure to
commence business within a year. This is because a year is long enough for the
company to have started operating and failure to do so within this period may be
indicative of the fact that the company is unable to operate and so should be
dissolved.

The court however has the discretion and can give the company a chance if there are
prospects that the company will be able tom operate in the near future (Section
114sets out the conditions that must be fulfilled before a public company can
commence business.)

WHEN COMPANY IS MEMBERLESS

When the member`s number has been reduced to below one, or when the company
ceases to have any members, then the company may be wound-up. In terms of
Section 7, a company must have at least one member. In terms of Section 32, if the
company ceases to have any members but carries on business for more than six
months, then any person who knowingly caused it to do so, shall be liable together
with the company for its debts.

LOSS OF 75% OF PAID UP SHARE CAPITAL

The purpose of this requirement is to pre-empt a situation whereby a company will be

unable to meet its obligations to third parties. Once a company uses up 75% of its
paid-up capital, an interested party may petition the court for winding-up. The
court however exercise a discretion .The fact that 75% of the paid-up capital has
been lost or has become useless does not necessarily mean that the company is
unable to pay its debts especially where the share –capital is lost but the directors
did not over –commit the company but entered only into transactions which the
company could be meet and the company has debts to pay other monetary
obligations to discharge

INABILITY TO PAY DEBTS

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This is considered to be the most common ground for winding up. Failure to pay debts
is defined in Section 205. (We quoted this Section in full in the proceeding chapter
on judicial management.)It has been said that the court has discretion. It should be
established that the company is unable to pay its debts in the sense of being unable
to meet its current obligations. If the company is still solvent in the sense that its
assets exceed its liabilities, the court may refuse to order winding up

JUST AND EQUITABLE GROUND

This is also a common ground for winding up. This is because this ground is all-
encompassing and gives the court a very wide discretion. It is based on the principle
of good faith which is derived from the law of partnerships.
This ground is usually divided into the following
categories:

1) Loss of the company’s substratum

2) Illegality

3) Deadlock

4) Minority Oppression

5) Lack of probity in the company’s affairs

LOSS OF SUSTRATUM

This occurs where the company has abandoned its main objects or is unable to achieve
them. It has been decided that where a company was formed to mine copper and no
copper was found, then the substratum of the company has disappeared and it
ought to wound up. The reason for this is that it would be unfair for the company to
pursue other objects which were not contemplated by the shareholders.

In RE SERMAN DATE COFFEE COMPANY, a company’s main object was to acquire a patent
for manufacturing dates as a substitute for coffee. The company was unable to
88
 obtain such patent but it was doing very well. It was held that it should have been
wound up.

In NAKHOODA V NORTHERN IND, formed to establish a mineral water factory, and a large
dry cleaning business. It did neither of these but carried on activity of money
lending .An application for the winding up was granted.

DEADLOCK OR STALEMATE

This may occur where the company is unable to take management decisions on account
of equality of voting strength of two opposing groups of shareholders. This is most
common in small companies where the shareholders may have personal
relationships. The court then tends to treat the company as if it were a partnership.
Once the court is of the opinion that the trust and confidence have been
undermined, it will order winding up.

In RE YENIDJE TOBACCO CO.LTD (1916) there were two tobacco manufacturers who were
the only shareholders in the company. They were also the directors, with equal
voting powers. They had a serious disagreement resulting in continuous quarrels. At
one point, one of them brought a legal action against the other. They had over one
thousand pounds in litigation over the validity of the dismissal of a factory
manager .They also argued over the terms of employment of a travelling salesman.
It is said that the relations between them became so bad that they could not talk to
each other but communicated through the secretary!

Although the company was doing very well, the court, applying the principles of
partnership ordered a winding up.

MINORITY OPPRESSION

If it can be shown that persons controlling the company have conducted themselves in
a manner oppressive to the petitioner, the court may grant winding up. The court
however will only grant winding up on the petition of the members even though
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 some other remedies are available provided that the member is not being
unreasonable to pursue that other remedy (section 208(2)).

LACK OF ROBITY

This is where there is no transparency. There is dishonesty or misconduct in the affairs

of the company in the case of WOOLMARK V COMMERCIAL VEHICLE SPARES, a minority
shareholder complained that the directors and the majority shareholders had
perpetrated a fraud on him by falsifying minutes, illegally issuing shares and
declaring and paying dividends. He said that this constituted a fraud and that as a
result of this misconduct; he had lost confidence in the management of the
company’s affairs. The court granted the order sought.

CONCLUSION

What we have looked at are the two ways and reasons for winding up. The rest of the
winding up procedure is merely administrative and fully provided for in the
companies Act .It is therefore not necessary for us to regurgitate the act. We
sincerely believe that a discerning student can study the act by herself or himself.

90