COMPANY LAW AND PROCEDURE

(HELPFUL TO ZIALE STUDENTS IN THE AREA OF LPQE EXAMINATIONS)

SOME EXAM TIPS OF THE CURRENT LPQE HEAD SIX (6)

 “Company law themes are interlinked. So make sure that you understand well
enough, all aspects of the subject and thus be able to relate one aspect to
another when required to do so.”

 “Make sure you familiarize yourself thoroughly with ALL key provisions of the
Companies Act on various company law areas, from incorporation to winding
up.”

 “Most questions will require you to think in order to be able to identify legal
issues (or the main legal issue). Therefore, develop an analytical and critical
mind.”

 And a Compulsory question seeks to examine a practical issue to be discussed in

an exam thus, question One is always very practical.

 “Do not rush straight into addressing the identified issue or issues (except where
you are really racing against time in the dying moments of the exam session).
Lay some foundation to your answer. If, for instance, the question revolves
around the theme of pre-incorporation contracts, state what a pre-incorporation
contract is and give a brief background to that topic. This not only helps to set
the scene, but also shows orderliness.”

 “In answering any exam question, assume that the examiner does not know
anything and address all legal issues that you are expected to identify.

 “Write in good grammatical English. Let your ideas flow logically in good prose
and avoid unnecessary misspellings. If your discourse is flowing very well, this
may even cause the examiner to overlook some of your minor mistakes.”

 “Avoid, as much as possible, the habit of “copying and pasting” huge chunks of
statutory provisions. Instead, simply make a proposition and state the provision

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 which supports that proposition or where necessary, just quote the relevant
portion or give the gist of a particular section in your own words. Copying and
pasting statutory provisions not only wastes the already limited time in an exam
situation, but also exposes the laziness of an exam candidate.”

 “Avoid starting your answer to any question, however phrased, with a ‘YES!’ or
‘NO!’, except in very rare situations where it is indicated that it is to be answered
that way.” Always remember that, whatever form a question takes, your answer
is expected to take the form of an essay. If an exam question requires you to
agree or disagree, the best approach is to treat it largely like any other
question. Firstly, identify the issue(s) and apply the relevant law to draw the
necessary logical conclusion(s). Then, based on the conclusion(s), you may
state whether your answer is in the affirmative or in the negative.”

 “Do not be a victim of the two extremes of writing too little or writing too much
on a given question. Your primary guide in this regard is the mark allocation.
Make a conscious effort not to be carried away when answering a ‘5 marks’ or a
‘10 marks’ question or sub-question, for instance.”

 “Take an interest in certain ‘things’ that appear in newspapers, among other

media, which raise interesting company law issues, because some exam
questions are actually based on such.”

HIGH FAILURE RATE CAN BE ATTRIBUTED TO:

 Failure to address questions and opt to write anything they know on the question
 You are either right or wrong in this Head, nothing like a person has tried
 Failure to offer criticisms to the law as it is. It is not enough to know the law but
should be able to identify gaps and offer criticisms and alternative suggestions
 Work continuously
 Don’t rely on class notes only but refer to other helpful sources

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DEFINITION OF THE COMPANY

There is no strict or technical definition of the word “company”. However, it may be

defined as a voluntary association of two or more persons formed for the purpose of
doing some business mainly to make a profit. In other words, it is an association of
persons with a common purpose.

The term company can be defined as an "artificial person", invisible, intangible, created
by or under law, with a discrete legal entity, perpetual succession and a common seal
to conduct business. It is not affected by the death, insanity or insolvency of an
individual member.1

In Zambia, the Companies Act2 makes provisions for the establishment or incorporation
of companies. Section 3 provides thus:

“Company means an entity incorporated in accordance with this Act and section 6 of
the repealed Act” . This definition is not a very useful and leaves much to be desired. A
more useful and comprehensive definition was given by Buckley J in the case of
Tennant v. Stanley [1906] 1 CHD 131, when he defined the word “company” as
follows: “The word “company” has no strict technical meaning. It involves two ideas
namely, first that the association is of persons so numerous as not to be aptly described
as a firm and secondly that the consent of all the other members is not required for the
transfer of a member’s interest.”

In Darmouth v. Warword [ ] 4 Wheat (US) 518, Marshall C.J. defined a

company as “A person, artificial, invisible, intangible and existing only in the
contemplation of the law being a mere creature of the law. It possesses only those
properties which the charter of its creation confers upon it, either expressly or incidental
to its existence.”

1
Bryan A. G. (ed.). (2001) Black's Law Dictionary (2nd Ed.). West. P. 234
2
Act No 10 of 2017 of the Laws of Zambia

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In the eyes of the law a company is a juristic person meaning, it is a kind of legal entity
or corporate body. It can sue and it can be sued; it has its own name and a separate
legal entity, distinct from its members who constitute it. A company has its own
property; the members (shareholders) cannot claim the property of the company as
their own property.

It must therefore be appreciated that a company has a dual nature as both an

association of its members and a person separate from its members. The company’s
property is owned by the company as a separate person, not by the members; the
company’s business is conducted by the company as a separate person, not by the
members; and it is the company as a separate person that enters into contracts in
relation to the company’s business and property3. “The members are not personally
entitled to the benefits or liable for the burdens arising, so their rights are restricted to
receiving from the company their share of profits and their liabilities to paying the
amounts due from them to the company”4.

The acts of the company are not the acts of the shareholder, and so the company’s
liabilities do not become the liabilities of the shareholders. This is perhaps the greatest
privilege of incorporation: in a company the members have no individual liability to its
creditors for debts owing by the company. This gives limited liability to shareholders
whereby they are only liable up to the extent of their committed investment in the
company.5

- The Scope of Zambian Companies Act of 2017 by virtue of section 2 has limited
the application to entities incorporated under the statutes other than the
companies Act (body corporate), with the exception of a corporate sole. The Act
does not however, state that the body corporate referred to are those
3
Mayson, French & Ryan (2005)
4
Birds, Boyle, MacNeil, McCormack, Twigg-Flesner, & Villiers (2004), p.44
5
Ibid

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 incorporated in Zambia i.e does not limit body corporate to those only
incorporated in Zambia.
- However, the major weakness inherent in the current Act, by virtue of section 2
(b), is that, in as much as it seeks to carter for companies registered under the
repealed Act (cap 388), it only refers to those incorporated in Zambia thus
leaving out foreign companies.
- Similarly, section 377 which provides for transitional provisions, omits foreign
companies existing under the Old Act to continue as if incorporated under the
new Act of 2017. Foreign companies existing under the repealed Act are
nonetheless catered for in the definition for ‘foreign company’ under section 3
and section 297
- In Zambia, a registered company is one formed and registered under the
Companies Act No. 10 of 2017. It also includes existing companies that were
formed before this Act. A company comes into existence at a definite point in
time.
- A company is deemed to come into existence when it is registered under the Act
i.e. when its name is entered into the register meant for the purpose under the
Act and the Registrar of Companies issues a Certificate of Incorporation to it.
This certificate is in the prescribed form and states that the company is on and
from the date specified in the certificate, incorporated.
- Registered Companies are governed by the provisions of the Companies Act and
by the rules made there under as well as by the Articles of the Company itself.

THE TYPES OF COMPANIES INCORPORATED UNDER COMPANIES ACT NO. 10

OF 2017 OF THE LAWS OF ZAMBIA

It is worth stating out-rightly that there are mainly two types of companies that may be
incorporated under the Companies Act, being a private company and a public company.
By virtue of section 6 of Companies Act the companies incorporated under the

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Companies Act may be a private company, or a public company with or without shares,
with limited liability, or unlimited liability.

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

Section 7 of Companies Act provides thus: Further, the articles of a public company
are required to state:

(a) the rights, privileges, restrictions and conditions attaching to each class of
shares, if there are two or more classes; and
(b) the authority given to the directors to determine the number of shares in, the
designation of, and the rights, privileges, restrictions and conditions attaching to
each series in a class of shares, if the class of shares may be issued in series.
Shares can be divided into different classes, each with its own rights as to dividends,
voting, and other restrictions, conditions and privileges. Modern company law has
invented more attractive types of company securities such as “futures” which allow
investors to speculate in or bet on fluctuations in the market price of shares or indices
of such prices.

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

Where shares are traded on a stock exchange, the market determines the price. The
Act provides that upon being wound up, a member shall be liable to contribute only to
the amount, if any unpaid on the shares held by her and him. A public company has no
restrictions on the maximum number of members. Any person may subscribe for shares

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in a public company which may be listed on the Stock Exchange, Shares are therefore
transferable freely.

2. PRIVATE COMPANY
The second type of company that may be incorporated under the Act is the private
company. Whereas section 6 of the Companies Act provides that a company
incorporated under the Companies Act may be a public company, or a private company
with or without shares, with limited liability, or unlimited liability, it further provides that
a private company is of three types: (1) a private company limited by shares (2) a
company limited by guarantee; or (3) an unlimited company.

(a) Private Company Limited by Shares

A private company is one which by its articles of association limits the number of its
members to a specified number, being a number not more than fifty. In the case
of a private company limited by shares, if there are joint holders of shares,
they shall be counted as one person. Further, members who are also
employees of the company shall not be considered as members in
determining numbers for the purpose of compliance with the “fifty” statutory
limitation.6 In effect a private company with a large workforce and several joint
holders can have as large a membership as one hundred and this could be used as a
mode of evading compliance with annual returns required of public companies. Private
companies are usually formed to enjoy the advantages of limited liability for family
business, and are most favoured for small ventures which may even be assimilated to
partnerships and for companies which are subsidiary to other companies.

What are the Liability of members in a Private Company Limited by Shares?

By virtue of section 9, the articles of a private company limited by shares are required
to state:

6
Section 8 (1) (3) (b) of the Companies Act of 2017

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 (a) rights, privileges, restrictions and conditions attaching to each class of shares;
and

(b) authority given to the directors to determine the number of shares in, the
designation of, and the rights, privileges, restrictions and conditions attaching to
each series, in a class of shares.

(2) All shares in a private company limited by shares rank equally except for
differences relating to the classes or series.
(3) Where a private company limited by shares is wound up in accordance with the
Corporate Insolvency Act, a member shall be liable to contribute an amount not
exceeding the amount, if any, unpaid on the shares held by that member.

(b) Private Companies Limited by Guarantee

This is a company is provided for under section 10 of the Companies Act. This
Company has no share capital and is limited by guarantee. It is a private company
which by its articles, the liability of its members is limited to such amounts as the
members under take to contribute the assets of the company in the event of its being
wound up. In that event, each member undertakes to make a specific contribution to
the assets of the company for debts incurred during his or her membership, or within
one year of ceasing to be a member. There is also provision for the debts and liabilities
of the company contracted before a member ceased to be a member, as well as costs,
charges and expenses of winding up and sums necessary for adjusting the rights of
contributories amongst themselves.

A company limited by shares has a share capital while a company limited by guarantee
may or may not have share capital. In Zambia, companies limited by guarantee have

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no share capital and are generally employed as non-profit making enterprises such as
charitable or faith based organizations, or social institutions like the David Kaunda
Foundation Limited. The rationale for this is that members of a company limited by
guarantee whose object is charity are able to carry on their business without
committing much money to it, except the money intended for the charitable work. The
Act provides that a company limited by guarantee shall not carry on business for the
purpose of profits for its members or for any one concerned in its promotion or
management.

The Act provides that each subscriber to an application for incorporation as a company
limited by guarantee shall sign a declaration of guarantee specifying the amount that he
or she undertakes to contribute to the assets of the company in the event of its being
wound up.7

Further, the Act requires each subscriber to the application for incorporation, to be a
member of the company upon its incorporation. Therefore a person shall become a
member of the company on approval by a resolution of the company by signing a
declaration of guarantee and delivering it to the company. A person shall cease to be
a member of the company by delivering to the company a signed notice in writing to
that effect.8

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

guarantee, the company is required to lodge with the Registrar a notice in the
prescribed form showing such status. In the case of a notice of becoming a member,
there must also be a declaration of guarantee by the person.9

7
section 10(3)
8
section 10(4) (a)
9
Section 10 (5)

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 (c) An Unlimited Company

The Companies Act in 1994 introduced another type of company, the unlimited
company. This company is Provided for under section 11 of the Companies Act No. 10
of 2017 and has a share capital. However, there is no limit on the members’ liability to
contribute to the assets of the company if, in the event that it is wound up, its assets
are insufficient to cover its liabilities. This means also, that the members’ liability
extends to their personal chattels. This is the oldest type of registered company in
England. The exemption from publication of an unlimited company’s accounts given by
the Companies Act of England, 1967 inter alia, made them quiet popular. The fact of
extension of members’ liability to their personal chattels probably also made it easier for
the company to borrow money from financial institutions.

An unlimited company has no limit in-terms of number of its members. Before the just
repealed law of 199410, the former Companies Act did not provide for unlimited
Companies, in spite of being based on the British Acts (in succession since 1855) 11.
The provision permitting registration of a company with unlimited liability complicates
rather than simplify the law.

However, creditors or would be creditors should welcome this type of company as they
can pursue the directors, managers and members of the entity for their personal assets
without limit.12 On the other hand, members or subscribers should be worried and
ensure strict control and limitation of directors and managers powers. The Act itself
makes provision for conversion of a private company limited by shares to one that is
unlimited.

10
Cap 388
11
Southern Rhodesia Ordinance no. 2 of 1895
12
Section 11 (3) Act no 10 of 2017

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COMPARING THE DIFFERENT TYPES OF COMPANIES:

Limited and Unlimited Companies

- An unlimited company has no limit on the liability of its members meaning its
members can be personally called upon to satisfy the whole of its liabilities to its
creditors. In a limited company, this liability is restricted by law to an amount
fixed by the terms of the company’s constitutional documents.

Companies Limited by Shares and Companies Limited by Guarantee

- There are two types of limited companies. In a company limited by shares a
member is not liable for the company’s debts beyond the amount remaining
unpaid on his shares. In a company limited by guarantee a member is only liable
to make a contribution to the assets of the company in the event of its being
wound up and the amount of this contribution is fixed at the outset by the
company’s constitution.

Public and Private Companies

A public company must state in its Memorandum of Association (Application for
Incorporation Form) that it is public company and must formally register as such. Only
a company limited by shares may be a public company. Public companies have the
advantage of being able to offer their shares by advertisement to the public for
investment; but they are subject to a greater degree of regulation by the law. A private
company is any company that is not a public company. There is provision in the Act for
a company to alter its status (e.g. from private to public – section 53) by conversion.

THE FUNCTIONS OF THE COMPANIES ACT ("CA")

The CA performs 2 main functions; namely the enabling function and the regulatory
function:
A. Enabling Function: this relates to provisions within the CA which stipulate the
requirements for Incorporation. This function is achieved by s.12 of the CA.

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B. Regulatory Function: on the other hand the regulatory function relates to
provisions within the CA which ensure that the company, once incorporated, conducts
its business and affairs within its Constitutional and Statutory framework.

s.17 of the CA.

since s.12 of the CA performs the enabling role of the CA, corporate
promoters need not look to other provisions within the CA to know what documents
they are required to file for purposes of incorporation.

Whether or not this is the case under the CA is debatable.

SECTION 12 - ENABLING FUNCTION

Section 12 of Act No. 10 of 2017.

- Sect 12 (1) now makes it clear that a Company should be incorporated for a
lawful purpose.

New incorporation Requirements.

- While the minimum number of people required to incorporate a company has

been maintained at 2, by virtue of section 12 (3) (e) and (f) the application
for incorporation should now be accompanied by a Statement of Beneficial
Ownership and declaration by applicants that the statement has been
submitted with the knowledge of the individuals to whom the
particulars in the statement relate.
- Section 12 (4) (i) now requires that the name and address of individual
lodging the application to indicate on the application for incorporation.

- A company, in terms of section 12 (9), can no longer be incorporated for the

purpose of engaging in religious activities. Religious activity has been defined

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 in section 3 as an activity which primarily promotes or manifests a particular
belief in, and reverence for, God or a deity, or which proclaims a particular belief.
- The Registrar, in terms of section 14 is now required to register the Company
and issue a Certificate within 5 days.
- The Registrar is clothed with power to reject the application for incorporation of
an entity. Section 19 outlines the grounds for rejection of an application,
namely failure to comply with the Act and providing false information, and
requires the Registrar to communicate decision to reject, in writing within 14 day
of making such a decision.

Effect Of Incorporation By Disqualified Person

- While section 12 (8) disqualifies certain individuals like those who are under
the age of 18 years; un-discharged Bankrupt; or of unsound mind from
incorporating a company, under section 14 (2), an incorporation by such
individuals does not invalidate an incorporation.
The Company to Display Certificate of Registration
- It is now a requirement under section 18 of the Act that a company displays its
certificate of registration in a prominent place at its business premises.
- This is not necessarily at its registered office.
- Further, section 29 requires company to paint or affix name above or adjacent
to the entrance to the companies registered office or records office and every
other place of business or place from which it operates and place its name on all
company documents.

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ACTIVITIES AND SAMPLE ANSWER STYLE ON INCORPORATION

1. A question may be posed in the following way:

Section 12 (8) of the Companies Act, No. 10 of 2017 of the Laws of Zambia, prohibits
the following kinds of people from subscribing to an application for incorporation: a
person under the age of 18; an undischarged bankrupt and a person of unsound mind
However, section 14 (2) provides that, “The incorporation of a company shall not be
invalid by reason only that an individual or individuals subscribed to the application for
incorporation in contravention of section 12 (8).”

This somewhat appears to be contradicting, i.e. whereas in section 12 (8) it forbids,

section 14 (2) appears to allow. Discuss

Suggested Answer:

It is envisaged that once a company is formed, it may enter into contracts, and this is
done through the people behind the company, i.e. the promoters or incorporators. The
contractual effect of incorporation is actually stated in section 17 of the Act, which
enacts that, “…the incorporation of a company shall have the same effect as a contract
under seal…” Further, a company may adopt pre-incorporation contracts, as provided
for by section 20 (3) of the Act.

It is a long standing concept of law that contracts are matters of consensus ad idem,
that is to say, the ‘meeting of the minds’, as in, when parties to an agreement
(contract), they have the same understanding of both the subject matter and terms of
the agreement, and such mutual comprehension is essential to a valid contract.

It is trite law, too, that generally a minor has no contractual capacity (except under
necessity); neither does a person of unsound mind, and therefore, that is the main

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reason why the two classes of people are prohibited by statute from being party to the
incorporation of a company.

Further to that, members of a company are, in certain circumstances, required to

contribute towards the discharge of the company’s liability at the time of insolvent
liquidation, hence the prohibition of undischarged bankrupts from subscribing to an
application for incorporation.

However, section 14 (2) deals with a situation whereby the company has now been
formed already, notwithstanding the fact that persons from one or more of the
prohibited classes of people were erroneously part of the incorporators. Since the
existence of the company now means a separate legal person, completely detached
from the incorporators, with its own legal attributes, and thus it can contract on its
own. It is envisaged that it may be dealing with third parties, and thus the people so
initially disqualified can be remedied as many other individuals may join the company as
members and the company would also be run by qualified individuals on behalf of
incorporators.

The wording under section 14 (2) of the Act, “by reason only” entails that you need
additional reasons to have the incorporation invalidated, such as incorporating a
company for an illegal purpose or fraudulent incorporation, e.g. where individuals were
required to have an investment licence (in the case of foreign investors) but are in
breach of such fundamental requirements of (or prerequisites to) incorporation. One or
more of such additional reasons (factors) would justify the invalidation of incorporation.

In conclusion, therefore, much as s. 14(2) appears to contradict the prohibition in the

immediately preceding provisions, it has been put there for the practical purpose of
safeguarding interests of members of the public, who may deal with a company
incorporated in contravention of the said prohibition. If the incorporation of such a

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company were to be invalidated those who may have dealt with the company would be
adversely affected; hence this legislative intervention to forestall such an eventuality.

Other Sample Questions On Practical Procedures On Incorporation Based On

New Act No. 10 Of 2017 (Just To Familiase Oneself With Answering
Techniques)

2. QUESTION 2

The members and directors of Mwandila Limited, a company incorporated under the
Companies Act, No. 10 of 2017, are desirous of having the Company, that is, Mwandila
Limited, incorporate a limited Company with Mr. Chawetz Mwandila under the
provisions of the Companies Act No. 10 of 2017.

Examine whether or not the desire by the members and directors of Mwandila Limited is
realisable and, if so, set out the key actions for incorporating and managing such a
company.

If the desire by the members and directors of Mwandila Limited is not realisable, set out
your reasons for taking this view. (20 Marks)

SUGGESTED ANSWER

The theme surrounding this question is incorporation of a company under the

Companies Act, No. 10 of the Laws of Zambia. To incorporate a company under the
Companies Act, all what is needed are two or more persons, some brief documentation
to be forwarded to the Registrar of Companies, accompanied by prescribed fees. In the
context of this question, what is of concern is whether a company [a juristic/artificial
person] can incorporate a company with a natural person.

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The members and directors of Mwandila Limited can indeed incorporate a limited
company with Mr. Chawetz Mwandila. This is because, section 12 (1) of the said
Companies Act [hereinafter referred to as “the Act”] simply states, “Subject to the
other requirements of this Act, two or more persons may incorporate a company
specified in section 6 for a lawful purpose by subscribing their names to an application
for incorporation in accordance with this section.”

A company is a person at law and, consequently, can subscribe to an application for

incorporation. However, it is important to note that a resolution should be passed by
the members authorizing this particular act. This is simply because a company, being
an artificial person, makes decisions through meetings and resolutions.

As regards Mr. Chawetz Mwandila, the directors and members of Mwandila Limited will
have to ensure that he is not suffering from any legal disability as contained in section
12(8), such as, he must not have been an undischarged bankrupt, of unsound mind, or
below the age of 18 years to mention but a few.

The next thing to be undertaken by Mwandila Limited and Mr Wetz is name clearance
and reservation. This is the process by which they will propose three names to the
Registrar of Companies, expressing their desire to incorporate under their first choice
name, or any of the two alternatives should the first choice be unavailable. This
process costs K83.00 and, if cleared, the name will be available for one month. If
unable to incorporate within one month, they have an option of reserving the name
under section 41 in a prescribed manner and form for a period of three months at the
cost of K166.00. The name to be proposed should, however, not contravene section
39 of the Act.

The third thing to be decided is where the registered office and the registered records
office will be situated in compliance with sections 28 of the Act. Mwandila Limited and
Mr Chawetz Mwandila should then decide on which of the two forms of limited company
they wish to incorporate that is public or private as guided by section 6. Depending

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on their choice, they will be required to fill in the applicable Incorporation Form, i.e.
Companies Form 1 or 2.

If the company to be incorporated is a private company limited by shares, the two

incorporators will have to agree on the authorized share capital, which cannot be less
than 15,000.00, as well as the number of shares each will hold and their par value.

It is also important for them to prepare articles of association which will regulate the
conduct and management of the company. This will be in conformity with section 25.
The articles of association should contain provisions relating to rights of members as
well as how the company will be managed.

Mwandila Limited and Mr. Chawetz Mwandila will have to identify the first directors and
company secretary. The persons so identified must sign [the Declaration of Consent
to Act as Director or Secretary (Companies Form 5)] as required by section 12
(3) (C). If the company is to be a company limited by guarantee, a declaration of
guarantee must be signed by each subscriber, in compliance with section 10(1) and
section 12 (3) (d), and lodged with the Registrar. It is worth noting that the first
secretary, has a short tenure of 1 year as fixed by sections 82(2).

The other important document to be prepared is the statutory Declaration of

Compliance with the requirements of the Act (Companies Form 11), in conformity
with section 13(1).

Supposing all legal provisions have been complied with, prescribed fees paid and all the
documents prepared in English, in compliance with sections 351, the Registrar will
then issue a Certificate of Incorporation (Companies Form 7) pursuant to
section 14 accompanied by a standard letter drawing the attention of the members to
post-incorporation procedures. If the company is a private company limited by shares,
a Certificate of Share Capital (Companies Form 10) will be issued as well.

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Issuance of Certificate of Incorporation shall be conclusive evidence that all formal
requirements of the Act regarding the incorporation of the company have been
complied with; and from the date of registration stated in the certificate, the company
shall have been incorporated in accordance with the Companies Act.
As a final point, it is worth to note that this new company so incorporated is separate
and distinct from both Mwandila Limited and Mr. Chawetz Mwandila. Thus it can own
property, employ persons, enter into contracts and incur its own liabilities as conferred
by Section 22.

A POINT TO NOTE:

Notwithstanding some of the references to provisions of the Act and Prescribed Forms
(in bold) being included by the “Essayist” herein, this answer may be argued to be too
detailed for a 20 marks question and may not ultimately reflect efficient time
management. Invariably, and except the foregoing fact, it is a very good step-by-step
answer. One can avail himself or herself a rare opportunity worth learning from!!! Lol!

POST-INCORPORATION PROCEDURES

Once the company is incorporated it is important that the Shareholders hold their first
meeting in which they have to make decisions on the way the company is to be
governed.
Once a company has been incorporated, statutory requirements are:

 The Filing of annual returns with the Registrar – a document which gives the
status of the company as at the date of its submission in terms of basic
information such as how its shareholding is, its registered office, who the

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 directors are as at the date of filing, etc. failure to do so may result into the
company being struck off the Register for non-compliance.
- Sec 270 provides that a company must file within three months at the end of its
financial year. It dispenses with the extra month given to companies that did not
have an AGM under Cap 38813.
 Notification of changes - Any change must be filed with the Registrar as far
as the registered particulars are concerned within the period prescribed. E.g. Sec
27 allows amendment of articles by special resolution, gives period of when
changes must be filed.

Exam questions on post-incorporation procedures require students to demonstrate a

firm understanding of the practical steps needed for starting the operations of a
company within the first few weeks or months of its existence.

It is just a pity that some of the most important post-incorporation procedures and
practicalities have not been carried over during the life of the repealed Companies Act
Cap 388. However, the new Companies Act No. of 2017 has enhanced penalties for
breach of the provisions of the Act and we are yet to see how the implementation of
these provisions will work in Zambia vis-a-vis Promotion of investment.

However, among such prominent procedures are the first members’ meeting and the
first directors’ meeting at which preliminary business of the company should be
transacted such as shareholders agreements, adoption of pre-incorporated contracts.

13
AGM not compulsory by statute for private limited companies and have no obligations to file audits, so annual
returns not req to be filed with financial statements

20 | P a g e
Thus, all it may require one to do is set out or in some detail the procedural steps
needed to be undertaken by a newly incorporated company and where possible back
them up with specific statutory provisions and regulations in the schedule to the Act.

Sample Question

You are the person who was named as the first Company Secretary of Lee-Way Limited
and have just received a letter from the Patents and Companies Registration Agency
[PACRA] advising that Lee-Way Limited had been successfully incorporated.

Prepare a memorandum setting out the post-incorporation procedures and practicalities

which the company should fulfill within the first few weeks or months of its existence
and what the rationale is for such procedures and practicalities. (20 Marks)

SUGGESTED ANSWER

When a company come into existence, it is required to set in motion the mechanism
that it will have to employ in order to start operating. It is important to mention at this
point that a company cannot exist without certain key individuals such as members,
directors and a company secretary. The directors and secretary named in the
application for incorporation are the first officers of a company.

Section 86 (1) of the Companies Act places management duties of a company in the
directors and section 85 (1) of the Act provides for appointment of directors by way
of ordinary resolution passed at a general meeting of the company. And subsection 2
of section 85 guides that a private company should have at least 2 directors whereas
the Public company should have at least 3 directors.

Therefore, there is a purpose why the Act allowed for the first officers of a company
such as company secretaries.

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Firstly, it is noteworthy that the first meeting is crucial and despite there been no
provision in the current Act No. 10 of 2017 for a meeting of members, before the first
annual general meeting, for the formalisation or ‘adoption’ of pre-incorporation
contracts that promoters may have undertaken on behalf of the company as well as
deliberating upon the need for a shareholders agreement if the members so desire.
The company will need to make certain decisions that have far reaching implications,
known as Shareholders Agreement. Cannot put everything in the articles because it
has disadvantages such as:

 Need to be filed with the registrar – makes them public documents unlike the
Shareholders Agreements which remains private.
 Can easily be amended by majority, binding on those who are privy to it. A
Shareholders Agreement needs consent of all the parties to be amended.

These are matters that are discussed as soon as a company comes into existence;
hence the need for the first members’ meeting. It would be at such a meeting that
members would pass a resolution to appoint more directors, for instance, in case there
is need.

Secondly, directors need to meet and transact their business within the shortest time
possible. Matters to be tabled in the first directors’ meeting may include, among other
things:-

 the formalization of appointment of a company secretary under section 82 of

the Act;
 production of the company seal;
 appointment of the chairman of the board;
 purchase of minute books and various register books;
 allot shares to the members who take shares in a company in the case of
companies with share capital;

22 | P a g e
  record details of how shares have been allotted to members;
 enter names of members in the register;
 appoint a person to be custodian of the seal (if it is not under the secretary’s
charge);
 confirm issues of the registered office and attend to all other issues that
directors attend to in order to start the proper functioning of a company.

It follows thus, it is necessary for both members and directors to meet a few weeks
after incorporation to kick start the functioning of the incorporated company.

In conclusion, needless to say, considering the importance of the foregone preliminary

aspects of the company, business cannot wait for the annual general meeting to be
transacted about fifteen months after incorporation, the said two meetings have to be
held for the simple reason that they mark the actual beginning of the functioning of a
company after incorporation. Thus, both members and directors meetings are crucial
and must be held within the shortest possible time after incorporation.

THE REGULATORY FUNCTION OF THE COMPANIES ACT

- The regulatory function of the CA relates to the role that the CA performs in
ensuring that the company, once incorporated, conducts its business and affairs
in accordance with its constitutional and statutory framework.
- This function is achieved by Section 17 of the CA, whose effect is that the
incorporation of a company has the same effect as a contract under seal
between the company and its members, and among those members themselves
(i.e. members will have contracts with each other, each member will also have a
contract with the company and the company will have a contract with the
members collectively, so that there are 3 types of contract) and their business to
be conducted in accordance with the articles and Companies Act.

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 - Members who join after incorporation will still be bound by the Articles of
Association.
- It is worth noting that the contract created by section 17 is a statutory
contract, which need not necessarily conform to the elements essential to make
a contract valid at common law.
- The statutory contract created by section 17 is defined and regulated by the
company's Articles of Association
- Articles bind the company and its members.

Furthermore, section 17, in performing the regulatory function of the CA,

obliges/mandates the company and its officers to conduct the company's business and
affairs in accordance with 2 documents, namely: the Articles of Association and the
Companies Act.

- These documents form the Constitutive documents of the company i.e. they
form the company's constitution.

NOTE:

A Memorandum of Association has been done away with in Zambia, and thus is no
longer in operation from 1994.

- It was desirable that to streamline the requirements of registration

- To reduce cost of incorporation
- Traditionally, the forms for incorporation were accompanied by two documents:
Memo of Association and Articles of Association. MoA states the purpose for
which the company has been formed and there raises the issue of ultra vires. AA
spelled out the distribution of power among different parties in the company, eg
voting patterns, payment of dividends. In 1994, the Current Act dispensed the
requirement to file the MOA, It was desirable that to streamline the requirements
of registration

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 - To reduce cost of incorporation
- Only the AA was maintained which can also now stipulate restrictions of what the
company could do, as part of efforts to simplify the process for incorporation of
companies. The Application for incorporation has replaced the MOA,
which depending on the company being formed the form changes
Companies form 1 for Public companies; form 2 for Private Companies Limited
by shares etc.
- By implication, the common law principle of ultra vires is still applicable though
modified. Secs 22-25 are relevant to determine the status of this doctrine
currently in Zambia.
- Sec 25(3) provides that a company shall not carry on any business or exercise
any power in a manner contrary to its articles. It codifies the principle of
ultra vires, the effect of this at common law was null and void.
- The doctrine has thus not been abolished by virtue of the MOA being no longer a
requirement. What then is the effect of the Directors doing anything they are
restricted from doing?
Sec 23(1) which provides that no act of the company shall be invalid
by reason only that its contrary to the articles. The statute is removing the
null and void effect of the doctrine of ultra vires at common law, but still holds
the company bound. Rationale is to protect innocent third parties who are
dealing with the company.

- If the directors are acting in an ultra vires manner, it’s up to the

shareholders to deal with the Directors and not disadvantage innocent
third party.

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 - The doctrine of ultra vires was based on one assumption – the doctrine of
constructive notice14 which was to the effect that any document filed with the
Registrar is deemed to be in the public domain.

- Sec 24 provides that even if a document is filed with the Registrar no person
will be presumed to know, unless s/he has actual knowledge. It thus
abolishes the doctrine of constructive notice in Zambia. It is aimed at protecting
innocent third parties who have no knowledge of a defect in the Directors’
powers not a party who has actual knowledge that the directors have no power
to do what they’re doing.

Articles of Association

Sec 25(1) of the Act provides that a company shall have articles regulating the
conduct of a Company15

Sec 25 (7) “A company may adopt the Standard Articles set out in the Schedules or
any specified regulation therein.”

Sec 26(1) of the Act says that once a company is incorporated, the incorporation
creates a contract between the members and the company, as well as amongst the
members inter se. This is a statutory contract. The terms of the contract are
contained in the articles of association. Similarity with standard contract:

14
Is a doctrine where all persons dealing with a Company are deemed to have knowledge of the company’s
Articles of Association and Memo of Association. The effect of this doctrine was harsh on the outsider to the
extent that they cannot claim relief on the ground that s/he was unaware of the powers of the company in the
case of ultra vires.
15
Use of the word may in Cap 388 was criticised because the argument is that there is no company that can exist
without articles. The current Act now makes it a mandatory requirement.

26 | P a g e
  Privity of contract – need to be a party to the contract to enforce a provision in
the articles or bring an action. You thus need to acquire shares to do so.

Difference:

 Enforcement of the provisions is restrictive, can only be done in the capacity as a

member. E.g. Beattie v Beattie Ltd 1938 Chancellor Division 708 – the
plaintiff was both a shareholder and a director. Provision in the articles said that
if there is a dispute between a shareholder and the company, matter must first
be referred to arbitration. There was a dispute between him and the company, in
his capacity as director. He raised the provision in the articles, but the court
refused because the matter related to him in his capacity as director and not as
shareholder.
Elley v Positive Government Security Life Assurance Company Ltd 1876
Exchequer Division 88 – prov in articles which stated that plaintiff was going to
be the first Solicitor of the Company and would remain so for the rest of his life.
He was also a shareholder. The other shareholders passed a motion to have him
removed as solicitor. He invoked the provision, but court held that you can only
bring an action as member qua member.
 Need of consent of the parties to alter the contract. Members can by special
resolution amend the terms, all you need is a majority as opposed to requiring
everyone.
 New parties cannot negotiate the terms of the contract because the articles have
already been determined, have to negotiate with the other parties.

The Articles of Association can contain all sorts of things because of dispensing of the
MOA which has been replaced by the Incorporation Forms.

NB: the application for incorporation forms have some historical significance. Section
27(1) says the articles can be amended but these forms cannot be amended even if

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you decided to change your nature of business. They shall remain as when the
company was incorporated. All you do is file a notice by way of a letter that we would
like the objects of the company to be updated. You will not file in another form 2 for
example.

SUGGESTED WAYS OF HOW TO TACKLE QUESTIONS ON ARTICLES OF

ASSOCIATION, APPLICATION FOR INCORPORATION (MEMORANDUM OF
ASSOCIATION), ETC. – THE SECTION 17 (STATUTORY) CONTRACT

In many mid-year and final exam papers there is usually a question on Articles of
Association.

The questions may be posed as follows:

1. “The Articles of Association constitute a contract between a company and

members. The contract is, however, an unusual one ‒ limited both in its scope
and permanence.” DISCUSS.
2. Section 17 of the Companies Act provides as follows: “…the incorporation of a
company shall have the same effect as a contract under seal between the
company and its members and between the members themselves, in which
they agree to form a company whose business shall be conducted in
accordance, the articles and this Act.” Is the contract created pursuant to
section 17 of the Companies Act REALLY a contract?

In attempting to answer any question posed around this contract as above, in any
situation, the starting point is section 17, itself. (But do not reproduce the whole
section as Mr. Bwembya emphasises).

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Here is one of the suggested ways to go:

Break down the question into parts and try to answer each portion by using the
main words, phrases or ideas in the question. For instance, the main ideas in the
first question are: (i) the Articles of Association being a contract; (ii) the contract
being unusual; (iii) it being limited in scope; and (iv) its limitation in permanence.

As stated, the grundnorm is section 17. Start by stating that (or something to
the effect that), the Articles are part of the constitution of a company, and once
the company is incorporated such incorporation has contractual effect. As far as
section 17 is concerned, the Articles form (a significant) part of the terms in
accordance with which a company’s business is to be conducted. Thus, Articles
constitute a contract between the company and its members and between the
members themselves. This proposition is supported by the cases below.

(The old common law view, though, as stated in many cases was that the contract
so created by the articles was only a contract between the members ‘inter se’, and
not between the company and the members.) This was so held, for instance, in
Re Tavarone Mining Company, (Pritchard’s Case) (1873) LR App 956 and in
Eley v Positive Government Security Life Assurance Co. Ltd (1876). Such
view was based on the law as it stood then.

The Companies Act No. 10 of 2017 expressly provides that the contractual effect is
extended to ‘between the company and its members’ in addition to the contract
being between the members themselves, in respect of their rights as members.

In Quin and Axtens v Salmon [1909] AC 442, Lord Wedderburn argued that
every member has a personal right … to see that a company is run according to
the articles, since the articles constitute a contract between the company and its
members. This proposition was approved in Hickman v Kent [1915] 1 Ch 881
and later in Beattie v Beattie [1938] Ch 708, in which it was stated that a

29 | P a g e
 member can bring an action to enforce this right, whether that has the effect of
enforcing rights conferred either on him or on other members, so long as he does
so in his capacity as a member, and in no other. The rights, in question, do not
extend to non-members. The case of Beattie v Beattie was distinguished on the
ground that the appellant there was suing as a director and not as a member. In
the Hickman case it was stated that, the articles of association constitute a
binding contract, and are to bind all the company and all the shareholders who put
seals on them. This case also laid down the principle that, a company can bring
an action to compel its members to abide by the terms of the Memorandum of
Association (MoA) and Articles and a member can bring an action to compel a
company to abide by the MoA and Articles.

These cases support the current position of the law under section 21 of the
Companies Act.

Further, despite such a contract, membership rights are limited and come under
the following two general categories:

(i) Personal rights relating to shareholding since a share can be defined as a

bundle of rights. For example, a member cannot assert a right over
company assets, as established in Macaura v Northern Assurance
Co. Ltd. [1925] AC 619

(ii) Constitutional rights: if a wrong is done to a company, it is only the

company which has a right to seek legal redress. This principle is known
as the rule in Foss v Harbottle [1843] 2 Hare 461.

Unusualness of the Contract: This contract can, indeed, be said to be unusual in

the sense that it differs, in several ways, from an ordinary contract:

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 1. First of all, the contract can be said to be imposed by law, as section 17, of the
Companies Act expressly provides for it, and so it is known as a statutory
contract. One of the fundamental principles of contract law is that parties to a
contract have free will to agree to the terms, through the process of offer and
acceptance, (this is referred to as freedom of contract) and the parties to a
contract are the ones who give it effect by their intention to create legal
relations. Unlike an ordinary contract, the statutory contract is given effect by
statute, i.e. through the provisions of section 17 of the Act, right upon a
company’s incorporation.

2. Secondly, in contrast to an ordinary contract, the statutory contract does not

provide for a party ‒ in this case a member ‒ to perform a list of specific
obligations after which the contract ends. Further, in a normal contract, the
moment the obligations are performed by the parties the contract comes to an
end, but the statutory contract is, by its nature, a perpetual one from the
moment the company is incorporated; thus it is characterized by longevity.

3. The statutory contract, unlike an ordinary one, is a relational one, which does
not specifically provide for what is to happen in every possible set of
circumstances. It is characterized by incompleteness, i.e. the articles, which
are more or less the terms of the statutory contract, are not intended to be a
complete statement of what will happen in the relationship between the parties.
Although they create and regulate this contractual relationship, a party may have
to rely on various other documents such as shareholders’ agreements, etc., to
get a broader picture of the contractual obligations.

4. The Articles are dynamic and subject to change as provided for under
section 27 of the Companies Act; and even in the event that they changed, the

31 | P a g e
 statutory contract would still remain in force, whereas under an ordinary contract
variation of even one part of the terms would bring about a new contract
altogether.

5. While appreciating that, by section 17 of the Companies Act, parties to the

contract are the company and members, and members themselves, this contract,
however, does not strictly adhere to the “doctrine of privity” in contract
law. Contrasted with an ordinary contract, it is trite law that a person, who is
not a party to a contract, can neither derive any rights or benefits from that
contract nor suffer any detriment thereunder. Further, once an ordinary contract
is sealed, the list of parties is closed, but as regards a statutory contract,
members who were not initially party to the contract, per se, may join any time.
On the other hand, any member, who wishes, may leave the company at any
time, and the new members that were actually not there at the time of formation
of the company or adoption of the articles will still be bound by the current
articles of the company at the time they join, in line with the statement above in
the Hickman case.

6. Unlike an ordinary contract, the statutory contract is not vitiated by the factors
such as misrepresentation, common law mistake, undue influence or duress.

There are other contractual principles which are inapplicable to the statutory
contract as a result of its special nature. For instance:

7. The court has no jurisdiction to rectify the articles once registered, even if it
could be shown that they did not, as they presently stood, represent what was
the true original intention of the persons who formed the company: Scott v
Frank F Scott (London) Ltd [1940] Ch 794.

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 8. Moreover, the court cannot imply terms from extrinsic circumstances to
supplement the articles under the business efficacy rule: Bratton Seymour
Service Co Ltd v Oxborough [1992] BCLC 693.

Limited Scope

a) The limitation may arise from the fact that the statutory contract only deals with
matters concerned with membership and the constitution of the company.
b) It is not conclusive or complete in dealing with all rights or issues of the
membership stated in Hickman v Kent and Beattie v Beattie: “the
contractual effect given to the articles of association by section 14 [equivalent to
our section 17], is limited to the provisions of the articles as applied to the
relationship of the members in their capacity as members only, and in no other.”
c) Other contractual rights of members are contained in other documents such as
shareholders’ agreements.

Limited Permanence

Section 17, by its construction, envisages that articles are subject to change “from
time to time”, and not to be permanently the same, as long as the members wish to
vary them as provided for by law and therefore the terms are not permanent but
dynamic. It then means, therefore, that the contractual relationship between the
company and members and the members inter se (in form of guidelines) would not
remain static as would be expected to happen in an ordinary contract.

33 | P a g e
One may also borrow the examiner’s words in the first question to answer the second
one (above). All the peculiar characteristics of the statutory contract may be brought
out in a bid to argue that while it may be unusual, its contractual effect is conferred by
statute and is just as binding as an ordinary contract. Alternatively, you may craft a
logical discourse, discussing the similarities and differences between an ordinary
contract and the contract created pursuant to section 17 (statutory contract) and then
come to a conclusion as to whether or not the statutory contract is really a contract.

3. COMPARE AND CONTRAST A STATUTORY CONTRACT AND COMMON

LAW (STANDARD) CONTARCT

See guiding Points below:

i. Definition:

A standard contract is simply defined as an agreement between two or more parties

to do or not to do act(s), their intention being to create legal relations and not
merely to exchange mutual promises, both having given something or promised to
give something of value as consideration for any benefit derived from the agreement

Whereas, a statutory contract does not necessarily need to have the essential
elements of valid contract fulfilled for it to be valid and effective contract

ii. Amendments:

Articles can be amended at any time merely by passing a special resolution (define
using defining section 3 what a special resolution is-i.e 75% of votes needed to
pass special resolution) at a meeting of the company.

However, a Common law contract can only be amended with the consent of all the
parties

iii. Nature of Documents

34 | P a g e
 While Articles are a public document and registrable with the Registrar of
Companies, the Common law contract is private in nature and is not necessarily
registrable thus secrecy of its contents is preserved as opposed to contents of
articles

iv. Capacity to Contract

For a person to enter into a contract, pure and simple, he must have the legal
capacity to do so i.e should not be a minor or of unsound mind.
- Whereas, in statutory contract, a minor person or of unsound mind can become
a member of a company. This is confirmed by section 14 (2) whose effect is
that an incorporation by such individuals does not invalidate an incorporation
implying that such individuals can become members of the company.

v. Privity of Contract

In a Common Law Contract, only parties to the contract are bound by it; where third
parties wish to join contract, a new contract must be made.

On the other hand, in a Statutory Contract, technically, no privity because technically no

new contract or Articles need to be drafted when new members join. Articles do not
obey privity of contract in that they become binding even upon the transferees of
existing shareholders, and new shareholders who are clearly were not party to the
statutory contract.

vi. Legal Force

Standard/Common law contract derives its legal force from agreement from the
members whereas the articles of association derives its legal force from section 17
and 26 of CA.

vii. Rectification

35 | P a g e
In an common law contract, where there was an error, the Court can allow rectification.
However, Articles can’t be rectified by the court even if there exists an error therein:
they shall be read as they are.

The reason being that the company has so many dealings with outsiders. Therefore, the
articles can only be amended by way of passing a special resolution pursuant to
section 27

viii. Vitiating factors

A Common law contract can be defeated merely on any of the vitiating factors such as
misrepresentation, fraud, as it can be rescinded whereas, a statutory contract cannot
be defeated by vitiating factors

NOTE:

Amendment of articles provided for under section 27 is subject to two (2) Limitations:

1. Section 25 (4) – the amendment must not be inconsistent with the Companies
Act
2. Variation of class rights (any change in the entitlement to members in a
particular class) thus variation of class rights has its own procedure – i.e all
members in that class must consent in writing or (sanction of court under a
scheme of arrangement under section 46 of Corporate Insolvency Act) if
articles forbid alteration or specify manner in which articles may be altered in
respect of that right (section 143(3) CA) etc. (read whole section 143 for
appreciation of the procedure on variation of class rights).

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SHAREHOLDERS’ AGREEMENTS

By shareholders’ agreements one usually refers both to agreements between

shareholders and between shareholders and the company. The agreement can include
all or some of the shareholders.

Shareholders’ agreements, whether made by all or only some of the shareholders,

create personal obligations between themselves only. They do not become a regulation
of the company (in the same way that the provisions of articles are). Neither do they
become binding on transferees of the parties to it or upon new or non-assenting
shareholders.

Shareholders’ agreements are generally about the rights and obligations belonging to
the shareholders involved. Since these rights concern the operation of the company, it
can be helpful to have the company as one of the parties to the agreement.
Articles of Association compared to Shareholders’ Agreements

Below is a comparison, in table form, between the two:

Articles of Association Shareholders’ Agreements

Articles are restricted to rights of members Shareholders’ agreements may include

as shareholders. The articles of a company even non-members’ rights.
only bind members with regard to
membership rights.
Articles constitute a public document that Shareholders’ agreements are private
is required to be registered at the Patents documents in respect of which there is no

37 | P a g e
and Companies Registration Agency legal requirement to register at any public
(PACRA) registry.
Articles of a company can be amended at A duly executed shareholders’ agreement
any time by special resolution requiring a cannot be altered using the majoritarian
three quarters (¾ or 75%) majority vote rule. It can only be amended by consent
by the shareholders, i.e. by special of all parties thereto. So even the
resolution: section 27 C/Act no. 10 of smallest ‘fish’ is protected.
2017
Articles form part of the constitution of a A shareholders’ agreement does not
company. become a regulation of the company in the
way that provisions of the articles do.
Articles do not obey privity of contract in A shareholders’ agreement, like an
that they become binding even upon the ordinary contract, does comply with privity
transferees of existing shareholders, and of contract in that, it is not binding on the
new shareholders who are clearly not transferees of the parties to it or upon
party to the statutory contract. new or non-assenting shareholders.

NOTE:
Shareholders’ agreements have several advantages compared to articles of association
in certain respects. Their informality and confidentiality are two obvious advantages.

CORPORATE CAPACITY (CAPACITY AND POWERS OF A COMPANY) AND

DOCTRINE OF ULTRAVIRES AND CONSTRUCTIVE NOTICE

This particular topic is the second most examinable, after corporate management, and
it is the most challenging in terms of both the quantity and quality of analysis expected
from students.

In context of Zambian Company Law, this topic revolves mainly around the provisions
found in sections 17, 22, 23, 24 and 25(2) of the Companies Act of 2017. “If
you master the one and only acceptable way of analysing these provisions at ZIALE and

38 | P a g e
be able to apply such analysis to any given set of facts in an exam, then you are home
and dry.”

As stated above, corporate capacity relates to the power or ability of a company to

enter into transactions or contracts with third parties.

- Section 22(b) of the CA imbues a company with the same rights, capacity,
powers and privileges of an individual, i.e. anything that can be done by a
natural person can also be done by a body corporate.
- Given the fact that an individual has unrestricted capacity to enter into contracts
or transactions with other persons, a company too is given unrestricted capacity
to enter into contracts with third parties once incorporated.
- However, the unrestricted capacity given to a body corporate is subject to 2
limitations, being:

a. limitations inherent in the company's corporate nature; and

b. limitations imposed on the company by the CA itself.

- Section 25(3) imposes restrictions on the company by providing that the

company shall not carry on any business or exercise any power that it is
restricted by its articles from carrying on or exercising, nor exercise any of its
powers in a manner contrary to its articles.

Therefore, it follows that where the company's articles contain restrictions on the
business that the company can carry on, such company would no longer have
unrestricted capacity and would be expected to conduct its business in
accordance with its articles.

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QUESTION

(A) Ngosa, Chibale and Temwani are desirous of incorporating a private

limited company under the name and style of ‘Boundless Investments Limited’.

The principal business which the company proposes to be undertaking is ‘any

profitable business’. Ngosa, Chibale and Temwani do not desire to have their
proposed company’s articles of association restrict the business which the
company will be undertaking. The trio has now approached you seeking to have
you assess the prospects of having Boundless Investments Limited successfully
incorporated.

Proceed. (10 Marks)

(B) The following article appeared in the Times of Zambia of 30 July, 2018
under the heading ‘PACRA DEFINES REGISTRATION TIPS’:

“The Patents and Companies Registration Agency (PACRA) has urged companies
to restrict their operations to what they are registered for. PACRA Livingstone
registration officer Jason Mwanza said the agency had noted that some
companies and organisations were in the habit of engaging in businesses which
were outside what they had registered for. Mr. Mwanza said the Companies Act
and Business Names Act had specified penalties for companies or organisations
that engage in businesses not in line with what they had registered with the
Agency. He said PACRA was carrying out inspections… to ensure that
[companies] were compliant with the law. ‘If a company registered as a butchery
or liquor trader, it must operate within these lines of business and they are not
allowed to engage in other business outside what they registered’, he said.”

Comment comprehensively on the issues raised in the above article. (10

Marks)

SUGGESTED ANSWER

(A) When people want to engage in business they have a right to choose what
kind of business they wish to engage. When it comes to companies, they can

40 | P a g e
 decide to incorporate one of the various types of companies depending on
the kind of business they wish to engage in.

The Companies Act plays two distinct [but overlapping] functions in the
incorporation and operation of a company. The enabling function is
provided for under s. 12 of the Act, as amended, while the regulatory
function is provided under s. 17 and 25 (2).

Section 12 (1) (2), in playing its enabling role, refers to the application for
incorporation form which has to be filled in the prescribed manner upon
payment of the prescribed fee.

It is a requirement, under most of the prescribed forms, for incorporators of a

company to state the principal business and any other business. Before filling
in the form one must pay attention to section 25(1) of the Act which states
the articles of a company may contain restrictions on the business that the
company may carry on. What this entails is that, if the articles of a company
do not contain any such restrictions then the company may engage in any
business, provided it is lawful.

However, the requirement to state the company’s principal business must be

fulfilled. Therefore, I would advise the trio accordingly. I would further
advise them that when it comes to the requirement to indicate ‘other
business’ on the incorporation form, they may simply state that “any other
business incidental to the principal business.” This is because having ‘any
profitable business’ for a company’s principal business would defeat the
whole purpose of the regulatory function of the Companies Act.

If the trio goes for the option of articles that do not restrict the business that
the company may conduct, then the provisions of section 22(a) shall also
come into play. The company shall be able to conduct any lawful business.

In conclusion, I would reiterate that the proposed principal business of the

company is two general or wide and thus is not in line with the requirement
for some specificity in the principal business. This would greatly narrow the
prospects of having the company incorporated. Lastly, the trio’s wish for the
company’s proposed articles not to restrict the business which the company
will be undertaking is well within their right and is perfectly achievable under
the law.

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 (B) As stated earlier, the articles of association and the application for
incorporation are among the documents which must be lodged at the
Companies Registry when incorporating a company.

It is in the application for incorporation that the incorporators of a company

shall state the company’s principal business, that is, the objects that it is
incorporated for. The articles may contain restrictions on the business which
the company may carry on.

It has been a long established principle of common law that once a company
has set out its objects [in the objects clause of the memorandum of
association] it could not conduct any business other than what is set out in
the objects clause. This was stated in a number of cases including Ashbury
Railway Carriage and Iron Co. Ltd v Richie. However, this led to
companies coming up with extensive objects clauses in order for them to be
able to conduct other business as well.

With the coming in place of the Companies Act, the memorandum of

association was abolished and replaced by the application for incorporation.

Section 25 (2) of the Act states that a company’s articles may contain
restrictions on the business that the company may carry on. This provision is
in line with section 17 of the Act which requires a company to conduct its
business in line with the articles of association and this Act.

Section 22 of the Act gives to the company the capacity, rights, privileges
and powers of an individual. What this means is that any lawful activity that
an individual can carry on can be carried on by a company as well, subject to
the Act and to such limitations as are inherent in its corporate nature.
Section 23 further goes on to state that acts of a company shall still be valid
even if they are contrary to its articles.

Looking at the article in question, one is inclined to disagree with Mr.

Mwanza, from PACRA, on his view that once incorporated, a company cannot
engage in other businesses outside what it is registered for.

The Companies Act, in section 22, grants to a company the capacity, rights,
powers and privileges of an individual. This should be understood to mean

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 that if a company has not restricted itself from conducting any type of lawful
business, then it is not restricted in any way from doing that which is lawful.

However, even in circumstances where a company has restricted its business,

the Companies Act, by section 23, still recognises that acts which are
outside the articles shall not prejudice a third innocent person who has
acquired rights from the company in good faith by reason only that the
articles have not been complied with among other things. This means that a
company can still be bound if it engages in acts that are contrary to its
articles but lawful.

DOCTRINE OF CONSTRUCTIVE NOTICE AND ULTRA VIRES

Section 24 of the CA suggests that the doctrine of constructive notice has been
abolished.

It effectively provides that a person dealing with a company shall not be affected by or
presumed to have notice or knowledge of the contents of the documents concerning
the company by reason only that the document has been lodged with the Registrar or is
held by the company, available for inspection.

Courts in Zambia have had the occasion to interpret the doctrine and the legal
provisions in a number of cases, including the following:
1. Bata Shoe Company Ltd v. Vinmas Held: the company's authorized
agents bound the company to comply with the contract and such liability could
not be avoided.
2. Bank of Zambia v. Chibote Meat Corporation
procedure in the management of a company are not the concern of third parties.
3. National Airports Corporation v. Zimba and Konie
dealing with a company cannot be concerned with any alleged want of authority,

43 | P a g e
 when dealing with a representative of appropriate authority and standing, or
type of transaction.

- e.g. if third party is dealing with a Director or the company then the third party
should not be concerned with the Director's authority and standing i.e. the third
party should not worry about whether the Director has the authority to bind the
company to the contract.

- However, if the representative does not have the appropriate authority and
standing (e.g. if dealing with a cleaner) then the court will look at the type of
transaction i.e. if the type of transaction is such that the representative (lacking
the appropriate authority and standing) can bind the company then company is
bound.

Memorandum of Association (application for incorporation)

At common law the memorandum of association defined the relationship between the
company and the outside world.
In effect, this document defined the company's ability/power to enter into contracts
with outsiders.

i.e. it communicated to the outside world what business/businesses the company was
authorized to pursue.

Corporate promoters were expected to set out the company's objects in the
memorandum of association.

Therefore, a company was prohibited or proscribed from pursuing objects that were not
specifically set out in its memorandum of association.

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Thus, in Ashbury Railway Carriage v. Richie it was held that specific performance
was not available against a company as the objects that the Directors set out to pursue
were not specifically set out in the memorandum of association.

Note that under the UK Companies Act 2006 the memorandum of association has been
downgraded to a vestigial role i.e. the memorandum of association no longer defines
the company's corporate capacity and its significance/relevance ceases once the
company comes into existence.

In other words, it is a document used merely for incorporation purposes and does not
form part of a company's constitutive/constitutional documents.

With the advent of the Zambian CA 1994, the memorandum of association has been
done away with as one of the documents to be filed for the purposes of incorporating a
company i.e. corporate promoters are no longer required to file the memorandum of
association when incorporating a company.

However, one may wish to note that what used to be the memorandum of association
has been condensed in the Incorporation Forms.

i.e. the substance of the memorandum of association has remained the same though
the form has changed (i.e. the substance is now contained in the application for
incorporation, albeit in a condensed form/version)

The purpose of the Memorandum of Association was to define the capacity of the
company by setting out its objects and powers.

The Application for Incorporation Form does this by doing 2 things:

(i). the form indicates what the capacity of the company will be; and

(ii). the form has provision for setting out the nature of the company's business.

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THE ULTRA VIRES DOCTRINE

Traditionally the ultra vires doctrine related to acts of a company that were beyond the
company's corporate capacity.

At common law, companies were required and expected to set out the company’s
objects in a document known as a memorandum of association.

This document defined the relationship between the company and third parties dealing
with the company.

Companies would therefore, not pursue objects that were not specifically set out in the
memorandum of association, as such objects were said to be ultra vires.

In Ashbury Railway Carriage v. Richie it was stated that the objects that the
Directors set out to pursue were ultra vires for the fact that they were not specifically
stated in the company's memorandum of association.

Following this decision, companies were made to come up with long lists of objects on
the memorandum of association so as to cover as many businesses as possible for the
company to pursue.

With the advent of the UK Companies Act 2006, one may argue that the ultra vires
doctrine has been abolished under the UK Companies Act 2006. This is so for the
following reasons:
The memorandum of association no longer defines the relationship between the
company and the outside world.
i.e. the memorandum of association is a document used merely for incorporating a
company and ceases to have any relevance at all once the

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Strictly speaking, the ultra vires doctrine is used to describe acts of the company which
are outside its powers. However, the ultra vires doctrine is also used to describe acts of
Directors which are outside their authority.

The Ultra Vires Doctrine Under The Zambian Companies Act No. 10 0f 2017

With the enactment of the Zambian CA 1994, the requirement to file the memorandum
of association for the purposes of incorporating a company was
done away with and the status quo has continued under the CA of 2017 . Two main
reasons were advanced for this, being:
1. So as to do away with the ultra vires doctrine; and

2. So as to simplify procedures for incorporation.

However, whether or not the legislative draftsman succeeded in these 2 endeavors (i.e.
simplify incorporation and abolish ultra vires doctrine) is debatable.

- To begin with, s.22(b) of the CA imbues a company with the same rights,
powers, privileges and capacity of an individual i.e. a company, once
incorporated, has the ability to enter into any contract or transaction with
outsiders.
- Implied in this, is that a company has the ability to depart from the objects set
out in its application for incorporation.
- It would, therefore, be inconceivable for a company with unrestricted capacity to
act beyond its capacity.
- This provision alone seems to suggest that the ultra vires doctrine has been
abolished.

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 - This position is supported in s.23 of the CA, whose effect is that no act of a
company shall be called into question solely on the basis that the company acted
contrary to the CA or the company's articles of association.

Does the Doctrine of ultra vires still exist in Zambia?

- However, Section 25 (2) provides that a company may restrict its business
through its articles.
- Section 25 (3) also prohibits company directors to exercise powers restricted
by its company articles
- Given the fact that a company can act contrary to the CA and its articles of
association, it would seem illogical to declare acts of such company as ultra vires
i.e. it would seem illogical/inconceivable for a company with capacity to act
contrary to the CA and its articles, to act beyond its corporate capacity.
- This provision, therefore, seems to suggest that the ultra vires doctrine has been
abolished under the Zambian CA.

s.87 (1) of the CA provides that Directors cannot sell a company's

property without the approval of an ordinary resolution by the company's members.

the act by the Directors would still be valid in light of s.23.

ultra vires doctrine has NOT been

completely abolished as remnants of this doctrine still linger on within some provisions
of the CA. To begin with, s.25 (2) of the CA gives a company the option to restrict its
business via its articles of association.

be said to be ultra vires (i.e. to be beyond the company's corporate capacity). Further,
where a company's articles contain restrictions on the business that the company may

48 | P a g e
carry on, section 17 comes into play, requiring such company to conduct its business
in accordance with its articles.

hat a company can lawfully

pursue is the business set out in its articles . Additionally, the use of the words "by
reason only" in s.23 of the CA, seems to suggest that if there are other reasons (other
than the mere fact that the company acted contrary to its articles or the CA) exist then
such act by the company can still be declared invalid.

s.24 of the
CA.

s.24 of the CA is that where a third party dealing with a company has or
ought to have had actual knowledge of the extent of the company's corporate capacity,
then the company may assert against such person that the Directors acted in want of
authority or beyond the company's corporate capacity i.e. the act by the Directors
would be said to be ultra vires. The above provisions seem to suggest that the ultra
vires doctrine has not been completely abolished but merely "watered down".

knowledge of the extent of the company's corporate capacity and the Directors acted
beyond the company’s corporate capacity, such acts would be said to be ultra vires.

The ultra vires doctrine must be approached from 2 dimensions, being the
external dimension and the internal dimension (i.e. internal validity).

The external dimension refers to the relationship between the company and third
parties dealing with the company, while the internal validity refers to the relationship
between the company and its Directors/members.

ultra vires doctrine has not been abolished but

merely watered down as shown by the above provisions.

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 ultra vires doctrine's internal validity, one will note that the ultra vires
doctrine has been maintained under Zambian company law, in that members would
always have specific remedies against Directors where such Directors act in want of
authority or beyond the company's corporate capacity.

mbers, being:
1. Members can seek an injunction from court to restrain the directors from

available where Directors have not yet acted but merely propose to act in an
ultra vires manner.
2. Members can sue the Directors in their individual capacities for damages
where such Directors have acted beyond the company's corporate capacity; or
3. The members can ratify such ultra vires act.

POSSIBLE QUESTIONS AND THOSE FROM PAST PAPERS

1. “In his book Principles of Modern Company Law, 5th edition, LCB Gower has
asserted that the ‘ultra vires doctrine… is not defunct…’ To what extent, if any
at all, does Gower’s assertion reflect Zambian law?” [20 Marks]

2. The significance of the common law doctrine of ultra vires appears to have been
somewhat watered down under the Zambian company law, following the
enactment of the Companies Act,. In contrast, the ultra vires doctrine continues
to enjoy some good measure of significance under English law. Mr Smith, a
senior Solicitor with a leading firm of Solicitors in London has sought your
reasoned view as to why English company law should follow the route which the
Zambian company law has taken. What arguments would you expect Mr. Smith
to advance in favour of retaining the ultra vires doctrine and what would be your
reaction to the same? [15 Marks]

3. Critically discuss the relevance or otherwise of the common law doctrines of ultra
vires and constructive notice in the context of the provisions of the Companies
Act,. Has the Act rendered the two doctrines anachronistic? [20 Marks]

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 4. The doctrines of ultra vires and constructive notice are anachronisms under the
Zambian company law: TRUE or FALSE? [20 Marks]

5. HK was a director of F Limited and KT Limited. Between the months of October

and December 1999, HK successfully negotiated for a loan of US$ 100,000.00
from TL Limited on behalf of KT Limited. One of the conditions under which the
loan was granted was that KT Limited was to export its products through TL
Limited and, in this way, enable TL Limited recover its loan from the arising sale
proceeds. A further condition for availing the loan was that HK was to
personally guarantee the loan in question. KT Limited was subsequently placed
under receivership pursuant to the terms of the floating charge which had been
created by KT Limited in favour of HB Limited. Although the joint receivers and
managers of KT Limited of KT Limited acknowledged the US$ 100,000.00 loan
from TL Limited, they refused to settle the same. The loan was, however,
subsequently paid off by F Limited in accordance with an understanding reached
between HK and F Limited. F Limited, HK and TL Limited subsequently instituted
an action in the High Court for Zambia seeking recovery of the US$ 100,000.00
loan. The action was dismissed in the High Court. Upon appeal to the Supreme
Court of Zambia, the quartet’s appeal was dismissed. The Supreme Court also
made the following observation: “In the instant case…we are not satisfied that
HK acted with the authority given to him by [KT Limited]. He acted without
authority hence his failure to produce evidence to that effect. As [HK] acted
without authority from [KT Limited] the loan agreement he entered into,
purportedly on behalf of [KT Limited] was therefore ultra vires and not binding
on [KT Limited]…”

Do you agree with the approach which was adopted by the Supreme
Court of Zambia as borne out of the observations quoted above? Give reasons
for your answer. [20 Marks]

6. It has been asserted that, in the context of the UK, the companies legislation has
abolished “the external dimensions of the ultra vires doctrine while retaining its
internal validity.” Examine the above assertion in the context of the Zambian
Companies Act, of the Laws of Zambia. [20 Marks]

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GUIDANCE

To answer such questions, first you need to generally appreciate the doctrines of Ultra
Vires and Constructive Notice and how they relate to our Companies Act, No. 17 of
2017. Secondly, you need to understand certain difficult words used in order to grasp
more fully the gist of the question; e.g. you need first to understand the meaning of
words such as ‘defunct’, which means “not existing or working anymore.” An
‘anachronism’ denotes something of the past…something misplaced in time or outdated.
So the meaning of anachronistic can be derived therefrom. The examiner may use
these terms in questions that hinge on the generic understanding of the doctrines of
ultra vires and constructive notice.

The Doctrine of Constructive Notice

This old entrenched common law doctrine, established in the case of Ernest v
Nicholls (1857) 6 HLC 401 assumed that “anyone dealing with a company was deemed
to have notice of the contents of its Memorandum of Association and of its Articles, in
short, of the company’s constitutive documents.”
The Memorandum of Association (MoA) was a document required when the
company was formed or incorporated. As a fundamental constitutive document, it
detailed reasons WHY the company itself was being formed, i.e., the reason for
incorporation and the reason for the company’s existence henceforward. Among the
details of the MoA was the ‘objects clause’, wherein the nature of the business the
company intended to embark on, once incorporated, was stated. Such business would
strictly be adhered to.

The MoA governed the relationship of the company with the third parties that would
deal it, thereby giving effect to the doctrine of ‘constructive notice’…that the third
parties henceforth ought to know the nature of the company’s business and anything
done outside the stated nature of business was then deemed to be beyond the
company’s capacity or ultra vires. The MoA, therefore, defined the company’s capacity,
i.e. what a company could and could not do.

Another fundamental constitutive document was the Articles of Association, which

outlined how the company would internally be structured and how it would be
regulated. Articles were, to a large extent, meant to regulate the directors and

52 | P a g e
managers of the company. They contained the rules about dos and don’ts. The
Articles basically granted powers to the directors the affairs of a company.

Being a registrable constitutive document, the articles too gave effect to the doctrine of
constructive notice, in that, anything done by the directors with third parties, in excess
of directors’ powers, would be ‘invalid’ both within the company and in relation to the
third parties.

Both such instances of invalidity, i.e. arising from the non-compliance with the MoA and
non-compliance with the Articles gave rise to what was called the doctrine of ultra vires.

The Doctrine of Ultra vires

Ultra vires is a Latin expression which describes acts which are ‘beyond (ultra) the legal
powers of those who have purported to have undertaken such acts. The two aspects of
the doctrine are:
i) Capacity of the company to undertake certain activities within its stated
“objects”.
ii) Powers of the company, i.e. that of its officers (servants and agents)

Under this doctrine, a company was understood to have limitations on what it could do.
A company could only validly undertake acts which were within the scope of its objects
clause, and reasonably incidental thereto. This has been the position consistently taken
in various cases, some of which are discussed below. The ultra vires doctrine,
therefore, referred to those acts that a company undertook beyond the scope of its
legal powers.

Rationale for the Ultra Vires Doctrine

The purpose or effect of this doctrine was:
(i) to protect the shareholders who had invested or would invest their money or
other assets in a company. The company was expected to stick to the
purposes for which the shareholders had put their investment in it.
Shareholders were assured that their investment could not be used for
anything other than that which they envisaged the company could do, in
terms of both the nature of business and the way it would be run.

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 (ii) to protect third parties who would deal with the company, especially those
that could grant credit to it, knowing all too well the reason why the company
was applying for such credit and that such credit may not be applied to things
other than what was stated in the objects clause.

Some Principles on the (collective) Operation of the Doctrines of Constructive

Notice and Ultra Vires
As stated, the doctrines assumed, respectively, that “anyone dealing with a company
was deemed to have notice of the contents of its Memorandum of Association and of its
Articles and that he understood the capacity and powers of that company and the
limitations thereto, and that if one dealt with the company in anything beyond its
powers, those acts would be ultra vires and, therefore, invalid ‒ hence no one could put
a claim on an invalid act.”

Authorities in support of the above propositions include the following:

Ashbury Railway Carriage and Iron Co. Ltd v Riche (1875) LR 7 HL 653
A company, which had clauses in its memorandum stating that the objects of the
company were to make and sell, etc., railway carriages, wagons, all kinds of railway
plant and rolling stock, and to carry on the business of mechanical engineers and
general contractors, purchased a concession for making a railway in Belgium. Riche
was to construct the railway under a contract with the company but, subsequently, the
company repudiated it as being ultra vires.

Riche unsuccessfully sued the company. It was held that since this agreement related
to the construction of a railway, a subject matter not included in the memorandum of
association, it was ultra vires; and that not even the subsequent assent of the whole
body of shareholders could make it binding. It was further held that “…the doctrine of
constructive notice long established that anyone dealing with a company should
discover for himself the contents of the memorandum of association and the articles of
association, and by the company entering into a contract that was outside the objects
and its capacity, it was ultra vires, and without legal powers and the claim should fail.
It was also stated in that case that “…the memorandum of association stated the
reasons for which the company was proposed to be established, the coming into
existence and the objects of the company and it is for those objects alone.”

54 | P a g e
Attorney General and Another v Great Eastern Railway Co (1880) 5 App Cas 473
This case confirmed the Ashbury case above, but, in addition, it went further to state
that “the ultra vires rule ought to be reasonably, and not unreasonably understood and
applied, and whatever may fairly be regarded as incidental to or consequential upon
those things which the Legislature has authorized, ought (unless expressly prohibited)
to be held, by judicial construction, not to be ultra vires.” – per Lord Selborne.

Bell Houses Ltd v City Wall Properties Ltd [1966] 1 WLR 1323
In this case the court gave effect to a clause that stated that “…the company shall carry
on any other business whatsoever which it can, in the opinion of the board of directors,
be advantageously carried on by the company in connection with or as ancillary to any
of the objects of the [company’s] business or the general business of the company…”

J. P. Karnezos v Hermes Safaris Limited (1978) ZR 197

This Zambian case gave effect to and confirmed the principles in the above discussed
cases, including the expressions: ‘ancillary to’; ‘incidental to’ and ‘in connection with’ the
main business.
Brief facts: By an oral agreement with the manager of the defendant company, the
defendant agreed with the plaintiff to purchase burnt maize. Under the objects clause
of the memorandum of association of the company the goods the company could buy
did not include burnt maize. When the dispute arose the defendant contended that the
purchase of the burnt maize was not within the power of the company.
Sakala, J. ruled in favour of the defendant, confirming or giving effect to the doctrine of
constructive notice and that of ultra vires, when he stated that:
(i) “Whether any given transaction is or is not within the powers of a company is
a question of law depending on the construction to be placed on the objects
clause of the memorandum of association; and
(ii) In construing any memorandum of association in which there are general
words, care must be taken to construe those general words so as not to
make them a trap for unwary people. General words must be taken in
connection with what are shown by the context to be the dominant or main
objects of the company.

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All above authorities support the position as it was then, the pre-1994 status of the law
in Zambia, prior to the enactment of the current Companies Act, CAP 388 of the Laws
of Zambia [hereinafter “the Act”].
The question that arises now and posed in the question above is whether the
doctrine of constructive notice and that of ultra vires are abolished or defunct or
have been rendered anachronistic.
The general answer, as outlined above, would have to highlight the fact that the
doctrine of ultra vires can be shown to arise from the doctrine of constructive notice.
The capacity and powers of a company are generally conferred upon it by section 22
of the Act. Specific aspects of the capacity and powers of a company are given in
relevant provisions of the Act.
Specifically on the doctrine of constructive notice, this can be said to have been
abolished under the Zambian [Companies] Act, and the authority is under section
24 of the Act, which states that, “No person dealing with a company shall be affected
by, or presumed to have notice or knowledge of, the contents of a document
concerning the company by reason only that the document has been lodged with the
Registrar or is held by the company available for inspection. [you do not need to
copy out the whole section…simply cite or concisely state its gist!]
In addition, there is no longer a requirement to lodge with the Registrar the
memorandum of association as it is no longer among the constitutive documents.
Suffice it to state that on the application for incorporation (i.e. ‘companies form’) there
is a requirement to indicate the general nature of business or the general nature of
activities (for companies limited by guarantee), as the case may be.
The “general nature of business or general nature of activities” provision can rightly be
said to be equivalent to the objects clause that was found in the MoA, which, to some
extent, requires one to specify the principal business or activity and any other business
or activity, as the case may be; but even then, sections 23 and 24 of the Act do apply
here in cases where a company acts outside what it will have specified and where third
parties ought to have been aware of such.
So, under Zambian company law, the common law rule that “any person dealing with a
company ought to know of the contents of its (registrable) constitutive documents prior
to dealing with it” is of no consequence anymore, unless, as qualified, there are reasons
to be considered other than just the fact of the documents having been lodged with the
Registrar or being held by the company available for inspection.

56 | P a g e
Regarding the ultra vires doctrine, it can be said not to have been abolished entirely,
but only partially, that is to say, it has been “watered down”. (This is one of the
flowery expressions Mr. Musonda likes to use).
As stated above, the ultra vires doctrine hinged on two limbs; i.e., it was concerned
with:
(i) the capacity of the company; and
(ii) the powers or authority of the company.
The aspect of the ultra vires relating to the capacity of the company, in dealing with
third parties, has been partially abolished or it is partially anachronistic or partially
defunct, as discussed below.
Firstly, the requirement to specify the principal business or activity and any other
business or activity, as the case may be, (equivalent to the then objects clause) appears
to still suggest that even though a company may enter into any other business or
activity, it cannot entirely depart from the business or activity that it will have specified
as its principal (main) business or activity, as that is the core reason for which the
company is incorporated.
Secondly, the provisions of section 23 of the Act were meant to protect third parties.
Therefore, even if a company does something that is beyond its capacity or power
(through its servants or agents) that act will still be valid (as opposed to the general old
doctrine and case law under which it would be held invalid). The act can only be
invalidated where there are reasons other than simply non-compliance with its articles
or the Act
To support this view further, the Application for Incorporation, now, does provide for
two options, i.e. where a company’s articles either (i) restrict the business that the
company may conduct; or (ii) DO NOT restrict the business that the company may
conduct. This is based on the provisions of section 25(2), which provides that, “The
articles may contain restrictions on the type of business that the company may carry
on.” Section 25 (3) of the Act goes further to prohibit a company from “[carrying] on
any business or exercise any power that it is restricted by its articles from carrying on
or exercising, nor exercise any of its powers in a manner contrary to its articles.”
Notwithstanding this immediately preceding point, sections 23 and 24 would certainly
override the provisions of section 22 (3), where third parties are concerned, in the
sense that where an act is done beyond the company’s capacity or in want or excess of

57 | P a g e
its powers, the act may still be valid, so third parties are not disadvantaged by what
would otherwise be an unenforceable contract against the company.
Actually, the introductory note that appears in each of the Companies Forms (i.e.,
Application for Incorporation — Forms 1–4), referred to hereinbefore, states
respectively, inter alia, as follows: “…[the company] has the capacity to enter any
business, unless restricted by its articles [sections 25(2) and 25(3)]. However, it is
bound by its acts even if they are contrary to restrictions in its articles (sections 23
and 24).”
Based on a logical analysis of the above highlighted provisions of the Act, it increasingly
appears that those who deal faithfully (i.e. bona fide third parties without actual notice)
cannot be faulted based on the want of authority of the company.
The ultra vires doctrine relating to the second limb that deals with the want or excess of
authority or powers of the company’s agents or servants appears to be still available
under the Companies Act, meaning that if a director of a company does an act either in
want of authority or in excess of his powers he can be held personally liable and this
seems to be the reasoning of the Supreme Court of Zambia in the case of Fresh Mint
Ltd and Three Others v Kawambwa Tea Co [1996] Ltd (2008) ZR (Vol. 2), 32.
An agent or a servant of a company may do an act which he has no authority to do,
e.g. restricted by the articles, such as contracting beyond his powers. To a third party
with whom he deals, such agent or servant could be held out as a representative of
appropriate authority when in actual fact the act in question exceeds his actual
authority, and so as stated above, third parties can no longer concern themselves with
actual authority if they view that the person they are dealing with is an authorised
agent, unless they have [actual] notice that he is actually no longer an authorised agent
as such.
In the Fresh Mint case a managing director in two of the companies, namely Fresh
Mint and Kawambwa Tea, negotiated for a loan of US$ 100,000.00 from a third party
company (lender) on behalf of Kawambwa Tea with the condition that the tea produced
would have to be exported through the said third party company for it to recover its
loan. A further condition for availing the loan was that the director was to personally
guarantee the loan in question.
Kawambwa Tea Co. Ltd was subsequently placed under receivership pursuant to the
terms of a floating charge which had been created by Kawambwa Tea Company in
favour of a bank (HSBC). Although the joint receivers and managers of Kawambwa Tea

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Co. Ltd acknowledged the US$ 100,000.00 loan to the lender, they refused to settle the
same arguing that the loan did not benefit the defendant company for whom it was
purported to be obtained.
The loan was, however, subsequently paid off by Fresh Mint Ltd in accordance with the
understanding reached between the managing director and Fresh Mint Limited. Fresh
Mint Limited, the managing director and the lender subsequently instituted an action in
the High Court of Zambia seeking recovery of the US$ 100,000.00 loan from
Kawambwa Tea Co. Ltd. The action was dismissed in the High Court. Upon appeal to
the Supreme Court of Zambia, the quartet’s appeal was also dismissed. The Supreme
Court also made the following observations: affirming their reasoning in Zambia Bata
Shoe Company v Vin-Mas Ltd (1993‒1994) Z.R. 136, they held that, “only
contracts entered into by authorised agents will bind the company…” and further stated
that “agents are formally authorised through a resolution of a company.”
They went on to state that, “In the instant case…we are not satisfied that the managing
director acted with the authority given to him by [Kawambwa Tea Co. Ltd. He acted
without authority, hence his failure to produce evidence to that effect…As he acted
without authority from [the defendant company] the loan agreement he entered into
purportedly on behalf of [Kawambwa Tea Co. Ltd] was therefore ultra vires and not
binding on [the defendant company]…”
The fact that the loan agreement was entered into by the managing director
purportedly on behalf of the defendant company, was not enough proof that the
defendant company was bound by the agreement. It ought to have been proved that
the defendant company indeed benefited from such an agreement, though it was
entered into without authority. In this case, the agreement was entered into without
authority and no benefit accrued to the company from the said agreement.
Further, the managing director was found to have breached his fiduciary duties.
Finally, if it can be proved that the managing director had authority to enter into the
agreement, then the defendant company shall be bound by it even if it did not benefit
from the said loan. It would also be bound by the said contract if it had derived some
benefit from the loan even if the managing director acted without authority. In the final
analysis, the second appellant, the managing director’s acts were ultra vires.
Although this case represents the current status of the law in Zambia on the particular
issues therein, upon a closer analysis of the case, the Supreme Court’s reasoning is
largely (if not wholly) flawed on the following points:

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  The Court’s statement that the contract could only bind the company if the
managing director had authority clearly contradicts the view that third parties
should no longer concern themselves with the want of authority when
dealing with a representative of appropriate authority or standing for
the class or type of transaction, a principle which the same court earlier
upheld in their decision in National Airports Corporation v Reggie Ephraim
Zimba and Savior Konie (2000) ZR 154. Except for the reference to “class or
type of transaction”, the principle as stated in the above case appears to agree
with the provisions of the Act. Mere lack of authority does not make an act
invalid, provided the person doing it is an authorised agent or of the appropriate
standing in relation to the type of transaction. [refer to the detailed analysis of an
authorised agent and authority in the National Airports Corporation case]

 As stated in BP Zambia Plc v Interland Motors Ltd (2001) ZR 37, confirming

the case of Associated Chemicals Ltd v Hill and Delamain Zambia Ltd and
Ellis and Co. (as a Law Firm) (1998) ZR 9, a company is “a separate legal
entity from its servants and agents, a metaphysical entity or a fiction of law, with
legal but no physical existence.” It acts through humans charged with the
management and conduct of its affairs, and therefore liability of the company
cannot be transferred to the managing director, whether he acted with or without
authority, at least not as far as third parties are concerned. Clearly, with all due
respect, the court mixed up issues of an “authorised agent” and “authority”,
which are two distinct issues. A director of a company is an authorised agent,
who will bind the company whether he acts with authority or not.

 The director, as per section 87 (3), was entitled to borrow money, as long as he
was in an authorised standing, but if he misapplied the money as was the case
here, and found to be wanting, then the company had an option to claim against
him and make him personally liable for breach of fiduciary duties. The evidence
in the case does not, however, go as far as stating whether the managing
director acted outside the provisions of the company’s articles; but even if that
was the case, sections 23 and 24 would have been invoked, in my view, so
that his acts would still have bound the company to third parties.

 Certainly, a director has fiduciary duties in relation to the company and, in any
case, through section 25 (3), a director found wanting can be held personally

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 liable, if he does an act that is restricted or beyond his powers, but as stated
above, with respect to the company’s standing with third parties, section 23
provides to the effect that no act can be called into question on the basis of want
of authority or excess of powers.

 However, based on section 23, if the court was of the unexpressed opinion that
there were some factors other than just non-compliance with its articles, then the
transaction in question would rightly be held to be invalid. Further, if, as stated
by the court, the loan was “dubiously” or fraudulently obtained, (no question of
application of the loan here) then such ‘alleged’ fraud would have made the loan
transaction invalid and thereby ultra vires. This means that it would not fall
within “the ‘by reason only’ qualification” under section 23 of the Act. Such
would have made good legal sense. Under section 25 (3), it still remains the
duty of the directors to observe any limitations on the powers conferred on them
by the articles and a member of a company may bring proceedings (through a
quia timet action) to restrain the doing of an act in want of authority or excess of
those powers. Section 24 also comes in to protect any person dealing with a
company from being “affected by, or presumed to have notice or knowledge of,
the contents of a document concerning the company by reason only that the
document has been lodged with the Registrar or is held by the company available
for inspection.” This is a virtual outright abolition of the doctrine of constructive
notice. Therefore, supposing the articles of Kawambwa Tea did not authorise the
managing Director to negotiate for the loan, in dispute, a third party would no
longer be concerned with such want of authority.

COMPANY LAW PART TWO

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 ZIALE IS SIMPLE!!!!

“Failing or passing an examination at ZIALE purely depends upon your

own decisions; believe in yourself not the stories you hear about bar
exams” WEZI, M.

"SATISFACTION LIES IN THE EFFORT, NOT IN THE ATTAINMENT;

FULL EFFORT IS FULL VICTORY."

PART TWO

CHANGE OF NAME OF COMPANY AND CONVERSION

i. CHANGE OF NAME COMPANY

Part IV of the Act provides for this under sections 42 – 47.

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 - Section 42 (1) requires that a special resolution to change the Company name
must be passed first
- Under section 42 (2), the special resolution must be filed with the Registrar the
prescribed form notifying the Registrar that the Company intends to change its
name to another one.
- The Registrar then shall notify the Company that the name is acceptable (sec 42
(3) (a))
- If the new name is not desirable or likely to cause confusion in the opinion of the
Registrar, he shall not register the new name.
- Once the name is acceptable, within 21 days after receipt of notice of the fact,
shall lodge with the Registrar
- i. The certificate of Incorporation
- ii. A copy of the resolution
- on receipt of the above documents, the Registrar then shall register the new
name in the Register of Companies and shall also issue a new Certificate of
Incorporation
- Further, the Registrar has power to direct any registered Company to change its
name if it that name contravenes section 40.
- Under section 46, within 12 months of name change and prior to realisg any
public notice, the Company is required to publish in the Gazette a notice stating
the changed name (new name) and the date on which the name changed and
what its former was.

Legal effect of Change of Name

Under section 47, the change of the company name does not alter nor affect any of its
rights or obligations nor render defective any legal proceedings by or against the
company.

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 ii. CONVERSION OF A COMPANY FROM ONE TYPE TO ANOTHER

Conversion of company from one form to the other is governed under Part V of the Act
provides for this.

- Sec 48-55 are called conversion provisions as each of these sections provides
for a particular conversion.
- Sec 54 is a general provision applicable to all manner of conversion. The
procedure to be followed is thus dependent on the type one is converting to.
- Thus, Sec 54 provides what general steps to take.
1. Conversion of a Private company limited by shares to a Private Company
Limited by Guarantee
– sec 48 provides that:
a) There should be no unpaid liability on any shares. The shareholders must
satisfy themselves that none of them is still owing on his shares.
b) The members must agree in writing to such conversion. This seems
problematic in the sense that logically, an amendment of the articles is what is
required to convert the company. Sec 27 of the Act deals with amendment of
the articles, which can be done by way of special resolution. Sec 3 defined
different types of resolutions, a special resolution however, is one passed by
members in a special meeting where 75% of the members are in favour of the
resolution. One the wonders why all the members must agree in writing when a
75% majority would suffice to amend the articles. So, what then should they put
in writing when it is clear that to make any decision it is by resolution?
c) The members must pass a special resolution amending the articles in order to
satisfy the requirements of sec 10, which is the provision that creates a
company limited by guarantee.

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 d) Each member must make a declaration of guarantee specifying the amount s/he
undertakes to contribute to the assets of the company in the event of the
company being wound up.

Once the members have satisfied the above, they must then satisfy sec 54 which
requires that within 21 days after passing of the resolution and putting it in writing,
the company must file with the Registrar an application in the prescribed form. Upon
receipt of the application, the Registrar will issue the Company with a new Certificate, a
Replacement Certificate of Incorporation, stating the name that it was, what it now is,
and the date of incorporation.

2. Conversion of a Private Company Limited by Shares to an Unlimited

Company –

sec 49 of the Act provides as follows:

a) Members are required to agree in writing to its conversion
b) Must pass a special resolution
c) Satisfy the provisions of sec 54
3. Conversion of a Private Company Limited by Guarantee to a Company
Limited by Shares or an Unlimited Company

sec 50: provides for two situations

a) Members agree in writing

b) Pass a special resolution
c) Members must state the share capital of the Company and how its divided into
shares. Each member must agree in writing to take up the specified number of
shares
4. Conversion of an Unlimited Company to a Private Company Limited by
Shares

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 Sec 51 details the procedure (read)

5. Conversion of a Public Company to a Private Company Limited by Shares

Section 52 provides that, “a public company may be converted into a private

company limited by shares if a special resolution is passed that: -
a) approves the conversion; and
b) amends the articles to satisfy sections 8 and 9, if the company’s articles do not
satisfy those sections.”

6. Conversion of a Private Company Limited by Shares to a Public Company –

Read sec 53

It is noteworthy that it is only a private company limited by shares that can be

converted into a public limited company. Therefore, a private company limited by
guarantee or unlimited company cannot be converted into a public limited company.

Legal Effect of Conversion

- Section 54(5) of the Act provides that, “the conversion of the company under
this section shall not alter the identity of the company, nor affect any rights or
obligations of the company except as mentioned in this section, nor render
defective any legal proceedings by or against the company.”
- This means one cannot use the medium of conversion to run away from legal
obligations or liabilities incurred under the old type of company. If it had any
actions before court, it can still pursue those because a company has perpetual
succession, the entity is a going concern even if it changes its form.
- In sec 42, a Company may change its name by passing a special resolution to
alter its articles.

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Note:

In an exam, when giving an answer on say for example a change of name, you must
explain that it needs to be done by way of special resolution as provided for by section
42 and explain what a special resolution is and explain what it is in terms of section 3

IMAGINARY EXAM QUESTIONS ON CHANGE OF NAME OF COMPANY AND

CONVERSION.

Question 1

Section 15 of the [Companies Draft Bill (January, 2019 edition)] provides that:

“A limited company may convert to an unlimited company by passing a special

resolution to that effect and by making any necessary amendments to its articles
and filing with the Registrar a copy of the resolution”,

While section 16 of the same bill provides that:

“An unlimited company may convert to a limited company by passing a

unanimous resolution to that effect and filling with the Registrar a copy of the
resolution.”

Comment on the above provisions in relation to each other. (5 marks)

SUGGESTED ANSWER

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Section 15 of the Draft Bill that provides for a limited company passing a special
resolution to convert to an unlimited company envisages a three-fourths majority to do
so, whilst the converse in section 16 would require the passing of a unanimous
resolution where all members would adopt the motion.

The conversion of a company from one form to another would have either serious or
beneficial effects for such a company depending on its reasons for converting. Limited
companies have limited liability. Thus, their members are only liable for any unpaid
amount on their shares whilst unlimited companies, as their name connotes, have
unlimited liability and creditors can go after the members’ personal assets.

It seems rather strange, upon a reading of the two provisions, that the conversion that
carries more risk for a company’s members requires only a special resolution under
section 15 of the Draft Bill whilst the conversion that would limit members’ liability
under section 16 requires a unanimous resolution.

QUESTION 2

(a) Can an unlimited company convert itself into a public company? Give reasons for
your views. [5 Marks]
(b) Neither a conversion of a company from one type to another nor a change of its
name can affect its “rights or obligations”. Identify and discuss circumstances which
would necessitate either of the processes highlighted above relative to the other.
[15 Marks]

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SUGGESTED ANSWERS

(a) Part V of the Companies Act provides for the conversion of companies
incorporated under this Act from one type to another.

Specifically, sections 48 to 55 of the Act deals with conversion. Under the said
sections cited there is simply no provision for the conversion of an unlimited
company into a public company. However, what the law provides for, in section
51, is the conversion of an unlimited into a private limited company.

Therefore, if an unlimited company is desirous of trading as a public company it

must first convert itself into a private Company limited by shares pursuant to
section 51 of the Act and thereafter by converting from a private company
limited by shares to a public company pursuant to section 53 of the Act .

As indicated above, an unlimited company cannot convert into a public company

but rather the conversion can still be done indirectly following the procedure as
briefly shown above.

(b) A company may decide to convert from one type to another for a number of
reasons. If a company is incorporated as a private limited company it may wish
to convert to a public company in order to trade its shares [on the stock market]
so that it can raise [additional] capital. It can also do this in order to increase
the number of members.

Similarly, a public limited company may decide to convert to a private limited

company if it has raised enough capital from the public on the stock market. It
may also convert so that it can limit the number of members.

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 A private company limited by guarantee may convert to a private company
limited by shares so that members can start sharing in the profits of the
company. A private company limited by shares may also wish to convert into a
private company limited by guarantee so that the income of the company can be
ploughed back into the company to enable it to undertake other activities of a
non-commercial nature.

Thus, a company may wish to convert from an unlimited company to a private

limited company in order to limit the liability of members so that in the event of
winding up their liability would only extend to the amount unpaid on the shares
held by them.

The above types of conversion highlight what would necessitate the conversion
of a company from one type to another.

The change of a company name, on the other hand, may be necessitated by the
need to re-brand in order to keep pace with the evolving business environment.

Sometimes an acquisition of a company by a new owner with an internationally

traded name may warrant the company to change its name. Even a merger of
companies would warrant name change.

Change of name may also be necessitated by a directive from the Registrar

under section 43 (1) of the Act on any of the grounds provided under section
40 (1) of the Act.

It is therefore worth appreciating that a conversion may be preferred to a name

change in a situation where a company is a well-established business and has,
through the use of its name, earned itself good will. Therefore, even if it
converts from one type to another it may still retain its name and continue
trading as such.

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 On the other hand a name change may be desirable where the conversion has
resulted into new business activities making it necessary to find a new name that
matches the nature of the new business.

In both processes of name change and conversion, the liabilities, obligations, and
rights of the company do not change simply because they have converted from
one form to another or changed the company name. In both processes the effect
is the same to maintain the status quo in so far as rights and obligations are
concerned.

Question 3

Compare and contrast the processes of name change and coversion of a company from
one form to another? [20 Marks]

Suggested approach of answering:

− All that is needed here is for one to go to the provisions relating to conversion of the
company and the change of name and identify what is thought are similarities and
differences

− In all manner of conversions what is the starting point if a company wants to

convert?

1. Members must first convene a meeting and pass a Special Resolution

2. The same is true when dealing with change of name. Both procedures are begun
by Special Resolution of the members

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− Effect of name change and conversion

1. In both the liabilities obligations and rights of the company do not change simply
because you have converted from one form to another or changed the company name.
In both processes, the effect is the same to maintain the status quo in so far
as rights and obligations are concerned

− The processes are however distinguishable

1. Name change simply affect the name whereas

2. Conversion of a company from one form to another is more likely to affect the status
of members (converting from a private company limited by shares to company limited
by guarantee the status of members changes). It also changes the company structure
whereas with a name change nothing happens to the company structure. Even the
structure of the capital

− There are differences of what to file: go to sections and state e.g file with Registrar
such documentation. There are numerous examples one can give.

CORPORATE GOVERNANCE /MANAGEMENT

A quick perusal of many past examinations papers will reveal that this is the most
examinable area of the course.

Below is a summation of this very important topic in company law, followed by a fairly
detailed survey of questions one is likely to meet in an exam and some guidance on
how to approach such questions.

- As stated in Associated Chemicals Ltd v Hill and Delamain Zambia Ltd

and Anor (1998) ZR 9, approved in BP Zambia Plc v Interland Motors Ltd
(2001) ZR 37, the importance of having officers in a company is that, a company

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 is a “metaphysical entity, a fiction of law, which only has legal but no physical
existence, and although it is a separate legal and distinct person from its
members or shareholders, it can only act through humans charged with its
management and control of its affairs.”
- Therefore, the artificial nature of a company demands that human beings must
do that which ought to be done by the company for and on its behalf.
- As stated, a company is a person in its own right, and subject to such limitations
as are inherent in its corporate nature, it has the capacity, rights, powers and
privileges of an individual (section 22, Act No. 10 of 2017), e.g. capable of
owning property, making contracts, committing crimes, etc. A company has, to
a large extent, many other qualities of a human being that can be ascribed to it.
- However, the functioning of a company literally brings out the practical aspect of
how its decisions are made and how its duties/contracts are performed.
- As stated already, practically a company can only act through its members and
officers and thus incur liability vicariously through its agents and servants.
- The articles of association constitute part of the regulatory framework through
which a company would function.

The company basically functions through two major organs, namely:

(1) a general meeting where members act collectively to make decisions for
the company; and
(2) the board of directors, which is primarily charged with the running or
management of a company as stated under section 86 of the Act. The
directors are given the mandate to manage the business of a company and,
therefore, they have a duty to do so as best as they can with any resources they
can lawfully utilise to achieve the company’s objectives. Directors are somewhat
special agents of the company.

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 The third level at which the company’s affairs are run is referred to as the cadre of
professional managers, and this is usually headed by a managing director (MD).
This is however, not expressly provided for under the Act.

THE COMPANY OFFICERS

The appointment, powers and duties of certain officers of a company are provided for
under Part VII (sections 82 – 122) of the new Act.

1. The Company Directors

- Section 86(1) of the Act provides that the business of a Company shall be
managed by, or under the direction or supervision of, a board of directors. It tells
us that management of the day-to-day affairs is a function of the Directors who
can perform any function, which is not specifically conferred upon the members.
It is important to note that the term Director refers to any person whose duty is
to perform the functions given in sec 86 regardless of what title is given to that
person. The Companies Act does not define the term Director. Determination of
who is a Director is simply by looking at the functions he is performing.
- The relationship between the Company and Directors is described as the
fiduciary relationship of principal and agent. All the principals of law relating to
principal and agent apply to Directors because they are agents. Although of
course in law they are not trustees per se, they occupy a position of trust so that
the common law duties of agent apply to Directors in relation to a Company.
These are:
 loyalty – directors must act in good faith and in the best interests of the
company (i.e. bona fide exercise of discretion: Re Smith & Fawcett Ltd
[1942] 1 All ER 542]);

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  compliance – they must exercise their collective power in accordance with the
law, the articles of association, and in accordance with the form of incorporation
(which contains the objects clause of the Company).
 Not to make secret profits – they must not use their positions to use
company property or profit from the assets of the company
 Independence of judgment – required to exercise independent judgment
under section 106 as a fiduciary duty.
 Conflict of interest – they must not allow their personal interests to conflict
with those of the company.
 Duty to act with fairness as between shareholders – they are required to
treat all shareholders equally irrespective of a stake that a shareholder has
 Duty to exercise reasonable care and skill – required to exercise diligence
in dealing with company affairs. What constitutes reasonable care is a question
of fact, a subjective test.
- The Companies Act No 10 of 2017 attempts to list down these duties although it
is a partial attempt. Sec 106 of the 2017 Act refers to the fact that Directors
have fiduciary duties and the only duties listed are the duty to act for proper
purposes - act in exercising a power only for the proper purposes for which these
powers were conferred. It also talks about the duty to act in the best interests of
the company but does not codify the full duties of agents as we know them, so
we continue to rely on common law.
- Percival v Wright 1902 2 CD 421 – the decision in this case is a celebrated
one as being exemplary of how the Directors relate with the shareholders insofar
as these duties are concerned. There were some shareholders who wanted to
sale their shares, so they approached the directors asking to sell to them. The
directors accepted to buy these shares at that given price, but they did not
disclose to the shareholders that there was in fact a third party who wanted to
buy those shares at a higher price. They bought and resold to the third party at

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 a profit. The shareholders sued so that they could recover their money and have
this contract rescinded. The question was, did the Directors owe this fiduciary
duty to the shareholders? The answer was no, the duties are owed to the
company and so there was no need for them to disclose about the third party.
- This decision would have been different if the shareholders had approached the
directors with the intention of them selling the shares on their behalf because
they would then have become agents of the shareholders. Although this case is a
decision that we use to demonstrate the relationship between the shareholders
and the company, the provisions of Cap 388 would not have allowed this - sec
220 created a statutory duty of directors in connection with sales or companies
securities (shares, bonds, debentures…) to disclose any information that a
director may have regarding the price changes in the share price if dealing with a
third party.
- Failure to disclose such information rendered the contract voidable at the option
of the buyer or seller whichever case it may be. This contract would thus have
been voidable at the option of the sellers. At common law such avoidance must
take place within reasonable time, which is a question of fact.

Appointment of Directors

- Sec 85(1) provides that a company shall, unless the articles provide otherwise,
appoint a person as a director by ordinary resolution (sec 3 -requires simple
majority) passed at a general meeting of the company.
- The first directors of a company are those who are named as such in the
application for incorporation pursuant to section 95 of the Act. Section 94
makes it mandatory to give consent in the prescribed form before appointment
as Director There are some persons who are deemed to be directors by default
notwithstanding such an appointment. Sec 85(5) a person not been a duly

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 appointed director of a company who holds himself out or knowingly allows him
to be held out as a director of a company shall be deemed to be a director for all
purposes of duties and liabilities including criminal sanctions. It is also a criminal
offence for a person who is not a director to hold himself out as one.

The scope of Directors’ authority

- Dealt with under sec 85(7) – no limitation upon the authority of a director of a
company…shall be effective upon a person who has no knowledge of the
limitation, unless, considering that person’s relationship with the company the
person ought to have had knowledge of the limitation. A third party who deals
with a director and does not know that they are limitations on the authority of
the director will be deemed to have acted in good faith and therefore the
Company would be bound. In order for the Company not to be bound by acts of
Directors who act ultra vires, one must show that this person had either actual
knowledge or because of his relationship with the company he ought to have
known.
- The Directors’ authority is wide, but their powers can be limited, which must be
communicated to third parties who are dealing with the directors.

Numbers of Directors

- Sec 85(2) – at least two directors for a private company and at least three
directors for a public company at every stage. This is because both organs of the
company, Board of Directors and Shareholders make decisions through
resolutions in meetings. You cannot pass a resolution alone.

Eligibility of Appointment

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 - The Companies Act makes provisions for eligibility or qualifications of
appointment of directions dealt with in sec 92. It essentially addresses us on
who is ineligible:
 A body Corporate – although a person in law cannot be appointed as director
because the fiduciary duties conferred are personal and can only be enforced
against a natural person.
 An infant (under 18) or a person under a legal disability or any person
disqualified from acting by an order of a High Court
 A person un-discharged bankrupt by court process
 A person who fails to satisfy any additional qualifications for directors provided
in the articles.
- A company can in its own articles add further prohibitions as to the qualification
for appointment as Director in practice.

Residential Requirements for Directions

- Sec 91 – provides that at least half the number of Directors must be resident in
the Republic because it is the Directors who are agents of the Company and is
upon them that Company documentation should be served. The same is not true
about shareholders – they can all be resident outside the Republic. This does not
mean that they must be nationals, can be foreigners but resident in the
Republic.,

Vacation of Office

- A company can in its own Articles of Association provide the circumstances under
which a person can vacate office. In terms of sec 99 a director vacates office:
i. When he resigns and upon giving notice in writing
ii. When a director dies;
iii. Is removed from or vacates office on accordance with the articles or this Act;

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 iv. Becomes disqualified to hold the office of director as specified in the Act (e.g.
Has been absent of meeting held within 6 months without the consent of other
director; when a director holds any office of profit under the company except as
managing director; For purposes of transactions in which a Director has an
interest. At that time such a person will be deemed not to be a director so that
you do not participate in meetings where the issues being discussed are to do
with the issues in which you have interest).

Types of Directors

a) Alternate Directors – a person who will act in the Directors place in the event
that the Director is not available to attend a meeting (sec 97)
b) Associate Directors – the Companies Act does not provide for this type of
Director, but Regulation 67 of the standard Articles provides that Directors
may from time to time appoint any person to be an associate Director who may
from time to time terminate any such appointment. Shall have the right to attend
and vote at any Board meeting with the consent of the Directors, by invitation
only.

Powers of Directors

- It is important to note that the way sec 86 is couched is such that the Directors
have wide powers unless limited in the Articles. This wide power has a limitation
in sec 87– there are four things that Directors cannot do without the consent of
a resolution of the members in acting in a general meeting:
 They cannot sell, lease or otherwise dispose of either in whole or part of the
undertaking of the company
 No power to issue any new or unissued shares in the company – they cannot
alter the capital on their own without a resolution of the shareholders

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  They cannot create or grant any rights or options entitling the holders thereof of
acquiring shares in the company – they cannot borrow money and confer a right
on a creditor to acquire shares in the company without a resolution
 They cannot enter into a transaction that has or is likely to have the effect of the
company acquiring rights or interests, or incurring obligations or liabilities the
value of which is the value of the company’s assets before the transaction.

Relationship between Directors and Shareholders

Do the shareholders have the power to override any decisions of the Directors?

- The Supreme Court of Zambia in ZCCM v Kangwa and Others 2000 ZLR 109
said: “shareholders as beneficial owners of the company have and enjoy as of
right, overriding authority over the company’s affairs and even over the wishes
of mere nominees or Directors”. This statement has been repeated in Bank of
Zambia v Chibote Compensation. If it is true that shareholders are the BO of
the company, then even the assets of the Company are theirs. But there is
separate legal personality of a shareholder and that of a company. The assets of
the Company belong to the company alone, therefore it is conceptually flawed to
state that shareholders own a company.
- The Companies Act in sec 86 gives the power to manage the Company to the
Directors and this power cannot be exercised by anybody except the Directors.
The shareholders cannot exercise the power of managing the Company. The
shareholders cannot pass a resolution and override the power of the
Directors even when Directors have validly exercised a power.
- Shaw and Sons Limited v Shaw 1935 2 Kingsbench Division 113 – “a
company is an entity distinct from its shareholders and its Directors. Directors
may according to its articles exercise some of its powers, certain other powers
may be reserved for shareholders. If powers of management are vested in
the Directors, they and they alone can exercise those powers. The only

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 way in which the general body of shareholders can control the exercise of the
powers vested in the Directors by the articles is by altering the
articles…shareholders cannot take up the powers vested in the Directors just as
the shareholders cannot take up the powers of the Directors”

2. The Company Secretary

- Company Secretary is an officer of the company created by statute in sec 82 of
the Act, and appointment to this office is firstly when the company is
incorporated; the first secretary will be the person(s) named in the form for
incorporation.
- In the Act (under Part VII), the functions of the Company Secretary are outlined
and the purpose is to clear doubt that has for many years surrounded the
expected roles of the Company Secretary, including in certain instances the
difficulties that have been encountered in determining whether a Company
Secretary has breached any of their duties.
- The Company Secretary is the officer of the company responsible for providing
legal advice to the Board of Directors as well as the members in meetings.
- The qualification for appointment in Cap 388 was not defined, and therefore,
legal analysts stated that this was partly responsible for the poor corporate
governance system that we have experienced in the Zambian scenario. Since it
left it open for any person to be appointed company secretary, failure to comply
with most statutes and particularly the Companies Act was alluded to the fact
that companies appoint incompetent person.
- The amended Act now provides the qualification for those to be considered for
appointment. The Act provides that:

For a person to be eligible for appointment as Company Secreatry, in sec 82, the new
Act provides that an individual shall not be eligible if:

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  If the individual is not a legal practitioner or, If not a chartered
accountant or a member of the chartered institute of secretaries.
 The Company Secretary must be resident in Zambia
- It is worth to note that, unlike Directors, a body corporate can be appointed
as secretary. A person can be appointed both a director and Company
Secretary. One of the directors can be appointed as Company Secretary.
- The only qualification is that a person so appointed as both director and CS
cannot execute a document in dual roles. The Company Secretary is also
appointed by Directors unlike Directors who are appointed in a general meeting.
The Company Secretary is thus an employee of the company who can either be
full-time or part-time.
- If a person is appointed as named in the incorporation documents as Company
Secretary, that appointment expires at the end of the financial year. It is either
renewed or a new company secretary is to be appointed.16
- The Company Secretary is also an agent of the company, therefore owes
fiduciary duties and can bind the company insofar as legal issues are concerned.
Need to understand, eligibility for appointment, responsibilities.
- The Comp Secretary just like Directors, irrespective of title is deemed to be
Comp Secretary by virtue of the nature of functions being performed.

SOME POSSIBLE EXAMINATION QUESTIONS

16
First question in repeaters exam paper was asking you to write a memo to Board of Directors as
Company Secreatry give details of what you would do or to undertake an audit of the company law
related issues and state what that audit would involve?? The functions outlined in the amended Act are
borrowed from the common law. The primary function being a chief legal advisor. Must understand what
the functions of the Comp Secreatary are and also post incorporation requirements. What does the
company need to comply with after it has been incorporated? E.g. file annual returns, resolutions that
have been passed along the way and see whether they have been complied with? Are the company
minutes and register of Directors and Members maintained and up to date? Give examples and cite
sections where necessary.

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 A. Regulation 67 of the Standard Regulations which are annexed to the Companies
Act of 2017, provides for the appointment of ‘associate directors’ by a company’s
directors.

Having regard to the relevant provisions of the Companies Act, 2017, which deal
with directors vis-à-vis their appointment, role/responsibilities and modus
operandi, is an ‘associate director’ really a director? Give reasons for your views.
(15 Marks)

B. Loose Peter, Michael Griffiths and David Impey, the authors of the text The
Company Directors; 9th edition (2007) have stated, at page 287 of their book,
that “…ridiculously, the rules governing a declaration of interest apply to shadow
directors”.
Do you, having regard to the relevant provisions contained in the Zambian
Companies Act of 2017, share the view held by the three authors named above?
Give reasons for your answer. (5 Marks)
SUGGESTED ANSWERS

A. The Board of Directors is one of the primary organs through which a company
operates. Directors manage the affairs of a company as they set the policy of the
company. However, the role of directors is of an intermittent nature in that it is
merely supervisory. In practice, a management team known as the ‘professional
cadre of managers’ manage the day to day affairs of a company.

Section 3 of the Companies Act of 2017, defines a ‘director’, as a person appointed

as a member of the Board of Directors and includes alternate directors. Further,

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 section 85 (1) provides that a director shall be appointed by a company by
ordinary resolution passed at a general meeting of the Company.

Regulation 67 of the Standard Regulations provides to the effect that directors

may from time to time appoint any person to be an associate director whose
appointment may be terminated. In addition, the directors determine the powers,
duties and remuneration of the person so appointed.

In light of the section 85 (1), which provides for appointment of a director by the
members of a company, it can be seen that an associate director is not really a
director for he is appointed by the directors.

It must be noted also that Regulation 67 will apply to a company by virtue of

section 25 (7) of the Act, that is, where the articles of a company adopt
Regulation 67. In that case, an associate director can be appointed by the directors.
In addition, it is noteworthy that such adoption may be achieved through
amendment of the company’s articles by special resolution via section 27(1).

Further, an associate director is not really a director for the following reasons.
According to sections 85 (1) and 86(1) of the Act, directors’ work is to manage or
administer the affairs of a company. However, where an associate director is
appointed, the terms of his appointment are regulated by a contract unlike in the
case of a director (proper) appointed by the members, whose terms of appointment
are not regulated by a contract…

Thus, powers of an associate director are limited by the contract of his appointment.
In contrast, the powers of a director appointed by the members are subject only to

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 limitations, if any, provided in the articles and those provided under sections 86
and 87 of the Act.

B. A shadow director is a person, not being a duly appointed director of a company, on

whose directions or instructions the duly appointed directors are accustomed to act.
Directors have fiduciary duties to the company under section 106 of the Act. One
such duty requires a director to disclose his interest in a contract at a meeting of the
directors or shareholders of the company.

A shadow director does not actively participate in the affairs of a company. He

merely gives instructions to the directors. It is indeed ridiculous to apply the rules
governing a declaration of interest to him, simply because it is not practicable. A
shadow director does not attend directors’ or members’ meetings. He is therefore
not able to make such a declaration.

Question 2
A. Compare and contrast a ‘shadow director’ and a ‘de facto director’. (15 marks)
B. Madeleine Cordes et al., the learned authors of the authoritative text entitled
SHACKLETON ON THE LAW AND PRACTICE OF MEETINGS,11th edition (2008: Sweet
& Maxwell) have stated that:

“It is not essential to the validity of an act of the board that the directors shall,
at the time of reaching a binding decision, have been assembled together in
one place under one roof. In today’s conditions, for example, directors situated
in several different places can be connected for a conference by telephone or

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 video conferencing, or by webcast: provided it has been duly convened as such,
this would constitute a valid board meeting.” (at page 250).
Examine the above passage in the context of Zambian Company Law. (5 Marks)

SUGGESTED ANSWERS

A. A ‘de facto director’ is any person who has not been duly appointed as director of a
company, but holds himself out or knowingly allows himself to be held out as
director of the company, whereas a ‘shadow director’ is a person who has not been
duly appointed director of a company on whose instructions or directions the duly
appointed directors are accustomed to act. These definitions are captured very well
in subsections (5) and (6), respectively, of section 85 of the companies Act of
2017.

The contrast would lie, inter alia, in the following: firstly, a de facto director may
even have been appointed as director, but the appointment was simply defective
and in the belief that his appointment was valid he goes about directing and
administering the company’s business, whereas in the case of a shadow director it
could be that he was never appointed, not even by a defective procedure, or he may
have vacated the office of director, but he issues or continues to issue directions or
instructions upon which the duly appointed directors act.

It can be seen that in the first case, which is of de facto director, the person in
question is himself directing and administering the company’s business, but in the
second case, the individual may simply be behind the scenes issuing instructions or
directions to the duly appointed directors.

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B. Meetings of directors at which decisions are reached, are provided for under
section 59 (a) of the Companies Act. Further, section 56 (2) provide that a
meeting may be held via teleconferencing or other electronic means. Prima facie,
there would be nothing wrong with that practice.

However, challenges may arise where voting on a resolution requires signing on that
document. It is practically impossible for each director in that case to append his
signature on the one and same document. Even where such voting is to be by way
of secret ballot there would be a difficulty.

However, as stated in the given passage and with regard to the fact that the
application of section 56 (2) of the Act, such modern means of convening
meetings are now permissible under the Act and expedient looking at how
conditions have evolved in the wider business environment.

QUESTION 3

Brenda Hannigan has asserted in her book, Company law, that:

“As well as an effective Board, good corporate governance depends on effective

shareholder control of the Board” (at p. 129)

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(A) Examine the meaning and ramifications of Hannigan’s assertion. Is Hannigan’s
assertion reconcilable with the principle of ‘directorial autonomy’? Give reasons for
your views. (10 Marks)

(B) To what extent, if at all, is Hannigan’s assertion consistent with or realisable

under Zambian company law? (10 Marks)

SUGGESTED ANSWERS

(A) Corporate management refers to the management of a company by the

directors and, in some aspects, by the members in areas where such powers of
management are reserved for them.

Directorial autonomy, as the name suggests, relates to the directors’ power to

manage the affairs of the company without any interference from the members
or any other entity not being part of the board of directors.

As a corporate entity can only operate through agents due to the fact that it is a
legal but not a physical entity, directors are the persons chosen due to their skill
to manage the affairs of the company. Directorial autonomy entails that these
directors are entrusted with management minus any interference or influence
from members of the company.

This principle was well established in the case of Shaw v Shaw (1935) 2 KB
113 in which the court held that powers of management are vested in directors.
They and they alone can exercise those powers. Members can only control this
power vested in the directors via the articles, by altering the articles, or by not

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 re-electing the directors whose exercise of the powers they do not approve of.
The members cannot usurp the powers given to the directors.

Further, in the case of Howard Smith Ltd v Ampol Petroleum Ltd, the court
was of the view that the constitution of a limited company provides for members
with defined voting powers, having power to appoint directors and to take
decisions, in a general meeting, on matters not reserved for the directors.

Based on the foregoing authorities, it becomes clear that directors are entrusted
with the right to manage the affairs of the company independently. Therefore,
the assertion of Brenda Hannigan is not reconcilable with the principle of
‘directorial autonomy’, as the principle entails that a company’s board of directors
should be free to govern a company’s affairs independently, but within the
company’s constitution.

Thus, Hannigan’s assertion appears to be misplaced in light of the decisions in

the Shaw v Shaw and Howard v Ampol. Actually, directors are chosen
largely due to their skill (real or perceived) for that particular office and thus they
should be left alone to exercise that skill.

(B) Under the Zambian Companies Act of 2017, the principle of directorial autonomy
is recognised under section 86, under which directors are vested with the
power to manage the business of the company, while reserving residual powers
for the members. Additionally, section 85(6) provides that no person, not
being a duly appointed director of the company, shall hold out that person or
allow that person to act as director.

Thus the two provisions clearly demonstrate that the Companies Act recognises
the element of directorial autonomy and does not, therefore, conform to Brenda
Hannigan’s assertions of effective shareholder control of the board of directors.

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 However, the interpretation the Supreme Court of Zambia has placed on the role
of the shareholders in relation to the directors appears to divert from the
principle of directorial autonomy and be consistent with Hannigan’s assertion.

The cases of John Paul Mwila Kasengele and Others v Zambia National
Commercial Bank Limited (SCZ Judgment No. 11 of 2000); BoZ v Chibote
Meat Corporation Limited; Van Boxtel v Kearney and ZCCM v Kangwa all
support the proposition that shareholders, as beneficial owners of the company,
enjoy overriding authority over the affairs of the company and therefore
directors must dance to the tune of shareholders.

This clearly is a departure from the spirit of directorial autonomy as envisaged by

the Companies Act and the English position, but nonetheless it would appear that
Brenda Hannigan’s assertion is indeed consistent with or realisable under
Zambian case law.

QUESTION 4

The following advertisement appeared in The Daily Newspaper on 14 January, 2019:

“BOARD RESOLUTION FOR MWANDILA ENTERPRISES LIMITED HELD ON 3RD

JANUARY, 2019 AT THE COMPANY PREMISES AT 09:30 HOURS.

A meeting was held by the MWANDILA ENTERPRISES LIMITED (Company reg. No

233333) where the following resolutions were passed:

1. That the company changes its name from Mwandila Enterprises Limited to Wetz
Super-grip Tyres Limited in order to be in line with the business that the
company undertakes.

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 2. That the company updates its records by filing Returns at the Companies
Registry (PACRA).

3. That PACRA office be notified of the resolutions above.

SIGNED (Chairman) SIGNED (Secretary).”

Identify and comment upon various company law issues which the above
advertisement raises. (20 Marks)

SUGESTED ANSWERS

The advertisement raises various legal issues. The first one is whether the board of
directors has power to resolve to change the name of the company. The second
hinges on corporate management.

In the case of Associated Chemicals Ltd v Hill and Delamain Zambia Ltd and
Anor it was held that a company is a metaphysical entity, a fiction of law, which has
legal but no physical existence. Although it is a legal person, separate and distinct
from its members, it can only act through human beings charged with the conduct
of its affairs.

There are two main bodies that make decisions, on behalf of a company, that can
then be rightly ascribed to the company. These are:

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 1. The Board of Directors – who have the power to manage the business of the
company (section 86 of the 2017 Companies Act);
2. The members acting in a general meeting and exercising specific and residual
powers specified by the Companies Act.

With respect to the issue of directors resolving to change the name of the company,
this is wrong and misconceived in company lay. The provisions of section 42 of
the Act point to the fact that this is the preserve of the members acting in a meeting
and passing a special resolution. Section 3 of the Act defines a special resolution
as one passed by not less than 75% of the votes of members of a company and not
directors. Therefore, the directors’ resolution was beyond the powers given to them.
The directors of Mwandila Enterprises Limited clearly exceeded their powers.

With respect to the issue of filing annual returns, section 270 (1) of the Act
provides that, “A company shall, within 90 days after the end of each financial year
of the company, lodge with the Registrar an annual return in prescribed form…” This
is a mandatory requirement by statute and this is not a matter for the directors to
resolve, as if they have a choice. They are obliged.

Finally, there is the issue of resolving that PACRA office be notified of the
resolutions. There is a requirement under section 42 (2) of the Act to register
copies of special resolutions to change name of Compnay. Hence, if a resolution is
‘special’ it must be registered at the Companies Registry and the decision to have
such a resolution registered in accordance with the law need not be made a subject
of the directors’ resolution.

In conclusion, the directors of Mwandila Enterprises Limited acted beyond their

powers in resolving to change the name of the company. Assuming that the
directors’ resolution was, in fact, what was required under section 42 (2) and

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 section 78 of the Act, it would be misconceived, in light of the cited sections of the
Act to file this resolution, as it is not a special resolution.

MEETINGS AND RESOLUTIONS

- Meetings17 are provided for in part VI of the current Act. The organs of the
company make their decisions collectively through resolutions passed in
meetings. In the Act, reference to meetings is about meetings of members
(shareholders, guarantors…etc) and not of Directors. Although management of
the company is by statute placed in the hands of Directors, there are some
powers retained by the members, which powers they exercise in general
meetings.

Categories of Meetings

There are three types of meetings that can be held:

I. Annual General Meeting (AGM)

II. Extraordinary General Meeting
III. Class Meetings

Previously, in the Act before 1994, there used to be something called a statutory
meeting and still exists in most commonwealth jurisdictions. It’s a mandatory meeting
that must be held by a company after the expiration for a prescribed period of time
soon after its incorporated. In some countries it could be 6 months and in others 1

17
EXAM QUESTION: Can a meeting be convened by conference call? Practical difficulties – meeting must
take place in Zambia, but if one is in London and another in Australia, where is the meeting taking place?
Place of meeting presupposes that the meeting must be by physical attendance. Section 56(2) of the
amended Act provides that a meeting may be held by teleconferencing or other electronic means. The
aim of such questions is for the student to appreciate that the law ought to move in tandem with
technological advancements.

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 year, prescribed by statute. The important thing is that its purpose was that it was
during that meeting that the company should consider whether to

 approve or confirm the appointment of directors,

 appoint the first auditors of the company,
 members consider whether the articles need to be altered.

It is argued that the statutory meeting in Zambia has been abandoned by provisions of
the Act. To answer this, we consider sec 57(1) of the Act which however, does not
refer to a statutory meeting. It provides that every company must hold an AGM every 3
month after the end of the financial year. Subsection (3) is saying a private company
may dispense with this requirement if all the members agree in writing and notify the
Registrar. One cannot dispense holding an AGM in the first financial year. This
suggests that the statutory meeting still exists, and the prescribed period is 1 year, the
first financial year even though the Act does not expressly state that this a statutory
meeting.

I. The Annual General Meeting

- The AGM is an ordinary meeting of the members which every company is
required to hold within three months after its financial year – a scheduled
meeting. The Act in sec 57(2) provides that if the company fails to hold this
meeting within 3 months, any shareholder can apply to the Registrar of
Companies for causing the meeting to be convened. The powers of the Registrar
in such circumstances are to compel the company to hold the AGM and if in the
opinion of the registrar some members are avoiding holding this meeting, the
Registrar can:
 Ignore the provisions of this company as to how quorum is supposed to be
formed for example - The Registrar can direct that it shall be deemed to be a
meeting even if one person attended and the resolutions will be deemed to
be resolutions of a company as if passed with quorum.

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 - Appointment of Directors is by ordinary resolution, so if the Registrar deems that
the attendance of one member shall suffice to meet quorum, that one member
can appoint Directors and those Directors will be duly appointed. The idea is to
protect the interests of members from abuse by Directors. The provision
however, has omitted to expressly state the power to direct that one member of
the company present in person (or by proxy) shall be deemed to constitute a
meeting. Regardless of the omission, such power is deemed to still be in
existence as the provision is so broad that the registrar should be able to
exercise that power.

Notice Requirements for Convening the AGM

- 21 days’ notice must be given before the AGM is held. However, the Act provides
that the articles of Association may prescribe a longer period of notice, but such
period may not be more than 30 days. This means that a shorter notice period
is also acceptable. The notice of AGMs must be given in writing. However, the
mere fact that there has been an omission to notify the member does bot
invalidate the meeting or resolutions passed in that meeting, what is key, is
whether the quorum was formed.
- Section 62 (1) provides that any person who is on the day before the last day
on which notice of the meeting may be given to – a member with voting rights,
auditor, director, and any person entitled under the Articles, shall receive notice
of the meeting.
- Meetings of companies incorporated in Zambia shall be held be in Zambia and
the nature of the meetings is that they must take the plenary form – no
member entitled to attend shall be deprived of the right to be heard.
- Typically, the business to be transacted in the AGM (ordinary resolutions) is the
following:
 Appointment of Directors

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  Appointment of Auditors
 Consideration and adoption of financial statements
 Receipt of auditor’s reports

The above issues are passed by way of an ordinary resolution. An ordinary

resolution in accordance with sec 3 of the current Act is a resolution made by simple
majority.

II. Extraordinary General Meeting

- An EGM is not a scheduled meeting – it is a meeting intended to transact
specific business which cannot wait until the next AGM. Its provided for in sec
59 of the Act. The Directors can convene this meeting anytime they deem fit.
The notice period is also 21 days. If the AGM is an ordinary meeting and the
resolutions are ordinary resolutions, it follows that the resolutions passed in an
EGM are extraordinary resolutions.
- Sec 3 provides that an extraordinary resolution requires 75% majority vote.
Extraordinary resolutions relate to those resolutions which would normally be
transacted in the AGM except they are now being transacted in a meeting
specifically called to deal with them. If you call an AGM to appoint new Directors
at a time when it is not time to call an AGM, it must be by extraordinary
resolution and will require 75% majority as opposed to simple majority of an
AGM. The reason is that not every member may be resident in the Republic,
therefore the higher requirements are to protect absentee members.
III. Special Meetings
- The Directors may call an EGM but to transact business which is not
normally transacted in an AGM. It ceases to be an EGM and becomes a
Special meeting whose resolutions become special resolutions requiring a

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 75% majority vote. E.g. the decisions to alter/reduce share capital or alter its
articles.
- Sec 3 defines a special resolution as one passed in a meeting specifically called
to pass a special resolution – not helpful but examples of what business can be
transacted in the Act.

IV. Class Meetings

- Meeting that is called and restricted to members of a class of shares, not open to
all members. This meeting can be convened either by the directors or by two or
more members of that class who hold at least 5% of shares in that class
(section 60).
- Sec 7718 allows private companies to pass resolution by way of signing of the
members – written resolutions, but to be effective, all members must
consent, does not apply to PLC because they are highly regulated.

Registration of Special Resolutions

- There is a general requirement that every special resolution be registered with

the Registrar within 21 days of such resolution (sec 78)19.

For Ordinary resolutions, unless the Act prescribes registration, there is no mandatory
provision to register. E.g. the Act requires that when directors are appointed the
Registrar must be notified within a specified period of time.

18
The members of a private company may, in accordance with this section, pass a resolution in writing
without holding a meeting, and such a resolution shall be as valid and effective for all purposes as if it
had been passed at a meeting of the appropriate kind duly convened, held and conducted.
19

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POSSIBLE EXAM QUESTIONS ON MEETINGS AND RESOLUTIONS

QUESTION 1

A. In his book entitled ONE STOP COMPANY SECRETARY, 6th edition, David Martin
has stated, at page 334, that:

“[Resolutions] are passed by way of “the votes [that] are actually cast”.

Examine the meaning, effect and ramifications of David Martin’s statement in

relation to the different types of company resolutions (other than Resolutions by
Circulation) that are provided for under the Companies Act, No 10 of 2017.
(10 Marks)

B. Comment on the following advertisement which was published in The Daily

Newspaper of 28 February, 2019.

“NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY given that an Extraordinary General Meeting of the members

of Mwandila Investment Holdings Plc will be held on Friday, 1st April, 2019 at
9:00 hours at Protea Hotel … for the following business.
1. To receive and adopt the Financial Statements of the Group for the year
ended 31st March, 2019, together with the Reports of the Directors and the
Auditors to the Shareholders.

2. To ratify the appointment of Directors.

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 3. To ratify the appointment of Auditors for the financial year ended 31st March,
2019 and to authorize Directors to fix their remuneration thereof.” (20
Marks)

SUGGESTED ANSWERS

A. When a company comes into existence it enjoys the powers, rights and privileges of
an individual. However, because it has unnatural existence, it is managed by human
beings in the form of Members in a General Meeting and the Board of Directors who
are in charge of directing and administering the business of the company. However,
in reality, the day to day running of the company’s business is done by the
professional cadre of managers and other employees for and on behalf of the
company.

In order to effectively manage the company the members of the company approve
the decisions made by the Board of Directors, in a members’ meeting called the
Annual General Meeting (AGM). Decisions made in such a meeting may be either
ordinary and, thus, called ordinary resolutions or special, in which case they are
referred to as special resolutions.

Needless to say, members may also meet for urgent business which call for an
extraordinary general meeting during which decisions may be made by either
extraordinary or special resolution.

The different types of company resolutions provided for under the Companies Act
are briefly outlined as follows:

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 (1) Ordinary Resolution provided for by section 76 (a) and section 3: - this is
a resolution passed by more than half (50 +1 %) of votes cast by members
of a company. Such members should be entitled to vote in person or by
proxy at a meeting duly convened and held.

(2) Extraordinary Resolution provided for by section 76(b) and section 3: -

requires not less than three fourths of the votes cast by the members of the
company who are entitled to vote in person or by proxy at a duly convened
and held meeting.

(3) Special Resolution [section 76(c)] and section 3: - this resolution must be
passed by not less than three fourths of the entitled members who may vote
in person or through a proxy at a duly convened and held meeting.

As regards the statement of David Martin, it can be said that resolutions are
certainly not the actual votes cast because the resolutions are determined as
ordinary, extraordinary or special depending on the requisite fraction of the
total votes actually cast, such as simple majority or 50% plus one vote or not
less than three fourths or indeed a requirement of a unanimous vote of all
directors present at a meeting.

The ramifications of Martin’s statement would be that all types of resolutions are
essentially passed in the same manner, i.e. by the votes that are actually passed,
without bothering about the fractions. However, from the definitions given in
respect of each type of resolution in the Act one may argue that resolutions are
not passed by the votes cast, but rather whichever side takes the simple majority
or three fourths carries the day. It can further be said that these majority

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 requirements ensure good governance in the company by promoting democratic
decision making.

In conclusion, therefore, resolutions, according to the Zambian Companies Act,

are passed according to the majoritarian principle. This is either simple majority
or three fourths majority.

B. Although a company, at law, enjoys the powers, rights and privileges of an

individual, it cannot act on its own. It needs the joint effort of human beings in
order to effectively achieve its objects. Thus the company is run by the members in
general meeting and by the Board of Directors who have to meet so that they make
decisions which will govern and manage the company. The decisions made by both
members and directors in their respective meetings are called resolutions. However,
for such resolutions to be effective, the procedure of convening a meeting must be
duly followed. Such procedure includes, but not limited to notice, the length of
notice (section 63 (1)), service of notice, place of meeting and the business to be
discussed at the meeting. The Companies Act, provides for these requirements and
once a company has adhered to these provisions in the Act (and if necessary or
applicable in its articles) then the meeting has been duly convened and the
resolutions passed are legitimate

From the foregoing, the following issues are raised in the given Notice of
Extraordinary General Meeting (EGM). An EGM is provided for in section 59 of the
Act. At this meeting, imminent business is the usual business on the agenda and
any resolution passed may be either an extraordinary resolution or a special
resolution if it was moved as such in the notice. Since the business at an EGM is
urgent business, can it be said that the business Mwandila Investments Holdings Plc
proposes to transact is urgent business? Whilst the Act does not clearly provide for

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 what kind of business is ordinary or special, the Standard Regulations, in
Regulation 41(2), provides a guide… These include declaring dividends,
consideration of Annual Accounts, Reports of Directors and Auditors and their
appointment.

Thus the business Mwandila Investments Holdings Plc intends to transact at the
EGM may be considered ordinary business capable of being properly transacted at
an Annual General Meeting (AGM), because an EGM deals with urgent or pressing
business that cannot wait for an AGM.

The Notice of Mwandila Investments Holdings Plc must state the place of meeting
(section 65 of the Act) which must be in Zambia. While the notice states Southern
Sun Ridgeway Hotel, a place in Zambia, it should actually include the city and
Zambia itself for the avoidance of doubt.

Other requirements in relation to notice are length and service of notice of a

meeting. Section 63 (1) provides the notice shall be given not less than 21 days
before the meeting is to be held. This is ‘in any other case’ which clearly includes
EGM. According to the given advertisement the date of the notice is 28 th Febraury,
2019 while the meeting will be held on 1st April, 2019. This meets the requisite 21
days’ notice. However, section 62 (3) of the Act provides for service of notice and
such service must be personal. Therefore, if the only notice by Mwandila
Investments Holdings Plc is the advert in The Daily Newspaper then they have not
complied with the requirement to serve the notice personally.

SHARE CAPITAL AND SHARES

- Shares, in simple terms, are the units into which the capital of a company is
divided, and the legal definition was given in Borland’s Trustee v Steel

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 Brothers and Co. Ltd [1901] 1 Ch 279, 288 by Farwell J as follows: “A share is
the interest of a shareholder in the company measured by a sum of money, for
the purpose of liability in the first place, and the interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders
inter se in accordance with section 14 [of the then UK Companies Act]. The
contract contained in the articles of association is one of the original incidents of
the share. A share is not a sum of money… but is an interest measured by a
sum of money and made up of various rights contained in the contract, including
the right to a sum of money of a more or less amount.”

Share Capital and Shares are provided for under Part IX of the Act. Share Capital
refers to the following:

a. Funds provided by the shareholders,

b. funds borrowed by the company,
c. the assets bought using those funds
- Share capital is one of the peculiar features of companies which are limited by
shares as opposed to companies which are limited by guarantee, Section 12(5)
of the Act provides that, “where a company being incorporated is required to
have share capital, the applicant shall state on the application for incorporation
the:
a) amount of share capital of the company;

b) division of the share capital into shares of fixed amount; and

c) number of shares each subscriber agrees to take.”

Nominal or Par Value Shares

- Statutory Instrument 53 prescribes the minimum nominal capital for different

companies, set in fee units which are determined by the Minister of Finance.
Currently the fee unit is 0.30 ngwee. The division of the share capital into

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 shares to each subscriber is the par value. It has been argued that the par
value is no longer necessary because when selling shares consideration is given
to the market value.
- Once the company has stated its par value, shares must never be sold below the
par value. When you divide the share capital into shares of a fixed amount of say
K1 or K5, the shares will give rise to par value or nominal value of each
individual share. For example, 15,000.00 shares divided into K1 nominal value or
par value. The Common Law Rationale for this requirement for nominal value
was stated in Ooregum Gold Mining Co. of India Ltd v Roper & Wallroth
(1892) AC 125 – shares must never be sold at a discount, that is, below
the par value20.

SHARE CAPITAL

- Authorized or nominal share capital - This is the total amount of

authorized Capital that the Company is allowed to issue, and which is
stated on the form of incorporation. Authorized capital implies that the
company would not be permitted to issue shares in excess of the authorized
share capital unless allowed to increase the share capital. This means alteration
of the share capital, which entails creation of new shares by passing a special
resolution.
- Issued or allotted share capital – this is the capital which is actually issued
to members. It represents the nominal value of shares which are appropriated to
the shareholders. The capital clause in the Incorporation Form is significant in

20
The Ooerugum Gold Mining Co of India Ltd issued 120,000 shares at 1 pound each. Shareholders said
they wanted to sell on the shares for 5 shillings, one quarter of the value the shares were issued at, but
that the buyers would be credited with a full 1 pound in the company. This would mean that the
shareholders would get a 15-shilling discount. At the time of the litigation, the share price stood at 2
pounds 14s. The shareholders at the time of the purchase even though they had voted for the issue, then
turned on the buyers and argued that shares were prohibited from being issued at a discount, and that
the transaction was void. The House of Lords agreed that shares must never be issued at a discount…

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 that it specifies the maximum number of shares that can be allotted at any given
time and it is thus a limitation on the company’s power of allotment of shares.
- Paid Up Capital refers to the amount of money paid to the company in respect
of the shares. It might be equal to the issued capital but it could be nil in the
case of a private company.
- If the company has issued partly paid shares and wishes to obtain more money,
it can make a “cae call” on the shares, in which case, the shareholders are
contractually bound to pay the amount specified in the call. This Called-Up
Share Capital. This is an aggregate (total) amount of the calls made on the
shares (whether or not those calls have been paid), together with any share
capital paid up without being called and any share capital to be paid on a
specified future date under the articles, the terms of allotment or any other
arrangements for payment of shares.
- Uncalled Capital and Reserve Capital: uncalled capital is the amount owing
on partly paid shares which members have not yet been called on to pay.
- Reserve Capital is uncalled capital the company has resolved not to call unless
the company is wound up.
- Once the company is incorporated, it does not mean that the capital will remain
static; the company may want to increase or even want to change the value of
each share. The Companies Act provides for alteration of share capital and
reduction of share capital.

Alteration of Share Capital

1. Alteration of share capital which does not amount to reduction

- Section 140 provides that a company may unless its articles provide otherwise,
by special resolution alter its share capital by doing the following:
i. By increasing the share capital - by way of adding new shares of such amounts
as the Company finds expedient

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 ii. consolidating and dividing all or any of its share capital into shares of a larger
amount than its existing shares. e.g. share capital is 20,000 divided into shares
of K1 each, can choose to consolidate into shares of larger amounts such as K2
to make the shares 10,000. Nothing has been done to change the share capital.
iii. converting all or any of its paid-up shares into stock, and re-converting that
stock into paid up shares of any denomination
iv. subdividing its shares, or any of them, into shares of smaller amounts than is
stated in the certificate of share capital;
v. cancelling shares which, at the date of the passing of the resolution, have not
been allotted to any person, and diminishing the amount of its share capital by
the amount of the shares so cancelled. This is not a reduction even though the
capital would be reducing, because the decision to cancel shares which have not
be allotted is not to the detriment of the creditors. The liability is limited to the
amount not paid on the shares as per section 125 of the Act

2. Alteration of share capital that amount to Reduction in share capital

- Provided for under section 150. At common law, the company could not reduce
its share capital for the sake of protecting the interests of the creditors. But, it
does not make commercial efficacy, that’s why by statutory intervention section
150 comes into play.
- Reduction is something the law approaches very cautiously because shareholders
can abuse the concept of separate legal liability by borrowing in the name of the
company so that when it winds up they have no liability. It is not as easy as
alteration.
- Section 150 outlines the circumstances and procedure to be followed:
- Subject to confirmation by the court, a company may if so authorized by its
articles and by special resolution reduce its share capital in any way, and in
particular, without prejudice to the generality of the foregoing power, may:

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 (a) extinguish or reduce the liability on any of its shares;
(b) either with or without extinguishing or reducing liability on any of its shares,
i) cancel any paid-up share capital which is in excess of the wants of the
company;
ii) pay off any paid-up share capital which is in excess of the wants of the
company; departs from the common law limitation placed by Trevor v
whiteworth that a company must never refund a shareholder.
(c) Accept the surrender of shares by any of its shareholders

and may, if and as far as is necessary, reduce the amount of its shares accordingly
except that such share capital shall not be reduced below the prescribed minimum.

- Sec 150(12) gives the court wide powers to even call creditors who may have
objections to the reduction.
- Section 150(14) provides circumstances when the High Court may dispense
with this requirement for creditors to object to reduction of capital, i.e.
a) Where the company has admitted a claim or particular debt and has made
arrangements to settle the claim or debt in full as such a creditor’s interest shall
have been taken care of;
b) Where the company does not admit the claim or debt but the Court itself
proceeds to fix the amount due after adjudication, as the Court would have
taken care of the interest of the creditor.

The Powers of the Court on Reduction

The order confirming a reduction may require that once the company has been issued
with a replacement certificate of share capital pursuant to section 151(2)(b) of the
Act, it should publish an appropriate notice announcing the reduction in
capital. By section 151(2), “where the Court makes any such order it may, if for any
special reason it thinks it proper so to do, make an order:

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 a) Directing that the company shall, during a period specified in the order, add to
its name as the last works thereof the words “and reduced”, or
b) Requiring the company to publish
i) a notice of the reduction in the prescribed form on receipt of the
replacement certificate of share capital; or
ii) reasons for the reduction or such other information in regard thereto as
the Court may think expedient with a view to giving proper information to
the public.”

The adding of the words “and reduced” is a warning to the members of the public that
there have been some changes in the share capital.

Reduction requires court confirmation and a creditor may object to the reduction unlike
in the case of alteration.

DOCTRINE OF MAINTENANACE OF SHARE CAPITAL

- Arising from the realisation that the attributes of incorporation may sometimes
be abused by those who incorporate companies (shareholder, directors), go on a
rampage borrowing on behalf of the company without care, knowing they will be
shielded by concept of limited liability in sec 125; they may be drawing assets,
and money from the company thereby making the financial position weak to the
detriment of the desired going concern concept, employees and creditors. In
order to protect such interest, the law has developed a set of principles aimed
at protecting the capital as it represents the life blood of the company.
These are together referred to as the doctrine of maintenance of share capital.

This is founded both at common law, also codified into statute.

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1. Shares must never be sold at a discount, that is, at a value less than the par value
[Ooregum Gold Mining Company of India v Rob – decision in this case is that
shares must never be sold less than the par value. For if you were to give discounts
on the par value, you are diluting the capital, the resources available to the creditors
and to the company to finance its operations. The open market value is often than
not more than the par value].
2. [Trevor v Whiteworth 1887 12 Appeal cases 409] – the principle in this case is
that a company must never return funds to shareholders for the shares surrendered.
There should never be a refund to any shareholder even as he surrenders shares.
To give commercial efficacy to this, we now have a class of shares called
redeemable shares which may be issued if permitted by the AA of a Company,
provided for in section 176. They are the type of shares were at the option of the
company or the shareholder, the shares may be returned, and shareholder refunded
– this widens the possibility of a company raising share capital. Shareholders may
want to raise money for a project without signing up members in perpetuity.
Although in common law, the rule in this case is that a refund is not possible, by
statutory intervention it is possible provided that it is a refund on redeemable
shares.
3. Dividends may only be paid out of profits [section 159]. Thus, shareholders are
not entitled to dividends paid out of anything but profits otherwise they would be
liable for such amounts. This prevents them from diluting the share capital.
4. Section 183(1) provides a restriction on financial assistance in respect of
acquisition of shares. The company must never give financial assistance to a person
in order to enable that person acquire shares in the company. Shares must not be
given for free using disguised ways or otherwise obvious. Have to scrutinise if a
transaction is an arms-length one to disguise this.
5. Section 183(4) relaxes this section 183(1) restriction, giving an exception to
giving financial assistance. These include:

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 a. Where the company is giving financial assistance in the normal course of
business, e.g. a bank
b. Where the financial assistance is given as loans to persons, other than directors,
employed in good faith by the company with a view to enable those persons
acquire fully paid-up shares, other than nominees of the company.
c. Where the financial assistance is given as part of an employee share scheme.
Usually given as a reward to motivate employees.
6. In respect of payments to shareholders and their closely related associates, the
courts sometimes have gone to the extent of stating that payments made to
directors who are also shareholders need to be scrutinised closely, to ensure that
those payments are for consideration. E.g. if a person is a shareholder and receiving
director’s fees for providing no service at all, such are deemed as disguised
payments and contrary to the doctrine of maintenance of share capital.

THE CONSIDERATION OF CLASSES OF SHARES AND RANK OF SHARES

- When a company is formed, and the articles are silent about shareholder’s rights,
the presumption is that all shares rank equally. This is true and similar to a
partnership where there is a presumption of equality among partners unless the
partnership agreement stipulates otherwise. It will be assumed that they have
equal rights to:
a. Dividends
b. Receiving a return on any surplus when a company is winding up in a solvent
state
c. The right to attend meetings and vote
- In this regard both sections 7(3) and 9(2) [dealing with PLC and PVT], state
that shares shall rank equally apart from differences due to their being in

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 different classes. The company has a power to create different classes of shares
with different rights, where such power will be contained in the articles.
- In the standard articles, Regulation 2 provides that without prejudice to any
special rights previously conferred on the holder of existing…it is up to the
shareholders to pass a resolution to create different classes and ranking of
shares if they so wish.
- If adopting standard articles, there are certain things you need to amend in
order to suit the needs of your clients. E.g. the standard articles (sec 59) restrict
the directors from borrowing over a certain amount, to a small amount such that
no company would survive, which results in Directors acting in an ultravires
manner.
- It thus important to amend this regulation and any other unfavourable
regulations by filing with the Registrar that section which you’re amending.

TYPES OF SHARES

1. Ordinary shares – most common type, and in traditional form. Holders of these
shares are entitled to information such as to be notified about meetings and
attend such meetings and participate in the deliberations. Most founder members
of companies hold ordinary shares. The number of shares held will determine
your voting power. The rights attaching to this class of shares include;
 the right to a dividend,
 the right to participate in surplus capital on winding up.
Usually, the ordinary shares carry the highest capital in the company.
2. Non-voting Ordinary shares
The rights attaching to this type of shares are the same as in (1) except the
right to vote. It is a type of share used to raise share capital.

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 3. Preference shares
They are so labelled because of the preferred manner in which they enjoy the
rights associated to them. Preference shares obviously will carry rights which are
preferred in relation to ordinary shares in the following ways:
a. The right to a fixed dividend
b. The right to a return of capital at winding up, and they will be paid first
before the ordinary shareholders are paid

This type of share is also issued in order to attract people to buy these shares
and raise capital. They also make sure that such shares have limited rights in
terms of voting for example. They have two disadvantages:

a. They usually do not carry voting rights, so they don’t participate in

managing the affairs of the company
b. They do not partake in any excess profits upon winding up and even as
the company is operating as a going concern because they have a fixed
dividend.
4. Founder shares
Sometimes called “deferred shares” are rarely issued. Usually reserved for the
founders of the company. It is more of an ordinary share except that the holders
of founder shares receive a second dividend after everyone has been paid. It is
up to the founders to create this type of shares.
5. Redeemable Preference Shares
A company may if permitted by its articles to issue redeemable shares. This is
only by authorisation of the Articles (otherwise the decision in Trevor v
Whiteworth holds.)
6. Golden Shares
This share carries a super vote and can be used to out-vote other shareholders.
It is not permissible to sell such shares on the Stock market, so it carries with it a

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 very strong voting power. Gowa criticises this type of share that it has caused a
lot of distortion in Company Law, saying its not necessary and the voting power
should have been left to the number of shares a shareholder has. However,
sometimes, it is used when government has interest in a company, where it may
use it to out-vote other shareholders in the interest of the Republic.

VARIATION OF CLASS RIGHTS

- A company may wish to vary any rights attaching to a class of shares. Variation
means a change in the rights attached to the share enjoyed by members of that
class. Section 143(1) defines a variation of rights as being:
1. When the rights attached to a class of shares are abrogated
2. When a company passes a resolution, which has the effect of diminishing the
proportion of the rights (voting and dividends distributions payable) attached to
that class.

Procedure to Vary Class Rights

- Described in section 143(3). Starting point are the Articles – they must provide
a right of variation to class rights. If the articles forbid any variation of the rights
of a class, they may not be varied, unless with the written consent of all
members of that class, or with the sanction of the court under a scheme of
arrangement made in accordance with the Corporate Insolvency Act21.

HOW A COMPANY RAISES RESOURCES/CAPITAL

1. A public company may raise money by offering shares to the public. There are
however procedures to be followed: not every company can raise money from the

21
Section 48 of Corporate Insolvency Act

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 public, only a public company is permitted. Private companies are not subject to a
rigorous regulatory framework and enticing members of the company would be
putting them at risk.

Section 210 sets out the requirements that are needed with public issue of shares.

What is meant by invitations to the public? Part X of the Act deals with this.

Section 119 of the repealed Cap 388 provided that it is not an invitation to the
public if:

 a company invites 15 or lesser people; or

 if you make an invitation to 50 or fewer people with a condition that the shares
are not assignable/transferrable
 you invite employees of the company to buy shares with a condition that the
shares are not transferrable

This does not however seem to be the position under Act No.10 of 2017.

In terms of section 211 a company that wishes to make an invitation must within 6
months before making the invitation register a prospectus – a doc which gives
the public disclosure about the company: its profitability, directors,
shareholders to enable them to make informed decisions.

- Section 212 outlines the minimum information that should be contained in a

prospectus. The prospectus must comply strictly with what is outlined in the
section.
- The information contained in a prospectus amounts to a statement of
fact in law, that is, a representation.
- Therefore, any information contained in a prospectus which is false amount to a
misrepresentation. Any Director who appended their signature to a prospectus

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 with false information or omission of material facts incurs a liability for
misrepresentation.
- A person who suffers as a result of this misrepresentation may retire the shares
and be entitled to compensation. But such a remedy is only possible where
restitution is possible. If a party has borrowed funds from the bank and has
bought shares, there is a third-party interest and rescission may not be possible
but rather opt for damages. The same principles in the Law of Contract apply
insofar as misrepresentation in a contract is concerned.
2. The other method a Company may use to raise capital is by way of borrowing –
mortgages and charges.
- Section 86(2) provides that the directors may exercise the power of the
company to borrow money…and may use any assets of the company as security
for those debts. This provision must be read together with the powers given in
the articles – in case there is a restriction on the amounts the directors may
borrow. A charge is nothing but a transaction in which a company places on an
asset.
- Companies borrow by issuing a document known as a debenture –
acknowledgement of debt. The document will stipulate the principle amount that
has been borrowed, interest, etc.
- Section 238 of the Act states generally a charge over the property or
undertaking of a company does not apply. Transactions over which a company
creates a charge to which section 238 applies must be registered with the
Registrar within 21 days22. The rationale is to protect third parties, particularly
credit financers because information is available for inspection by the public.

22
The obligation to register is on the company…but this under Cap 388 contradicted sub section 11
where failure to do would make the debt unsecured and affect the creditor/lender negatively. [in the UK,
the obligation is both on the debtor and lender]

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 - Section 99(11) of Cap 388 gave the effect of a failure to register such a
transaction saying:

a) the charge shall be void against a liquidator and any creditors of the company23

b) the full debt secured by the charge shall become payable by the company

There is no similar provision under Act No.10.

THE MOVABLE PROPERTIES SECURITY INTEREST ACT OF 2016

- Was enacted primarily to create a registry known as collateral registry in

which all transactions involving movable assets as security are to be registered.
- The creditor is entitled by this statute to register such a transaction, meaning
this creditor will rank in priority to all subsequent creditors who will have an
interest in that property.
- It further provides mechanisms for enforcement of such transactions. In order to
foster confidence in the financial sector, this Act has been enacted so that
Financial Institutions can be encouraged to lend to SMEs even if they have just a
laptop as collateral for example.
- Section 6 of this Act provides that this Statute shall have supremacy over all
other statutes in respect where movable properties are presented as collateral.
- The meaning is that it shall override even the provision of the Companies Act
insofar as movable assets are concerned.
- The Trade Charges Act for example deals with the Provision of Goods in Trade as
collateral, the effect is that the above statute trumps this even if there was a
transaction dealing with goods in trade as movable assets.

23
that debt ceases to be a secured debt]. Debenture holders are secured debtors but failure to comply
makes the debt unsecured, the lender then suffers loss. In practice, banks have taken it upon themselves
to register because they are the ones subject to suffering

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 - In order for a creditor to be able to enforce his debt in accordance with the
MPSIA the transaction must be registered.

What effect has this statute had on section 238?

- A floating is not a charge on any specific assets, but hovers over until it
crystallises. The assets which will be the subject of this charge will be both
movable and immovable assets when it crystallises.
- What happens if during the subsistence of this transaction the company had
provided as collateral any of its assets and the creditor has registered its assets
under the MPS? The person to be recognised as a secured creditor is one who
has registered the transaction under the MPS Act.
- This will in practice create some problems. In practice, registration of floating
charges requires dual registration – both under the Companies Act and
under the collateral registry, so that in terms of immovable asset your debt as a
creditor will be secured under section 238 and rank in priority under the MPS
Act.24
- The Companies Act of 2017 equally does not to a large extent resolve this
problem.
- It excludes those transactions which are supposed to be registered under the
MPS Act that they do not need to be register. However, a floating charge will
however over both movable and immovable assets therefore for creditor
protection, dual registration is necessary.25

24
This does not present itself as something that is of commercial efficacy but unfortunately that is the
current law.

25
Need to amend the statutes and see to it that they are consistent in how they deal with floating
charges

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POSSIBLE EXAM QUESTIONS

Question 1

On 20th December, 2018, the Patents and Companies Registration Agency (PACRA)
caused the following advertisement to be published in The Daily Newspaper of that day:

“GUIDELINES ON REBASING OF PAR (NOMINAL) VALUE OF COMPANY

SHARES AND SHARE CAPITAL FOLLOWING THE REBASING OF THE KWACHA
ON 1ST JANUARY 2019.

1.0 INTRODUCTION AND BACKGROUND

1.1 These are guidelines on the automatic rebasing of par value of company shares and
share capital to be effected by the Agency on 1st January, 2019, and the measures
needed to be taken by companies.

2.0 REBASING OF PAR VALUE OF COMPANY SHARES AND SHARE CAPITAL

2.1 The Agency shall, in accordance with the Government policy of rebasing the
national currency, convert the share capital and nominal value of shares of all
companies to the rebased value on 1st January, 2019.

2.2 Accordingly, the share capital and nominal value of shares will be automatically
divided by 1,000.

3.0 IMPLICATIONS OF REBASING THE NOMINAL VALUE AND SHARE CAPITAL

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3.1 Companies limited by shares with a nominal capital of 5,000,000.00 and par value
of K1.00 will automatically have their nominal capital rebased to 5,000.00 and the par
value to K0.001.

4.0 COMPANIES TO BE ADVERSELY AFFECTED BY REBASING

4.1 As the lowest monetary value under the rebased currency shall be 1 Ngwee, par
value of K1.00 will translate to K0.001 which is below 1 Ngwee. Affected companies
will therefore need to consolidate shares into shares of larger amount of at least 1
Ngwee.

4.2 The application for alteration of par value of shares shall be made in a prescribed
form, the Notice of Change of Par Value and Shareholding Structure which is available
on the Agency’s website.

4.3 Considering that alteration of the par value of shares may result in the reduction in
the total number of shares in the company, companies will be required to redistribute
the shares in proportion to existing shareholding.

4.4 It is important to note that under the Companies Act, any consolidation or
subdivision of shares should be authorised by special resolution. Accordingly, the
meeting at which the special resolution is to be passed should be convened as a special
meeting…”

Comment on the efficaciousness or otherwise of the various company law issues which
are raised in the above guidelines.

N.B: The legislation which rebased the Zambian currency makes no reference to any
aspect of company Act.

SUGGESTED ANSWER

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Every company incorporated pursuant to the companies Act of 2017 and having share
capital is required to indicate its share capital in the capital clause of the application for
incorporation. Section 14 (1)(c) of the Companies Act mandates the Registrar to
issue a Share Certificate stating the amount of share capital in a prescribed form.

A company may, however, for commercial reasons, among other reasons, decide to
alter its share capital. The alteration may take two forms:

1. The first being alteration that does not reduce share capital.
2. and the other being alteration that reduces share capital.

The guidelines from PACRA compel companies to alter their share capital. This raises
the very important aspect of how a company can alter its share capital especially one
that does not amount to reduction and indeed whether there is legislative backing
which mandates PACRA to compel companies to alter their share capital.

In order to fully advise on this issue it is relevant first to consider how a company can
alter its share capital and some of the circumstances that may necessitate a company
to alter its share capital.

Alteration of share capital is provided for in Part IX, particularly sections 140 and
150-151, of the Companies Act.

Section 140 of the Companies Act provides that a company may alter its share capital,
if its articles allow, by passing a special resolution. The first point, therefore, is that a
company itself may, of its own volition, decide to alter its share capital. It must be
mentioned that a company, in this context, is “the members in a general meeting”.
Therefore, not even the directors of the company can decide to alter share capital.
There is no law which provides for any instance when the company could decide to
alter its share capital other than by its members in a general meeting. The guidelines
by PACRA to compel companies to alter their share capital are, therefore, misconceived.

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They lack the legal basis and contravene the rule of law. Simply put, every act of a
public officer or authority must be founded on the law.

Secondly, to alter share capital, section 140 of the Act provides that the articles must
expressly authorise such a course of action. PACRA’s guidelines are, therefore, further
misconceived because of the fact that some companies may have articles that do not
allow alteration of share capital. Therefore, to compel companies to alter share capital
by passing a special resolution is to overlook the procedure in the process of alteration
of share capital which provides that the article of the company must first authorise the
same.

It must be mentioned here that the guidelines refer to a “special meeting”. However,
there is no such a thing known in company law as special meeting. There can only be a
special resolution. The guidelines are further misconceived to this extent.

Another question that arises is, what would happen to those companies that would not
comply with the guidelines, bearing in mind fully well that the same have no legal basis
and thus illegal. It is an established principle of law that an illegal act can be ignored
with impunity. Therefore, companies have the latitude legally to obey or not to obey
the guidelines from PACRA.

Furthermore, it must be pointed out that the material legislation makes no reference to
the Companies Act. It does not envisage rebasing of share capital, let alone compelling
companies to alter their share capital. Therefore, the guidelines from PACRA have no
basis in company.

In conclusion, therefore, it must be made clear that there is no legal basis for PACRA to
compel companies to alter share capital. As discussed above, such alteration is only
achieved at the instance of the company itself and not PACRA. The proper course for
PACRA to achieve its mandate could perhaps have been to make relevant
recommendations to the legislature through the Ministry of Commerce to make the

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relevant amendments to the Companies Act so that it can provide for PACRA to have
powers to compel companies to alter their share capital. This could include an
amendment to section 140 discussed above.

Question 2

Is share allotment synonymous with share issuance? [5 marks]

Main Point of the suggested answer

A distinction between share allotment and share issuance was made in the case of
National Westminster Bank plc. and another v Inland Revenue
Commissioners [1994] 3 All ER 1 as follows: “shares are allotted when a person
acquired an unconditional right to be included in the company’s register of members in
respect of the shares, …and shares are issued when the entire process from application,
allotment and registration is complete. So when one’s name is finally registered in the
members’ register or register of shareholders, the shares are said to have finally been
issued.”

On the authority of the above case, one can confidently assert that share allotment is
merely a part of (the process of) share issuance.

PRE−INCORPORATION CONTRACTS

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 - This is one of the most fertile grounds for exam questions as can be gathered
from a perusal of many Mid-Year and Final Exam Papers of ZIALE except Mr.
Bwembya seems to have departed from the approach of Judge Musonda.
- However. the following are some of the major points to note when faced with a
question relating to pre-incorporation contracts:
- It is possible for negotiations of a contract to take place and for a contract (or
what purports to be a contract) to be made, when one of the parties to this
contract is a company that is not yet formed or incorporated. In this case, the
purported company is not yet in existence. A contract concluded in such
circumstances is referred to as a pre-incorporation contract, and may be entered
into prior to the company being legally registered and for various business
reasons.
- Under the Companies Act No. 10 of 2017 of the Laws of Zambia, a company
comes into being by virtue of sections 14 and 15 (having been registered
pursuant to the provisions of section 12 and other related provisions). Section
15 (1) (b) provides that, “...from the date of registration stated in the
certificate, the company is incorporated....”
- It is common sense that a company has no legal existence or capacity before it is
incorporated.
- It is incapable of entering contracts by itself, and equally incapable of acting
through any agent. Actually, the legal principle applicable on this issue is one of
the law of agency, namely that no agent can act for a non-existent principal.
- The general rule or position of the law on pre-incorporation contracts is that a
company that is not yet in existence is not bound by such a contract as it clearly
has no contractual capacity.
- Case law, cited below, will show that a person, who purports to make a contract
on behalf of a company that is not yet in existence, becomes personally liable on
that contract.

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 - Section 20 (1) of the Act agrees with the above statement. The section
actually gives effect to the general rule. The general thrust of the provision is
that a person that purports to enter into a contract on behalf of a company that
is yet to come into existence shall be bound by the contract, incurring liabilities
thereunder and deriving benefits therefrom.
- Actually, section 20 (1) provides for unwritten contracts, while section 20 (2)
provides for written contracts.
- However, for the written contracts, the section provides that the contract formed
under that section, i.e. section 20 (3), may be “adopted” by the company
within 15 months [Note: connect this time frame to that which is required for
holding the Annual General Meeting (AGM) of a company under section 57
(1)]. Among the agenda items for such a meeting is the ‘adoption’ of pre-
incorporation contracts.
- It must be noted that a pre-incorporation contract can only be adopted by a
company through passing an ordinary resolution, which only requires a “simple
majority of votes cast by such members of the company as, being entitled so to
do, vote in person or by proxy at a meeting duly convened and held”, as
provided by section 3 of the Companies Act.
- The adoption must be by a members’ resolution, i.e. one that is passed by the
shareholders as opposed to a directors’ resolution. That is why the word
‘company’ is employed in section 20 (3), to show that it is the members acting
together in general meeting who are passing the resolution.

- In an exam question the facts may state that a “pre-incorporation contract was
adopted by a resolution of the ‘board of directors’ at their first meeting…” Look
out for such, as that would certainly be an erroneous mode of adopting the

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 contract since section 20 (3) expressly provides for an ordinary resolution,
which is a “members’ resolution”.

- While, as stated above, the general rule is that the person that purports to enter
into a pre-incorporated contract shall be bound personally by the contract,
section 20 (5) has come in to provide that if the pre-incorporated contract
expressly provides that the person purporting to contract in the name or on
behalf of the company, before it comes into existence, will not be bound by the
contract nor entitled to the benefits thereof, then such would be the case. This
is a statutory modification of the general common law rule.

Case Law on the General Rule:

Kelner v Baxter (1866) LR 2 CP 174

In this case, the promoters of a proposed company purportedly entered into contract on
behalf of the company to supply wine. The company was formed and the directors
purportedly ratified the contract. Having been in business for some time, the company
was wound up. The plaintiff sued the defendants for the stock. It was held that the
defendants were personally liable. Erle CJ said that if the company had been in
existence at the time of the contract, the defendants would have agreed as agents for
the company, but since the company did not exist, the contract was wholly inoperative
and therefore binding on the defendants personally. If a person purports to contract
for a principal at the time such a principal is not yet in existence, the contract binds the
person passing off as or professing to be an agent.

Re English and Colonial Produce Co. Ltd (1906) 2 Ch 435

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In this case, solicitors were given instructions to incorporate a company and they went
ahead to pay the prescribed fees for its registration. They later sought to recover the
fees from the company that was now in existence. It was held that their claim should
fail, as they were not entitled to such. There was basically no company in existence to
have contracted with at the time of the contract.

Furthermore, even if the person entered into the contract signing his name and adding
after his name the description of the office that he would hold when the company is
incorporated, still no liability would arise as there was no contract. This was the
position in Newborne v Sensolid (Great Britain) Ltd [1953] 1 All ER 708. In this
case, the company purported to sell a quantity of ham to the defendant. The
defendant refused to take delivery of the ham. The company sued for breach of
contract but as the company had not been registered until after the contract was
concluded and as the plaintiff had signed his name together with some description as
director, it was held that there could be no liability.

A way of evading this rule is for the promoter to enter into a draft agreement providing
that the company, when formed, shall enter into a similar agreement with the third
party and that the liability of the promoter shall thereupon cease. But the draft
agreement creates no binding contract between the company and the third party, so
that each can, with the collusion of the promoter, deprive the other of the expected
benefit of the contract.

Effect of the Pre-incorporation Contract once Adopted

- Upon the adoption of such a contract, as stated in section 20 (3) of the Act,
such a contract shall now bind the company for all intents and purposes, and the
benefits thereof (or liabilities) shall accrue to the company as if the contract was
duly made after the company came into existence. Further, upon the adoption

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 of such a contract, the person that purported to act in its name or on its behalf
shall cease to be bound by the contract or will no longer be entitled to the
benefits (nor be subject to liabilities) thereof.

Why is the Contract not “RATIFIED”, but simply “ADOPTED”?

- The word ‘adopt’ is said to mean “to take or receive as one’s own what is not so
naturally”, or can mean: “to take an action of another to become yours.”
- Under the Law of Agency, alluded to, above, for an act to be ratified, a principal
must have been in existence at the time of the agent’s action. Furthermore, a
principal can only ratify a contract if he (himself) was competent to make such a
contract at the time of the agent’s action. Based on the above points, a pre-
incorporation contract cannot be ratified. The two reasons for impossibility of
ratification of a pre-incorporation contract can be summarised as follows:
(i) At the time of contract, the principal (company) is not yet in existence (as
held in Kelner v Baxter)

(ii) The principal, being a non-existent company, has no legal capacity to

contract at the time of entering into contract.

POSSIBLE EXAM QUESTION

QUESTION 1

A. In the case of Phonogram Limited v Lane [1982] Q.B 938 Lord Denning MR
observed that:

“Where a person purports to contract on behalf of a company not yet formed, then,
however he expresses his signature he himself is personally liable on the contract”.

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 To what extent is Lord Denning’s observation consistent with Zambian company
law? (10 marks)

B. What, if at all, is the effect or ramification of the words “subject to ....” in relation
to a pre-incorporation contract under the Companies Act no 10 of 2017?
(10 marks)

SUGGESTED ANSWERS

A. As a general rule, where a person purports to enter into a contract on behalf of a

company, before the company comes into existence, that person will be personally
bound by the contract, in that he will be entitled to the benefits [and be subject to
the obligations that stem from it.

Section 20 of the Companies Act regulates this important aspect of pre-

incorporation contracts. Looking at Lord Denning’s statement, prima facie, it
appears to be correct especially in light of the general position alluded to above.
However, this position may still be applicable in England, but in Zambia it is not the
case.

Before proceeding with discussion of the Zambian position, it would be necessary to

refer briefly to the common law and some cases.

In Kelner v Baxter the court held that a person that purports to enter into an
agreement on behalf of a company not yet formed shall be personally liable on the
agreement. The same view was shared by the court in Re English Colonial

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 Produce. Perhaps Lord Denning’s viewpoint is adopted from the above stated
cases.

In Zambia where a person purports to enter into an agreement on behalf of a

company not yet formed, provided that it is in writing, the person may escape
personal liability. The instance at which such personal liability will not apply is
where the company adopts the contract by an ordinary resolution not later than 15
months after its incorporation. This is what is provided for in section 20(3) of the
Act.

The effect of adoption is that the company accepts the contract as its own, thereby
acquiring all the rights and obligations created by the contract.

What is remarkable about the position of the Zambian company law is that, unlike
the English law, is that “whether or not the relevant contract is adopted by the
company, the other party to the contract may apply to the court for an order fixing
obligations under the contract as joint or joint and several, or apportioning liability
between or among the company and the person who purported to act in the name
of or on behalf of the company…”, as per section 20(4) of the Act.

As demonstrated above, one may conclude that Lord Denning’s observation is not
entirely consistent with Zambian company law.

B. In this regard, a promoter and a company may enter into a contract, in which it is
agreed that the person who purported to act in the name, or on behalf, of the
company before it came into existence shall not in any event be bound by the

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 contract nor entitled to the benefits thereof. This position is reflected in section
20(5) of the Act.

Therefore, “subject to...or except as provided in.....” mean that if there is an

agreement that creates an intention which diverts from the general rule that the
promoter will be liable, that agreement must be given effect.

The words suggest that a company and a promoter may, in a separate agreement,
agree that the promoter shall not be liable whatsoever on a contract purportedly
entered into on behalf of the company before it was formed.

The effect of these words is that if such a contract existed, then the general rule
created by section 20(1) that a promoter will be liable will not apply.

COMPANY LAW PART THREE

CORPORATE INSOVENCY

RELEVANT PROVSIONS IN THE COPORATE INSOLVENCY ACT

FEATURES OF THE NEW CORPORATE INSOLVENCY ACT

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  Candidates wouldn’t be examined examined in great detail about the procedures
as in the words of Mr Bwembya.

- The question on corporate insolvency is examining whether there is

understanding generally what the new features of the act are all about. Expected
to make reference to the Act. The following lecture will give guidance.

- In the repealed CAP 388 Part 13 dealt with matters relating to the insolvency of
companies and a lot of criticism were echoed regarding the inadequacies of that
of part of the Company’s Act

1. Insolvency practitioners were not sufficiently accountable to the stakeholders of

companies in financial distress. Employees are stakeholders, creditors are and
the public generally

- The law did not provide sufficient mechanism to make liquidators to be fully
accountable to compel them to be fully accountable and to be fair.

- In practice many companies that are either in receivership or in liquidation, they

are still in liquidation and this means the liquidator stands to benefit because he
continues to charge fees. The biggest beneficiaries are liquidators because of the
legal regime. The Company’s Act lacked mechanisms for holding insolvency
practitioners accountable.

- Legal scholars have pointed out that CAP 388 was premised on English
Companies Act 1948 but England itself and other jurisdictions have gone
under repeated legal reform to the extent that what is in CAP 388 is not in line
with what is internationally accepted as corporate insolvency law regime.

- With this background the policy framers felt that the problems form a sound
basis for creating a new statute to address the same issues above.

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 - These problems informed the creation of the new Corporate Insolvency Act no 9
of 2017.

- One other key important issue is the fact that the mechanisms provided for in
CAP 388 did not promote a culture of corporate rescue. Giving a fresh breath of
life to companies that underwent financial distress. In practice whenever a
company went into receivership such companies eventually ended up in
liquidation and winding up.
- In England and America where they have developed corporate insolvency laws
being placed in receivership is not a death sentence to a company only that one
of the receivers are enforcing rights. Lack of accountability transparency by
insolvency pratictioners
the regulatory framework was so weak that eventually the company would end
up in receivership.

- Like other jurisdictions Corporate Insolvency has now evolved as a separate

branch of law. Strictly speaking corporate insolvency law is very much company
law but it is now being studied a s a separate branch of law and now there are
lawyers specialising in Corporate Insolvency Law – it’s very much company law
for the purposes of studies here.

The new Corporate Insolvency Act basically has 3 mechanisms which

constitute insolvency procedures and these mechanisms are those which
have been borrowed from CAP 388 and brought into this Act and the new
Corporate Insolvency Act has added another mechanism being the
administration procedures to the company undergoing financial distress

 In the definition section of the Corporate Insolvency Act “insolvent” means

having liabilities that exceed the value of assets….”

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  A company is insolvent if it has libilities in excess of the assets. Insolvency law is
about those procedures, mechanisms or processes available to the company
unable to pay its debts as they fall due and whose liabilities are in excess of its
assets

The purposes of Insolvency Law

1. Insolvency law is concerned about the distribution of monies realised from the
assets of qinsolvent companies to the creditors and other entitled persons. This
means there could be employees, states organs the company owes, including
shareholders in surplus.

2. Secondly this branch of law is also concerned about maximising the value that
creditors would get in the event that the company was insolvent. Maximising
meaning trying as much as possible for creditors to get the greater value even
though its liabilities exceed its assets to do that which is in the interest of
creditors.

3. This branch of law is also concerned about providing legal mechanisms to

maintain companies as going concerns. Even if the company is financially
distressed we must make mechanisms to try and rescue the company.
Therefore, the old and traditional thinking that insolvency law is about selling
assets and distributing to creditors. It serves great purposes. In essence, this is
what this new regulaton seeks to achieve

Mechanisms available in this piece of legislation are:

1. Business Rescue Proceedings

2. Receivership
3. Schemes of Arrangement and Compromise

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 1. BUSINESS RESCUE PROCEEDINGS
- As stated above, our corporate law regime has been criticised over the years for
a lack of a proper and effective mechanism that can guarantee to a higher
degree that financially distressed companies can be given a fresh breath of life,
back to profitability. Receivership, schemes of arrangement and compromises,
although in away designed to try and give some breathing space to a company
that is in financial trouble have been found to be quite ineffective.
- Studies have shown that jurisdictions were the number of companies that go into
liquidation have reduced, the results have been attributed to certain modern
concepts such as administration. They have introduced in their laws modern
concepts that are aimed at business rescue so that liquidation must be the very
last resort.
- The legislature in answer to this has under Part 3 of the new companies act
introduced administration. It is a procedure whereby a company that is in
financial trouble but has possible prospects of being turned around can be saved
from collapse by being placed under the supervision of a qualified insolvency
practitioner and also fencing the company off from creditors enforcing their
rights. This insolvency practitioner is known as an Administrator.

Commencement of Business Rescue Proceedings

- Section 21 of the Act provides one of the two methods of commencement of

business rescue proceedings. The Act provides that the first method is that
company may, by special resolution,26 resolve that the company voluntarily
begins business rescue proceedings and place the company under supervision of
an Administrator. Further reading of these provisions suggest that there are
further pre-conditions that must be satisfied:

26
Special resolution is by the members while the decision that the company is financially distressed is by
directors

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 1. the Board of Directors must have reasonable grounds to believe that the
company is financially distressed. Section 2 of the Act defines financial distress
as follows: “a company is likely to be insolvent within the immediately ensuing 6
months”, i..e. inability to pay its debts.
2. Section 21(1) - There are prospects that the company can be rescued.
- Section 21(1)(b)(i)-(iii) gives the purposes for which Business Rescue
Proceedings may be began:
 To maintain the company as a going concern;
 To achieve a better outcome for the company’s creditors as a whole than is
likely to be if the company where to be placed in liquidation;
 To realise the property of the company in order to make a distribution to one or
more secured or preferential creditors;
- The law further says that a company cannot validly pass a resolution to
commence Business Rescue Proceedings if liquidation proceedings have already
been commenced [section 21].
- The legislators are trying to avoid a situation where the creditors have already
started the process of liquidation which is selling the assets of the company and
paying off the creditors and members frustrate such process where creditors
have already exercised their rights of enforcement.
- The purpose of insolvency law is to protect all stakeholders including creditors by
balancing out the rights of creditors on the one hand and attempting to rescue
the company. Business Rescue Proceedings is available if liquidation proceedings
have not been commenced.
- Once the resolution has been passed, it must then be filed with the Registrar.
There is no prescribed period for filing, however, the Act says that the resolution
shall become effective after it has been filed with the Registrar. The reading of
sec 21 is that it only says that it shall become effective after not on the date.

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 - The reason is that it is the members themselves who should appoint the effective
date of this resolution and give notice within 30 days after filing it to all affected
persons indicating the effective date of the resolution. Who are these affected
persons? Section 3 defines them as to include “a regulator, shareholder,
member, director, creditor, employee, former employee, registered trade union
and the Registrar.” Use of the term includes means that the list is not limited to
these. The members can then now proceed and appoint a business rescue
Administrator.
- Section 21(4) when you have appointed a Business rescue Admin, you should
within 7 days of such appointment publish a copy of the notice of appointment to
each affected person.
- Section 21(5) A failure to give a notice of a resolution under section 21(3)
and a notice of appointment under sec 21(4) would mean that if you have failed
to follow either procedure, within 60 days after passing the resolution, the
resolution shall lapse. This means that the company will not be under
Administration and is effectively not fenced off/protected.
- When a resolution has been passed, section 22 provides for ability to oppose
this resolution. Any affected person may apply to court to oppose the adoption of
the resolution and the application to set aside this resolution should be based
solely on the grounds prescribed in section 22.
- Section 22(1)(a), (b) and (c) gives the grounds upon which the court may
set aside this resolution:
1. No reasonable basis for believing that the company is financially distressed;
2. No reasonable prospect for rescuing the company;
3. The company has failed to satisfy the procedural requirements set out in
section 21, e.g. no notice given;
4. The business rescue administrator is not qualified to act as such. Section 30 of
the Act provides that a person may be appointed as a business rescue admin if

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 that person qualifies to be appointed as a receiver or meets other qualification.
Accreditation is valid for 1 year. The regulations under the corporate insolvency
act provides for qualifications.
- Section 23 provides another means by which BRP may be commenced.
Through a court process. An affected person may apply to court for an order to
place a company under supervision and begin BRP. The regulations will state
what is the method of commencement. The applicant shall serve a copy on the
company, the registrar and the official receiver – the Administrator General and
notify each affected person of the application in the prescribed manner.
- If the court is satisfied, they make an order to put the company under
supervision. Section 23(4) conditions:
1. Financially distressed,
2. failed to pay an amount under obligation in relation to employment matters;
3. if it is equitable that a company be placed under supervision. This is a wide
power which may go beyond the restrictions placed under sec 21.
- In all cases the prospects of turning around the company must be present.
- Section 23(7) creates a problem: commencement of BRP as provided for in this
statute whether by special resolution or by court is something premised on the
SA Insolvency Act. This provision has been found to be a big problem in SA and
there is talk of having an amendment to be made. Section 23(7) reads “if
liquidation proceedings have been commenced by or against the company at the
time an application (by an affected person) is made as provided in (1), the
liquidation proceedings shall be suspended. Until then, the court as shall
adjudicate upon that application…if there are proceedings going on in court to
liquidate the company, the moment an affected person files an application,
liquidation proceedings shall be suspended. The problem that has been found is
that the Act does not define the term liquidation proceedings.

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 - Does this refer only to court proceedings before the final order of liquidation is
given? At what point shall you say that these are just liquidation proceedings and
liquidation itself has not commenced? Liquidation in South Africa is being
frustrated left, right and centre. This goes against the spirit of insolvency law.
Liquidation entails that the company has no prospects of rescue, it is a terminal
stage. If it has commenced why are you stopping it?
- The Court in South Africa said “it is in my view remarkable that the legislature
did not refer to the company already under liquidation. Although there is no
definition of what exactly liquidation entails, the legislature does not include a
liquidated company. In attempting to determine what the legislature intended
rules of interpretation are clear by considering the use of the plain
language…legislature would have stated clearly if that was the intention that
business rescue is possible even after the liquidation order.”
- If there are no problems with commencement, automatically the fencing off
starts. This is known as a moratorium, a period within which creditors lose
their right of enforcement against the company.
- Under Section 25 – there can be no legal proceedings against the company
during this period except with the written consent of the business rescue
administrator or with leave of court. This moratorium does not extend to criminal
proceedings against directors or officers of the company. Any proceedings
against the company for purposes of setting off what the company had claimed
in another proceeding, e.g. against a third party are not prohibited under a
moratorium.
- The procedures require that the Administrator must from time to time call for
meetings, submit a report and a plan which must be approved by the creditors.
The moratorium will go on for the period that the creditors agree with the
Administrator.

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 - Section 36 provides that the creditors will participate in the business rescue
plan by way of voting. The creditors would have concerted to the duration of the
proceedings. Section 38 provides for participation by the shareholders who will
vote for the approval of that plan.
- The insolvency practitioner has to make periodic reports to these interested
parties so they will be very much a part of the proceedings.
- The Business Rescue Plan – section 44 shows what processes it has to be
put through: a vote by the creditors and shareholders; pursuant to section 44 if
the plan is rejected by these two parties, the options available are
i. administrator may seek approval of the meeting that he produces a revised
plan or;
ii. he may inform the meeting that the company shall apply to court to set aside
the results of the vote on the grounds that it was inappropriate. H will
probably be arguing that this is the best plan that can be crafted and will go
to court to prove so
iii. section 44/2 provides that if the administrator does not do either of these
two things, an affected person can call for a vote of approval from the
holders requiring the administrator to be given an opportunity to submit a
revised plan;
iv. any affected person can also inform the meeting that that affected person will
be applying to court to set aside the results of the vote on the grounds that it
was inappropriate.

2. RECEIVERSHIP.

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 - What is expected of a student here is to show an understanding for the reform
that has taken place, the lecturer makes little or no reference to the Act at the
moment.

- DEFINITION OF RECEIVERSHIP, APPOINTMENT, DUTIES AND

RESPONSIBILITIES AND ITS IMPLICATIONS

- The concept of debenture that is a debenture holder has a power to enforce his
debt if the company is not winding up and has failed to service a debenture. This
is done through the appointment of a Receiver.

- Receivership is a situation where a secured creditor enforces his security by

appointing an insolvency practitioner called a receiver whose general duty is to
take possession of the subject matter (the assets secured) in dispute and make
the property produce or generate revenue for purposes of satisfying the debt.
The receiver may as well realize the asset (sell the asset). There are two types of
receivers provided for in the act :
- A receiver and manager. This type of a receiver is one who has power to
oversee the business or the undertaking: whilst
- An Ordinary receiver simply called receiver simply takes possession of the
assets in question. This is to explain the procedures that are contained and not
go into details of practice

- A receiver is defined in section 2 of the corporate Insolvency Act No. 9 of 2017

(hereinafter called the Insolvency act) for purposes of this discussion that :

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 “ receiver ” means a disinterested individual appointed as a receiver,
receiver manager or judgment receiver, in accordance with this Act, for a
corporate or other person, for the protection or collection of property that
is the subject of diverse claims, is litigated or has been litigated or income
arising from the property of the corporate or other person, and includes
the Official Receiver;”

- From the foregoing it appears that a receiver is an independent person or

secured creditor appointed for the purpose of realizing the Assets in order to
make good the creditor of the company by:

i. Sale of the assets

ii. Take possession of property

APPOINTMENT

- A receiver is appointed by the following:

1. The Court pursuant to section 4 and 12 of the Insolvency Act.

2. Under a deed of appointment pursuant to section 4(3) and 13 of the
Insolvency act.

- It must be noted that before a receiver is appointed he SHALL be required to

meet certain qualifications as provided by section 9 of the Act that:

“ section 9. (1) An individual is eligible for appointment as a receiver if

that individual has been practicing as a chartered accountant or a legal

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 practitioner for a period of at least seven years and is accredited by the
Registrar as an insolvency practitioner.
(2) An individual who wishes to perform the function of a receiver shall
apply for accreditation in the prescribed manner and form and pay the
prescribed fee.
(3) An individual shall not be appointed, act or continue to act as a
receiver of the property or undertaking of a company if the individual is—
(a) by reason of a mental disability incapable of performing the functions;
(b) prohibited or disqualified from so acting by any order of a court of
competent jurisdiction;
(c) a mortgagee or chargee of the company;
(d) an undischarged bankrupt;
(e) a person who is, or has been within the previous two years, a director
or officer of the company or any related body corporate, except with the
leave of the court;
(f) a trustee under any trust deed for the benefit of debenture holders of
the company, except with the leave of the court;
(g) a person who has been convicted, within the previous five years, of an
offence involving fraud or dishonesty; or
(h) a person who has been removed, within the previous five years, from
an office of trust by order of a court of competent jurisdiction.
(4) Accreditation as a receiver is valid for a period of one year from the
date of accreditation and is subject to renewal in the prescribed manner
and form and upon payment of the prescribed fees.
(5) Accreditation that is not renewed in accordance with subsection (4) is
void.
(6) A person who acts or continues to act as a receiver, contrary to this
Act, commits an offence and is liable, on conviction, to a fine not

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 exceeding two hundred thousand penalty units or to imprisonment for a
period not exceeding two years, or to both.
The following are some of the requirement for one to act as a receiver under a deed or
by court:
1. Must lodge a Notice or form 39 within 14 days after obtaing the order
with the registrar this is done pursuant to section 5 (1) and (2) of the
Act.
2. The registrar SHALL cause the said notice to be published in the
Government Gazette

- In the Case of ZAMBEZI PORTLAND CEMENT LTD V STANBIC BANK LTD

2010 ZR 499 a receiver has been said to have DUAL roles or DUTIES are owned
by two parties. This Comes from the fact that a receiver appointed by creditor is
an agent for the company, But a receiver appointed by the Court is an officer of
the Court.

- Prior to the New Corporate Insolvency Act, there was a response to the many
complaints which were made with regards to the companies act 388, this new
Act was in an effort to minimize complaints of charging fees and the
qualifications and limitation and accreditation and built up on the Amendment to
Companies Act of 2011.

DUTIES AND RESPONSIBILITIES

There are many duties and responsibilities that a Receiver may have and these include
the following;
1. SHALL within 3 month of appointment prepare and submit a statement of the
affairs of the company pursuant to section 6

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 2. SHALL act in accordance with the Directions and instruction of the Court as
provided in section 12
3. SHALL, subject to section 14 be considered as a agent and officer of the
company

4. SHALL manage the assets before disposal as provided in section 16 of the

Act

5. SHALL as soon as is practical make a report in writing to the Registrar or

official receiver as provided by section 19 of the act.

A Receiver may leave office or the office of a receiver may become Vacant
pursuant to section 20 that :

“20. (1) The office of a receiver becomes vacant where the receiver—
(a) dies;
(b) becomes ineligible for appointment as specified in section 9;
(c) is removed by order of the Court; or
(d) is removed from the Register of Insolvency Practitioners in accordance
with section 143.
(2) A receiver may resign from office by giving one month’s notice, in
writing, to the appointing authority or the Court, of the receiver’s intention
to resign.
(3) A receiver may be removed by the Court, on application to the Court
by the holder of a charge by virtue of which the receiver was appointed,
or by revocation of the deed of appointment.

(4) Where a receiver vacates office—

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 (a) the receiver’s remuneration and any expenses properly incurred by the
receiver; and

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 (b) any indemnity to which the receiver is entitled out of the property of
the company; shall be paid out of the property of the company which is
subject to a charge and such remuneration shall have priority in
accordance with this Act as a secured creditor.
(5) Where a receiver ceases to be receiver or is removed by the Court, the
holder of the charge by virtue of which the receiver was appointed shall,
within fourteen days of the cessation of the receivership or removal of the
receiver, notify the Registrar and Official Receiver in the prescribed form
and manner of the cessation or removal and the Registrar shall enter the
notice in the Register of Receivers.
(6) If, by the expiry of a period of thirty days following the removal of a
receiver or the cessation of a receivership and no other receiver is
appointed, the deed by virtue of which the receiver was appointed shall
cease to attach to the property.
(7) A person who contravenes this section commits an offence and is
liable, upon conviction, to a fine not exceeding one hundred thousand
penalty units or to imprisonment for a period not exceeding one year, or
to both.”

SHORT COMINGS WITH RECEIVERSHIP

The major short coming is that:

i. It is not a Business Recue mechanism because the law does not expressly
provides that a Receiver has a duty to ensure that the Business survives, this
makes it a weak mechanism

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 ii. Receivership does not guarantee that the company will survive, to the Extent
that He/she will just act to the best interest of the creditors

iii. In the case of MAGNUM ZAMBIA LTD V BASIT QUADN AND

GRNDSLAY BANK(z) LTD 1955 ZR, the observation of the Court are that:

“a Receiver cannot be conceived to be a business rescue …………………but

where it is trite law . a receiver cannot be seen to be acting in the best
interest of the company.

- Even if the Receiver appointed by the Court although is the officer of the court,
the act does not expressly require the court to order the receiver to propose
business rescue strategy even when such a receiver is biased towards the
interests of the creditor or stakeholders.”

3. SCHEMES OF ARRANGEMENT SECTION 48 OF CORPORATE

INSOVENCY ACT

- A scheme of arrangement is a procedure by which the creditors may waive some

of their rights in order to give the company that is in financial distress some
breathing space.

- A scheme of arrangements can also be extended to shareholders to give

breathing space to the company.

Specific examples:

Debenture holders giving an extension of time for repayment of their debts, or

accepting cash payment less than the face value of their debentures or giving up
their security in whole or in part or even converting their debt into shares –

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 these are examples of schemes of arrangement. This process is initiated by the
company itself or a member or members by calling for a meeting of the affected
creditors and subjecting the resolution of the creditors to court approval.

- -In a nutshell a scheme of arrangement is an arrangement whereby the creditors

or shareholders realise the company is undergoing financial distress, they hold a
meeting pass a resolution and get court approval and once in place it’s binding
on the creditors that none of them will enforce their security. The current
Corporate Insolvency Act has transplanted the provisions of CAP 388 and
included this mechanism

TERMINAL PROCEEDINGS FOR COMPANIES

These are proceedings available to bring the lifespan of a company to an end.

1. Deregistration by the Registrar – Part 15 of the Act. The exercise of the

power by a registrar to deregister should be distinguished from the company
being wound up. Deregistration is a process by which the registrar strikes the
name of a company off the register. It is different from winding up which is a
process by which a company’s assets are realised, sold, credit has been paid,
and the remainder of the assets distributed among the members, i.e. a
liquidation process.
Under what circumstances can a company be deregistered? Section 317
provides that the register may deregister where:
a) A company has not filed annual returns for two consecutive years;
b) The court on an application by a registrar issues an order that the company
be deregistered;
c) The registrar has reasonable cause to believe that company is a dormant
company - section 3 defines a dormant company – a company which is not

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 carrying on business or is not in operation from the date of incorporation or
for a prescribed period.27 The idea is that you do not want to have companies
remaining on the register that are not in operation (how about charging them
for maintaining the register?) – shelf companies are not recognised in this
jurisdiction.
d) The company itself applies on grounds that it is dormant
Contrary to cap 388, the procedure for deregistration has been abridged. All
the registrar needs to do is give notice in a prescribed manner and give
reasons for deregistration, requiring the company to show cause as to why is
should not be deregistered. If the company does not take remedial measures
within 30 days, the registrar may deregister the company. Need to publish
the notice of deregistration through the government gazette or a widely
circulated newspaper or other media.

What is the effect of deregistration?

Deregistration renders the company dysfunctional – loses capacity to contract.

Section 317/8 provides that a company that has been deregistered shall not
from the date it receives notice of deregistration:

i. Enter into any form of contract in relation to its business

ii. Renew or vary a contract relating to the affairs of the company

Section 317/9 states that the Corporate Insolvency Act shall apply to a
company which has been deregistered in accordance with sub section 1/a and b,
i.e. on deregistered because of failure to file annual returns or as a result of a
court order. For a dormant company, there is no need to invoke provisions of the

27
Time period to be considered dormant to be stipulated in the Regulations.

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 Insolvency Act because it has not been in operation therefore by implication has
no debts.

4. If the Registrar strikes a company off the register, it is still alive except
it loses contractual capacity, doing so is an offence. The lifespan of
any company ends through winding up processes.

WINDING UP OF COMPANIES

A non-dormant company has to go through the processes of winding up pursuant to the

Insolvency Act. It is the process by which a liquidator is appointed to realise the debts

1. Voluntary winding up by the members

A member’s voluntary winding up is initiated when the members of the company adopt
a special resolution for the voluntary winding up of the company. It should be noted
that a VWU is only possible where the company is solvent – the assets of the company
exceed its liabilities. Therefore, the Insolvency Act requires that the directors must sign
a Statutory Declaration of Solvency in writing pursuant to section 91 of the Corporate
Insolvency Act (CIA) declaring that they have carried out an enquiry into the affairs of
the company and that they are satisfied that the company meets the solvency test28.

If the company is not solvent, then VWU is not possible because you need to be able to
pay the debts. The idea is the protection of creditors otherwise the corporate vehicle
would be abused. Failure to pass the solvency test means that the winding up
procedure becomes the creditor’s voluntary winding up.

28
Means a test to determine that:
a) A company is able to pay its debts as they become due during the course of business
b) The value of its assets is greater than the value of its liabilities including contingent liabilities
(those likely to come up)

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2. Creditors Voluntary Winding Up

It is initiated when the members adopt a special resolution for VWU without a Statutory
Declaration of Solvency by the Company’s directors. A Creditor’s VWU is invoked in
relation to insolvent companies. It should be noted that the involvement of court is not
required in initiating this process.

3. Compulsory Winding Up by the Courts

The court may issue an order that company winds up on the application of the following
persons:

i. The registrar or the official receiver

ii. The company itself
iii. A creditor
iv. A member
v. A person who is a personal representative of a deceased member29
vi. The liquidator if of the company, if the company is in liquidation initiated by way
of member’s VWU
vii. The trustee in the bankruptcy of a member [under the Bankruptcy Act if you are
declared bankrupt you cease to act on your own but by way of a trustee]

It should be noted that the grounds upon which the court may compulsorily wind up a
company are limited. They are specified in section 57 which provides:

a) The company has resolved by special resolution that the court wind up the
company;
b) On the grounds that the court carries out an enquiry and is of the view that the
company is unable to pay its debts;

29
When a member dies the shares automatically by operation of law transmit to the PR giving them the
power

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 c) If the period fixed for the duration of the company by the articles expires or an
event occurs of which the articles provide that the company is to be dissolved;
d) If the number of members is reduced to below two;
e) If the company was formed for an unlawful purpose;
f) ? what is f?
g) If in the opinion of the court it is just and equitable that the company should be
wound up – this is broad, what is ‘just and equitable’?
In Ibrahim v West Bourne Galleries Limited 1973 AC 36030 . The House of
Lords stated that “there has been a tendency to create categories or headings
under which cases must be brought if the clause is to apply. This is wrong.
Illustrations may be used but, general ways should remain general and not be
reduced to the sum of particular instances. In companies that are quasi-
partnerships, the question should always be ‘would it be unjust and inequitable
for the petitioner to be forced to remain a member of the company?’”.

In a nutshell, the principles established in Ibrahim case are that

a) The just and equitable clause to wind up a company may apply even though
the respondents acted within their strict legal rights31
b) The just and equitable clause32 may apply when the complaint relates to
behaviour that is contrary to the settled and accepted course of conduct
between parties whether or not, reinforced by contract, or by the articles.

30
Company incorporated by two people. One of the shareholders introduced his son into the company.
They are now able to pass resolutions which are to the detriment of the other shareholder. They passed
a resolution to remove him as Director, taking over the day to day management of the company. This
was within their strict legal rights as it was done according to the articles. This shareholder then
petitioned the court to wind up the company on the basis that it is just and equitable to do this. It sets a
principle which is applicable in interpreting this provision.
31
Would it be unjust and inequitable to refuse to dissolve this company?
32
You will be given a scenario in the exam, must show how the just and equitable clause can apply. So
must know the principles and apply them. important thing is do you understand how the just and
equitable clause may apply

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Other Circumstances /Examples

1. The just and equitable close to wind up accompany will be applicable

where its substratum or the principle object of the company has failed.
This principle will normally apply where a company was formulated to pursue a
particular adventure. Re Germany Coffee Company 1882 20 CHD 169 – the
only object of the company was to acquire and work a patent, but they failed to
acquire the patent33. E.g. also, If the object of the company is to work a mine
and then it is found that its not a mine because there are no mineral deposits. 34
See also Re Kitson and Company Limited 1946 1 All ER 435.
2. It is just and equitable to wind up the company where there is a complete
deadlock in management. In most cases, the courts will hold that there is no
deadlock where there exists sum legal means to get decisions made using some
procedure under either the articles or the general law.35

33
This company had what they thought was an invention which needed to be protected as a patent, and
then begin to produce using it or giving licenses. The authorities refused to give the patent saying the
idea was not novel, so the substratum failed. This was decided when there was strict application of the
objects clause
34
Application of the just and equitable clause today is wider, as the company may have several objects
so that the company can shift from one adventure to another. The just and equitable clause will thus only
apply where it is clear that the company was formed for just this particular purpose.

35
E.g. you may have a company where some of the shareholders are directors and some are just
shareholders. For some years the shareholders who are also directors have not been keeping proper
records or allowing the auditors to have access for the records, and general meetings don’t take place.
Ordinarily you would expect that the court wind it up on the basis that it is just and equitable to do so.
But here, we are being told that where other procedures exist, then it should not be wound up. There is
a procedure in the Companies Act to appeal to the Registrar to force them to convene a meeting and has
the power to direct that should quorum not be formed, whoever shall attend the meeting will make a
decision that shall bind all other shareholders.

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 3. It is just and equitable to wind up a company where there is a justifiable lack of
confidence in the management of the affairs of the company.
The case of Loch v John Blackwood Limited 1924 AC 783 – illustrates the
circumstance under which you might say that there is a genuine lack of
confidence. There was a deceased person who through a will/ trust deed left a
company to be managed on behalf of beneficiaries and this person stop giving
reports. He was the only person who was knowledgeable to run it, so it could not
go on.

What are the effects of winding up proceedings on the company?

When a petition has been received by a court for the winding up of a company, and the
proceedings have commenced:

1. section 62 prohibits the disposition or selling of any of the assets of the

Company including things in action.36 Sale of shares – prohibits new members
and surrender of shares when winding up proceedings have begun – this is for
creditor protection.
2. Section 63 says an attachment, sequestration, distress processes, execution put
in place on assets of a company after winding up processes have begun is void.
3. Section 66 provides that no action against the company, except with leave of
court can be commenced. The court can refuse or accept that you commence
such action.
4. Section 67 provides for appointment of liquidator by court – the court my either
appoint an individual as provisional liquidator (interim – to give chance to the
creditors or members to appoint a substantive liquidator) or as liquidator. If the
court has not appointed either a provisional/liquidator, then the official receiver
is automatically the liquidator.

36
Those issues which can create some proprietary rights for a person. E.g. shares, a debt owed by
another person can create proprietary rights for a third party. These are

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 Powers of the liquidator are contained in section 74 and the powers are
wide:
a) To pay any class of creditors in full subject to priority ranking of the Act
b) Make any compromise or arrangements with the creditors (may accept less
than full amount that they are owed or waive their interests if any attached to
a debt)
c) Dispose or the assets by public tender or in the most transparent manner, etc
- The liquidator does not operate in isolation but has a responsibility to give
account to the court as an officer of the court. He also has to work according to
the comments given to him by the committee of inspection provided for in
section 77 consisting of creditors or members of the company and their agents.
This is the committee which will be taking care of the interests of the members
and creditors, appointing a few amongst themselves. He has to present periodic
reports to them.

GENERAL SUMMARY EXAM TIPS ON THE NEW COMPANIES ACT AND

CORPORATE INSOVENCY ACT

1. Companies Act of 2017

NOTE the Following:

1. The new features in the incorporation of companies. A company

must provide articles or association or a statement that they have
adopted the articles. Makes it an obligation for a company to state that
they are adopting standard articles if they are.

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 2. Beneficial ownership – the promoters must state if the people who
are named in the application are not the beneficial owners. Come as a
result of universal requirement for transparency to fight money
laundering and terrorist financing. Failure to adhere is a criminal
offence.
3. The Act also with reference to Directors duties now tries at codifying
the traditional directors duties which were being borrowed from
common law. Note that the provision relating to this is incomplete, so
must be read with the common law position. This takes centre stage in
the exam because these are the main drivers of the company.
4. The law relating to articles of association is also NB because it has
many implications in law. It’s the constitution of the company, but
apart from that is also a statutory contract. Revise the law relating to
AA and its implications.
5. All the questions are situational questions except part of the
compulsory question which attempts to focus more on procedure.
Almost all the questions have a number of issues that need to be
identified and discussed.
6. The law relating to share capital, shareholding, variation of share and
class rights, rights of shareholders, are you able to identify a situation
and know that this constitutes a variation of class rights? Are you
able to identify as many issues as possible in a given scenario?
Did the directors act without authority or exceed their authority? Was
the right procedure followed in amending the articles? Etc
7. The public issue of shares’ provisions are almost identical to cap 388
and are NB to understand.
8. Formation of companies – Cap 388 suggested that a company is
formed when the promoters file with the registrar – part 13 concept of

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 amalgamation in Act No 10 of 2017 however is couched in a different
way.

Two ways for amalgamation:

I. One gets swallowed by another and becomes part of that company. Registrar to
issue certificate of amalgamation
II. Where the two merge and form a different company, should issue certificate of
incorporation

Corporate Insolvency Act No. 9 of 2017

- Introduction of Business Rescue Mechanism – new concept so will

definitely be in the exam. NB to understand procedure in terms of its meaning
and the procedures involved in its commencement, moratorium, duration, legal
implications for stakeholders, directors powers, appointment of administrator…
- Schemes of arrangements and compromise, receivership also need to be
understood and know how they relate with the new concept of administration.
- Winding up, compulsory winding up, circumstances under which the court
may wind up, requirements for voluntary winding up.

Not expected to go into greater detail as regards distribution of assets, periodic reports
of the liquidator.

Registration of charges

- Section 238 of Companies Act of 2017 – registration of charges by

companies – the practical implications as where explained was that the way sec
99 of cap 388 had been couched was need for dual registration.

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 - Section 238 removes requirement for registration under the Act if the asset
being dealt with is subject to the Trade Charges Act or the Movable Property
Security Interests Act. Note that there is a gap in section 238 – no specific
provision for implications for failure to register a charge. This provision is silent.37
For now, we rely on the gen provisions for sanctioning non-compliance with the
act but this is still not sufficient.

Is Sec 138 an attempt to codify the position in Foss v Harbottle?

Mr Bwembya does not think that rules in foss v Harbottle have become irrelevant by
virtue of sec 138. Where there is a gap in the Act, you can refer to common law.

AUGUST 2018 PAPER FINAL EXAM:

Answer Guidelines

(Questions are not reproduced here- Find the Past Paper)

Question 1:

− This question required the candidate to recall firstly the checklist as it existed in CAP

388 and what new features have been introduced. Question also required explaining

whether they think the new inclusions in the checklist would be efficacious in practice.

37
Need for amendment of statute

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− One of the major weaknesses of failure to score high marks was incomplete

answering the question whereas one could identify the new features they failed to

explain whether the initiatives would achieve new purpose and to underline the

underlying policy consideration.

− Section 12 (1): the way the section is couched… “subject to… for a lawful purpose”

For a long time every time when we read Section 6 that had a checklist any persons

can incorporate a company for any purpose. Can you do it for an illegal purpose? The

policy consideration was that let us make it clear that companies can only be

incorporated for lawful purposes. This is a new inclusion for purposes of clarity to

exclude illegal activities to constitute objects for which companies can be incorporated.

− Section 12(3) CA: it was never a requirement that applicants or subscribers must

give a statement to give application that they have adopted standard articles – it was

by default. When companies did not submit any articles automatically standard articles

apply and application was not needed to accompany a statement that a company has

adopted standard articles. Now it is a new requirement that there must be a statement

that you have adopted standard articles and this statement the way it will be done is

that it has created a standard form where statement has been made that a company

has adopted them in full etc. Section 12 makes it very clear that you are adopting

standard articles or bringing your own articles since now you have to expressly state

the position unlike CAP 388 where it was a default position. This was problematic in

practice because a company may have submitted their own articles and where they go

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missing any person dealing with the case will assume that they adopted standard

articles. The likelihood to miss the point that they adopt standard articles is minimal

they could disappear and no trace that they filed articles.

− Furthermore, in Section 12(3)(e): this is the new inclusion which was never a

requirement and what is the foundation for this? Why is it required that we must know

beneficial owners? The persons who exercise real control. It is now mandatory that they

must be named and failure to name them constitutes a crime. This statement is a

declaration that a natural person is a beneficial owner The policy considerations is part

of the transparency requirements as a way of fighting money laundering, financing for

terrorism because it was believed that people involved in criminal activities use

figureheads to wash dirt money through normal business. Read provisions which

deals with beneficial ownership generally in the Act Section 124 also read the

general offences in the Act there is a general penalty for giving false

information to the Registrar and giving false information to a public officer

generally is an offence.

Therefore, how efficacious may this be: it is quite difficulty because, does the Registrar

have time to follow up the declarations to know that they are indeed genuine. It is

difficult to know whether it will achieve its intended purpose and whether people are

compelled to speak the truth. We do not know that it will achieve its intended purpose.

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− Lastly, in the checklist Section 12(9): this is the new inclusion Section 6 of CAP

388 never had anything to prohibit any type of company, never restricted any activities

companies incorporated under that statute to engage in now a prohibition the

incorporation of companies for faith based activities. The consideration being that there

has been a growing trend of churches in which the activities of them were termed to be

taking advantage of their followers and it has been suggested that most churches

whose leaders are found wanting are the ones formed under companies and because of

no regulatory framework under the Act that churches formed under Societies Act

because the Registrar of Society including powers to de-register companies if think the

activities are undesirable whilst Registrar of companies had no power to wind up the

company simply because in his opinion it is desirable and there was an outcry. The

framers or policy makers thought it wise to include. Whether this will achieve the

intended purpose of minimising misconduct by church leaders is not known.

Question 1 (b): Conversion

− All that was needed to do is go to the provisions relating to conversion of the

company and the change of name and identify what is thought are similarities and

differences

− In all manner of conversions what is the starting point if a company wants to

convert?

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1. Members must first convene a meeting and pass a Special Resolution

2. The same is true when dealing with change of name. Both procedures are begun

by Special Resolution of the members

− Effect of name change and conversion

1. In both the liabilities obligations and rights of the company do not change simply

because you have converted from one form to another or changed the company name.

In both processes the effect is the same to maintain the status quo in so far

as rights and obligations are concerned

− The processes are however distinguishable

1. Name change simply affects the name whereas

2. Conversion of a company from one form to another is more likely to affect the status

of members (converting from a private company limited by shares to company limited

by guarantee the status of members changes). It also changes the company structure

whereas with a name change nothing happens to the company structure. Even the

structure of the capital

− There are differences of what to file: go to sections and state e.g file with Registrar

such documentation. Numerous examples you can give.

− Compulsory question seeks to examine a practical issue discussed in this exam

similarly to question one the compulsory question is very practical

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How to tackle situational questions

Question 3 (2018) final

− Do not be intimidated by the length of the question because usually the longer the

question the simpler it is.

− Company has two types of shares Ordinary and preference shares.

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Identify the area being examined on.

Clearly this question is about variation of class rights:- there can be class
rights even if its only one individual who owns that type of right or share.
This is a class and the procedure for variation of class rights must apply if there is to do
anything to the rights attaching to the individual

What are the issues arising from this scenario?

The questions to be answered are two simple ones

1. Does the conversion or subdivision of ordinary shares into shares of N10 from K1
each amount to a variation of class rights in so far as Andrew is concerned or whether
the conversion of these shares by shareholders amount to variation of Andrew’s class
rights

− If you are to vary class rights the holders of shares in that class must consent ALL
OF THEM. If articles prohibit, 75% if articles permit. Andrew does not hold any
ordinary shares so shares converted. Each share carries full voting rights as told in the
question. Each share carry one vote if they were K1 each now N10 now holds 10 shares
and now has 10 votes. Does this conversion amount to a variation of Andrew’s
class rights?

2. Appointing a director, does it also amount to a variation?

Once you have identified the issues go to the law

− Define a variation of class rights: a variation of class rights in accordance with

the Company’s Act Section 143(1) – abrogation of any rights attached to a particular
class and we know also from the case that variation of class rights was further clarified

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Greenhalgh v Arderne Cinemas ltd spoke about abrogation occurs as a result of
what is being done directly it’s not a variation if you are adversely affected but your
being affected is a consequence of what is happening to members of another class.

− This is a good example of ordinary shares divided into 10N each and this dilutes
Andrew’s voting power. An abrogation of his rights occurring as a consequence of what
is occurring elsewhere. In applying the law it appears it’s not a variation of class rights
he is affected. Variation is where the activity involved has been applying directly on
your rights as members of a class. If what has resulted into part of you is as a result of
what has happened in a different class and yours is just consequential it’s not a
variation. Follow procedure contained in Section 143.

- Altering the articles to remove Andrew’s right to appoint a director – this is in

sync with the definition. This company just passed a Special Resolution. This is
not how you vary class rights

- Variation can be done in 2 methods if articles prohibit by receiving consent of all

members in the class. This is what Section 143(3) says. If the articles forbid
you can only vary rights attached to the class with consent of all members of the
class we are not told that articles forbid connect what would apply is Section
143(4): if articles do not forbid variation what is required the rights will be valid.
What we need 75% consent for the members in the affected class? In the
queston we are told the shareholders voted and passed two resolutions. There
must be 75% consent of the holders since Andrew is in this class. Andrew does
not have a good case because it is in compliance with provisions of the section
but does he have a right of challenging this in court? Section 143(5): - he does
not have the right to go to court he has 5% not 15% as provided by statute,
thus, he has no locus standi

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Read notes carefully and be calm. Read all but in-depth approach to issues discussed
here. Read more on your own.

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ZIALE IS SIMPLE!!!!

ALL THE BEST DURING YOUR STAY AT ZIALE AND GOD RICHLY
BLESS YOU AS YOU STUDY THIS RICH SUPPLEMENTARY
MATERIAL.

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