business law2
TRANSCRIPT
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COURSE OUTLINE – BUSINESS LAW 2 BM 203 – LECTURER T.
GWATIRISA and F GUNDU
1) CONCEPT OF A COMPANY
Historical development of Company Law in Zimbabwe. Types of Companies
Memorandum of Association, Articles of Association, What is a Company Limited
by shares. What is a company Limited by guarantee. Acquisition of Legal
Personality (Salomon’s Case), Piercing the Corporate Veil, Doctrine of Disclosure.
2) CAPACITY & REPRESENTATION OF THE COMPANY
Pre-incorporation Contracts, Ultra-Vires Doctrine, Statutory Arrangement,
Constructive Notice, Turquand Rule.
3) SHARE CAPITAL AND CLASSIFICATION OF SHARES
What is a share, Types of Shares, Debentures, Reduction of Share capital , Allotment
and issue of shares, transfer of shares and security by means of Shares-Prospectus
and offers to the public, Maintenance of share capital.
4) MEETINGS
Kinds of meetings, Annual General meeting, Notice of meeting, Proceedings at
meeting, voting rights, resolutions, minutes and reports of meetings.
5) DIRECTORS AND AUDITORS
Appointment, Rights And Duties, Powers, Removal from office.
6) MAJORITY RULE AND MINORITY INTEREST
Rule in Foss V Harbottle, Derivative Action, Statutory Protection of Minority
Interests.
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7) JUDICIAL MANAGEMENT
Circumstances, Provisional Judicial Mnagement Order, Final Order, Appointment
and Duties of Judicial Manager, Meetings, Remuneration of Judicial Manager,
Cancellation of Judicial Management Order.
8) WINDING UP AND LIQUIDATION
Voluntary Liquidation, Compulsory Liquidation, Appointment of Liquidator, claims,
Dissolution of Deregistration.
9) READING MATERIAL
COMPANY LAW IN ZIMBABWE – NKALA & NYAPADI
COMPANY LAW THROUGH THE CASES – HAHLO
CORPORATE LAW:CILLERS,BENADE AND OTHERS
TETT AND CHADWICK-ZIMBABWEAN COMPANY LAW
COMPANIES ACT:24:03
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HISTORICAL BACKGROUND OF COMPANY LAW IN ZIMABABWE
• Company law in Zimbabwe is largely governed by the Company Act [ Chapter
24:03] which sterms from the Company’s Act Chapter 190 of 1952 and the
numerous pieces of subsidiary legislation that was made thereunder.
• Company Act [Chapter 190 ] was passed on 22 November 1951 as act 47 of that
year and it came into effect on 1 April 1952.
• Prior to the pasing of and enforcement of the Company Act in 1952, Company
law in the Colony of Southern Rhodesia was based on the ordinance.
• Furtherback, Company law in the Colony of Cape of Good Hope governed the
laws of Southern Rhodesia following the proclaimation issued by the British high
commissioner in South Africa on 10 June 1891.
• It should be noted that the company ordinance of 1895 and the law of the colony
of Good Hpoe were derived from English law with the former being based on the
English company Act of 1862. When the Act was passed therefore company law
as contained in the companies ordinance was in practical terms 90 years old, that
is, 1862 to 1952.
• Thus the Act was only indegenous by virtue of having been passed by the local
legislative assembly.
• In essence it was merely a replica of the English companies Act (1948) with some
provision being derived from South African Companies legislation which was
mainly based on English Company law.
• When introducing the 1951 companies bill the minister of justice emphasised on
the immediate need to have law that was consistent and uniform to that of other
parts of the world so as to derive value from judicial interpretations from other
countries which inturn could then be applied to the Souhern Rhodesia’s
legislation.
• The Minister implored on other members of the house to adopt the phrasiology
used in English laweven where there might have been imperfections so as 6to
avoid difficulties that could flow from making alterations.
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• Furthermore a Drafting Commission headed by attorneys of the High court
namely [Sir Ernest Guest and W. A. Godlonton] and Mr Underwood an
accountant had in the process of drawing up the bill examined, in addition to the
company law statutes referred in reports of the Cohen Commission which had
examined the whole field of company law legislation in England and the Millin
Commission which had done a similar exercise in South Africa.
- Cohen Commission – examined company law in England.
- Millin Commission – examined company law in South Africa.
DEFINITION OF A COMPANY
• According to Buckley as quoted in Tett and Chadwick (1896) the word company
has no strict technical meaning it basically envisages two ideas – namely:
- that the association is of persons so numerou as not be aptly described as a
firm.
- The consent of all other members is not required to the transfer of a
member’s interest.
• A company is a registered corporation with limited liability formed with the
intention of benefiting its members.
• Company law may be defined as that part of law that sets down (the conditions
upon which personified aggregations of capital may operate in our society.
• Zimbabwean Company Law is codified and governed by the Companies Act and
the regulations. It is also governed by the various judicial decisions not only from
Zimbabwe but from England and Souyth Africa as well.
• The main reason for forming a company is essentially to provide the means of
raising large sums of money from a multitude of investors [that is shareholders]
• Applcation of these large sums of money is left in the hands of a few managing
directors [ who are normally shareholders themselves].
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• When shareholders invest their money in shares they are guarding against peronal
liability. In theory they are not interested in the day to day running of the
company but in the return of investment, thatis, divident declared.
TYPES OF COMPANIES / ASSOCIATIONS
When a person decides to form a company he must choose between the following :
- private company
- public company
- company limited by guarantee
- co-operative companies.
PRIVATE COMPANY
• This type of a company is suitable for establishing a small business with few
shareholders wo usually constitute a family business.
• Most members are actively involved in the management of the company and
merely as an investment but also as a source of livelihood.
• Private companies are usually far more numerous than public companies although
they usually have a smaller total paid up capital.
• Decision on whether to form a private company or a public company depends on
the amount and source of capital to be raised. For example if a small share such as
$ 100 000.00 is required and is to be raised from subscriptions by members of o
family or specified families or a small group of families, then such a company is
likely to be a private company.
• Conversely if a large share capital is to be raised through the issue of shares to the
public then the company will be a limited company.
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• There are no statutory limitations on the size of the share capital of private
companies, the limittion is, however, on the size of membership.
Please read the following:
Section 33 – Defination of private company
Section 34 – Consequencies of default in complying with conditions for a private
company.
Section 35 – Statement in lieu of prospectus on ceasing to be a private company.
Section 114 – Private company may commence business as soon as it is registered
Section 123(3) Annual returns made by company.
Section 124(1) Does not have to hold statutory meetings.
• A private company must therefore comply with these provisions along with
certain advantages and exemptions which private companies enjoy over public
companies, for example.
• The right to commence business as soon as it is registered whereas a public
company canno do so unless all provisions of the Act in respect of starting a
company has been complied with and registrar has certified that the company is
entitled to start business.
• Private companies have the right to appoint directors of its own choice, even
those who do not hold any shares in the company.
• A private company does not have to appoint an auditor if the number of members
does not exceed 10 and none of the members is a public company or a subsidiary
of a public company which itself has appointed an auditor.
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PUBLIC COMPANY
According to section 2 (the interpretation section) a public company is :-
“any company that is not a pivate company”.
• This is fine as long a we know what a private company is.
• A promoter who wishes to float a company with a very large share capital is
likely to open subscriptions of the shares off the proposed company to the public
at large in order to form a company.
• A public company therefore refers to any company including a co-operative
company which is not a private company licenced under 526.
• However this does not distinguish what a private company is but rather what it is
not.
• A private company is thus only distinguishable from a public company by
restrictions placed or imposed by its articles of association on the transferability
of shares and of the offer of those shares to the public.
• Also there is no limit on the size of membership of a public company.
• Because the public company is entitled to offer shares to the public, there is need
to protect the investor.
COMPANY LIMITED BY GUARANTEE
• This is a company created for a charitable purpose. Section 26 states that the
association must exist for purposes which are in the interest of the public.
• Must comply with section 8 (1b) – memorandum of company limited by
guarantee.
• It is not intended to generate profit for its members and prohibits payment of
divident to its members.
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• In terms section 26 if the minister is satisfied that the association complied with
the provision of that section, he may licence the registration of the association as a
company without using the word ( limited) at the end of its name.
• Registrar of companies shall register the company accordingly.
• Liability of the members of such a company is limited to the amounts they
guaranteed to contribute on winding up of the company.
Read section 25 and 26.
• A company limited by guarantee enjoys all priviledges of a company and is
subject to the obligations thereof.
• However it has certain exemptions which do not apply to other companies in
addition to the exemptions from using the word “limited” and examples :-
Section 65 – prohibits allotment of share capital.
Section 71 - which relates to registers and returns as to allotment.
Section 123 – which focuses on statutory meetings.
Section 149 – which relates to balance sheets and auditors.
Section 171 – which restricts appointments.
CO-OPERATIVE COMPANY
• The company is formed in persuance of section 36 . Its main objective is to
provide a service facilitating the production or market of agricultural produce
or livestock or the sale of goods to its members.
• It restricts the transfer of its shares and has only one class of ordinary shares.
• Examples are Seedco, Farm and City, Seed Potato Company.
• Must comply with restriction on :-
- The right to transfer of shares.
- Creation of only one class of ordinary shares.
- Limit the number of shares to be held by each member.
- Regulation of voting rights.
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- Limiting divident which may be paid on its shares.
- Provision for the division of a part of the whole of its profits among it
members of certain or all of their business.
The above requirements must be adhered to otherwise any default may cause the co-
operative company to lose some of its priviledges and exemptions confered by the Act
since the provisions of the Company Act will apply to it as if it was not a co-operative
company.
OTHER FORMS OF ASSOCIATIONS
CO-OPERATIVE SOCIETY
• Unlike a co-operative company, co-operative society is not formed in terms of the
Company Act but rather in terms of the Co-operative Society Act.
• This is a small enterprise catering for people with limited financial means.
• Its objectives must include the promotion of economic and social interests of its
members in line with government policy.
• A co-operative sociaty I therefore an association of persons who have voluntarily
come together to promote their economic and social interests.
• It is a legal person with limited liability.
• It has a minimum of at least 10 persons and there is no maximum.
UNIVERSITAS
• Common law corporation
• A legal fiction
• Is a legal person with capacity to acquire rights or obligations seperately from its
members.
• Has perpetual succession
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• Members must draw up a constitution. Examples include the church, burial
society, football club.
STATUTORY CO-OPERATIONS
• Created in terms of an enabling statute and answerable to a relevant minister.
• No shareholders but financed by the government. Examples include Air
Zimbabwe, ZESA, NRZ, PTC.
PARTNERSHIP
• This is an unregistered association of 2 or more persons but not exceeding 20
according to section 6 (1) of the Companies Act.
• The intention of the partners must be to benefit from each other from the joint
venture hence their intention must be to make a profit.
• They contribute in many ways, it could be money, skill or labour.
• There is no limited liability and the partners are jointly and severally liable and is
a risky form of business.
THE CONCEPT OF LEGAL PERSONALITY
• Upon registration, a company acquires a juristic personality. A juristic person is a
body or association, other than a natural person, that is endowed by law with the
capacity to have rights and duties apart from its members [Hahlo – S A Co LAW]
• Juristic persons are not only companies but other statutory bodies, for example,
parastatals, universitus etc.
• A company has a separate legal excistence from its members. As a juristic
persona, a company is an entity apart from its members.
- Has capacity to own property apart from its members.
- Its debts and liabilities are not debts and liabilitis of its members.
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- Has perpetual succession meaning that its existence and identity is not
affected by a change in its shareholdig or control.
• A company is therefore a distinct legal persona, an artificial person or simply a
body corporate.
• A company is a person apart, but nevertheless a person all the same. According to
Ellison Kahn “ A company has neiher a body that can be kicked, nor a soul that
can be damned.”
• A company therefore in a nutshell is a legal fiction, an abstraction.
The Company Act does not deal with what is meant by corporate status and so it is to
the common law that one must look for theories in this regard. In particular the
leading case of Aaron Salomon (Pauper) V Salomon and Co ltd.
• SALOMON V SALOMON AND COMPANY LIMITED
- Aaron Salomon succesfully carried on business for many years on his
own account as a leather merchant and boot manufacturer.
- He sold the business to a limited company with a nominal capital of 40000
shares of one pound each.
- In part payment for the business, the company issued Salomon with
debentures to the value of 10000 pounds.
- He was also issued with 20001 paid up shares and his wife and five
children were issued one share each.
- Owing to the strike on the boot trade the company failed, and its assets
were not sufficient to pay the creditors.
� The question arose whether Aaron Salomon had a secured claim in respect of his
debentures, or whether the company was merely his alias or agent obliging him
to pay debts.
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• In Vaughan Williams J. at first instance and the court of appeal, held that the
company was a mere sham and contrary to the spirit of the Act, on the basis that
it was in reality Salomon’s business hence he was liable for all its debts.
� The House of Lords however reversed the decision and gave judgement for
Salomon.
Lord Halsbury L. C. in dealing with the problem said “…. Short of such proof [that is
of fraud] it seems to me impossible to dispute that once the company is legally
incorporated it must be treated like any other independent person with rights and
liabilities appropriate to itself and that the motives of those who took part in the
promotion of the company are absolutely irrelevant in discussing what those rights
and liabilities are….”
Lord Macnaghten who also agreed with this view elaborated further.
“ When the memorandum is duly signed and registered, though they be only seven
shares taken the subscribres are a body corporate capable of exercising all the
functions of an incorporated company. Those are strong words. The company attains
maturity at its birth. There is no period of minority – no interval to incapacity.”
He went on to elaborate furthermore
“The company is at law a different person altogether from the subscribers to the
memorandum and though it may be that after incorporation, the business is precisely
the same as it was before and the same persons are managers and the same hands
receive profit, the company is not at law the agent of the subscribers or trustee for
them. Nor are subscribers as members liable, in any shape or form except to the
extent and in the manner provided by the Act. This case, that is, Salomon v Salomon
and Co ltd has been consistently followed and it is now settled beyond question that a
company properly registered in terms of the Act is in law a different persona
altogether from its members.
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GUMEDE V BANDLA VUKANI BAKITHI LTD
It was decided that a company whose shareholders and directors were Africans was
not itself “native.”
DADOO LTD AND OTHERS V KRUGERSDORP MUNICIPAL COUNCIL
It was pointed out that a company could not have an enemy character. It has no body,
parts nor passions. It cannot be loyal or disloyal, neither, of course can it possess any
characteristic which belong to a race of people.”
FACTS OF THE CASE IN BRIEF
• There was provision in a statute whose effect was to prevent Asiatics from
establishing business or owning property in the Transvaal.
• Dadoo and others of Asiatic extraction formed a company to carryout business in
a prohibited area and the municipality sought to prevent them from operating
arguing that they were Asiatics. It was thus held by the court that no law ad been
breached.
• Essentially though the company was formed by Asiatics, it was not Asiatic itself
as a company does not have any race or colour.
LEE V LEE AIR FARMING
- Lee was a commercial farmer who converted his farming business into a
compay. He was then employed by Lee Air farming ltd as a pilot.
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- One day when piloting the aircraft he was killed in a crash and his widow
claimed for compensation.
� - The question before the courts was whether Lee was a “ worker for the purpose
of workman’s compensation.
- The privy council held that he was a worker even though he was a
controlling shareholder in the company. The court held that:-
“ Just as the company and the deceased were separate legal entities, so as to
permit contractual relationship being established between them so also they were
separate legal entities.”
MACAURA V NORTHERN ASSURANCE COMPANY
- Macaura was a commercial farmer. He took out an insurance policy with
the Northern Assurance company to cover his timber.
- Subsequently, he sold the timber to the company in which he was a
majority shareholder but did not transfer the insurance policy to the
company.
- The timber was destroyed by a fire and Macaura claimed on the policy.
� The court held that Macaura was not entitled to indemnity because he had no
insurable interest in the timber which in any event did not belong to him but to the
company.
- In other words Macaura stood in no legal or equitable relation to the
timber at all.
� The gravamen of this case is that company property is distinct from that of its
members and no member can or should purpote to insure company property
because it belngs to the company and the company alone.
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PIERCING THE CORPORATE VEIL
The fiction of the separate corprate personality cannot, however be taken too far as was
said by Williamson, J IN Bark and Anr NNO V Boesch, there are occassions when
“ The court is entitled to peer behind the facet of a fictitious separate legal persona.
- Itn should be noted that there are examples taken from English law where
the courts have refused to give full recognition to the separate legal
personality of a company.
1 ABUSE OF THE CORPORATE PRINCIPLE
• There are situations where the court is of the opinion that the corporate principle
has been abused or has been used simply to hide from the eyes of equity.
• In such occurrences the courts will disregard the Salomon principle and hold that
the company and its members are similar.
CASE A GILFORD MOTORS LTD V HORNE CO LTD
- There was a contract in restraint of trade which was to the effect that
Horne, on leaving the employer Gilford Motors would not solicit or take
away the latter’s customers.
- Horne subsequently left employment with Gilford Motors and proceeded
to from his own company.
- Through his company Horne was soliciting his former employer’s
customers.
- Gilford Motors brought the matter before the courts.
- Horne argued that he was not in breach of the covenant in restraint of
trade because it was not him but his company which was soliciting and in
any event he and the company were two distinct personalities.
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- The court ruled that this was clear abuse of the corporate principle and
that Horne was using the company to evade an equitable obligation.
CASE B RE: BUGLE PRESS LTD
- The directors of a company had fallen out with the third director.
- These directors held 90% of the shares in the company.
- They then formed a company for the purpose of taking over the business
of the first company in which they held 90% shares.
- Their intention was to exclude the third director and in persuance of their
plan they applied the take over scheme.
- The court refused to sanction their intention and held that this was highly
improper.
- Directors had built a little house around themselves.
- There was no need for the plaintiff to knock.
- He only needed to shout and the walls of Jericho would come tumbling
down.
2 FRAUD SITUATIONS
- Where there is fraud the court will not hesitate to lift the corporate veil and
this is clear abuse of the corporate status.
- It is recommended that these be studied “ mutatis mutandis.”
3 AGENCY SITUATIONS
- There are instances where the court may be prepared to consider a
company an agent of another.
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SMITH, STONE AND KNIGHT V BIRMINGHAM CORPORATION
Smith, Stone and Knight V Birmingham Corporation, a holding company owned some
business premises but did not carry on business there.
- Its subsidiary company did.
- Birmingham corporation wanted to compulsorily acquire the land.
- The holding company demanded compensation.
- The corporation argued that the holding company was not carrying on
bussiness on the premises and had suffered no loss.
- As for the subsidiary company it was also no entitled to compensation
because the land did not belong to it.
� The court held that the holding company was entitled to compensation because
even though it was not carrying on business on the premises, the subsidiary
company was doing so as its agent.
4 STATE INTERESTS
The court can regard the company as an enemy where the majority shares are held by an
enemy company or by nationals of an enemy country especially where two countries are
at war .
DAIMLER CO. LTD V CONTINENTAL TYRE AND RUBBER CO [GREAT
BRITAIN.]
The plaintiff company, that is Continental Rubber And tyre Company was incorporated
on England for the purpose of selling tyres on England which were made in Germany by
a Germany Company which held bulk of the shares on the English Company.
- except for one shareholder the rest were German residents
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- after the outbrek of war between England and Germany in 1914 the
plaintiff sued the defendant company, that is, Daimler company for
payment of debt.
- Defendant refused to pay the debts alledging that payment would amount
to trading with an alien enemy.
STATUTORY EXCEPTIONS TO THE VEIL
- Other than the common law or judicial exception to the legislature was
provided for situations where some of the characteristics of a company
may be ignored.
- Tha Companies Act is fraught with situations where the legislature is
prepared to ignore the veil.
- A few of them are considered hear under:
1 Section 32 – Provides for personal liability where the business is carried with no
members.
2 Section 318 – creates personal liability for directors and other persons for fraudulent
conduct of company business.
3 Section 113(4)(b) – any officer of the company who signs a cheque or promissory note
on behalf of the company the name of the company is not mentioned on legible form, that
officer shall be liable to the injured third parties.
4 Section 143 – A holding company and its subsidiary company may be treated as one
economic unit. A consolidated balance sheet and profit and loss account is usually
presented in the form of Group accounts.
- The parent – subsidiary relationship therefore becomes essentially a matter
of mere organisation
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- See also Section 144 – obligation to lay group accounts before holding
company.
5 In terms of the criminal and procedure and evidence act, if any offence has been
commited for which a corporate body may be liable to prosecution, any director
etc shall also be liable unless it can be shown that he was not party to the offence
6 In terms of the income tax act, the commissioner of
CASE: LITTLE WOODS MAIL ORDER STORE V I.R.C.
- The issue was that the court had to decide whether a wholly owened
subsidiary company was to be regarded as a separate and independent
entity from the parent company for purposes of group accounts. The court
held that : “ The doctrine laid down in Salomon V Salomon has often
been supposed to cast a veil over the personality of a limited company
through which the courts cannot. But that is not true.
- The courts can often draw aside the veil. They can often do pull off the
mask. They look to see what realy is behind. The legislature has shown the
way with group accounts and the rest and the courts should follow suit. I
think we should look and see it as it really is, the whole owned subsidiary.
It is a creature, puppet in point of fact and it should be regarded so in point
of law.”
5 In erm of the Criminal Proceedure and Evidence Act, if any offence has been
committed for which a corporate body may be liable to prosecution, a director etc shall
also be liable unless it can be shown he was not part to the offence.
6 In terms of the Income Tax Act the commissioner of taxes is empowered to disregard
the corporate form and tax the members individually.
7 Section 58 and Section 59 – provides for personal liability for directors both civilly and
criminally for misstatements in the prospectus.
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8 Section 115 – provides for personal liability for failure to keep a register and index of
the members.
Study:
Section 101 – notice of refusal to register transfer.
Section 66 – prohibition of allotment in certain cases unless statement in lieu of
prospectus delivered to registrar.
Section 65-prohibition of allotment unless minimum subscription isreceived .
Section 67(2)-effect of irregular transfer with regard to directors who knowingly
contravene Section 65.
DOCTRINE OF DISCLOSURE
- The doctrine of disclosure remains one of the fundamental doctrines of
South African company law .
- In Britain, the country from which South African and Zimbabean law was
adopted ,the practical feasibiity of this doctrine has been seriously
questioned while in other countries various reservations have been raised
regarding some of its consequencies.
THE CRUX AND IMPORTANCE OF THE DOCTRINE
The crux of the principle lies therein that the requirement of disclosure of prescribed
information provides protection for certain interested parties and that disclosire tends to
regulate corporate conduct better than imposition of regulatory and prescriptive
provisions.
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- There is thus, in fact, a functional connection between requiring
disclosure and dispensing with rigid legislative controls on company
conduct.
- It is on this basis that typically uncompljicated process of incorporation of
Zimbabwean and South African company law is founded.
- The person forming a company secure its incorporation by registering its
constitutional documents, the memorandum and the articles of association
with the companys registration office where these documents are then
available for public inspection.
OPERATION OF THE DOCTRINE
- In terms of the doctrine the disclosure requirements are of a continous
nature and apply to the company on every phase of its existence on
incorporation until its dissolution or deregistration.
- The history at every company and especially at the public company is
chronicled in the files kept for public inspection by the Registrar of
companies.
- Whenever the public is invited to subscribe for its shares or debentures the
company must issue a prospectus containing information.
- Continous disclosure of the lates information in regard to company by
means of publication of annual financial statements and interim reports
serves to round off the operation of disclosure.
CLASSES WHOSE INTERESTS ARE SAFEGUARDED
- as far as the effects of the operation of the doctrine of disclosure is
concerned several classes can be distinguished whose interests are
safeguarded or benefited by the pubication of information relating to the
company mainly potential shareholder or investors.
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MEMORANDUM OF ASSOCIATION
- deals with the relationship between the company and the outside world.
- Defines the limits/ extent of the company’s powers.
- What the company may or may not do.
- Is the constitution of the company.
- One of the most important document that has to be lodged with the
Registrar.
- No certificate of incorporation may be issued if there is absence of the
memorandum.
Section 8 – deals with the memorandum of association.
Drafting of the memorandum should ensure that the following clauses are contained in
the memorandum.
• Name claue
• Objects clause
• Limitation of liability clause
• Capital clause
• Subscription clause
NAMES CLAUSE
- must have the word “limit” as if it is a public company.
- If it is a private company then it should have the word (private) as the
penultimate word eg
- This is to warn those doing business with the company that liability of its
members is limited.
- In choosing the name for his company, the promoter must comply with
provision of section 24.
- He may not choose a name that is identical of another company
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- May not choose a misleading name that is likely to cause offensive,
suggestive of blasphemy or indecency or undesirable for any other reason.
- Or that which suggests that the company is under state patronage.
- Discretion of the registrar to refuse a name is very wide indeed.
- Promoter must therefore apply a name reservation so that if he has chosen
an unacceptable name then it can be changed.
CASE: BON MARCHE (PVT) LTD V LEES BON MARCHE AND OTHERS
Bon Marche [Harare sued le Bon Marche] in Bulawayo arguing that the name used was
similar to his own and deceived customers.However it was held by Dumbutschena CJ ,as
he was then that there ought to be evidence of intention to deceive not a mere likelihood.
- this brings us to the delict of Passing-off which essentially was an unfair
practice and in this case one person misrepresents that his business is that
of another.
- This is unfair in that it misleads customers and clients with some
prejudicial consequencies.
- A company may change its name in terms of section 25.
- A special resolution is required before the registrar can enter a new name.
- Company is under obligation in terms of section 133 to display its name at
all times and its registered office.
- Failure to do so is a punishable offence.
OBJECTS CLAUSE
- the most important clause in the memorandum of association.
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- Powers of the company may be persued by the company.
- Objects are those things which a company intends to persue eg general and
mechanical engineering business.
- Anything which is not outlined in the object clause can be changed by
special resolution (section 16)
- A company may wish to change its objects inorder to diversify or even
limit those objects.
ULTRA VIRES DOCTRINE
- ultra vires means beyond the powers.
- Doctrine has been changed by the Act to the extent that it now only plays
a residual role and it now almost non existent.
Read section 9 – speaks about the fact that the company shall have the capacity and
powers of a natural person.
Read section 11
THE LIMITATION OF LIABILITY CLAUSE
- this clause must be concluded in the memorandum of the company
,whether the company is limited by shares or guarantees Section 7(1)(a) –
“ …a company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively
held by them…”
- such a company is called a company limited by shares.
- If the company has issued 100 shares to a member at $10 and the member
has paid the full $1000,00 he will no longer have further liability to the
company or its creditors but if he paid $150,00 or half the issue price these
shares are desctribed as partly paid shares and he will be liable for the
balance of $50,00 when the company makes a call payment in full.
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CAPITAL CLAUSE
Section 8(1) (v) – “ the amount of share capital which the company proposes to be
registered and division thereof into shares of a fixed amount.
We can illustrate the effect of this section in this manner:
Share capital - $30000,00
Divided into – 30000 shares of $1 each.
SUBSCRIPTION CLAUSE
- Refered to as the assopciation clause.
- This is a statement that they wish to form a company.
- They must therefore in terms of section 58 (3) sign in their own
handwriting and state their names opposite to the number (in words) of
shares they take eg Tatenda Gwatirisa 300.
ARTICLES OF ASSCIATION
- constitutes a contract between shareholders and the company and also
shareholders inter se.
- refered to as the internal document of the company.
- Articles of association are only enforceable a s members’ rights hence
outsiders cannot enforce these rights.
- Articles provided for in section 17 .
- Articles must be signed by the subscribers to the memorandum.
- If the articles are inconsistent with the memorandum the articles are
subordinate so that the official provision will be void to the extent of the
inconsistency.
- They constitute the contract between the company and its members and
members qua members.
26
HICKMAN V KENT ROONEY SHEEP BREEDERS ASSOCIATION
The fact briefly explained were:
- The articles of KRSBA provides that the differences between the
association and members shall be refered to an arbitrator appointed by the
parties in difference.
- It was hel that the article can neither constitute a contarct between the
company and an outsider nor give an individual member special contract
rights beyond those of members generally.
- Plaintiff therefore must enforce the rights.
- The articles of association contained a clause to the effect that one Eley
should be the solicitor of the company and transact all its legal business.
- Articles had been drafted before the company was formed.
- Articles were then registered when the company was incorporated.
- Eley was not appointed solicitor by any resolution but continued to act in
such capacity.
- Subsequently the company stopped employing him and he brought an
action.
- He purpoted to rly on the articles of association.
- It was held that there was no contract between Eley and the company
because Eley was not a member even though he subsequently became one.
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TURQUAND RULE
- In terms of this rule an outsider contracting with the company in good
faith is entitle to assume that the internal requirements and proceedures
have been complied with.
- Therefore the company will be bound by the contract even though all
matters of internal management and proceedures have not been complied
with.
- This rule is undoubtedly necessary.
- Where the articles provide that someone can become an agent of the
company after compliance with certain formalities it is an impossible task
for an outsider to ascertain whether all internal formalities required to
authorise a potential representative have been complied with.
PRE-INCORPORATION CONTRACTS
- Before a company is formed, the promoter needs to enter into a contract
with third parties for the benefit of his new company.
- Promoter may not want to attract personal liability but would wish that his
new companyshopuld benefit from those contracts.
- Rules relating to pre-incorporation contracts are intended to protect the
company when it is formed from debts by the speculative promoter.
- Common law lays down the fidicuary duties of the promoter that he has
to act in good faith and not make secret profit.
- Promoter must therefore exercise due care and deligence.
28
- A prudent promoter will therefore strive to do only those things and to
enter only into those contracts and ultimately benefit his company and will
not bring it down.
- Section 47 – “ any contract made in writing by a person profesing to act as
an agent or trustee for an unregistered company shalll be capable of being
satified or adopted by or otherwise binding upon and enforceable….”
Requirements of pre incorporation contracts – summary
- contract must be in writing.
- Person making the contract must profess to an agent or trustee.
- Memorandum must contain as one of its objects the ratification or
adoption of preincorporation contract.
- The original copy or a certified copy must be lodged with the registrar
together with the memorandum of association.
- Contract must be legally enforceable.
DOCTRINE OF CONSTRUCTIVE NOTICE
- Every person dealing with the company is deemed to be fully acquinted
with the dealings of the company in which the memorandum and articles
are the most inmportant and no person can successfully claim against the
company that they were unaware of the limitations of the company.
- This position however been tampered with the provision of the act section
11 which states “…no person shall be deemed to have notice on
knowledge of a company’s memerandum and articles or documents that
have been registered by the registrar or available for inspection at the
company’s office.”
- Basis of constructive notice: it is presumed that sufficient publicity has
been given to the limitation on the authority to bind the company.
STATUTORY ARRANGEMENT
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The new approach from the previous position in that
a) The premise that a company posseses capacity and powers remains intact.
b) The memorandum should set out the company’s capacity clearly and concisely.
c) The directors must act within the company’s capacity as set out in the
memorandum. If they fail to do so they may be called to account. This protects
the company and its members against abuse of powers by directors [section 10
(2b)].
d) The provisions relating to the capacity form part of the contract that exista in
terms of section 16 (2a) between the company and its members; accordingly may
undercertain circumstances be restrained by its members from acting beyond its
capacity.
ULTRA VIRES DOCTRINE
It is now permissible for companies to state the main object which should be stated in
broad simple terms without speling it in detail.
For example:
- It might be stated as to engage in agriculture or to undertake mining
operations or a combination of activities may also be stated and you may
also state ancillary objects.
- A company may alter its objects clause and for this refer to section 16.
- The main point of section 16 is that an act beyond the company’s power is
not void merely by reason of the fact that the company was without
capacity or power to do so.
- The company can void liability by proving that its agents lack the
necessary authority to act on its behalf and cannot evade liability surely
because the lack of authority results from the fact that the act is beyond the
company’s capacity or power.
- The company is bound even though the other party may have known that
tha act is outside the company’s capacity.
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SHARE CAPITAL AND CLASSIFICATION OF SHARES
Definition - A share may be described as a form of intangible corporeal movable
property. It is an interest which a person has in a company and this interest comes with
rights and obligations as derived from the articles of association and Companies Act. It is
measured in monetary terms.
TYPES OF SHARES
ORDINARY SHARES
- If a company has one class of shares these would usually be ordinary
shares and they are the most common and most numerous. Ordinary shares
do not confer special rights and obligations.
- The most riskiest type of shares.
- The risk lies in the fact that the ordinary shareholder is postponed for
payment of his divident when one is declared.
- In other words a preference shareholder is paid his proportion of the
dividend before the ordinary shareholder receives his own.
- Sometimes this happens also in respect of the repayment of his capital
and the ordinary shareholder bears the risk of the company’s profits or
assets being insufficient.
- Founder members usually get ordinary shares and articles of the company
would usually require that whenever a fresh issue is made it should be
made to ordinary shareholders first.
- These new shares are usually offered at a low price than they would to
outsiders.
- Ordinary shareholders control the company since they are so numerous
and by virtue of this numerical strength the holders of such shares have the
control of the running of the company.
PREFERENCE SHARES
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- These shares offer preference to their holders in respect of rights eg
dividents, voting etc.
- Have preferencial rights attached to them in regords to divident and the
repayment of capital of liquidation.
- Entitled to a fixed rate of dividend eg 12.5%.
- When the divident is declared then they will be paid the 12.5% before any
other shareholders are paid.
- This is a contractual right in terms of the articles of association.
- Preference shares were designed for the investor who desired a fixed
income coupled with a reasonable degree of security.
- With the high inflation rates over the past years ordinary peference shares,
ie preference shares other than participating preference shares or
convertible preference shares have lost erstwhile attractiveness and
presently enjoy a very limited market on the Zimbabwe stock exchange.
PARTICIPATING AND NON-PARTICIPATING PREFERENCE SHARES
- Participating preference shareholders may be allowed to participate with
the other shareholders in the remaining dividend after they have been paid
their fixed percentage.
- So, for example, the holders of participating preference shares may be
entitled either to share residual profits pro rata with the ordinary
shareholders or to share in the residual profits only after a specified %
dividend eg 10-15% has been paid to ordinary shares.
- Non-participating preference shareholders do not enjoy these rights.
CUMULATIVE AND NON-CUMULATIVE PREFERENCE DIVIDEND
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- Cumulative preferential rights to dividend are usually expressly stipulated
and also reflected in the designation of the shares eg 12% cumulative
preference shares.
- Cumulative preferencial right entails that if in a given year or years no
dividents are declared, the arrear and current preference dividents have
priority at a subsequent dividend distribution before a dividend can be
declared in respect of any other classe of share.
- The requirement that dividends nust be declared before they can be
claimed has the result that even the holders of cumulative preference
shares have no preference on liquidation in respect of arreas but
undeclared dividends.
- Where conditions of issue are silent on the point the general presumption
is that preference shares are cumulative.
- Where however it was provided that preference dividend was payable out
of the net profit of the year concerned, the court held that preference
shares were non-cumulative.
REDEEMABLE PREFERENCE SHARES
Section 76 provides that a company, if authorised by its article of association issue shares
which are redeemable at the option of the company or shareholder concerned, such
shares are redeemable.
- can only be fully paid if they are issued.
- Section 77 – shares can be redeemed only out of profits or out of the
proceeds of a fresh isue of shares made for the purpose of redemption.
- Redemption of shares means that all shares redeemed are treated as
cancelled and the amount of the company share capital shall be
diminished by the nominal value of those shares.
- Redemption , however shall not be taken as reducing the amount of the
company’s authorised share capital. [section 77(4)]
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DEFERRED SHARES
- lesser shares, the holders are paid after all the other shareholders including
ordinary shareholders have been paid.
- Payment of their dividend is therefore postponed or deferred until all other
shareholders have been paid.
- They are to ordinary shareholders what ordinary shares are to preference
shareholders.
- They carry large voting rights but considered risky.
- Usually founder members’ shares, ie promoters.
DEBENTURES
- the company is usually authorised by its memorandum to borrow money
for its operations.
SEE – ARTICLE 78 TABLE A FIRST SCHEDULE
- company authorises this by issuing debentures.
- Section 106(1) gives the company the right to issue debentures.
- Section 2 of the Act defines a debenture as including debenture stock or
bonds. In simple terms a debenture is really acknowledgement of debt and
comes in the form of a document.
- A debenture may be secured by either movable or immovable property
and some security must be stated on the document.
- If the debenture binds movable property then it may be registered as a
notarised bond.
- If it binds immovable property it may be registered by means of a
mortgage bond.
REDUCTION OF SHARE CAPITAL
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- With the reduction of share capital the emphasis falls mainly on the
protection of the rights of creditors.
- The theoretical concept that the issued share capital of the company
constitutes a guarantee fund for creditors which must be maintained for
their benefit, underlies the regulation of reduction of capital.
REASONS FOR REDUCTION OF SHARE CAPITAL
a) where a company accumulated losses.
b) Where a company’s fixed assets are overhauled
c) Where it has capital in excess of it needs.
d) Where preliminary expenses are exceptionally high.
In such instances a reduction of share capital enables the company to write off losses,
over –valuations or fictitious assets, or to return excess capital to shareholders so that its
balance sheet can reflect a more realistic picture of the financila position of the company.
SCOPE OF CAPITAL REDUCTION
Reduction of share capital can be effected:
a) By cancelling any paid-up share capital which is lost or not represented by
available assets.
b) By paying back any paid-up share capital which is in excess of the needs of the
company.
The court empowers the company to reduce the share capital when it deems fit even if it
means doing something which is normally prohibited such as purchasing its own shares
or amening the rights attached to certain classes f shares. However redeemable preference
shares constitute an exception to the rule that a company cannot purchase its own shares
[read section 76]
- Section 78 permits the purchase of own shares by a company.
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- To do that they are provisions in section 79 which had to be complied
with.
- Prohibition of issue of shares at a discount. However section 75 empowers
the company to issue shares at a discount but this has to be done in
compliance with statutory requirements.
TRANSFER OF SHARES
READ COMPANIES ACT SECTION 98 – 105 AND SECTION 74 – 84.
MAINTANANCE OF SHARE CAPITAL
- Share capital of a limited company constitutes the fund to which creditors
of the company should look for their claims.
- Creditors are acoordingly entitled of the fact that such funds, although it
may be diminished or lost in the course of the comopany’s business must
not be diverted from the objects of the company.
Maintainance of share capital is mainly premised on:
a) Prohibition of dividend payout of share capital.
- a dividend cannot be declared from share capital but only from profits of
the company.
- Creditors look to the share capital as a fund which they can be paid on
liquidation.
b) Prohibition of the purchase by a company of its own shares.
c) Prohibition of the isue of shares at a discount.
ALLOTMENT AND ISSUE OF SHARES
Allotment and issue of contrasted with the transfer of shares.
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- a person can acquire title to shares in a company in one of the 2 ways:
i. He can acquire the shares from an existing shareholder usually by way
of purchase and have the shares transferred into his name.
ii. He may acquire them directly from the company usually by applying
to the company which can then allot and issue shares to him.
GENERAL ALLOTMENT AND ISSUE PROCEDURE
- the contract by which a subscriber agrees to take a number of shares and
the company agrees to allot the shares to him, is subject to the ordinary
rules of the contract as modified by express stipulation of the Companies
Act.
- Where a company wishes to obtain share capital from the public it directs
a written invitation in the form of a prospectus, accompanied by an
application form to apply for a certain number of shares and submits his
application with the issue price to the company.
- Like any other offer it can be revoked at any time before its acceptance by
the other contracting party.
- Acceptance of the offer is ussually by a resolution of the board of directors
to allot the shares to the public.
- Should the offer of the subscriber not be accepted within reasonable time
it lapses.
- Special rules govern the allotment of shares offered to the public for
subscription.
a. No allotment may be made before minimum subscription has been made (section
65)
b. No allotment may be made where the application form hs been attached to a
prospectus (section 66).
SECURITY MEANS OF SHARES
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- a certain degree of confusion and uncertainty exists in the area of the
security of debts by shares.
- A clear distinction must be drawn between the two legal concepts that are
involved, namely pledge and cession in securitatem debiti.
- A pledge of incorporeals is now generally accepted although serious
criticism has been levelled at this approach.
- A pledge of a right, being an incorporeal can only be effected through
transfer of the right by means of cession.
- A cession in securitatem debiti can be construed in two ways, that is:
i. It can either be a pledge of an incorporeal.
ii. It can be an out and out cession subject to pactum fiduciae or right to
claim a recession from the cessionary once debt is paid.
38
JUDICIAL MANAGEMENT
Judicial management means the substitution of the company directors with a judicial
manger duly appointed by the court.
Judicial management must be distinguished from winding up. These two processes
are fundamentally different both in purpose and effect. Although in both instances
the company will be experiencing problems, thee two remedies are different.
Winding –up is concerned with the dissolution of the company and the extin ction of
its personality. Judicial management on the other hand is intended to save the
company from collapse. It is therefore an alternative remedy to winding up. The
court has a discretion whether or not to put a company under judicial management.
Judicial management is only granted in circumstances where a winding up order may
cause unnecessary prejudice to the shareholders and creditors of the company. It has
been said that judicial management is like a “halfway house between life and death
of a company.” However, it does not follow that before a company can be wound up,
it must be placed under judicial manmagement. Judicial management is essentially
intended and designed to enable a company suffering from a temporary problem or
setback due to mismanagement or some viability problem to become a successful
concern once more. The company is therefore aken over by a judicial manager who
is supervised by the Master of the High Court. His aim is to rejuvinate the company
once more and give it a new lease of life.
In deciding whether to wind up a company or to place it under judicial management,
the court will be guided by the principle of whether there are grounds or certainty of
success. The disadvantage of judicial managemnet is that it affects the credit
worthiness of the company.
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OBTAINING A JUDICIAL MANAGEMENT ORDER
There are basically two stages in judicial management proceedings – the provisional
stage and the final stage. The court, if satisfied, will grant a provisional order which
may or may not be confirmed on the return date.
Section 300 provides that a provisional judicial management order may be granted if
it appears to the court –
(i) “that by reason of mismanagement or for any other cause the company is
unable to pay its debts or is probably unable to pay its debs and has not
become or is prevented from becoming a successful concern, and
(ii) that there is a reasonable probability that if the company is placed under
fiduciary management it will be enabled to meet its obligations and pay its
debts and become a successful concern, and
(iii) that it will be just and equitable to do so.”
INABILITY TO PAY DEBTS
This is also a ground for winding up the company. In terms of Section 205, it
provides as follows:-
“A company shall be deemed to be unable to pay its debts:-
a) if a creditor, by cession or otherwise to whom the company is indebted in an
amount exceeding one hundred dollars then due, has served on the company a
demand requiring it to pay the um so due by leaving the demand at its registered
office and if the company has for three weeks thereafter neglected to pay the
sum secure or compound for it to the reasonable satisfaction of the creditor, or
40
b) if the execution or other process issued, on a judgement, decree or orderof a
compotent court in favour of a creditor, against a company is returned to the
Sheriff or messenger with endorsement that no assets could be found to cover the
debt or that the assets found were insufficient to do so, or
c) if it proved to the satisfaction of the court that the company is unable to pay its
debts and, in determining whether a company is unable to pay its debts, the court
shall take into account the contigent and prospective liabilities of the company.”
Basically, the fact that a creditor has demanded payment without success will be
prima facie evidence that the company is unable to pay its debts, as amplified in the
above cied section.
MISMANAGEMENT OF THE COMPANY
The courts have a history of keeping their distance where management of the
company is concerned. Judges appreciate that they are not sufficiently eqquiped to
run the affairs of the company. They are reluctant to usurp the functions of directors.
A judicial manager will btherefore only be appointed if there is something
manifestly illegal, oppressive or fraudulent. The court will not interfere, for instance
where there is just animosity between the directors. The court will also not interefer
if the mismanagement complained of can be remedied using the company machinery.
INABILITY TO MEET ITS OBLIGATIONS
The inability could be as a result of mismanagement. This, however does not
necessarily mean inability to pay debts. It could just be failure to timeously perform
contractual obligations.
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PREVENTED FROM BECOMING BECOMING A SUCCESSFUL CONCERN
It has to be satisfactorily shown that there is a possibility that the company can can
operate successfully if given the opportunity to do so. If it is only to buy time, the
court will not grant the application. The purpose of this remedy is not to dely the
obvoius death of a terminaly ill company. Failure to become a successful concern
can be a result of mismanagement as well or where the company is plagued with
labour , unrest or litigation.
THE JUST AND EQUITABLE GROUND
Under this ground, the court attempts to strike a balance between the interests of the
members and those of the creditors. The creditors are obviously not interested in the
sustenance of the company which has no prospects of survival. The members would
want their company to be given a chance to overcome its problems. The court would
therefore grant the application on this ground if the eventual result will be beneficial
to both creditors and shareholder.
APPLICATION FOR JUDICIAL MANAGEMENT ORDER
The court has a discretion whether or not to grant the order sought (Section 229(1)
(a) (b) states that people who are competent to apply for judicial management can
also apply for winding up. When an application is made a copy of that application
shall be filed with the Master who will report to court on any circumstances
justifying postponment or dismmissal of the application (Section 299(2). The order
granted provisionally will provide in terms of section 301 (1) (c) inter alia that:-
‘……. All actions and proceeedings and the excecution of all writs, summons and
other processes against the company be stayed and be not proceeded with or without
the leave of the court.”
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The rationale of this provision is to protect the company from lawsuits during the
time of the order in order to give best opportunity to survive.
APPOINTMENT OF THE PROVISIONAL JUDICIAL MANAGER
In terms of section 302(1) (b) (i), the Master shall without delay appoint a
provisional judicial manager. The provisional judicial manager will take custody of
the company property uponn his appointment and the custody would have been
hitherto hands of the Master. He is appointed in the same manner as a liqiudator in
terms of Section 272. The duties of the provisional judicial manager are itemisewd in
section 303 and these are to
(a) assume the management of the company and recover and take possession of all
the assets of the company, and
(b) within 7 days after his appointment lodge with the Registrar, under cover of the
prescribed form, a copy of ter of appointment as provisional judicial manager and
(c) prepare and laid before the meetings convened…. A report containing
(i) an account of the general state of the company; and
(ii) a tatement of the reasons why the company is unable to pay debts or is
probably unable to meet its obligations or having become or, is prevented
from becoming a successful concern
(iii) a statement of the assets and liabilities of the company and
(iv) a complete list of creditors of the company, including contigent and
prospective creditors and of the amount and nature claim of each creditor;
and
(v) the considered option of the provisional judicial manager, the prospects of
the company to become a successful concern and the removal of facts and
circumstances which prevent the company from becoming a successful
concern.”
On the return day in terms of Section 305, the court may after considering the
evidence and it appears that there is a reasonable probability that the company
43
concerned, if placed under judicial management, will be able to become a
successful concern and that it is just and equitable to grant such an order, or it
may discharge the provisional judicial management order or make other order that
it think just.”
If the court discharges the provisional order, then the company has no hope of
surviving and it may as well be just wound up. If it confirms the provisional
judicial order, then the company will be put under judicial management and the
final judicial manager will be appointed.
Section 306 provides that the final judicial manager shall exercise these duties
subject to the memorandum and the articles and his duties are like those of the
liquidator.
ADDITIONAL READING
Section 306
Section 308
Section 314
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WINDING UP AND LIQUIDATION
WINDING UP
We noiticed at the beginning that upon registration, a company becomes alegal
personality. It personally comes to an end at the dissolution of the company.
During its life the company would have acquired rigths and incurred liabilities.
These have to be dealt with before the company is finally dissolved. Theb process
of ascertaining and realising the assets and apportioning them to the payment of
creditors and distribution of the residue to the members is called winding up or
liquidation. Therefore, winding up is just a process.
Dissolution spells the death of the company and its legal personality is
extinguished. The concepts of dissolution and winding up, even though they are
used synonymously are interchangeable and should not be confused. These two
concepts should, in addition not be confused with de-registration. Deregistration
does not terminate the existance of a company. It simply deprives it of its legal
personality but it will continue as an asset whose members are personally liable
for its debts.
Winding up is essentially an administrative process which involves the handing
over of company’s affairs to a luiquidator. Directors are therefore releived of their
duties of directing the company. During the process of winding up the company
retains its legal personality which is only extingushed at dissolution.
There are two procedures for winding up a company as provided for in Section
199 which provides as follows:-
“Modes of winding up
(1) The winding up of a company be either –
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(a) by the court; or
(b) voluntary.”
Winding up by the court is called compulsory winding up. In this case the
company is wound up by the court following a petition by various persons
specified in the Act.
Where the company is wound up voluntarily, this follows an application by the
company itself following a special resolution.
COMPULSORY WINDING UP
Section 206 sets out the circumstances in which the company may be wound up
by the court as follows:-
“A company may be wound up by the court –
(a) if the company has by special resolution resolved that the
company be wound up by the court;
(b) if default is made in lodging the statutory report or in holding a
statutory meeting;
(c) if the company does not commence its business within a year
from its incorporation or suspends its business for a whole
year;
(d) if the company ceases to have any members;
(e) if 75% of the paid up share capital of the company has been
lost or has become useless for the business of the company;
(f) if the company is unable to pay its debts;
(g) if the court is of the opinion that it is just and equitable that the
company should be wound up.”
46
DEFAULT IN LODGING STATUTORY REPORT OR HOLDING
STATUTORY MEETING(S)
The petition for winding up under this ground should not be presented before the
expiration of 14 days after the last day on which the meeting ought to have been
held. The ideas give the directors an opportunity to remedy the wrong or put right
the default (Section 207 (1) (ii).
In terms of Section 208 (3), the court has a discretion and may , instead of making
a winding up order direct that the statutory report should be delivered or that the
meeting should be held.
FAILURE TO COMMENCE BUSINESS WITHIN A YEAR
Under this groung, the court can order the winding up of a company for failure to
commence business within a year. This is because a year is long enough for a
company to have started operating and failure to do so within this period may be
indicatice of the fact that the company is unable to operate and so should be
dissolved. The court , however has a discretion and can give the company a
chance if there are prospects that the company will be able to operate in the near
future ( Section114 sets out the conditions that must be fulfilled before a company
may commence business.)
WHEN COMPANY IS MEMBERLESS
When the members’ number been reduced to below one, or when the company
ceases to have any members, then the company may be wound up. In terms of
Section 7 a company must have at least one member. In terms of Section 32, if a
company ceases to have any members but carries on business for more than 6
months, then any person who knowingly caused it to do so, shall be liable
together with the company for its debts.
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LOSS OF 75% OF PAID UP SHARE CAPITAL
The purpose of this requirement is to pre-empt a situation whereby a company
will be unable to meet its obligations to third parties. Once a company uses up
75% of its paid up capital, the interested party may pertition the court for winding
up. The court, however excercises a discretion. The fact that 75% of paid up
capital has been lost or has become useless does not necessarily mean that the
company is unable to pay its debts especially where the share capital is lost where
the directors did not over commit the company but entered onl;y into transactions
which the company could meet and the company has debts to pay and other
monetary obligations to discharge.
INABILITY TO PAY DEBTS
This is considered the most common ground for winding up. Failure to pay debts
is delt in Section 205. It has been said that the court has a discretion. It should be
established that the company is unable to pay its debts in the sense of being
unable to meet its current obligations. If the company is still solvent in the sense
that its assets exceeds its liabilities, the court may resolve to order winding up.
JUST AND EQUITABLE GROUND
This is a common ground for winding up. This is because this ground is all
encompassing and gives the court a very wide discretion. It is based on the
principle of good faith which is derived from law of partnerships.
The ground is usually divided into the following categopries:
(1) Loss of company’s substratum
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(2) Illegality
(3) Deadlock
(4) Minority oppression
(5) Lack of probity in the company’s affairs.
LOSS OF SUBSTRATUM
This occurs where the company has abandoned its main objects or is unable to
achieve them. It has been decided that where a company was formed to mine
copper and no copper was found then the substratum of the company has
disappeared and it ought to be wound up. The reason for this is that it will be
unfair for the company to persue other objects which were not contemplated by
the shareholders.
In RE SERMAN DATE COFFEE COMPANY, a company’s main object was to
acquire a (plant) for manufacturing dates as a substitute for cofee. The company
was unable to obtain such (plant) but was doing well. It was held that it should
have been wound up.
In NAKHOODA V NORTHERN IND, A company was formed to establish a
mineral factory, and a large dry –cleaning business. It did neither of these but
carried on activities of money lending. An application for winding up was
granted.
DEADLOCK OR STALEMATE
This may occur where a company is unable to take manegement decisions on
acount of equal voting strength of two opposing groups of shareholders. This is
most common in companies where the shareholders may have personal
relationships. The court then tends to the company as if it were a partnership.
Once the court is of the opinion that the true confidence has been undermined, it
will order winding up.
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In RE YENDJE TOBACCO CO. LTD (1916), there were 2 tobacco
manufacturers who were the only shareholders in the company. They weere also
the directors, with equal voting powers. They had a serious disagreement resulting
in continous quarrels. At one time, one director brought a legal action against the
other. They had over one thousand pounds in intigation over the validity of the
dismissal of a factory manager. They also argued over the term of employment of
a travelling salesman. It is said that the relations between them became so sour
that they could not talk to each other but communicated only through the
secretary! Although the company was doing very well, the court applying the
principles of partnership ordered a winding up.
MINORITY OPPRESSION
If it can be shown that persons who control the company have conducted
themselves in a manner oppressive to the petitioner, the court may grant winding
up. The court, however will only grant winding up on the petition of the members
even though some other remedies are available provided that the member is not
being unreasonable to persue that other remedy (Section 208(2)).
LACK OF PROBITY
This is where there is no transparency. There is dishonesty or misconduct in the
affairs of the company in the case of WOOLMARK V COMMERCIAL
VEHICLE SPARES, a minority shareholder complained that the directors and the
majority shareholders had perpetrated a fraud on him by falsifying minutes,
illegally issuing shares and declaring and paying dividents he said that this
constituted a fraud and that as a result of this misconduct, he hafd lost confidence
in the management of the company’s affairs. The court granted the order sought.
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CONCLUSION
What we have looked at are the ways and reasons for winding up. The rest of the
winding up proceedure is merely administartive and fully provided for in the
companies Act. It is therefore unnecessary for us to regurgitate the Act.
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MAJORITY RULE AND MINORITY PROTECTION
The general rule in company law is that the minority are bound by the decisions of the
majority. If a member has a contract with the company, that contract as evidenced by the
articles of association can be altered by the majority and his rights therein changed.
The minority is not supposed to complain, the rationale being that when he joined the
company, he had knowledge that its rules might be changed or altered in the future by the
majority vote. It has been said that –
“ The law looks upon companies as autonomous democracies in which the
minority has to abide by the will of the majority. If the wrong
complained of is a wrong done to the company, then the minority
shareholders as a rule cannot seek redress”. – Nkala, Nyapadi.
This is because the wrong has been done to the company and to the company alone. The
company is a legal persona. It can sue and be sued in its own name, therefore the decision
to remedy the wrong complained of lies with the company. The company is the proper
plaintiff. This is called the rule in FOSS V HARBOTTLE 1843 2 HARE 46. In that case,
a minority shareholder brought an action to court alleging that the company’s property
was being misapplied, sold and wasted by some directors. His prayer was that the
directors should be ordered to make good the loss done to the company. The minority
brought the action on behalf of itself and all other members of the company except the
directors. It was held that –
“… it cannot be competent to individual corporators to sue in the manner
proposed by the plaintiff….”
1) Judges are unwilling to interfere in the internal affairs of companies. The rationale
for this is that, it is not for the courts to manage the company’s affairs. That duty
is best left to the directors and the majority shareholders in a general meeting. The
general meeting is the company’s parliament where corporate decisions are taken.
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2) The minority cannot complain of a wrong done to the company as a whole or of
any internal impropriety.
3) Without such a rule, there would be futile actions and oppessive litigation.
4) Even if the minority were allowed to institute litigation, the result will be a
vicious circle in that the majority would get its wishes anyway.
The courts realise that the majority view dominates in the use of the company’s name and
in a legal action, the minority would be in a dilemma. The situation was summed up by
one Judge, -
“ If directors do acts which perhaps because of lack of quorum or because their
appointment is defective or they are actuated by improper motive, they can make
full disclosure to the majority shareholders and obtain absolution and forgiveness
of their sins. If the acts are not ultra vires, then all will seem alright”.
A simialr case to Foss V Harbottle is that of MaCDOUGALL V GARDNER (1875)
ICDL 13. The articles of association of a company provided for the taking of a poll at a
general meeting of the company if so demanded by five shareholders. At a general
meeting, the chairman, in breach of the articles, declined to take a poll. One of the
shareholders brought proceedings on behalf of himself and all other shareholders except
the directors, against the directors and the company, seeking a declaration that decisions
taken at the meeting were invalid and an injunction to restrain their implementation. The
action failed. The words of MELLISH, LJ are illustrated of the court’s attitude at the
time-
“ In my opinion, if the thing complained of is a thing which in substance the
majority of the company are entitled to do, or if something has been done
irregularly which the majority of the company are entitled to do regularly, or if
something has been done illegally which the majority of the company ar entitled
to do legally, there can be no use in having litigation about it, the ultimate end
which is only that a meeting has to be called, and then ultimately the majority gets
its wishes. Is it not better that the rule should be adhered to that if it is a thing
which the majority are masters of, the majority in substance shall be entitled to
53
have their will followed? Of course, if the majority are abusing their powers, and
are depriving the minority of their rights, that is an entirely different thing, and
there the minority are entiltled to come before this court to maintain their
rights…(25)
EXCEPTIONS TO THE RULE IN FOSS V HARBOTTLE
1) Where the majority have not acted bonafide in the interests of
the company as a whole. In this case, there is a heavy burden on
those who want to prevent the alterations since it is the majority
which is best placed to decide what is in the best interests of the
company.
It is an accepted principle in company law that shareholders in
casting their votes do not owe each other the duty of care,
neither do they owe this duty to the company. As a result, a
majority vote can ratify a breach of duty by the directors.
However, decided cases show that where minority shareholder
can show evidence of malice or poitive hrm of discriminaion,
the courts may interfere.
SIDEBOTTOM V KERSHAW LEASE & CO.
The defendant was a private company. It passed a resolution to alter its articles of
association by providing that directors who had majority shares should have the power to
require shareholders who crried on competing business with the company to transfer their
shares at a fair value to the directors. Sidebottom held minority shares and carried on
competing business. He appealed against the resolution claiming that it was not in the
best interests of the company and discriminated against the minority. It was held,
considering the nature of the company under the circumstances, majority power was used
bona fide the company.
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In EDWARDS V HALLIWELL (1950) 2 AER 1064 (CA)
The constitution of a trade union provided that contributions were not to be altered until a
ballot vote of the members had been taken and a two-thirds majority obtained. A meeting
of the Union, without taking ballot, passed a resolution increasing the contributions of
members. Two members of the Union were not impressed and they sued the excecutive
to declare the resolution invalid. Their action succeeded.
In BROWN V BRITISH ABRASIVE CO.
The company needed more capital. The majority shareholders with 98% of the shares
were willing to provide the capital provided that they could buy up the 2% minority
shareholders. The minority shareholders were unwilling to sell. The majority then
proposed to alter the articles so as to provide for compulsory acquisition of the shares. It
was held that this was not bona fide the company, it was plain abuse of majority power
because the alteration was not going to result in increased capital.
In the case of DAFEN TIN PLATE V LIANETHY
By altering the articles, the majority were empowered to compel any member to sell his
shares at a price to be fixed from time to time by the directors. A minority shareholder
did not agree with the alteration. It ws held that the company could not confer such
powers to the directors. Said the judge –
“ As drawn, the resolution authorises the majority at their will without any reason
other than desire to get into their hands the whole of the shares of the company, to
expropriate the shares of the minority…”
Where the minority can prove that the majority is perpetrating a fraud on the minority.
The minority will then be allowed to enforce a company’s action. The minority seek to
enforce the company’s action because the company has refused to do so or is prevented
from doing so by the majority. The minority must prove that –
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i. The wrong has been done to the company but the company is prevented
from rectifying the situation by the majority.
ii. That he has clean hands the first law of (equity).
iii. That the majority would benefit from the act complained of.
A fraud on the minority means inter alia a breach of the directors duties of good faith and
where there is voting for company resolutions that are not in the interests of the company.
It could also be where there is expropriation of the minority’s property.
Where a minority seeks to enforce individual or class rights. (Where those rights are
being infringed or varied, the members of that particular class must accept the variation.)
Where an act requires special procedure eg. Special resolution (see Edwards V Haliwell
(Supra) )
STATUTORY MINORITY PROTECTION
1) Oppression of the minority
An application may be made in terms of section 196 (1) which provides as
follows-
“ A member of a company may apply to court for an order in terms of section
198 on the ground that the company’s affairs are being or have been conducted in
a manner which is oppressive or unfairly prejudicial to the interests of some part
of the members, including himself…”
2) Variation of rights attaching to shares
Where there are different classes of shares and it is intended that a class of such
rights be varied by a majority decision in a general meeting, the holders of not
less than 15% of the issued shares of that class who did not agree to the variation
may apply to court for such variation to be cancelled. (Section 91)
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3) The Minister’s Application
The Minister is empowered in terms of section 197 to make an application to
court if it-
“…appears to him that the company’s affairs are being or have been conducted in
a manner which is oppressive or unfairly prejudicial t the interests of some part of
the members…”
4) The shares owned by the minority may be compulsorily acquired in take-over bids
and mergers if 90% of the majority agrees. However the minority are entitled to
lodge an application objecting to this. (section 194)
5) A company may be wound-up if it appears just and equitable that it should be so
wound-up. The just and equitable ground which is very wide indeed has been
interpreted to include oppression of the minority. (Section 206(g) )
THE ACTIONS WHICH MAY BE USED BY THE MINORITY (PROCEDURAL
ASPECTS OF MINORITY PROTECTION)
These may conveniently be listed as follows –
1) Personal Action or Personal Claim
2) Representative Action or Claim
3) The Derivative Action
THE PERSONAL CLAIM
In this case, the shareholder makes a claim in his own name against the company to
enforce his rights. He may bring the action to restrain the company from engaging in acts
that are ultra vires its stated objects. He can also bring this action to enforce his rights to
vote.
In addition, the shareholder is at liberty to utilise this action to enforce a right to a
dividend or any other right that accrues to him in terms of the articles.
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This claim is therefore enforced in an individual capacity for a wrong done to him
personally or for a breach of duty which is owed him personally.
THE REPRESENTATIVE ACTION
In this case, a minority seeks to enforce class rights. Representative actions are
permissible only where a group of persons have the same interests or a common
grievance.
Where a minority feels that they are oppressed, they can institute a representative action.
The general rule is that, if class rights are varied, then the class of shareholders affected
must accept the variation. In the case of LIVANOS V SWARTZBERG & ORS, 1962 (4)
SA 395, it was held that where oppressive conduct is alledged by a minority, it must
conduct that is harsh, unfair or burdensome.
In the case of ALLEN V GOLD REEFS LTD the court said that there is no fiduciary
duty on members to act in the interests of the minority.
Allen held fully paid up and unpaid shares in the company. Under the articles, the
company had a lien for all debts and liabilities of any member to the company upon all
shares not being paid up. By a special resolution, the company altered the articles so as to
omit the words “ NOT BEING FULLY PAID”. This created a lien over Allen’s fully paid
up shares as well. Allen sought an order to declare the alteration oppressive.
The decision of the court which has been criticized severly was that the company had
power to alter the articles. Any regulation to deny the company this power is not valid.
The shareholders were being treated in a similar manner. The mere fact that Allen
happened to be the only member of that class who was unhappy did not make the
alterations oppressive. The court added that indeed there was oppression, but not
selective oppression.
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THE DERIVATIVE ACTION
If the minority can prove that the majority are perpetrating a fraud on the minority, then
the minority can institute an action against the company. With this action, the minority
sues in the name of the company for a wrong done to the company provided the company
cannot get redress in a general meeting.
The minority in this case seeks to enforce the company’s action because the company has
refused to do so or if prevented from doing so by majority.
The majority does not infact sue for its own benefit, but for the benefit of the company
which cannot do so.
The shareholder sue in the name of the company but the company is made a nominal
defendant so that it can be bound by the decision of the court.
The purpose of the derivative action is to allow the court to interfere and remedy a wrong
done to the company. In order to succeed, the minority must prove the following:-
1) The wrong has been done to the company and the company would have instituted
action but is unable, or is being prevented from doing so.
2) That the majority would benefir from the act complained of.
3) That he has clean hands ie, he is not party to the fraud. (This is the first law of
equity)
In the case of ATWOL V MERRY WEATHER, the owners of a derelict mine formed a
company and sold it to Merryweather company. The shareholders sought to rescind the
contract. An action was brought to court. The majority voted to discontinue the action..It
was alleged that the majority had put minority property into their pockets. Atwol, a
shareholder started a new xction in his name and all the other minority shareholders
except for the fraudulent ones. The action succeeded. The court said that, with the
derivative action, the company must be made a nominal defendant and the minority can
use the company’s name without authorisation.
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LIMITATIONS TO THE DERIVATIVE ACTION
1) It is limited in ambit and scope. It is limited only to cases of illegality, ultra vires
and fraud.
2) It is extremely sexpensive especially to a minority shareholder wholacks
resources to persue it.
3) If anything is recovered from the action, the money goes into the company coffers
and the minority may get nothing.
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COMPANY MANAGEMENT
Introduction
A company, as was observed earlier on is a legal persona with a distinct
personality from its members. It is by legal fiction, supposed to run its own
affairs without looking up to any person to help it do so.
However, a company is in reality only an abstraction wit no physical existence.
It can only function if there are officers of the company who have to run it and
conduct its business activities. The people are the company directors.
Shareholders theoretically are not interested in the day to day running of the
business of the company but are interested only in their return on investment.
Directors therefore are the stewards who are entrusted with running the
company.
DIRECTORS
Directors once appointed do so at their own peril and must undertake the
obligations imposed on them by the Act and the articles, and the common law. It
is not enough, neither is it a defence for a director to sy that he was appointed
only as formality to fulfill the legal requirements.
Every company must have not less than two directors, other than alternate
directors, at least one of whom shall be ordinarily resident in Zimbabwe. See
Section 169(1)
Section 2 defines a director as including any person occupying the position of
director, alternate director of a company by whatever name he may be called. This
means that, any person whose functions are effectively those of directing a
company is a director, even though he can be called, for instance, the chief
executive officer, manager, official or superintendent.
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In addition, every person signing the memorandum of the company is deemed to
be a director of the company until other directors have been appointed.
APPOINTMENT OF DIRECTORS
The articles of association usually provide for the appointment of directors. The
shareholders exercise the power to appoint directors in a general meeting. It is
also possible for the articles to give the power to appoint directors to the directors
themselves.
Subscribers to the memorandum, or a majority of them appoint the first directors
and determine their number, which in any case may not be less than two. This will
be set out in the document submitted to the Registrar in terms of section 171(4).
These people will hold office until the appointment of directors in a general
meeting. The general meeting will decide what will happen to the first directors,
that is, whether they will retire or continue to hold office.
Table A of the first Schedule, Articles 74-108 deals with directors. Article 90
deals with the rotation of directors and provides that at the meeting, that is, the
first annual general meeting of the company, all the directors shall retire from
office.
WHO MAY BECOME A DIRECTOR
Section 173 lays down the persons who are disqualified from becoming directors.
It provides as follows:-
‘(1) Any of the following persons shall be disqualified from being
appointed a director of a company –
a) a body corporate;
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b) a minor or any other person under legal disability:
Provided that a woman married in community of property may be a director if her
husband gives his written consent and that consent is lodged with the Registrar;
c) save with the leave of the court, an unrehabilitated insolvent;
d) save with the leave of court, any person who has at any time been
convicted, whether in Zimbabwe or elsewhere, of theft, fraud, forgery
or uttering a forged document or perjury and has been sentenced
therefore to serve a term of imprisonment without the option of a fine
or to a fine exceeding $100.
e) Any person who is the subject of any order under this Act is
disqualified.
f) Save with the leave of the court, any person removed by a competent
court from office of trust on account of misconduct.”
This list is obviously not exhaustive. The articles may in terms of section 173(4)
also lay down further disqualifications such as foreigners or directors of other
companies.
The case of Tengende v Registrar of Companies is illustrative of the stance
which the court adopts when dealing with issues of disqualification. In that case,
the case, the court said that even when a person has a string of previous
convictions, he will not be disqualified by that fact alone. The court will look at
the whole character of the person to determine whether he has been rehabilitated,
said the the judge in that case.
“In my view, what must be scrutinised herein is the applicants whole
character whether it can be said that his word is his bond. In this regard,
the petition’s obvious lack of candour or tendency to deceive casts a great
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deal of doubt whether he is a truly reformed character, one to be trusted
with the honest management of the company.”
Certain people are disqualified from being directors because it must be ensured
that the company is run by capable, responsible and honest people. The office of
director is one of trust. He has a fiduciary relationship with the company hence
the demand for the utmost integrity.
ALTERNATE DIRECTORS
It is not always possible for the substantive director of a company to act in that
position. He may be on leave, on holiday in another country or he could be ill.
This does not mean that the company will go without a director. An alternate
director is usually appointed. The definition of a director in section 2 includes an
alternate director. He is only however a substitute director, or one appointed to
act in the place of the absent substantive director. An alternate director can only
be appointed if the articles permit such an appointment. A company must have not
less than two directors in terms of section 169(1) However, alternate directors are
not included in reckoning the number of directors of a company. An alternate
director is bound to comply with all the duties of a director even though he is not
counted as a director for purposes of Section 169, he is nevertheless a director by
virtues of the definition of a director in section 2.
THE BOARD OF DIRECTORS (BOD)
The Board of Directors consists of the various directors of the company. This is
where directors sit ( in a room called the Boardroom) to discuss the affairs of the
company. This is where meetings of directors are held. Usually there are
executive and non-executive directors although they may be called by various
names such as MAnaging Director (MD), Chief Executive etc. Let us consider
briefly the offices of these types of directors.
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EXECUTIVE DIRECTORS
Executives directors or Management executives are officers of the company with
a service contract. They work full time for the company hence tey are often
refered to as full time directors.
The executive director has knowledge of the company and is usually in that
position because of his expertise. He is very powerful and important in the
administration and day to day running of the company. The executive director is
almost invariably refered to as Managing Director or Chief Executive Officer.
The MD is also provided for in Article 108-110.
There is a difference between an ordinary manager and the Managing Director
although the difference still is a grey area. A director is under the control of the
BOD. He occupies an office which is statutory hence he is legally essential to the
company. His powers and duties are defined by law. The ordinary manager on the
other hand is merely an employee and is not a legal requirement for a company.
He is engaged by the directors for his services hence he is a worker albeit higher
up the hierarchy. (Managers of course dislike to be described in this way!)
NON-EXECUITIVE DIRECTORS
They are essentially statutory directors. They are rather formalities to fulfill the
legal requirements. In large companies, there are usually quite a number of these
non-executive directors. As their name suggests, they do not work full time for
the company unlike the executive directors. Sometimes they are employed
elsewhere on a full-time basis and may even be non-executive directors for
several other companies.
Indeed, some of them have “little relevant knowledge” of the companies they
direct. (Nkala & Nyapadi). They therefore rely heavily on the MD hence they
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have been described as “guinea pig” directors. Their powers, and rights which
they exercise in the BOD is determined in the General Meeting which is the
“ultimate organ of corporate control”.
REMUNERATION OF DIRECTORS
Payment for services of directors depends on the articles and their service
contracts, if any. It should always be realised that directors are not servants of the
company like ordinary employees.
Therefore the mere fact that one is a dirctor does not imply that he must be paid
for it. In the absence of a provision regulating payment of directors, the payment
will be in the nature of a gratuity. Managing Directors are usually paid a salary
with some percentage of the profits in terms of Article 109 of Table of the first
Schedule, the MD is entitled to a salary , commission and participation in the
profits as the directors may determine.
Please study section 177 which deals with loans to directors and section 172
which deals with share qualification for directors.
POWERS OF DIRECTORS
These powers are provided in the articles of association and the Articles of the
Companies Act together with the common law.
Articles 81-88 deal with the powers and duties of directors.
The BOD can act in any manner it wishes as long as it does not exceed its powers
as granted by the articles. The shareholders have nocontrol over what directors
can do it terms of their granted powers. If the BOD does anything that displeases
the shareholders, then the powers of the directors may be restricted by alteration
of the articles as founded for in section 16. The directors may also be removed
66
from office by resolution of which special notice is required before the expiration
of his period of office in terms of section 175(1).
Article 81 table A gives the directors powers to run the company subject only to a
regulation of the general meeting. In the case of Shaw v Shaw it was held that a
company in a general meeting cannot resolve to override the powers of directors
when they have been properly execised.
The company had resolved in a meeting to discontinue an action which ahad been
instituted by the directors in a court of law. The court said that some powers may
be exercised by directors and some by shareholders in a general meeting. The
directors are, however the only ones who can exercise the powers of management
if such powers are vested in them by the articles. The shareholders may, if they
are unhappy with the decision of the directors, alter the articles, refuse to re-elect
them or simply remove them from office. The guiding principle, however, is that
there shall be no interference with the directors unless the articles specifically
state that they shall be subject to the general meeting.
DUTIES OF DIRECTORS
The duties of directors can be divided into the following:-
1) Fiduciary duties
2) Duty to exercise powers bona fide the company’s interest
3) Not to make secret profits
4) Not to have personal interests conflicting with the company’s interests
5) Duty to disclosure (equitable disclosure)
6) Duty of care and skill
7) Duty to exercise an independent discretion
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FIDUCIARY DUTIES
These are derived from the law of agency and trust. Directors occupy a position
of power and trust in the company. They have a duty to act soley for their
company and to protect its rights.
Directors have a greater duty of good faith than the ordinary agent in that
directors act for a company which has no real existence but is only a legal fiction.
It can therefore not act on its own.
Directors are expected to exhibit honesty and integrity. They owe a fiduciary duty
to the company and the company alone. They do not owe any duty of care to the
individual shareholders. This was decided in the important case of PERCIVAL V
WRIGHT. In case the Secretary of a company received enquiries from certain
shareholders who wished to sell their shares to anyone willing to buy them. The
directors bought the shares themselves even though they had been approached by
a certain person who wanted to buy them at a price higher than that paid by the
directors. The directors did not disclose this fact to the shareholders. When the
shareholders discovered this they sought to have the sale set aside. The court
came to the conclusion that the directors did not have any duty to disclose such
information to the shareholders. The directors had not approached the
shareholders, instead the shareholders had approached the directors wishing to
sell their shares.
It has been said that a director has a duty to promote the interests of his company
and not to take away business from it. In the case of HORCAL V GATLAND, the
facts briefly were as follows:-
A company director by the name of Gatland was close to retirement. The BOD
decided to award him a golden handshake. After the decision had been taken,
Gatland received a phone call from a customer who wanted to do business wit the
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company. Gatland converted the business to his own use. The company only
camre to know of this when the irate customer rang to complain about the shoddy
job. The company sued Gatland for the profits and the golden handshake
payment. The court ordered Gatland to pay the profits but not the golden
handshake. The reasoning of the court was that the decision to award the payment
was taken before Gatland converted the contract. There were evil thoughts but
not evil deeds.
This was reiterated in the case of INDUSTRIAL DEVELOPMENT
CONSULTANCY V COOLEY where a company director pretended to be ill so
that he could be away from work and take some business contracts intended for
the company. The court said that he was in breach of his fiduciary dutie.
However, even though directors owe a duty to the company, they do not owe that
duty to the shareholders. The traditional view is that the interests of the company
are those of the shareholders, hence directora are enjoined to act in the interests of
the company and not their own selfish interests. The question then is :- what are
the inter4ests of the company? It has been decided that the interests of the
company are the interets of the shareholders.
The directors must act in good faith. They must not be motivated by any ulterior
purpose. The court will not, however, usurp the power and functions of directors
since it is not concerned with financial wisdom neither is it concerned with the
commercial wisdom of directors. Given a choice, the court would rather best
leave company matters in the capable hands of the directors. The court will
therefore, in determining whether a particular act is for the benefit of the company
enquire into whether a reasonable person would believe such acts to be in the
interests of the company.
Directors must be carefull not to engage in activities which will result in a conflict
of interest with the company. As a general rule, directors may not compete with
69
the company. A director should not obtain any other advantage fom his office
other than that to which he is entitled by way of the director’s remuneration or
fees. If a director obtains any additional advantages, these will be regarded as
secret profits and the director will accordingly be in breach of his fiduciary duties.
The duty to act in good faith for the company, is so fundamental that it cannot be
contracted out of. If the articles of the service contract purpote to free the director
from this duty, such a provision will be a complete nulity and of no force or
effect.
In the case of ROBINSON V RANDFONTEIN ESTATES GOLD MINING
COMPANY, the company wanted to buy a piece af land. The owner, however
was not willing to sell on the terms proposed by the company. Robinson who was
chairman of the company then entered into negotiations personally with the seller
and managed to buy the piece of land for R120000. He then resold the land to the
company for R550000 hence making a huge profit from the speculation. The
court held that he had used his position as director to make the profit. The court
had this comment to make,
“ Where one man stands to another in a position of confidence involving a
duty to protect the interests of the other, he is not allowed to make a secret
profit at the other’s expense or place himself in a position where his
interest conflicts with his duty.”
As long as one ia a director, the duty not to make a secret profit subsits, hence in
the case of ATLAS ORGANIC FERTILISERS V PIKKEWYN GHWANO, a
director gave notice of his intention to leave the company. He wanted to go and
direct another company he was going to join. During the period he was serving
notice, he enticed the employees of the company he was intending to leave to
leave the company as well and join his new company. the court decided that his
intentions were not bona fide the company’s interests. He was still a director of
the company, until he formally left, he owed the company the fiduciary duty.
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DUTY TO DISCLOSE
Section 186 (1);(2) provides for this duty in the following terms:-
1) “….it shall be the duty of the director of a company who is anyway, whether
directly or indirectly interested in a contract or proposed contract with the
company to declare the nature and full extent of his interest at a meeting of the
directors of the company.
2) In the case of a proposed contract, the declaration required by this section to
be made by a director shall be made at the meeting of the directors at which
the question of entering into the contract is first taken into consideration or, if
the director was not at the date of that meeting interested in the proposed
contract, at the next meeting of the directors to be held after he became
interested and in a case where the director becomes interested in the contract
after it is made, the said declaration shall be made at the first meeting of the
directors held after the director becomes so interested.”
It is clear from the wording of this section that the disclosure must be made to the board
of directors. Directors are not prohibited from being interested in any contract with the
company for purposes of transparency, they must make an equitable disclosure of their
interest. Article 85 restricts members from voting on matters where they have an interest.
It states:-
“ (2) Adirector shall not vote in respect of any contract or arrangement in which
he is interested, and if he shall do so his vote shall not be counted, nor shall he be
counted in the quorum present at the meeting…”
If their company has not adopted article 85, or if the matter falls within one of the
exceptions provided therein the directors may of course vote.
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DUTY TO EXERCISE AN INDEPENDENT DISCRETION
This duty is closely related to the duty of directors to act in the interests of the company
and the company alone. The directors should be independent of external influence and
should not dance to the tune of any person other than the company. Indeed , directors
may be nominees, but when it comes to directing hthe company, their duty to exercise an
independent discretion comes above everything else. They should therefore have an
unfettered discretion. They should not be dummies, puppets or stooges of any person.
In the case of S V SHABANIE, a judge did not mince his words when he said the
following:-
“ I want to destroy the idea that puppets cn be lawfully employed in our company
system. By that I mean, persons placed on boards who pretend to have taken part
in resolutions of which they know nothing. Our law does not know the complete
puppet who pretends to take part in the management of the company when having
no idea what it is to which he puts his signature. It is utterly foreign to have basic
concepts of our law and the courts will punish it as a fraud, all the more when
entire boards consist of puppets manipulated from outside by persons who are
ostensibly unconnected with the company.”
Great words, those, need we say more?
DUTIES OF CARE AND SKILL
Directors have a duty to display reasonable care and skill in the execution of their duties.
Decided cases show, this duty is not heavy or onerous.
In the case of RE: CITY EQUITABLE FIRE AND INSURANCE COMPANY LTD, the
company experienced serious shortfalls. The MD was convicted of fraud. The liquidators
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sought to make other directors liable in negligence for failing to detect the frauds. The
court held as follows:-
“ A director need not exhibit in the performance of his duties a greater degree of
skill than may be reasonably expected from a person of his knowledge and
experience. A director of an insurance company, for instance does not guarantee
that he has the skill of an actuary or a physician.”
Directors should act with such skill and care as is reasonably expected to of them having
regard to their knowledge and experience. They are not liable for mere errors of
judgement. In the case of RE: DENHAM & CO. for instance a director had
recommended payment of divident out of capital. He was not held liable because he was
only a country gentleman and not an accountant!
The extent of this duty will also depend on the nature of the company’s business
operations. Having regard to the exigencies of business and the articles of association,
some duties may be left to other officials and a director may be justified in trusting that
official to perform his duty honestly.
In the case of DOVEY V METROPOLITAN BANK OF ENGLAND AND WHALES,
a director delegated the task of drawing up accounts to others. It was heldhe was entitled
to reply n those accounts in recommending the payment of a dividend which was made
out of capital.
“The duties of care and skill are light compared to those of loyalty and good faith but the
directors may not be indifferent or be mere dummies.”
NOTE Examiners tend to require candidates to explain and discuss both the common
law and statutory duties of directors.
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