LECTURE NOTES-BUSINESS LAW II[BM203]

HISTORICAL BACKGROUND OF COMPANY LAW IN ZIMABABWE

Company law in Zimbabwe is largely governed by the Company Act [ Chapter 24:03] which as is amended from time to time and the numerous pieces of subsidiary legislation that are made hereunder.

Although the act covers a great deal, it becomes of necessity to the student of company law that one has to turn to common law to answer some of the questions connected with companies

The first observation about the origins of Zimbabwean company law is that it consists of a rich heritage of legal rules and institutions from ancient to modern times

Secondly one observes the presence of a mixture of rules from Roman Dutch law, English law, Germanic law, Canon law and South African company law.

Lastly one is impressed by the development of law which took place in Zimbabwe since the chartering of the British South African Company in 1889 to the present new statutory arrangement.

Common law in Zimbabwe plays a very vital role and is mainly based on the Roman Dutch law.

Roman Dutch law was introduced in Zimbabwe through South Africa when the Dutch settlers invaded South Africa in 1652. During the preceding centuries one of the provinces of Netherlands called Holland received into its legal system, a substantial injection by lawyers and legislature of the time, of the legal rules of Roman origin-whence the name Roman Dutch law.

Jan van Riebeeck and the settlers who arrived in the Cape of Good Hope were from the province of Holland and applied the law they knew.

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 passing of and enforcement of the Company Act in 1952, Company law in the Colony of Southern Rhodesia was based on the ordinance.

Further back, Company law in the Colony of Cape of Good Hope governed the laws of Southern Rhodesia following the proclamation 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 Hope 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 indigenous 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 in turn could then be applied to the Southern Rhodesia’s legislation. ‘‘Company law is, in a sense of international character and it is desirable accordingly that the law should be similar in different parts of the world. We do desire to keep our law as uniform as possible with the law of other countries, not only for the convenience of people who have

to come under the provisions of the law but also because of the value of having judicial interpretations of other countries which may be applied to our own legislation.”

The Minister implored on other members of the house to adopt the phraseology used in English law even where there might have been imperfections so as 6to avoid difficulties that could flow from making alterations.

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.

ENGLISH LAW Was introduced at the cape in 1795 when the cape became the British colony The British never repealed or abolished the roman Dutch law which was effective at

the cape after British occupation The result was thus that the later developments in the system in Holland had no

effect in south Africa after British occupation However the Roman Dutch law was accepted and applied in south Africa up to this

time and remains effective together with the influence of new English law Despite the influences of the English laws, the extent to which the rules were applied

and developed in south Africa has led to the general acceptance of roman-Dutch law in south Africa

Today there is a general tendency when legislature or the high court is confronted with the challenge of solving modern problems for which there are no applicable roman-Dutch, south African and Zimbabwean rules of law to make use of comparative studies of the foreign legal systems over the world and in way to create the best new Zimbabwean law.

STATUTORY LAW Also referred to as legislation Covers all those legal rules which are formulated, produced or imposed by the

parliament of the day or by the other organs with authority to make contemporary rules for the community

Each piece of legislation emanating from parliament is referred to by a name given to it by parliament together with a reference number and the year in which it was promulgated e.g. company act chapter 24-03 of 2000

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 numerous 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 South 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]

Application of these large sums of money is left in the hands of a few managing directors [ who are normally shareholders themselves].

When shareholders invest their money in shares they are guarding against personal liability. In theory they are not interested in the day to day running of the company but in the return of investment, that is, dividend 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 who 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.

There are no statutory limitations on the size of the share capital of private companies, the limitation is, however, on the size of membership.

Please read the following:Section 33 – Definition of private companySection 34 – Consequences 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 registeredSection 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 cannot 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.

PUBLIC COMPANYAccording to section 2 (the interpretation section) a public company is :-“any company that is not a private company”.

This is fine as long as we know what a private company is. A promoter who wishes to 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 licensed 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 dividend to

its members. In terms section 26 if the minister is satisfied that the association complied with the

provision of that section, he may license 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 privileges 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 pursuance 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.- Limiting dividend 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 privileges and exemptions conferred 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 society 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 separately from its

members. Has perpetual succession 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 also other statutory bodies, for example, parastatals, universities etc.

A company has a separate legal existence 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 liabilities of its members.- Has perpetual succession meaning that its existence and identity is not affected

by a change in its shareholding 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 neither 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 successfully 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.

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 judgment 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 subscribers 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.

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 company. He was then employed by Lee Air farming ltd as a pilot.

- 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 purport to insure company property because it belongs to the company and the company alone.

PIERCING THE CORPORATE VEIL

The fiction of the separate corporate personality cannot, however be taken too far as was said by Williamson, J IN Bark and Anr NNO V Boesch, there are occasions when

“ The court is entitled to peer behind the facet of a fictitious separate legal persona.- It 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.

- 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 pursuance 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.

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 business

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- after the outbreak 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 alleging 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.

- That 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

- 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 committed 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 owned 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 really 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 term of the Criminal Procedure 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.

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 is received .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 Zimbabwean law was adopted ,the practical feasibility of this doctrine has been seriously questioned while in other countries various reservations have been raised regarding some of its consequences.

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 disclosure tends to regulate corporate conduct better than imposition of regulatory and prescriptive provisions.

- 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 uncomplicated 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 companies 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 continuous 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.

- Continuous disclosure of the late 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 publication of information relating to the company mainly potential shareholder or investors.

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 clause 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- 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 consequences.

- 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.- Powers of the company may be pursued by the company.- Objects are those things which a company intends to pursue 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 in order 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 described as partly paid shares and he will be liable for the balance of $50,00 when the company makes a call payment in full.

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 - $30000,00Divided into – 30000 shares of $1 each.

SUBSCRIPTION CLAUSE

- Referred to as the association 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.

- referred 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.

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 referred to an arbitrator appointed by the parties in difference.- It was held that the article can neither constitute a contract 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 purported 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.

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 procedures have been complied with.

- Therefore the company will be bound by the contract even though all matters of internal management and procedures 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 company should 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 fiduciary duties of the promoter that he has to act in good faith and not make secret profit.

- Promoter must therefore exercise due care and diligence.- A prudent promoter will therefore strive to do only those things and to enter only

into those contracts and ultimately benefit his company and will not bring it down.

- Section 47 – “ any contract made in writing by a person professing to act as an agent or trustee for an unregistered company shall be capable of being satisfied 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

pre-incorporation 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 acquainted with the dealings of the company in which the memorandum and articles are the most important 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 memorandum 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

The new approach from the previous position in thata) The premise that a company possesses 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 exist in terms of section 16 (2a) between the company and its members; accordingly may under certain circumstances be restrained by its members from acting beyond its capacity.

ULTRA VIRES DOCTRINEIt is now permissible for companies to state the main object which should be stated in broad simple terms without spelling 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 that act is outside the company’s capacity.

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 SHARESORDINARY 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 dividend 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

- These shares offer preference to their holders in respect of rights eg dividends, voting etc.

- Have preferential rights attached to them in regards to dividend and the repayment of capital of liquidation.

- Entitled to a fixed rate of dividend eg 12.5%.- When the dividend 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 preference shares, i.e. 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

- Cumulative preferential rights to dividend are usually expressly stipulated and also reflected in the designation of the shares eg 12% cumulative preference shares.

- Cumulative preferential right entails that if in a given year or years no dividends are declared, the arrear and current preference dividends have priority at a subsequent dividend distribution before a dividend can be declared in respect of any other classes of share.

- The requirement that dividends must 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 arrears 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 issue 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)]

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, i.e 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

- 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 overhauledc) 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 financial position of the company.

SCOPE OF CAPITAL REDUCTIONReduction 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 amending 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.- 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 SHARESREAD 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 accordingly entitled of the fact that such funds, although it may be diminished or lost in the course of the company’s business must not be diverted from the objects of the company.

Maintenance 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 issue of shares at a discount.

ALLOTMENT AND ISSUE OF SHARES

Allotment and issue of contrasted with the transfer of shares.- 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 usually 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 has been attached to a prospectus

(section 66).

SECURITY MEANS OF SHARES

- 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 leveled 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.

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 extinction 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 management. 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 taken over by a judicial manager who is supervised by the Master of the High Court. His aim is to rejuvenate the company once more and give it a new lease of life.

In deciding whether to wind up a company or to place it under judicial management, the court will be guided by the principle of whether there are grounds or certainty of success. The disadvantage of judicial management is that it affects the credit worthiness of the company.

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

b) if the execution or other process issued, on a judgment, decree or order of a competent court in favor 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 contingent and prospective liabilities of the company.”

Basically, the fact that a creditor has demanded payment without success will be prima facie evidence that the company is unable to pay its debts, as amplified in the above cited section.

MISMANAGEMENT OF THE COMPANY

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

PREVENTED FROM BECOMING A SUCCESSFUL CONCERN

It has to be satisfactorily shown that there is a possibility that the company 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 delay the obvious death of a terminally ill company. Failure to become a successful concern can be a result of mismanagement as well or where the company is plagued with labor , 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 postponement or dismissal of the application (Section 299(2). The order granted provisionally will provide in terms of section 301 (1) (c) inter alia that:-

‘……. All actions and proceedings and the execution of all writs, summons and other processes against the company be stayed and be not proceeded with or without the leave of the court.”

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 upon his appointment and the custody would have been hitherto hands of the Master. He is appointed in the same manner as a liquidator in terms of Section 272. The duties of the provisional judicial manager are itemized in section 303 and these are to

(a) assume the management of the company and 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 letter 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 statement 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 contingent 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 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 READINGSection 306Section 308Section 314

WINDING UP AND LIQUIDATION

WINDING UP

We noticed at the beginning that upon registration, a company becomes a legal personality. It personally comes to an end at the dissolution of the company. During its life the company would have acquired rights and incurred liabilities. These have to be dealt with before the company is finally dissolved. The process of ascertaining and 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 existence 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 liquidator. Directors are therefore relieved of their duties of directing the company. During the process of winding up the company retains its legal personality which is only extinguished at dissolution.

There are two procedures for winding up 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 –(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.”

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 group, 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 indication 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.

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 petition the court for winding up. The court, however exercises 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 only; 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 dealt 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 categories:(1) Loss of company’s substratum(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 pursue other objects which were not contemplated by the shareholders.

In RE SERMAN DATE COFFEE COMPANY, a company’s main object was to acquire a (plant) for manufacturing dates as a substitute for coffee. 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 management decisions on account 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.

In RE YENDJE TOBACCO CO. LTD (1916), there were 2 tobacco manufacturers who were the only shareholders in the company. They were also the directors, with equal voting powers. They had a serious disagreement resulting in continuous quarrels. At one time, one director brought a legal action against the other. They had over one thousand pounds in instigation 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 pursue 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 dividends he said that this constituted a fraud and that as a result of this misconduct, he had lost confidence in the management of the company’s affairs. The court granted the order sought.

CONCLUSION

What we have looked at are the ways and reasons for winding up. The rest of the winding up procedure is merely administrative and fully provided for in the companies Act. It is therefore unnecessary for us to regurgitate the Act.

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 FO S S 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 corporations 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.

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

EXCEPTIONS TO THE RULE IN FOSS V HARBOTTLE

1) Where the majority have not acted bona fide in the interests of the company as a whole. In this case, there is a heavy burden on those who want to prevent the alterations since it is the majority which is best placed to decide what 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 positive harm of discrimination, 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 carried on competing business with the company to transfer their shares at a fair value to the directors. Sidebottom held minority shares and carried on competing business. He appealed 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.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 executive 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 was 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 –

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)

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 Claim2) Representative Action or Claim3) The Derivative Action

THE PERSONAL CLAIMIn 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.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 ACTIONIn 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.

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.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.

COMPANY MANAGEMENT

IntroductionA 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.

DIRECTORSDirectors 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.

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

‘(1) Any of the following persons shall be disqualified from being appointed a director of a company –

a) a body corporate;b) a minor or any other person under legal disability:

Provided that a woman married in community of property may be a director if her husband gives 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 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 DIRECTORSIt 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.

EXECUTIVE DIRECTORSExecutives 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 DIRECTORSThey 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 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 DIRECTORSPayment 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 DIRECTORSThese 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 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 DIRECTORSThe duties of directors can be divided into the following:-

1) Fiduciary duties2) Duty to exercise powers bona fide the company’s interest3) Not to make secret profits4) Not to have personal interests conflicting with the company’s interests5) Duty to disclosure (equitable disclosure)6) Duty of care and skill7) Duty to exercise an independent discretion

FIDUCIARY DUTIESThese 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 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 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.

DUTY TO DISCLOSESection 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. 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 SKILLDirectors 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 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.