ZIMBABWE INSTITUTE OF MANAGEMENT

Presents

EXECUTIVE DIPLOMA IN GENERAL

MANAGEMENT

COMPANY LAW AND SECRETARIAL PRACTICE

PROMOTING THE ART, SCIENCE AND PRACTICE OF GOOD, SOUND MANAGEMENT

COPYRIGHT RESERVED

ZIMBABWE INSTITUTE OF MANAGEMENT

WELCOME NOTE

WELCOME TO THE STUDY OF company law and secretarial practice! Our study of the subject takes us through the many corridors and

intricacies of law having a bearing on companies operating in Zimbabwe and those who practice that law. It is a law that requires of you an initial understanding of the theoretical concepts of Company and Secretary and the link between the two.

The best way to understand this subject is to adopt a practical approach because the subject is practical. You are therefore urged to ensure that as soon as you are familiar with terminology, concepts and underlying

principles of the subject, you learn the practical procedures that are the essence of the subject.

All laws are adjusted from time to time to meet the requirements and demands of the day. In the same vein, Company Law and Secretarial

Practice as a subject experiences certain amendments in the Act, from cited decided cases and statutory pronouncements that are made occasionally. The onus is on you to keep pace and be at grips with these

changes.

The subject is not difficult in any aspect. You however, have to read as widely as possible on the subject. Articles are found in journals, newspapers and many other periodicals on law, commerce and industry.

It is hoped that you find the subject as challenging and enterprising as it is meant to make out of you a graduate in Company Law and Secretarial

Practice.

All the best!

ZIM

CONTENTS

Page WELCOME NOTE OBJECTIVES INTRODUCTION

1. Corporate Personality

1.1 Historical Perspective 1.2 Definition 1.3 Forms of business organization 1.4 Features of a Company

Review Questions

2. Company Formation

Reasons for forming Company Reasons Against Forming a company What type of Company? Companies, Partnerships, Co-operatives Private and Public Companies

Review Questions

3. Procedure to Obtain Registration of Company Name Search Memorandum of Association

Statement of Intent Articles of Association

Alteration of Memorandum and Articles Registrars Office Promoter

Review Questions

4. Management of Company Directors Shares General Shares Types The Rights and Liabilities of Shareholders

Review Questions

5. Commencement of Business

6. Winding Up Judicial Management Types of Winding Up By Court By Creditors Members Voluntary Consequences

Review Questions

7. Company Secretarial Practice The Company Secretary Duties Termination of Appointment

7.2 Meetings

APPENDICES

OBJECTIVES OF THE COURSE

Unlike other subjects which the objectives of study may be chapter by chapter as it were, area by area, Company Law and Secretarial Practice, as a subject has the following as objectives that cater for and represent the

subject coverage in its entirety:

1. To explain the basic and elementary principles of company law that

are necessary for the participant to appreciate the practical

application of those principles to real-world and business situations.

2. To cause simplification and ensure deeper understanding of some of

the more complicated and confusing aspects of the subject through

leading decided cases, few as they may be (that were selected).

3. To provide sufficient knowledge to the participants to enable them to recognize fully, problem areas (and potential ones) in the field and

thus be in a position to successfully manage those areas.

4. To ensure that the participant emerges from the course not so much as a company law expert an/or a qualified Company Secretary, rather, to equip him with an awareness that Company law

requirements and secretarial practice demands meet this participants daily challenge and that, therefore, his role to play in this for his organization must be more meaningful, enlightened, cost reducing, effective and must more enjoyable after this course.

5. To share knowledge and experiences among participants and thereby

make the study of the subject more of a delight than a fright.

1. CORPORATE PERSONALITY

At the end of this topic, the participant should be able to:

a) Outline the historical perspective of Company Law in Zimbabwe.

b) Define a company as seen through the eyes of law, citing its features.

c) Understand the various forms of business organisations in Zimbabwe

1.1 Historical Perspective

The common law origins of Company Law in Zimbabwe stem from the Roman Dutch Law introduced to this part of Africa in 1891 and subsequently greatly influenced by English Law. Our law is therefore an

amalgam or admixture of Roman, Roman-Dutch and English Laws.

Roman Law did not encourage the existence of Private Corporations for fear of them becoming subversive organisations, but corporate bodies were set up by the State for various purposes even in the classical period

and by the time of justinian (527-565 AD) they could also be set up by individuals and other non-commercial purposes. This form of corporate body derived its nature from and was recognised by its constitution and was known as a Univesitas, a form of association, which can exist today

in our law. Roman Dutch law did not take the common law of

corporations much further and the development of law in this country and in South Africa owes most of the injection of English Law. In England also the idea of the corporate body or association began in the shape of the univesitas, mainly applicable to churches and other

religious organisations, but later in the 15th century, the Kings deviced a

way of making money by granting to groups of merchants or to trade guilds so called Royal chatters which purpoted to confer on these groups a corporate status and, as a rule, certain monopolies in trading

rights. These corporate bodies owned property and incurred liabilities separately from their members so that a judgement against a corporation did not permit execution against the personal assets of a member. Later

there came into being corporate bodies built created by act of parliament, a procedure which we will still see today in the setting up by Government

of Parastatal bodies such as National Railways of Zimbabwe.

The only example in our history of a company or corporate body set up by Royal Charter was that of the British South Africa (BSA) Company

chartered by Queen Victoria for the purposes of colonization.

The 18th century was a great time of commercial activity. There was a great deal of abuse of the system at that time and the advantages of separate corporate status. The fraudulent company promoter appeared

on the same scene, having purchased the Charter of a defunct company or merely purpoting to have done so. This culminated in a grave loss of public confidence in companies particularly in the South Sea Bubble incident which ruined most investors. The British Government reacted by introducing legislation, which delayed the further development of the

corporate idea and obliged the businesses to operate on the basis of a so-called deed of settlement, a document, which, although it was of doubtful authority, appeared to be accepted by the courts. Eventually the

Government realised that the corporate body, which came to be known as the company was here to stay. The first Companies Act to control such organisations was promulgated in 1844.Its main features were:

a) It required registration of new companies with more than twenty-five

members.

b) It permitted incorporation to be by mere registration

c) It permitted companies to issue shares and shares to be transferred

d) It provided for the publicity necessary to prevent fraud It did not, at the time, provide for the limited liability of members, an

important feature of modern company law, which was introduced eleven years later by the limited liability Act of 1855. By permitting transfer of

shares the 1844 act of course implied established the third characteristic of a company, viz, perpetual succession, which distinguishes it from a partnership.

The first companies Act promulgated in this country was the ordinance of 1895,prior to which the law of Cape Colony, largely modelled on English Law, prevailed. The Act enabled corporate status to be attained by companies whose members held shares simply by registration of a

Memorandum of association. It covered the liability of directors and other officers and provided for the limited liability of members. It also laid down the procedure for the liquidation or winding up of companies.

The statute which now governs the affairs of companies of the Companies Act Chapter 24:03 which came into effect on 1st April, 1952,

has been amended since then and was last consolidated in 1976. The main objectives of the act are:

a) To establish the corporate status of companies registered under the

act as legal personae separate from their members. b) To establish the limits of the liability of members of companies.

c) To provide safeguards for the creditors of companies.

d) To provide safeguards for investors in companies.

e) To protect the interest of employees 1.2 Definition

The word company has been used variously to convey meanings that include body of persons associated together for identifiable purposes; a number of guests; a firm; a ships crew; a sub-division of a regiment; etc. In terms of the Companies Act, Company means a company formed and registered under the Companies Act. In common Law, a company is a legal person or legal entity separate from and capable of surviving beyond the lives of its members. Like any juristic person, a company is legally an entity apart from its members, capable of surviving beyond the lives of, its members. Like any juristic person, a company is legally an entity apart from its members, capable of rights and duties of its own, endowed with the potential of perpetual succession.1 It is a legal device for the attainment of any social or economic end and to a large extend

publicly and socially responsible. It is, therefore, a combined political, social, economic and legal institution.

A company is an artificial or juristic person. It can therefore own property (assets), enter into contractual relationships with other

persons, can sue and be sued, open an account with a bank (or other institution) in its own name, etc. It can also be indebted (owe money) to others as well as be a creditor or other persons. The point to underline here is that the companys property (money, assets, etc) belongs to the company and not to the members or the shareholders in their own

capacities (of course the members/shareholders own the company). By the same token and in the same vein, the companys debts and liabilities are the debts of the company, so that the shareholders cannot be held

responsible for payment. 1 Hahlos Casebook on Company Law, 42 (4th ed. By Hahlo and Trebicock)

It is important to understand that although a company is a legal person, yet its activities can only be through human agents (directors) it must

have members, known as shareholders. Shareholders vis--vis the company as well as inter se, are regulated and controlled by the

companys Memorandum and Articles of Association, to be discussed later.

In essence, therefore, a country is . an intricate, centralised, economic administrative structure run by professional managers who hire capital from the investor.2 Its fundamental distinguishing principle in the company is that it must be a person separate and distinct form the other persons who are its members and directors.

A company must be capable for perpetual succession although it is possible that it may become insolvent and thereby wind up its business

activities (liquidation, under an appointed person called a Liquidator).

No statutory definition in strict, technical or legal terms of the word company exists. The term must be used in the context that the company is formed for, including thee advantages concomitant with the

separate legal existence concept of a registered company.

1.3 Forms of Business Organisation

1.3.1 Companies formed in terms of Chapter 24:03, limited by shares, i.e. deriving their capital from the issue, for a consideration, of

shares in the company. The holder of a share acquires certain rights in the company and becomes a member of the company also having certain obligations towards it. This form of company is

recognisable by the letters Ltd after its name. 1.3.2 Companies also formed in terms of the Act but for non-profit

making purposes, having no share capital and in which the liability of members is limited to an amount which they have

undertaken (guaranteed) to pay into the company fund in the event of winding up. Such companies must comply with certain requirements to enable them to be licensed by the Minister.

1.3.3 Statutory Corporations very much part of the modern scene, with

authorised share capital of half a million dollars or more.

2Managing, reviewing Livingstons The American Stockholder, (1958) 67 Yale Law Journal 1476, 1489.

1.3.4 Private Business Corporations (PBCs) recently introduced into

our law, but not yet widely practiced. The equivalent of the PBC was introduced in South Africa with some high degree of success.

It combines features of partnerships and private companies. 1.3.5 Co-operatives, created expressly to provide a form of organisation

designed for group production and marketing of agricultural produce and livestock, or the sale of goods to its members, e.g. the Farmers Co-op. The Act was amended in 1978 to provide for co-

operatives.

1.3.6 Partnerships still a commercial reality but becoming less frequent, although members wish to work with others, to form partnerships e.g. doctors, legal practitioners, accountants, etc.

1.3.7 Unincorporated associations professional associations, clubs, etc. 1.3.8 Universitas for charitable and non-commercial motives.

1.3.9 Chartered Companies now extinct and anachronistic. There is no such thing in our law as the company with unlimited

liability.

In the main, we will focus our study on to the form of company cited under 1.3.1 above. This is a company formed in terms of the Act, limited by the shares, that is, it raises its working capital by having people join it

by purchasing shares. Once formed the company has its own existence and hold its own property quite distinct from that of the shareholder or members. In the event of the company incurring any liability,

contractual or otherwise, the liability of members is limited to any outstanding among which they have undertaken to pay for the shares

they have purchased.

1.4 Features of a Company Incorporation (the formation of a body corporate) offers the following distinctive features or characteristics, which tend to appear as

advantages over all forms of business organisation.

1.4.1 Independent Corporate Existence

A company is, in law, a person. It is a legal persona existing independent of its members. By incorporation under the

Companies Act, the company is vested with a corporate personality, which is distinct from the members who compose it. This body corporate is capable of exercising all the various

functions of an incorporated company and it must have perpetual succession. A well known illustration of the above principle is the case of Salomon v Salomon Co. Ltd (1897) AC 22 (H.L.) which is as

follow:

One Salomon was a boot and shoe manufacturer. His business was in sound condition and there was a substantial surplus of assets over liabilities. He incorporated a company named Salomon & Co Ltd., for the

purpose of taking over and carrying on his business. The seven subscribers to the memorandum were Salomon, his wife and daughter

and four sons and they remained the only members of his company.

Salomon, with his two sons, constituted the board of

directors of the company. The business was transferred to the company for 40 000 pounds.

In payment, Salomon took 20 000 shares of 1 pound each and debentures worth 10 000 pounds. These debentures

certified that the company owed Salomon 10 000 pounds and created a charge on the companys assets. One share was given to each remaining member of his family. The

company went into liquidation within a year.

On winding up, the state of affairs was broadly something like this Assets 6000 pounds, Liabilities Salmon was debenture holders. 10 000 pounds and unsecured creditors

7 000 pounds.

Thus after paying off the debenture holder, nothing would be left for the unsecured creditors.

The unsecured creditors, therefore, contended that though incorporated under the Act, the company never had an independent existence, it was in fact Salomon under another name; he was the managing director, the

other directors being his sons and under his control. His vast preponderance of shares made him absolute master. The business was

solely his, conducted solely for and by him and the company was mere

sham and fraud, in effect entirely contrary to the intent and meaning of the Companies Act.

It was HELD, however, that Salomon & Co Ltd was a real company

fulfilling all the legal requirements. It must be treated like a company, as an entity consisting of certain corporators, but a distinct and independent corporation.

Not surprisingly, there have been occasions when the courts have found it justified to ignore the separate personality of the company and have

pierced through the corporate veil or according to one judge. Peered behind the faade of a fictious separate legal persona. They have done this in cases where the company is being used for fraudulent or other illegal purposes, or where matters of residence, trust

relationships and the interests of third parties are involved.

1.4.2 Limited Liability

The liability of members/shareholders is only to the extent of the

amount unpaid on their shares. The priviledge of limiting liability for business debts is one of the principal advantages of doing business under the corporate form of organisation.3

The company, being a separate person, is the owner of its assets

and is bound by its liabilities. Members are neither the owners of the companys undertaking nor the liability for its debts. In other words, the liability of the members is limited. No member is bound

to contribute anything more than the nominal value of the shares held by him.

In a partnership, the liability of the partners for the debts of the business is unlimited, i.e. partners are bound to meet, without any

limit, all the business obligations of the firm. Speaking of he advantages of trading with limited liability, Buckley J., said:

The statues relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity

of the country. They have, to the advantages as well of the investor as of the public, allowed and encouraged aggregation of all sums into large capitals which have been employed in undertakings of great public utility

largely increasing the wealth of the country.

3 Cadman, The Corporation in New Jersey, 327 (1949) 4 In re London & Globe Finance Corp (1903) 1 Ch 728, 731

1.4.3 Perpetual Succession

An incorporated company will continue to exist even when a member

dies or resigns, i.e. a company never dies. This feature is a direct result of the transferability of shares. The membership of the company may change from time to time but the company will be the same entity, with the same privileges and immunities, estat3es and possessions.5 Perpetual succession, therefore, implies that the company may

experience many changes in its membership but that does not affect its continuity. The death or insolvency of individual members does not, in

any way affect the corporate existence of the company. Professor Gower, for example, has cited this example in a footnote in his

book:

During the war, all the members of one private company, while in general meeting, were killed by a bond. But the company survived; not even by a

hydrogen bomb could have destroyed it.6

The bankruptcy of a member of a private company is no ground for wind

up of the company.

Members may come and go but the company can go on for ever.7

1.4.4 Separate Property

As earlier pointed out, a registered company is capable of owing, enjoying and disposing of property in its own name, since it is the owner of its

capital and assets. The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed of. In other words, no member can claim himself to be the owner of the

companys property during its existence or in its winding up. Simply put, The property of the company is not the property of the shareholders, it is the property of the company.8 in a partnership, the distinction between the joint property of the firm and the private property of the partners if often not clear.

5Canfield & Wormser, Cases on Private Corporations, 2nd ed., p.l Chap 1 on The Legal Conception of a Corporation. 6Gower Modern Company Law, 76(5th Ed.) 7Gower, loc.citt.pp. 75-76 8 Gramophone & Typewriter Co. v Stanley, (1906) 2KB 856 p.869

1.4.5 Transferable Shares

The shares of any member of a company are movable property and therefore transferable in the manner provided by the articles of the

company. In a partnership, a partner cannot transfer his share in the capital of the firm except with the unanimous consent of all the partners. If a transfer is made against the will of the other

partners, the transferee does not become a partner although he has some rights in the dissolution of the firm.

1.4.6 Capacity to Sue and be sued

A company, being a body corporate, can sue and be sued I its own name.

CORPORATE PERSONALITY

QUESTIONS

1.

a) What is a company?

b) Discuss, briefly, the different types of business enterprise in

Zimbabwe.

c) What are the advantages of forming a company?

2. Discuss, in greater detail, the nature, characteristics and advantages

of a registered company.

3. The company is at law a different person altogether from the subscribers to the memorandum. Do you agree?

4. A partnership firm was carrying on the business of plying buses. Having worked for some time, some of the partners formed a private

limited company, which they could under the law even while the partnership continued to be a running concern. Such of the partners who formed the company sold to the company their own buses which

were, up to then, being used by the firm. The other set of partners who constituted the minority, sued the section forming the company for accounts and their share of profits on the ground that in reality

the company was not a different entity from the firm and the business carried on by it was the same as that of the firm.

a) Was there a legal right to sue the plaintiffs?

b) The buses which the company was plying whose property were they?

c) Does the law recognize the existence of the company quite

irrespective of motives, schemes, conduct etc. of individual

shareholders?

2. COMPANY FORMATION

2.1 Reasons for Forming a Company 2.1.1 To give limited liability to the proprietors of a business (often

rendered useless by banks demanding guarantees from the individual shareholders).

2.1.2 To allow an association of more than 20 persons for the purpose of earning a profit (Only Professional partnerships are allowed more

than 20 partners). 2.2 Reasons Against Forming A Company

2.2.1 Bureaucracy must have secretary, directors, hold meetings, keep

minutes, file returns, etc.

2.2.2 Taxation - high tax bracket and extra 20% tax on dividends to

individual shareholders but not to shareholders who are themselves companies.

Note: Listed companies have a 15% withholding tax on dividends.

2.3 What Type Of Company? As discussed earlier, there are many types of business organization,

although there are mainly tow types of companies generally formed viz the private and public companies. Before we look at this in some detail, lets look at the company in general, the partnership as well as the co-

operative all being forms of business organizations that we see here, there and everywhere.

At the end of this topic, the participant should be able to:

a) Explain the reasons for and against forming a company.

b) Understand the criteria used to distinguish and differentiate between and among: company, partnership, co-operative, private company, public company.

Cite some of the advantages of a private company over a public company.

2.4 Companies, Partnerships and Co-operatives Compared and Contrasted

The major differences are set out below:

COMPANY PARTNERSHIP CO-OPERATIVE

1

FORMATION

Incorporated in terms of the

Companies Act Chapter 24:03

Verbally Or In Writing

(Partnership Deed)

Registered in terms of the Co-operative Societies Act.

2

NUMBER OF MEMBERS

Private company 1-50, public

company a minimum of 2

2-20

At least 10

3

CAPITAL

Private company provide by those involved in the business.

Public company may have hundreds of shareholders, who

take no part in running the business, contributing large

amounts of capital.

Provided by the partners

Most provided by co-operators, with loans

becoming more important

4

INTERNAL AFFAIRS

Controlled by the Act,

memorandum and article

Partners may make any

arrangements they wish, as long as they are lawful

Controlled by the Act and by-laws, e.g. each member

has one vote, no matter how large their contribution

5

LIABILITY OF MEMBERS

Shareholders liable only for the amount unpaid on their shares

Each partner is liable

personally for all partnership debts.

Limited to contributions if

co-op registered

6

SUCCESSION

Perpetual succession the company may continue

indefinitely.

Except where specific

provision is made in a deed of p/ship or by will, a

p/ship terminates upon the death or insolvency of a

partner.

Perpetual succession, i.e. the co-operative, may continue indefinitely

7

PROPERTY

Property belongs to the

company, not the shareholders.

Any property acquired by

the partnership belongs to all the partners in common.

Property belongs to the co-

operative, not the members

8

TRANSFER OF INTEREST

Private company-restricted.

Public company usually fully paid shares feely transferable.

All partners must consent to the transfer of interest

from one partner to another. A transfer will terminate the original

partnership.

Transfer of interest

restricted.

9 MAKING CONTRACTS

Shareholders have no power to

contract for the company unless authorized.

Each partner is an agent of the p/ship and has implied

authority to enter into contracts within the scope

of the business.

Only those co-operators

authorized in terms of the CO-operatives by-laws may

contract for the CO-op.

10 SEPARATE EXISTENCE

Exists separately form the

members and is a legal person.

Do not have an existence

separate form the members who form it.

Has a personality

completely separate from the members it is a legal

persona.

11 AUDIT

Annual audit compulsory,

except for a private company with less than 10 members.

Do not require an annual

audit.

Annual audit only

necessary if required by the co-operatives.

2.5 Private and Public Companies

The majority of companies registered in this country are those companies registered in this country are those companies limited by shares. Such

companies will have a share capital. In general a (registered) company may be a public company or a private company. Let us compare and contrast between the two.

Private and Public companies Compared and Contrasted.

PRIVATE COMPANY PUBLIC COMPANY

1.

COMMENCEMENT OF

BUSINESS

May start business

immediately on registration.

Needs to be certified by

the Registrar of

Companies before starting

business.

2.

PROSPECTUS Statement

in lieu

Not required.

Compulsory.

3.

APPOINTMENT OF

DIRECTORS.

Certain formalities dispensed

with e.g. Not required to lodge consent form with

Registrar.

Formalities required, e.g.

Must signed consent form

with Registrar and sign for

qualification shares.

4.

OFFERING SHARES TO

THE PUBLIC

Prohibited

No prohibition, but strict

control.

5.

TRANSFER OF SHARES

Must be restricted e.g. by giving control of transfers to

Directors.

Generally unrestricted.

6.

DIRECTORS SHARES

Not required: but if directors have shares, not required to

pay for them before company

commences business.

Not required; but if directors have shares,

company cannot start

business until each

director has paid for their

shares.

7.

DIRECTORS

No register kept.

Registers must be kept.

8.

STATUTORY MEETINGS

Not required.

Compulsory.

9.

BALANCE SHEET

Not usually required to file

with Registrar.

Annual balance sheet

must filed with Registrar.

10.

LOANS TO DIRECTORS Permitted if 9/10 of registered

share capital agrees. Not

required to be shown in the

accounts.

Generally prohibited. If

granted, must be shown

in the accounts at the

annual general meeting.

11.

AUDITOR

Not required if less than 10 members

Compulsory.

Advantages of a Private Company vis--vis Public Company

There are more reasons and advantages of opting to form a private

company than a public one, among them the following:

1. A private company can be formed in a matter of a couple of weeks

and can commence business as soon as it is incorporated.

2. The stringent rules relating to the appointment of the first directors

(Section 148) and the absolute prohibition of any loans to directors (Section 154) do not apply to private companies.

3. Generally, the fact that a private company has only a few members

makes for relatively easy management where decisions requiring a

resolution of the company are concerned (e.g. an increase in share capital).

4. A private company need not file accounts and auditors reports

annually with the Registrar of Companies unless it is a subsidiary

of or has a member a public company.

5. The total cost of floating a private company, even if one hands the

matter to ones legal practitioners will not cost more than a few hundred dollars.

FORMATION FO A COMPANY

QUESTIONS

1. Compare and contrast between a private and a public company.

2. How different is a Partnership from a Co-operative?

3.PROCEDURE TO OBTAIN REGISTRATION OF A COMPANY

In order to obtain the registration of a company, it is necessary to file an application with the Registrar of Companies. Such application

follows a certain laid down procedure which, when followed properly, will result in a company being formed in as short a period of time as two weeks. The procedure is described, broadly, below:

Name Search Submit on prescribed form CR21 the proposed company name

(preferably three or even four names in order of preference). This is to ascertain by search and examination, that a name is available for

registration, i.e. no company is in existence in the same name. The Registrar maintains a register of company names. Identical or near-identical names are rejected. (It must be noted that the Registrar has

the power to reject any name, for registration purposes, which in his opinion, may be misleading, offensive, derogatory, blasphemous or

undesirable.) A name which is in compatible with the main object of the company

being formed will not be accepted. For example, a furniture

At the end of this topic, the participant should be able to:

a) Understand the difference between Memorandum and Articles of Association

and what each contains.

b) Explain who a Promoter is, his role and duties in relation to a company.

c) Outline the practical procedure following in forming a company.

d) Demonstrate his/her ability to fill in the various forms necessary in the incorporation of a company.

Explain what each of the various company registration (CR) forms is used for, when and why.

manufacturing company will not be registered with such names as Dairy Marketing or Candy Confectionery. Sometimes, also, the Registrar of Companies will object to the company name if such a name is in conflict with the provisions of Section 20 (1) of the Act.

There is a practice followed by the Registrar of Companies in the approval of company names but this is beyond the scope of this

study/module. It is compulsory, by law, to include the words Limited and Private Limited after the name of the public and private limited companies, respectively. Law requires, further, that the name of the company

shall be displayed in a very conspicuous position outside all offices or places of operation, and it must appear on all offices or places of operation, and it must appear on all business letters, notices, etc.

(See a specimen of Form CR21: Application for Search as to Availability of Name at end.)

Memorandum and Articles of Association

Memorandum of Association Any two (recent enactment, one) or more persons may form a

company by signing a Memorandum of Association. It is the registered companys charter. It regulates the companys external affairs and its importance lies in the fact that it states the limits and extent of the relationship of the company to those persons with whom it may have dealings and/or investments in. The

Memorandum must state the desire of the subscribers to be formed into a company, and the agreement of each to take a specific number of shares in the company. In Zimbabwe, no subscriber may take less

than one share. Each subscriber is required to write opposite his name the number of shares he takes and sign the Memorandum in

the presence of at least one witness who must attest the signature. The Memorandum of Association is the Constitution of the company, and it therefore defines the main objects of the company. It is a requirement of the Companies Act (Section 9) that the Memorandum, state:

3.2.1.1 The Name Clause

3.2.1.2 The Objects Clause

3.2.1.3 The Liability Clause

3.2.1.4 The Capital Clause

3.2.1.1 The Name Clause

We have already discussed the details and conditions of the Name under Name Search above. Nevertheless, it must be understood that a company, being a legal person, must have a name to establish its

identity. The name of a corporation is the symbol of its personal existence.9 Suitability of the name must be observed. What is of equal importance is that the name of the company should not be identical with the name of another registered company. The

reason is: nder (any) Companies Act, a company by registering its name gains a monopoly of the use of that name since no other

company can be registered under a name identical with it or so nearly resembling it as to be calculated to deceive.10

A name may be said to be calculated to deceive when the name is misleading e.g. when the company is with small resources, but the name suggests that it is trading on a great scale or over a wide field.

3.2.1.2 The Objects Clause

The objects set out in the Memorandum of Association prescribe the powers of the company. The common law recognizes that a company

is a creature of statute and only has the powers it is born with. It regards as ultra vires any act by a company which is not within the powers set out in the objects within the Memorandum of Association.

To avoid difficulties with the ultra vires(beyond the powers) rule, the objects of the company usually start with the main one, e.g. To carry on the business of Cattle Ranching anywhere in and continue with a long list of supplementary/ancillary objects to enable the company to

carry on business as general dealers, borrow money on security of the company to carry on business as general dealers, borrow money ton

security of the companys assets, open bank accounts and place moneys therein, buy and sell land and other assets, pay dividends, etc. The list of objects usually ends up with one all embracing object.

To do anything incidental or conducive to the attainment of the above objects. 9Johnson, J. in Osborn v. The Bank of US. 9Wheat (22US) 738 10Lawrence,J. in Society of Motor Manufacturers and Traders Ltd v. Motor Manufactures and Traders Mutual Assurance Ltd(19250) 1 ch 675

Note: The October 1993 amendments have substantially destroyed the ultra vires doctrine, except in so far as shareholders vis-

-vis the company and themselves are concerned.

The choice of objects obviously lies with the subscribers to the Memorandum and their freedom in this respect is almost certainly unrestricted. The only obvious restrictions are that the objects should

not go against the law of the land and the provisions of the Companies Act. Further, the Act provides that a company limited by shares cannot, subject to a few exceptions, purchase its own shares. Accordingly, any

clause in the Memorandum giving the company a power to purchase its own shares will be in operative.

3.2.1.3 Why Objects?

Ownership of the corporate capital is vested in the company itself. Yet, in reality, that capital has been contributed by the

shareholders and is thus held by the company as though in trust for them. Such a fund must then be dedicated to some well-defined objects so that the contributors may know the purposes to which it can be lawfully applied. The statement of objects. Therefore, gives a very important protection to the shareholders by

ensuring that the funds raised for one undertaking are not going to be risked in another.

In the second sense, the objects clause accords a certain degree of protection to the creditors as well. The creditors of the company

trust the corporation (registered) and not the shareholders (who may come and go). Creditors have to seek their repayment, need

to do so arising, only out of the companys assets. The fact that the corporate capital cannot be spent on any project not directly within the terms of the companys objects seems to suggest and give the creditors a feeling of security. Creditors are important.

By confining the corporate activities within a defined field, the statement of objects serves the public interest also. It prevents

diversification of the companys activities into areas and directions not closely connected with business the business for which the company may have been initially established. It also prevents

concentration of economic power.

3.2.1.4 The Liability Clause

Clause 3 of the Memorandum is brief, blunt and to the point, stating as it does that The liability of member is limited. This means that no member can be called upon to pay anything more than he nominal value of the shares by him, or so much thereof as remains unpaid. If his shares are fully paid up, his liability is nil.

3.2.1.5 The Capital Clause

This clause simply states the amount of nominal (authorized) capital of the company and the number and value of the shares into which

such registered share capital is divided. For example, it may read:

The Share Capital of the Company is THIRTY TWO THOUSAND DOLLARS ($32 000) divided into THIRTY TWO THOUSAND (32 000) Ordinary Shares of the nominal value of One Dollar ($1,00)

each and such capital may be increased, reduced or varied Statement of Intent to Form A Company

The statement is invariably termed as Subscribers Declaration or Subscription. Whatever the terminology, this is a declaration, at the end/conclusion

of the Memorandum of Association, that the subscribers are desirous of being formed into a company in terms of the Memorandum of Association. The printed names, addresses and occupations of the

subscribers for, written in their own handwriting. There must also be the printed name, address and occupation of at least one witness to the subscribers signatures, together with his signature.

3.2.2 Articles of Association

A companys articles set out the way in which the company will regulate its affairs regarding the variation of rights of

members; the issue, transfer, conversion and forfeiture of shares; alterations of share capital; the notice required and

conduce of meetings; the appointment, qualifications, rotation and powers and duties of the directors; the manner in which dividends will be declared and profits capitalized, the keeping

of books of account and presentation of financial statements; etc.

11 Lord Wrenburg in otman v. Brougham (1918) AC 514 at p.522

It is not a requirement that articles be registered with the

memorandum but this is normally done. If articles are not registered, then Table A of the First Schedule of the Companies Act automatically

applies to the company. If articles are registered with the memorandum, then they must be signed and dated by the subscribers and their signatures witnessed. The names, addresses

and occupations of the subscribers and witness must again be printed.

In so far as articles of a company do not exclude or modify the regulations contained in Table A, these regulations shall apply as if

they were incorporated in the companys own articles. A private companys articles must include regulation 2 of Part II of Table A i.e.:

The company is a private company and accordingly:

a) the right to transfer shares is restricted in the manner

hereinafter prescribed.

b) the number of members of the company, excluding employees

and ex-employees, is limited to fifty.

c) any invitation to the public to subscribe for any shares or debentures of the company is prohibited.

In the case of a private company, earlier see, the articles must restrict the right of members to transfer shares, must limit its members to not more than fifty and must prohibit any invitation to the public to

subscribe, and a co-operative company must have similar provisions.

One point worth noting with regard to the Articles of a Company: They usually cover matters like the distribution of the share capital,

the rights of shareholders of different classes, transfers, liens, forfeiture of shares, alteration of share capital, meetings, voting

procedure, appointment of Directors and their powers, keeping of accounts. The articles constitute a contract between the company and its members and between the members themselves but they differ

from other contracts in that the terms can be changed unilaterally by the company in general meeting and a member joins the company with that understanding and cannot sue the company for any breach

if it changes its articles (or Memorandum) by the proper procedure.

In other words, provided the appropriate majority are happy, the minority have to accept the terms of the contract as amended.

The articles are not in any way a contract between the company and any employee as such. In the case of Eley v. Positive Government Security Life Assurance Co. Ltd (1896) 1 EX.D 88 the plaintiff had

been employed as a Companys solicitor during which employment he became a shareholder. When later the company ceased to employ him and employed another solicitor, Eley sued the company for breach of contract in terms of the articles. He failed because the

rights conferred on him by the articles were in his capacity as a member.

ARTICLES OF ASSOCIATION

WHAT THEY ARE:

1. Regulations for the INTERNAL arrangements and the MANAGEMENT of the company.

2. Bye-laws of the company governing its management and

embodying the powers of the directors and officers of the company

as well as the powers of the shareholders as to voting, etc.

3. Articles deal with the issue of shares, transfer of shares, alteration

of share capital, general meetings, votes and voting rights, directors (including their appointment and powers) managing

director, secretary, dividends, accounts, audit of accounts, winding up, etc.

4. Articles form a contract between the company and each member and between the members.

5. A private company limited by shares must register a set of Articles

of association together with the Memorandum of Association at the

Registrar of Companies Office. If it does not, then Table A applies.

6. Articles may adopt ALL or ANY of the regulations in Table A of

Schedule 1 of the Act. Table A in Schedule 1 to the Act is a model form of articles for a company limited by shares.

7. Thus a company may:

a) Adopt Tale A in full or subject of modification.

b) Register its own articles and exclude Table A.

8. Articles must be

a) Printed.

b) Dividend into paragraphs numbered consecutively.

c) Signed by each subscriber in the presence of one witness d) Dated

9. Articles can be altered by Special Resolution.

WHY THEY ARE IMPORTANT TO THE COMPANY

The Articles form a contract biding the members of the company. (Rule in Foss v. Harbottle)

The Articles constitute a contract binding the company to the

members.

Members are only bound by and entitled on the above-

mentioned contract qua members i.e. in their capacity as members.

The Articles constitute a contract between each individual

member and every other member (in most cases, though, the court will not enforce the contract as between the individual

members; rather it is enforceable only through the company.

The provisions of the Articles do not constitute a contract

binding the company or any member to an OUTSIDER, i.e. a person who is not a member of the company, OR to a member

in a capacity other than that of member e.g. that of solicitor, promoter or director of the company.

The contract constituted by the Articles can be VARIED to the

extent that the articles themselves can be altered in accordance with the provisions of the Act (because of the words SUBEJECT TO THE PROVISIONS OF THIS ACT).

The company may, therefore, alter the articles by special Resolution, subject to a number of restrictions.

3.3 Alteration of Memorandum and Articles

A special resolution is always required for the alternation of the

memorandum and articles.

If the objects of the company are to be altered so as to render the companys name inappropriate, then the name of the company must also be changed. Prior approval of the Chief Registrar of

Companies must first be obtained by filing for CR21 and the proposed change of name must be advertised in the Gazette and

local newspaper. At least 14 days must elapse before applying to the Registrar for applying to the Registrar for approval of change of name.

Copies of all special resolutions must be filed with the Registrar of Companies on form CR 11 together with:-

Form CR. 1 - Where the name of the company is changed.

Form CR. 4 - Where the make up of the share capital is varied.

Form CR.5 - Where the nominal capital is increase.

3.4 Actual Registration of Company Registrars Office

If the company is to be registered in Bulawayo, three copies, and if in

Harare, two copies of the memorandum of association together with the articles (if any) must be delivered to the Registrar of Companies. Registration fees are based on the nominal share capital and are $1 per

$100 with a minimum fee of $10 is required for the certificate of incorporation. (figures valid as at January 1997).

If the company is a public company then the persons who are named as directors in the articles, prospectus or statement in lieu of prospectus

must each lodge from CR12, which is their consent to at as directors, with the Registrar of Companies.

Providing the memorandum and articles are in accordance with the Companies Act and the registration fee has been paid and consents to

act have been received from the proposed directors of a public company,

then the Registrar will enter the name of the company in the Register. He will endorse one copy of the memorandum and articles with the

companys number and dote of registration and return it to the company together with the certificate of incorporation.

Upon the incorporation of a company, form CR.6 must be lodged with the Registrar of Companies, notifying him of the street address of the

registered office of the company. (Form CR6 is lodged at the same time as the memorandum and articles).

Public companies will now register their prospectus or statement in lieu

of prospectus with Registrar of Companies and commence to invite subscriptions for shares. It must obtain payment for the shares the directors and/ or other person have agreed to take up. When the

minimum subscription has been obtained and all the directors have paid for the shares they agreed to take, then form CR.7 must be filed by

the secretary or a director. This form is an affidavit that has to be sworn before a Commissioner of Oaths to the effect that the minimum subscription has been obtained and the directors have paid for their

shares. The registrar will then issue the certificate that the company is entitled to commence business. The statutory meeting must be held within one to three months of this date and form CR. 10 filed with the

Registrar of Companies.

For all companies, form CR. 2 Return of Allotments must be filed with the Registrar within one month of an allotment of shares being made. The share certificates must be issued to share holders within two

months of the allotment.

3.5 PROMOTER

Definition: promoter is a person who brings about the incorporation and organization of a corporation. he brings together

the persons who become interested in the enterprise, aids in procuring subscriptions, and sets in motions the machinery which leads to the formation itself

A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary

steps to accomplish that purpose.14

12 Bosher v. Richmon etc. Land Co. 89 Va 455 (16) SE360 ases on Private Corporations 13 Cockburn, C.J., in Twyncross v. Grant, (1877) 2 CPD 469 (C.A.) at p. 541 14 Bowen, J, in Whaley Bridge Calico Printing Co. v. Green & Simith (1880) 5 QDR 109:28 WR 351

A promoter is defined as any person who is party to the preparation of a prospectus.

The term promoter is a term not of law, but of business, usefully summing up in a single word a number of operations familiar to the commercial world by which a company is generally brought into

existence. Fiduciary Position

They stand, in my opinion, undoubtedly in a fiduciary position. They have, in their hands, the creation and molding of the company. They have the power of defining how and when and in what shape and under what supervision the company shall start

into existence and begin to act as a trading corporation.

The business of promotion thus gives a very advantageous position to the promoter in relation to the proposed company. He is expected to

stand in a fiduciary position towards the company and to work for the companys interests with the utmost good faith. He is not to make a secret profit or derive an undisclosed benefit for himself out of his

operations for the company. He may not, either, misapply or retain any property belonging to the company (Section 278 of the Act).

Anyone who acts merely as the servant or agent of a promoter is not himself a promoter. A solicitor, therefore, who merely does the legal

work necessary to the formation of a company is not a promoter. A promoter is not an agent for the company which he is forming because a company cannot have an agent before it comes into existence. This is a view which was held in the case Kelner v. Baxter (1866) LR2 CP 174.

A promoter must disclose a profit which he is making out of the promotion either:

a) An independent board of directors;

Or

b) The existing and intended shareholders, e.g. by making disclosure in a prospectus.

15 Lord Cairns, in Erlanger v. New Sombrero Phosphate Co., (1878) LR# App Cas 1218:39 LT269

A function which a promoter frequently has to perform is to enter into contracts in advance on behalf of the company he is about to create.

In English Common Law it is not possible to contract on behalf of a non-existent person. Even in our law which does allow it in the form of stipulatio alteri there are certain disadvantages, the principal one

being that the person who negotiates the contract on behalf of the as yet, non-existent other person (in this context a company yet to be

formed) must do so as principal in the hope that the company will ratify and adopt the contract when it is formed. Form a business point of view, it is obviously necessary to have such contracts lined up

in advance.

Many companies are formed for the express purpose of undertaking contracts and there would be little point in going to the expense of forming a company unless the contract was already in the bag. Therefore, statute has come to the rescue and, in Section 32, provided for the ratification by a company, after it is incorporated, of a contract

made on its behalf by a person who professes to be acting as agent or trustee of the company not yet formed provided that:

The memorandum contains provision for such ratification in its objects clause and:

The contract document (or a copy) is delivered to the Registrar along with the memorandum (the contract must be in writing).

It is, of course, possible for the company to ratify the contract even if the memorandum does not provide for this, but until it does the

contract is incomplete.

MEMORANDUM AND ARTICLES OF

ASSOCIATION

Questions

1. (a) What is a Memorandum of Association? (b) Distinguish between a Memorandum of Association and Articles

of Association.

2. What is a Promoter? Write about his position and duties.

3. A company purchased and operated a rice mill beyond its powers. The rice was consigned to certain persons who paid the price. The consignees had to sell the rice, owing to its inferior quality, at a

considerable loss. The company gave them drafts promising to pay for the loss. The company went into liquidation and the question

about the enforceability of the drafts arose.

a) How would you describe the transaction of trading in rice?

b) Explain, showing how and why, whether the directors could

bind the company.

c) Everyone dealing with a company is supposed to know its

powers. Explain this statement with reference to the position of the consignees above.

4. (a) What are the Articles of Association?

(b) What purposes do they serve?

4. MANAGEMENT OF THE COMPANY

In theory the management of a company is controlled by its members

meeting together and issuing instructions, and there are some major matters which can only be decided by resolution, ordinary or special,

of requisite majority of the members such as alteration of the memorandum of articles, ratification of pre-incorporation contracts, appointment of directors, removal of directors etc., but in practice the

detailed conduct of the affairs of the company is in the hands of the Board of Directors. Every company, even a small private one, must have at least two directors but of course large companies have many.

The first directors of any company are people who subscribe until others are appointed in terms of the Articles. These usually provide

that the directors are appointed in general meetings, but often, particularly in small private companies, the appointment is informal.

In terms of the Act a company must also have a Secretary who is the companys administrative manager, and has many responsibilities in seeing that the company complies with the terms of the Act.

A company is required to designate someone as its public officer in terms of the Income Tax Act and it is usually the company secretary who finds himself in this role.

4.1 Directors

The position occupied by directors in a corporate enterprise requires no professional qualification. A director could well be a mere figurehead (or cog in the machinery) sitting on the board y

virtue of his nobility of reputation or because his name looks good on company letter heads, thus giving it semblance of respectability.

At the end of this topic, the participant should be able to:

a) Understand the role of a director in a company.

b) Explain a share, its different types and how shares continue

various types of capital.

Having said that, however, Section 150 (1) of the Act disqualifies

certain persons from holding office as a director of a company, the reason being that it wants to keep management out of the hands of

unscrupulous persons. The following are disqualified, according to the Section cited above:

A body corporate.

A minor or other person under a legal disability.

An unrehabilitated insolvent, unless the court gives permission.

A person who has been convicted of theft, fraud, forgery, uttering, forged documents or perjury AND has been sentenced for this

offence to imprisonment without a fine, or to a fine exceeding $100 unless court gives permission.

Any person who is subject to an order in terms of the Companies

Act, disqualifying her/him from being a director.

Anyone removed by a competent court form an office of trust on

account of misconduct, unless the court gives permission.

In terms of Section 146(1) every company shall have not less two directors (other than alternate directors), at least one of whom shall reside in Zimbabwe.

Directors are appointed at the AGM (annual General Meeting) of the

company usually, by election, and they form a small body regarded as governing directors of the company.

Whatever a directors activity or lack of it may be the law requires him to stand in a fiduciary position in relation to the company. Thus,

anything he does in his capacity as director must be intra vires its articles and memorandum; he has the duty of the utmost good faith towards the company and must never profit himself at the companys expense; he has a duty toe exercise care and skill in the service of the company and the usual remedies lie against him at the hands of the company, its members or third parties if he defaults in this respect.

These are the common duties but in addition the Act puts many other liabilities on his shoulders. I have no time to deal with these

provisions in detail or even to summarise them but you will find a useful summary table in Tett and Chadwicks book. In particular, those provisions which ensure full disclosures by the company and/or

the directors themselves of any transactions involving the latter should be noted as should the section dealing with the

disqualification of a director. It will be noted also that Section 152 enables a company at a general meeting by resolutions, special notice

of which ahs been given,, to remove a director from office subject to his right to make representations and to be heard. Such removal does not require a special resolution as defined in the Act, which is required before a company may effect certain procedures. The Act does not make it mandatory for a director of a company to

hold shares in that company although might think that in order to provide some assurance to the investor a director should be required

to put his money where his mouth is and stake some of his own wealth in the company he is putting over to the public, the taking up of one share at a cost of $1 does not guarante4e that a director is

going to guard his investment carefully.

A director must, however, take shares where:

a) The director was a subscriber to the memorandum in which

case he must take at least one share, or:

b) The articles provide that directors must hold shares.

If required to hold shares a director is not permitted to acquire them on terms more advantageous than those on which they are offered the public, and he must acquire them within tow months of his

appointment (Section 149).

It is outside the scope and compass of this condensed account of the company law to deal with the methods by which shares in a company

are offered to the public. Also the intricacies of rights issues and bonus issues are left to deeper studies. But there is need for mention of one more important point about shares and share capital

which is that, when an offer of shares to the public is made the prospectus (or statement in lieu) must state the minimum

subscription which the original directors feel to be necessary to meet the expenses of establishing the company to provide the capital necessary for it to get into business. Until this minimum sum is

realized by offers from would-be shareholders a public company can neither allot shares nor start in business, because, in terms of Section 91 a company which has issued a prospectus will not be granted a

certificate to enable it to commence business until the Registrar has

received an affidavit signed by the Secretary or a director testifying to the effect that:

a) The directors have all paid for their qualification shares on the

same basis as the ordinary shareholder and;

b) The minimum subscription is in the bag.

4.2 Shares A share is

.. the interest of a shareholder in the company measured by a sum of money, for the purpose of

liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in

accordance with the Companies Act The contract contained in the Articles of Association is one of the original incidents of the share .16

Essentially, therefore, a share is measured by a sum of money, viz the

nominal amount of the share, and also by the rights and obligations belonging to it as defined by the Memorandum and Articles of Association. A share means a share in the capital of the company.

Each share in a company is distinguished by its appropriate number,

provided that it need not have a number if all the issued shares, or all the issued shares of a particular class, are fully paid and rank PARI PASSU for all purposes.

A share certificate, which specifies the shares held by the member and which is prima facie evidence of his title to the shares is issued

to a shareholder.

Section 9(1) (iv) sets out the requirements of the capital clause of the memorandum.

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

16 Farwell J., in Borlands Trustee v. Steel Bros & Co. Ltd (1901) 1 Ch 279 at p.288

The word capital has many shades of meaning anything which has an ascertainable value, money, property, including such intangible as

patents, trade secrets, skills can be designated as capital but for our purpose we would be wise to consider only share capital which is the monetary value of the aggregate of shares which a company is authorized to issue when registered. A share is simply a fixed fraction of that total value and is represented by a certificate (numbered for

identification) which is issued by the company to those who purchase shares. The share capital stated in the memorandum is thus generally known as the Authorized or Nominal share capital. It may be, however, that, in order to provide for future expansion and to avoid the necessity to amend its memorandum a company may set its

level of nominal capital higher than its immediate needs to that it does not have to allot and sell its hares when it starts up. Thus we get the term Issued Share Capital which means the value of the shares which have actually been allotted to members. Again the company may not need payment in full for the shares it issues but

may allow members to acquire, say, a $2.00 share for $1,00. The value that he company gets from members under these circumstance is known as the Paid Up capital, while the total amount still owing to the company by thus generally member s on their share is the Unpaid Capital.

It is this unpaid capital which represents the liability of members in a company limited by shares. The company can demand its payment

(or as it is said call it up) at any time. Of course the issued share capital may never exceed the authorized or nominal capital. If a company requires more capital than its memorandum states the

memorandum must be altered by special resolution (provided that the articles permit this, otherwise they must be amended first if the memorandum does not preclude such amendment). Notice of any

increase in share capital must e given to the Registrar within a month of the passing of the special resolution. (See section 64, 65, 66). On

the other hand should a company wish to reduce its share capital and if authorized by its articles to do so, it may again effect this by special resolution but, in this case in order to safeguard the interests of

creditors the resolution has to be confirmed by order of court before it can be registered and put into effect (Sections 68-72). There are

heavy penalties imposed on any officer of a company who conceals from the court the existence of any creditor who is entitled to object to the reduction.

Various other expressions using the word capital are to be found in Company Law, e.g.

a) Debenture capital this is really money which the Company has borrowed and is a debt owed by it to persons who have lent

the money which loan is acknowledged by the issue to the lender of debenture certificate.

b) Fixed capita: - this is represented by a fixed or permanent

assets of the company, such as buildings, plant.

c) Floating or circulatory capital stock in trade as a rule.

d) Reserve Capital Section 63 permits a company, by special

resolution determine that any portion of its share capital which has yet been called up will not be called up except in the event of winding up or if the company falls under judicial

management.

This must distinguished from the Capital Redemption Reserve Fund of which more anon, and the Share Premium Account into which all monies received by the company by way of premiums (i.e. extra

payments) on shares must be paid and thus become part of the capital of the company subject to the same restriction on expenditure or disposal as are other capital assets. Certain special items on which

moneys can be spent from the Share Premium account are sated in Section 59.

4.3 Type of Shares

There are a number of different kinds of shares. The articles of the

company will include details a regards the varieties the company proposes to issue and of the rights and liabilities attaching to them. Remember what has been said regarding the status of the articles as a

contract between the company and member and between members themselves. Quite apart from the blurb in the prospectus the prudent

would-be member of a company should therefore study its articles to find what he is letting himself in for and what his rights will be.

The common types of shares are:

4.3.1 Ordinary Share The Most Usual

When a dividend is declared the holder is entitled to a payment in proportion to the number of shares he holds;

when the company is wound up he is entitled to a like proportion of its realizable capital; in meetings he has voting

power again in proportion to his holding. The dividends (representing the income earned by the capital invested) may

be quite high in poor years of course there may be none al all.

4.3.2 Preference Shares

The shareholder here is entitled to first cut in the profits.

Thus the preference shareholder is on a relatively safe be at low odds.

There is a legal authority for the cumulative nature of preference dividends i.e. the carry over of shortfalls to subsequent years, but in practice it is rare for preference shares simplicity to be issued. They are usually created as

cumulating preference shares.

4.3.3 Redeemable Preference Shares

In general a company cannot buy its own shares. But if authorized by its articles, Section 61 permits a company to

issue Preference shares on the understanding that it may sometime in the future redeem or buy them back but it may so redeem the shares only out of profits which would otherwise be distributed as dividends and only if the shares have been fully paid up. The Shares can also be redeemed

out of the proceeds of a fresh issue. Section 6.1. gives the right to issue redeemable shares, but clearly sets out how they may be redeemed.

Note: Any share may now be issued as redeemable.

4.3.4 Participating Preference Shares

Here the shareholder not only gets his preference dividend

but can also participate, in proportion to his holding, in the profits available for distribution to ordinary shareholders after the preference dividend has been paid. In other words

they rank together with ordinary shares for ordinary dividends but have preference in the first bite at distributable profits.

4.3.5 Vendors, Management, Founders, Promoters Shares

Shares issued for consideration other than cash. E.g.

services rendered to the company, or property transferred to the company. They are sometimes called deferred shares

because the payment of dividends to their holders may be deferred until all shareholders who have brought their shares have received a fair dividend. It should also be noted

that because these shares have not been paid for in cash there must be lodged with the Registrar within one month of their allotment, a written contract showing the terms and

reason for the grant, and details of any such arrangement must be published in the prospectus.

4.4 The Right and Liabilities of Shareholders

The liabilities of shareholders are fairly simple; they are bound to

observe their contract with the company and with their fellow members in terms of the articles. Their main liability is to pay, on call, any portion or any other amount of the purchase price of their

shares which is outstanding.

As regards the rights of shareholders these are as follows:

1. The right to his fair dividend if a dividend is declared.

2. The right to his fair share of the net assets of the company on

winding up.

3. The right to be put on or taken off the register of members as

appropriate (rectification).

4. The right to resist oppression (by the majority shareholders).

5. The limited right to sue for damage done to the company.

The first three of these rights are self-explanatory and 4 and 5 need some further consideration. Taking no

The obvious snag about this rule is that, if the defaulters are majority shareholders they can outvote the complaining minority, so exceptions to

the rule have evolve3d, the first being that where any attempt to obtain a remedy in the company itself will be defeated by a fraudulent or otherwise culpable majority, the minority can bring an action on behalf

of the company. See Section 171 which gives any member who believes he is being oppressed the right to make application to the court for

redress. (Section now wider, though).

The other exceptions are:

a) When an act done in ultra vires.

b) Where the act done though not ultra vires has been done in an

irregular manner.

c) Where the personal rights of the shareholder as such have been

infringed. Minority shareholders are also protected by the provision of the Act and

the common law which are designed to prevent so called oppression of minorities.

The common law rule here is really an extension of the first exception to

the rule in Foss v. Harbottle as elaborated in the case of Atoll v. Merryweather (1867) L.R. Eq 464n as relating to fraud on a minority. In brief if a minority cannot gain redress for a fraud on it by a majority in general meeting, that minority, by a legal fiction can sue in the name of the company.

The statutory remedies available to minorities fall into two groups:

1. Those where the individual shareholder needs the requisite support of others; these are:

a) Section 12(3)(a) the right to object to an alteration of the

memorandum.

b) Section 134 the right to apply for investigation of the affairs of

the company.

c) Section 170(2)(b) the right to demand to be bought out under

certain circumstances.

2. Those where an individual shareholder may seek the remedy; these are:

a) Section 105 the right to apply to court for order to hold a meeting.

b) Section 171 & 171 A & B the right to seek a remedy from the courts other than winding up.

c) Section 180 the right to petition for winding up. Section 270 as

read with 271 the right to apply for an order of judicial management.

This discussion cannot go into any detail on the procedure for issue and allotment of a companys share, by offer to the public, offer for sale stock market, etc. But there is one section of the Act to which

your particular attention is drawn viz. Section 49 which specifically prohibits the hawking or pushing of shares and ties up any loose ends which might otherwise exist with regard to the requirement of a prospectus or statement in lieu.

MANAGEMENT OF THE COMPANY

Questions

1. What does management of a company entail and how is this

achieved in practice? 2. Describe the position of a director of a company under the

following headings:

(a) Appointment

(b) Who may and who may not be a director

(c) Shares held by a director

3. (a) What is a share?

(b) Describe and differentiate among the different types of capital.

(c) What are the various types of shares hat you are aware of?

4. What are the various rights of shareholders? Are there some

that may be ultra vires?

5. COMMENCEMENT OF BUSINESS

A private company can commence business as soon as it is incorporated but a public company needs to get a certificate from the

registrar before it can do so and Section 91 of the Act requires a public company (unless licensed in terms of Section 22) which has issued a prospectus to furnish the registrar which an affidavit to the

effect that:

Shares have been allotted to a total amount of not less than the minimum subscription as stated in the prospectus.

Every director has paid to the same extent as other members for all shares taken or contracted to be taken by him for which he is liable to

pay in cash. If the public company has not issued a prospectus it must register a

statement in lieu. Only when these formalities have been observed will the registrar issue a certificate to enable the company to commence business.

Once a company is in business the main pre-occupation of the law is

naturally to protect the interest of the people to whom the company owes money its shareholders, creditors and debenture holders. The law is determined (but not always successful) to ensure that, if any

danger of the company being unable to meet its obligations should arise people should know as soon as possible. Hence the number of

reports and returns which a company has to render, and the penalties

At the end of this topic, the participant should be able to:

Explain when a private company can start business and when a public company can.

Understand the various requirements of certain sections of the Act in

relations to the business operation (Section 57-61,67,118 and 160).

imposed on those responsible as agents of the company if they default.

It has been seen that a company may by observing the terms of the

Act lawfully alter its share capital in certain ways but its perhaps more important to note the various provisions hidden away in various sections which are intended to ensure that the current issued share

capital of the company is actually represented by assets. It must be remembered, however, that share capital and the various

reserve accounts (e.g. share premium account, share redemption account, etc.) are not represented by cash sitting in piggy banks

locked up in a safe. They must however, be identified in order that they appear somewhere in the companys accounts and are thus subject to examination. In the final event, the shareholders or creditors protection lies in their ability to read and interpret the audited accounts of the company.

Sections of the Act designed to prevent the general public from being taken for a ride are discussed below:

Section 57 deals with the payment of commissions to any person in consideration of his subscribing or agreeing to subscribe . For any shares in the company if and there follows a number of restrictions on commission except for the purpose of raising that

capital. Section 58 prohibits a company from providing any financial

assistance to anyone for the purchase of share sin the company or in its holding company unless its business is that of a money lender and the loan is made in the ordinary course of business or the shares are

to be held by or in trust for employees.

Section 59 insists that if a company issues shares at a premium (i.e. at a price which includes a sum additional nominal value of the shares) it must put the money acquired as a result of the premium

into a special account the share premium account which becomes part of the capital of the company and subject to the same restrictions

as regards expenditure as many other part of the capital. Section 60 puts limitations on the power of a company to issue shares

at a discount; in particular it makes such an issue subject to sanction by the court.

Section 61 (we have already seen this) limits the conditions under which redeemable shares may be issued. Bonus issues can of course

be made only out of profits. Section 65 and 70 make it obligatory for any alterations in share capital in terms of section 64 and 69 to be

notified to the registrar so that the public have constructive notice of these alterations and in the latter case, of course, sanctions by the

court is also required. Section 67 limits the power of a company to pay interest due on

money owed out of capital only to cases where such payment is authorized by the articles or by special resolution and it is in respect of capital expended on capital projects. The payment must also have

the prior approval of the minister, who may, at the expense of the company, enquire into the circumstances.

Section 118 requires the presentation of audited accounts at the annual general meeting of every company and its subsidiaries, the

form of account being specified by Section 119 and the seventh Schedule and article 123 of the First Schedule.

Section 160 prohibits the issue to directors of shares on more advantageous terms than they are issued to any member of the

company and prohibits the disposal of the directors of any (or all) of the assets of the company, unless the transaction, in specific terms is approved by the company in general meeting.

There are many other subtle provisions in the Act which attempt to

protect the public from the evil machinations of the company and the people who run it; but these are enough. The requirements regarding accounting are really the final security for both members and public

because, one way or another they are publicized. In spite of the ingenuity of the legislature which, of course is limited,

companies do go to the wall. Perhaps this is due to the legislation with which we have been dealing. So from time to time companies go

into liquidation, because they cease to have a raison detre or because they are no longer able to fulfill their objectives without prejudicing either their members or their creditors.

6. THE WINDING UP (or Liquidation)

A company may be wound up because it is no longer needed or because

it cannot continue to operate due to lack of money. It may be thus wound up voluntarily by its owners or compulsory by its creditors. It

may also be struck off the Register as a result of error. Section 283 of Act provides that the Registrar may strike a company off the Register if he has reasonable grounds to believe it is no longer in business. If the

company secretary fails to render the annual return and fails to respond to the Registrars reminder, the next thing he will know is when creditors start phoning in panic because the companys name has appeared in the Gazette under the heading Companies to be Struck Off. This is something that should be avoided at all costs, as it does not do the

companys credit standing any good at all. The death of a company is accompanied by formalities much more

complicated than those of a requirements mass. It is therefore fitting that we should pay some attention to this aspect of the law before we

put this seminar to bed. But before we call in the undertaker and put the company to its last resting place we ought to give the Doctor a chance and discuss whether and how the life of a sick company can be

restored. There are, I fact, many devises to this end such as mergers, takeovers, amalgamations, arrangements with creditors, etc. We will

At the end of this topic, the participant should be able to:

a) Explain why companies wind up.

b) Cite how companies can wind up.

c) Understand what judicial management is and under what circumstances it is resorted.

d) Explain the consequences of winding up.

e) What mode of winding up is the most common in Zimbabwe.

deal with what is often the penultimate event in the life of a company, viz, Judicial Management.

6.1 Judicial Management

6.1.1 Why Judicial Management

Judicial management comes about because investors and creditors are more inclined to cut their losses and have no faith in the ability of an uninvolved, even if professional, manager to rehabilitate a moribund

6.1.2 Granting An Order of Judicial Management

A court may grant an order of judicial management at its discretion but it may first call for a report from the Master or for an investigation by

inspectors appointed by the Minister.

6.1.3 Effects of Judicial Management The effect of an order of judicial management is simply to suspend the

management of the company, to remove all power from the directors and confer these of the judicial manager. The companys auditors however, continues to function in collaboration with the manager whose duties are

stated in general terms in Section 274.

If at any time the judicial manager comes to the conclusion that he is flogging a dead horse and that the company connoted be resolved he may apply to the court for cancellation of the order and the issue of a winding

up order instead. On the other hand if the judicial manager or other interested party is of the opinion that the company has been

rehabilitated they may apply to the court for cancellation of the order, a request whiny may be granted subject to such directors as he court may give regarding resumption of management, including the holding of a

general meeting to appoint directors.

WINDING UP OF COMPANIES Although judicial management has been dealt with, so far, in what is considered to be its logical place, this subject is preceded in the Act by

the provisions which deal with the winding up or liquidation of companies the last rites as it were. Indeed this subject occupies most of Part IV of the Act and is further dealt with in a lengthy set of

regulations known as the Companies (Winding Up) Rules 1972 as subsequently amended.

However, since winding up is really only of interest to the Company Secretary when it is a voluntary winding up by the members, you are

thus referred to those sections of the Act dealing with winding up. The practicalities of winding up an unwanted company is dealt with the secretarial side of this module.

6.2 Types of winding Up

The winding up of a company may either:

1. Winding up by order of the court.

2. Voluntary winding up:

a) Creditors voluntary winding up

b) Memb