Issued but unpaid (K2,000,000) A2
40. Company Officers
This is conferred under Part X of Cap 388 which provides the primary officers of the company which are the directors and the secretary.
1. Directors
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Section 215(1) of the Act provides that, “the business of a company shall be managed by the directors, who may pay all expenses incurred in promoting and forming the company, and may exercise all such powers of the company as are not, by this act or the articles, required to be exercised by the company by resolution.” The section prescribes the powers of directors as defined by statute. Specifically the directors may exercise the powers of the company or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the company or of any other person (section 215(3).
(a) Who is a director?
The Companies Act does not define who a director is but suggests in section 203(1) that any person who is appointed by the members of a company to direct and administer the business of the company shall be deemed to be a director of the company, whether or not he is called a director. In charitable companies, a person may not be known by the title of director but he will for purpose of company law be known as director. In the corporate world, there are also persons who are known as directors but who in the context of company law are not directors.
(b) Fiduciary nature of the office of director
The relationship of the director with the company is that of principal and agent.
Directors are agents of the companies they work for. By reason of this relevant law is that of agency. Although directors are appointed by members they only stand in a fiduciary relationship with the company that they serve, i.e. they owe their duty to the company and not necessarily to the members. The directors are therefore, required to act in the best interest of the company as opposed to those of the individual members.
Although directors are not necessarily trustees, they do occupy a position of trust so that they owe those common law duties of care, good faith and royalty to the company as opposed to the members (or shareholders) who will have appointed them. The fiduciary duties may be summarized as follows:
(i) Royalty: Directors must act in good faith in doing what they consider to be in the best interest of the company.
(ii) Compliance: The directors must exercise their collective powers in accordance with the Incorporation Form, articles of association and the law generally. They must ensure that as they discharge their functions, they have due regard to the Incorporation Form, articles and the law as it stands. For example, if the directors were to declare a dividend when the company had insufficient funds to warrant that dividend, it would be an example of this breach of duty. Note that members cannot declare a dividend unless the directors have recommended it.
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(iii) No Secret Profit: The directors must not use their positions, i.e. use the company’s property, name, information or indeed opportunities that belong to the company for purposes of advancing their own or anyone’s benefit unless it is allowed by the company’s constitution or in those cases where the directors will have appropriately declared their interest and the company consented to the directors retaining the benefit.
(iv) Independence: The directors are required not to restrict their powers in respect of their independent judgment. This independence is also embodied in section 212(1) of the Act which provides that, “a person shall not give directions or instructions to the duly appointed directors of a company if the person is not eligible to be a director of the company.”
(v) Conflict of Interest: Directors must never allow their personal interests or duties to conflict with those of the company (section 218).
(vi) Directors are Required to Act with Fairness as Between Shareholders: This means they are required to treat all the shareholders equally.
(vii) Duty to Exercise Reasonable Care and Skill: Directors are required to exercise this duty. What constitutes reasonable care and skill is a question of fact. The members should choose a person with necessary competence to discharge the functions of director especially now that there is a distinction between the company and directors. Directors occupy such a serious position in the company that they should possess the competence, i.e. reasonable care and skill. In Ethiopian Airline Ltd v Sunbird Safaris Ltd & Others SCZ Judgment No. 26 of 2007, the managing director of the first respondent company was held personally liable for the payment of all the company’s debts and liabilities as he had knowingly carried on business of the company for more than 6 months with less than 2 directors and for fraudulent purposes contrary to the provisions of sections 26(1) and 383(1) of the Companies Act.
(c) Appointment of Directors
Section 206(1) of the Act provides that the number of directors of a company shall be the number of first directors named in the application for incorporation, or such other number as the company may decide by ordinary resolution. This means that apart from the first directors, the members can by an ordinary resolution appoint an increased number of persons as directors.
(d) Persons Deemed Directors by Default
The definition of directors entails that a director will not be restricted to persons who are formally appointed as there are other persons who will be treated as directors for purposes of the Act even though they will not be appointed as directors. Accordingly section 203(3) of the Act provides that, “a person, not being a duly appointed director of the company, who holds himself out, or knowingly allows himself to be held out, as a director of the company –
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i. Shall be deemed to be a director for the purposes of all duties and liabilities (including liabilities for criminal penalties) imposed on directors by this Act; and
ii. Shall be guilty of an offence, and shall be liable on conviction to a fine not exceeding 500 monetary units.
It is an offence for a company to hold a person as director who has not been formally appointed as such.
(e) De Facto Director
This is a director not formally appointed as opposed to de jure. Section 203(4) of the Act provides that, “a person, not being a duly appointed director of a company, on whose directions or instructions the duly appointed directors are accustomed to act shall be deemed to be a director for the purpose of all duties and liabilities (including liabilities for criminal penalties) imposes on directors by this Act.”
(f) Scope of the Director’s Authority
Section 203(6) of the Companies Act provides that, “no limitation upon the authority of a director of a company, whether imposed by the articles or otherwise, shall be effective against a person who does not have knowledge of the limitation unless, taking into account his relationship with the company, he ought to have had such knowledge.” The starting point is that a limitation will be ineffective as against a third party with no knowledge of the limitation. However, where the third party had actual knowledge, he shall be bound.
(g) Number of Directors
Section 204(1) of the Act requires every company to have at least 2 directors regardless of whether it is a public limited company or private company. It is an offence for a company to operate for more than 2 months with fewer than 2 directors (section 204(2) of Cap. 388 and Ethiopian Airline Ltd v Sunbird Safaris Ltd & Others above).
(h) Eligibility for Appointment
Section 207(1) of the Act sets out the categories of legal persons who cannot be appointed or who cannot continue to act as directors.
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i. A body corporate. This would be ineligible for appointment as a director because a body corporate is incapable of exercising fiduciary duties as discussed earlier.
ii. An infant or any other person under legal disability.
iii. Any person prohibited or disqualified from so acting by an order of the High Court.
iv. An undischarged bankrupt.
A company can in its own articles add further prohibitation as to qualification for appointment as director. Section 207(6) of the Act provides that if the company appoints ineligible persons to be directors in contravention of the section this shall not invalidate any transaction entered into by the company.
(i) Residential Requirements of Directors
Section 208(1) of the Act provides that more than half of the directors of a company, including (a) the managing director, if the company has a managing director; and (b) at least one executive director, if the company has executive directors, shall be resident in Zambia. This provision brought a number of problems in practice during the privatization programme especially in the mines, as most directors were not resident in Zambia. As a result there were exemptions made to the law to accommodate the interests of the foreign company owners.
(j) Directors’ Share Qualification
In accordance with section 209(1) of the Act, there is no requirement that a director or prospective director must be a member of the company or hold any shares in the company in which the appointment relates.
(k) Vacation of Office of Director
In addition to those circumstances set out in section 210 of the Act, a company can in its own articles of association provide other circumstances in which a person can vacate the office of director. But in terms of section 210, a director can vacate the office by:
i. Resignation upon giving notice in writing to the company;
ii. Death;
iii. Being absent from meetings of the directors held during 6 months, without the consent of the directors;
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iv. Holding any office of profit under the company, except that of managing director or principal executive officer, without the consent of the company by ordinary resolution;
v. If as a director one is directly or indirectly interested in any contract or proposed contract with the company and fails to declare his interest as required by the Act.
In terms of section 210 and 211 of the Act, a director may be removed from office via an ordinary resolution at a general meeting of the company except that if the directors are removed in breach of his employment contract, he shall have the right to claim damages for breach of contract.
(l) Types of Categories of Directors
The Companies Act does not give a distinction between types of directors. It however gives recognition to the fact that a company can have both executive and non-executive directors (section 208). However, modern company practice gives a distinction between executive and non-executive directors.
(i) Executive Directors
Executive directors are full time officers of a company who manage the business on daily basis but who are also co-opted onto the board of the company. They are in employment relationship with the company and therefore, enjoy rights, duties and remedies applicable to employees.
(ii) Non-Executive Directors
Non-Executive directors have no employment or executive functions and typically these will be part time persons who genuinely bring an independent voice in the management of the company. Because of their independent voice, they are very important category of directors in the management of the company.