1 1. INTRODUCTION
Company law is the law relating to corporate bodies. A company is a body corporate, which exists separate from the individuals who form it. It is an association of two or more persons who come together to undertake business for profit. The word ‘company’
does not possess any precise legal definition, and it is ambiguous. A more general definition is that a company is a continuing, regulated and formal organization (or association) of two or more persons (natural or legal) who come together (associate) in order to undertake business or any other legal purpose.
A company however, is not the only legal vehicle used to undertake business for gain.
There are other forms through which business may be undertaken: - 1.1. Partnership
Section 1(i) of the Partnership Act 1890 defines a partnership as “the relation, which subsists between persons carrying on a business in common with a view of profit.” The Law in Zambia requires all law firms to be partnerships. A partnership can either be formal or informal. A formal partnership is one endorsed by a partnership deed. An informal partnership means all that partners do is to fill up a form pursuant to the Regulation of Business Names Act, Cap 389.
A partnership is not a legal entity and has no separate legal existence from the persons that constitute it. Therefore, the partners themselves are liable for the debts and liabilities of the partnership, i.e. there is no limited liability. The Limited Partnership Act 1907 applies to Zambia by virtue of Cap 11 of our laws. Such partnerships are called limited liability partnerships (LLP) but we do not have them in existence in Zambia today.
1.2. A Sole Trader
This is someone who undertakes business either alone or with employees. Most sole trader businesses in Zambia today have no legal existence to the extent that they will not have complied with legal requirements before undertaking business as provided by the Registration of Business Names Act, Cap 389, that is to say:
a) Choice of a name to be used for the business,
b) Have the name cleared by the Registrar of Business Names,
c) Once cleared, filling up of a prescribed application form and paying prescribed fees with the Registrar of Business Names by the applicant before being issued with a certificate of registration by the Registrar so that the applicant is at liberty to use the name as cleared.
2
As with partnership, a sole trader does not have separate legal existence. As a matter of fact when registering a partnership you go through the same procedure as a sole trader except that in a partnership, such as a law firm, added details shall be required.
1.3. Co-operative Societies
This is another form of doing business, Section 2 of the Co-operative Societies Act, Cap 197 defines a co-operative society as, “any enterprise or organization owned collectively by its members and managed collectively for social economic benefit and whose activities are not prohibited by law”.
Every co-operative society must be registered by the Registrar of Co-operatives who is a Public Officer as provided by Part III of the Act. The Co-operative Societies Act envisages that a company incorporated under the Companies Act can convert itself into a co-operative society by passing a special resolution to that effect (see section 14).
1.4. Clubs and Societies
The Clubs Registration Act, Cap 162 regulates the registration and operation of clubs in Zambia by providing that for a club to be registered it must have a minimum of 25 members and the club must have premises. Here the persons can associate as a club or otherwise for philanthropic, social, charitable or professional reasons, e.g. political parties, golf clubs, or women’s clubs. The registration is with the Registrar of Societies.
Clubs and societies do not however, enjoy separate legal personality from members.
Legal action is brought against members in their official capacity. However, certain clubs and societies such as trade unions are excluded from registration.
In National Milling Co. v M. Vashee (2000) ZR 98, the appellant Company, due to the flooding of the market with cheap imported wheat, resorted to offering to buy wheat from the farmers at much reduced prices contrary to an agreement concluded and signed between the Zambia Farmers’ Union and the Company fixing the 1993 season factory delivery price of wheat at US$302.00 per tonne. Aggrieved by this turn of events the Farmers’ Union sued through their Chairman, M. Vashee. Held, that an unincorporated association is not a legal person and therefore, cannot sue or be sued unless such a course Is authorized by express or implied statutory provisions. That, however, a contract purportedly made by or with an unincorporated association is not necessarily a nullity as the officers can be sued or can sue in their official capacities.
2. SOURCE OF COMPANY LAW
The primary source of company law is the Companies Act, Cap 388 as supplemented by other statutes such as the Banking and Financial Services Act, Cap 387, The Securities Act, Cap 354, the Competition and Fair Trading Act, Cap 417, Incorporation Form, the articles of association of the respective companies; stock exchange requirements in case of a public limited company; and case law since courts interpret the provisions of the statutes.
3 3. Functions of Company Registration
3.1. Enabling function for the company to incorporate and enjoy benefits of being incorporated;
3.2. Regulatory function, to ensure that companies operate in accordance with the law.
4. Why incorporate?
There are a number of factors that influence the decision whether to incorporate or not.
These are:
a) The size of the business: Where the undertaking is large, then formation of a company as opposed to a partnership would be advised;
b) The nature of the activity: For example, if a client wishes to establish an entity which would thrive behind the personal attributes of the person who forms it, then it would be appropriate to form a partnership with no separation between the business and the persons forming it.
c) The duration of the activities: Some activities are for a fixed duration, that is to say undertake a specific task in which case you would need a partnership which would be dissolved once the activity is accomplished. Where the activity is of a permanent nature and would even outlast the members, then formation of a company would be advised.
d) Regulatory regime: There may be regulatory framework demanding that certain business ventures may only be undertaken by a company and not a partnership.
e) Legislation and Government Policy: Ask the client why they want to form a partnership and not a company. Maybe it is for purposes of benefiting from taxation as in partnerships it is the individuals who are taxed on a graduated scale while in a company taxation is based on corporate profit. The Government may want to provide specific incentives for companies set up in particular areas or carrying on specific business ventures. Hence the client may wish to benefit from such incentives by forming a company as opposed to a partnership.
All the above factors have to be weighed against the peculiar position of the client. To incorporate means to form into a corporation. There are two main ways of incorporating a company:
i. Pursuant to Parliament passing a law creating a company: Such companies may be corporate sole in which case the holder of an official position becomes a legal entity. Examples of a corporate sole are the Minister of Finance who is allowed to enter into binding contracts on behalf of the Government, the
4
Administrator General, Official Receiver and the Investigator General who pursuant to legislation are corporate sole in their official functions. On the other hand, there are corporate aggregates, i.e. an aggregation of persons who are conferred with corporate personality as a group of persons, e.g. the Council of the University of Zambia.
ii. Via the Companies Act, Cap 388 of the Laws of Zambia. Most companies are formed through this medium and shall be the emphasis of this course.
5. ATTRIBUTES OF INCORPORATION 5.1. Separate Corporate Personality
The incorporated company exists independent of the members who constitute it. It is from this attribute that all attributes stem from. In Associated Chemicals Ltd v Hill &
Delamain and Ellis $ Co. (1998) ZR 9, the respondent company sued the appellant company for recovery of money owed for services rendered at the appellant’s instance and request. The appellant company was sold to a new shareholder. There were clauses in the share purchase agreement whereby the vendors undertook to indemnify the purchaser and the appellant company against outstanding financial liabilities incurred prior to the sale of the shares. Counsel for the appellant company argued that the new management of the appellant company was not liable for the debt.
Held, that it is wrong in principle to distinguish between old and new shareholders or between new and old management or to treat business transactions giving rise to the claim as one essentially between individuals. Ngulube CJ stated following the decision in Salomon v Salomon & Co., that, “a principle of the law which is now too entrenched to require elaboration is the corporate existence of a company as a distinct legal person………Upon the issue of the certificate of incorporation, the company becomes a body corporate.’’
In Salomon v Salomon & Co. (1897) ACC 22, a trader sold a solvent business to a limited company with a nominal capital of 40,000 shares of 1 Pound each, the company consisting only of the vendor. 20,000 shares were also issued to him and were paid for out of the purchase money. These shares gave the vendor the power of outvoting the 6 other shareholders. No shares other than these 20,000 were ever issued. All the requirements of the Companies Act, 1862 were complied with. The vendor was appointed Managing Director, bad times came; the company was wound-up, and after satisfying the debentures, there was not enough to pay the ordinary creditors.
Held, that the proceedings were not contrary to the true intent and meaning of the Companies Act 1862; that the Company was duly formed and registered and was not the mere “alias” or agent of or trustee for the vendor; that he was not liable to indemnify the Company against the creditors’ claims; that there was no fraud upon creditors or shareholders; and that the Company (or the liquidator suing in the name of the Company) was not entitled to rescission.
5 5.2. ‘Lifting the Veil.’
The principle of separate corporate personality as confirmed by Salomon’s case and reasserted in later cases, forms the corner-stone of company law. This principle may be referred to as the “veil of incorporation”. In general, the law will not go behind the separate personality of the company to the members so that as in Macaura v Northern Assurance Co. Ltd, it was held that the largest shareholder had no insurable interest in the property of the company .There are, however, exceptions to the principle in Salomon’s case, where the veil is lifted, or pierced, and the law disregards the corporate entity and pays regard instead to the economic realities behind the legal façade, i.e. where the facts supersede from. These exceptions may be classified into those expressly provided by statute and those under judicial interpretation.
One example of a case where “the veil is lifted” by statute is where a company carries on business for more than 6 months with less than the statutory minimum number of two members (section 26(1) of the Companies Act). In such a case, every person who is a member during part of the time the business is so carried on after the end of the 6 months period and who knows that the business is being so carried on, is jointly and severally liable for the payment of all debts and liabilities of the company incurred after the end of that 6 months. This is an exception because the general rule is that the company’s debts and liabilities cannot be enforced against the members.
An example of a case where “the veil is lifted” by courts in the past is where a company registered in England was held to be an alien enemy if its agents or the persons in de facto control of its affairs were alien enemies, and in determining whether alien enemies had such control, the number of alien enemy shareholders hand the value of their holdings were material (Daimler Co. Ltd v Continental Tyre etc, Ltd (1916) 2 AC 307).
In Re-Express Engineering Works Ltd (1920) 1 Ch 466, the decision of all the shareholders was held to be the decision of the company, i.e. something less formal than a resolution duly passed at a general meeting was regarded as the act of the company.
More recently, the position of the courts has become clearer. There must be some evidence of impropriety before the corporate veil can be pierced. Thus the Court of Appeal in Re H (1996) 2 BCLC 500, upheld an order made against the assets of two companies controlled by two individuals accused of excise fraud, rejecting the argument that the assets of the companies and those of the individuals were separate. Basing their judgment on Adams v Cupe Industries Plc (1990) Ch 433, the Court of Appeal held that this was an “appropriate case” in which to lift the veil: “As to the evidence, it provides a prima facie case that the defendants control these companies; that the companies have been used for fraud, in particular the evasion of excise duties on a large scale; that the defendants regard the companies as carrying on a family business, and that the company cash has benefited the defendants in substantial amounts”.
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
6
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 provisions of sections 204(1) and 383(1) off the Companies Act, respectively.
In the absence of impropriety, the courts will not pierce the corporate veil. In Ord v Belhaven Pubs Ltd (1998) 2 BCLC 447, the Court of Appeal refused to pierce the corporate veil. They rejected any idea that a group of companies could be regarded as a single entity except in very limited circumstances where there was some impropriety or the company was a façade concealing the true facts. Even in that situation, it was suggested that the situation was best dealt with by applying the insolvency laws.
It would, perhaps, give a better perspective to the discussion of Salomon’s case and the other cases if they were regarded not simply as statements of an elementary and obvious principle, but as instances when a plea that the veil should be lifted, though perhaps initially successful, ultimately failed.
5.3. Advantages of Incorporation
As a company is a legal entity separate from its members, there are advantages which flow with incorporation:
1. Limited Liability: The liabilities of the company do not extend to members and if so is limited to the amount on unpaid shares. The limitation of liability relate solely to the members (or shareholders) while the liability of the company is unlimited. The limitation of liability will arise in the event that the company is being wound-up. For example, if X Limited is would-up and if at the time of winding-up the shareholders had paid for their shares in full, they will have no liability to the company. But if they had not paid in full, they will be required to contribute to the extent of their unpaid shares.
Hence section 17(3)of the Companies Act provides that where a private company limited by shares is wound-up, a member shall be liable to contribute, in accordance with Part XIII, an amount not exceeding the amount, if any, unpaid on the shares held by him.
2. Perpetual Succession: An incorporated company enjoys perpetual succession, i.e. the company can in theory exist in perpetuity or until liquidation, independent of the shareholders who may die, sale shares, or get bankrupt, in ZCCM & Ndola Lime Ltd v Sikanyika & Others SCZ Judgment No. 24 of 2002, the respondents were unionized employees of the second appellant which was a wholly owned subsidiary of the first appellant. The workers launched proceedings in the Industrial Relations Court against their employee and the holding company requesting for a declaratory relief that they were entitled to payment of terminal benefits prior to transferring their contracts of employment to those that would buy the second appellant under the privatization programme. The court held that a change of ownership of shares cannot result in the corporate becoming a new employer as the corporate character of a company continues despite changes in the shareholders. This is based on the separateness of the corporate
7
entity from those behind it, owning it and directing its affairs. Therefore, the company will still be the same employer and will be bound by the contracts of employment.
In a partnership or sole trade business, the Partnership Act 1890 provides that there is no perpetual succession as in case of death or resignation of a partner, the partnership would stand dissolved.
3. Property Ownership: The corporate character of a company enables the company to own property independent of the shareholders. In Macaura v Northern Assurance Co. Ltd (1925) AC 619, the owner of a timber estate sold the whole of the timber thereon to a timber company in consideration of fully paid up shares in the company. Subsequently by policies effected in his own name with several insurance companies, he insured this timber against fire. The greater part of the timber having been destroyed by fire, he sued the insurance companies to recover the loss, but the actions were stayed and the matter was referred to arbitration in pursuance of the conditions contained in the policies. The claimant was the sole shareholder in the company and was also a creditor of the company to a large extent. The Court held that if a trader sells his business to a company, he will cease to have an insurable interest in its assets even though he is the beneficial owner of all the shares.
A person who no longer wishes to be a member is only entitled to whatever price he can get for his shares. In case of unincorporated associations, there is no separation between business and personal property; the property of the partnership therefore, is the property of the partners. If there are any changes in the composition of the unincorporated association, the property will have to be shared.
4. The rights and obligations of the company are distinct from those of the shareholders. A corporate entity is entitled to pursue its own actions independent of shareholders. A company can enter into a legally valid contract with its shareholders. It is also possible for one person to be principal of a company and also to be its servant. In Lee v Lees’ Air Farming Ltd (1961) AC 12, Lee was the governing director and qua chief pilot of the company at a salary. He held 2,999 out of the 3,000 shares in the company which he himself had formed. Lee was killed in an air crash whilst working for the company. His widow claimed compensation under the New Zealand Workmen’s Compensation Act 1922 for personal injuries to her husband in the course of his employment. A workman was defined by this Act as an employee under a contract of Service and it was argued that no compensation was payable because Lee and Lee’s Air Farming Co. Ltd were one and the same person. The Privy Council applying Salomon’s case .held that Lee was a separate person from the company and could perform the actions of both director and employee; that therefore, compensation was payable.
In Underwood v Bank of Liverpool (1924) 1 KB 775, the sole director of and main shareholder in a company paid cheques, drawn in favour of the company, into his own account Held, (1) the Managing Director, even if he owns all the shares except one, cannot lawfully pay cheques to the company into his own banking account or draw cheques for his own purposes upon the company’s account, (2) the bank (which had
8
allowed this to happen) was put upon inquiry and was not entitled to rely on his ostensive authority, and could not rely on the rule.
5. Borrowing or raising of finance: Limited companies do have advantages when it comes to borrowing. A company can borrow money and create debentures or floating charges to secure the debt. Only a company can create a floating charge. (Floating charge is a kind of security for a loan.) The charge “floats” because it does not attach any particular asset, but floats over the company’s assets as they exist from time to time.
Certain events cause the charge to “crystallize” and attach to whatever assets the company has at the time.
In this way a company can use its assets as security for borrowing while it remains at liberty to continue using the assets for purposes of carrying on its business. A limited company can invite an investor and offer limited liability. Such advantages are not available to partnerships or sole trader businesses. In terms of public limited companies, they have distinct advantages as they can raise finance from the stock exchange.
6. Taxation: At times a company would enjoy tax benefits which may not be available to partnerships or sole traders. There may be tax exemptions on capital, or tax heavens.
7. Efficiency: Limited companies do allow for separation of ownership and management. The power to manage a company resides in the directors. It is possible in the context of a Limited company for owners of the company to entrust its management in the hands of professionals or experts in the field of the investment.
8. Status: An incorporated entity enjoys higher status than a partnership or sole trader. This is true in real terms. This higher status has the effect of attracting high caliber personnel who would like to be associated with the status.
9. Flexibility: The corporate world allows for flexibility in many areas. Examples of such flexibility are:-
a. Individuals can own shares in different companies at any given time with full knowledge of the extent of their liability due to the attribute of limited liability, b. As the case is with parastatal companies, one can own shares in a corporate
entity using nominees. A nominee does not own shares as a beneficiary as usually there will be as a trust allowing him to own shares in trust of the one who nominates him,
c. A limited company can also become a shareholder in a subsidiary company, d. A company can change its name and in the like manner its share capital or share
structure by say addition of preference shares.
9
Shareholding is easily transferable unless the company’s articles of association give restrictions.
10. Crimes: A company can be convicted of a crime, regardless of whether its directors are also convicted. However, a company cannot be convicted of a crime which requires physical act of saying driving a vehicle, or a crime for which the only available sentence is imprisonment. There are particular problems with crimes which require mens rea (“a guilty mind”) – most common law crimes require mens rea, while many statutory offences involve strict liability. In order to convict companies of common law crimes, courts may regard the mens rea of those individuals who control the company to be the mens rea of the company.
Similarly a company may be a victim of crime. It is theft to steal from a company, even if those accused of the theft are also the company’s only shareholders.
6. Disadvantages of Incorporation
6.1. Formalities and Compliance with Requirements: Incorporation invites a wide range of formalities, expenses and lack of privacy as every company is subject to regulation and control pursuant to the provisions of the Companies Act, Cap 388.
Division 8.5, section 184 to 189 of the Companies Act which provides for annual returns requires one to pay fees as they file annual returns.
The several documents that one has to file with the Registrar of Companies become public documents making the company lose privacy. Section 189 of the Act, in fact makes it an offence to fail to file the documents as required. For public limited companies, the requirements are even much stricter. The requirement of keeping proper accounting records is provided under Part VIII of the Act. In order to comply with the Act, the company has to use lawyers and accountants which is an added expense.
6.2. Legislation: Sometimes the Government may pass legislation which will have a direct negative effect on particular kinds of companies.
6.3. Tax Treatment: The tax exposure may actually be prohibitive.
7. TYPES OF COMPANIES
Companies are creatures of the law and are created either to:-
a. Pursuant to Special Act of Parliament: These companies are called statutory companies. Statutory companies are established for purposes of achieving specific objectives for public good. Examples of statutory companies include Development Bank of Zambia. TAZAMA and NAPSA,
b. Under the Companies Act, Cap 388. These represent the typical companies we have in Zambia. The Companies Act recognizes the existence of corporation
10
companies. When the promoters have made a decision as to what type of company they intend to form, they must address the issue of the objectives that they intend to achieve through the establishment of the company. Hence as a lawyer you have to establish what the client wants to use the company for.
8. Classification of Companies under the Companies Act
Division 2.2 of the Companies Act provides for types of companies. Under the Act, one is able to trade as a corporation with limitation to their liability and those who wish to have no limit to their liability. Section 13 of the Act broadly speaking recognizes two types of companies namely public limited company and three forms of a private company, i.e. private company limited by shares, private company limited by guarantee and an unlimited company.
A. Public Company
The term “Public Company” is used to describe a company which is incorporated as such and has the following:-
i. Share capital (section 14(1),
ii. Capacity to enter into any business, unless restricted by its articles (section 22(3), iii. Is bound by its acts even if they are contrary to restrictions in its articles (sections
23 and 24), and
iv. If it is wound-up and its assets are insufficient to cover its liabilities, the liability of its shareholders is limited to the amount left unpaid on their shares (sections 265 and 266).
The articles of a public limited company (Plc) do not restrict the right to transfer shares other than restrictions in section 14(5).
From PACRO website, i.e. www.pacro.org.zm and as a practice carried over from the repealed Companies Act, for a public limited company to be established, there is need for a minimum of 7 members but with no maximum number. On commencement of business, section 15.(1) of the Act provides that a public limited company shall not transact any business, exercise any borrowing powers or incur any indebtedness, except for a purpose incidental to its incorporation or to the obtaining of subscription to, or payment for, its shares, unless the Registrar has issued it with a certificate under that section. The requirement here is that minimum capital requirements must have been satisfied. The declaration is to be made by the director or secretary of the company stating that the minimum capital requirement has been satisfied (Companies Form 12).
Under Division 6.2 of the Act public limited companies have authority to invite members of the public to buy shares and acquire debentures. Section 122(2) of the Act provides that a person shall not make an invitation to the public to acquire shares in a company
11
unless the company is a public company and the invitation complies with the Division, or the invitation is supervised by the Court.
The minimum nominal capital is prescribed in Statutory Instrument No. 29 of 2005, i.e.
the Fees Amendment Regulations. The formation and operation of public limited companies is characterized by many restrictions because of the need to protect the members of the public as shares are tradable on the stock exchange market. For example, cautionary announcements must be made by public limited companies when they intend to invest in a different company.
B. Private Companies Limited by Shares
These are by far the majority of companies registered in Zambia. The legal letter of such companies is summarized in the application form of companies, i.e. Companies Form 2.
They are formed for purposes of creating profit while at the same time offering limited liability.
A private company limited by shares has share capital (section 17). Liability for private companies limited by shares at the time of winding-up is limited to the amount unpaid on the shares allotted, just as the case is with public limited companies. According to section 16(1) of the Act, a private company limited by shares may not have more than 50 shareholders. This prescribed maximum number of shareholders does not include shareholders who are employed or who are employees of related companies or joint shareholders, i.e. A and B who are counted as one (section 16(4) (a)).
By section 16(5) of the Companies Act, if a private company has more members than permitted by its articles; or invites the public to acquire shares or debentures in the company in contravention of section 122; the Registrar may give notice to the company to give reasons why the company should not be converted into a public company. The Act creates an offence against contravention on the maximum number of shareholders under section 16(6). From sections 122(2) and (3) of the Act, it is prohibited for a company limited by shares to invite members of the public to subscribe for shares or debentures. The same consequences shall arise when the company membership exceeds 50.
As with a public limited company, section 18(1) provides that a private company limited by shares must not transact business or exercise any borrowing powers or indeed incur any debt unless or until minimum capital requirements have been paid for shares issued by it and the company has furnished the Registrar with the requisite statutory declaration that the company has already done the foregoing (Companies Form 56). The Companies Form will accompany the other registration documents and is then issued with certificate of incorporation to confirm that one has not breached the requirements. Section 16(3) prohibits private companies from restriction on transfer of shares once issued. A company limited by shares has capacity to transact any business unless restricted by its articles (section 22(3) and Companies Form 2). If a company notwithstanding any
12
restrictions in the articles proceeds to engage in that activity, that company would be bound, i.e. it cannot plead ultra vires (sections 23 and 24).
Under sections 265 and 266 of the Act, if a company is wound-up and its assets are insufficient to cover its liabilities, the liability of its shareholders is limited to the amount left unpaid on the shares. The minimum capital for a private company limited by shares is K5, 000,000.00, while for a bank it is K1bn and K500mn for financial institutions and insurance companies.
C. Companies Limited by Guarantee (section 19)
Companies Form 3 is the relevant companies form dealing with this type of companies.
This type of companies does not have share capital; must not carry on business for purposes of profit to its members or anyone responsible for its management; it is not allowed to invite members of the public to acquire shares. Companies Form 62 must be filled in by subscribers to indicate that in the event of winding-up, the subscribers shall pay what they have guaranteed. The members are not referred to as shareholders because there is no share capital. One therefore, becomes a member by subscribing and by signing Companies Form 62 as well as meeting the other pre-requisite requirements. A company limited by guarantee can make an application to the Registrar by which it will be entitled to omit the use of the word “limited” (section 39(1).
D. Unlimited Companies (section 20)
These are the third type of private companies regulated under the Companies Act. They are very unusual type of companies. Companies Form 4 shows that this type of companies is similar to private companies limited by shares. Unlimited companies are however, different from private companies limited by shares in the following ways:-
i. There is no limited liability so that in the event of winding-up the members are required to contribute towards debts of the company to an unlimited extent. In this regard they are like partnerships.
ii. By virtue of section 16(2) of the Act, it may be provided in regulations that articles of an unlimited company may, subject to any specified conditions, limit the number of its members to a number larger than 50.
iii. Unlimited companies may, especially in formative stages, benefit form access to loans much easier than companies limited by shares due to this unlimited liability which assures the lender of the repayment of debt by the members themselves should the company fail to pay.
9. INCORPORATION CHECK LIST
These are the things that one has to fulfill from initiation to when a company is formed.
A lawyer must take full instructions from the client once it has been decided on what sort
13
of a company is to be formed. This is because you have to interpret the instructions of the client to translate into what the client wants to achieve.
The lawyer must get all the information necessary for the incorporation of a company section 6(2) of the Act sets out the information required. Here the secretary of a company may be a corporate body. If the secretary is a firm, it is sufficient to take up the name and physical address of the firm.
10. Registered and Records Offices
Two issues to be resolved relate to registered office and registered records office under sections 190 and 191 of the Act respectively. A company is a person in law and therefore, must have domicile and nationality. A company’s nationality is determined by reference to the country of registration.
(a) Registered Office
The Companies Act does not clearly define registered office. Section 190(1)(a) of the Act provides that for the purposes of the Act, on the incorporation of a company the registered office of the company is the place the physical address of which was notified in the application for incorporation. A dictionary definition of a registered office is that,
“a registered office of a company is the office where all communication and notices must be communicated.” It is an important office such that in case of service of documents the matter may be set aside for irregularity if service of process was on a different office.
(b). Records Office
Records office is the place where the company keeps its official records. Section 191 provides that for the purposes of the Act, a company’s registered records office is-
(a) the place specified as the company’s registered records office in a notice in the prescribed form lodged with the Registrar, if such a notice has been lodged and not revoked by the company; or
(b) the company’s registered office, if no such notice is current.
11. Name Search and Name Clearance
After taking instructions, the next step is clearing the name or names that have been availed to the lawyer through the Registrar of Business Names. The process of name clearance is important because:
a) According to section 37(3) of the Act, people should not be allowed to register names, which the Registrar believes are likely to cause confusion with the names of other companies, or are otherwise undesirable. Though “cause confusion” or
14
“undesirable” are not defined in the Act, the Registrar has the discretion to make a determination.
b) People should not be allowed to use names, which are too similar or too close to already existing names. Hence, section 41(1) of the Act provides that if, in the opinion of the Registrar, the name of a company is likely to cause confusion with the name of another company or is otherwise undesirable, the Registrar may direct that the company shall change its name in accordance with Division 2.5.
c) From section 37(4) of the Act, people should not be allowed to register names, which suggest that the company enjoys the patronage of the President. In practice, the Registrar has refused to register business names suggesting an actual name of an individual where such an individual behind such a name does not exist. The Registrar may also not register a name if such a name is not consistent with the objects of the company to be formed. But contrast with Dar Farms Ltd which is involved in transportation.
The process of name clearance starts with writing to the Registrar seeking to have a proposed name or names cleared by her/him. You seek to be advised whether the name or names are available for use. Statutory Instrument No. 29 of 2005 states that 56 fee units, i.e. K10,080 which relates to one or maximum of 3 names must be paid. Where there are more than 3 names, you pay an additional K5, 000 per name for purposes of name clearance.
If a name is available, the Registrar will advise accordingly and the name cleared will remain available for one month beyond which a fresh application will be required in the event that you will not have reserved it. Where you wish the name to be reserved, you are required to pay K55, 000 and such a name will be reserved for up to 3 months.
The next step is to fill up Companies Form 1, 2, 3, or 4 depending on the type of company you intend to form. Section 6 of the Companies Act sets out the documentation you must prepare for such purposes:
First is the Application Form which appears to have substituted the memorandum of association. The second document is the articles of association. Sections 6(1) (a) and 7(1) of the Act seem to suggest that a company can dispense with the requirement for articles, by using the words “any” and “may”. However, a company cannot exist without articles of association. According to section 7(5) of the Act, if the company does not file the articles, then Standard Articles in the First Schedule of the Act will automatically apply.
The third document is statutory declaration in accordance with section 9 of the Act. For this purpose, Companies Form 11, which is Declaration of Compliance, prepared by a lawyer, first director or secretary of the company is used. The declaration should state that all the requirements of the Companies Act in respect of matters precedent to the corporation of the company and incidental thereto have been complied with.
15
The fourth document is Declaration of Consent to act as director or secretary filed under Companies Form 5. The fifth document is the Declaration of Compliance with Minimum Capital Requirements; Form 12, if it is a public company, Form 55, if it is a private company limited by guarantee or if it is a private company limited by shares.
The declaration is to be made by the director or secretary of the company stating that the minimum capital has been paid. Section 18(1) (b) of the Act relates to declaration by private company limited by shares while section 15(3) relate to declaration by public limited companies.
When filling in the form, section 6(2) must be fulfilled as well as sections 7 and 8 of the Companies Act. Section 244 of the Act provides for the Registrar to maintain a register of foreign companies for the purposes of this part.
From section 6(4) of the Act, the application for incorporation and the documents, which accompany them, must be type written. Section 372(1) provides that subject to the Act, where the Act requires a document or register to be prepared, kept, maintained or lodged, the document shall be in English.
For purposes of the Companies Act, a document or particulars shall be deemed not to have been lodged with the Registrar until any fee prescribed under section 377 has been paid to the Registrar (section 370(2)). According to section 6(5) of the Act, each subscriber in the presence of at least one witness who should attest to the signature shall sign the application for incorporation.
If a company has a share capital, the subscribers will indicate in the application against their names the shares they are taking. The following persons are according to section 6(6) of the Act prohibited from subscribing for incorporation, i.e. an individual who:
a) is less than 18 years of age;
b) is an undischarged bankrupt under the laws of Zambia;
c) subject to an order by the court, is an undischarged bankrupt under the laws of another country; or
d) is of unsound mind and has been declared to be so by the Court or a Court of competent jurisdiction of another country.
If any person under any of the disabilities referred to above proceeds to execute the documents, then according to section 6(7) of the Act, the incorporation of the company shall not for that contravention alone be rendered invalid.
Once the application form and all the other documents have been duly completed, they are lodged with the Registrar upon payment of lodgment fees. Section 370 provides for registration of documents upon the Registrar satisfying himself/herself that they are
16
proper having fulfilled the entire prerequisites. However, section 370(5) of the Act provides circumstances when the Registrar may refuse registration. The functions of the Registrar in deciding whether or not to register the company are administrative, rather than judicial, but a refusal to register can be challenged though with little success because of the conclusive effect of the certificate. In R V Registrar of Joint Stock Companies, exparte More (1931) 2 KB 197, a company was formed in England for sale of tickets and licences in the Irish Lottery. The Court held that the object of the company was unlawful and therefore, the Registrar of Joint Stock Companies was right in refusing to register the company.
Once the Registrar is satisfied, he shall:
a) Issue a certificate of incorporation in the prescribed form (section 10(1)).
b) Issue a certificate of incorporation to a public company whose nominal value of allotted share capital is not less than the authorized minimum (section 15(2).
c) In case of a private company limited by shares, be furnished with a declaration signed by one of the directors or secretary, stating that the requirement of payment for shares in section 18(1) (a) have been complied with.
d) In case of a company with share capital, at the same time, issue a Certificate of Share Capital stating the amount of share capital of the company; and the division of the share capital into shares of fixed amounts (section 10(2)).
The insurance of these certificates signals the birth of the company with effect from the date of incorporation as specified in the Certificate of Incorporation. This means that with effect from the date of incorporation, the subscribers and persons who subsequently become members become a body corporate under the corporate name set out in the certificate. Upon being incorporated, all particulars of the company will be registered in the register of the companies in accordance with section 12 of the Act.
12. Office of the Registrar of Companies
The Office of the Registrar of Companies is established under section 366(1) of the Act.
Section 366(4) provides that the Registrar shall exercise the powers conferred on the Registrar under the Act, and shall administer the Act through the Office of the Registrar of Companies.
However, as regards incorporation of a company, the Registrar’s role is purely administrative. He has to be satisfied that the documents lodged are all in order and that all the formalities in the Act have been complied with.
While issuance of certificate of incorporation constitutes conclusive evidence of registration of a company, and that the formalities have been compiled with, the Registrar will in so doing not mean that the objects are lawful. In Bowman v Secular Society Ltd
17
(1917) AC 406, the Secular Society Limited was registered as a company limited by guarantee under the Companies Act, 1862 to 1893. the main object of the company, as stated in its memorandum of association, was “to promote…..the principle that human conduct should be based upon natural knowledge, and not upon supernatural belief, and that human welfare in this world is the proper end of all thought and action.” The Court observed that the Attorney-General would move the Court for judicial review to have registration cancelled in the event that the objects for which the company was registered were unlawful.
13. The Effect or Consequence of Incorporation
Section 21 of the Act provides that, “subject to this Act, the incorporation of a company shall have the same effect as a contract under seal between the company and its members from time to time and between those members themselves, in which they agree to form a company whose business will be conducted in accordance with the application for incorporation, the certificate of share capital from time to time, the articles of the company from time to time, and this Act.” Section 22(1) of the Act provides that a company shall have, subject to the Act and to such limitations as are inherent in its corporate nature, the capacity, rights, powers and privileges of an individual.
Further, a company can through its articles restrict its powers. If in spite of having a restriction on the nature of the business that a company can transact in a company proceeds to transact in the restricted business, the company would nevertheless be bound in relation to third parties according to section 23 of the Act. But if the contravention of articles from misdemeanor by officers of the company, the members would have recourse against such officers.
14. THE MEMORANDUM OF ASSOCIATION
The memorandum of association is a very fundamental document of a company incorporated under English law because it is a constitutive document which brings about the formation of the company, i.e. it is the grand norm of the company. The memorandum of association governs the relationship between the company and the outside world as it defines the capacity of the company. Although this was a key feature in the repealed Companies Act, the current Act has done away with memorandum of association and in its place the Act prescribes an application form, i.e. Incorporation Form. This incorporation form has 4 variants depending on the company you desire to incorporate. In case of a public limited company, you use Companies Form 1; private company limited by shares, you use Companies Form 2; private company limited by guarantee, Companies Form 3; and for unlimited company, Companies Form 4.
What used to be the memorandum of association has been condensed in the Incorporation Form. The substance has remained the same though the form has changed. The purpose of the memorandum of association is to define the capacity of the company by setting out its objects and powers. The incorporation form does this by doing two things:
18
a) The form signals what the capacity of the company will be. Section 22(3) of the Companies Act provides that a company shall not carry on any business or exercise any power that it is restricted by its articles from carrying or exercising, nor exercising any of its powers in a manner contrary to its articles.
b) The form also has provision which defines the nature of business that the company will engage in subject to the fact that it may not do what a natural person would do and also that it may impose disabilities on itself.
Case law has tended to draw a distinction between the role of a company and its powers.
Power has been defined as a legal ability by which a person may create change or extinguish legal relations. Power is thus an aspect of capacity. Power is something less than an object in the sense that it is the means while object is the end. In Ashbury railway Carriage v Riche (1875) LR 7 HL 653, the directors agreed to assign to a Belgium company a concession which they had bought for the construction of a railway line in Belgium. It was held, that since this agreement related to the construction of a railway, a subject matter not included in the memorandum of association, it was ultra vires; and that not even the subsequent assent of the whole body of shareholders could make it binding. Therefore, an action brought by the Belgian company for damages for breach of contract necessarily failed.
In A-G v Great Eastern Railways (1880) 5 AC 473, the Court held that, “the ultra vires rule ought to be reasonably, and not unreasonably understood and applied, and whatever may fairly be regarded as incidental to or consequential upon those things which the Legislature has authorized, ought (unless expressly prohibited) to be held, by judicial construction, not to be ultra vires” per Lord Selborne. Since this case, courts now interpret the rule in a liberal spirit and agree that anything reasonably incidental to the specific objects will be ultra vires.
An act, which comes within the scope of, a power conferred expressly or impliedly by the company’s constitution is not beyond the company’s capacity by reason of the fact that the directors entered into it for some improper purpose. In Rolled Steel Products v British Steel Corporation (1986) Ch 246, Clause 3(k) of the memorandum of Rolled Steel Products empowered it to give guarantees. It guaranteed the obligation to British Steel Corporation of an associated company, SSS, and gave security over its property in transactions which were in no way for its own advantage but did benefit one of its own directors. All the shareholders of Rolled Steel Products were aware of the irregularity of these transactions, and so also was British Steel Corporation.
Held: (1) that although as a matter of construction the power, accorded by Clause 3(k) of the plaintiff’s memorandum of association, to give guarantees and become security was a mere power acillary to the objects of the plaintiff and not an independent object, the execution of the guarantee and the debenture were within the plaintiff’s corporate capacity and, thus, not ultra vires the plaintiff; but that it was beyond the authority of the directors to enter into the guarantee and, to the extent of the guarantee, the debenture in furtherance of purposes not authorized by the plaintiff’s memorandum of association; and
19
that, the defendant corporation knew of the lack of authority, they could acquire no rights under those transactions; and (2) that, further, the directors of the plaintiff were acting in breach of the plaintiff’s articles of association and their fiduciary duties to the plaintiff in purporting to authorize and in executing the guarantee and the debenture; and that, as the defendant corporation and the receiver had notice of that breach when they received assets of the plaintiff, they were accountable therefore to the plaintiff as constructive trustees.
(i) Contents of the Memorandum of Association a) The name clause,
b) The objects clause, i.e. general nature of the business, c) The capital clause, i.e. nominal capital,
d) The association clause, e) The registered office clause.
(ii) Corporate Capacity and the Ultra Vires Doctrine
Although the ultra vires doctrine is used to describe acts of the company, which are outside its powers, the same doctrine is loosely used to describe acts of directors which are outside their authority. However, the use of the ultra vires doctrine ought to be restricted to the capacity of the company, i.e. members acting in a general meeting, while lack or want of authority should be employed when describing acts of directors which are outside or beyond their authority.
Corporate capacity must be understood in the context of a number of parameters:
a) Complete lack of authority on the part of the company;
b) The company acting in excess of its powers, e.g. the company may have power to borrow up to K100mn but proceeds to borrow K200mn.
c) The company failing to adhere to certain procedural requirements which relate to the exercise of the company’s powers, e.g. the company may have power but the manner of exercise of that power may be prescribed by the articles. They may in this respect be prohibited in the articles that a resolution must be passed before the exercise of the power. The question to be asked is “has the Act been properly done so as to be legally recognized as binding on the company, i.e. has the Act been done in accordance with the company’s procedural rules?” – Royal British Bank v Turguand
It has been held that the ultra vires doctrine must not only be appreciated by reference to the memorandum of association but also to the articles and the Companies Act as well.
Rolled Steel Products Ltd v British Corporation (1986) Ch 246, above). The ultra vires doctrine is approached in two stages:
20
a) Has the company got capacity to do the act in question? If the answer is in the affirmative, proceed to the next stage. If on the other hand the answer is negative, the matter ends there.
b) Did the company’s servants or agents have the authority to bind the company? If the answer is in affirmative then the company will be bound because the act will be treated to be ultra vires. If the company’s agents had no authority themselves, then things get dicey. You then establish the nature of lack of authority. Is it lack of authority or part of authority that outsiders or third parties would be presumed to possess knowledge of or is it something of internal or domestic character.
(iii) The Doctrine of Constructive Notice
Has the doctrine of constructive notice been abolished in the Companies Act? Section 22(1) states that “a company shall have, subject to this Act and to such limitations as are inherent in its corporate nature, the capacity, rights, powers and privileges of an individual.” Section 23 states that, “no act of a company, including any transfer of property to or by a company, shall be invalid by reason only that the act or transfer is contrary to its articles of this Act.” Further, section 24 suggests that the doctrine of construction notice has been abolished. It provides that, “no person dealing with a company shall be affected by, or presumed to have notice or knowledge of, the contents of a document concerning the company by reason only that the document has been lodged with the Registrar or is held by the company available for inspection.
These sections of the Act seem to suggest that the ultra vires doctrine has been abolished.
The use of the word ‘only’ in section 23 and 24 seem to suggest, however, that there are other factors that may validate the action. Section 25 does not allow disclaimer.
Therefore, if the third party actually knew that the act in question was contrary to the articles of the company, he would be bound. The Supreme Court of Zambia has had confusion to interpret the meaning of sections 23, 24 and 25 of the Act in the following cases:
Bata Shoe Co. Ltd v Vinmas (1993-1994) ZR, the Managing Director of the appellant company instructed one of his subordinates, one Mr. Mbewe, to advertise some of the company’s houses for sale. Mr. Mbewe issued the advertisements. The Managing Director then left the country but while he was away, Mr. Mbewe went ahead and sold one of the company houses to a prospective buyer. Upon his return, the Managing Director was surprised to find that the house had been sold and told Mr. Mbewe that he was not authorized to sell the house as that power rested in the Board of Directors. The appellant company attempted to overturn the contract of sale but the trial court dismissed the action and on appeal; the Court held, that the company’s authorized agents bound the company to comply with the contract and such liability could not be avoided.
In Bank of Zambia v Chibote Meat Corporation (1999) ZR 103, the current account of Meridian BIAO Bank Zambia Limited was overdrawn at the appellant Central Bank. The overdraft was subsequently converted into a loan. The loan was secured by an abattoir belonging to the respondent company. A charge document was prepared and signed by
21
two of the directors of the respondent company. When Meridian BIAO Bank Zambia Limited became insolvent, the appellant Central Bank commenced an action to enforce the security by taking possession of the mortgaged property. The respondent company disputed the claim and alleged that the mortgage or charge had been procured by duress and undue influence exercised by the Chairman of Meridian BIAO Bank Zambia Limited, on the directors who signed and executed the document. It was further alleged that the execution of the security was procured by fraudulent concealment of the true state of affairs of Meridian BIAO Bank Zambia Limited, which was already insolvent.
Held: (1) That shareholders enjoy as a matter of right overriding authority over the company’s affairs. Therefore, it is wholly unrealistic as between a nominee and his principal that there cold be undue influence in carrying out the wishes of the principal. If anything, it was the nominee who stands in the relationship of trust and confidence and who should take account of the best interest of the principal and the beneficial owner who had entrusted him with his property.
(2) That matters of internal procedure in the management of a company are not the concern of third parties.
In National Airports Corporation v Zambia and Konie (2000) ZR 154, the appellant company was desirous of employing a Managing Director. The short listed candidates were interviewed and the position was offered to the first respondent in a letter dated 6th August, 1996, written on behalf of the appellant by the second respondent who was at the time the Chairman of the Board of Directors of the appellant company. Consequently, the first respondent was offered a two year contract to run from 1st September 1996, to 30th August 1998.The fist respondent worked for 4 months and a few days until 14th January, 1997, when his contract was terminated quite summarily. The Court held that an outsider dealing with a company cannot be concerned with any alleged want of authority when dealing with a representative of appropriate authority and standing or type of transaction.
15. ARTICLES OF ASSOCIATION
These are the domestic regulations, which regulate the conduct of a company. Section 7.
(1) of the Act provides that, “a company may have articles regulating the conduct of the company.” The wording of the subsection suggests that having articles of association is optional, i.e. that a company is at liberty to choose whether or not to have these articles.
However, no company can exist without articles such that where a company decides not to come up with its own articles, then the Standard of Articles in the First Schedule of the Companies Act will apply in default. This is confirmed by section 7(5) of the Act, which provides that, “the articles of a public company or a private company limited by shares shall be deemed to have adopted the regulations of the Standard of Articles except insofar as the articles exclude or modify those regulations.” This means that in the event of the company failing to come up with its own articles, the articles in the First Schedule will apply to the company.
22
Section 7(2) of the Act provides that, “the articles may contain restrictions on the business that the company may carry on.” The restriction referred to here is also attempted in section 22(3) of the Act which says, “a company shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor exercise any of its powers in a manner contrary to its articles.” These 2 sections seem to suggest that a company may restrict its activities via its articles. The provisions of the Act are effectively altering the traditional purposes of articles of association in relation to the memorandum of association. The purpose of the memorandum of association (MOA) is to define the relationship of the company with the outside world. Significantly the memorandum of association defines the capacity of the company. On the other hand, the articles are the internal or domestic regulations, which govern the internal relations. The articles will regulate the manner in which the officers will exercise the various powers assigned to them, e.g. allotment of shares, appointment and removal of directors, issues concerning convening of meetings, etc. On the other hand, the memorandum of association is a more outward looking document. The articles tell us how the powers conferred by the memorandum of association are to be administered.
The company’s sources of power are the Companies Act itself and the memorandum of association. The articles ought to show how the powers given by the Act and the memorandum of association are to be exercised. Here the Act and the memorandum of association determine the capacity of the company.
How then should the articles define the power of the company as provided in sections 22(2) and 22(3) of the Act? To define capacity therefore, you have to refer to the memorandum of association, the Act and the articles since articles restrict the capacity of a company. The restrictions by the articles should have been placed in the memorandum of association, i.e. the Incorporation Form, as the memorandum of association and the Act are the source of power.
(i) The Legal Effect of the Articles
The articles of association constitute a contract or covenant, which binds each member to the company on one hand and each member on the other as well as between the members inter se. The Articles bind members only, i.e. members in their capacity as and not in any other capacity. It has been held that Articles create a contract, which binds each member to the company as well as members amongst themselves. In the leading case of Hickman v Kent (1915) Ch 881, the articles provided for resolution of disputes between members and the company to be referred for arbitration. The plaintiff brought an action against the company against the removal from the company. The court held that the plaintiff was bound by the clause in the articles, which bound him to refer the matter to arbitration as opposed to instituting legal action.
In Beattie v Beattie Ltd (1938) Ch 708, the dispute involved a director and the company. The director sought to have the dispute referred for arbitration under one of the articles. However, the court following Hickman above refused to grant the
23
application to refer the dispute for arbitration as the dispute was qua director as opposed to qua member.
The articles also constitute a contract between individual members (shareholders).
Normally the contract between the individual members would be enforceable through the company because the rights prescribed in the articles are not personal to the members.
The rights, which members enjoy, are derivative as they derive as a result of the company. To say the rights are not personal means they can only be enforced through the company.
The rule in Foss v Harbottle is that, as one would except, the plaintiff in an action to redress an alleged wrong to a company on the part of anyone, whether director, member or outsider, or to recover money or damages alleged to be due to it, is prima facie the company and, where the alleged wrong is any irregularity which might be binding on the company by a simple majority of members, no individual member can bring an action in respect of it. In other words, the company is normally the proper plaintiff in an action to recover loss or to enforce a duty owed to the company by directors or controlling members, and where the breach of duty can be condoned by an ordinary resolution of the members in a general meeting, no individual member or minority of members may sue.
And the appropriate agency to start an action on the company’s behalf is the board of directors, to whom this power is delegated as an action alleging that the loss suffered by the company has consequently diminished the value of his o r her shares.
A general meeting may be held so that the members may by ordinary resolution decide whether to sue or not. If such a meeting has been held and the breach of duty condoned, not only does this prevent a single shareholder from bringing an action, it may, depending on the circumstances also prevent the liquidator form subsequently doing so. It also follows that where the wrong may be ratified by a special resolution, and such a resolution is passed, no action will lie.
The rule is therefore, a combination of two principles;
(a) the proper plaintiff principle, and (b) the majority rule principle.
In Foss v Harbottle, two members took proceedings on behalf of themselves and all other members except those who were defendants against the directors of a company to compel them to make good losses sustained by the company owing to the directors buying their own land for the company’s use and paying themselves a price greater than its value.
Held, that, as there was nothing to prevent the company in its corporate character from taking the proceedings, if it thought fit to do so, the action failed.
The articles of a company as such do not constitute an enforceable contract between the company and an outsider. Outsider here means a person who is not a member or indeed a member who is acting in a capacity other than for that of a member. Therefore, even a director of a company will be treated as an outsider so that any right, which an outsider
