Financial Training Company

2007

Corporate and Business Law- F4 (Zimbabwe)

Casebook

Corporate personality
Generally, the universal principle of corporate personality which applied to companies the world over also applies to the law in Zimbabwe in that as soon as the company is registered it acquires corporate personality which is separate from the natural persons or promoters behind the company. This rule of law is generally acclaimed as the principle of law in Salomon v

Salomon and Company (1897) and the apposite pertinent decision of the court reads:

The company is at law a different person altogether from the subscribers to the memorandum and though, it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee of them In our jurisdiction, this decision has been reiterated in a number of cases for example in the case of Dadoo v Krugersdorp (1937) in which the issue was whether or not a company could acquire the race or nationality of the majority shareholders. Taking its cue or lead the South African Appellate Division emphatically pronounced that once incorporated, a company is at law a different person from the shareholders or natural persons who would have assisted in its promotion or creation.

From the point of view of the Companies Act, s.9 of the Act states that a company shall have the capacity and powers of a natural person of full capacity. This clearly emphasises the fact that once incorporated the company attains a personality akin to that of a natural human being of full capacity. Notwithstanding the rule of the separateness of a company or its juristic personality, Zimbabwean law recognises a number of instances when the veil (corporate personality) may have to be lifted thereby effectively discarding the principle of separate existence of a company.

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Some of the notable exceptions are for instance, where corporate personality is being used for fraud or some other illegal purpose. This fact was clearly outlined by Lord Helsbury in Salomon v Salomon and Company (1897) when he explicitly admitted three sets of exceptional circumstances where the corporate veil could be ignored which he pronounced as namely, where fraud was present, the company was used as an agent of the incorporator and where the company was not a real one but a fiction or a myth. Generally it should be noted that, under common law courts are very willing to uplift the corporate veil where trust relationships are involved and where the interests of third parties are at stake. It should be noted that whenever determination of matters such as residence of a company are concerned the acts of agents have been sufficiently recognised.

Apart from the common law or judicial exceptions to the rule of corporate status separateness or personality, the Act itself provides that examples where the law refused to give full recognition to the idea of a separate legal personality. Hence reference should be made to Chapter 24:03 in s.32 and s.318. Section 32 of the Act clearly imposes personal liability of a member where business came on with no members. In terms of the said section, if a company has no members and the company continues to trade for more than six months while it has no members, any person who knowingly causes it do so will be liable, jointly and severally with the company for all debts incurred by it after the six months have lapsed.

Section 318 is also very important. It tends to summarise the whole spirit of common law principle on fraud or any form of business form or transaction knowingly or intentionally carried out detrimental or prejudicial to third parties. In terms of s.318 (1) if at any time it appears that any business of a company was being carried on recklessly, with gross negligence or with intent to defraud any person or for any fraudulent purpose the court may uplift the corporate status of a company, upon application by the Master of the High Court or judicial manager or any creditor. This is the civil liability which can be attached to any person, even if he is neither a member nor a director, nor for that matter, an official of the company, so long as he is found to have been knowingly a party to the fraudulent carrying on of the companys business.

The statutory exceptions have not been confined to the statutory uplifting of the corporate veil to the Companies Act alone, there are other Acts with provisions designed to achieve the same goal. The best example is the Criminal Procedure and Evidence Act [Chapter 9:06] which provides that when an offence has been committed for which any corporate body is or was liable to prosecution, any person who was, at the time of the commission of the offence, a director or servant of the corporate body is deemed to be guilty of the said offence, unless it can be proved that he did not take part in the commission of the offence. The same provision goes

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on to say that such person will be liable for prosecution either jointly with the corporate body or separately.

Active control
Once a company is registered in terms of the Companies Act, Chapter 24:03, it acquires juristic personality with the capacity to acquire rights and incur duties and obligations appropriate to itself. The notion of legal personality of companies is based on the principle that there is a clear distinction between the company and its members. As long as the essential requirements of incorporation have been complied with, the company is perceived as a real entity and not a fiction or myth. Neither is the company used as an agent of the incorporator, regardless of the fact that it may be a .oneman company..

The fact that one or two persons are in full control of a company does not by itself deprive that company of its juristic persona separate from the person or persons who control the company. One or two cases can easily illustrate the point. In Lee v Lee Air Farming Ltd (1960) the appellants husband formed a company of which he was the controlling shareholder, director and chief pilot. In line with statutory requirements, the company insured itself against liability to pay compensation in case of accident to its employees. The appellants husband was killed while working for the company. The question that arose for determination by the court was whether he could be regarded as having been the companys worker for the purpose of the New Zealand Workers Compensation Act. The Privy Council held that he was a worker notwithstanding that he virtually .owned. the company and was its Managing Director.

Also in the case of Dadoo Ltd v Krugersdorp Municipal Council (1920) under the legislation relating to non-whites as it stood in 1915 (in South Africa) Asiatics were prohibited from owning immovable property in the Transvaal but nothing was said as to Asiatic companies. In 1915 the company of Dadoo Ltd was registered in the Transvaal, with a share capital of 150 shares of which Mr Mahomed Dadoo held 149 and Mr Dindar held the other one share. Both Messrs Dadoo and Dindar were Asiatics. The court ruled that the statutory prohibition did not apply to companies even though their shares were held by Asiatics because ownership of the immovable property by the company was not the same thing as ownership of that property by the company.s Asiatic shareholders.

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As Innes C.J observed, .a registered company is a legal persona distinct from the members who compose it... Nor is the position affected by the circumstance that a controlling interest in the concern may be held by a single member. This conception of the existence of a company as a separate entity distinct from its shareholders is no mere artificial and technical thing. It is a matter of substance; property vested in the company is not, and cannot be regarded as vested in all or any of its members ...

However in appropriate circumstances, as an exception to the rule, the courts have disregarded the notion of corporate personality by piercing/lifting the .veil of corporate personality. in order to identify the natural persons behind the artificial persona. Both the common law and statutory law have a number of exceptions to this time honoured principle of law.

Statutory obligations of a registered company

The following are the main statutory obligations of a registered company. (1) Establish and maintain a registered office in Zimbabwe (s.112). (2) Continuously display its name in a conspicuous position in legible characters outside its registered office and also outside every other place where it conducts its business (s.113). (3) Have its name set out in legible characters on all business letters, notices, cheques, invoices, receipts etc (s.113). (4) State in legible characters the names of every director of the company on all trade catalogues, trade circulars, business letters on or in which the companys name appears (s.188). (5) Appoint auditors (s.150). The first auditors of a public company must be appointed within one month of the date of the certificate to commence business and other companies must appoint an auditor within one month of the issue of the Certificate of Incorporation. A private company may dispense with an auditor in certain situations as stipulated under s.150(7) of the Act. (6) Public companies must prepare the Statutory Report and hold the Statutory Meeting. This meeting must be held between one and three months from the date of the certificate to commence business (s.124). (7) Hold an Annual General Meeting and submit an annual return (s.125). (8) Keep a minute book (s.138). Minutes of all proceedings of all general meetings and all meetings of directors must be entered in this book.

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(9) Keep proper books of accounts (s.140). Every company must observe this requirement and the advice of its auditors should be sought as to what books and records should be kept. (10) Lodge all prescribed returns punctually. (11) The following records must be kept at the registered office of every company: (a) register of share allotments (s.74) (b) register of mortgages, debentures and debenture holders (s.115) (c) register of members (s.115) (d) minute book (s.139) (e) books of account (s.140(1)) (f) register of directors shareholdings (s.182) (g) register of directors and secretary.

Registration of members
It is a mandatory requirement for every company to keep a register of its members and punctually enter the following details: (i) the names and addresses of the members (ii) a statement of the shares held by each member (iii) the date at which each person was entered in the register as a member (iv) the date at which any person ceased to be a member.

Objects clause
The rationale behind the ultra vires doctrine was two-fold. Firstly, to protect investors in the company so that they might know the objects for which their money was to be used or employed. Secondly, to protect creditors of the company by ensuring that funds, to which alone they could look for payment in the case of a limited company, were not dissipated or eroded in un-authorised activities. See Ashbury Carriage Company v Riche (1875).

Management is usually in the hands of the board of directors, which is charged with the overall day to day running of the company. Section 10(2)(b) offers legal remedy to a member or creditor of a company where, the company alters its objects or engages in a transaction which exceeds its objects resulting in a loss suffered by the company.

In terms of s.16(1)(b) of the Companies Act, [Chapter 24:03] a company may by special

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resolution alter the objects clause of its memorandum of association. The requirements of a special resolution are stipulated under s.133 namely that: It should be passed by a majority of not less than three-quarters of such members entitled to vote as are present in person or by proxy at a general meeting of which not less than 21 days notice has been given, specifying the intention to propose the resolution as a special resolution and the terms of the resolution and at which members holding in aggregate not less than one-quarter of the total votes of the company are present in person or by proxy. The initial decision to change the main objects clause of Nhapitapi (Pvt) Ltd will have been made at a duly convened board meeting, notice of the general meeting of the company will be issued, setting out the terms of the resolution to be passed as a special resolution together with a circular explaining the reasons and effect of the proposed alteration in the objects clause.

At the general meeting which in all probability will be an Extraordinary General Meeting (although it is possible for such business to be transacted at an Annual General Meeting), the proposed special resolution will be passed with or without modification by the requisite threequarters majority. Finally, within one month of the meeting a copy of the special resolution must be lodged with the Registrar together with a copy of the notice convening the meeting.

Reasons for altering the objects clause

In terms of s.16 of the Companies Act, a company is entitled to alter its objects clause. However, before it alters the clause, it is required, by the same section, to pass a special resolution. A company can alter its objects clause for various reasons and the following are some of them: (i) to carry on its business more economically and efficiently; or (ii) to enlarge or change the local area of operation; or (iii) to restrict or abandon any of its objects; or (iv) to amalgamate with another company; or (v) to carry on some business which may be conveniently combined with its own; or (vi) to increase or decrease the share capital of the company; or (vii) to alter the name of the company, in terms of s.25 of the Companies Act.

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Ultra vires doctrine

The case of F P Holdings v PTC Pension Fund (1988). According to Tett and Chadwick on Zimbabwe Company law: the result of the ultra vires rule ... is that if a contract is made, which is ultra vires the object clause, it is void and cannot be ratified even if all the members agree thereto. Hence the fact that Eldorado Enterprises (Pvt) Ltd (EE)s directors would not have sanctioned such purchase if they had been aware of it, is legally irrelevant according to the case of Ashbury

Railway Company v Richie (1875).

In the Ashbury case, the objects clause gave the company power to carry on business as mechanical engineers and general contractors. The directors entered into a contract for the financing of a certain railway in Belgium and it was argued that the words general contractors embraced such activity. It was held that the contract was ultra vires the memorandum and even if every member had agreed or endorsed it, was void and unenforceable. However the doctrine of ultra vires has largely been abolished in Zimbabwean company law through s.10 of the Companies Act [Chapter 24:03] i.e. (effect of a statement of objects) which essentially provides that the effect of a statement of the objects of the company in its memorandum or elsewhere, shall not be to invalidate any transaction which exceeds those objects and which was made by the company or entered into by the company with any other person.

It should also be noted, however, that a distinction exists between those actions which are ultra

vires the companys powers and those ultra vires the powers of a director, but within the powers
of a company as the situation in the case of Royal British Bank v Turquand (1856). Note should also be taken to the fact that ss.11 and 12 of the Companies Act are quite relevant to the given set of facts.

Section 11 clearly crystalizes the position at common law. This section clearly does away with the issue of constructive notice of all company documents to the public and even some of the company officials and employees. Section 12 constitutes a presumption that any person having dealings with a company or with someone deriving from a company shall be entitled to assume among other things, that every person described in the companys register of directors and secretaries, or in any return delivered to the Registrar by the company has authority to exercise the functions customarily exercised by a director, manager or secretary of a company carrying on business of the kind

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carried on by the company (presumption of regularity).

Adherence to the Ultra vires rule

Prior to the amendment of the Company.s Act in 1993 the courts adopted a fairly strict approach in interpreting the objects clause. The company could not do anything outside the powers given in the memorandum . anything so done was ultra vires.

Any act done by the directors which was ultra vires (beyond the powers) of the company, would be void and the company could not make it valid, even if every member assented to it.

Ashbury Railway Carriage Company v Riche (1875)

The position is somewhat different now and this is captured by section 10(1) of the Act (incorporating amendment act No. 6 of 1993) which reads as follows: .The effect of a statement of the objects of a company, whether in its memorandum or elsewhere, shall not be to invalidate any transaction which exceeds those objects and which was made by the company or entered into by the company with any other person, notwithstanding that the other person was aware of the statement of the objects ..

Although the position of the courts towards agreements which exceed the objects clause has now considerably softened in the light of section 10(1) of the Act, the remedy which Messrs Toughtalk and Roughlife, the two aggrieved shareholders, desire to get (interdict) is provided for under section 10(2)(a) which reads: .without derogation from any remedy that may be available to the person concerned. (a) any member or debenture holder of a company may, prior to the event, apply to court and may obtain an interdict restraining the company from making or entering into any transaction which exceeds its objects, whether stated in its memorandum or elsewhere .. Although the ultra vires doctrine has been abolished some of its residual effects are still being felt.

Books of accounts
Companies Act, Chapter 24:03. Section 140 requires every company to keep proper books of account which give a true and fair view of the state of the companys affairs. Section 140(1) reads, every company shall cause to be kept in the English language proper books of account with respect to:

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(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place. (b) all sales and purchases of goods by the company. (c) the assets and liabilities of the company. Although s.140 refers only to books of account, supporting vouchers will also be necessary to give the required true and fair view. The books of account shall be kept at the registered office of the company or at such other place as the directors think fit and shall at all times be open to inspection by the directors. Furthermore s.141 requires the directors to lay before each Annual General Meeting a balance sheet and profit and loss account in respect of the previous financial year, the balance sheet being signed on behalf of the board by two directors (s.146(3)). As they have not kept any records James and Joseph are not in a position to comply with these provisions. Detailed rules as to the form and content which the accounts must take are laid down in s.142 and the paramount consideration as per s.142(1) is that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its financial year and every profit and loss account of a company shall give a true and fair view of the profit and loss for the financial year. The responsibility for the preparation and presentation of accounts falls on the directors and the general duty of the auditor is to examine these accounts and report on them to the members. Although s.150(2) says that every company shall at each Annual General Meeting appoint an auditor to hold office from the conclusion of that meeting until the conclusion of the next Annual General Meeting. Section 150(7) permits a private company to dispense with the appointment of an auditor when it is of such a size and type that its members do not feel the necessity for an independent check on the work of their directors. The relevant s.(150(7)) reads:

A private company shall not be required to appoint an auditor if: (a) the number of members in such company does not exceed ten and (b) .......................................... and (c) such company is not a subsidiary of a holding company which has itself appointed auditors and all the members in such company agree that an auditor shall not be appointed. In reporting to members on the accounts, the auditor must frame his report strictly in accordance with s.153 of the Act which provides for either an unqualified report, a qualified report or an explanation for being unable to make a report. In order to enable the auditor to discharge his duties efficiently, the Act gives him a right of access at all times to the books, accounts, vouchers and securities of the company, together with the right to call for information from the officers of the company, its subsidiaries and the right to speak at general meetings.

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A director of any company shall cease to hold office if he is convicted, whether in Zimbabwe or elsewhere of theft, fraud, forgery or uttering a forged document or perjury and has been sentenced therefore to serve a term of imprisonment without the option of a fine or to a fine exceeding one hundred dollars, or . . . If any person who is disqualified under this section from being or continuing to be a director of any company directly or indirectly takes part in or is concerned in the management of any company he shall be guilty of an offence and liable to a fine not exceeding one thousand dollars or to imprisonment for a period not exceeding two years or to both such fine and such imprisonment.

As was noted by Manyarara J. A. in Oliver John Tengende v The Registrar of Companies (1988)

the object of s.173 of Chapter 24:03 is that management of companies should not be in the hands of unscrupulous or disreputable men and a conviction within the terms of that subsection is to be regarded as at least prima facie evidence that the person concerned is of such a nature . . .
Smart Alecks position on the Board is now legally untenable because of the conviction that hangs over his head. Whilst he can remain as a member or shareholder of Slack Enterprises (Pvt) Ltd he has to relinguish his position as a board member.

Listed companies
In terms of s.3.3 of the ZSE Listing Requirements, listed companies are obliged to publish a press announcement giving details of: (a) circumstances or events that have or are likely to have a material effect on the financial results, the financial position or cash flow of the company and/or information necessary to enable holders of the issuers listed securities and the public to avoid the creation of a false market in its listed securities; and (b) any new developments in its sphere of activity which are not public knowledge and which may by virtue of the effect of those developments on its assets and liabilities or financial position

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or on the general course of its business, lead to material movements in the ruling price of its listed securities. Information that is required to be published according to paragraph 3.3 must not be given to a third party before it has been published, although such information may be given in strict confidence to certain people, such as the companys advisers, potential financiers, Government departments and the Reserve Bank. The decision by Hombarume Company Limited to sell off its spinning division is a new development which might have a significant effect on the price of its shares. Accordingly, the company is bound to publish a press announcement in terms of this section. This announcement is commonly referred to as a cautionary statement.

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