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ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

LICENTIATE LEVEL
L 7: Business and Corporate Law
June 2010
December 2010
June 2011

QUESTION PAPERS AND SUGGESTED SOLUTIONS

Table of Contents

JUNE 2010

BUSINESS AND CORPORATE LAW ............................................ 3


SUGGESTED SOLUTIONS ........................................................... 7

DECEMBER 2010

BUSINESS AND CORPORATE LAW .......................................... 20


SUGGESTED SOLUTIONS ......................................................... 24

JUNE 2011

BUSINESS AND CORPORATE LAW .......................................... 38


SUGGESTED SOLUTIONS ......................................................... 43

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS


LICENTIATE LEVEL
L7: BUSINESS AND CORPORATE LAW
SERIES: JUNE 2010
TOTAL MARKS 100
TIME ALLOWED: THREE (3) HOURS
INSTRUCTIONS TO CANDIDATES
1.

You have ten (10) minutes reading time. Use it to study the examination paper carefully so
that you understand what to do in each question. You will be told when to start writing.

2.

This paper is divided into TWO sections:


Section A: Attempt this ONE question.
Section B: Attempt THREE questions only.

3.

Enter your student number and your National Registration Card number on the front of the
answer booklet.

4.

Your name must NOT appear anywhere on your answer booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

6.

All workings must be done in the answer booklet.

7.

Present legible and tidy work.


3

SECTION A
Attempt any three (3) questions from this Section
Question 1
(a)

Under the doctrine of judicial precedent explain the following:


(i)
Overruling
(2 marks)
(ii)
Reversing
(2 marks)
(iii) Distinguishing
(2 marks)
(iv) Reconciling
(2 marks)
(v) Disapproving
(2 marks)
(b) Explain in brief the hierarchy of courts in Zambia showing clearly which courts create
binding precedents and which ones are merely persuasive.
(10 marks)
(Total : 20 marks)
Question 2
(a)
(b)

Discuss the three different forms of consideration under the law of contracts.
(6 marks)
Bwalya agreed to construct a block of three flats for JMG Associates an accountancy firm.
The contract had been drawn up by the legal assistant who is Bwalyas good friend. The
agreed contractual price was K300,000,000 (three hundred million). The materials for the
building site where purchased and supplied by JMG Associates. Both parties had agreed
that the construction works would be completed by December 2008 from June 2008.
The contract contained a penalty clause which provided for a penalty of 2% of the
contractual price if the project is not completed on the schedule time.
Bwalya had sub-contracted the electrical works for the three flats to Lolo who had agreed to
complete the work by December 2008 for the price of K400,000,000 (forty million).
Unfortunately Lolo had underestimated the work involved. In November 2008 Lolo decided
to approach Bwalya to explain the reason for the delay and they both agreed that an extra
payment of K30,000,000 (thirty million) would be required to complete the electrical works
by December 2008.
In order to avoid the penalty clause in the main contract Bwalya agreed to the extra
payment to Lolo. In return Lolo hired more staff to complete the works on schedule. Once
the work was finished Bwalya refused to pay the extra k30,000,000 (thirty million) claiming
that this was not agreed in the original contract between Lolo and himself. In fact he further
stated that Lolo had not done anything extra to entitle him to that payment.

Required:
Discuss the merits of the case on behalf of Lolo. What remedy (if any) will the court award to Lolo
should hesucceed in his claim against Bwalya.
Your answer should concentrate on issues of consideration and remedies under the law of
contract.
(14 marks)
(Total: 20 marks)
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Question 3
(a)

Vicarious liability is the principle whereby a person is held liable for a tort committed by
another person. Explain the three circumstances under which vicarious liability may arise.
(6 marks)
(b) Discuss the following general defences under the law of tort.
(i)
Volenti non fit injuria
(ii)
Inevitable accident
(iii) Contributory negligence
(9 marks)
(c) What main remedies will follow a successful tort action?
(5 marks)
(Total: 20 marks)
Question 4
(a) Fiduciary nature of the partnership relationship means that each partner has a duty to act in
good faith and, in the best interest of the firm. This is a general duty but the Partnership Act
1890 lays down three (3) specific statutory duties. Discuss in detail these three duties (10
marks)
(b) Every partner is responsible for the full amount of the firms liability. Outline the partners
liability on the debts and contracts including torts of the firm.
(10 marks)
Total: 20 marks)
SECTION B
Attempt any two (2) questions from this section.
Question 5
(a) Give an account of the legal procedures which must be followed in order to effect the
registration of a new public limited company which is entitled to commence business. You
should make reference to the relevant sections of the Companies Act, chapter 388 of the
Laws of Zambia.
(12 marks)
(b) After doing business successfully for three years (3) and being listed on the Lusaka Stock
Exchange a Company decides to increase its share capital. Explain the procedure and
method that the Company should use to increase its share capital assuming that all its
shares are ordinary shares.
(8 marks)
(Total: 20 marks)
Question 6
(a)

(b)

At a Companys meeting the main purpose is to make decisions on behalf of the company
and this is normally done by passing a resolution. The resolution being put forward is voted
upon and passed or rejected by the meeting. Explain the three most important types of
resolutions.
(12 marks)
A company must hold its Annual General Meeting. Outline the type of business that is
normally transacted at the AGM.
(8 marks)
(Total: 20 marks)
5

Question 7
(a)

The shareholders of a company will delegate the power of management of the company to
the directors. Explain the statutory powers given under the Companies Act and the Articles
of Association to the directors.
(10 marks)

(b)

Outline which persons are eligible to be appointed as directors under Section 207(1) of the
Companies Act.
(10 marks)
(Total: 20 marks)
END OF PAPER

LICENTIATE LEVEL
L7: BUSINESS AND CORPORATE LAW
SUGGESTED SOLUTIONS

Solution 1
1.

(a)

Overuling
A precedent is overruled when a judge refuses to follow it because it was wrongly
decided, or it is overtaken by a new law.
(2 marks)
Reversing
This is where a decision of a court has altered following an appeal to a Superior court
on any grounds of law advanced.
(2 marks)
Distinguished
This is where the court decide to disregard a previous decision on basis that the
material facts are sufficiently different.
(2 marks)
Reconcile: This is where the courts find that the material facts are similar so as to
follow decisions of the courts decided earlier.
(2 marks)
Disapprove
This is where the courts give a dissenting view on a matter already decide about
without overruling the decision without overruling a previous case, a judge gives his
opinion that the case was wrongly decided.
(2 marks)

(b)

The judiciary is the courts system in Zambia and it consists of the local courts, the
Subordinate Courts, High Court and finally the Supreme Court. The courts are arranged as
a hierarchy from the lowest to the highest. Precedent is developed by the process that the
ratio decidendi of a case must be applied in any case heard in a court, which is on the same
level, or below the level in the hierarchy, of the court originally making the decision.
The hierarchy of the courts in Zambia is a follows:
The Supreme Court
This is the highest court in Zambia having unlimited jurisdiction in civil and criminal cases. It
does not hear cases as first instance but only on appeal from the High Court. Its decisions
are binding on all other courts.
High Court
It has original and unlimited jurisdiction to hear matters either as a new case or on appeal
form the Subordinate Courts. It can hear both civil and criminal cases. It is bound by the
decisions of the Supreme Court and is generally bound by its own decisions except where
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the judge is sitting alone. A single High Court judge is normally not bound by the decision of
another single High Court judge.
Subordinate Courts and Local Courts
Both courts hear new cases but the Local Courts deal mainly with customary law cases.
While decisions of local courts are not reported or written down, a subordinate court is a
court of records. These courts are bound to follow the decisions of the High Court and the
Supreme Court. Decisions of subordinate courts bind local courts.
10 marks)
[ Total: 20 marks]

Solution 2
(a)

Consideration is the price paid by each party to the contract for the other partys promise.
Consideration can be:Executed
Executed consideration is given where a promise is made in return for the performance of
an act. For example, where an offer of reward is made, one party promises to pay if and
when another performs the specified act.
In the case of Carlill v. Carbolic Smokeball Co. Ltd (1893), Mrs Carlill purchased and used
the smokeball as directed and did catch the flu. The manufacturer had to pay her the
promised 100 reward.
(2 marks)
Executory
Executory consideration is given where there is an exchange of promises to do something in
the future. Executory means yet to be done. For example, the sale of a piece of land where
title will be transferred to the buyer at a future date when he completes paying the total
purchase
price.
(2 marks)
Past
Is an act put forward before promise of a reward:
In Roscorla V Thomas, 1842, Plaintiff purchased a horse from the defendant. After the sale,
defendant gave an assurance that the horse was not vicious, which proved to be false. An
attempt by the buyer to sue the seller for break of warranty of the soundness of a horse,
could not succeed because the new promise was not supported by past consideration of
sale of the horse.
(2 marks)

(b)

One of the main rules of consideration is that performance of an existing contractual duty
does not entitle the other party to any additional sum of money to ensure that the contract is
completed on the scheduled time. There is no new contract in respect of the extra sum of
money unless the other party does something more than the contractual duty. This is
because the person doing the work had provided no new consideration in other words there
is no sufficiency of consideration. The party has to do more that what is already agreed
under the pre-existing contract. Without this consideration there can be no contract and the
party cannot make a claim that the new contract has been breached. This general rule was
established in the case of Stilk v. Myrick (1809,) where the captain of the ship promised the
remaining crew that they would be paid an additional wage to complete the voyage after two
seamen had deserted the ship. This payment would be in addition to the contractually
agreed wages. The court decided that the extra payment should not be made since by
completing the voyage the remaining seamen did no more than they were originally obliged
to do. In other words the new contract was not supported with consideration from both
parties.
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This general rule was revised in the case of Williams v. Roffey Brothers (1990). In this case
the plaintiff agreed to do some carpentry works in a block of flats for the defendant at a fixed
price by an agreed date. When he was unable to complete the work on time the defendant
agreed to pay his an additional amount to complete the same work on time. The defendant
had agreed to pay the extra sum in order to avoid a penalty in his contract with the owner of
the flats. The court in this case decided that there was a new contract which was valid even
though the plaintiff had not done anything more than what was provided in the original
contract. Both parties had benefited from the new contract since the plaintiff had been
promised an extra amount of money while the defendant has avoided the penalty in the
original contract and the cost of substituting the sub-contractor.
Apply the above rules to the facts in the question it is clear that Lolo case is the same as the
one cited above. The original contract between JMG Associates and Bwalya contained a
penalty clause and was time bound. Lolo had to complete the electrical works on time so
that Bwalya could avoid the penalty clause. This would mean that the new contract to pay
Lolo the extra K30,000,000 would be valid. Both parties would benefit under the contract
and therefore Bwalya was obliged to pay Lolo. The court would rule in favour of Lolo to be
paid the extra K30,000,000.
(14 marks)
[ Total: 20 marks]

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Solution 3
(a)

(b)

The person who commits the tort is always liable for his wrongful act. The injured person
can sue him since liability is said to be personal. In certain circumstances the injured person
can sue someone else even though that person did not take part in committing the wrongful
act. This brings about the concept of vicarious liability. Vicarious liability can arise in the
following circumstances.
(i)

In the case of a partnership agreement regulated under the Partnership Act of 1890,
partners are jointly and severally liable for the torts of other partners. This statutory
requirement is provided for under Sections 10-12 and states that the tort should be
committed in the ordinary course of the firms business or with the authority of the
other partners.
(2 marks)

(ii)

Under the law of agency, the principal is liable for the contracts entered into by the
agent. In addition the principal will be liable for the torts of his agent committed within
the scope of his actual or apparent authority.
(2 marks)

(iii)

Under a contract of service and employer may be vicariously liable for the torts
committed by the employee. The two conditions that have to be met are that the
person committing the tort should be serving under a contract of service and not an
independent contractor and secondly, that the tort was committed in the course of his
employment.
(2 marks)

For the claimant to prove that the defendant has committed the tort he must show that the
defendant was negligent. It is only when the claimant proves that the defendant committed a
tort there is need for the defendant to actually plead a defence. The general defences
available in most tort actions are:Volenti non fit injuria
This means to he who consents no injury is done. In this defence the defendant is claiming
that he claimant was aware of risk of harm and had consented to that risk. In the case of
Morris v. Murray(1990) where the claimant embarked on a flight with a pilot whom he knew
to be drunk at the outset. The result was a crash in which the claimant was badly injured.
The defence of volenti non fit injuria succeeded.
(3 mark)

Inevitable accident
This is an accident which could not have been foreseen or avoided by any reasonable
precaution. This is strictly not a defence, rather a plea to the effect that no tort has been
committed. It is not available in cases of strict liability where fault is immaterial. Act of God,
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such as flood or lighting which could neither have been foreseen nor prevented by any
reasonable precautions is a good example.
(3 marks)
Contributory negligence
In this case the defendant alleges by this defence that the claimant contributed, by his own
negligence, to the extent of his injuries. The effect is that the court will reduce the claimants
damages by a certain percentage to reflect his contributory negligence. In the case of Jones
v. Livox Quarries Ltd (1952) where the claimant was shot while riding on the back of the
defendants vehicle. The court held that he had contributed by exposing himself to other
risks such as falling off as well. Or in Oonnel V Jackson, 1971, where a cyclist sustained
head injuries because he was not wearing a helmet his damages were reduced by 15%.
(3 marks)
(c)

The following remedies will follow a successful tort action:


Unspecified damages
This is a claim for damages which cannot be predetermined by the parties. The amount of
damages awarded by the court is assessed on the basis of compensating the claimant for
the loss he has suffered. In other words the amount that will put the claimant in a position as
if the tort had not occurred. These will include:General damages
Court will assess compensation for losses which cannot be quantified eg pain and suffering.
Special damages
What the claimant can positively prove eg medical expenses.
Nominal damages
Awarded for torts actionable per se, claimants right has been infringed but no loss has been
suffered eg trespass to land.
(3 marks)
Eqiutable remedies
An injunction can be granted by the court. This is an order of the court to a person to do
something or to desist from doing something. The injunction can be prohibitory in which
case it is an order to restrain the defendant form committing or repeating a tortuous act,
usually given in the case of a nuisance. If it is a mandatory it will be an order requiring the
defendant to perform a positive act to put an end to some wrongful act eg removal of a
person who is trespassing on someones land.
(2 marks)
[ Total: 20 marks]

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Solution 4
(a)

(b)

A Partnership agreement a partner when acting on behalf of the business act as an agent of
the other partners. There are a number of duties placed on the partner by common law as
well as statutory duties under the Partnership Act 1890. Fiduciary duty to act in good faith
and in the best interest of the firm is a general duty under common law. The three specific
duties under the Partnership Act 1890 are:(i)

Duty of disclosure
The partnership Act, section 28 states that all partners must render true accounts
and full information relating to all things affecting the firm to the other partners. In
other words a partner must disclose all the information regarding the business of the
firm to the other partners. In the case of Law v. Law (1905) an offer was accepted by
one partner without full disclosure of the assets belonging to the firm. The court
decided that since the purchasing partner had breached the duty of disclosure, the
agreement could be set aside.
(4 marks)

(ii)

Duty to account
This duty places obligation on a partner to account for any profit made by him without
the consent of the other partners from using the firms property, name or business
connections under section 29 of the Partnership Act. The profit that is obtained
without consent rightfully belongs to the firm and not the individual partner and
therefore can be recovered. The case of Bentley v. Craven (1853) shows that a
partner who had bought sugar on his own account and later sold it to the firm without
declaring his interest was not entitled to keep the profit. The firm could claim the
profit from him.
(3 marks)

(iii)

Duty not to compete


A partner should not carry on business in competition with the partnership. If he is
involved in a competing business he has to get the consent of the partnership under
section 30 of the Partnership Act. Where consent is not sought he will be liable for all
the profit made in the course of that business.
(3 marks

Every partner is responsible for the payment of the debts of the firm and they are not
protected under limited liability. The third party has an option of either suing the partners
collectively being the firm or the individual partners. Where the court gives judgment for the
third party to recover damages from one partner only the other partners are liable to
contribute equally to the amount paid.

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Liability on debts and contracts


This is regulated by the Partnership Act 1890 under section 9 that states that the partners
are jointly and severally liable on any contracts and for any debts of the firm. This liability
extends to acts committed during the course of business.
Liability for torts
Tortious liability is also regulated under the Partnership Act under section 10 which outlines
that for a tort committed during the ordinary course of the partnerships business the
partners are jointly and severally liable. The liability is towards the person who has suffered
the loss. The party who has suffered the loss can recover the loss in full against the
partners. The only exception is where the tort is committed outside the scope of the
partnerships business then the partner will be personally liable.
(10 marks)
[Total: 20 marks]

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Section B
Solution 5
(a)

The procedure to follow in order to incorporate a public limited company under the
Companies Act is as follows:Application for name clearance
The persons who want to incorporate the company must select a name and submit it to the
registrar of companies for clearance.
Proposed articles
They must draft the articles of the company as per Section 6(1) (a) of the Companies Act,
Chapter 388 of the Laws of Zambia.
Statutory declaration
The Companies Act requires the persons promoting the company to submit a statutory
declaration of compliance in accordance with Section 9 of the Act. This declaration should
state that the provisions relating to incorporation had been complied with.
Consent to act as Director/Secretary
The persons should submit a signed consent from each person named in the application as
first director or secretary of the company as per section 6 (1) (c).
Application Form
The application should be submitted in prescribed form and signed by each of the
subscriber stating all the details outlined under section 6 (2) (a) to (i)
Lodgement schedule and prescribed fees
Once all the documents are prepared the persons should lodge them at the office of the
registrar of companies together with the prescribed fees. If the documents are in order the
registrar will issue a certificate of incorporation.
Minimum capital requirement certificate to conduct business
A public company cannot commence business without meeting the requirement of section
15 of the companies Act. A statutory declaration should be submitted to the office of the
registrar in prescribed form indicating:(i)

nominal value of the companys allotted share capital

(ii)

amount paid on the allotted share capital.

(iii)

estimated amount of preliminary expenses.


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After submitting the details the registrar will issue to the public company a certificate of
minimum capital requirement permitting the company to do business.
(12 marks)
(b)

The public company will normally state in its article its authorized share capital. The
Companies Act allows for the alteration of share capital. The procedure under section 74 is
that the company should hold a meeting. At this meeting a special resolution should be
passed to alter the share capital. The special resolution and the amendment to the share
capital clause in the article should be submitted to the registrar within 15 days. The registrar
will issue a new certificate to the company showing the altered share capital.
Increase of share capital is regulated under section 74(1) (a) and this can be done by the
company by issuing new shares. The increase can be of any amount. For example if the
current share capital of the company is K10,000,000 divided into 1,000,000 shares of K10
each and the company wants to increase it to K20,000,000 that is permitted. In this case
the new share capital will be K20,000,000 divided into 2,000,000 shares of K10 each.
(8 marks)
[Total: 20 marks]

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Solution 6
(a)

The decisions of a company are done at a general meeting by way of resolutions. This is
done through voting. The three most important types of resolutions are:Ordinary resolution
This resolution is passed by a simple (50% + 1) majority of votes cast at a meeting as per
section 156(1) of the Companies Act. The votes should be cast by the members or their
proxies duly appointed to do that task. An ordinary resolution is not required to be lodged
with the office of the registrar. It is used to appoint directors of the company under section
206 of the Companies Act.
Special resolution
A special resolution is passed by a majority of not less than three-quarters of the votes cast
at a meeting. The meeting itself must be convened to consider the special resolution as per
the requirements of section 156(3) of the Companies Act. Special resolution is prescribed
for a number of important company decisions. The reduction of share capital by the
company requires a special resolution under section 76 of the Act. A special resolution is
also required to be lodged with the registrar of Companies within 15 days of being passed.
Extraordinary resolution
An extraordinary resolution is one passed by at least three-quarters majority of votes cast at
a meeting convened by a notice specifying the intention to propose the resolution as an
extraordinary resolution. Under section 156(2) it is voted upon by the members present or
their proxies. It may be used in voluntary winding up..
(12 marks)
The annual general meeting is a statutory requirement under the Companies Act Section
138. The following business in normally conducted at the annual general meeting:(i)
(ii)
(iii)
(iv)
(v)

Consideration of the final accounts and the auditors report for the financial year
Retirement and elections of the directors
Appointment of the auditors and the fixing of their remuneration
Declaration of dividends
Consideration of the directors reports
(2 marks for any four of the above)
(8 marks)
[Total: 20 marks]

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Solution 7
(a)

Powers given to the directors under the Companies Act include the following:(i)
to manage the business of the company under section 215 (1) of the Companies Act.
(ii)
to borrow money and to charge the property of the company or its uncalled capital
under section 215(3) of the Act
(iii) to issue debentures or give other security for a debt, liability or obligation of the
company under S215(3) of the Act.
(iv) to appoint by a power of attorney any person to act on their behalf as per S215(4).
(v) to sign, draw, accept, endorse or execute all cheques, promissory notes and other
bills of exchange under S215(6) of the Act.
Under the Articles of Association the directors may:(i)
issue shares as per clause 2.
(ii)
convene the general meeting under clause 40
(iii) on approval of other directors appoint a person as an alternate director under clause
61.
(iv) the director may delegate any of their powers to a committee during a meeting as per
clause 65.
(v) the director will provide for the safe custody of the seal of the company under clause
69.
(10 marks)
Candidates can use other clauses of the articles as well

(b)

The following persons are eligible to be appointed as directors of a company:(i)


a person of 21 years and above
(ii)
a person not disqualified or prohibited by a court order
(iii) a solvent person
(iv) a sane person
(v) a person who holds qualification shares if the company so requires.(2 marks for
each)
(10 marks)
[Total: 20 marks]

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ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS


LICENTIATE LEVEL
L7: BUSINESS AND CORPORATE LAW
SERIES: DECEMBER 2010
TOTAL MARKS 100
TIME ALLOWED: THREE (3) HOURS
INSTRUCTIONS TO CANDIDATES
1.

6.
7.

You have ten (10) minutes reading time. Use it to study the examination paper carefully so
that you understand what to do in each question. You will be told when to start writing.
This paper is divided into TWO sections:
Section A: Attempt this ONE question.
Section B: Attempt THREE questions only.
Enter your student number and your National Registration Card number on the front of the
answer booklet. Your name must NOT appear anywhere on your answer booklet.
Do NOT write in pencil (except for graphs and diagrams).
The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.
All workings must be done in the answer booklet.
Present legible and tidy work.

8.

Graph paper (if required) is provided at the end of the answer booklet.

2.

3.
4.
5.

20

SECTION A:

Attempt any three (3) questions in this section.

Question 1
(a) Discuss the three (3) main concepts that support the fact of supremacy of legislation as a
source of law.
(10 marks)
(b) Explain the powers of the courts in interpreting legislation, paying particular regard to the
three (3) main rules they use in so doing.
(10 marks)
[Total: 20 marks]
Question 2
(a) Outline how a statement made in negotiations will become a term of the contract or remain a
mere representation.
(10 marks)
(b)

Fast Track is a keen racing driver and purchases a car from No Goddy Ltd at the agreed
price of K15 Million. The car looked to be in perfect condition when Fast Track took delivery
on 1st October 2010. However over the next one month Fast Track had to take it back to No
Goddy on three separate occasions for minor repair works. On 15th December 2010 while on
the racing track Fast Track had to come to a sudden stop and realized that the cars engine
had seized due to a manufacturing fault. No Goddy Ltd offered to fit a new engine under the
manufacturers guarantee but Fast Track stated that he had lost confidence in the car and
wanted a full refund of the purchase price. Advise No Goddy Ltd whether the company can
insist on repairing the car, or whether Fast Track is entitled to a full refund.
(10 marks)
[Total: 20 marks]
Question 3
When delivering his opinion in the case of Parker v. South Eastern Railway Co.1 , Baggallay L J
said.
Now as regards each of the plaintiffs, if at the time when he accepted the ticket, he either by actual
examination of it, or by reason of previous experience, or from any other cause, was aware of the
terms or purport or effect of the endorsed conditions, it can hardly be doubted that he became
bound by them.
(a)
(b)

Discuss the quotation in view of incorporation of exclusion clauses into a contract.


(11 marks)
Explain the following rules of interpretation of exclusion clauses in a contract in view of the
quotation above.
(i) Contra proferentem rule;
(3 marks)
(ii) The main purpose rule;
(3 marks)
(iii) Doctrine of fundamental breach.
(3 marks)
[Total: 20marks]

Parker v. South Eastern Railway Co. (1877) 2 CPD 416

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Question 4
(a)

Explain the difference between liability arising in tort and liability arising from breach of
contract.
(10 marks)

(b)

More Money has completed his studies in the field of accountancy and feels that he needs to
put into practice what he has learnt regarding investment of his hard earned money. He
reads a number of reports on public limited companies in Zambia. Relying on the basis of an
auditors report about the financial soundness of Developing Markets plc More Money
decides to invest in the company by buying shares. Two years later More Money discovers
that the share prices had fallen and he had not earned any dividend on his shares. He sues
the auditor of the company for making a false report. More Money alleges that the auditors
could easily have anticipated that someone (including the existing shareholders) might rely
on their clients audited financial statements in making an investment in the Company and
could be harmed if the statement were wrong. Argue More Moneys case based on the
principle whether the auditor owes any duty of care to the potential or the existing
shareholders who are interested in investing in the Company.
(10 marks)
[Total: 20marks]

SECTION B:

Attempt any two (2) questions from this section.

Question 5
(a)

The Articles of Association of a private limited company forms a contract which is


enforceable between the company and the members, the members and the company and
the members between themselves. With reference to decided cases explain the three main
contractual relationships.
(10 marks)

(b)

The Articles of Association of Big Force Limited include the following provisions:
Article 22: Kabwe Long is the companys managing director for life at a salary of K120 million
per annum plus such annual bonus as shall be agreed by the company in a general meeting.
Article 23: Any member of the company who wishes to sell his shares must offer them to the
directors who will purchase them at the price determined by the auditors.
Explain whether the Articles may be relied upon:
(i) by Kabwe Long to obtain compensation if he is dismissed by the company after serving
for three years.
(5 marks)
(ii)

by Sabstone if the board should refuse to purchase her shares in the company
contrary to article 23 above.
(5 marks)
Total: 20 marks]
22

Question 6
(a)

Explain the doctrine of separate personality in relation to companies.

(10 marks)

(b)

What are the three (3) exceptions to the doctrine of separate personality?

(10 marks)
[Total: 20 marks]

Question 7
(a)

What are the differences between an ordinary share, a preference share and a redeemable
share?
(10 marks)

(b)

Discuss the two-fold procedure that a public limited Company has to follow in order to allot its
shares.
(10 marks)
[Total: 20 marks]
END OF PAPER

23

DECEMBER 2010
L7- BUSINESS AND CORPORATE LAW

SUGGESTED SOLUTIONS

24

Solution 1
(a)

The three statements that support the argument that legislation is a supreme source of law
are:(i)

No court may question the validity of an Act of Parliament; using the same argument
the courts cannot declare a parliamentary enactment to be illegal in the United
Kingdom due to the doctrine of parliamentary sovereignty.
In the case of Cheney v. Conn (1968), the plaintiffs objection that tax collected by the
government was being used in the production of nuclear weapons cannot be used to
invalidate the clear authority given to the government to collect the taxes. The courts
decision was that the Finance Act gave the clear authority for taxes to be collected and
therefore it cannot be declared illegal.
In Zambia and other countries practicing constitutional supremacy all enactments of
parliament are subject to constitutional interpretation by virtue of article 1(3), of the
Constitution and the law it makes is not supreme law because of the constitution.
(4 marks)

(ii)

An Act of Parliament can expressly or impliedly repeal an earlier statute. This rule is
directly linked to the presumption that Parliament cannot bind its successors. In the
case of Vauxhall Estates v. Liverpool Corporation (1932), where assessment of
compulsory purchase would produce different results if calculated under different
pieces of legislations. In addition the earlier Act had provided that any Act inconsistent
with it would have no effect. The decision of the court was that the later Act had
impliedly repealed the earlier Act.
(3 marks)

(iii)

An Act of parliament may be passed to vary or revoke the common law or even to
retrospectively reverse a judicial decision. The War Damage Act (1965), was enacted
to remove the vested rights to compensation from the Crown. It also contained a
provision that it will be applicable to proceedings commenced before the Act had come
into force. It therefore reversed the decision given by the House of Lords in the case of
Burmah Oil v. Lord Advocate (1965).
(3 marks)
(10 marks)

(b)

The rules used by the judges in interpretation of statutes are as follows :


(i)

The literal rule


This rule follows the literal, ordinary or natural meaning of words. Under this rule the
judges are required to consider what the legislation actually says rather than

25

considering what it might mean. The words of the statute should than be taken in their
ordinary and grammatical meanings. The rule is only applicable where:

The words are clear

The language is plain

Only one meaning can be derived from the wording of the statute
In the case of Fisher v. Bell (1961), the court followed the contract law interpretation of
the meaning of offer in the Act in question. The facts were that the shopkeeper was
charged for the sale of a flick-knife in a shop window contrary to a legislative provision.
The decision of t he court was that the display was not an offer for sale but an
invitation for the public to make an offer to purchase the item.
(3 marks)
(ii)

The Golden Rule


This rule is applied where:

An ambiguity or vagueness in the words or phrases of the statute arises

Two apparently contradictory meanings of a particular word used in statute are


possible.
The court will apply the least absurd meaning. If the ordinary interpretation leads to an
absurdity the meaning can be modified to avoid that absurdity but no further.
In the case of Re Sigsworth (1935), the golden rule was applied to prevent a murderer
from inheriting on the intestacy of his victim even though he was her only son and the
sole heir to her estate applying the literal interpretation of the Administration of Estates
Act 1925 .
(4 marks)
(iii) The Mischief Rule
If the literal rule does not give the desired results the rule to be applied is the mischief
rule. Where the Act is passed to remedy a mischief the court must adopt the
interpretation which will have the effect of remedying the mischief in question. The rule
was laid down in the Heydons Case (1584) and the criteria in applying the rule are:

What was the common law before the Act?

What was the mischief for which the existing law did not provide?

What remedy has Parliament decided upon?

The Affiliation Proceedings Act (1957), is an example of an Act where the mischief rule
can be used in the interpretations of its provisions.
(3 marks)
(10 marks)
[Total: 20marks]
26

Solution 2
(a)

Parties to a contract will normally be bound to perform any promise that they have agreed to
undertake and these promises are considered to be the terms of the contract. Some
statements which have induced the other party to enter into the contract do not form part of
the contract. The distinction between a term and a representation is that pre-contractual
statements that do not from part of the contract but induce the parties to enter into the
contract are representations while statements that form part of the contract are called term.
The courts have developed four tests to distinguish between a term and a representation.
(i)

Where the statement is of such major importance that the promisee would not have
entered into the agreement without it, then it will be construed as a term. In the case of
Bannerman v. White (1861), the statement regarding the hops being treated with
sulphur was a statement of major importance and therefore a term of the contract.
(2 marks)

(ii)

Where there is a time gap between the statement being made and the entering of the
contract, the statement will most likely be treated as a representation. In the case of
Routledge v. McKay (1954), the statement about the date of the model of the
motorcycle was a pre-contractual representation and the plaintiff could not sue for
damages.
(2 marks)

(iii)

Where the statement is made orally and is excluded from the subsequent written
document, that statement is likely to be a representation. The oral statement as to the
age of the motorbike in the case of Routledge v. McKay (1954), was not included in the
written document and therefore it was a representation.

(iv)

Where one of the parties to an agreement has special skill and knowledge, then
statements made by them will be terms of the contract. In the case of Dick Bently
Productions Ltd v. Harold Smith (Motors) Ltd (1965), the Statement made by the
defendant regarding the motor vehicle was made with special skill and knowledge and
therefore a contractual term.
(3 marks)
(10 marks)

(b)

No Goddy Ltd had breached the implied statutory term that goods supplied should be of
satisfactory quality. Term will be implied by virtue of the Sales of Goods Act 1893. Therefore
Fast Track will have a cause of action against No Goddy Ltd for breach of contract. Fast
Track can rescind the contract and recover his money as long as he does not:(i)

affirm the contract

27

(ii)

delay in taking the action in which case he will only be able to recover compensation
for the repairs to the car.
Affirmation of the contract can be deemed if Fast Track expressly accepts the car or he
impliedly treats the car as his own. Further if he continues to retain the car after the
lapse of a reasonable time without intimating that he had in fact rejected the car.
Applying the law the facts in the question, Fast Track has not accepted the contract
and agreeing to repairs can not be deemed to be acceptance.
The main issue that the court will have to address is the question of taking the action
within a reasonable time. What amounts to reasonable time was discussed in the case
of Bernstein v.Pamson Motors a delay of three weeks was held to be unreasonable.
Following this decision Fast Track cannot recover his money, and No Goddy Ltd can
insist upon fitting in a new engine and returning the car to Fast Track.
(10 marks)
[Total: 20marks]

28

Solution 3
Definition of an exclusion clause
A clause in the contract which aims to exclude or limit the partys liability for breach of contract or
negligence.
1 marks)
Incorporation of exclusion clauses
Exclusion clauses will only operate if they are actually part of the contract.
(a)

(1 mark)

Three main methods of incorporation are:(i) by signature

(ii)

If the plaintiff signs a document which has a contractual effect and contains an
exclusion clause, it will automatically form part of the contract and will be binding. This
rule applies even if the document is not read or understood by the party. In the case of
LEstrange v. Graucob (1934), the plaintiff bought a cigarette vending machine and
signed an unread contract which contained in very small print an exclusion clause. The
clause provided that any express or implied condition, statement or warranty is
hereby excluded. The machine failed to work and in an action for breach of warranty
the defendants relied on the exclusion clause. The court decided that if a document
containing contractual terms is signed, then, in the absence of fraud or
misrepresentation the party signing is bound by it.
(3 marks)
by notice
The general rule is that an exclusion clause will be incorporated into the contract if the
person relying on it has taken reasonable steps to draw the other parties attention to it.

Notice must be given at or before the time of concluding the contract

The terms must be contained in a document which was intended to have


contractual effect

Reasonable steps must be taken to bring the terms to the attention of the other
party.
An exclusion clause cannot be introduced into a contract after it has been made. In the
case of Olley v. Marlborough Court, (1949), a notice was placed at the back of the
hotel room stating that the hotel will not be responsible for items lost or stolen from the
hotel room unless they are handed to the manager for safe keeping. On the loss of her
fur coat from the hotel room the plaintiff sued the hotel. It was decided by the court that
the notice placed on the back of the hotel room was not incorporated in the contract. (3
marks)
29

(iii)

by previous course of dealings


Exclusion clauses can be incorporated into the contract if there is a regular and
consistent course of dealings between the parties. The interpretation of consistent
depends on the facts. In the case of Hollier v. Rambler Motors (1972), the use of the
garage for three to four times over a period of five years did not amount to a course of
dealings. On some occasions the plaintiff had even signed a contract which excluded
the defendant from liability but the clause was not incorporated into the contract
3
marks)
(11 marks)

(b)

Once incorporated the exclusion clause has to be interpreted to determine whether the
clause covers the breach that has occurred. The basic approach is that liability can only be
excluded by clear words. The main rules include:(i) Contra proferentem rule which states that any ambiguity will be construed in favour of
the party disadvantaged by the clause. On other hand if there is any ambiguity or
uncertainty as to the meaning of the exclusion clause, the courts will construe it against
the party who inserts the clause in the contract.
(3 marks)
(ii) The main purpose rule
Under this rule, a court can strike out an exemption clause which is inconsistent with
the main purpose of the contract.
(3 marks)
(iii) The doctrine of fundamental breach
Before 1964, common law considered that a fundamental breach could not be
excluded or restricted in any circumstances. This approach was rejected in one of the
cases in 1964. The current rule is that the question of whether a clause could exclude
liability for a fundamental breach was held to be a question of construction of the
clause. In the case of Photo Productions v. Securicor Transport (1980), the exclusion
clause was wide enough to cover fundamental breach and yet valid. The plaintiffs
action failed.
(3 mark)
(10 marks)
[ Total: 20 marks]

30

Solution 4
(a)

(b)

A tort is a civil wrong and the person wronged sues in a civil court for compensation or an
equitable remedy. The claim generally is that the plaintiff has suffered a loss such as
personal injury at the hands of the defendant. The defendant will be ordered to pay
damages.
In a tortuous action no previous relationship needs to exist. Parties that may be complete
strangers but they can claim in tort based on the general law of duties and rights
When a plaintiff sues in tort claiming damages he must normally prove his loss. The
necessary basis of his claim is that the plaintiff has suffered a wrong.
In the case of Electrohrome v Welsh Plastics (1968), the defendants lorry, driven carelessly,
crashed into a fire hydrant. The result of the crash was that the water supply to the plaintiffs
factory which was located nearby was cut off. The factory had to remain close until the
supply was restored. The plaintiff claimed damaged for his loss. The court decided that the
fire hydrant was not the plaintiffs property and even though he had suffered a loss no legal
wrong had been done to him for which he could hold the defendant liable.
(5 marks)
A contract on the other hand is simply an exchange of commodities or services between two
parties for a price. Contractual liability arises out of the promises to perform obligations
agreed under the contract. All contracts are agreements but not all agreements are contract.
This is because some agreements might not be enforceable at law. For a contract to be valid
there are four basic elements, the offer and the acceptance of that offer which creates the
agreement. The agreement is then exchanged between the parties by consideration. This
may be shown by one party suffering a loss or detriment, in return for the benefit received.
The law enforces bargains made by the parties, not gratuitous promises. In addition there
should be clear intention between the parties to be bound by the contract.
Some contracts will be wholly or partly invalid at law because of a vitiating factor such as
mistake, misrepresentation or undue influence.
Non performance or defective performance of the contractual obligation allows the injured
party to sue for breach of contract. Remedies for breach of contract include monetary
compensation, called damages, an action for the price or any other equitable order such as
specific performance or injunction. The contractual agreement is the basis of liability arising
out of the relationship.
(5 marks)
Where financial loss was caused and the action against the auditor is based on the tort of
negligence, then it must be proved that the plaintiff was owed a duty of care by the auditor,
that the auditor was in breach of this duty and the loss resulted in consequence of the
breach.
In the case of Hedley Byrne v. Heller & Partners Ltd (1963) established the fact that a duty of
care could arise through spoken words or written words and cover financial loss as well as
31

physical injury. The case involved a faulty bank reference to a client, although the Bank
avoided liability by the insertion of disclaimer clause. The court decided that liability for
negligence applied to careless words as well as deeds and covered financial as well as
physical injury. As a result of this case, whenever anyone with a special skill such as an
auditor, undertakes to apply that skill for the assistant of another person who relies on such
skill, a duty of care will arises. The duty of care arose to the particular person to whom the
skill was extended and not to the public as a whole who rely on that advice.
For an action for a negligent misstatement, there must be a special relationship between the
parties which has been established in an appropriate context. The concept of special
relationship has now been redefined by the House of Lords in the case of Caparo Industries
plc v. Dickman and others (1990). In this case the plaintiff owned shares in Fidelity plc and
after receiving the audited accounts which showed a profit for the year it purchased more
shares in F plc and then made a successful takeover bid for F plc. After the take-over Caparo
sued the auditors alleging that the accounts were misleading in that they showed a profit
when in fact there had been a loss. The court in determining the existence and scope of the
duty of care recognized the difficulty in setting a single general principle which could be
applied to every situation. It set out three criteria which must be fulfilled to give rise to a duty
of care. The first being foreseeability, secondly, proximity and thirdly, whether it is just and
reasonable that the duty of care should be imposed.
Applying the law to the facts More Money would have no remedy if he had bought the shares
in Developing Markets plc on the basis of the audit report only. No duty of care is owed to a
potential investor or to the existing shareholders who want to invest further in the company.
In which case there can be no breach or resultant loss. The claim of non payment of
dividends has to fail.
(10 marks)
[Total: 20 marks]

32

Solution 5
(a)

The Articles of Association deals mainly with the internal conduct and affairs of the company
such as transfer of shares and conduct of meetings. The standard articles are provided as a
schedule to the Companies Act, chapter 388 of the Laws of Zambia in the form of Table A.
(2 marks)
The effect of the Articles of Association in relation to the shareholders is statutorily provided
under section 21 of the Companies Act.
The Articles bind the:Members to the company
The shareholders of the company known as the members are deemed to have separately
covenanted to observe the articles.
(2 marks)
Company to the members
The company is able to enforce the rights and obligations which affect its members. The
company is able to commence an action and recover the loss from the members in their
capacity as members.
(2 marks)
Members and Members
The members are contractually bound by the articles in their dealings with one another as if
each had separately agreed to be bound by them. (Rayfield v Hands).
(2 marks)
Company to Third party
The contractual effect does not bind the company to third parties. In Eley v Positive
Government Security Life Assurance Co (1876), where Eley, although a member of the
company brought a claim in his capacity as solicitor and not as a member, the contractual
effect could not be relied upon to support such a claim
(2 marks)
(10 marks)

(b)

(i)

Section 21 of the Companies Act provides that the Articles of Association of a


registered Company constitutes a contract between the company and its members and
between the members themselves. The enforcement of this section is usually by way
of an injunction restraining a threatened breach of the Articles or by an order of specific
performance compelling performance of an act. However, a non member cannot
enforce the provisions of the Articles. In the case of Eley v. Positive Government
Security Life Assurance Co. (1876), it was established that one cannot enforce non
member rights and therefore as Solicitor of the company the rights were that of non
member.

33

Kabwe Longs right to compensation is a non members right, it does not arise from his
membership of the company. The position of the Director is served under a contract of
service. Following Eleys case he will be unable to use Section 21 of the Companies
Act in order to enforce the provisions of the Articles and thereby claim compensation.
However, following the case of Re New British Iron Co. Kabwe Long can rely upon the
Articles to provide evidence of a contract between him and the company provided that
he is appointed the managing Director for life in his contract of service. In this
circumstance, the provisions of the Articles can be implied into his contract. Since he
has been dismissed after serving for three years he can sue under his contract of
service.
(5 marks)
(ii)

Sabstone can use the provisions of Section 21 in order to enforce the clauses of the
Articles of Association as it is the directors who are obliged to purchase her shares. In
the case of Rayfield v. Hands, the Articles contained a similar clause requiring the
directors to hold shares in the company. The directors are then members of the
company. The provision requiring the directors to purchase members shares was held
to be enforceable against the directors, in their capacity as members. Applying this law
to Sabstones case he will be able to enforce the provisions of the Articles. (5 marks)
(10 marks)
[Total: 20 marks]

34

Solution 6
(a)

(b)

Corporate personality states that a company as a legal person is an entity in its own right.
This doctrine of incorporation recognizes the company has having a legal personality distinct
from its members. This was established in the case of Salomon v. Salomon & Co (1897),
where the House of Lords held that the business was owned by and its debts were liabilities
of the company, not of Salomon personally. In addition although Salomon owned all the
issued shares of the company he could also be a secured creditor with enforceable rights
against the company in that capacity. This doctrine was also applied in the case of Lee v.
Lee Air Farming Ltd (1960). The consequence of this doctrine is that:
property of the company belongs to the company itself and it may take action to
enforce its own rights. In the case of Macaura v. Northern Life Assurance (1925), the
plaintiff could not claim on the Insurance policy since the property damaged belonged
to the company and not him and as shareholder he had no insurable interest in the
forest.

any debts of the company are its debts which it can enforce against the creditors.

Liability of members is limited to the amount they have contributed in share capital

A company has perpetual succession

The company can sue and be sued in its own name.


(10 marks)
The veil of incorporation can be lifted under common law as well as under the Companies
Act. Situations arising under common law are:(1 mark)

Where the corporate veil is used for purposes which are fraudulent or otherwise
contrary to public policy as laid down in the case of Gilford Motor Co Ltd v Horne
(1933),
( 3 marks)

In times of natural emergency (war or economic sanctions) to discover the nationality


of the persons who hold the shares and control the company.
( 3 marks)

Where companies are formed for tax evasion schemes


(3 marks)
OR
Situations under the Companies Act:
A public Company trading without obtaining a trading certificate under section 15 of the
Companies Act. Failure to obtain the certificate leads to personal liability for the
directors for any loss or damage suffered by a third party.
(3 marks)

Membership of the Company falls below two and the single member continues to trade
for six months. The liability of the debts extends to the ones incurred after the six
months have expired under Section 26 of the Companies Act.
(3 marks)

Liability for use of company name in incorrect form. The Officer of the company is
personally liable to the creditor where the company fails to pay the debt under Section
194(2) of the Companies Act.
(3 marks)
Any three situations can be explained by the students
[Total: 20 marks]
35

Solution 7
(a)

A share is defined in the case of Borlands Trustee v Steel Bros and Co (1901), as the
interest of the shareholder in the company measured by a sum of money for the purpose of
liability. It means that the shareholder must pay for the shares in full.
(1 mark)
A Company may issue different types of shares but the most common ones are the ordinary
shares. In the absence of contrary provisions in the Articles it is presumed that the rights of
all shareholders are equal. These include rights to equal liability, payment of dividends,
attendance and voting at meetings and return of capital on reduction of share capital or
winding up. Ordinary shares carry normal rights without special definition. Voting rights are
commonly attached to ordinary shares but they maybe issued without voting rights. (2 marks)
On the other hand preference shares have the characteristics of carrying a prior right. This
right is to receive an annual dividend of fixed amount. There are four different points
regarding the payment of dividends. Firstly, the right to receive a dividend at the specified
rate before any other dividend may be declared or paid. Secondly, the right to receive a
preference dividend is deemed to be cumulative. Thirdly, if a company, which has arrears of
unpaid cumulative preference dividends, goes into liquidation, the preference shareholders
cease to be in arrears. Lastly, holders of preference shares have no entitlement to participate
in any additional dividend over and above their specified rate.
(4 marks)
Redeemable shares are issued if the Company is authorized to do so by its articles under
Section 59(1) of the Companies Act. They carry with them a right by the Company to redeem
or buy back the shares. Once the shares are bought back by the Company they are
cancelled. The result is a reduction of the share capital of the Company as such there are
strict rules about issue and redemption of such shares. The rules are:

A company cannot issue all its issued share capital are redeemable

It cannot convert shares into redeemable shares if they have not been issued as
redeemable

Redemption of these shares can only take place if the shares are fully paid up under
section 59(3) of the Companies Act
(3 marks)
(10 marks)

(b)

For the Public Company to allot its shares it must follow the two-stage procedure provided for
listed Companies on the Lusaka Stock Exchange. The procedure is as follows:(i)

The Company should issue a renounce-able allotment letter which the original allottee
may for a limited period transfer to another person by signing a form of renunciation.
The period of time is limited to six weeks. No entry is made in the register of members
when the allotment letter is first issued. It is not until renouncement or the completion
36

of the application for registration of the shares in the name of allotee is submitted the
procedure will be completed.
(5 marks)
(ii)

On receipt of application for registration the company enters the name of the applicant
in the register of members and delivers a return of allotment to the registrar to show
which members are on the register. The applicant becomes a member by virtue of the
entry on the register and receives a share certificate from the company to confirm
ownership of the shares
(5 marks)
(10 marks)
[Total: 20 marks]

END

37

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS


LICENTIATE LEVEL
L6: BUSINESS AND CORPORATE LAW
SERIES: JUNE 2011
TOTAL MARKS 100 TIME ALLOWED: THREE (3) HOURS
INSTRUCTIONS TO CANDIDATES
1.

You have ten (10) minutes reading time. Use it to study the examination paper carefully so
that you understand what to do in each question. You will be told when to start writing.

2.

This paper is divided into TWO sections:


Section A: Attempt THREE questions only.
Section B: Attempt TWO questions only.

3.

Enter your student number and your National Registration Card number on the front of the
answer booklet. Your name must NOT appear anywhere on your answer booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

6.

All workings must be done in the answer booklet.

7.

Present legible and tidy work.

8.

Graph paper (if required) is provided at the end of the answer booklet.
38

SECTION A:
Attempt any three (3) questions in this section.
Question 1
(a)

Discuss the origins of common law and equity and explain how the two are administered in
the Zambian jurisdiction.
(12 marks)

(b)

Zambia operates a dual legal system. This means application of both African Customary Law
and English (received) Law.
(i)

Identify five (5) factors to be considered if a custom is to receive judicial recognition.


[5 marks]

(ii)

State the conditions that must be fulfilled for African customary law to be administered
and name the courts in which African customary law can be administered in Zambia.
[3marks]
[Total: 20 marks]

Question 2
(a)

(i)

Define acceptance.

(2 marks)

(ii)

Outline two basic rules of acceptance.

(4 marks)

John found Toms puppy wandering in the forest and took it to him. As he was walking
out of the gate, he saw an advertisement promising whoever found the lost puppy a
reward of K 250,000.
When he confronts Tom for the reward, Tom insists that he can not pay him as they
are friends. Show if John is entitled to the reward using rules that govern acceptance.
(4 marks)
(b)

(i)

Define consideration and show its importance in a contract.

(ii)

Kokoliko is selling a second hand BMW car for the price of ten million kwacha. Bolingo
is interested in the car. He makes an offer to buy the car at ten million Kwacha.
Kokoliko tells Bolingo that the BMW is a fast car. Bolingo pays the ten million Kwacha
purchase price which is accepted by Kokoliko. After concluding the contract, Kokoliko
tells Bolingo that the vehicles fuel consumption remains low even at the speed of 260
km per hour. After driving the car for 100 km Bolingo discovers that the car had
consumed the full tank of fuel. He decides to return the vehicle to Kokoliko and
demands the refund of the purchase price stating that the fuel consumption of the car
is contrary to what was promised.
Advise using the rules of consideration.
[6marks]
[Total: 20 marks]
39

(4marks)

Question 3
(a)

Two Congolese professional footballers, Kakoko and Kalala were engaged to play for City Ya
Moto Football Club. Their contracts stipulated that they had to attend adequate training before
any league game. Kakoko had problems connecting by air from Katanga to Lusaka and
arrived three days before a crucial league game with Kalampa F.C., which City lost by three
unanswered goals. Kalala never showed up for fear of being blamed for the loss, until the
dust had settled three months later. Both players were dismissed and have approached you
for advice. Advise the two players as to their rights and liabilities arising under the contract of
employment.
(8 marks)

(b)

Bwalya is employed by Lusaka Transport Company. He has been assigned a duty to


transport goods from Lusaka to Kafue to be delivered to Kafue Wholesalers. On his way to
Kafue he stops to answer the call of nature at a pub. While there he decides to have a beer
and while in the pub he is attracted by beautiful Julieta seated next to him and they have
some drinks together. Julieta asks for a lift to her home within Chilanga. On the way to
dropping her they meet with a head-on collision accident with a car from the opposite
direction due to Bwalyas negligence. Discuss the liability arising in this case.
(8 marks)

(c)

State the three (3) elements that extend the duty of care in the cases of negligence. (4marks)
(Total: 20 marks)

Question 4
(a)

Explain three (3) ways in which Agency relationships differ from Partnerships.

(b)

(i)

Both Partners and Agents associate using fiduciary duty as a yard stick for their
relationship. What is fiduciary duty? Explain giving an example of when such duty
arises.
(2 marks)

(ii)

Identify three (3) main duties from agent principal relationship and the consequences
of their breach.
[8marks]

(c)

(6 marks)

The court may order dissolution of a partnership under S.35 of the Partnership Act, 1890.
Explain at least four (4) circumstances under which the court may make such an order.
(4 marks)
[Total: 20 marks]

40

SECTION B:
Attempt any two (2) questions in this section.
Question 5
John Bosco Kamau was a successful pastoralist with an estimated 10,000 cows in the Kafue Flats.
Due to prolonged drought caused by climate change, he lost most of the animals. He sold the
remainder and convinced his uncle Hilltop Hamatu not to sell his animals but to migrate to the city
where they would set up an abattoir. They carried their simple implements comprising stools, mats
and spears with which to start their business.
When they arrived in the city, Dedan, a former school mate of Kamau advised the pair to register
their business. Kamau purchased machinery, and gave the remaining balance to Dedan who
promised to assist them with the formal registration of the business. Hamatus animals were
slaughtered and the meat sold. After one month of successful trading, their business was not yet
registered because of bureaucracy. The pair collected more animals from the villagers promising to
pay them as soon as their business was registered. Unfortunately, the Kafue Bridge was washed
away by floods and the delay to cross resulted in animals losing a lot of weight and subsequently
made a loss when the animals eventually reached Lusaka and were slaughtered and sold.
When the business was finally registered the pair shared the profit and paid themselves salaries.
They did not pay the villagers for their animals.
(a)

What type of business entity would you advise Kamau and Hamatu to establish their business
under?
(4 marks)

(b)

Explain the liability of Kamau and Hamatu before and after the company was registered.
(12 marks)

(c)

What are the remedies available to the company against Kamau and Hamatu after the
business is registered?
(4marks)
(Total: 20 marks)

Question 6
(a)

(b)

(i)

Identify two (2) ways in which a public company may raise capital.

(2 marks)

(ii)

Explain the main elements of the capital maintenance rule.

(6 marks)

(iii)

Distinguish between Share capital and loan capital.

(4 marks)

Explain the main conditions set out under section 59 of the companies Act Cap 388 of the
Laws of Zambia on issue and redemption of redeemable shares issued by the company.
(8 marks)
[Total: 20 marks]

41

Question 7
(a)

(i)

Name two (2) ways in which a person can become a director of a company. (2 marks)

(ii)

In what ways would directors vacate office?

(3 marks)

(iii)

Explain three (3) fiduciary duties Directors owe a company.

(3 marks)

(b)

Distinguish between owners and directors of a company.

(4 marks)

(c)

Explain the usual business conducted at the Annual General Meeting (AGM).

(8 marks)

[Total: 20marks]

END OF PAPER

42

JUNE 2011
L7: BUSINESS AND CORPORATE LAW

SUGGESTED SOLUTIONS

43

Solution 1
(a)

Before 1066, the laws of England were based on local customs with the King as the fountain
of justice. Customary law was difficult to administer as customs differed from district to
district. A centralized local court structure developed a common set of rules applied uniformly
through out the realm these became known as common law. Common law was
administered in the Kings courts by judges appointed by the king. They visited the district 34 times a year.
Common law was rigid and harsh and there was only one writ used to commence
proceedings with one damages as a remedy. Anyone dissatisfied with judgments from
common law courts could petition the king for extraordinary relief which became known as
equity based on fairness.
The result was the administration of two sets of laws in parallel courts and conflict was
inevitable. Instead of strict application of the law, the Chancellor was more concerned with a
fair outcome which pleased both plaintiff and defendant. On the other hand, common law
courts did not recognize equitable remedies such as injunctions, rectification and specific
performance.
(12 marks)

(b)

(i)

(ii)

For a custom to receive judicial recognition,


I.

It must have been in existence for a long time (antiquity)

II.

It must have been exercised without interruption

III.

It must have been enjoyed peacefully

IV.

A custom must be certain and not vague

V.

It must be reasonable

(5 marks)

The custom must not be repugnant to natural justice or morality, and must not be
contrary to any written law.
[3marks]
(Total marks20)

Solution 2
(a)

(i)

Acceptance is an unconditional statement of intention to be bound by the specific


terms of the offer.
(2 marks)

(ii)

Basic rules of acceptance are


(1)

The mirror- image rule acceptance must correspond exactly with the terms of
offer (must be unconditional, unequivocal or unqualified). Any attempt to vary
terms of offer is a counter offer and a rejection of the original offer: Hyde V
Wrench, 1840. It was held that Hyde by offering an alternative price of 950
pounds to the original 1000 pounds had made a counter offer. He could not
44

therefore turn round and accept what he had rejected. When Wrench refused
later to sell the farm at him at 1000 pounds, he was not in breach of contract.

(b)

(2)

Acceptance must be communicated by the offeree or someone with the offerees


authority. In Powell and Lee (1908) the plaintiff applied for a job of head teacher
and attended. One of the members of the interviewing committee informed him
that he had been picked for the job. The committee changed its mind and
appointed someone else. Powell sued for breach of contract. The court held that
until acceptance had been properly communicated, there was no valid contract.
(4 marks)

(3)

An offeree can not accept an offer he is not aware of Taylor V Laird. A captain of
a ship who gave up command of a ship and opted to sail as an ordinary crew
member, could not be paid in that capacity because he had not communicated
his offer to work in that capacity to his employers. *In the scenario given, John
was not aware of the offer of the reward by the time he found and returned the
puppy, and Tom is not under any obligation to give John the reward. (4 marks)

(i)

Consideration is some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment loss or responsibility given, suffered or undertaken by the other.
Currie v Misa (1875) Consideration is an element that makes the contract complete.
(4 marks)

(ii)

Past consideration is where the act put forward as consideration was performed before
any promise of reward was made. It is not valid consideration. In Roscorla v Thomas
(1842) where the plaintiff purchased a horse from the defendant and after the sale was
completed the defendant gave an undertaking that5 the horse was not vicious. This
proved to be wrong. They plaintiff sued on the undertaking. It was held that
consideration was past with reference to the undertaking.
In Kokoliko and Bolingos case, after the contract of sale, Kokoliko gave an undertaking
which was not supported by fresh consideration. Bolingo is therefore unable to enforce
the promise by Kokoliko because the consideration for that promise is past. (6 marks)
(Total marks 20)

45

Solution 3
(a)

The contract of employment is regulated by the Employment Act Cap 268 of the Laws of
Zambia. In order for Kakoko and Kalala to claim their rights and liabilities, they must show
that they had been employed under a contract of services by City Ya Moto. The law under
section 25 of the Employment Act states that the employee can be dismissed summarily, that
is without notice but the labour commissioner must be informed in writing explaining the
circumstances leading to and the reasons for such dismissal. While section 26A deals with
termination related to conduct or performance. This implies the application of the rule of
natural justice which should be taken into account when dismissal is under section 26A.
Kalala stayed away for three months which was a breach of a condition of service. The
employer was justified in dismissing the employee.
For Kakoko who arrived three days before the game, it was a breach of a warranty. In this
case the employer should have followed the rules of natural justice and given him an
opportunity to explain himself under section 26A. Summary dismissal in Kakokos case was
therefore not justified.
(8 marks)

(b)

(c)

Vicarious liability is applicable to a relationship of employer employee. For the employer to


be liable, the tort must be committed by the employee. It is also necessary to prove that the
employee served under a contract of services and that the tort was committed in the course
of employment. The relationship between the Transport Company and Bwalya is that of
employer and employee. The test the court will apply in showing that the act was committed
in the course of employment, is dependent on whether the employee was doing the work for
which he was employed. Bwalya was employed as a driver and was instructed by the
employer to transport the goods from Lusaka to Kafue. If the employee while engaging on his
duties does something for his own convenience the employer will not be liable 3. In other
words, where the employee is on a frolic of his own, the employer cannot be held vicarious
liable. In Twine v Bean Express there was an express notice given by the employer forbidding
the driver from giving liftswhile driving the company vehicle. The driver gave a lift to a
passenger who was killed in the accident. The court5 held that the driver was acting in the
course of his employment as the passenger was a trespasser and the employer could not be
held
(8 marks)
Bwalya acted on a frolic of his own when he gave a lift to Julieta and diverted from this
prescribed route during the course of the journey to Kafue. The accident was caused by his
negligence but the employer cannot be held vicariously liable for Bwalyas negligence.
To establish liability in negligence Caparo v Dickman extended the duty of care to include
three further elements which are:
(i) Existence of a special relationship in Caparo PLC v Dickman [1990] the auditors
statement was relied upon by the investors and potential investors. The court held that
the auditors did not owe a duty of care to the public at large.
46

(ii)

Reasonable foreseeability that is where the person making the statement has
knowledge or knows that the statement will be relied upon by the public.

(iii)

It should be just and equitable to extend the duty of care to the public.

(4 marks)
(Total marks 20)

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Solution 4
(a)

(b)

(i)

The agent-principle relationship is governed by the rules under the general law of
contract, while partnerships are regulated under a specific statute called the
Partnership Act of 1890.

(ii)

Liability of partners is unlimited for the debts, obligations and torts committed while
they are still partners. The agents liability depends on the authority given to him by the
Principle. If the agent exceeds the authority given to him, he may be liable for breach
of warranty of authority.

(iii)

Partners share in the profit of the firm while agents earn a commission.

(i)

Fiduciary duty is a duty of trust, honesty and full disclosure, and the law imposes on the
partner a duty to disclose or to account to the partnership for any personal gain.
(2 marks)

(ii)

The three main agent-principal duties are

(6 marks)

He must not delegate performance of his duties arising from the agency.

He must exercise due care and skill in the execution of his duties.

He is under a duty to account to the principal all money and property received by
virtue of the agency

The consequences of breach

(c)

The agent will be liable to the principal for any loss if there is breach of duty.

If there is a serious breach the principal may dismiss the agent and refuse to pay
him any commission.

The principal may recover any benefit obtained or profit made by the agent.
(8 marks)

The four circumstances under the Partnership Act 1890 section 35 are:
(i)

where a partner is suffering from a mental disorder

(ii)

Where a partner is incapacitated permanently and incapable of carrying out the


partnership agreement

(iii)

Where the business is carried on at a loss

(iv)

Where it is just and equitable to do so.

[4marks]
Total [marks20]

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Solution 5
(a)

the business entities would include:


(i)

Sole trader a business which is carried on by a single person.

(ii)

Partnership - an agreement between two or more persons conducting the business in


common with a view to profit.

(iii)

Registered company a company incorporated under the companies Act.

(4 marks)

(b)

Kamau and Hamatu play the role of promoters, and owe a fiduciary duty to the company
when it is formed. They must not put themselves in a position of potential conflict of interest.
They may be entitled to reimbursement of expenses and remuneration prior to incorporation
if articles expressly provide for this. They started trading before the company was formed
and therefore what ever profits and losses that accrue, are borne personally and can not be
imputed on the formed company: S. 28 (1) of the Companies Act
(12marks)

(c)

(i)

The company after incorporation may rescind the contract and recover the purchase price.
This was stated in the case of Erlanger V New Sombrero Phosphate Co. 1873promoters made a profit by leasing an Island in the Caribbean, and because they did
not reveal this, it was held the company could rescind the contract and recover the
price from Erlanger and other members.

(ii)

Promoters may have to account to the company for any profit they have made:
Gluckstein V Barnes, 1900: a syndicate that brought property at a discount and sold it
to the newly formed company of which they were directors, were called upon by the
liquidator to repay the discount to the liquidator.

(iii)

The company may sue the promoters for damages for breach of fiduciary duty.
(4marks)
(Total marks20)

49

Solution 6
(a)

(i)

Capital can be raised by a public company through offer of shares for sale and
borrowing.
(2 marks)

(ii)

The capital maintenance rule states that:

(iii)

(b)

A company does not make a gift of its shares to an allotee, shares must be paid
for.

Selling shares at a discount or below the nominal value is prohibited

the companys acquisition of its own shares is also restricted.

Share capital is the amount raised from the purchase of shares

Loan capital is money borrowed by the company

Loan capital there is always interest accruing to the lender

dividends are payable as a return on the shares.

(6 marks)

(4 marks)

Issue and redemption of shares:


(i)

The Articles must authorize

(ii)

No issue of redeemable shares at the time when there are no


company

(iii)

Only fully paid shares will be redeemed

(iv)

Redemption can only take place from issue of shares or from distributable profits of the
company.
(8 marks)

50

issued shares of the

Solution 7
(a)

(i)

First directors named in the articles and have signed a statement to act in that capacity
once a company is registered. Subsequent directors are appointed by an ordinary
resolution in the Annual General Meeting (AGM).
(2 marks)

(ii)

Directors may vacate office:

(iii)

(a)

by resignation

(b)

by way of provisions in the Articles of Association for other reasons.

(c)

Due to continued absenteeism from meetings of directors for 6 months without


notifying the other directors.
(3 marks)

Fiduciary duties of Directors


Duty to act bona fide
Act for the benefit of the company as a whole
Duty to avoid conflict of interest

(b)

(c)

(3 marks)

(i)

Shareholders are equity owners of the company while directors are managers of the
company

(ii)

Shareholders acquire shares in a company while directors serve under a contract of


service.

(iii)

Liability of shareholders is limited to the amount unpaid on the shares while directors
are not personally liable for the companys debts.

(iv)

The Shareholders receive dividends from the company while directors are paid for their
service.
(4 marks)

Usual business to be conducted at the AGM:


(i)

Consideration of accounts and financial statement

(ii)

Appointment, retirement and re-appointment of directors

(iii)

Appointment of auditors

(iv)

Consideration of the Directors Report.

(8 marks)
(Total marks20)

END

51