Formation of a Company

CHAPTER ONE: Formation of a Company
1.1 Definition of a company
“A Company is an association of individuals for purposes of profit,

possessing a common capital contributed by the members
composing it, such capital being commonly divided into shares of
which each member possesses at least one, and which are
transferable by the owner”
1.2 Advantages of a company over a partnership or sole trader-ship

or an association
1.2.1 The single most attraction of a company as a means of

carrying on business is that it offers members limited
liability for its debts. Where the company is limited by
shares, the limit will be any sum that remains unpaid on a
member’s share. Where the company is limited by
guarantee, it will be the sum that he undertakes to pay in
the event of the company winding up with unsettled debts.
Unlike a partnership or a sole trader, a member’s private
properties cannot be seized to settle debts of the company
if the member has fully paid up his shares.
1.2.2 A company once incorporated becomes a separate legal
entity from its members.
1.2.3 A company owns and disposes of property in its own
name.
1.2.4 A company can sue and be sued in its own name.
1.2.5 Transferable membership is only available in a company.
1.2.6 Perpetual succession – a company continues as a going
concern despite the death, bankruptcy, transfer of shares or
other change of interest or title of any member.
1.2.7 Flexible Borrowing facilities – i.e. debentures, fixed and
floating charges
1.2.8 A company is allowed to issue shares to raise capital.
1.2.9 There is no requirement for common interest in a
company.
1.3 Limited liability comes at a price [disadvantages]
COMPANY LAW for PAEC students BYALLAN HANS MUHOME LLB (HONS) MW 1
Lecturer in Law Courses
1.3.1 However, the company pays a price for such benefits
generally by following the stringent provisions of the
Companies Act and common law with regard to registration
of the MOA and AOA, publication of returns, meetings, and
resolutions e.t.c.
1.3.2 Making various disclosures in respect of its operations filing
various documents with the registrar.
1.3.3 Companies are also subjected to peculiar tax regimes.
1.4 Promoters
1.4.1 A promoter is a person who takes or participates in taking,

steps necessary for the formation of a company and to set
it on its feet.
Per Lord Cairns – in Erlanger vs New Sombrero
Phosphates Co. [1878]
“Promoters have their hands in the creation
and moulding of the company; they have the
power of defining how, and when, and in
what shape, and under what supervision, it
shall start into existence and begin to act as
a trading corporation”. Also: Twycross vs
Grant (1877)
1.4.2 Things that a promoter may do:-

 conceive the company and its business
 find directors for it
 make statements and invitations for its shares and
debenture
 pay its preliminary expenses
 may hold money or property on its behalf
 may acquire property for its use after incorporation
and enter into transaction for its benefit
 may engage services of a lawyer, an accountant or
other professional adviser
Therefore likelihood of abuse of his powers (which the Act

and common law in turn seeks to discourage). Below is a
discussion of legal mechanisms preventing abuse of office
by promoters;
1.4.3 Duties of a Promoter
A promoter owes fiduciary duty to the company he is
forming; he therefore has the following duties:-
(i) Not to make secret profit;

(ii) Not to let his personal interest conflict with that of
the yet-to-be-formed company;
(iii) Duty of care and skill.
NB; It was stated by Lord Cairns in Erlanger vs New

Sombrero Phosphates Co. Ltd [1878] (facts below) that
the promoters of a company “stand undoubtedly in a
fiduciary position.”
1.4.4 Duty not to make secret profit

If a promoter makes such a profit, he must disclose it to
an independent board of directors or the company’s
existing and future shareholders. Should he fail to do that,
the company may do the following;
(a) Compel him to account- Gluckstein vs Barnes- A

syndicate bought property for £140,000 and resold it at
£180,000 to a company. In effecting that transaction, the
syndicate had made a profit of £20,000 which it did not
disclose. Held; that the syndicate was bound to pay the
company the secret profit of £20,000.
(b) The company may rescind the contract- Erlanger vs

New Sombrero Phosphates Co. Ltd- The appellants
formed a syndicate which bought the lease of an island at
£55,000. Subsequently, the syndicate created a company
to which it resold the lease at £110,000. No disclosure was
made of the profit made by the syndicate on the deal.
Held; that the company was entitled to rescind (rescission)
the contract of sale
(c) The company may sue the promoter for damages for
breach of his fiduciary duties
1.4.5 Liability under pre-incorporation contracts

Apart from breach of the fiduciary duty, a promoter may
also be liable because of what are called “pre-
incorporation contracts”. These are contracts entered into
on behalf of a company not yet formed to procure goods
or property which it will need to operate after
incorporation. Promoters are not agents of the yet to be
formed company. It is a basic principle of the law of
agency that one (an agent) cannot act on behalf of
another person (principal) who does not exist. This
principle is supported by section 20 of the Companies Act.
S.20(1) provides that any person who purports to enter

into a contract in the name of or on behalf of a company,
before incorporation will be personally bound by the
contract.
Nali Farms Limited & Khoromana vs National Seed Co.

of Malawi [1984]
The 2nd Plaintiff who was the sole owner of Nali farms
bought chillie seeds from the Defendant. Subsequently, he
formed a company, the 1st Plaintiff of which he was the
major shareholder and director, which took over all the
assets of the farm. When the seed turned out to be
defective and caused losses, the 2 nd Plaintiff sued the
defendant. Issue: Whether the company could sue on
the contract Held: up to the time the company has been
incorporated it cannot contract or enter into any other act
in law. Even after incorporation it cannot be held liable on
or be entitled under contracts purported to be made on
its behalf prior to its incorporation.
In Kelner v Baxter (1866), the plaintiff supplied promoters

of a proposed hotel company with wine which the
company later failed to pay for. It was held that the
company was not liable but the promoters were
personally liable.
Two exceptions to s.20 (1)
S.20 (2) a company is allowed to adopt a written contract

concluded on its behalf before it came into existence. (The
promoter may however be jointly and severally liable
through a Court order applied for by the creditor).
S.20 (4) where there is an express provision in the contract

which excludes the liability of the promoter.
A contract may also provide that once the company is

incorporated the promoter’s liability terminates.
Under section 20(3) the injured party can apply to court to

make an order that the promoter and the new company
be jointly and severally liable or apportioning liability
between the promoter and the company.
Liability under s.299 (1)

A promoter is liable for a misappropriation of funds
during the promotion but which is discovered by the
liquidator or any creditor at the time the company is
winding up.
Liability by virtue of s.22 (1)

S.22 (1) prohibits a company from carrying on business or
any object that is restricted by its MOA or AOA. This
means a promoter cannot enter into contracts which are
prohibited or restricted by the company’s MOA or AOA –
he will personally shoulder the liability.
Termination of a promoter’s office

The promoter’s office ceases once the company has been incorporated
or once the board of directors takes over from the promoter to
complete the process of incorporation.
1.5 Registrar of Companies
The Companies Act establishes the office of the Registrar of

Companies (for short registrar) whose main functions include the
following;
(1) To issue certificates of incorporation and change of name;
(2) To register and keep for safe custody, documents required
by statute to be filed with him and to pursue companies
which fail to comply with such requirements;
(3) To issue certificates of registration of mortgages and
charges;
(4) To provide facilities for the examination of filed
documents by members of the public and give copies of
documents or certificates on payment of a fee;
(5) To complete final dissolution of a company on winding up
by striking the company off the companies register.
1.6 Incorporation
1.6.1 A company comes into being upon incorporation which is

registration of a company with the registrar of companies.
1.6.2 Incorporation Procedure

S.4 “any two or more persons associated for any lawful
purpose may by subscribing their names to a memo of
association and otherwise complying with the
requirements of this Act in respect of registration form an
incorporated company”.
1.6.3 Analysis of S.4

 Two or more persons – one person cannot form a
company;
 Associated for any lawful purpose – not illegal;
 Subscribing their names to a memo – signing in the
presence of witnesses;
 Memo of association (later) but it is the constitution of
the company which contains rules governing mostly its
corporate structure.
 Memo then delivered to the registrar of companies
with
(a) Full name, residential and postal address and
occupation of each of the company’s first
directors, and company secretary;
(b) the situation and postal address of the company’s
registered office
 Registration fees paid;
 The Registrar then gives the company a “designating
number” and a Certificate of Incorporation which is
conclusive evidence that all the requirements of
registration have been complied with and that the
company has been duly registered.
1.7 Certificate of Incorporation
Legal effect (section 15)

Section 15 provides that from the date of incorporation mentioned
in the certificate, the subscribers to the memorandum together with
such other persons as may from time to time become members of
the company, become a body corporate by the name contained in
the memorandum capable forthwith to exercise all the functions of
an incorporated company having perpetual succession and power to
hold land. (See Salomon v Salomon)
Conclusiveness of the certificate of incorporation (section 16)

A certificate of incorporation by section 16 of the Act is conclusive
evidence that the formalities of registration have been complied
with. This means that even if it is subsequently discovered that the
formalities of registration were not in fact complied with, the
registration will not be held invalid. The reason for this is that once
a company has commenced business and entered into contracts, it
would be unreasonable to void the contract because of a procedural
defect in the registration of the company. The affected party can at
any time request the Registrar to remedy the defect in the
registration. In other words, the certificate of incorporation is
enough proof of the existence of the company.
1.8 Classification of Companies
Broad classification
There are two broad classes first statutory companies (also called
parastatals) are created by an Act of Parliament/statute e.g. Water
Boards etc and secondly companies under the Companies Act
(Our major concern)
Classification of companies under the Companies Act
1.8.1 Limited and unlimited companies
S. 5(1) (c) says that an unlimited company has no limit on
the liability of its members. At winding up members are
personally liable for all the debts of the company. In a
limited company the amount of capital to be contributed
by a member of the company is fixed by agreement
between him and the company such that his liability
attaches to the unpaid amount on any share the member
holds.
Conversion of a limited company to an unlimited

company and vice-versa
Condition 1; all members of the company must give
written consent to the conversion
Condition 2; the company must adopt MOA and AOA
appropriate to its new status
Condition 3; the following documents must be delivered
to the registrar
(a) Certificate of incorporation.
(b) A copy of the new MOA and AOA.
(c) A copy of the special resolution sanctioning the
company’s adoption of the MOA and AOA.
(d) Statutory declaration by the company’s directors and
secretary confirming that the company has fulfilled the
conditions above.
NB; an unlimited company cannot be converted into a limited

company unless it is solvent on the date of the conversion; an
Auditor’s report must confirm this plus a statutory declaration by
the directors and the company secretary. [WHY- to prevent owners
from evading liability]
1.8.2 Companies limited by guarantee and those limited by

shares
Limited by shares Limited by guarantee
 Contributed capital- issue  No contributed capital-no issue

of shares of shares
 Liability of members is  Members liability is limited to a
limited to the amount, if fixed amount
any, unpaid on the shares promised/pledged/guaranteed
 Meant for Profit making by each member
organisations  Ideal for NGO’s (an offence to
run a co limited by guarantee
for profit)
Conversion of a company limited by shares to a company limited

by guarantee
Condition 1; the company’s shares must be fully paid up.
Condition 2; all members of the company must give written consent
to the conversion.
Condition 3; the company must adopt MOA and AOA appropriate
to its new status.
Condition 4; each member must guarantee payment of a fixed sum
at winding up.
Condition 5; the following documents must be delivered to the
registrar;
(a) Certificate of incorporation

(b) A copy of the new MOA and AOA
conditions above.
1.8.3 Public and private companies
Public Co. Private Co.
(the opposite is true) According to S. 5(3) through its

MOA or AOA
 It restricts the right to transfer
shares
 Limits the total number of
members to 50
 Prohibited from offering shares
or debentures to the public
Some of the privileges enjoyed by a private company over a
public company
1. Alteration of its memo is more difficult to effect therefore
members are assured that outsiders will not easily join
them;
2. It is easier to convert a private company into a public
company than it is to convert a public company into a
private company;
3. A private company is not under duty to send to its
members copies of the Profit and Loss account and
Balance Sheet.
4. A private company is not obliged to accompany the
Annual Return with the Profit and Loss account and
Balance Sheet.
5. There are strict rules on the payment for shares in a public
company (i.e. the payment must be in cash) than in a
private company (see Chapter 9).
Alteration of the status of a company by re-registration

A public company may be re-registered as a private
company if a resolution to that effect is passed and a new
MoA and AoA are adopted by the company and delivered
to the Registrar, together with an application in the
prescribed form.
An objection may be raised to cancel such resolution, but
if not so raised or cancelled by the court then the
company may be re-registered as a private company.
The re-registration will not affect the rights, or liabilities of
the company in respect of any obligations entered into by
the company before re-registration.
S57 governs the application for the cancellation of the

resolution. This application must be made within twenty-
eight days after the resolution is passed:
 by not less than 5% of the total shareholders

Conversion of a private company to a public company

Condition 1; the company’s shares must be fully paid up.
Condition 2; all members of the company must give
written consent to the conversion.
Condition 3; the company must adopt MOA and AOA
appropriate to its new status.
Condition 4; the following documents must be delivered
to the registrar
(a) Certificate of incorporation
(b) A copy of the new MOA and AOA
conditions above.
Corporate status is the form in which a company is

established or exists e.g. a company limited by shares.
(Contrast with corporate personality and corporate
democracy)
1.8.4 External companies

S. 306(2) a body corporate formed outside Malawi which
establishes or maintains a place of business in Malawi.
1.8.5 Holding and Subsidiary companies

A holding company is one that owns (holds shares) in a
subsidiary company therefore;
(i) It can appoint, remove or prevent the appointment or
removal of at least half of the subsidiary company’s
directors.
(ii) It holds more than half of the nominal value of the
subsidiary company’s share capital.
Examples; Press Corporation and NBM…
CHAPTER ONE: Formation of a Company
(A selection of non-factual past questions)
-----------------------------------------------------------------------------------
Companies, partnerships and sole tradership

1. Outline six legal differences between a public company limited by
shares and an association (6 marks- Dec 2004 & Dec 2008)
 PLC created by registration under Companies Act; association
by express or implied agreement, no special form required
 Former is an artificial legal person with legal personality
distinct form members; latter not person in law
 Shares in PLC freely transferable; in an association, e.g.
partnership, partner needs consent of all partners, and he
may assign right to share in profits, but assignee does not
become a partner.
 Must comply with more formalities than association, e.g.
maintaining of registers and annual auditing of reports
 Greater publicity given to affairs of PLC, e.g. concerning
directorate, financial position etc
 Member of PLC not agent, but partners are agents of firm
therefore will bind it by their actions.
2. Mention four advantages of converting a partnership or sole tradership
to a company (8 marks- Dec 2001, Dec 2002, June 2003, June 2008)
 by dividing the business into shares, which are then sold to persons
wishing to purchase a stake in the enterprise, it is possible to
secure the release of large amounts of capital finance from
shareholders, which enables the business to proceed on a more
ambitious footing than it could if the available capital were
restricted to a few running the business together;
 liability of each shareholder is limited to the amount which the
shareholder has agreed to invest in the company
 corporate entity, artificial legal person
 possible tax advantages
 transferability of shares
Promoters
1. Who is a promoter of a company (3 marks- Dec 2000, Dec 2001, Dec
2003, June 2005 & June 2007)
2. Explain the significance of a promoter in the formation of a company (5
marks- Dec 2002)
3. Mention four activities that a promoter has to undertake in the course
of establishing a company (6 marks- June 2003 & Dec 2006)
4. What duties does a promoter owe to the company? (6 marks- June
2001 & Dec 2005)
5. The case of Erlanger v New Sombrero Phosphates Co. holds that
promoters of a company stand undoubtedly in a fiduciary position.
Mention four consequences of this fiduciary relationship in dealings
between the company and the promoters (8 marks- June 2001)
6. Define the fiduciary duties of a promoter. (6 marks- Dec 2000)
7. What remedies do members have against promoters who breach their
duties during the incorporation of a company (6 marks- Dec 2001 &
Dec 2006) (damages, rescission, compel to account}
8. Who is liable to pay for the price of goods bought by the promoters
on behalf of the company, once the company is incorporated? (8
marks- Dec 2001, June 2003 & Dec 2006)
9. Discuss the legal position regarding the effect of pre-incorporation
contracts to a company after its incorporation. (4 marks- Dec 2000, Dec
2003, June 2005, June 2007 & Dec 2009)
10.State two exceptions to the legal position discussed in the question
above (4 marks- Dec 2000 & June 2005)
Classification of companies
1. Mention two common features between a company limited by shares
and a company limited by guarantee (4 marks- June 2001, June 2004 &
June 2008)
2. Mention three differences between public companies and private
companies in relation to payment for shares (3 marks- Dec 2004)
3. What is a private company as defined by the Companies Act (3 marks-
June 2009)
4. Mention two types of companies limited by shares (2 marks- June
2001)
5. State and define types of companies under the Companies Act (7
marks- Dec 2005)
6. Distinguish a limited company from an unlimited company (4 marks-
June 2000, Dec 2000, June 2004, Dec 2006 & Dec 2009)
7. Distinguish a public company from a private company (5 marks- Dec
2002, June 2003 & Dec 2009 )
8. Distinguish a company limited by guarantee from one limited by shares
(4 marks- June 2000, Dec 2000 & Dec 2009)
9. Distinguish a holding company from a subsidiary company (5 marks-
Dec 2002, Dec 2009)
Conversion of companies
Outline the procedure in converting
(a) a limited company to an unlimited company (6 marks- June 2000, June
2004 & Dec 2006)
(b) a company limited by shares to one limited by guarantee (6 marks- June
2000, June 2003, June 2004, Dec 2006 & June 2009)
(c) a private company limited by shares to a public company limited by
shares (5 marks- June 2003)
Registration
Give five functions of the registrar of companies (5 marks- June 2007 &
Dec 2008)
Incorporation
1. What is meant in company law by the term ‘incorporation’?
2. Explain the legal effect of the certificate of incorporation. (5 Marks- Dec
2009)
3. Discuss the legal position where a company enters into a contract and
it is subsequently discovered that it did not follow certain registration
requirements. Is the contract valid? Give reasons for your answer.

Formation of a Company

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CHAPTER ONE: Formation of a Company

1.1 Definition of a company

“A Company is an association of individuals for purposes of profit,

1.2 Advantages of a company over a partnership or sole trader-ship

1.2.1 The single most attraction of a company as a means of

1.3 Limited liability comes at a price [disadvantages]

1.4.1 A promoter is a person who takes or participates in taking,

1.4.2 Things that a promoter may do:-

Therefore likelihood of abuse of his powers (which the Act

(i) Not to make secret profit;

NB; It was stated by Lord Cairns in Erlanger vs New

1.4.4 Duty not to make secret profit

(a) Compel him to account- Gluckstein vs Barnes- A

(b) The company may rescind the contract- Erlanger vs

1.4.5 Liability under pre-incorporation contracts

S.20(1) provides that any person who purports to enter

Nali Farms Limited & Khoromana vs National Seed Co.

In Kelner v Baxter (1866), the plaintiff supplied promoters

Two exceptions to s.20 (1)

S.20 (2) a company is allowed to adopt a written contract

S.20 (4) where there is an express provision in the contract

A contract may also provide that once the company is

Under section 20(3) the injured party can apply to court to

Liability under s.299 (1)

Liability by virtue of s.22 (1)

Termination of a promoter’s office

1.5 Registrar of Companies

The Companies Act establishes the office of the Registrar of

1.6.1 A company comes into being upon incorporation which is

1.6.2 Incorporation Procedure

1.6.3 Analysis of S.4

1.7 Certificate of Incorporation

Legal effect (section 15)

Conclusiveness of the certificate of incorporation (section 16)

1.8 Classification of Companies

Classification of companies under the Companies Act

Conversion of a limited company to an unlimited

NB; an unlimited company cannot be converted into a limited

1.8.2 Companies limited by guarantee and those limited by

Limited by shares Limited by guarantee

 Contributed capital- issue  No contributed capital-no issue

Conversion of a company limited by shares to a company limited

(a) Certificate of incorporation

1.8.3 Public and private companies

Public Co. Private Co.

(the opposite is true) According to S. 5(3) through its

Alteration of the status of a company by re-registration

S57 governs the application for the cancellation of the

Conversion of a private company to a public company

Corporate status is the form in which a company is

1.8.4 External companies

1.8.5 Holding and Subsidiary companies

Companies, partnerships and sole tradership

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