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An Introduction To Company Law in Malawi PDF
An Introduction To Company Law in Malawi PDF
An Introduction To Company Law in Malawi PDF
Malawi
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INTRODUCTION
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An lntroduction
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Company Law
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in
Malawi
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Published by:
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University of Malawi
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AN INTFODUCTION TO COMPANY LAW IN MALAWI
TO COMPANY LAW IN MALAWI
Directors' duties /0
Contents Directors' remuneration
Remedies against directors
.... ...' . 7B
80
Loan to directors 81
Preface The board of directors. 82
Termination of aPPointment . . 83
Table of cases
6 Company officers ({1,
I
CHAPTER The Company Auditor. '-' .
.
87
The Company Secretary 90
The Company Manager 90
1 The formation of a comPanY
Promoters 12
lncorporation. . . . . . . . 17
7 CompanY liabilitY
Classification of comPanies 19 92
Liability through directors' acts ' .
24 9B
The filing of documents. Liability through the company secretary's acts
Liability through the company manageds acts 99
2 The constitution of a company
The Memorandum of Association ' . ' 27
33
8 Enforcement of controllers' and directors' duties and minority
Alteration of the Memorandum
Articles of Association. . . . . . . .
Relation of Articles to the Memorandum
38
38
F; protection
The rule in Foss v Harbottle
Common law excePtions. . . ' .
101
102
Effect of the Articles 39 103
Statutory excePtions
Alteration of Articles 40
r(- \
i'y finance- Share capital
9 Company
3 The legal status of a comPanY
Corporate personalitY 43 ;+l
'\-)'
"
Share.
EL-'..*i-..
:tr' ' 110
111
45 lssue and allotment of shares
Lifting the corPorate veil 112
Share distinguishing number
r+
ta Slrare certificate 112
4 The management of a company
com ( / Share warrant 113
CompanymembershiP "" 49
113
"""' Share trust
Companymeetings 51
Classification of shares 114
Noticeatgeneral meetings """' 53
119
meetings '''' ' 56 Transfer of shares
Persons entitled to attend general 120
Proceedings at the generai meeting 57 Transmission of shares bY law
121
Offering shares to the Public
I
Directors ..'...;.
Considerationforshares ..... 127
ffi:,ilH1l-:::::: rr i! \t2'
'tt'l ----
67
'Fi
10 Maintenance of share capital 'ti
Alternatedirectors ...."" 69 ',
Prohibition of the return of capitalwhile the company is a going
Registerof directors """ 70 concern
AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI -t!
Prohibition of financial assistance by a company for the purchase of A scheme involving reconstruciion or amalgamation 1gti
its shares 132 An arrangement between a company and its members under section 263 . 198
Prohibition of a company's acquisition of its ovrn shares 134 An arrangement between a company and its creditors under section 266. . 199
Redemption of redeemable shares 135 Directors Compensation . . . 200
Payment of commission or discount on shares 136 A take-over under section 201 2C1
Application of share premiums 139
Payment of dividends 140 15 Winding up and dissolution of a registered compan I
Reduction of share capital 143 Compulsory winding up by the court 208
,t" - Voluntary winding up by members . . . 219
11 Company finance- Loan capital q- ' Voluntary winding up by creditors. . . ?-23
Powertoborrow ....). 149 Special provisions for the protection of creditors'
Debentures and debenture stock 150 and members'interests 224
The issue of debentures . . . 150 Liability at members to contribute towards the settlement of debts . . ' ' . 235
The debenture trust deed . 151 Dissolution of a registered company 235
Liability of the trustees . . . 152
Classification of debentures . . . 152 15 Externalcompanies
The issue of debentures at a discount 156 Pegistration requirements. . . . . 240
Security for debentures. . . 157 Obligation to state name. 241
Registration of charges 161 Regulations as to localdirectors 242
Priority of charges 162 Accounting records and accounts . . . 243
Satisfaction of a charge 165 Registration of charges 244
Remedies for debentureholders 166 Public invitation {or debentures and shares 244
Cessation of business. 245
12 Company accounting records, accounts and financial reports i. j.ln Notification of winding uP . . . 245
'^175 246
Keeping accounting records Windingup...
Accounts 176 l
13 Company taxation
Filingof thecompanyconstitution.... .. 183
Thecompanypublicofficer. .....183
Returns ...184
Payabletax... ...185
Shareholders who are absent from Malawi . . . . ...... . 188
14 Schemes of arrangement and take-overs
A scheme of arrangement or compromise under section 198 . . . 190
.ur,{ \
6 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
ACompany,Re(1984).. .......210
Allen, Craig & Co Ltd - ' '. 179 EbrahimivWestbourneGalleriesLtd... """' 1O7
AmmoniaSodaCoLtdvChamberlain ....- 142,215 Eddystone Marine lnsurance Co Ltd, Re . " " ' " 127
UnangoEstatesLtd&ChigambavMichael
Underwood Ltd v Bank of Liverpool& Martin Ltd . . .
.....174
. . 44,98
W^ T'.'-,1ulu-
UnitConstruction Co LtdvBullock..... ........ 47 F. t' - E'',,y F:t p 7
WallvExchangelnvestmentCorp. ......57 L!1.*-,,J'7,,:.
WallvLondon&NofthernAssetsCorp. ........56 Preface ' ( iJc G'ld
WallersteinervMoir(No. 1) ...... 46
WallersteinervMoir(No.2) .....132
WebbvShropshireColtd ......156 When this book was first published, the overriding idea was to provide a basic
WeltonvSaffery ..136 introduction to company law in Malawi to University and Malawi College of
WestCanadianCollieriesLtd,Re ........55 Accountancy students in the light of the Companies Act, 1984. Because of that,
WheatleyvSilkstone & Haigh MoorCoalCo Ltd ....... 163 many matters of detail and style were considered unimportant. However it has
WhitelayvChallis .......169 become clear in the course of the book's usethat itcannotcontinue in its original
Woodroffes (Musical lnstrumenls) Ltd, Re . . 159,216 form- both in terms of content as well as layout. And it is for this reason that less
WorcesterCorsetryLtdvWitting ........67 than a year on, I have decided to have it reprinted.
Wragg Ltd, Re 127,214
ln this reprint three major changes have been introduced. First, is the omission
Yorkshire Woolcombers Association, Re. ... . 136, 158, 163 of any reference to the ultra vires doctrine. lt is my view that the doctrine is a
historical relic which is of impofiance only to students of legal history. Conse-
quently I believe that there is no justification to continue devoting space to it in
a modern company law text book like this one. Second, major parts of chapters
5, 6,7 ,8, 9, 10, 12-14 have been rewritten. ln fact whole chunks have been
expunged from chapter 12. This is because in the light of my book entitled
COMPANY ACCOUNTING LAW lN MALAWI, I feel that they need no longer be
part of this book. And lastly, footnotes, an index and a preface have been added
to the book. The result therefore is that the book is now better than when
originally presented to the reader.
Having said that, let me take this opportunity to express my gratitude to RPC for
financially supporting production of this edition. I am also greatly indebted to
Ralph Mhone (Assistant Company Secretary for Brown & Clapperton) for
drawing my attention to matters which I had overlooked in the first publication.
Special mention should also be made of to my third year students over the last
three academic years for contributing in no small measure to the evolution of this
book.
O{ course although I share the pleasure of producing the book with all these
people, any shortcoming in the exposition of the law is entirely mine.
."4
12 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI
(tt \
Chapter One
Such a business entity has been recognised for many years. The law not only
allows its creation but also confers on it the capacity of a natural person. As
shown more fully in Chapter 3, an incorporated company has perpetual
succession. Besides, subject to limitations inherent in its corporate characier,
it has full legalcapacity to employ and dismiss people, buy and sellgoods and
services, contract debts and other forms of legai liability, and own property of
all kinds. Moreover, it can be bought and sold.
1.1 Promoters
Persons who are forming a company occupy a very crucial position vis-a-vis the
nascent company. They will hold money or property for it; make statements in
respect of rnvitations for its shares and debentures; acquire property for its use
after incorporation and enter into transactions for its benef it. Undoubtedly these
activities create opportunities for the abuse of that position. And to prevent that
abuse, both the Companies Act and the common law impose duties on any
person who can be described as a'promoter'of a company.
Now although the Act uses the word 'promoters' in Sections 60(4), 173(2) (c)
(ii)and299 (1), itdoes notdefinetheword. However, atcommon law, apromoter
is the person who takes or participates in taking, steps necessary for the
formation of a company and to set it on its feet. As Cockburn C.J. said in
Twycross v Grant (1877):
AN INTBODUCTION TO COMPANY LAW IN MALAWI - 13
"A promoter ... is one who undertakes to farnr a company with reference to a
given praject and to set ii going, and who takes the necessary steps to
acco mpl i sh th at pu rpos e". ttl
"[Promoters] have their hands in the creation and rnoulding of the company;they
have the power cf defining how, and when, and in what shape, and under what
supervision, it shall start into existence and begin to act as a trading corpora-
tion". r2t
ln other words, a promoter wili conceive the company and its business, find
directors for it, make invitations {or its shares, pay its preliminary expenses and
do other things to ensure that it is ready to operate immediately after incorpo-
ration. He may later become either director or member of the company. Of
cgurse a legal practitioner who handles legal technicalities of the formation
process is not a promoter. This is because he is employed and paid to do that
job. On the other hand, the person who engages him will be a promoter.
lf the profit is made from a sale by the promoters to the company, the latter will
also be entitled to rescind the contract of sale. This will involve refund of the
purchase price and return of the property sold. ln the case of Erlanger v New
1,
14 - AN INTROOUCTION TO COMPANY LAW IN MALAWI
Lastly, the promoters may also be sued by the company for damages for breach
of their fiduciary duty. This is illustrated by the case of Re Leeds and Hanley
Theatres of Variety Ltd. (1902;tst. ln this case a company acting through its
nominee, bought hallsfort24,000with the intention of re-selling them to another
company which it was intending to form. When this company was formed, the
halls were sold to it at e75,000. A prospectus was later issued by the new
company which showed the nominee as the seller oJ the halls but did not
disclose the first company's interest in the sale or the profit made out of the I
transaction. lt was held that because of the failure to make the disclosure, the I
first company was in breach of its fiduciary duty for which it was liable to pay
damages to the second company.
It should be noted that the fiduciary duty exists as long as the promotion
continues. ln other words, it will not cease simply because subsequent to the
commencement of the promotion but before its completion, the p.romoter
becomes director or member of the company. Similarly, if the process includes
the setting up of the company as well as procurement of its working capital, the
duty may continue even after the company has been incorporated.
These principles of law have been incorporated into the Companies Act.
t
_\
Sectron 20(1) provides that any person who purports to enter tnto a contract in
the name of or on behalf of a company before incorporation will be personally
bound by the contract and be entitled to its benefits. The application of this
provision is illustrated by the case of Nali Farms Ltd & Kholomana v National
Seed Company ot Malawi (1 9Ba1.tot 11.re the second plaintiff who was the sole
owner of Nali Farms bought chilli seed from the defendant. Subsequently, he
formed a company, the first plaintiff of which he was the major shareholder a.nd
director, which took over all the assets of the farm. When the seed turned out
to be defective and caused loss of profit through poor yield, the second plaintitf
sued the defendant for the loss. A preliminary issue which had to be considered
was whether or not the plaintiff company could sue on the contract between him
and the defendant. lt was held that it could not because as Mbalame, J. said:
"[U]p 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. lndeed ratification is not possible when the ostensible principal
did not exist at the time when the contract was entered into."
There are, however, two exceptions to this rule which apply to written pre-
incorporation contracts only. First, section 20(4) states that if there is an express
provision in the contract which excludes the liability of the person who con-
cluded the contract on behalf of a company before its incorporation, then he will
neither be bound by the contract nor be entitled to the benefit of it. Clearly, this
gives the promoter who is negotiating a contract on behalf of a company which
he intends to form a strong incentive to insist on the inclusion of a clause in the
contract terminating his liability, preferably as soon as the company is incorpo-
rated. The effect of that clause will be to put the company in his shoes so that
it is liability as if the contraci had been concluded by it. Second, under Section
20(2), a company is allowed to adopt a written contract concluded on its behalf
before it came into existence. Of course the contract must be adopted within a
reasonable time after the company's incorporation. The adoption may be
express or implied frorn conduct which signifies intention on the part of the
company to be bound by the contract.
There is, however, one disadvantage here. For, although one of the conse-
quences of the company's adoption of the contract is to release f rom liability the
promoter who concluded it on the company's behalf, the other party to the
contractcan havethatliability re-instated. Section 20(3)givesthe partythe right
to apply to court for an order which either:
16 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
(a) makes the company and the promoter jointly and severally liable for the
contract or
(b) apportions liability for the contract between the company and the
promoter.
Thus, it will be clear that the only way whereby a promoter can conclusively
escape liability for a contract concluded on behalf of a company which he is
promoting is to have a dause inserted in the contract which terminates his
liability under the contract as soon as the company comes into existence.
lf the wrongdoing is proved, the court can compel him to repay or restore the
money or property or pay such compensation to the company as the court
deems just.
1.2 lncorporation
It must be clear from the opening paragraph of this chapter that a company's
personality is a creature of the law. ln other words, it acquires the personality
through a legal process.
The incorporation procedure is laid down by the Act itself. section 4 provides
that:
18 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI
Thereafter, those who are associating to form the company must subscribe their
names to the memorandum. As Section 4 shows, there must be at least two
subscribers, clearly indicating that a company must have a minimum of two
members. According to Section 7(1), the subscription involves signing of the
memorandum by the subscribers in the presence of a witness who attests each
signature. Once that is done, the memorandum must be delivered to the
registrar for registration tel either on its own or together with articles of
association. A document which must accompany the memorandum is a
statement in the prescribed form which shows:-
(a) the full name, residential and postal address, and the occupation of each
of the company's frrst directors;
(b) the {ull name, resrdential and postal address and the occupation of the
company's secretary; and
(c) the situation and postal address of the company's registered office. tl0l
However, these documents will not be deemed to have been delivered to the
registrar for registration unless the appropriate registration fee is paid le Ii6.ttt)
Consequently, they must be accompanied by the fee. The Schedule to the
Companies (Fees) Regulations of 1986 provides that the registration fee for a
company with a share capital together with its memorandum, articles (if any
and all accompanying documents), is K65 plus K35 for the lirst K1 ,000, and
i
K10 for each additional K2,000, of that capital. On the other hand,for a
company limited by guarantee and all its registration documents, the fee is
a flat figure of K100.
After the company is registered, Section 19(1 1) requires the registrarto assign
to it a'designating number'. This will be used to identify the company if for any
-
reason it has no registered name. The registrar is also required to issue to the
company a certificate of incorporation t12l which will be conclusive evidence that
all the requirements of registration have been complied with and that the
company is duly registered. t131
After the registrar receives these documents, he must issue a new certificate
of incorporation to the company which reflects the change of status.
But instead of a share capital, a company may simply get a promise from each
member to contribute a fixed amount, if necessary, to pay the company's debts
on winding up. Such a company will be limited by guarantee and, therefore,
cannot by virtue o{ Section 5(6), create or issue shares. The liability of the
members of such a company will be limited to the amount which they have
respectively undertaken to contribute towards the settlement of its debts on':) r'l',i.",
winding up. ttsl Sorrnis reason acompany limited byguarantee cannot have any
contributed capital until it is wound up. Accordingly, it will be ideal for a non-profit
making business. ln fact section 23(1 ) prohibits incorporating a company limited
by guarantee with the object of carrying on profit-making business. lf this
prohibition is contravened members and off icers of the company who are aware
of the contraventron will be jointly and severally liable to pay the debts which the
company incurs while carrying on the profit-making business.
L
AIiI INTRODUCTION TO COMPANY LAW IN MALAWI - 21
lf these conditions are satisfied, the company must deliver the following:
(c) a copy of the special resolution whereby the company adopted these
documents;and
(c) prohibits the company to invite the public to acquire any of its debentures or
shares.
Should a private company failto comply with any of these three requirements,
it willcease to be entitled to the privileges and exemptions conferred on it by the
Act. Some of these privileges and exemptions are:
no longer comply with Section 5 (3), the company will be deemed to have
been converted into a public company. Then within 21 days of passing the
resolution the company must send a copy of it and the company's certif icate
of incorporation to the registrar. Where the conversion is from a public
oompany to a private one, the company must accompany these documents
with a statutory declaration by its directors and secretary that Section 27(1)
has been complied with. On the other hand, where the company is being
converted from a private company to a public one and the conversion takes
place at least 1B months after the company's incorporation, Sectioru2ffi)S2*i?
requires that there be delivered to the registrar a certif ied copy of each of the
following additional docu ments :-
After receipt of these documents the registrar will issue a new certificate of
incorporation to the company.
2. holds more than half of the nominal value of the latter's equity share
caPital.t2ll
The objectof this requirement isto furnish the registrarwith as much information
about the company as possible and to apprise him of any changes in its
corporate and financial structures. But apart frorn that, the filing of these
documents also acts as a means of disclosing information aboutthe company's
affairs to the generai public. This is because Section 329(1) allows any person
to inspect any document registered by the registrar under the Act - of course
upon payment of the appropriate inspection fee.
Previously, the rule was that mere filing of a document with the registrar gave
ccnstructive notice to the general public of not only the document itself but also
its contents. ln other words, a person was deemed to have notice of the
document and what it contained, irrespective of actual knowledge of them,
simply because the filing put the document in the public domain. However, that
rule has now been repealed by the Companies Act. Section 343 provides that
no person will be affected by or be deemed to have notice or knowledge of the
existence or contents of a document concerning a company by reason only that
the document has been registered with the registrar or is available for inspection
at any office of the company or elsewhere by virtue of the Act.
26 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Chapter One
1. [1877] 2 CPD 46e.
2. [1878] 3 App Cas 1218.
3. [1900] 4C240.
4. Supra., note 2.
5^ [1902] 2 Ch 809.
6. Civ cas 469/1989.
7. Civ cas 52611987.
8. Section 6(2).
9. Section 14(1 ).
10 Section 14(2).
11. Section 325(2).
12. Section 15(1 ).
'13. Section 16.
14. Section 25(2\.
15. Section 5(1 Xb).
16. Section 24(1).
17 . This excludes bona fide employees of the company and former employees
who were, and have coniinued to be, members of the company.
18. Section 10(4Xb).
19. Section 2B(2).
20. Section 197(1).
21. The expression 'equity share capital' generally refers to ordinary share
capital unless there is a restriction on ordinary shareholders'participation in
any distribution to be made by the company. ln that case, the expression will
refer to deferred share capital.
22. Civ cas 2BG119B7.
_I
The Constitution
of a Company
Every organisation usually has a constitution which governs the way it is run.
The constitution will spell out the organisation's objects and explain how it will
obtain funds necessary for the achievement of those objects. Besides, it will
contain rules on the organisation's management and membership, and the
division of decision-making powers between the two. Finally, the constitution
will also make provision for the organisation's office-bearers, their election and
how its meetings are to be conducted. ln the case of companies, this function
is performed by the memorandum and afiicles, of association. lt is with these
two documents that this chapter is concerned.
2. The restrictions, if any, imposed on the business which the company can
carry on;
3. The amount of share capitalwith which the company is registered, and the
number of shares into which the capital is divided;
4. Where the shares are divided into two or more classes, the rights
privileges, restrictions and conditions which attach to each class;
7. The full name, address and occupation of each subscriber to the memo-
randum.
1 . lts income and property will be appiied solely towards the promotion of its
objects;
3. Upon its winding up and after the discharge of all its debts and liabilities,
any property which remains will either be transferred to another company
limited by guarantee which has similar objects or be applied to some
charitable object.
(a) paint or affix the name in easily legible Floman letters above or adjacent
to the main entrance to its registered office and to every office or piace
in which it carries on business; and
(b) have the name accurately mentioned in the same type of letters in all its
business letters, invoices, receipis, notice or other publications and all
negotiabie instrumenis or order for money, goods or services purporting
to be signed or endorsed by or on its behalf .
Its seal must also bear the name in legible Roman letters. tsl * t ll t l',
According tc Section 130(3), il any officer of a company signs or endorses a
negotiable instrument or an order for money, goods or services on behalf of the
company without accurately mentioning ihe company's name on the instrument
or order, he will be personally responsible to discharge the liablilty thereby
incurred. Of course this responsibiliiy will not arise if the liability is duly
discharged by the company. lndeed even if he is liable, he can ciaim an
indemnity from the company. ln Rafsanjan Pistachio Producers Go-opera-
tive v Rice sathe plaintiffs who obtained a default judgement against a cornpany
reached a compromise with it whereby it paid them five post-dated cheques.
The defendant director signed the cheques on behalf of the company.
30 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
However there was no mention of the company's name on the cheques or the
capacity in which the defendant signed them. lnstead the cheques simply
showed the company's bank account number. lt was held that since the
company's name did not appear on the cheques, the defendant was personally
liable under the English equivalent of Section 1 30(3) to discharge the obligation
they created.
2.1.1.3 Passing-off
A problem related to a company's name which may occur is that of passing off .
This will be the case where in order to take an unfair advantage of another
person's business goodwill, a company conducts itsbusiness in such a way as
to mislead the general public into taking it as that of the other person. Usually,
a company passes off by operating under a name which so closely resembles
that of another business as to make confusion of the businesses likely. Where
that happens, the offended business may seek an injunction to prevent further
trading under that name by the offending company. The former may also bring
an action to recover damages for any profit lost as a result of the passing off.
It should be emphasized that these remedies will be available only if the two
businesses are trading in the same line so that the offending company is in
effect taking advantage of the business reputation already established by the
other to gain custom. ln Parker-Knoll Ltd v Knoll International Ltd (19621 tttt
both parties were manufacturers of furniture, the plaintiff being a well-known
company in Britain and the defendant, an American company which had just
begun operating in England. lt was held that the defendants were guilty of
passing off and the court granted an injunction to restrain them from continuing
to usef their name on their f urniture without distinguishing the f urniture f rom
that made by the plaintiff company. The court reasoned that the name applied
by the defendants to their furniture was such as to create a likelihood that a
-----]
substantial section of the purchasing public would be misled into believing that
the furniture was that of the plaintiff.
What this means is that it is now possible to have companies limited by shares
with unlimited business capacity. For if no restrictions are imposed on the
business of such a company, it will be free to carry on any legal business which
it likes. lt is perhaps because of this that subject to limitations inherent in the
corporate personality, every company registered in Malawi now has, and must
always be deemed to have, the capacity of a natural person of full capacity.
tH:
l,t
Of course if the business of a company limited by shares is subject to
restrictions, the company is not allowed to encroach upon those restrictions.
Similarly, since every company limited by guarantee must state the objects for
which it is registered, itwillnotbe allowedto carry on any business outsidethose
objects. This is because according to section 22(1):
"A company shatt not carry on any business or pursue any obiect or exercise
any power that it is restricted by its memorandum or articles from carrying on
or pursuing or exercising".
But transactions which contravene Section 22(1) will not necessarily be void.
This is because the proviso to this provision States that an act of a company or
transfer of property to or by it will not be invalid simply because the act or transf er
contravenes Section 22(1). Thus subject to what is said below, such an act or
transfer is enforceable by or against the company.
Section 22(2) allows any member of the company or the holder of any
debenture secured by a floating charge over all the company's property or
a trustee for the holder of any such debenture to apply to the court for an
t:.
l
32 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
injunction prohibiting the doing of any act or the transfer of property which
contravenes subsection(1). To understand the significance of this provision, it
is important to bear in mind that creditors and shareholders put their money in
a company on the expectation that the money wiil not be dissipated on
unauthorised business activities. Now what section 22(2) does is to give these
persons the right to prevent the company from carrying on such activities
wherever that is feasible. When this is read together with the proviso to Section
22(1) what emerges is that a transaction which contravenes the business
clause of a company's mernorandum is voidable at the option of the company's
shareholders and creditors mentioned in subsection (2). But if they fail to avoid
the trarrsaction, the company can enforce it as if there is nothing wrong with it.
the business which the company can carry on or to impose such a restriction
or to change the situation of its registered office. But whatever the idea behind
it may be, the alteration can only be made by special resolution, and in
accordance with the Act. Furthermore, Section 8(2) provides that where a
memorandum contains provisions restricting or excluding the company's
powers to alter it or imposing conditions for the alteration of the memorandum,
then unless the company obtains the sanction of the court under a scheme of
arrangement pursuant to section 198, the memorandum can only be altered in
compliance with those provisions. Moreover, even wherethe memorandum is
validly altered, the alteration will not be binding on any member without his
written consent in the absence of a scheme of arrangement pursuant to section
198, il its effect is to either:
(a) require him to take more shares in the company than those held by him
at the time of the alteration; or
A registered company may also alter its share capital by either consolidating
and dividing the capital into shares of larger amounts, re-converting stock into
shares, subdividing its shares, redeeming redeemable preference shares or
>,.'r'r' cancelling unallotted shares. trTlAgain, this must be approved by a resolution
. (which according to Article 17, Table A is an ordinary resolution) ol the
):.- ' company in a general meeting. t18l Then twenty-one days after passing the
resolution, the company must send notice of the alterationtothe registrarunder
Section 65(1). The Act does not say whether or not a copy of the resolution
must also be sent to the registrar under Section 65(1). However, it requires the
notice to specify the shares which have been consolidated, divided, subdi-
vided, redeemed or cancelled, or the stock which has been re-converted.
, ;.'Lastly, share capital may also be altered by being reduced in any way,
trel
.,
except the cancellation of shares which have not been taken or agreed to be
;_.. *taken by any person. This type of alteration can only be made a special
t20l
resolution of the company. Of course the resolution will not be etfective unless
confirmed by a court order for which the company must apply under Section
68(1). Besides, if the resolution sanctioning the reduction varies rights at-
tached to any class of shares, it must comply with Section 48; otherwise it will
'
: , .: be ineffective.
t2rl
take the form of varying rights attached to certain classes of shares. According
to Section 8(1)(c) as read together with Section 67(3), such an alteration must
be made in accordance with Section 48. This provision stipulates two methods
whereby the variation may be made. lf a company's memorandum expressly
forbids variation of the rights of any class of shares or provides the procedure
wherebythe variation may be made and forbids anyalteration of that provision,
then the variation can be made either:
Where, on the other hand, the memorandum is silent on this issue, the variation
may be made with either the written consent of three-quarters of the holders
of issued shares of that class or the approval of a special resolution passed at
a separate general meeting of those nolders*]fl But however the variation is
atfected, holders of at least 5% ol the issued bharels of the class allected can
apply to the court for cancellation of the variatiqn,,Sltr!n that case, unless the
variation is confirmed by the coun, it will have no effect.t24l
For the purpose of this procedure, the creation or issue of further shares does
notamounttoavariation of class rights. On the otherhand, a resolution willvary
class rights if its effect is to either:
Subsection (4) gives the lollowing persons the right to apply to court to have
the proposed alteration cancelled:
The significance of the right conferred by subsection (4) lies in this. Creditors
and shareholders will invest their money in a registered company on the
understanding that it will be used for purposes mentioned in the business
clauSe of the company's memorandum. For that reason, it is not unreasonable
that where it is intended to alter that clause, they should be notified and their
consent be sought.
Where an application is made by any of these persons, the court may confirm
r-'; tr,.the alteration in whole or in part or may cancel it altogether. PrThen within 21
days, the company must send a copy of the court order to the registrar for
registration. Ittll" t.:, ",
1
A company need not register any articles of association; it may send its
memorandum onlyfor registration.lzelAccording to Section 12(3), if it does that,
it will be deemed to have adopted the articles in Table A or C, depending on
whether it is limited by shares or by guarantee. The effect of this provision is
clearly that instead ol preparing its own articles, a company may adopt those
in Table A or C, and modily them wherever necessary to suit its own capital and
corporate slructures.
But in spite of this, because the two documents are contemporaneous, the
articles may be used to explain any ambiguity in the memorandum. Besides,
reference can be made to them to fill any gap in the memorandum.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 3t
As these two cases show, the contracl embodied in the articles is between the
company and its members, and not outsiders. ln other words, a person who,
as an outsider deals with the company, cannot rely on the articles to compel
it to refrain from breaking the deal even though the deal is sanctioned by the
articles. This is illustrated by the case of Eley v Positive Government
Security Life Association Co. Ltd (1876). t33l Here the articles provided that
the plaintiff should be the defendant company's solicitor for which he was to be
paid fees. The plaintiff served in that post for some time. When he was
subsequently dismissed, he sued the company for breach of the provision of
the articles which made him the company's solicitor. lt was held that as the
plaintiff was not a member of the company, the provision did not place the latter
under an obligation to keep him as its solicitor.
Moreover, since (as shown below) the articles are alterable the contract which
they create can be altered. As a result if they are altered no member who is
adversely affected by the alteration can sue the company for breach of that
contract. ln Shuttleworth v Cox Bros & Co Ltd (19271t34l the company's
40 - AN INTRODUCTION TO COMPANY LAW lN MALAWI
articles provided for five people to be its directors for lile unless disqualified in
accordance with certain contigencies . The articles were subsequenily altered
and a new contigency was added to them. By reason of this contigency one of
the directors was.asked to resign f rom his post. The director sued the company
for breach ol the provision in its articles which made him directorlor life. lt was
held that although articles do create a contract between a company and its
members, that contract was based on terms which were alterable. For that
reason, neither party to the contract had a cause for complaint if those terms
were altered.
Third, as already noted, articles must comply with the memorandum. Conse-
quently any alteration which purports to make them superior to the memoran-
dum or introduces any conflict between the two, will not be effective.
Finally, at common law an alteration of the articles will be void if the majority
who approve it are not acting bona fide in what they deem to be the interest of
the company. ln the case of Brown v British Abrasive Wheel Co. Ltd. (1919)
l35l the defendant company needed more capital. The majority who held
98%
of its existing shares were willing to provide the extra capital but on the
condition that they should first buy up the 2/" minority. When the minority
refused to sell their shares, the majority proposed to alter the company's
articles to provide forcompulsoryacquisition of the shares atafairvalue. ltwas
held that the alteration was invalid since it was merely for the benefit of the
majority and was not directly concerned with the provision of the capital which
the company needed.
Enunciating the law here Evershed MR said: ". . . 'bona lide for the benefit of
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 'I1
the Company as a whole means not two things but one thing. lt means that the
shareholder must proceed upon what, in his honest opinion, is for the benefit
of the company as a whole. The second thing is that the phrase 'the company
as a whole', does not . . . mean the company as a Commercial entity, distinct
from the corporators: it means the corporators as a general body." t36l
Of course, if the majority are acting bona fidethen the alteration will be valid
and this is illustrated bythe case of Sidebottom v Kershaw Leese & Co. Ltd.
(1920) t37l Here the defendant company passed a resolution to alter its articles
by providing that its directors should have power to require any shareholder
who carried on business in competition with the companyto transfer his shares
tothem atafairvalue. The plaintitf whowas a minorityshareholderand carried
on a competing business sought to have the alteration declared invalid. lt was
held that the alteration was valid because the majority who supported it were
acting bona fidelor the benefit of the company as a whole by providing for the
removal from its membership of any person who abused his position as a
member to compete with the company.
Chapter Two
1. Section 19(2).
2. Section 19(5).
3. Section 17.
4. Section 19(1).
5. Section 131(1).
5a. [1990] BCLC 352.
6. Section 19(3).
7. Section 19(5).
8. Section 19(7).
9. Section 19(8).
10. Section 19(9).
11. [1962] RPC265.
12. Section 6(1Xb) and (3Xb).
13. Section 21(1).
14. Section 7(1).
15. Section 8(3).
16. Section 66(1).
17. Section 64(1).
18. Section 64(3).
19. Section 67(1).
20. section 64(4).- provides that this type of cancellation rs ,,ot a reduction
of share Capital within the meaning of the Act
21. Section 67(3).
22. Section 48(3).
23. Section 48(5).
24. Section Re Holders lnvestment Trust Ltd t19711 2 Ail ER 289.
25. Section 48(4).
26. Section 10(2).
27. Section 10(6).
28. Section 10(7).
29. Sections 11 and 14.
30. [19s2] 2 Ail ER 871.
31. [1915] 1 Ch 881.
32. [19s8] 2 Ail ER 194.
33. [1876] 1 Ex D 88.
34. 1192712 KB 9.
35. [191e] 1 Ch 2e0.
36. Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, p.1126
37. [1e20] 1 Ch 1s4.
4SIRODUCTION TOCOMP
Ghapter Three
{i-
One of the effects of this is that generally members of the company are not
personally liable for its debts as long as it is still a going concern. ln the case of
Naidoo v Mazi lmport and Export and Tchongwe (1 985)nlthe plaintiff and the
second defendant formed a limited company of which they were both directors
.and shareholders. Subsequently, the plaintiff incurred some expenses in the
name of the company. When the matter came to court one of the issues to be
considered was whether or not he could recover those expenses f rom the first
and the second defendants. lt was held that since the company was a distinct
legal personality, the expenses could be recovered from it, and not from the
second defendant.
Summer said:
"He owned almost dllthe shares in the company, and the company owed him
., good deal of money, but neither as creditor nor as shareholder, could he
insure the company's assefs. The debt was not exposed to fire nor were the
shares, and the fact that he was virtually the company's only creditor, while the
timber was its only asset, seerns to me to make no difference".
The court may also rip open the corporate veil if it feels that the company's
corporate personality is being used to evade tax. ln Unit Construction Co.
Ltd. v Bullock (1959) lr2l three companies which were wholly-owned subsid-
iaries of a United Kingdom company were registered in Kenya. The boards of
the subsidiaries were distinct from the board of the parent company. Although
the constitutions of the companies required board meetings to be held in
Kenya, allthe three were in fact managed entirely by -that holding company in
Britiain. lt was held that as the companies were managed in the United
Kingdom, they were resident in that country, and, therefore, liable for taxation
in accordance with its laws.
)
Ghapter Three
1. Civ cas 706/1985.
2. [1925] AC 61e.
3. [1e24] 1K8775.
4. See Re Savoy Ltd [1981] 3 Att ER 646.
5. See, forexample, Lennard's Carrying Co Ltd v Asiatic petroleum Co
Ltd [191s] AC 70s.
6. Section 42(1\.
7. [1971] 2 Ail ER 127.
L Section 337(1).
9. Section 130(3).
10. [1933]Ch 93s.
11. l1e74l1 Ail ER 217.
12. [1959] 3 Ail ER 831.
13. [1939] 4 Ail ER 116.
ti!
AN INTRODUCTION TO COMPANY LAW IN MALAWI
Chapter Four
The Management of a
Registered Company
4.1 Company membership
Every regist"r"O must have at least two memU#ftrl lf the company
"orp"nymust not exceed 50 whereas if it is public, there is no
is private, its membership
ceiling on the maximum number of members which it can have.
(d) the tra'nsfer of the company's shares to him in accordance with Secti:ns
49 and 52.
was prepared and executed by him in which he agreed to hold 51% of the
company's shares on trust. curiously he had not been registered as a
shareholder in the company's shareholder register when the share certilicate
was issued nor had the share transfer form been completed at the time. A
subsidiary issr"re which required decision at the trial was whether or not he was
in fact the holder ol5'1"/" of the company's shares. lt was held that he was not.
As Skinner C.J. put it:
(e) the amount paid or agreed to be considered as paid on each share. ,y'' r:
According to section 37, the register is prima facie evidence of any matter
directed or authorised by the Act to be inserted in it. Therefore, subject to any
rectification under Section 35, it will be prima facie evidence of the particulars I
which have just been enumerated.
company is wound up and its creditors are paid, there are some assets which
are left over. And thirdly, he will have the right to participate in the interim
distribution of its surplus property in the form of dividends. Of course, these
rights may be varied or removed altogether by the company's articles. Thus,
there may be some shares which do not have any voting rights or which have
more rights than others. r'1 ;+ 7 ".*,1 i
A, + , .1,- ,T.,L.:_^ A
4.2 Company meetings
As will be shown later, a company is administered and managed by its directors
and fulltime employees. For that reason, its members do not have any real
influence on its day to day business. However, this does not mean that they
have no influence on its decision-making. For if that were the position, the law
would have been deficient in that it would have denied them elfective means
of contributing to policies governing the use of the money which they had
invested in the company. Therefore, in fact, members do participate in their
company's decision-making. lndeed, there are some decisions e.g. alteration
of the memorandum and articles, and reduction of share capital, which must
be made by them in general meetings.
lf the directors do not within 21 days of the deposit of the requisition convene
the meeting, the requisitionists may convene it themselves. Of course, they
must do so within three months of depositing the requisition at the company'i
5i;"t,'jregistered office. tl3l,
:l shareholders but does not provide the procedure whereby the variation should
be made, the rights may be varied by a special resolution passed at a separate
,l general meeting of the holders of shares of that class. section'124(1) then
provides that provisions of the Act relating to general meetings will apply to
such a meeting. The major difference, however, between these two types of
meetings is that where a class of shareholders comprises one member, that
memberwill be deemed to constitute a meeting. on the other hand, the quorum
for company general meetings is usually two members.
t
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 53
ordinary shareholders in the hall clearly showed that they had waivecj their
objection to that presence. Consequently the resolutions passed at the
meeting were valid.
;
"A shareholder may properly and prudently leave matters in which he takes no
personal interest to the decision of the majority. But in that case he is conten,t
to be bound by the vote of the majority because he knows the matter about
which the majority are to vote at the meeting. lf he does not know that, he has
not a f air chance of determining his own interest whether he ought to attend the
me:ting, make further enquiries, or leave others to determine the matter for
him..."
Now, as far as the purpose of the general meeting is concerned, Article 24has
been construed as imposing a duty on the companyto say in broad, ratherthan
exact and specific, terms what the meeting is intended to discuss. Therefore,
a notice will comply with it if it states that the general meeting is called to
discuss, for instance, 'the reduction of the company's capital'.
I
that the meeting was being called lo inter alia'elect directors'. lt was held that
this disclosure sufficiently specified the business to be transacted at the adver-
tised meeting as required by the company's afiicles. As Uthwatt J. put it:
"The question ... is whether, reading the document you can properly say
that notice has been given of the general nature of the business. There
is no need to specify the exact nature of the business ... Ail you have to
do, to comply with the articles, is to specify the general nature of the
business. I think there is in this notice a sufficient specification of the
general nature of the business ..."
On the other hand, if the notice fails to give sufficient indication of the nature
of the special business to be transacted at the proposed meeting, then the
resolutions passed by the meeting will be invalid. ln Tiessen v Henderson.
(1899) trel a company issued notices of general meetings whose purpose was
stated to be to pass special resolutions forthe company's f inancial reconstruc-
tion. The company had a provision in its articles which was similar to Article 24
of rable A. Three of the company's directors had financial interest in the
reconstruction in that they were entitled to receive commissions if the proposed
scheme of reconstruction succeeded. Because the notices did not disclose this
point, some members petitioned the court to restrain the company and the
directors from implementing the reconstruction. lt was held that the notices'
LL
AN INTRODUCTION TO COMPANY LAW IN MALAWI
(a) every member who has the right to vote at such a meeting. By virtue ol
Article 108(1) of Table A, this means every member who has supplied to
the company an address within Malawi where the notice can be sent to
him;
(b) every person upon whom ownership of a share devolves within the
meaning of Section 54;
(d) every auditor lor the time being of the company 1201 g *:'7
lf any one of these persons does not receive the notice, any resolution passed
at the meeting will be of no etfect. ln Musselwhite v C H Musselwhite & Sons
Ltd. (1962) t211 the plaintiff agreed to sell his shares in a company to another
person. lt was agreed that the plaintiff should remain on the cc,mpany's
membership register until the price for the shares was fully paid. Before the
payment was completed, the company convened a general meeting. However,
no notice was sent to the plaintiff because the company's directors erroneously
believed that since he had executed transfers of the shares, he was no longer
a member of the company and, therefore, not entitled to receive notice of its
general meetings. lt was held that the omission prima facie invalidated the
general meeting and that as it was not accidental, it could not be cured by the
company's articles which provided that accidentalomission to give notice of a
meeting to any member will nst invalidate the proceedings of that meeting.
As this case shows, not every omission to give notice is fatal; there are other
omissions which are not. Normally, articles provide, as does Article 26 of Table
A, that'accidental omission to give notice of a meeting to, or the non-receipt
of notice of a meeting by, any person entitled to receive notice shall not
invalidate the proceedings at that meeting. Therefore, if a company which has
a similar provision in its articles omits, through inadvertence, to send notice to
any person who is entitled to that notice, the omission will not invalidate
proceedings at the meeting. ln Re West Canadian Collieries Ltd (1962)r,'?1
55 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
i meetings and the company secretary, the right to attend the company's general
meetings. Nevertheless, the company reserves the right to prohibit by its
articles any member from attending the meetings if sums payable by him in
respect of shares held by him in the company have not been paid. Moreover,
Afiicle 39 of Table A provides that a member cannot vote at his company's
general meeting if he owes the company some money on the shares which he
,tn:;,pblds in it. The articles may also prohibit a director to vote in respect ol any
ii'ri. .lltontr"ct or arrangement in which he is materially interested. I26t However, if
there is any objection at a general meeting to the qualif ication of any voter, that
must be raised at that meeting. This is because if his vote is not disallowed
l':+']here, it will be valid for all purposes.t2Tl ln other words, in the absence of f raud,
| i
' ' the court cannot impeach the chairman's decision to accept that vote. As North
J. said in Wall v London & Northern Assets Corp.('18991 tert which involved
tr
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 57
'"The article in question is not of very general application; it does not go to the
extentof making the chairman's decision final as to a resolution being passed.
lf he made a mistake in counting, for instance, the article would not apply ...1
do agree that such a provision ... would apply even in a case of fraud. Any
fraudulent ruling would ...be vacated by a competent court".
This was applied in Wall v Exchange lnvestment Corp. (1926) Ialwhere one
of the provisions in the defendant company's articles was similar to Article 40
of Table A. The company held a general meeting to pass a special resolution
forthe company's liquidation and the appointment of liquidators. One of the the
participants voted as a proxy under a power of attorney. The plaintiff objected
to his votes being counted on the ground that the power of attorney did not
authorise voting by proxy. The chairman refused to disallow the votes with the
result that the resolution was passed with the required majority. lt was held that
since there was no fraud involved and the chairman acted bona fide, his
decision to allow the votes was final and could not be reviewed by the court.
q.S,.Z Voting
lssues presented for consideration at company general meetings are decided
by vote. The voting may be by show of hands or by poll. According to Article
7'-
58 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Ii
ptoposed for the post, one got three votes while the other got two which were
cast by members who held more shares in the company. No poll was
i demanded by the members for this vote. The chairman decided that the
: candidate who got two votes was duly elected as the company's liquidator. ln
i an action to challenge this decision, it was held that the chairman erred
I because as no poll was demanded, election of the liquidator was supposed to
I U" by show of hands and that entitled each member to one vote, regardless ol
the number of shares which he held in the company. Now since according to
that method the first candidate had more votes, he should have been declared
the tiquidator.
Members can demand a poll on any issue except the election of the chairman,
i or. the adjournment, of the meeting and any article which removes this right is
i q,1ai,;,yoid. t36l The reason for this restriction would seem to be that these two issues
However, the chairman must accede to the demand for a poll on any
issue if it is made by at least three members or any number of members
who represent at least one-twentieth of the total voting rights of all the
members entitled to vote at the meeting. Any article which makes such
::rr'rLli€ demand ineffective is void. I37I
4.5.3 Proxies
Section 1 13(1) allows every member of a registered company who is entitled
to attend, and vote at, its meeting to appoint another person to attend the
meeting and vote in his stead. He can appoint more than one person, each
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 59
To ensure that members are aware, and avail themselves, ol this right,
subsection (7) requires every notice of a general meeting of a company limited
by shares to contain a reasonably prominent statement that every member of
the company is entitled to appoint one or more persons (who need not be
members) to stand in and vote for him at the meeting. The appointment must
.; * be by a written instrument in the form prescribed by Table A or C l3el and be
; - s,signed by or on behalf of the appointor.(el lf the latter is a body corporate the
instrument must be under its seal or be signed by its authorised agent or officer.
Moreover, it must contain instructions by the appointor to the proxy on how to
, :
, : vote in respect of any resolution dealing with special business.tarl
4.5.5 The chairman
Usually, the chairman of the board of directors willpreside overthe company's
general meetings. However, if there is no such chairman or he is late for a
quarter of an hour or is unwilling to preside, the members present can choose
one of them to chair the meeting. to"t/\'+ 1t' f /\
3. decide any incidental question which may arise during the meeting, e.g.
how a polldemanded by members may be taken.
Where there is an equality of votes on either side, the chairman is usually given
the power to decide the issue through his casting uo1".t43lr1r+ 'l+ r;+
4.5.5 Resolutions
Company action must be backed by two types of resolutions: ordinary or special.
For instance, as already shown, articles of association can be altered only by a
special resolution. Similarly, share capital can be reduced only by a special
1 resolution. tsl On the other hand, a company needs an ordinary resolution only,
\
to increase its share capi[a/f4o or to remove any of its directors from his post. t46li rE'
V
60 - AN |NT8ODUCT|ON TO COMPANY LAW tN MALAWT
4.5.5.1 Ordinaryresolution
This is a resolution passed by a simple majority of votes cast by members of
4s);)r.rthB company, who are entitled to vote, personally or by proxy. raTt Thus, if a
company has five members andthree of themvote infavourof a resolution, that
resolution will be duiy passed if it is an ordinary resolution. Besides, a company
is under no legal obligation to give special notice of an ordinary resolution
intended to be passed at any of its general meetings. ln other wordi, a general
meeting can pass an ordinary resolution even though members had no prior
notice of the intention to propose the resolution at that meeting.
This is illustrated by Parker & Cooper Ltd. v Reading (1926) tlgt ln that case,
an arrangement was made that one of the company's directors (who was also
a member) should advance money to it and that the loan should be secured by
a debenture drawn in hisfavour. Thearrangementwas neversanctioned bythe
company's general meeting. However, members discussed it form time to time
and individually assented to it. Because of this, the company and its liquidator
subsequently brought an action to have the debenture declared invalid. lt was
held that the debenture was valid because:
"[W]here the transaction is intra vires and honest, and especialty if it is for the
benefit of the company, it cannot be upset if the assent of the corporators is
L
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 61
given to it. I do not think if matters in the least whether that assent is given at
different times or simultaneously ... I can find nothing ... to prevent all the
corporators from arranging to carry out an honest intra vires transaction
entered into for the benefit of the company, even if they do not meet together
in one room or place, but all of them merely discuss and agree to it one with
another separately''.
4.6 Directors
As just shown, the function of the company in general meetings is to
formulate policy and shape the company's capital and corporate struc-
tures. ln other words, the general meeting does not generally have the
power to manage the company. Usually, that power is given to the
company's directors. Thus for instance, Article 53 of Table A declares
that the business of the company which adopts Table A as its articles
must be managed by the company's directors.
It is clearly because of this that directors are defined by the Act as 'persons
appointed to direct and administer the business and affairs of the company''[51]; 1,1i]r 1
More will be said about directors in Chapters 5 and 7. Here it is intended merely
to look at their powers of management and limits imposed on those powers.
Similarly, in John Shaw & Sons Ltd. v Shaw ( 1 935;tsst *5ere the general power
of the company's management had been delegated by the articles to the
directors and the company in general meeting passed a resolution that
proceedings which had been instituted by the directors in the company's name
be discontinued, it was held that the resolution was invalid. ln the words of
Greer, L.J:
"A company is an entity distinct alike from its shareholders and its directors;
some of its powers may, according to its articles, be exercised by directors;
certain other powers may be reseruedforthe shareholders in generalmeetings.
lf powers of management are vested in the directors, they and they alone can
exercise these powers".
2. determine how negotiable instruments and receipts for money paid to the
company are to be executed;lssl
. .
6. ensure that accounting records are kept and that accounts are prepared
and laid before the company in general meeting;tssl. .
f. issue shares and determine the rights and restrictions which may be
attached to them 16rl and
oI
AN INTBOOUCTION TO COMPANY LAW IN MALAWI - 63
3. create or grant any right or option which entitles the holder to acquire any
class of shares in the compdny.lsr)
Third, these powers are conferred on the directors collectively as a board. This
is clear from the use of the word 'directors' in Article 53. For this reason,
generally the powers will be exercisable at board meetings ol which appropri-
ate notice has been given and at which a quorum is present. By the same token,
neither an individual director nor any group of directors can,as a general rule,
exercise the powers and create a binding obligation on the part of the company.
ln Metalimpex v AG Leventis & Co. Ltd t66l the defendant company had
powers under its memorandum of association to inter alia indorse and
r otherwise deal with bills ol exchange.The powers were conlerred on the
company's board of directors by its articles of association. Subsequently bills
L
r
64 - AN INTFODUCTION TO COMPANY LAW IN MALAWI
Fourth, the company in general meeting has the residuary power to exercise
directors' power of management if they are unable or unwilling to exercise the
powers. ln Barron v Potter (1914) toTl a company's afticles gave the board ol
directors power to appoint an additional director. However, because of per-
sonal dilferences between existing directors, the board could not meet to make
the appointment. Consequently, the company in general meeting appointed
the director. lt was held that the appointment was valid.
And lastly, the company in general meeting maintains uJtimate control over
directors because of its powerovertheirtenure of office. lt has powerto appoint
them. Besides, section 146(1) empowers it to remove from office all or any of
them in spite of any provision to the contrary in afiicles. Clearly, this determines
the extent of the board of director's superiority over the company in general
meeting.
LI
AN INTRODUCT]ON TO COMPANY LAW IN MALAWI - 55
Chapter Four
1. Section 4.
2. Section 31(1).
3. Section 31(2).
4. 11s73-741MLR 416.
5. See also Musselwhite v Musselwhite & Sons Ltd [1962] 1 Ail ER 201
and Spencer v Kennedy [1926] Ch 125.
6. Section 32(1).
7. Section 47 and Article 2, Table A.
8. Section 2.
9. Section 104(6).
10. Section 104(5).
11. Section 105.
12. Section 106(2).
13. Section 106(3).
14. [1937] 2AilER422.
15. [1899] 1 Ch 861.
16. Section 108(1).
17. Section 108 (3).
18. [1941] 1 Ail ER 762.
19. Supra., note 15. See also Baille v Oriental Telephone & Electrical Co
Ltd [1915] 1 Ch 503.
20. Section 107.
21. Supra., note 5.
22. [1962] 1 Ail ER 26.
23. Section 117(1).
24. Section 117(2).
25. Section 118(3).
26. Section 150(5) and Article 55(2), Table A.
27. Article 40, Table A.
28. [1898]2 Ch 469.
29. [1e26]Ch 146.
30. Article 28, Table A.
31. Section 124(2).
32. Section 124(3\.
33. Article 29, Table A.
34. Article 37, Table A.
35. [1879] 11 Ch D 109.
66 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Chapter Five
Company Directors
5.1 Appointment
Section 141 (1) provides that a registered company must have a minimum of
three directors. But subject to that, each company can have as many
directors as it wishes to have. tllThus, Article 64 of Table A empowers the
company to increase or decrease from time to time the number of its
directors. The first directors are usually appointed by the subscribers to the
company's memorandum, t2l Appointment of additionaldirectors may be left
to the board of directors. I31 However, if the company's articles contain a
provision similar to Article 64, the company will also be deemed to have
power to make that appointment. ln Worcester Gorsetry Ltd. v Witting
(1 936) t4l the plaintiff company whose articles contained provisions similar to
Articles 64 and 65 held a general meeting where directors were appointed.
Some of the company's members then brought an action to have the
appointment declared invalid on the ground that only the board of directors
had the power to appoint 'additional' directors. lt was held that although the
power was clearly vested in the board, that did not exclude the power of the
company in general meeting to make the appointment.
But even if the articles expressly confer exclusive power on the board of
directors to appoint subsequent and additional directors that power will revert
to and be exercisable by the company in general meeting if the board is unable
or unwilling to exercise it. This follows f rom the case of Barron v Pottertslwhich
empowers the company in general meeting to assume the board's powers in
such a case.
Normally, the articles willalso provide that allfirst directors should retire at the
company's first annual general meeting and that one third of them must also
vacate their posts at every subsequent annual general meeting. t6l Where that
is the case, the company in general meeting can fillthe vacancy by electing
someone to each post at the same general meeting. rn lf the company fails to
do so and the retiring director offers himself for re-election, he will be deemed
to have been re-elected.
68 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
1. a body corporate;
Moreover, the court has power under section 160 to order any person not to
be inter alia, company director without court permission if
(b) he is found guilty of fraud or breach of duty in the course ol the winding
up of any body corporate.
5.1.3 Sharequalification
Generally, it is not necessary for a person to be a member of , or to hold shares
in, the company of which he is director.tr2l However, if the company's articles
require itsdirectorsto haveacertain sharequalification, each one of them must
obtain that qualification not later than two months after his appointment. lf the
share qualification is introduced while he is already serving as a director, he
must obtain it within the neld two months. Should he fail to do so, he must vacate
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 69
his office tr31 and cannot be re-appointed director of the company until he
acquires the stipulated shares. tral
Where a share qualification is imposed, the articles may require that the shares
should be held in the directo/s own right. ln that case, the qualificatioh will not be
satisfied unless the director is registered in the company's membership register
in respect of the shares and enjoys the rights attached to them. ln other words, it
will not be enough firstly, if he has a mere right to be registered in respect of the
shares. The case of Spencer v Kennedy (1926) Irsl illustrates this. Article 20 of
a company's articles empowered directors from time to time to appoint any other
'qualified person'to bedirectorof thecompany. Adicle T0addedthateach director
should hold at least one share in the company. The company held a board meeting
on a Saturday and elected the plaintiff as director. Before the election, one share
was transferred to him. lt was held that although the plaintiff had acquired an
absolute right to be registered in respect of this share, he was not a 'qualified
person'within the meaning of Article 20 untilthe following Monday when his name
was put on the company's membership register. Therefore, his election on
Saturday was invalid.
Secondly, the share qualification will not be satisfied if the director holds the
shares concerned for someone, and has no beneficial interest in them. ln
Bainbridge v Smith (1889) t16l where the articles ol a company contained a
provision requiring the managing director to hold 'in his own right' e25,000
worth of shares, Cotton L J said:-
"[ l]n my opinion holding in his own right is something more than holding, and
it must be shown that he was not only the legal title holder which being on the
register gives h!m, but that he is an independent holder, and has got the
beneficial ownership of the shares".
director and his appointor may act as directors of the company. But unless the
former is a director in his own right, he cannot attend, or vote at, any meeting
of the company where his appointor is present. ttal Finally, the company cannot
pay remuneration to both the alternate director and his appointor; on the
contrary, the alternate director can either receive the remuneration which the
latter would have received during the period of the appointment or be paid by
his appointor.
(a) holds himself out or knowingly allows himself to be held out as a director
of the company; or
The lirst of these relates to the care and skill which they must display in the
performance of their functions.Describing the extent of this duty in Re City
Equitable Fire lnsurance Co Ltd (1901) t2al Romer J. said:
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 71
"A director's duty has been laid down as requiring him to act with such care
as reasonably to be expected f romhim having regard to his knowledge and
experience. He is ... not bound to bring any special qualifiations to his
office. He may undertakethe management of a rubber company in com-
plete ignorance of everything connected with rubber without incurring
responsibility for the mistakes which may result from such ignorance;
while if he is acquainted with the rubber business he must give the
company the advantage of his knowledge when transacting the company's
business".
The application of this rule is illustrated by the Marquis of Bute's case (1892) t26l
where the Marquis became president of a bank when he was six months old. He
attended only one board meeting in 38 years. lt was held that he was not liable for
irregularities which occurred in the bank's lending operations in his absence
72 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI
Of course, this rule applies to non-executive directors only. Where the director
is a f ull-time executive or managing director of the company, his duties will not
be intermittent. On the contrary, he will be expected to give continuous
attention to the eompany's business.
ln Re W & M Roith Ltd. (1967)t 8l the controlling shareholder and director of two
companies wished to make provision for his wife. He, therefore, entered into a
service agreement with one of them whereby on his death she would be entifled
to a pension for life. lt was held that since no thought was given to the question
whether the arrangement was for the benefit of the company, and its sole object
was to provide for the widow, the agreement was not binding on the company.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 73
Secondly, the directors must not put themselves in a position where their duties
to the company and their personal interests may conf lict. One implication of this
is that a director must not make a secret profit or appropriate his company's
opportunities by reason of his position. lf he does that, he must account for the
prof it to the company. ln Boston Deep Sea Fishing Co. Ltd. v Ansell (1888)
t3ol the director of a company contracted on its behall for the construction of
should account for the benefit mafle under the contract to the company'
not have acquired the propertyforthe company itself- the prof itwhich he makes
is the company's even though the property by means of which he made itwas
not and could have been acquired on its behalf..." t3tel
According to this case, the director will have to account for the oppor-
tunity, profit or property if he obtains it for himself . ln other words, if he
obtains it as a nominee for someone else, he is not bound to account for
it to the company.
Another implication of the fiduciary duty is that a director must generally not have
an interest in a contract into which his company enters or intends to enter. Clearly
this will be the case where he has an interest in the other party to the contract by
being,lorexample, itsdirector, shareholder, proprietororwhere itis a partnership,
by being one of its partners. But f or this rule to apply, the interest m ust be'material'.
And what is material interest is a question of fact. According to Section 150(2), an
interest need not be direct for it to be material; it may be indirect as where the
directoCs son or wife is a proprietor of or a director, partner or shareholder in the
other party to the contract. Besides there may be material interest even though the
directormakes no profitfromthecontract. Howeverif the otherpartytothecontract
is a public company, the mere fact that he is its debentureholder or holds 5% of
its shares will not make his interest in the contract material. t32l
Of course, unless the company's articles provide otherwise, a director will not be
in breachof hisfiduciarydutynotto puthimself inapositionwherethereisaconflict
between his interests and those of his companysimply because he has a material
interest in such a contract. He will onty be in breach of the duty if he does not
disclose the interest to other directors or shareholders at the meeting where the
question of entering into the contract is lirst discussed.F3l ln that case, the contract
will be voidable by the company and he may be liable to account to the company
lor any profit made. ln Transvaal Lands Co. Ltd. v New Belgiqm Land Go. Ltd.
(1914) t34l the plaintifls bought shares in the defendant company. A person who
was a shareholderin both companies as wellas a directorof the plaintitf company
voted for the purchase without disclosing his interest in the defendant company
as required bythe articlesof theplaintitf company. ltwas heldthatthe contractwas
voidable at the plaintiff company's option.
I
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 75
A third implication of the requirement that directors should not put themselves
in a position where their duties to the company and their personal interests may
collide is that they must not exploit information which they have on the
company's debentures and shares for their benefit. ln the course of his job and
by virtue of his office, a director may acquire or become privy to data which may
atfect the value of these securities. The information may relate to an imminent
take-over bid or expectations of a rise or fall in the company's profits or a
probable purchase or sale of the debentures or shares at a high or low price.
l{, after acquiring such information, he buys or sells the securities, he is obliged
to disclose it to the purchaser or seller.l36l For the purpose of this provision a
director buys or sells company securities if he has or has had any beneficial
interest in them. tszl Clearly he will have such an interest if the purchase or sale
is made by him or on his behalf or on his advice or instructions or on the advice
or instructions of any person to whom he had imparted the information. lf he
f alls to make the disclosure, he will be liable to account to the company for the
profit made on the purchase or sale. Besides, the purchaser or seller of the
debentures or shares can avoid the transaction within twelve months of its
conclusion. l38l
"lt is well established ... that a person who acquires special knowledge or
76 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
However, it would seem that if the sale is not initiated by the director, he is not
obliged to disclose the confidential information to the other party. This will be
even more so where the information relates to a mere overture, rather serious
negotiations, byathird partyfora possible purchase at a profit of the company's
undertaking. ln PercivalvWright (1902) I4ol the plaintiff offered their shares for
sale to their company's directors at a price fixed by the plaintiffs. Three of the
directors accepted the offer and bought the shares. Subsequently, however,
the plaintiff discovered that during the negotiations for the sale, the board of
directors had been approached by someone for a possible purchase of the.
entire undertaking of the company at a price per share which was considerably
higher than that paid for the plaintiffs' shares. They then brought an action
seeking to have the sale set aside on the ground that as the purchasers of the
shares were directors of the company, they ought to have disclosed this
information while considering the plaintiff's offer. Dismissing the action, Swinfen
Eady, J. held that directors are not obliged to disclose information premature
disclosure of which might well be against the best interest of the company.
Besides, he added:
'There is no question of unfair dealing in this case. The directors did nc!
approach the shareholders with the view of obtaining their shares. The
shareholders approached the directors , and named the price at which they
were desi rousof selling".
Apart from this duty of disclosure, if the securities are traded publicly, section
a3(1) of the Capital Market Development Act, 1990 imposes another duty on
company directors in respect of confidential information. lt prohibits every such
director to abuse the information by:
(c) carrying out any securities transaction based on internal and confidential
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 77
Section 2 of the Act defines material informalion as any information which can
reasonably be considered to be of interest to existing or potential parties in a
capital market or to any person engaged in the buying, selling or holding of
securities for investment purposes for his own account. This includes any
information which is likely to affect the price or value of securities.
5.4.3 The duty to act in conformity with the articles and memorandum
As shown in chapter 2, Section 22(1) prohibits a registered company to carry
on any business or exercise any power which the company is restricted by its
articles or memorandum from carrying on or exercising. Besides, it prohibits
the company to exercise its powers in a manner which is inconsistent with the
company's articles or memorandum. Since most company powers will be
delegated to the company's directors and the directors will also be given power
to decide which business the company can carry on, the effect of Section 22(1)
is to impose a duty on them to act in conformity with the company's articles and
memorandum. Examples ol the exercise of powers in a manner which does not
conform to the company's articles include:
5.5 Directors'remuneration
Directors are not seruants of the company, on the other hand, they are, as already
indicated, its managers and controllers. For this reason, they are usually not
entitled to be paid a salary unless there is a service contract between them and
the company which entitles them to that payment. However, the articles do
sometimes provideforsome remuneration to be madetothem. Thus, forinstance,
Article 50 of Table A provides for such remuneration which accrues from day to
day as determined by the company in general meeting. The afticles also empower
the companyto reimbursethem alltravelling, hoteland otherexpenses which they
incur in connection with the business and meetings of the company.
As this provision shows, it is for the general meeting to determine f rom time to
time how much remuneration the directors should receive. Clearly, if no such
determination is made, they will not be able to receive anything. ln Re
Richmond Gate Ploperty Co Ltd. (1965)taala company's articles contained
a similar provision. When the company went into liquidation, the plaintiff who
was its managing director sought remuneration on a quantum meruit basis.
However, the company had not determined his remuneration. lt was held that
since his remuneration was to be determined by the company's directors, he
could not get anything if they had not determined to pay him.
Now generally the company is not under any legal obligation to disclose this
remuneration in its annual financial accounts. What is required is simply to
attach a note to the accounts which shows inter alia,lhe aggregate amount of
the directors' emoluments and pensions.t45l This aggregate must include fees,
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 79
(a) the payment of damages awarded by any court for breach by the
company of a valid service agreement and
For the purpose of this exemption, a service agreement will not be deemed to
be valid if it is entered into in contemplation of the transfer or an offer to acquire
the comPanV's shares. tstt
is made to directors in connection with the bid, the directors must disclose
particulars of the payment in the notice of the bid sent to the company's
shareholder. {521This will apply where the offer is made to:
(b) all holders of the class of shares to which the ofler applies or
(c) all holders of shares which, together with shares beneficiary owned by or
on behalf of the offeree confer on the latter the right to one:third of the
voting power at any general meeting of the company.
1. he may have to account to the company for the prolit made out of the
breach; ts{
2. he may have to indemnify the company against loss caused by the breach;
(a) lend money to any of its dircctors or to any director of its subsidiary company or
(c) lend money to any other body corporate or guarantee or give security for a
loan to another body corporate if any director of the company is interested
in at least one-third of that body corporate's issued share capital. Isel
However, this does not atfect a loan by a company to its subsidiary or holding
company tsel or its provision of a guarantee or security for a loan to its holding
company or subsidiary. 160l Similarly, section 151(1) does not prohibit a loan,
guarantee or security by a company whose business is that of lending money
or giving guarantees or security for loans as long as the amount lent or
guaranteed does not exceed 1% of the company's net assets. ln other words,
section 151(1) does notprohibit a commercial bank t6rlto lend money to its
director. of course such a loan would be subject to the supervision of the
Reserve Bank of Malawi under section 29 ol the Banking Act. Moreover, a
company can lend money to its directors to meet expenses incurred by them
lor the purpose of the company or to enable them perform their functions
properly.t62lButforthis to be valid, priorapprovalmust be given bythe company
in general meeting after disclosure of the expenses and the amount of the loan
or the extent ol the guarantee sqcurity. lf the approval is not given at or before
the next annual general meeting, then the loan must be repaid or the liability
T
(
82 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
(b) it is not necessary to give notice of board meetings to directors who are
absent from Malawi;
(d) in the event of an equality ol votes, the chairman of the meeting is entitled
to a casting vote.
Similarly, the quorum for board meetings is left to the board's discretion. Where
none is fixed by the board, the quorum will be two directors 163) 65 in the case
of general meetings. A vacancy in the board cannot stop the board from
performing its functions. However, if the vacancy is such that it reduces the
number of directors below the quorum for board meetings, then the board is
only allowed to increase the number to the required quorum and to summon
the general meeting of the company. t61l lf the board does anything else while
the number of its members remains below the quorum, lhat action will be
invalid.
t
AN INTRODUCTION TO COMPANY LAW IN MALAWI _ 83
ln a vote to remove a director from office, the articles will often give him more
votes for each share which he holds in the company. tr2lThis weighted voting
r 84 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
5.9.2 Retirement
As already noted, all the first directors of a registered company must retire at
the company's first annual general meeting.It3lA third of them must also retire
at every subsequent annual general meeting.
A director may also have to vacate his otfice il he accepts or holds any other
office in contravention ol his company's articles. ln the case of The lron Ship
Coating Co Ltd v Blunt (1868) ITal the company's articles provided that any
director who accepted or held any other office in the company than that of
manager should thereupon be disqualified f rom being and cease to be director.
A person who was the company's secretary was later appointed director. From
the time of his appointment, he ceased to receive a salary as secretary
although he continued to perform secretarial duties. lt was held that by
continuing to perform these duties, he did not contravene the company's
articles because in ceasing to receive a salary as secretary, he stopped holding
another office within the meaning of the article.
AN INTROOUCTION TO COMPANY LAW IN MALAWI - 85
Chapter Five
1. Section 141(3).
2. Article 48, Table A.
3. Article 65, Table A.
4, [1e36] Ch 640.
5. [1914] 1 Ch 895.
6. Article 60, Table A.
7. Article 62, Table A.
8. Section 142(1).
9. Section 142(5).
10. Section 143(1).
11. Section 143(2).
12. Section 144(1).
13. Section 144(2).
14. Section 144(3).
15. [1e26] Ch 125.
16. [1889] 41 Ch D 462.
17. Section 147(2).
18. Section 147(6.
19. Section 157(1).
20. Section 158(1).
21. Section 158(3).
22. Section 140(5).
23. Section 140(21.
24. [192s] Ch 407.
25. [1e11] 1 Ch 42s.
26. [1892] 2 Ch 100.
27. [1e01] AC 477.
28. [1967] 1 Ail ER 9.
29. [1e74] 1Ail ER 1126.
30. [1888] 39 Ch D 33e.
31. 119721 2 Ail ER 162.
31a. 119421 1 Ail ER 378.
32. Section 150(7).
33. Section 150(1X2X3).
34. [1e14] 2 Ch 488.
35. [1904] 1 Ch 32.
36. Section 152(1).
r"
l--.
j
AN INTRODUCTION TO COMPANY LAW IN IIALAWI - r
Chapter Six
Company Officers
There are many instances where the companies Act lifts the corporate veil and
holds a company 'officef responsible for contravention by his company of
certain statutory requirements. For example, if a company fails within 2 months
of allotting its shares to send to the allottee a share certificate, the company and
the off icer responsible for the failure will be liable to a fine under section 52(3).
similarly, failure by a company to send to the registrar notice ol an application
to the court against a variation of class rights makes the company and its officer
who is in default liable under section 48(8) to a fine. Again section 156(7)
provides that should a company carry on business for more than 2 months
without a secretary, the company and every officerwho is in default will be liable
to a fine. For these reasons, it is important to determine who is a company
officer.
6.1.1 Appointment
Under Section 191(1), within three months of its incorporation and thereafter at
each annual general meeting, every registered company must appoint an
LAW IN MALAWI
auditor or auditors to hold otf ice until the next annual general meeting. The f irst
appointment nl.y be made by subscribers to the companies memorandum.
However, if they do not make the appointment within one month of the
company's incorporation, the company's directors may appoint the auditor(s).
lll lf a company has no auditor for a continuous period of three months,
the
-registrar may appoint one for it. t2l within twenty one days of the appointment
or on the occurrence of any change in its auditors, the company must give
notice of the appointment or change, as the case may be, to the registrai for
registration.
6.1.2 Qualification
According to section 192(1) the person appointed as auditor of a registered
company must be eligible and entiiled to act as such under the public
Accountants and Auditors Act. But even if he is so qualified, he cannot be
appointed or act as an auditor unless prior to the appointment he gives written
consent to it.
6.1.3 Duties
section 194(1) requires company auditors to be faithful, diligent, carefuland
to show ordinary skill in the performance of their functions. ln other words, the
law does not impose any special standard of performance on them. on the
contrary, it expects no more than the duty of care of an ordinary auditor found
in similar circumstances. And just like in the case of directors, section 194 (2)
renders ineffective any provision in a company's articles or memorandum or
in any contract between a company and an auditor which exempts him from
that duty or indemnifies him against liability for its breach.
6.1.4 Powers
Every company auditor is entitled to have access at all tirnes to its place of
business and to all its accounts and accountirrg ;c;o;ds. t3r He is also entitled
to require from the company's officers such information and explanation as he
thinks necessary for the performance of his duties. Moreover, section 194(4)
allows him to attend any general meeting of the company and to be heard at
such meetings. talof course, this is additionalto his right to receive notice of
such meetings contained in section 107. company auditors do also have the
right to apply to court for directions in relation to any matter concerning the
performance ol their functions under the Act. Ist,
6.1.5 Remuneration
Generally, the auditor's remuneration may be fixed by the subscribers to the
-l
I
2. written notice of the intention to move the resolution has been given to the
company at least thirty five days prior to that meeting;
3. on receipt of the notice, the company has sent a copy of it to the auditor
and
4. the company has given at least twenty one days' notice of the resolution
to its members. t8l
However this resolution will not be effective unless certain conditons are
satisfied. First, it must be passed ata general meeting of the company. Second,
special notice of the resolution must have been given to the company at least
35 days before the meeting. Third, after receiving the notice the company must
have sent a copy of it to the auditor. And lastly, the company must have given
notice of the resolution to its members.
be heard on the resolution and to read the statement. lf the resolution is passed,
it can not take effect until after the conclusion of the meeting.
Unless the company's articles provide otherwise, the company secretary must
be appointed bythe directors who also have powerto remove him from office.
The appointment may be for such term and remuneration and on such terms
as the directors think f it. t11l once the appointment is made the company must
enter in the register of secretaries the secretary's particulars such as name,
occupation, and business and residential address.
The company secretary plays a more restricted role in the company than
directors. Forthat reason, he has no general authority to bind the company by
contract. Similarly, he cannot generally borrow money on the company's behalf
unless he is specifically empowered to do so.
Of course, this is not to say that he is a mere clerk. On the contrary, he is the
chiel administrative off icer of the company with extensive administrative duties
and responsibilities. As the man responsible for the day to day administration
ol the company, he makes decisions on behalf of the company and enters into
contracts in its name in matters relating to that area. Consequenfly, the
company is taken to hold him out as having authority to bind it in respect of
contracts connected with administration of its affairs.
Chapter Six
1. Section 191(4Xa).
2. Section 191(a)(c).
3. Section 194(3).
4. See also section 11 1.
5. Section 194(5).
6. Section 191(7)(a).
7. Section 191(5).
8. Section 193(1).
9. Section 156(5).
10. Section 156(3).
11. Section 157(1).
92 - AN INTROOUCTION TO COMPANY LAW IN MALAWI
Ghapter Seven
Company Liability
A company can be convicted of crimes. trl lt can also be liable for torts. I2l And
in both cases the company's liability may be vicarious because the wrongs are
committed by its employees. Obviously this is not the place to discuss in detail
the basis on which an employer may be vicariously liable for the wrongs of his
employee. But as explained elsewere r3lthe liability will arise i{ the employee was
acting in the course cf his employment or the wrongf ul act was either calculated
to further the employer's interests or was a means of acheiving what the
employee was expressly or impliedly authorised to do. As long as these
requirements are satisfied, the company (as employer) will be liable even
though the act was beyond its capacity.tal However the object of this chapter is
to discuss how a company may be liable for wrongful acts committed by other
individuals who are not its employees. These indivduals may be its directors or
the company secretary.
"A corporation ... must act through living persons ... then the person who acts
is not speaking or acting for the company. He is acting as the company and
hismind which directs his acts is the mind of the company. There is no question
ofthe company being vicariously liable. He is not acting as a seruant, represen-
tative, agent or delegate He is an embodiment of the company ..."
"[A] corporation is an abstraction. lt has no mind of its own any more than it has
a body of its own; its active and directive will must consequently be sought in
the person of somebody who for some purposes may be called an agent, but
who is really the directing mind and will of the corporation, the very ego and
centre of the corporation ... if Mr Lennard was the directing mind of the
company, then his action must ... have been action which was the action of the
company itself ..."
Similarly in Bolton & Co. Ltd. v Graham & Sons Ltd. (1956) 14 the plaintiffs
who were tenants of certain business premises, were entitled to have the
tenancy renewed unless the landlord intended to occupy the premises them-
selves. The question was whether the defendant company which was the
landlord, had effectively formed that intention. No formal general or board
meeting had been held to considerthequestion butthe directors who managed
the company caused notice to vacate the premises to be given to the plaintiffs.
It was held that this was sufficient indication of the defendant company's
intention to oucupy the premises.
Second, a company may be liable for the acts of its directors because for
certain purposes, directors are regarded as agents of their company. As far as
those purposes are concerned, the company will be bound by their acts in
accordance with the principles of agency law as applied to companies.
Generally, a company as the principal will be bound by the acts of its agent
which are within his actual authority, whether that authority is express ol
implied. ln Hely-Hutchinson v Brayhead Ltd (1968) t8l R who was chairman
of company A negotiated with H as representative of company B in a certain
financial transaction, R acted as the chief executive and managing director of
company A although no such appointment had been made, and the company's
board was aware of and acquiesced in his activities on behalf of the company.
Subsequently R signed documents whereby company A agreed to indemnif ied
H against liabilities which the latter had incurred as part of the transaction.
Because R had no authority from his board to sign those documents, when H
claimed under them, company A denied that liability on the ground that the
documents had been signed without its authority. lt was held that although R
94 - AN INTBODUCTION TO COMPANY LAW IN MALAWI
had no express authority from the nature of his office to sign the documents,
the company had, by its acquiescence in his previous activities on its behalf,
implied that he had authority to bind it in the transaction.
A registered company may also be bound by the acts of its directors, as its
agents, because they have ostensible authority under its memorandum to bind
it in certain transactions, e.g. the issuing of shares, borrowing of money etc.
This was the view of Slade L.J. in the case of Rolled Steel Products Holding
Ltd. v British Steel Corporation (1986)tel where he said that a company holds
out its directors as having ostensible authority to bind the company to any
transactions which is within theirexpress orimplied powers. Of course if athird
party who deals with directors knows thatthey do not have powerto enter into
that transaction on behalf of the company, he cannot rely on this authority to
hold the company liable for that transaction. tt0l
What happened in this case was that the plaintitf company which was
empowered by its memorandum to lend moneyto and give guarantees lorsuch
persons, firms or companies and on such terms as may seem expedient
executed a guarantee and debenture for a debt owed by company C to a
company owned by the plaintiff's major shareholder. Company C was con-
trolled and later taken over, by the defendant. After the plaintitf paid the debt,
it sought a declaration that the debenture and the guarantee were void because
they were not in its interest and that the defendant was aware of that at the
material time. lt was held that as the transactions were authorised by the
plaintiff's memorandum, by entering into them, its directors were prima facie
acting within their ostensible authority.
However, since this provision applies where the director has been appointed,
it is evident that it will not apply where the irregularity consists in the fact that
no such appointment was made. ln Morris v Kansen (1964) Ir{ K and C were
the first directors of a company. when differences arose between them, c and
s entered into a scheme to remove K f rom his post. To this end c and s falsely
claimed that the latter had been appointed a director and an entry was made
in the company's minute book to this effect. subsequenfly, after c's appoint-
ment as director had ceased, the two purporting to act as directors appointed
M a director and the three of them proceeded to allot shares to themselves. lt
was held that the English equivalent ol section 162 could not apply to validate
M's appointment and the allotment of shares. As Lord Simonds said:
of course even if there has been no appointment, a company may still be bound
by the acts of a person who purports to act on its behalf as director if it holds
him out as having authority to act in its name. This follows from the holding in
the case of Hely-Hutchnson v Brayhead Ltd ti2r discussed above, and from
the wording of section 140(2\ which does not rule out this possibitity.
involves forgery or f raud can not create a binding obligation on their company.
However the posltion under the Companies Act is different. This is because of
section 139 which makes a company liable for the acts of its agent or officer
notwithstanding that he has acted lraudulently orforged a document. Of course
this can not prevent the company trom dismissing him or suing him to indemnify
it for the liability arising from his action. ln fact the company will be liable under
section 139 if it would be liable for the acts of that agent or officer. Therefore
if it included a provision in its articles excluding its liability for his acts, it will not
(subject to Section 343) be liable for his fraud or forgery.
However, this absence of appointment and authority will not aflect an outsider
who deals with such a person unless the outsider actually knew that the person
AN INTRODUCTION TO COMPANY LAW IN MALAWI 97
was not a director and/or that he did not have the authority to bind the company.
And the outsider's position is strengthened by the fact that he is not bound to
enquire intothe rules governing thecompany's internalmanagement belore he
enters into any transaction with a person purporting to act on its behalf. This
is illustrated by the case ol Royal British Bank v Turquand (1856) tlal from
which this rule derives its name. ln that case the company's board of directors
was authorised by the company's registered deed of settlement (the precursor
of the modern memorandum and articles of association) to borrow on bond
such amounts as should from time to time be authorised by a resolution of the
company in general meeting. The board borrowed money from a bank on a
bond bearing the company's seal. However, no resolution had been passed by
the company to authorise the amount borrowed. lt was held that since
externally the directors appeared to comply with the company's regulations,
the companywas bound bythe loan. The bankwas not bound to checkwhether
or not the resolution had been passed; on the contrary, it had 'a right to infer
the fact of a resolution authorising that which on the face ol the document
appeared to be legitimately done'.
But the rule has exceptions. First, it will not apply if the person dealing
with the company knew or ought to have known ol the non-compliance
with the company's rules of internal management.This would also seem
to be the effect ol section 140(4) which makes limitation of directors'
authority binding only on a third party who is aware of it. ln Howard v
Patent lvory Manufacturing Co. (1888;ttst the articles of a company
provided that its directors had power to borrow up to E1 ,000 on behalf of
the company without the consent of a general meeting and to borrow
above that limit with such consent. The directors themselves lent e3,500
to the company without the consent of the company's general meeting.
It was held that the loan was valid only to the extent of €1,000.
charges, it was held that the latter was liable to pay because the secretary had
apparent or ostensible authority to enter into contracts, on behalf of the
defendant, which were connected with the administration side of its atfairs.
Chapter Seven
1. General Construction Co. Ltd v Rep (1971 - 72) ALR Mal 41.
2. Makwakwa v Oil Company of Malawi Ltd Civ Cas 7711981
3. Employment Law in Malawi, Chapter 9.
4. James v Mid-Motors Nigeria Co Ltd (1978) ALR Com 119.
5. [1971] 2 AIIER 127.
6. [1915] AC 205.
7. [19s7] 1 OB 159.
8. [1e67] 3 Ail ER 98.
9. [1985] 2 WLR e08.
10. Section 140(4).
11. [1946] 1 Ail ER 586.
12. Supra., note 8.
13. De Busche v Alt (1878) I Ch D 286.
14. [1856] 119 ER 886.
15. [1888] 38 Ch D 156.
16. Farrar's Company Law, 2nd ed., p. 316.
17. Supra., note 8.
18. [1924] 't K8775.
19. [1971] 3 Ail ER 16.
20. Supra., note 5.
AN INTRODUCTION TO COMPANY LAW IN MALATVI
..'.
Ghapter Eight ,, \t-i
Enforcement of Gontrollers'
and Directors' Duties and
Minority Protection
8.1 The Rule in Foss v Harbottle
Since directors owe their duties to the company, by definition it is the company
which will suffer if any of the duties is broken. Therefore, any action to seek
redress for the breach must be brought by it, and not by any of its creditors or
members. Similarly, where something (e.9. alteration of the memorandum,
reduction of the share capital or variation of class rights) is required to be done
by the company in general meeting, no single shareholder or group of share-
holders has the right to take that action alone. And once the action has been
taken by the majority in the meeting he must, as a general rule, abide by it even
if it is not in his interest. This is usually referred to as lhe rule in Foss v
Harbottle'(1843). nt ln that case directors of a company bought their own land
for the company and paid themselves an exorbitant price for it. Two members
brought an action on behalf of themselves and all the other members of the
company except the defendants, against the directors to compelthem to make
good the loss suffered by the company as a result of the transaction. lt was held
that as there was nothing to prevent the company f rom suing the directors if it
so wished, the action would fail.
The problem, however, is that strict application of this rule may lead to
remedial action not being taken for abuse of power by the controlling
shareholders or the board of directors. This may happen because the
perpetrators of the wrong controlthe company and will use their'muscle'
to prevent the commencement of any legal action to remedy the abuse.
And they can do that by either having their conduct ratified by the
company in general meeting or using their voting power in the meeting
to have any suit brought against them discontinued.
102 - AN INTFOOUCTION TO COMPANV LAW IN MALAWI
Second, where the abuse amounts to an illegal act, the rule in Foss v
Harbottle will also not apply. Such an act would be unratifiable by the
company and since ex hypothesi the culprits would not allow any
remedial action to be brought by the company, the redress will have to
be sought by individual shareholders.
Third, the rule in Foss v Harbottle will also not apply where the wrong amounts
to a non-@mpliance with the company's procedure, such as the requirement of
a special resolution. The argument here is that if the law insisted that remedial
action in such cases should be brought by the company alone, it would in effect
be giving licence tothose in control of companiestoviolate company procedure
with impunity. ln the case of Baille v Oriental Telephone & Electrical Co. Ltd
lal directors of the respondent company were also directors of a wholly owned
Fourth, a shareholder will also be allowed to bring an action for the controllers'
or directors' abuse which constitutes 'fraud on the minority'. Here 'fraud'
includes appropriation by wrongdoers of money, property or advantages
belonging to the company or in which other shareholders are entitled to
participate. And the plaintitf's case will be in a representative form (i.e., he will
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 103
It should be noted that the 'fraud' does not lie in the character of the act or
transaction giving rise to the cause of action but in the controlling shareholders'
or board of directors' use of their voting power. ln Estmanco Ltd v Greater
London Council t6l the defendant formed the plaintiff company to manage a
block of 60 flats. lt was agreed by the two that the flats would be disposed of
by sale. The company had 60 shares all of which were held by the defendant.
A sale of each flat entitled the purchaser to one of the shares. However all
voting rights remained with the defendant until allthe flats had been disposed
of . Subsequently after 12 of the flats had been sold the defendant unilaterally
ordered that the remainder should not be sold but be let out to tenants. When
the company sued it for breach of the agreement on the mode of disposing of
the flats, it used its voting power to direct the company's directors to discon-
tinue the action in the company's name. lt was held that this use of voting power
by the defendant to bring advantage to itself and disadvantage to the minority
12 shareholders represented fraud on the latter' According to Megarry, V-C,
'no right of a shareholder to vote in his own selfish interest entitles him with
impunity to injure his voteless fellow shareholders by depriving the company
of a cause of action and stultifying the purpose lor which the company was
formed'
8.3 Statutoryexceptions
8.3.1 Court injunction under Sections 22(2)
It was shown in Chapters 2 and 5 that section 22(1) prohibits a registered
company to:
(a) carry on any business or exercise any power which the company is
restricted by its articles or memorandum from carrying or exercising; and
(b) exercise its powers in a manner which is inconsistent with the company's
articles or memorandum.
Now if while exercising those pov/ers they contravene Section 22(1),ilwill not
be open to the company to take remedial action; that right is available only to
individual members. Section 22(2) empowers any one of them to apply to the
court for an injunction to prohibit the act or contravention. ln other words,
although it is the company which may in fact suffer loss as a result of the
contravention, the company in general meeting cannot proceed against the
culprits. lt is up to individual shareholders to do that.
(a) the affairs of the company are being conducted or the powers of directors
are being exercised in a manner which is oppressive to one or more or
the members or disregards his or their proper interests as members of
the company; or
(b) some act of the company has been done or is threatened or that some
resolution of the members or any class of them has been passed or is
proposed which unfairly discriminates against or is otherwise unfairly
prejudicial to one or more of the members.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 105
Thus the court's jurisdiction here is very wide. But specifically, relief will be
granted under this provision if the conduct complained of is oppressive or
unfairlydiscriminatoryor prejudicial, to the minority ordisregardsthe minority's
interests as members of the company. And that may include anycontravention
of Sections 22(1). This is because according to Section 22(4), any breach of
that provision may be asserted in any proceedings under Section 203. Of
course for section 203(1)(a) to apply, there must be a continuous process, as
opposed to an isolated incident, of abuse. On the other hand, there is no such
constraint on the application of section 203(1Xb).
What is 'oppressive' conduct is not def ined by the Act. However at common law
it is taken to import that the complainant is being constrained to submit to
something which is unfair as a result of an overbearing act or attitude of the
defendants. As Lord President Cooper said in Elder v Elder t8t:
where similar relief was sought. What happened was that a holding company
and its subsidiary 6ngaged in the same class of business. Subsequently, the
- former started running down the subsidiary's business by cutting off supplies
to it. The result of this policy was that the business of the subsidiary came to
an almost complete standstill and the value of it shares declined. Consequently
the subsidiary petitioned for an order that the holding company should buy its
shares. lt was held that the holding company conducted the affairs of the
subsidiary in a manner which was oppressive to the minority and, therefore,
should buy their shares at fair price.
"[A] member of a company will be able to bring himself within the section if he
can show that the value of his shareholding in the company has been seriously
diminished or at least seriously jeopardised by a reason of a course of conduct
on the part of those persons who have had de facto controlof the company,
which has been unfair to the member concerned. The test of unfairness must
... be an objective, not a subjective, one. ln other words, it is not necessary for
the petitioner to show that the persons who have had de facto control of the
company have acted as they did in the conscious knowledge that this was
unfairto the petitionerorthatthey were acting in bad faith;the test... is whether
a reasonable bystander obseruing the consequences of their conduct, would
regard it as having unfairly prejudiced the petitioner's interests."
Now the fact that the prejudice must be caused by the conduct of the board or
the controlling shareholders means that if it arises from the petitioner's own
wrongdoing, section 203 will not be available to him. ln Re a Companyltztgye
of the directors of a private company oflered to buy out the petitioner who was
a shreholder and director of the company. He refused the offer and petitioned
for the winding up of the company on the ground that it was just and equitable
to do so. lt was held that even if he had been unfairly excluded lrom participating
in the affairs ol the company, his petition would not be granted because he had
acted unreasonably in refusing the olfer for his shares.
AN INTRODUCTION TO COMPANY LAW IN MALAWI 107
Besides, the action complained of must affect the petitioner in his capacity as
a member of the company. ln other words, for example, where the conduct
alleged to be unfairly prejudicial affects his interests in the company, those
interests must vest in him qua member and not arise ex contractu or by reason
of some principle of law or legal procedure. Thus in Re a Company trsl where
the company refused to buy the shares of a deceased minority shareholder or
to propound a reconstruclion scheme to facilitate realisation of the shares and
his excutors sought relief under the English equivalent of section 203(1)(b) on
the ground that the refusal was unfairly prejudicialto his interests, it was held
that the relief would not be granted at all. According to Lord Grantchester, the
right of a memberto have his shares bought by his company arises as a matter
of agreement between him and the company, and not by reason of his
membership. Similady, when a scheme is proposed it will confer certain rights
on a member as a party to it. Consequently refusalto propose a scheme cannot
prejudice him in his capacity as a member of the company.
As shown by the cases cited above, the relief which the court will grant under
Section 203 is generally to remedy the matter complained of by making such
order as it thinks fit Ilal More particularly, however, it may:
(a) direct or prohibit any act or cancel or vary any transaction or resolution;
or
(c) provide for the purchase of the shares of any member by the company
for other members. 116I
the plaintiff and N made it unjust or inequitable for N and G to rely on those
rights.
The minority could also invoke section 213(1) if the company contravenes
section 22(1). This is because section 22(4) allows any shareholder to assert
that contravention in any proceedings brought under Section 213.
However, it should be noted that the court will not grant the petition under
section 213(1) (f) if the petitioner has another remedy (either under any of the
exceptions to Foss v Harbottle or section 203) and it is unreasonable for him
to insist on the winding up of the company instead of pursuing that other
remedy. t18l ln The Matter of Mapanga Estates Ltd (1 988)nsl the company had
two shareholders who held 49% and 51% of its shares respectively. Subse-
quently serious differences arose between them so that it became impossible
to carry on the business of the company. As a result the minority shareholder
sought a court order for the winding up of the company on the ground that it
would be just and equitable if that was done. lt was held that since the court's
power under section 213 (i) (f) is discretionary, the court would not order the
winding up of the company. According to Mtegha, J. the company was viable
and prosperous so that it would not be in the shareholders' interest to wind it
up. lnstead he ordered the petitioner to sell her shares and gave the f irst option
to buy them to the other shareholder.
Chapter Eight
1. [1843] 67 ER 18e.
2. Shuttleworth v Cox Bros Ltd 1192712 KB 9.
3. Section 8(3).
4. [1e1s] 1 Ch 503.
5. [1874] LR 9 Ch App 350.
6. [1982] 1 AIIER 437.
7. [1919] 1 Ch 290.
8. [1e52] SC 4e
L [1958] 3 Ail ER 689.
10. [1958] 3 Ail ER 66.
11. [1e83]BCLC273
12. [1983] 2 All ER 36
13. [1983] 2 Ail ER 854
14. Section 203(2\.
15. Supra., note 8.
16. Supra., note 10.
17. 11972J 2 Ail ER 492.
18. Section 216(3).
19. Civ cas 109/1988.
110 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Chapter Nine
Company Finance -
Share Capital
It is axiomatic that a company will need finance to carry out its business
activities. Usually, this will come from capital contributed in exchange for
shares, long-term loans, bank overdrafts, credit in the form of deferred payment
for goods and seruices, and retained profits. Of these, only share and loan
capital are specifically governed by the Companies Act. lt is, therefore, with the
two that this chapter and next are concerned.
9.1 Share
As indicated in Chapter 1, the capital of a company limited by shares must be
divided into shares of a f ixed amount. tll Section 2 def ines 'sl'iare' as share in the
share capital of a body corporate. But more simply a share can be described as
a unit of account for measuring a member's interest in a company which can be
transferred from one person to another gratuitously orforvalue. Each share will
have a monetary value assigned to it which shows the size of the unit of account.
This monetary value, also called the 'nominal value' of the share, is what
the company will be entitled to demand as contributed capital on that
share. ln other words, it is what the holder of the share is liable to
contribute to the company's capital. Consequently, if on the winding up
of he company the whole nominal value is paid up, he cannot be called
upon to pay anything towards the settlement of the company's debt and
liabilities. On the other hand if part of that money remains unpaid, it is
the outstanding amount which he must pay to the company lor the
settlement of the debts and liabilities.
As shown below under paragraph 9.4, after allotting any of its shares, a
registered company is required to send to the registered holder of each share,
a share certificate. Besides, the company must send to the registrar for
registration a return of allotments a month after they are made. t2l The return
must show the number and amount of the shares allotted and the full name,
addresses and occupations of the allottees.
112 - AN INTBOOUCTTON TO COMPANY LAW IN MALAWI
However, there is a limit to this rule. According to Section 53, the certificate is
only prima facie evidence of the holder's title to the shares shown on it. His
entitlement to the shares and his rights in respect of them depend not on the
certificate but on the entry of his name in the company's shareholder register.
ln other words, the certificate will merely represent that he is, as at the date of
the certificate, the holder of the shares with or without any outstanding liability
on them. Thus, it will not, for instance, say anything about his continued
ownership of the shares after the issue of the certificate. Consequently, if any
person wishes to act on it after that date, he does so at his own risk.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 113
Besides, il the certificate is forged, the company can deny the holdeds title to
the shares shown on it. ln Ruben v Great Fingall Consolidated (1906) n 16s
defendant's secretary applied to the plaintiffs for a loan to buy shares tn the
defendant. The plaintiffs arranged with a bank to advance money to the
secretary after receiving a share certificate showing that they were registered
in the company's share register as transferees of shares transferred to them
by him. Although on the lace of it the certificate was in order, it was in fact a
forgery by the secretary. Since the company had never held him out as having
authority to do anything more than delivering share certificates when duly
processed to shareholders, it was held that the company was not estopped by
the certilicate lrom disputing the plaintiff's claim.
Arguably, this second characteristic makes a share warrant an easy target for
the fraudulent. No wonder, therefore, that the Companies Act restricts the
issue of share warrants. According to Section 45, no company can issue bearer
share warrants.
One result of this is that the receipt by a person in whose name a share stands
in the register of members, is a valid and binding discharge of the company's
responsibility for any dividend or other payments in respect of that share. tel
Another is that the company must send notice of its meetings to the shareholder
on its register of members, and not disregard him in favour of the beneficial
ownerof the shares concerned aswas done in Musselwhitev C.H. Musselwhite
& Son Ltd. t10l which was discussed in paragraph 4.3.3. This principle was
summerised by Lindley L.J. in Societe Generalede Paris vTramways Union
Co. Ltd. (1984) llrl where he said:
"lf a shareholder in a company governed by the Companies Act ... does not
transfer his shares, but agrees to transfer them or to hold them upon trust for
another ... there can be no doubt as to the validity of the agreement , nor as to
the effect of it as between the parties to it . As between them the agreement or
trust can be enforced; but as regards the company the shareholder on the
register remains shareholder still . He is the person to exercise the rights of a
shareholder, for example, to vote as such to receive dividend as such , and to
transfer the shares. On the other hand , he ... is liable for calls and to be put on
the list of contributories if the company is wound up. The person having the
benef icial interest in the shares has, as against the company, no right to them."
Now although companies have the freedom to create more than one class of
shares, the shares cannot be issued unless the issue is authorised by the
company's memorandum or articles. lndeed where the shares are new, their
issue must be sanctioned by an ordinary resolution. lr2l Moreover, rights
attached to any class of shares can be varied by either the written consent ol
three-quarters of the holders of shares of that class or the sanction of a special
resolution passed at a separate general meeting of the holders of the shares
of that class. Ir3I
by shares can issue. Thus if a company has one class of shares, these will
necessarily be ordinary shares. ln fact even where the company has more than
one type of shares, it must have at least one ordinary share. Consequently,
unless a company issues deferred shares (which are discussed below),
ordinary shares willform the residuary class in which is vested everything after
the special rights of other classes have been satisfied.
9.7.3 Preferenceshares
The essentialcharacteristic of a preference share is that its holder has priority
in the receipt of dividends in any linancial year. He may also have priority in the
return of capital on the company's winding up. However, this would have to be
expressly stated in the articles. This is because it does not automatically follow
that merely because a shareholder is entitled to priority in the distribution of
dividends, he will also have priority in the distribution of surplus assets on
winding up. ln Re Syston & Thurmaston Gas, Light & Coke Co Ltd (1937)1141
there was no provision in the company's memorandum or articles for the
distribution of surplus assets in the event of a winding up. Subsequently, when
the company's undertaking was sold and it was wound up, a question arose as
to the distribution of assets remaining after payment of the company's debts
and amounts paid up on shareholders' shares. lt was held that the assets
should be distributed paripassu between the shareholders.
And in the case of dividends he has priority if the company decides to pay a
dividend to its members; if it does not make that decision, he cannol compel
it to do so. ln Bond v Barrow Haematite Steel Co. Ltd. (1902;ttst16" company
decided not to pay its preference dividend because it had suffered losses and
the value of its assets had fallen. Preference shareholders contended that
since the company had reserves of f240,000 f rom which it could have declared
the dividend on their shares, it should make the payment. lt was held that the
court would not override the directors'decision.
116 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
(b) the company's articles expressly provide that in the eveni of the company
going into liquidation, the arrears are to be paid prior to the return of
capitalto the company's members.
(a) any restrictions on the number of shares which eligible individuals may
have the right or option to acquire;
118 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
(e) the voting and dividend rights to which holders of the shares may be
entitled.t2ol
Now just like shares, these rights or options cannot be issued free of charge.
On the contrary, consideration must be paid forthem. According to the Act the
consideration can be lixed by either the company's directors or (if they are
interested in the issue) the general meeting. And in the absence of f raud, their
decision as to the adequacy of the consideration will be conclusive.t23l
However, the transfer cannot be registered without the delivery of the instru-
ment of transfer to the company. Isl Moreover, Section 50(2) allows the
company to refuse to register any transfer which is not accompanied by the
appropriate share certif icate.
9.10.1 Prospectus
The invitation to the public to take shares, in a company will involve issuing a
document which provides information abaut the company and shows the
advantages of investing in it. This document is called a'prospectus'. The Act
does not define the word. However, its meaning is generally regarded as
including any notice, circular, adveftisement or any other invitation offering
shares to the public.
Section 167 (1) renders unlawf ul any invitation to the public to take shares of
a registered Company unless six months before it is made a prospectus
relating to the invitation is registered by the registrar. Besides every person to
whom the invitation is made must be supplied with a copy of the prospectus.
Of course generally section 178(1) prohibits issuing a prospectus in respect of
equity shares of a company unless all such shares carry an unrestricted right
to vote at the company's general meetings and, on a poll, a constant number
of votes which is the same for each share.
b) a full description of the securities which the public are invited to acquire;
Moreover section 167(1) requires that the prospectus should be registered six
months before it is issued to the public. lf it is issued by or on behalf of a
company in respect of the company's shares or debentures, the copy sent for
registration must be signed by every person named in it as the company'
director or his agent.t$l Besides, it must be a true copy of the registered one
and show the date of registratiol.ts4. :
in response to it until the expiry of 10 ten days after the first publication of a
registered prospectus in respect of the invitation.torAnd any application, offer
or acceptance in response to the invitation is revocable at any time before the
end of that period.
(b) made to any section of the public comprising more than fifteen persons;
or
(c) made to any person so that he may renounce or assign his benefit of it
or of, any shares to be obtained under it to any other person.
similarly, the issue of any form of application for shares or debentures will be
deemed to be an invitation to acquire those shares.rarrAgain an allotment or
agreementto allot shares mayalsoconstitute an invitation tothe public to make
an offer lor shares if a company allots or agrees to allot the shares to any person
with the view that the public should be invited to acquire them. ln the absence
of evidence to the contrary, this will be considered to be the case where within
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 123
six months after the allotment or agreement he invites the public to acquire the
shares or he makes the invitation before the company has received the full
consideration forthe shares. ta2lon the other hand an invitation which in allthe
circumstances is of a domestic concern for those making and receiving it or is
made by or for a company exclusively to its existing shareholders,
debentureholders or employees on condition that they cannot renounce or
assign the benefit of it or of the shares to be obtained under it in favour of any
person, will not be deemed to be made to the public.lol :
(ii) every director of the body corporate making the invitation when the
prospectus was made;
(iii) if the invitation was made by the company to whose shares or debentures
the invitation relates,
(b) every promoter of the company who was a party to the preparation
of the prospectus; and
(iv) every person who consented to the publication in the prospectus of his
stalement as an expert.
(b) an agreement to secure prolits to any of the parties from the yield of
securities or by reference to fluctuations in the value of securities.
However, the plaintiff may be prevented from rescinding the contract by such
bars to rescission as lapse of time, aflirmation and impossibility ol restitutio in
integrum. ln Seddon v NE Salt (1905) t44 a company's net trading loss was
represented as not exceeding 8250. On the faith of this representation the
plaintifl bought shares in the company. Subsequently, however, he discovered
that the loss was much biggerthan €250. Yet instead ol taking immediate steps
to rescind the contract he continued to run the company for another three or
four months. lt was held that he could not rescind the contract because, rnler
alia, by continuing to run the company after he had information which should
have led him to rescind the contract, he affirmed the contract.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 125
(b) any interest, privilege, right, option, warrant or receipt in respect of issues
referred to in (a); and
Where the securities are traded in the capital market, the Act imposes
three more requirements. The disclosure referred to above must include
information about the issuer and the issuer's business.tael Of course the
issuer must ensure that no unauthorised person has access to that
information before it is made Public. tsot '
Secondly, the issuer must furnish true, complete, prompt and continuous
disclosures to th6 market by providing copies of the material information to
brokers, dealers, market makers, underwriters, investment advisers and
portfolio managers. tsrl The issuer must also prepare and file with the Reserve
Bank and every registered self-regulatory organisation trading in securities, of
any elections, resignation, vacancy or change in directors, chief executive
officers, managers or auditors. t52l
(a) etfecting a purchase or sale of any security which does not involve
any change in the beneficial ownership of the security in that a
person associated with the purchaser or seller in relation to the
security holds can interest in the security after the purchase or sale;
or
Now where the consideration is not in the form of cash, the company's valuation
of the property, goodwill etc constituting the consideration will be considered
conclusive as to its adequacy. ln other words, the consideration will not be
inadequate (and therefore constituting an allotment of shareg at a discount)
because an independent valuerwould have placed a value on it which is lower
than the company's valuation. However if the inadequacy is apparent on the
face of the transaction or there is evidence of f riend or no attempt to determine
whether the consideration is adequate, the company's valuation will not be
conclusive and may be challenged. ln Re Wragg Ltd (1897)tsethrys people sold
their business and its assets to a newly-incorporated company at t46,300. The
company paid for the purchase partly by issuing €20,000 worth of shares and
partly bycash and debentures. when thecompanywas wound upthe liquidator
contended that the value of the business had been overstated because some
ol the assets valued at €27,000 were worth only c1 5,000 in the market. For that
128 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
"lt has ...never yet been decided that a limited company can not buy property
or ...seruices at any price it thinks proper, and pay for them in fully-paid up
shares. Provided a limited company does so honestly and not colourably and
provided that, it has not been so imposed upon as to be entitled to be relieved
from its bargain, it appears to be settled ... that agreements by limited
companies to pay for property or seruices in paid-up shares are valid and
binding on the companies and their creditors". t60l
Further on he added:
"lt is not law that persons can not sell propefi to a limited company for fully
paid-up shares and make a profit by the transaction. We must not allow
ourselves to be misled by talk of value. The value paid to the company is
measured by the price at which the company agrees to buy what it thinks it
worth its while to acquire.'t6u
Chapter Nine
1. Section 6(1)(c).
2. Section 59(1).
3. Section 56.
4. Section 62(1Xb).
5. Section 52(1).
6. [1900] 1 Ch 833.
7. [1e06] AC 43e.
8. Section 36(1).
9. Section 36(3).
10. [1962] 1 Ail ER 201 .
11. [1884] 14 QBD 424.
12. Section 149(1)-1.)
13. Section 48(3).
14. [1937] 2 Ail ER 322.
15. [1e02] 1 Ch 3s3.
16. Section 62(5).
17. Section 61(2).q'
18. Section 58(2).
'19. Section 58(3).
20. Section 58(4).
21. Supra., note 18.
22. Section 50(3Xb).
23. Section 58(5).
24. Section 50(3).
25. Section 50(4).
26. Re Bede Stream Shipping Co Ltd [1917] j Ch 123 and Re Smith &
Fawcett Ltd [1924]Ch 304.
27 . Section 43(1).
28. Article 10, Table A.
29. Section 49(3).
30. Section 49(1).
31 . Section 51(1).
32. Section 51(2).
33. Section 51(3).
34. [1905] 1 Ch 646.
35. Section 54(3).
36. Section 170(2).
37 . Section 167(1)(c).
130 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
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Chapter Ten
Maintenenance of
Share Capital
Apart from enabling a company to carry on its business activities, share capital
provides the means of discharging its debts and liabilities on winding up. As a
matter of fact, share capital may be the only fund available to a company's
creditors in that event. Forthese reasons, a company must handle and dealwith
its share capital in such a way that as much of it as possible is available to meet
theirfinancialclaims. ln effectwhatthis implies is that unless diminished through
the company's ordinary business operations, assets representing its shares
capital, including any outstanding liability on issued shares, must not generally
be reduced except as allowed by law. To ensure that, the law provides the
following devices.
But Section 72(11 may produce strange results if taken too f ar. For it may
AhI INTRODUCTION TO COMPANY LAW IN MALAWI - 133
mean that if a person enters tnto a genuine arm's length transaction with
a company whereby the latter pays money to him which he later uses to
buy its shares, it could be guilty of providing f inancial assistance to him
to purchase its shares contrary to Section 72(1). This absurdity is
highlighted by Belmont Finance Corporation v Williams (No. 2)tst
that case a person wished to purchase the shares of the plaintiff'n
company. Because he did not have the money to do so, the company's
directors arranged to buy f rom him issued shares of another company
of which he was a shareholder. He then used the money f rom the sale
of the shares to buy the f irst company's shares. lt was held that the first
cornpany had provided him f inancial assistance to purchase its shares
contrary to the English equivalent of Section 72(11.
(a) lend money in the course of its business where money-lending is part of
that business. ln Steen v Law (1963)tal for reasons of tax, a company
decided to become a subsidiary of another company. Thereafter, the
subsidiary's shareholders sold their shares to the holding company which
got the money used to pay for the shares from the subsidiary. The coutt
found that the latter clearly gave financial assistance for the purchase of
its own shares. However, the question was whether the lending of the
money was part of the subsidiary's ordinary business so as to fall within
the English equivalent of the f irst proviso to Section 72(1).lt was held that
since the subsidiary did not in tact carry on the business of lending
money, the loan to its holding company was not covered by the proviso'
(b) provide money as part of a scheme for the purchase of fully paid-up
shares in the company by or for the benelit of employees of the company
and
(c) grant loans to its employees to enable them purchase fully paid up shares
in the company which they can hold as beneficial owners.
This also accounts for the prohibition by Section 57(1) of a body corporate to be
a member, or to appoint a nominee as a member of its holding company and the
transfer or allotment of shares in the latter to the subsidiary. The idea behind it is
clearly to prevent a registered company circumventing Section 73(1) by having
a subsidiary to buy its shares. And here it should be recalled that a holding
company is a member of its subsidiary so that if the latter were allowed to buy
the lormer's shares, the subsidiary may abuse that permission to purchase its
own shares f rom its holding company. Of course notwithstanding the provision
in Section 57(1), a subsidiary company may become a member of its holding
company by reason of its being a personal representative of a deceased
member or trustee of the shares of the holding company. t6l
One exception to Section 73(1) is where a company purchases its own shares
lunder a court order to relieve an unfairly prejudiced minority.Pl Similarly, a
company may purchase its own shares without contravening Section 73(1)
AN INTRODUCT]ON TO COMPANY LAW IN MALAWI - 135
lf the shares are redeemed at a premium, the premium must be paid out of the
company's profits or share premium account. Of course the premium will be
paid out of this account only if the shares were initially issued at a premium. ln
other words, il no premium was paid then on the shares, their redemption will
have to be paid out of the company's profits.
136 - AN INTBODUCTION TO COMPANY LAW IN MALAWI
'[A nmpny limited by shares] is fomd on the pnrrciple of having the liability of its
menhe rc limited to the amou nt u npaid upon tlei r shares. That musl mean that the liabi lity
of a membercontinues so bng as anything rcnnins unpid upon his shares. Nothing
but pynent, and pynent in full, an put an erd to the liability ..."
ln this context words'discount or allowance' in effect mean the same thing, that
is, a rebate on what wouid justly be due from the allottee on the shares allotted to
him. Now so long as the allottee pays the full nominal value for the shares, they
will not have been allotted to him at a discount nor will the company have paid a
commission on them simply because their market price at the time of allotment is
higher than their nominal value. ln Hilder v Dexter (1902) Irsl a company offered
f 1 shares at par to the appellant and others, with an option to take fufther shares
at par within a cedain time. The appellant subscribed for the shares and when
subsequently their market price rose to a premium, he exercised his option to take
furthershares. On thequestion whetheror not by not allottingthesefurthershares
to him attheir market pricethecompany had applied its capital'directly orindirectly
in payment of a commission, discount or allowance' within the meaning of the
English equivalent of section 60(2), it was held that the company had not. ln the
words of Lord Davey:
10.5.1 Allowablecommission
A company may have an offer of its shares underwritten by someone. The
effect of this will be that the underwriter will agree to take any of the shares
which are not taken by the offerees. ln exchange for that agreement the
company will normally pay the underwriter a percentage of the price at which
the shares are being offered. This payment is called an underwriting commis-
sion. Now according to section 60(1) such a commission is payable by the
company only if:
138 . AN INTROOUCTION TO COMPANY LAW IN MALAWI
(c) the shares in respect of which the commission is paid are offered to the
public and the rate of the commission payable on them is disclosed in the
prospectus containing the offer;
(d) where the shares are not offered to the public, the rale of the commission
is disclosed in a statement sent to the registrar for registration before
payment of the commission and
Besides, as section 60(2) shows, the payment must comply with section 72.
Any commission which does not comply with these requirements is unenlorceable
and renders the paying company liable to a fine under section 60(5). ln Booth v
NewAfrikander Gold Mining Co (1 903;net" entered into an agreement
with certain persons for the sale to them of"ompany
the company's undertakings. The
purchasers were supposed to form acompanywhich would buythe undertakings
in retum for the allotment o{ its shares to members of the old company. As
consideration for the agreement, the purchasers agreed to accept allotment in the
new company of any shares which would not be required by the members, and
e 12,300 in cash. When the new company paid this sum to them the payment was
challenged onthe groundthatitamountedtoacommission whichcontravened the
English equivalent of Section 60(1). lt was held that the payment was indeed a
commission and that since there had been no offer of the new company's shares
to the public for subscription and the !12,300 was not a rate which had been
disclosed in any prospectus, the payment was caught by the prohibition in the
English equivalent of Section 60(2).
amount standing to the credit of that account to write off the discount. ln fact
according to section 61 (2) the account can also be applied to write off commission
paid on the issue of company shares.
required to pay for each one of them an amount which exceeds its nominal
value. Thus, where shares are issued for an overualued non-cash consider-
ation, the excess will be treated as a premium.trel
Once the transfer is made, the share premium account wiltbe treated as if it
were the company's paid-up share capital. Thus, no dividend can be paid out
of it and unless the company complies with the prescribed procedure for the
reduction of share capital, it cannot reduce the account except if the purpose
is to:
Lastly, although a registered company can pay dividends out of profits made
in previous years, it is not obliged to recoup losses from those years before
distributing a dividend in the current year. ln othei words, there is no legal
requirement to accumulate realised losses and deduct them f rom distributable
profits in any accounting period. For this reason, as long as in any given year
the company has distributable profits, it can pay out a dividend even though
there are unrecouped losses from previous years. Similarly, a company is not
required to ensure that there are no losses on its {ixed capital account before
it pays out a dividend. Consequently, it can make the distribution without
deducting such losses, if any, from its net realised profits in the year of
distribution. ln Ammonia Soda Co. Ltd. v Chamberlain (1918;tatt" manufac-
turing company which had been incurring losses on its trading account
subsequently made profits. lts directors set off the losses against an apprecia-
tion of the company's capital assets as ascertained by two of the directors who
were not expert valuers. The directors then paid dividends out of the subse-
quent net profit without any further provision for replacing the losses. lt was
held that there was no rule of law lorbidding a company lrom setting off an
appreciation in the value of its capital assets, as ascertained by a bona fide
valuation, against losses on the revenue account. Besides, the court went on,
company law does not impose any obligation on a limited company that it shall
not distribute as dividend the clear net profits of its trading unless its paid-up
capital is intact or until it has made good all losses incurred in previous year's.
According to Peterson J., this is because:
"lf during the year there is no balance to the credit of profit and loss, any
dividend which is paid must be provided out of the paid-up capital and any
payment must reduce the paid-up capital ... Such a payment is clearly a
reduction of the paid-up capitaland is ultra vires. But where a company had
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 143
made lasses in past years and then makes a profit out of which it pays a
dividend the question is a different one. Such a dividend is not paid out of paid-
up capital. lf it were, the paid-up capital would be still further reduced by the
payment. ln fact the assets representing the paid-up capital remain the same
or of the same value as before the payment of the dividend. lt may be that the
balance to the credit of profit and loss accaunt ought to be applied in making
up tost capital ...But such a payment does not involve a reduction of capital ..."
Once the capital is reduced, the share capitalclause in the company's memoran-
dum will have to be altered accordingly. Besides, the company must apply to the
High Court lor an order confirming the reduction. And unless confirmed, the
special resolution approving the reduction will not be effective.tsl
capital reduction, the court's role is not simply to endorse the company's
decision. On the contrary, it is to considerwhetherthe reduction procedure has
been complied with and to determine the effect of the proposal on the rights of
the company's shareholders and creditors. lf the reduction involves either
diminution of liability in respect of partly paid-up shares or payment to any
shareholder ol paid-up share capital, its effect will be to reduce the amount
available for the settlement of the company's debts. Naturally the company's
creditors will be interested in the reduction. For that reason, the court will give
them an opportunity to express their objection, if any, to the proposal.lsAl Of
course if thecourt so wishes, it can dispense with any creditor's consent to a
reduction of share capital by securing the company's payment ol his debt or
claim.t3sl And even where the proposal does not entail a reduction of the
company's ability to pay its debts on winding up (i.e. because it involves mere
cancellation of paid-up share capital which is lost or not represented by
available assets) the court may allow the creditors to object to it. However for
that permission to be granted, they must give very strong reasons lor wishing
to object to the reduction.This is because such a reduction will not adversely
affect their interest in the company's share capital.
As far as shareholders are concerned, the court will be interested to see that
the reduction does not violate their rights. Thus where the reduction is in the
form of paying off excess paid-up share capital it may not be confirmed if
preference shareholders are not paid in full before other shareholders.This is
because usually preference shareholders will be entitled to priority in the return
of contributed capital on the company's winding up and the court will not want
to see that deleated by a payment of the capital before winding up. ln Re
Chatterly-Whitfield Collieries Ltd (1948) t37150% of the company's share
capital comprised ordinary shares and the other 50%, preference shares. As
a result of the nationalisation of its colliery undertaking, the company decided
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 145
to reduce its capital which was now in excess of the company's capital needs.
The reduction which was approved by a special resolution involved returning
to preference shareholders the whole capital paid upon their shares. Some of
the preference shareholders objected to the reduction on the ground that by
singling thenn out for repayment first, it was unfair in that it deprived them of the
opportunity of participating in the distribution of surplus assets on the company's
winding up. lt was held that on the construction of the company's articles,
the preference shareholders were not entitled to participate in that
distribution; their entitlement was simply to priority in the repayment of
capital. For that reason, there was nothing unlair in the proposed
reduction since they were entitled under it to be repaid their contributed
capital before ordinary shareholders.
This case should be contrasted with Re Old Silkstone Collieries Ltd (1 954).p8l
Heretoo the company's colliery undertaking was nationalised.While waiting for
the assessment and payment of compensation, the company carried out two
reductions of its preference share capital. The reductions which involved
partial repayment to prelerence shareholders of their contributed capital were
approved by the shareholders on the company's assurance that once the
compensation was paid by the government for the nationalisation, they would
be entitled to claim the same adjustment of their interests as if there had been
no reduction of their capital. Subsequently, without their consent, the company
procured the passage of a resolution authorising repayment to them ol the
remainder of their contributed capital. lt was held that the court would not
sanction this third reduction because by completely extinguishing their share
capital in the company the proposal made them lose the right (given to them
by the two earlier reductions) to participate in the compensation awaited from
the government.
Similarly, where the reduction involves variation of anyclass rights the court may
not sanction it if it is not approved by that class of shareholders or if the approval
given is not in the bonafideinlerest of the class. ln Re Holders lnvestment Trust
Ltd (1971) t3et the company proposed a reduction of its capital by cancelling its
redeemable cumulative preference shares and allotting to their holders the same
nominal amount of unsecured loan stock redeemable later than when the shares
would have been redeemed. The scheme was authorised by a special resolution
of the company and approved by a special class meeting of preference sharehold-
ers. Many of the shareholders voted against the reduction while others abstained
from voting. Nevedheless it was approved by the requisite majority because
trustees of the trusts which held g0% of the shares supported it on the ground that
,T46 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
as holders ol52Vo of the company's ordinary shares they stood to gain from the
reduction. lt was held that as the trustees did not vote forthe reduction in the bona
fide interest of the general body of preference shareholders (and the scheme was
unfair in that its advantages fell substantially short of compensating preference
shareholders for the postponement of the redemption date of their securities), the
court would not sanction it.
Of course the mere fact that the reduction does not provide equal treatment to all
shareholders of the same class in that it involves paying off some and leaving the
others unpaid, does not in itself mean that the reduction is unfair so that the court
should refuse to sanction it. This is because the reduction which requires the
court's confirmation under section 68(2) is one which involves inter alia 'lhe
payment to any shareholder of any paid-up share capital'. And these words do not
rule out confirmation by the court of a reduction which provides for differential
treatment of shareholders o{ the same class. ln British & American Trustee
Corporation v Couper (1894) tel a company which had been carrying on
business in England and the United States decided to discontinue its American
business. As part of the decision a special resolution was passed which provided
for the reduction of the company's share capital by paying otf the shares held by
the American shareholders. One ol the company's shareholders objected to the
proposal on the ground that it entailed unequaltreatment of shareholders with
similar rights. lt was held that although the reduction did not provide for uniform
treatment of shareholders whose rights were similar, it would nevertheless be
confirmed because there was nothing unfair about it. According to the court, the
correct interpretation of the quoted words in section 68(2) is that as long as there
is nothing unfair and inequitable in a share capital reduction, there is no reason why
a company limited by shares should not extinguish some of its shares without
dealing in the same manner with all other shares ol the same class.
Now once the court is satisfied that the reduction safeguards the shareholders'
and creditors' rights and is fair, it will confirm the proposal on such terms and
conditions as it thinks f it. tall Thereafter the company must send to the registrar lor
registrationthe courtorderconlirmingthe reduction and a minute approved bythe
court which shows:
Chapter Ten
1. [1e00] 1 QB 88.
2. [1e75] 1 Ail ER 84e.
3. [1980] 1 Ail ER 393.
4. [1963] 3 Ail ER 770.
5. [1887] 12 App Cas 409.
6. Section 57(2).
7. Section 203(2)(c).
8. Section 62(1)(a).
9. Section 62(1Xd).
10. Section 62(5).
\l'
11. Re wragg Ltd [1897] 1 ch 796 and shearer v Bercain infra., note 20.
12. [1897] AC 2ee.
13. [1892] AC 125.
14. Section 60(2).
15. [1902] AC471.
16. [1903] 1 Ch 295.
't7. [1895] 2 QB 604.
18. [1918] 2KB 454.
19. Shearer v Bercain infra., nole 20.
20. [1e80] 3 Ail ER 29s.
21. Section 61(2).
22. Bond v Barrow Haematite Steel Co Lld infra., note 25.
23. Section 75(1).
24. Section '17 of the Banking Act.
25. see also Bond v Barrow Haematite steelco Ltd [1902] 1 ch 353.
26. Article 91, Table A.
27. [1886] 35 Ch D 502.
28. See also Moxham v Grant Supra. note 1.
29. [1961]Ch 335.
30. Ammonia Soda Co Ltd v Chambertain [1918] 1 Ch 266.
148 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
,I-
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 149
Gompany Finance -
Loan Capital
11.1 Power to borrow
Apart from issuing shares, a company may also raise capital by borrowing
money. Previously, a registered company could not borrow money unless it had
express power under its memorandum to do so. The harshness of this rule was
later mitigated by granting a trading company implied power to borrow money
for the purpose of its business or trade.tll
However, all this is unnecessary now. For this reason, even if a company is
limited by guarantee and its objects do not give it power to borrow or it is limited
by shares and borrowing money is among the restrictions imposed on its
activities, it can still borrow money and the loan will not be void. on the corrtrary,
the lender can enforce it against the company as long as it is not prohibited by
an injunction under Section22(2).
Debentures are always issued for specif ied amounts ol money, say K5000,which
can be transferred from one person to another as a unit. However, instead of
obtaining the money sought from a number of individuals and issuing a single
debenture to each one of them, the loan may be in the form of a fund to which
they contribute. tzl This lund is called 'debenture stock' and each of the lenders
is given a debenture stock certificate evidencing parts of it which he has
provided. ln this case the debenture stock is the indebtedness while the
certificate evidences the stockholder's interest in it.
The advantage of debenture stock over a debenture is that whereas the latter
can be transferred only as a unit, the former can be subdivided and be
transferred in any fractions which the holder wishes. To the company, the
advantage of debenture stock is that if it seeks to borrow a lot of money f rom
a number persons, it does not have to enter into separate agreements with
each one of them. Rather it simply has to consolidate the loan into one mass
as debenture stock and then issue to each lender a debenture stock certif icate
representing his part ol that loan.
The elfect of creating the trust is that the debentureholders will not deal directly
with the company. On the other hand, between them and the company will be
interposed their trustees whose responsibility will be to safeguard the interests
of the debentureholders and to intervenewherethose interests arethreatened.
Another consequence is that the loan agreement - to pay principal and interest
- will be between the company and the trustees, and not between the former
and the debentureholders. Consequently, any security provided for the loan
will be given in favour of the trustees who will hold it on trust for the
debentureholders. Besides, where there is need to make any alterations in the
debenture or debenture stock certificate, instead of consulting all the holders,
the company can deal with the trustees. Moreover, il it becomes necessary to
enforce the security, the trustees will do that on the holders' behalf. From this
it will be apparent that the creation of a trust is a far more satisfactory nnethod
of protecting the interests of debentureholders than leaving that to the
individual holder who may not have the financial resources, inlerest, skill and
time required for him to take relevant action on his own.
Of course trustees will not act for debentureholders in every case where the
latter's interests require protection. ln some cases eitherthe debentureholders
or the trustees can take the requisite action. For example, as already noted,
where a company alters the business clause in its memorandum eithertrustees
for the company's debentureholders or the debentureholders themselves (as
long as they hold at least 5% of the company's debentures secured by a f loating
charge over the company's property) can apply to the court to have the
alteration annulled.lTl Similarly, the holder of any debenture secured by a
lloating charge over a company's property or the trustee for such a
debentureholder, may apply for a court injunction to prohibit any act on the part
of the company which contravenes Section 22(2\'trt And to facilitate such
applications the debenture or debenture trust d6ed will provide for the
J
Under Section 79(1), none of the following persons is eligible for the appoint-
ment:
(d) any person convicted within the preceding ten years of an offence
involving fraud or dishonesty;
(e) any person removed within the preceding ten years from an office of trust
by a court of competent jurisdiction; or
debentures are bearer debentures. But as shown below, where the register of
debentures is kept, it will be relevant to the transfer of the debentures and
payment of the money thereby secured.
The second implication is that just like in the case of shares, it will be unlawf ul
for the company to register a transfer of the debenture or debenture stock
certificate unless a proper instrument of transfer has been delivered to the
54-ir!) company. tzsl16",ransfer may be lodgedfor registration byeitherthetransferor
,>4i, :l or transferee tzrl and unless it is otherwise provided in the company's articles
or the terms upon which the debentures are issued the company may refuse
to register the transfer if it is not accompanied by the appropriate debenture or
debenture stock certif ic6lg. Izsl lf the company ref uses to register the transfer,
notice of the refusal together with reasons which justify the refusal, must be
sent to the transferee and transferorwithin two months afterthe date when the
transfer was lodged. tzstr;4i0i"\
Lastly, these debentures and debenture stock certificates are not negotiable
inslruments. consequently, although they are transferable, the transferee
takes them subject to all claims which the company may have against prior
holders at the date of the transfer. ln Patridge v Rhodesian Goldlields Ltd
(1910) t27l a debenture stockholderwhowas also atrustee of the deed securing
the stock and director of the company transferred 810,000 worth of stock to
certain transferees. The trust deed did not contain any condition protecting the
transferees from any equity of the company against the transferor. Evidence
showed that assets which were subject to the trust deed comprised a debt
owed by the transf eror to the company. lt was held that the transferees took the
stock subject to this claim because generally the transferee ol a chose in action
stands in no better position than the transferor.
of the transfer, the liquidator declined to do so and claimed to deduct the debt.
from the amount due on the debentures. lt was held that the transferee was
entitled to receivewithout deduction sums payable in respect of the debentures
because, according to Siirling J:
'"The company has for valuable consideration renounced any right it would
otherwise have had to object to transfers [of the debentures] on the ground of
equities subsisting between the company and the transferor ..."
lnitially, Section 45 of the Companies Act 1984 made it unlawful for any
regislered company to issue bearer debentures. However, this has been
reversed by Section 60 of the Capital Market Development Act 1990. Conse-
quently, as long as a registered company is allowed by its articles or memo-
randum to do so, it can issue some of its debentures to bearer.
(b) which is, in the ordinary course of the company's business, changing
from time to time; and
(c) until the holders enforce the charge, the company may carry on business
and dealwith the assets charged.
which one looks at them. From the lnder's point o{ view the fixed charge is more
advantageous than the f loating for two main reasons. First, the former confers
on him an immediate right to the asset over which it is created. As a result if the
company disposes of the asset, it must repay to him the amount borrowed or
else the purchaser of the asset willtake it subject to the fixed charge. Second,
the fixed charge gives him certainty as to the assets which are his security. Cn
the other hand, as far as the company is concerned, a floating charge is better
than a fixed charge because the former allows it to put up its stock-in-trade as
security for a loan without losing the freedom to turn over the stocks in
the course cf its business to generate the money needed to settle its
indebtedness to the lender. ln other words, the floating charge allows it
to borrow money even where it has no fixed assets but a collection oi
current assets.
2. before crystallisation, the lender does not know for sure which assets
constitute his security;
charge, the company has powerto create a f ixed charge which has priority over
that floating charge. ln Wheatley v Silkstone & Haigh Moor Coal Co' Ltd'
(1885) directors of the defendant company issued debentures charging the
Iael
The reasoning behind this is that, f irstly, a fixed charge attaches to the property
over which it is created f rom the date of its creation whereas a floating charge
will become attached'to the property only after crystallisation. Secondly, as
shown by the case of Re YorkshireWoolcombers Association Ltd,t50l before
a f loating charge crystallises, the company has licence to dealwith and dispose
of the property charged in the ordinary course of its business. And that includes
the power to create further charges on the charged property. However, it is not
uncommon to insert in the instrument creating a floating charge a clause
prohibiting the company to create any charge ranking in priority to or pari passu
with the floating charge. tsll
On the other hand, in relation to one another, floating charges have priority in
accordance with the dates of their creation. For that reason, a company which
has created a floating charge cannot later on create another floating charge
over the same or some of the assets, which ranks pari passuwith or in priority
to the original floating charge. This is illustrated by the case of Re Beniamin
cope&SonsLtd(1914)'152]Herethecompanyissuedaseriesofdebentures
for E2,OOO which were said to rank pari passu. The debentures were secured
by a floating charge over the company's present and future property. A clause
in the debentures provided that notwithstanding the charge, the company
could, in the ordinary course of its business, dealwith thd charged property as
thought f it and in particular, could mortgage it or any part of it. Ten years later,
it
while these debentures were still subsisting, the company issued a second
series of debentures which were also said lo rank paripassuand were secured
by a floating charge over the company's existing and future property. lt was
held that the first series had priority over the second because although the
former allowed the company to use its property to secure further loans, it
to security in the form of mortgages rather than floating charges.
"referred
Of course as already noted (and confirmed bythiscase), where debentures are
issued in a series, they will rank paripassu. Besides, even if debentures are
created on different dates, they will rank pari passu if the holder of the first one
154 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
This is what happened in SEDOM v Gep Shoe Company Ltd & lndefund.ts6l
ln that case the first defendant obtained a loan f rom the second defendant and
issued a debenture to the latter which provided lor the appointment of a
receiver/manager in the event of the former's default under the debenture.
When the f irst defendant fell into financial diff iculties and failed to keep up with
repayments under the debenture, they approached the plaintiff for financial
assistance. However before the plaintiff could assist, they sought the second
AN INTRODUCTION TO COMPANY LAW IN MALAWI _ 165
And if the charge is fixed and requires registration undersome otherwritten law
which accords priority as between successive charges aflecting the same
property, its priority will be determined by that law. This is because Section
'>x.r 189(1) will not apply to that property.tsa Clearly this means that charges
governed by the Deeds Registration Act and the Registered Land Act will not
have priority in accordance with the Companies Act. Rathertheir priority will be
determined by their registration under these two statutes.
After that the company may send to the registrar a statement in the prescribed
form and signed by both the company and the person entitled to the charge
showing that the charge orthe propefty has been satisfied or released f rom the
charge respectively. And once the registrar receives the statement, he must
(_r -,r l€nter it on the register. rssl This statement is binding on that person and anyone
- t"'-claiming under him, in favour ol the liquidator and any creditor of the company,
i.rl $utlln other words, should the company be subsequently woud up neither him
nor his legal representative would be allowed to seize the property or under-
taking in satislaction of the debt.
(c) present a petition to the court for the compulsory winding up of the
company under Section 213(1Xd) on the ground that it is unable to pay
its debts.l6lj
(d) exercise powers conferred by the debenture or trust deed for the
appointment of a receiver; or
(e) apply to the court for the appointment of a receiver or for an ordel for the
sale or foreclosure of the security.
It should be noted that where the security is in the form of a charge on registered
land, sectionT4 ol the Registered Land Act does not allow the chargee to
foreclose or enter into possession of the land or to receive rents of the land,
merely because of the default by the chargor in the repayment of the secured
debt or interest payable on it. Rather according to section 68, if the default
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 167
continues lor a month the chargee should serve on him written notice to pay
the money owing. lf within three months of the notice the chargor fails to
comply, he can either appoint a receiver of the income of the charged property
or sell the property. lf he makes the former choice, he cannot exercise the
power of sale unless he has served a further notice of demand on the chargor
and the latter has failed, within three months of the date of service, to pay the
money owing.
Futhermore, although the chargee is entitled to bring an action for the secured
debt, section 71 allows that action only if:
1. without any wrongful act by the chargor or chargee, the charged property
is destroyed or the security is rendered insufficient and the chargor has
failed, after being given a reasonable oppodunity, to provide further
security to make the security sufficient or
receiver. ln lndefund v Manguluti & Manguluti, t62l the defendants who were
shareholders and directors of a limited company borrowed money from the
plaintiff to finance the business of the company and guaranteed to repay the
money if the company failed to do so. The company issued a debenture in
favour of the plaintiff which was secured by a floating charge over the
company's assets. ln the event of default bythe companyto repaythe loan, the
debenture empowered the plaintiff to appoint a receiver/manager. When the
company subsequently fell in arrears with the repayment of the loan, the
plaintiff proceeded to exercise this power and also sued the defendants as
guarantors, for the principal which was in arrears and interest. bn trial, the
defendants argued that the appointment of the receiverwas inappropriate and
premature. Dismissing the contention, Mtegha J., said:
lf the debenture does not contain any power to appoint a receiver, the
debentureholdercan apply to have the appointment made bythe court. Section
94(1) empowers the court to appoint a receiver whenever a charge has
become enforceable which will be by reason of the occurrence of any of the
events enumerated by the learned judge in the above case. Moreover, where
a debenture is secured by a floating charge the court may appoint a receiver
even though the charge has not become enforceable, if it is satisfied that the
security is in jeopardy. Security will be deemed to be in jeopardy if the court is
satisfied that events have occurred or are about to occur which render it
unreasonable in the interests of the debentureholder that the company should
retain powerto dispose o{ its assets. ln practicethiswillbethecasewherethere
is a risk of the security being seized to pay claims which do not rank in priority
to the debentureholder's claims. ln Re London Pressed Hinge Co. Ltd.
(1905) t63l the company borrowed money under a debenture and created a
floating charge over its assets as securityforthe loan. Subsequently, a creditor
of the company obtained judgement against it which entitled him to seize its
assets if the judgement was not satisfied. At the time ot the judgement the
company had not defaulted under the debenture in the repayrnent of the loan
or interest payable on it. Nevertheless, it was held that the
debentureholder in whose favour the floating charge was created was
entitled to the appointment of a receiver because the imminent seizure
ii:r.1,;ffi.+-dlwm&.
11.12.2 Receiver/manager
Under Section 94(1) the court has power, where a charge has become
enforceable, to appoint not only a receiver but also receiver or manager.
However, the Act does not define the word 'manager' as used in this context
nor does it give any indication as to the distinction between an ordinary receiver
and a receiver/manager.
".... d e pe nds o n the q uestio n whethe r the goodwi ll o r b usi ness [of the company]
is expressly or by implication included in the properly charged, so as to make
it part of the security. [This is because] the duty of a manager is only to manage
for the purpose of realisation, and until he can conveniently realise."
Similarly, in Makins v lbbotson & Co. Ltd. (1891) t65l the company issued
debentures to the plaintiff which were secured by a charge on 'all its property...
both present and future'. When the company subsequently failed to repay the
loan, he applied for the appointment of a receiver and manager of the
company's business. lt was held that the application would be granted to
enable the business to be sold as a going concern as long as the plaintiff
undertook to realise the company's property as soon as possible.
Thus where the charge is created over specific and identifiable property the
cou rt can only appoint an ordinary receiver if the charge becomes enforceable.
This is illustrated by Whitelay v Challis (1892).1661ln that case, the defendant
r-
170 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
hoteliers who were about to rebuild their hotelcharged 'the hotel and buildings
to be erected' with repayment of the money borrowed to effect the construction.
Subsequently, after the hotel was rebuilt and the chargor defaulted in the
repayment of the loan, the chargee applied for the appointment of a receiver
of the hotel. The trial judge granted the application but went further and
appointed a receiver and manager. On appeal by the chargor, it was'held that
as the charge did not include the business or goodwill of the company but was
intended to be confined to the physical structures only, the court should not
have appointed a receiver/manager.
(e) a director or officer of the company or any person who has been in such
office within the preceding two years;
(0 a trustee under any trust deed for the benef it of debentureholders to which
the company is a party;
(g) any person convicted within the preceding two years of an olfence
involving fraud or dishonesty; or
(h) any person removed within the preceding ten years from an office of trust
by a court of competent jurisdiction.
1. Any floating charge created by the company will crystallise and become
lixed so that thereafter the company will not be allowed to deal with the
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 171
assets over which the charge was created without the receiver's consent.
6. Where the receiver is appointed over the whole or substantially the whole
property of the company on behalf of a holder of a debenture secured by
a floating charge, Section 101(1) requires that within fourteen days of his
appointment,lhere must be delivered to him a statement which shows:
It should also be noted that any person who appoints or obtains an order
for the appointment of a receiver or manager of any property of a
registered company must, within seven days, notify the registrar in
'r I : rwriting of the appointment or the order. tTtl Similarly, after the appointee
has ceased to act as a receiver or manager he must within fourteen days
notify the registrar accordingtY. ,t1L
i:rul
1 1.12.5 The legal position of the receiver
.-.r, ?A receiver appointed by the court is an officer of the coud. For that reason he
'must act in accordance with the court's instructions and directions. On the
other hand, a receiverappointed outof court undera provision in the debenture
I is an agent of the company. rsl Consequently, he must comply with the
instrument under which he is appointed. tralHowever, he can apply to the court
for directions in relation to any matter arising in connection with the perfor-
mance of his functions. tTsl Furthermore, every receiver is personally liable lor
anycontract into which he enters.176lOf coursewherethe contract is concluded
in the proper performance of his duties, he is entitled to be indemnified in
respect of any liability which may arise under it.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 173
Chapter Eleven
1. General Auction Estate Ltd v Smith [1891] 3 Ch 432.
2. Section 76(4).
3. Section 77(1).
4. Section 79(2).
5. Section 76(4).
6. Section 80(1).
7. Section 1O(4xbxiii).
8. Section 22(2)(b).
L Section 83(1).
10. Section 83(2).
11. Section 78(1).
12. Section 76(6).
13. Section 85.
14.' Section 84(1).
15. Section 84(2).
16. Section 82(1).
17. Section 77(1).
18. Section 77(2).
19. Section 50(1).
20. Section 50(3).
21. Section 77(3).
22. Section 50(2).
23. Section 49(1).
24. Section 49(2).
25. Supra., note 24.
26. Section 49(4).
27. [1910] 1 Ch 239.
28. [1eoo]2 Ch 149.
29. [1904] 2Ch743.
30. [1898] 2 QB 658.
31. [1893] 3 Ch D 307.
32. [1904] 2 Ch 108.
33. Section 76(2).
34. Section 81(1).
35. Civ cas 52611987
36. [1903] 24h248.
37. Civ cas 23211985.
38. [1985] 2 Ail ER e08.
38a See Aluminium lndustrie Vaasen BV v Romalpa Aluminium [1976]
1 All ER 552.
39. Section 86(8).
174 - AN INTRODUCTION TO COMPANY LAW IN i/IALAWI
Ghapter Twelve
Gompany Accounting
Records, Accounts and
Financial Reports
12.1 Keeping accounting records
Every registered company must keep accounting records which sufficiently
explain its operations and transactions. ttl Besides, the records must be
enough for the preparation in accordance with the Act of balance sheets and
profit and loss accounts which give a true and fair view of the company's
state of affairs, and profit or loss, respectively. For this reason, they must
contain entries of:
2. all goods sold and purchased by the company, other than ordinary retail
transactions; and
12.2 Accounts
Apart from keeping accounting records, every company must at least once
every calendar year prepare a profit and loss account, and a balance sheet.tsl
Where the company is a holding company at the end of its f inancial year, it must
prepare group accounts which are consolidated accounts comprising:-
(a) a profit and loss account showing the company's profit or loss as well as
that of its subsidiaries; and
(b) a balance sheet showing the company's state of affairs as well as those
of its subsidiaries.tTl
Besides complying with the main part of the Act the accounts must also meet
the requirements of the Third Scheduletsi which has effect in addition to the
provisions of the Act. tel Of course on the application or with the consent of the
company's directors, the registrar may adapt any requirement of the Schedule
to the circumstances of the company as long as the adaptation does not
derogate from the principle that company accounts should give a true and fair
view of the company's state of affairs.tlol
The Schedule requires the accounts to give a 'true and fair view' of the
company's state of affairs, its operations and the results of those
operalions.llll However, like many expressions used by the Act, 'true and fair
view' is not defined. But it suggests that the accounts should contain informa-
tion which gives to their expected readers an accurate and adequate picture
of what the accounts are supposed to deal with. ln other words, the accounts
must not be false or misleading. For that reason, the fact that they have been
prepared in accordance with accepted accounting standards and practice will
only be prima facie (and not conclusive) evidence that they give a true and fair
view.
Moreover, they must provide any matters which though not prescribed by the
Act or the Schedule have affected or are likely to affect the business of the
company. This must be done both by way of figures and narrative reporting
which complements and explains the figures. However, any matter required by
the Schedule to be stated in the accounts may be presented in the forms of a
note or annexe to the account, if that presentation would be more effective or
convenient. And any item which is not material may be lelt out because the
company is not obliged to disclose it in the accounts. trzl
ANY LAW IN MALAWI
Similarly, even if at the end of its financial year it is a holding company, the
company's group accounts do not have to dealwith the affairs of its subsidiar-
ies if the company's directors are of the opinion that:
4. the holding company's business and that of its subsidiaries are so different
that they cannot reasonably be treated as a single undeftaking. lzsl
2. in the case of group accounts, the accounts give a true and fair view of the
state of affairs and profit or loss of the company and its subsidiaries;
4- proper returns adequate for their audit have not been received from
branches not visited by them; and
5. the prof it and loss account is not in agreement with the accounting records
and returns.
The auditors must also satisfy themselves that statements made in the
director's report do not distort the meaning, or conflict with a fair interpretation,
of the company's account. rsl where information given in the directors' report
is deemed to form part of the accounts the auditors must also report on it.
It should be noted that although the auditors' report must be addressed to the
company's members, the auditors are not obliged to actually send it to each
one of them. Their duty under section 190(1) will be discharged if they sign the
report and forward it to the company's secretary. ln Re Allen, Graig & co. Ltd.
(1934) t3rl after the auditors had prepared their report, they sent it to the
company's secretary. However, the report never got beyond the secretary and
a general meeting was never convened to discuss it. Holding that the auditors
were not in breach of the English equivalent of section 1go(1), Bennet J, said:
"fllt certainly has never been the practice ... for auditors to send their report to
every member of the company...ln my judgement the duty of the auditors, after
having affixed their signatures to the report ... is confined to forwarding the
reportto the secretary of the company, leaving the secretary ... or the directors
to perform the duties ... of convening a general meeting to considerthe report,,.
The report must at alltimes be open for inspection bythe company's members
and debentureholders at the registered office of the company. t32r Besides, it
must be read at the annual general meeting of the company held after its
circulation to the members and debentureholders.
180 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
lf the annual general meeting forthat year is waived, then the inlormation in the
return must be as it is twenty-one days after the dispatch of the company's
accounts and reports to its members and debentureholders under section
182(3).
ln the case of any public company other than a company limited by guarantee
the annual return must be accompanied by a certified copy of its accounts and
reports by its auditors and directors. t36l On the other hand, a private company
and a company limited by guarantee must send the annual return to the
registrar together with certificates showing, respectively, that since its incorpo-
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 181
poration or last return, as the case may be, the company has not invited
the public to acquire any of its shares or debentures and that the number
of its members does not exceed fifty. These certificates must be
accompanied by either a certificate that the company is not a holding
company or a subsidiary of a public company or a copy of its accounts,
directors' report, if any, and auditors' report circulated to its members
and debentureholders under Section 182. t371
Ghapter Twelve
1. section (2)' For a detaired discussion of the raw governing
.180 company
see generaily: chitumpha, company d;dilii;i'r_a.w
ftnT,:$l:'.n, ln
2. Section 180(1).
3. Section 180(5).
4. Section 180(3).
5. Article 98, Table A.
6. Section 182(1).
7. Section 185(4).
8.
!9ct51n 18_3(3Xb) and 184(1).
9. The Third Schedule, para.'Z.
10. Sections 183(4) and 184(2).
11. The Third Schedule, para. S.
12. lbid.
13. Section 183(1).
14. Section 183(2).
15. Section 183(3).
16. Section 187(1Xb).
17. Section 184(1).
18. Section 187(1Xb).
19. The Third Schedule, para. 43.
20. Section 185(8).
21. Section 185(4).
22. Section 185(10).
23. Section 185(12).
24. The expression 'wholly_.owned subsidiary' is not defined by the
Act.
However a company wiil.probabry be a wfiotty ffi;i ;ffiiiLrv
within
the meaning of the Act if it has nb members except that oth;iand
latter's ryh.olly owned subsidiaries or perions actirig on'itJ the
6ena-it or' on
behalf of those subsidiaries
25. Section 185(3Xa).
', 26" Section Section 185(3Xb).
: 27' Section 182(1XbXc).
28. Section 189(3).
29. Section 190(1).
30. Section 190(2).
31. [1e34] Ch 438.
32. Section 190(3).
33. Section 182(1).
34. Section 182(2).
35. Section 181(1).
36. Section 196(1).
37. Section 197(1).
t*-
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 183
Chapter Thirteen
Gompany Taxation
Generally, the Taxation Act makes no distinction between natural persons and
registered companies. lt treats their income in more or less the same way.
However, a company is not similar to a natural person in all respects; there are
major differences between the two. For this reason, sorne provisions of the Act
apply exclusively to registered companies. lt is with those provisions that this
chapter is concerned. Consequently, for a more comprehensive approach to
taxation of companies in Malawi readers should refer to relevant materials on
the subject.
every change of the off icer must be reported to the commissioner within thirly
days of its taking effect. tsl lf the company fails to appoint a public officer, its
managing director, director secretary orany off icer of the company designated
by the Commissioner will occupv the office. Fl
Everything which a public officer does under the Act in his representative
capacity must be taken as done by the company which he represents. Itrl
13.3 Returns
As a person chargeable with income tax under the Act, a company must
prepare and send to the Commissioner a return of its income not later than the
'lst day of May next following each year of assessment or such longer time as
the Commissioner may allow. n2l The Commissioner may also require it to
furnish him with returns of its employees and earnings, salary, wages allow-
ances or pensions paid or allowed to the employees. lr3l Where the company
carries on any trade in Malawi, it must also furnish the Commissioner with a
return showing:-
1. all payments made to any person in respect of any share or interest in the
trade;
2. all money received by it from any person or deposit and any amount of
interest received or paid by it; and
AN INTRODUCTION TO COMPANY LAW IN MALAWI 185
3. all such other information in its possession with regard to the income
received by or accruing to or in favour of itself or any other person, as may
be prescribed or required by the Commissioner. tlal
deduction from the assessable income of a company if it arises solely out of the
company's trading operations in Malawi and to the extent that it has not been
allowed as a deduction in any previous year of assessment.tlel The loss is also
deductible f rom acompany's assessable income intwo othersituations. First if the
company is formed in Malawi to take over the entire undeftaking of an external
company in consideration of an allotment to the latter's members of its shares.lml
The assessed loss allowable as a deduction from the predator company's
assessable income in such circumstances is that of the target company. Besides
the allowance is made after the predator company's acquisition ol the target
company's undertaking, and only to the extent that the loss has not been
previously allowed as a deduction from the former's assessable income.
will not be included in the member's taxable income by reason of Section 1 1 . Now
although this may solve the problem of double taxation, it may not satisfy those
shareholders who want a cash return from their shares.
To avoid this, the company pays income tax on the dividends so that what the
shareholder receives is net of tax. However, the tax so paid is Ceducted from the
tax payable on his taxable income. ln effect, therefore, the dividends are not an
allowable deduction to both the company and the shareholder but the company
pays tax on them on his behalf.
This method serves two major purposes. lt avoids double taxation of company
dividends by in effect requiring the company to pay income tax on them on
behalf of its shareholders. Besides, it protects the shareholders from being
over-taxed on account of receiving dividends by ensuring that any excess tax
paid by the company on each dividend is repaid to them as a tax rebate.
Of course the method does not apply to every company dividend. lts applica-
tion is only to dividends received by non-corporate shareholders. ln other
words, it does not apply to dividends accrued to corporate shareholders. Now
188 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI
although the Act does not say how such dividends are to be treated to avoid
double taxation, the practice seems to be to tax them in the hands of the
distributing company and exclude them from the taxable income of the
recipient corporate shareholder.
Chapter Thirteen
1. Section 68(2).
2. Section 67(1).
3. Section 67(3).
4. Section 67(2\.
5. Section 67(7).
6. Section 67(4).
7. Section 67(9).
8. Section 77(1Xa).
9. Section 78.
10. Section 69.
11. Section6T(10).
12. Section 84(1).
13. Section 85(1).
14. Section 85(2).
15. Section 68(1).
16. Section 66 as amended by section 6 of the Taxation (Amendment) Act,
1 990.
17. Section 28(1).
18. The Eleventh Schedule to the Act as amended by the Taxation (Amend-
ment) Act,'1991.
19. Section 42.
20. Section 44.
21. Section 70(1).
22. Section 70(2\.
23. Section 43(1).
24. Section 42(2).
25. Section 26(4\.
26. Section 26(2).
27. Section 26(3).
28. Section 764(1).
29. Section 2 of the Taxation (Amendment) Act, 1987.
30. Section 76A(2).
31. Section 80.
190 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Ghapter Fourteen
Schemes of Arrangement
and Take-Overs
It was noted in para. 2.3 that a company requires a scheme of arrangement to
alter its memorandum where:
2. the alteration entails that its members should take more shares in the
company, increases their liability to pay money to the company or restricts
the transferability of their shares.
There are two procedures which can be used to ellect these re-organisations.
One is a scheme ol arrangement between the company and its creditors or
members under section 198. Another is the procedure provided by section 201 .
Whichever of these two is adopted depends on whether it is intended to have
the company and the court involved. As shown below, although where variation
of members' rights in accordance with section 201 is unfair any member can
apply to the court against it, generally the court has no role to play in the
implementation of that variation. By contrast, it plays an important role where
section 198 is used instead. Besides, where it is intended to put one company
(the target) under the control of another (the predator) using section 201, the
AN INTRODUCTION TO COMPANY LAW IN MALAWI 191
matter will be between members of the target and the predator; the target itself
has no statutory role in the affair. On the other hand, if section 198 is used the
target, as a person, must be involved otherwise the scheme willbe inetfective.
Moreover, the procedure under section 198 is available to members as well as
creditors. However section 201 can only be used to adjust shareholders' rights.
Finally, variation of members' rights under section 201 needs to be approved
by a 90% majority of them whereas under section 198 it would require the
support of 75o/o of the members present and voting at the meeting where the
variation is considered.
Again, where the object is a variation of the company's legal relationship with
its creditors and members involving the company's voluntary winding up, there
are three options available. These are:
1. a scheme under section 198 between the company and either its creditors
or members;
2. a scheme under section 263 between the company and its members and
3. a scheme under section 266 between the company and its creditors.
The major differences between a scheme under section 198 and schemes
under sections 263 and 266 is that the latter do not require coufi confirmation
whereas the lormer does. Besides, although all these schemes need to be
approved by a meeting of the creditors or members, as the case may be, under
a section 198 scheme the holding of the meeting must have been previously
sanctioned by the court; if it was not, the coutt will subsequently refuse to
confirm the scheme even though the meeting supports it by the appropriate
majority. On the other hand, meetings of members or creditors under sections
under sections 263 and 266, respectively, require no prior coud approval.
When the application is made forthe court to sanction the scheme, the court's
function is not simply to endorse what the creditors or members have already
approved. On the contrary, it is to determine whether or not:
1. the procedure laid down in sections 198 and 199 has been complied with;
2. the scheme has been approved by the majority in lhe bona frde interest
ol the entire affected group of creditors or members and
Consequently, if these condilions are not satisfied, the court may not sanction
the scheme even if the creditors or members approve it by the appropriate
majority. ln Re English, Scottish & Australian Chartered Bank (18931tt0t16"
bank was ordered to wind up. As part ol the liquidation process, a scheme of
reconstruction was proposed whereby a new bank was to be established which
would defray the liabilities of the old bank. The court ordered a meeting of the
bank's creditors (in accordance with the English equivalent of section 198(1))
to be held to ascertain their views on the scheme. More than 3/4 of the creditors
approved the scheme. However when the court sanctioned it, some of
the creditors objected to the decision on the ground lhal inter alia lhe
scheme was improvident and unfair towards the creditors generally.
Explaining the court's function when asked to sanction a scheme of
arrangement, Lindley L.J. said on appeal:
"What the court has to do is to see, first of all, that the provisions of that statute
196 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
have been complied with; and secondly, that the minority is not being overriden
by a maiority having interests of its own clashing with thase of the minority
whom they seek to coerce. Fufther than that, the court has to look at the
scheme and see whether it is one as to which persons acting honestly, and
viewing the scheme laid before them in the interest of those whom they
represent, take a view which can be reasonably taken by businessmen".
Applying this test, it was found that the scheme was not unfair and therefore
the lower court's decision to sanction it was upheld.
ln determining whether the procedure in Sections 198 and 199 has been
complied with, the court will be particularly keen to see if at the creditors' or
members' meeting called to approve the scheme, the minority had an oppor-
tunity to be heard and voice its objection. lf there was that oppodunity, the court
will confirm the scheme. ln The Matter of Spearhead Enterprises t111 a
scheme of arrangement proposed between the company and its credi-
tors under section 266 was approved by all creditors except the Govern-
ment which abstained from voting at an unsecured creditors' meeting.
ln spite of that when confirmation of the scheme was sought, it was
given. ln the words of Skinner, C.J, (as he then was):
"lt is trite law that before a majority of creditors can make decisions binding
upon a minority, the minority must have an opportunity of being heard and voice
its obiection. Government had that opportunity, its representative was present
atthe meeting, hecould have been heard inopposition infact, therepresentative
was s i le nt d u e to m is u nde rstand i n 9 ... I am satisf ied that I should make an order
and I do so. I sanction the scheme..."
(a) the transfer to the transferee of the whole or any part of the undertaking
or property or liabilities of the transferor
The companies in respect of which the order is made must, within 21 days,
198 AN INTROOUCTION TO COMPANY LAW IN MALAWI
The scheme requires the sanction of a special resolution of the company and
may be in consideration of:
Once the resolution is passed, the scheme will be binding on the company.
Besides, each member will be deemed to have agreed with the body corporate to
accept the fully-paid shares, debentures or similar interests to which he is entitled
t1el However, if within one year of the passing of the resolution
6.,, ,,.' il:nder the scheme.
)'v an orderis made bythecourt undersection 213forthe winding up of the company,
the scheme will not be valid unless sanctioned by the court. Moreover, any
member of the company who opposes the scheme may, within 28 days of the
passing of the resolution, write to the liquidator requiring him either to:
Two major points must be noted about this scheme of arrangement. Unlike the
scheme under section 198, this scheme does not require court confirmation
and dissentient shareholders are not given a statutory right to object to the
scheme in court. As section 263 itself shows, any objection must be addressed
to the company's liquidator. Besides, the form which consideration for the
scheme musttake is expressly provided forbythe provision. Consequently any
scheme which provides for a diflerent lorm of consideration would be unen-
forceable under it. And although section 263 does not afford any shareholder
the right to apply to court against the scheme, he can make such an application
on this ground. ln Bisgood v Henderson Transvaal Estates Ltd I2a acting
under powers in its memorandum and articles of association a company
passed resolutions approving a scheme of reconstruction involving the
company's winding up. The scheme provided that the undertaking of the
company was to be sold to a new company, formed for that purpose, in
consideration of shares in the new company being issued to members of the
old company. lf any such member ref used to accept the scheme, the liquidator
of the old company was to sell the shares to which the member would have
been entitled and give him the proceeds. lt was held that the scheme
contravened the English equivalent of section 263. For although this provision
does allow consideration for a scheme of arrangement to be in the lorm of cash,
the cash element here was not intended to be consideration for the scheme;
rather it was intended to be a means of dealing with any dissentient member.
Clearly this was contrary to the legal position here which as already shown,
gives such a memberthe option of requiring the liquidatorto eitherabstain from
going ahead with ihe scheme or purchase his shares in the company sought
to be wound up.
found that sale of ils assets or undertaking would not yield sufficient funds to
settle the debts. Besides there were a number of external companies who were
interested to enter into joint ventures with the company so long as it was
solvent. Consequently a scheme was arranged between the company and its
creditors. The essence of the scheme was that the company would transfer its
assets to a newly-incorporated company called Spearhead Holdings Ltd in
consideration ol the latter assuming full responsibility for all the former's
liabilities. For their part, the creditors would give up the debts owed to them by
Spearhead Enterprises Ltd in exchange for an allotment ol shares in the
new company equivalent in nominal value to 2OYo of each creditor's
debt. Moreover the creditors could appoint directors in the new com-
pany: the Government, up to three director; the banks, acting together,
one director and the unsecured creditors as a group, one director too.
As already noted, the scheme succeeded.
Now just like the scheme under section 263, this scheme too will be
binding on the 'old' company. However it will not be binding on the
creditors unless a majority in number representing314 ol them in value
; r,.i iuaccedes to it. t25l For the purpose of this provision, a creditor will be
considered a creditor for value for such as appears to be the balance to
be due to him after allowing for
Fl'it''''
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 201
lf these requirements are not complied with, the payment will be deemed to
;i;.<.;iilhave been received on trust for the company't28l Here 'payment' includes any
I ri a.', benelit or advantage whether in cash or kind.l2elAnd section 155(4) provides
' that a payment will be deemed to have been received by a director in
connection with a transfer of undertaking or property if he receives it within one
year before or two years after the agreement for the transfer is made.
1. the offer must be made to holders of all shares of the target company
except those which are already held by of for the predator company or its
subsidiaries or holding company;
3. the same terms must be offered to all shareholders to whom the offer is
made or, where the shares to be acquired are of different classes, to all
holders of shares of the same class and
90% of the offeree's shareholders accepted the offer except the applicant who
came to know ol the offer after the period within which the put option was
exercisable was over. Subsequently the offeror gave him notice under the
English equivalent of section 201(3), of its desire to acquire his shares. By this
time the market value of the ofleror's shares had fallen f rom 70s to 34s. For this
reason, the applicant accepted to sell his shares to the offeror at the cash price
of 60s per share. lt was held that the offeror was entitled and bound under the
English equivalent of section 201{3) to acquire the shares on the terms of its
offer which included a put optior, of 60s per share. Accordingto Brightman, J.,
if a company chooses to exercise its rights underthis provision, the dissentient
shareholder is entitled to receive the same terms as those upon which
approving shareholders sold their shares to the offeror.
the first ruling only if the offer is unfair to the general body of sharehold-
ers to whom the ofler is made. However since at this stage the offer will
already have been accepted in respect of at least 90% of the shares, it
will not be easy to prove the unfairness. This is more so because as long
as the offer is fair to the body as a whole, the fact that it is not fair to one
or two shareholders or is open to criticism, will not be enough for the
court to order the predator company not to acquire the dissentient
shareholder's shares. As Plowman, J., said in Re Grierson, Oldham
Ltd (1968),134lthe test of fairness is whether the offer is lair to the
offerees as a body and not whether it is unfair to a particular shareholder
in the peculiar circumstances of his own case. ln that case an offer was
made for a company's ordinary shares at 6s per share. The offer was
accepted by holders of more than 99% of the shares except the
applicants who held less than 0.1% of the shares. Thereafter the offeror
served notice on the applicants to the effect that it desired to acquire
their shares and that unless they applied to the court within one month
and the court ordered otherwise, the offeror would be entitled and bound
to acquire their shares on the terms of its offer. The applicants then
applied for a court declaration that the offeror was not entitled to acquire
their shares because its olf er was unfair. lt was held that the application
would not be granted because the offer price was above the market price
of the shares and over 99% of the ordinary shareholders had accepted
the offer.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 203
Similarly, in Re Sussex Brick Co. Ltd ('1969;tost the applicant was a holder of
ordinary shares in a company. Anothercompany offered to acquire preference
and ordinary shares of the company. 90% of the shareholders of the target
company approved the offer. When the predator company notified the appli-
cant of its intention to acquire his shares, he sought a court declaration that the
company was neither bound nor entitled to acquire the shares because its offer
was unfair to him. lt was held that on the evidence submitted in the court, the
otfer was not unfair. Therefore his application was turned down. Speaking on
the question of fairness Vasey J. said:
"lt is diff icult to predicate unfairness in any case in which there has been
perfect good f aith on the side of the person who is alleged to have been
unfair. There being no suggestion of an intentional misleading of the
applicant, I think that he is faced with the very diff icult task of discharg-
ing an onus, which is undoubtedly a heavy one, of showing that he, being
the only man ... out of step, is the only man whose views ought to prevail
... I think that the scheme must be obviously unfair, patently unfair,
unf air to the meanest intelligence. I do not think that merely f inding items
in the scheme or details of the scheme which are open to valid criticism
is enough. A scheme can be effective to bind a dissenting shareholder
without complying to the extent of one hundred per cent with the highest
possible standard of fairness, equity and reason. Afterall,aman mayhave
an offer made to him and although he likes something better, may be prepared
to accept it, because it is good enough in allthe circumstances."
However, even if the offer is fair, the cout't will order the predator company not
to acquire the dissentient shareholder's shares if he shows that the company
and the 90% of the target company's shareholders who have accepted the
take-over offer are in substance the same. ln Re Bugle Press Ltd (19611t0et
90% of the target company's shares were held by two shareholders S and J
while T held 10% of the shares. Subsequently, the two major shareholders
formed the predator company which offered to buy the target company's
shares at €10 per share. S and J accepted the offer but T rejected it. When the
predator company sought to exercise its right to compulsorily acquire his
shares, T sought a court declaration that the company was not entitled to the
acquisition. lt was held that the declaration would be made because the
predator company and the holders of 90% of the target company were the
same so that the English equivalent of section 201 was being used not for a
scheme of arrangement properly so called but for the purpose of enabling
majority shareholders to expropriate the minority.
204 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
On the other hand, if the court orders the predator company to acquire the
dissentient shareholders shares on certain terms, then before the company
acquires the shares it must give notice of the terms to all the other sharehold-
S;titilrs, including those who may have accepted the originalterms. t37l Within 2
months of that notice, every such sharehoider can ask the predator company
to acquire his shares on the new terms and if he already accepted the original
terms, he can claim any additionalconsideration to which he would have been
entitled had his shares been acquired on the new terms.
1. send to the target company a copy of the notice sent to the latter's
shareholders under section 201 (3), together with an instrument of transfer
of shares executed by or on behalf ol each of the shareholders and the
target company and
(i) all shareholders of the company or all holders of shares of the class to
which the offer relates or
]
owned
l
Ghapter Fifteen
Winding Up and Dissolution of
a Registered Company
A registered company cannot be subject to bankruptcy proceedings like an
individual. tll On the contrary, if there are grounds for requiring that its property
should be realised to pay off its debts, and that the surplus be distributed among
its members, the company must be wound up. Thus the winding up of a
company can be described as the formal process whereby its assets are
realised, its creditors are paid off, the surplus is distributed among its members
and the company is thereafter dissolved.
up the company. However, il the company is being voluntarily wound up, the
court will not grant an application for its compulsory winding up unless it is
satisfied that the voluntary winding up may prejudice the interests of the
creditors or members. tal
(a) the company has resolved by special resolution that it should be wound
up by the court; or
(b) the company does not commence its business within one year of its
incorporation or suspends its business for a whole year; or
(e) the company has covered the period for which it was intended to last or
an event has occurred on whose occurrence it was provided that the
company should be dissolved; or
(f) The court is of the opinion that it is just and equitable that the company
should be wound up.
The court may also grant a compulsory winding up petition by the Attorney
General if in his opinion:-
(i) the company has persistently failed to comply with any provision of the
Act. tsl
(a) a creditor who is owed more that K100 by the company serves on it a
written demand for payment of the debt and the company neglects, within
the next twenty-one days either to pay or to offer reasonable security for
the debt. This is illustrated by ln The Mafter of Kumchenga lndustries
Ltd(1987).rtl There the company owed the applicant K83,266. The latter
served on the company a notice demanding payment of the money.
However, atler 21days no payment had been made. Consequently, the
applicant petitioned forthecompany'swinding up undersection 21 3(3)(a).
It was held that since the company had neither paid the debt or offered
reasonable security, within 21 days of the notice of demand, it should be
wound up.
Of course if the company bona fide disputes the debt, it will not be heid
to have neglected to pay the debt within the.meaning of Section 213(3).
Therefore, the petition will be dismissed. ln Be a Company (194+;u16"
petitioner demanded twelve thousand, four hundred thirty five pounds
and seventy five pence as payment under a contract. The company
admitted liability for two thousand, two hundred thirty four pounds and
thirty eight pence only and paid this amount in response to the petitioner's
formal demand. On his petition for the company's winding up on the
ground that it was unable to pay its debts, it was held that the company's
refusal to pay the full amount claimed was not 'neglect' within the
meaning of the English equivalent of section 213(3) Consequently, the
petition was dismissed.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 21 1
"[S]ection 213 of the Companies Act empowers the count to order the
winding up of a company ... The matter is discretionary really. I have
given the matter considerable thought. Severalthings can be said. First,
the debt... is quite substantialand ... the same is not disputed in anyway.
It is also to be noted that the company has not tendered any payment at
all. And, finally, nobody has come forward to oppose the petition."
(c) a creditor proves to the satisfaction of the court that taking into account
the contingent and prospective liabilities of the company, it is unable to
pay its debts.
of the cornpany's shares and the olher 41To. After running the company for
about thirty years, differences arose between the two so that they could not
even speak to each other. Because of that, the petitioner who held 49% of the
company's shares petitioned the court under 213(3)(f) to wind up the company
on the ground that it was just and equitable to do so. The court found the
company to be so viable and prosperous that it would not be in the
interest of both shareholders that it should be wound up. Therefore,
instead of making an order for the compulsory winding up of the
company it ordered the petitioner to sell her shares and gave the first
option to buy them be given to the other shareholder.
Once the winding up petition is presented, the court may dismiss it, adjourn its
hearing or make any such order as it thinks fit. IlllHowever, it cannot refuse to
make a winding up order simply because:-
(a) the company's assets have been put up as security lor loans equalto or
exceeding the value of those assets; or
(c) there will be no assets available lor distribution among members of the
company.
'1. The company or any of its creditors or members may apply to the court
to stay any action which is pending against the company;tr{
4. The court may' appoint the official receiver or any other person to be a
provisional liquidator for the company until the winding up order is made;rr']
After the winding up order is made, there will be the following additional legal
consequences:-
5. The petitioner must send a copy of the winding up order to the registrar,
the secretary of the company and the liquidator within seven dayJ of the
court making it. And within fourteen days of receiving his copy, the
registrar must get notice of it purblished in the Gazette. rrsr
7. All the property to which the company is or appears to be entitled will vest
in the liquidator or provisional liquidator;tr01
(c) securities held by each creditor and the date when each securit! was
given; and
(d) such other information as may be prescribed oras the liquidator may
require.
(c) if the company has failed, the causes of the failure; and
11. Every invoice, order for goods or business letter issued by or on behalf
of the company or liquidator must have the words 'in liquidation' added
after the first use of the company's name. t23l
Where the couil appoints a provisional liquidator, he must continue to act until
a liquidator is appointed. t2al lf no provisional liquidator is appointed, the olficial
receiver must by vidue of his office become the provisional liquidator. t2ll The
court may appoint a liquidator or give directions for his appointment by creditors
or members of the company.t26l lf the coun does not make the appointment, the
official receiver must be the liquidator.l2Tl lt is a criminaloffence under Section
295 for any person to give or agree or offer to give any valuable consideration
in order to secure his own appointment or nomination or to secure or prevent
the appointment or nomination of some person otherthan himself , as liquidator
of the company.
1. A body corporate;
following things with the authority of either the court or the committee of
inspection:
(a) carry on the business of the company to the extent necessary for its
beneficialwinding up;
(h) execute in the name of the company all deeds, receipts and other
documents;
(i) prove, rank and claim in the bankruptcy of any member or debtor for any
balance against his estate and receive dividends in the bankruptcy in
respect of that balance;
(i) draw, accept, make and endorse any billof exchange or promissory note
in the name of the company;
(k) take out letters of administration of the estate of any deceased member
or debtor and do anything necessary to obtain any money due from him
or his estate which cannot be convenienily done in the name ol the
company;
(n) do all such other things as are necessary for the winding up and the
distribution of the company's assets. Issl
'|-5.1.4.4 Remuneration
A provisional liquidatorotherthan the official receiver is entitled to receive such
payment for his job as is determined by the court. t38r similady, a liquidator other
than the official receiver is entitled to receive payment for his job as is
determined by the court. t3el However, the remuneration of any other liquidator
who is not an official receiver must determined by either:
The official receiver too when acting as liquidator, is entiiled to such payment
as may be prescribed, unless the court otherwise orders. taol
The special manager will be an officer of the court. As a result he will receive
218 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
such remuneration as is fixed by the court. Besides, he must account for his
actions or property under his control in such a manner as the court directs. The
court will also direct how much sceurity he should give for his appointment. He
can vacate his office by resignation (of which a month's notice is given to the
liquidator) or being removed by the court.
liability in respect of any act done or default made by him in the administration
of the company's affairs or in relation to his conduct as liquidator. t€l Of course
the order may be revoked if it is shown that it was obtained by fraud or
suppression or concealment of any material fact. Where the court makes an
order dissolving the company, the registrar must, on receipt of a copy of the
order, strike the name of the company off the register and publish notice of that
in the Gazette. l44l
inspection of the company's books and papers by its creditors and members.t46r
Fifth, it can summon before it and examine on oath an officer of the company
or any person known or suspected to have in his possession any property of the
company or who is supposed to be indebted to the company or whom it deems
to be capable of supplying information on the promotion, formation, trade,
dealings, alfairs or property of the company.l4Tl Besides, the court may also
require such a person to produce any books or papers relating to the company
which are in his custody or control.t4l And lasily, on proof that there is probable
cause for believing that a member or officer or former member or officer of the
company is about to leave Malawi or to remove or conceal any of his property
in orderto evade payment of moneyduetothecompanyorto avoid examination
in respect of the affairs of the company, the court may order his arrest and seize
his papers and personal property.tast
(a) its duration expires or the event on the occurrence of which it was
intended that the company should be dissolved has occurred, and the
220 _ AN TNTBODUCTION TO COMPANY LAW IN MALAWI
Within seven days of the passing of that resolution, the company must
send a copy of it to the registrar for registration. ts2l Moreover, within
fourteen days of the passing of the resolution, the company must get
notice ol it published in the Gazette. I53I
1. From the commencement of the winding up, the company will cease to
carry on its business except to the extent necessary for the winding up.
However, its corporate personality and powers will continue until its
dissolution. tsal
2. Any transfer of shares without the sanction of the liquidator and any
alteration in the status of the members made after the commencement of
the winding up is void. ts5l
(a) they have made a full enquiry into the affairs of the company; and
(b) as a result of that enquiry they are of the opinion that the company will
be able to pay its debts and liabilities within twelve months of the
commencement of the winding up.
2. made live weeks immediately prior to the passing of the resolution for the
voluntary winding up of the company; and
15.2.3.1 Duties
A liquidator in a voluntary winding up by members is under the same duties as
the liquidator in the compulsory winding up of a company. Additionally,
however, the former has the following duties:-
But unlike the members' meeting, this meeting must be attended by one of the
company's directors together with the company secretary to explain the
circumstances leading to the winding up and present a statement of the
company's affairs. The statement must contain a list of the company's creditors,
the estimated amount of their claims and the value of the company's assets.
Besides, it must show how the value has been obtained.
The Second Schedule to the Bankruptcy Act provides the manner ol proving
debts. lt stipulates that every creditor must prove his debts As soon as possible
after the commencement of the winding up by sending an aff idavit verifying the
debt to the liquidator. The affidavit must be made by or on behalf of the creditor
and must contain or refer to a statement of account which shows particulars of
the debt. Besides, it must specify vouchers, if any, which substantiate the
claim. The affidavit must also state whether or not the creditor is secured
because if he is secured but omits to say so, then unless the omission is
inadvertent, he will be required to surrenderthe securitytothe liquidatorforthe
general benelit of all the creditors.
AN INTRODUCTION TO COMPANY LAW IN MALAWI 225
lf a creditor fails to prove his debt until after a final distribution of the company's
assets, the debt is not repayable by eitherthe company or its contributories. P3r ln
Butler v Broadhead (1974) tTal a company conveyed a plot of land to D. Two years
later the company went into voluntary liquidation and in 1964 the liquidator
mistakenly purported to convey the same plot to the plaintiffs. Thereafter, the
liquidator paid the company's debts, distributed its surplus assets amongst its
contributories and the company was dissolved. ln 1971 the plaintiffs learnt for
the first time of the earlier conveyance to D and that in 1964 the company had
no title to convey to them. When they were dispossessed of the land by D, they
sued the company's contributorie slor inter aliacompensation for breach of the
covenants as to title in the'1964 conveyance. lt was held that since the
liquidator had duly advertised for claims against the company and the plaintiffs
had not put in a proof of debt, they were precluded from sharing in the benefit
of any distribution of the company's assets and could not recover from the
contributories the sums claimed. Moreover, since the court's right to call any
contributory to pay any money due from him to the company came to an end
with the company's dissolution, the plaintiffs could not be subrogated to the
company's position under that right.
(a) the charge has become void because of the commencement of the
winding up proceedings. Section 289 provides that a floating charge on
226 - AN INTRODUCTION TO COMPANY LAW lN MALAWI
(b) the debt in respect of which the security was given has lost priority.
Section 287(4) states that where the assets available for the payment of
general creditors are insufficient to meet the preferential debts enumer-
ated in subsections (1) and (3), those debts have priority over the claims
of holders of debentures secured by any floating charge created by the
company and must, therefore, be paid out of the property which is subject
to that charge in priority to the secured debt.
Now unless these two provisions apply, after the receiver has paid out the
secured creditors, any surplus must be paid overto the liquidator. On the other
hand, if the proceeds of the realisation of security cannot cover the secured
creditor's fullclaim, he will be treated as unsecured non-preferential creditor
in respect of the balance which remains unsatisfied.
(a) he can surrender this security and prove for the debt just like any other
creditor;
(b) he can rely on the security and not prove his debt at all;
(c) he can realise the security and prove as unsecured creditor the balance
of the debt; or
(d) he can value the security and prove for any balance.
AN INTFODUCTION TO COMPANY LAW IN MALAWI - 227
ln the case of options (b) and (d) the liquidatorcan elect to redeem the security
by paying the secured creditor from other sources.
2. (a) all wages of any labourer or workman not exceeding K100 payable
in respect of services rendered to the company during twelve months
before the commencement oi the winding up;
(b) all wages or salary of any clerk or servant not exceeding K200
payable in respect of services rendered to the company during
twelve months before the commencement of the winding up; and
(c) all sums due in respect of workers' compensation under any written
law relating to workers' compensation accrued before the com-
mencement of the winding up. Of course this will not apply where the
company is being voluntarily wound up for the purpose of a recon-
struction or amalgamation with another company or where the
company has entered into a contract with an insurer in respect of its
liability under any written law relating to workers'compensatiep. P6l
3. (a) any tax, duty or rate payable by the company to the government in
respect of any period prior to the commencement of the winding up
and
(b) all government rents not more than five years in arrears.
4. All rates from the company to any local authority due and payable within
three years before the commencement ol the winding up.
Of course, where the company has given security for the payment or repay-
ment of the preferential debts in (3) and (4), the debts in this respect will be any
228 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
amount which remains outstanding after there has been deducted from it the
net amount realised from the security. rrzl
Any person who advances money for the payment of wages or salary to any
employee of the company has the same priority as the employee would have
had if the payment had not been made. rel Similarly, any sums received by the
company under a third pafiy insurance policy and payable to the third party to
discharge its liability to him is a preferential debt which must be paid belore
other unsecured debts but after the payment of the debts mentioned above.tTel
After all these preferential debts, the next in line are unsecured non-pre{eren-
tial debts. These will include bank overdrafts and other short-term debts such
as those incurred in the purchase of goods and services on credit. Any part of
a secured creditor's debt which remains unsatisfied after the realisation of
security will also fall in this category. lf the assets of the company are not
sufficient to pay these debts, its members will be called upon to contribute to
the assets. The rules relating to those contributions are contained in Sections
205 and 207 and are discussed below under para. 15.5.
Any assets which remain after creditors have been paid are distributable
among shareholders in accordance with their entitlements and priorities under
the company's articles. Thus preference shareholders will be paid firstfollowed
by ordinary shareholders and then deferred shareholders, il any. Should there
be any surplus, that wilt be distributable among ordinary shareholders unless
the company's articles allow other classes of shareholders to parlicipate in
such a distribution.
(c) it i5 made with a view to giving that creditor or any surety or guarantor for
the debt due to that creditor, preferences over other creditors.
ln the case of a compulsory winding up, the date which corresponds with the
date of the presentation ol a bankruptcy petition is whichever is earlier between
the date of the presentation of a winding up petition and the date on which the
resolution is passed to voluntarily wind up the company. t82l On the other hand,
where the company is voluntarily wound up the date corresponding to the date
of the presentation of a bankruptcy petition is the date when the resolution to
voluntarily wind up the company is passed. ts3lThus, for instance, the creation
of any charge over a company's property within three months from the
7_
230 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
(a) any estate or interest in land which is burdened with onerous covenants;
(d) any other property which is unsaleable or not easily saleable because it
binds the possessor to perform any onerous act or to pay any sum of
money.
Thddisclaimer must be made in writing, with the permission of the court or the
committee of inspection and within twelve months or such other period as the
court allows after the commencement of the winding up. However, the
liquidator will not be allowed to make the disclaimer if:
(a) any person interested in the property has served him with a written
application to show whether or not he will disclaim the property and the
he has not within at least twelve days indicated that he intends to seek
permission to disclaim; or
(b) in the case of a contract, after that application, he has not within at least
twelve days of his receipt of the application disclaimed the contract. 186I
(a) fraud has been committed or that any material fact has been suppressed
or concealed by any person in the promotion or formation of the company
or by any officer in relation to the company since its formation; or
(b) any officer of the company has failed to act honestly or diligently or has
been guilty of any impropriety or recklessness in relation to the affairs of
the company,
(b) been guilty of any mis{easance or breach of duty or trust in relation to the
company,
the court may compel him to repay or restore the money or property or
contribute to the assets of the company. te4l
234 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI
1. by false pretences or any other fraud, induced any person to give credit
to the company; or
3. with intent to def raud creditors of the company, concealed or removed any
part of the company's property within two months of the date of any
unsatisfied judgement or order lor payment of money made against the
company.
1. does not deliver to the liquidator any property or books of the company in
his custody or under his control; or
4. conceals f rom the liquidator any false debt proved against the company; or
5. does not to the best of his knowledge and belief fully and truly disclose to
the liquidator all the whereabouts and sale of the company's property; or
t_
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 235
Generally the rule is that on the winding up of a company, all its members
(including past members) are liable to contribute to the payment of its debts,
liabilities and expenses incurred in the winding up.leslWhere the company is
limited by shares a member's contribution cannot exceed the amount, if any,
unpaid on his shares in the companyte6l unless the company was initially
registered as unlimited and it is wound up within three years of its conversion
into a limited company. ln that case the liability of its members will be
unlimited.tea On the other hand, if the company is limited by guarantee then
every member must pay the amount which he undertook to contribute to its
assets in the event of its being wound up with debts.tea .
Now although both existing and past members are liable to make the contribu-
tions, the latter's liability is confined to debts incurred by the company before
they ceased to be members. But even then, a past member is liable to
contribute only if:
(a) it appears to the court that existing members are unable to satisfy the
contributions required of them by the Act and
(b) the winding up commences within one year of his ceasing to be a member
of .the company.
(b) its affairs have been fully wound up and the liquidator has been in default
235 - AN INTBODUCTION TO COMPANY LAW IN MALAWI
lor six months in lodging any return required of him by the Act; or
(c) its atfairs have been fully wound up under Section 232 and it cannot pay
for a court order for its dissolution; or
(d) its affairs have been fully wound up and it is not necessary to obtain a
court order dissolving the company.
Third, where the company passes any ordinary resolution requesting the
registrarto strike it off the register. This is most likely to happen after completion
of the company's winding up. ln that case the company will also need to file with
the registrar a copy of the resolution and a statutory declaration by at least two
of its directors showing the disposition of its assets and stating that it has no
debts or liabilities.
15.6.1 Procedure
lf the registrar has reasonable cause for believing in the existence of the first
ground, he will send a letter to the company notifying it of the belief and stating
that unless it shows cause to the contrary within one month, notice will be
published in the Gazette to strike its name off the register. ln the case of the
last two grounds, the notice sent to the company will state that unless it shows
cause to the contrary, its name will be struck off the register after three months
from the date of that notice. This notice will also be published in the Gazette.
ln all the three cases if the company fails to show cause te the contrary within
the stated period, the registrar must get notice of that published in the Gazette.
And once the notice is published, the company will be dissolved.
However, the dissolution will not affect the liability of any member or officer of
the company; that willcontinue and be enlorceable as if the company had not
been dissolved. Besides, in spite of the dissolution, the court will still have
power to wind up the company if it is dissolved before being compulsorily
wound up. Moreover, if had the company been existing it would have been
bound to carry out, complete or give effect to some dealing, transaction or
rnatter by doing a purely administrative act, that act may be done by the
registrar as representative ol the company or by its liquidator.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 237
Chapter Fifteen
1. Section 1 16 of the Bankruptcy Act.
2. Section 204(1).
3. Section 212.
4. Section 212(2).
5. Section 213(2).
6. [1880] 14 Ch D 104.
7. Civ cas 33/1987.
8. [1984] 1 WLR 10e0.
9. Civ cas 434/1989.
10. Civ cas 109/1988.
11. Section2l6(1).
12. Section 214(2\.
13. Section 214(1).
14. Section 217.
15. Section 218.
16. Section 219.
17. Section 221 .
Chapter Sixteen
External Companies
As pointed out in Chapter 1, the Companies Act recognises what it refers to as
the'external company'. This is delined by Section 306(2) as'a body corporate
formed outside Malawi which establishes or maintains an established place of
business' here. ln this respect an established place of business means 'a
branch, management, share transfer, or registration office or factory, mine or
other fixed place of business'. However, it does not include an agency unless
the agent has a general authority to negotiate and conclude contracts on behalf
of the body corporate or maintains a stock of merchandise for the body
corporate from which he regularly fills orders on its behalf. Similarly, a body
corporate will not be deemed to have an established place of business in Malawi
simply because it carries on business in the country through a broker or general
commission agent who acts as such in the ordinary course of his business.
Again, the fact that a body corporate has a subsidiary which is incorporated,
resident or carries on business in Malawi will not necessarily constitute the
latter's place of business in the country an established place of business for the
body corporate.
The Act seeks to treat external companies in almost the same way as internal
companies. Thus external companies must register their particulars and
charges which they create over their propefty in Malawi. Similarly, they must
have directors, some of whom must be local, and must have particulars of the
directors registered. External companies must also keep accounting records,
prepare annualfinancial statements and exhibit their names at every place of
business which they maintain. The rules controlling public invitations for
debentures and shares also apply to external companies. And lastly, the Act
also provides rules for the winding up and dissolution of these companies.
(b) a statement in the prescribed form giving particulars of the company; and
(c) such particulars and copies of any charges on the company's property as
require registration in accordance with sections g6 and g7. lf there are
no charges, the company must send a statement in the prescribed form
to that effect.
4. the former and present forename(s) and surname, residential and postal
address and business occupation of each local director;
5. the number and nominal value of its authorised and issued shares and the
amount paid on them;
6. the address of its registered or principal office in the country where it was
incorporated;
7. the address of its principal place of business in Malawi and the number of
its post office box; and
8. the full name, residential and postal address in Malawi of its documentary
agent, that is, the person authorised by the company to accept service of
process and other documents on its behalf.
Section 316(1) requires that it must conspicuously exhibit its name and the
name of the country where it was incorporated on every place where it carries
on business and on the head of all business correspondence, in Malawi. That
exhibition must also show whether or not the liability of the company's
members is limited. Where the company's name is in a foreign language, this
requirement will be fulfilled by exhibiting the name in English or any language
acceptable to the registrar, as translation of it. tu
The majority, not less than three, of the local directors must be resident in
Malawi. t51 Besides, in all its trade circulars and business correspondence
where its name appears, the company must state the present and former
forename(s) and surname of each local director. t6l
After the appointment of directors has been made under Section 314 (1), the
company is free to vary the number of individuals appointed. m However, the
variation must not decrease or increasethe number of local directors beyond the
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 243
statutory limit imposed by subsection (1). lndeed, the number of local directors for
the time being appointed cannot be reduced if the Minister so directs.
1. they give a true and fair view of the company's state of affairs in respect
of its operations in Malawi;
2. they are adequate for the preparation of proper balance sheets and profit
and loss accounts in accordance with the Act; and
(a) all sums of money received and expended by the company in the course
of and for the purpose of its operations in Malawi, and the sources f rom
which the money was received and the transaction in respect of which the
expenses were incurred;
(b) all sales except ordinary retail sales and purchases, by the company in
the course of its operations in Malawi; and
(c) the assets and liabilities of the company relating to its operations in
Malawi and its members' interests in those assets and liabilities.
Section 312(1) also places every external company except those which carry
on banking and insurance business, under a duty to prepare and send to the
registrar f or registration at least once every calendar year, a balance sheet and
a prof it and loss account. lf the company is a holding company, it must prepare
group accounts instead. These accounts must contain the same particulars as
would be required in the company's country of incorporation.
Besides, the company must also send to the registrar for registration:
1 . a profit and loss account giving a true and fairview of its prof it or loss in respect
244 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
2. a balance sheet giving a true and fair view of the company's state of affairs
in respect of its assets and liabilities attributable to its operations and
properties in Malawi as if those assets and liabilities were of an internal
company at the end ol the period to which the balance sheet relates;
3. a statement as at the end of its financial year showing its assets which are
situated in Malawiand the nature and amount of any specific charges on
them. The assets must be classified, distinguished and valued in the
prescribed manner.
4. the date when and the country where the company was incorporated. tsl
(a) he receives an answerto the effect that the company has ceased to have
an established place of business in Malawi; or
The local directors must also conspicuously state on every invoice, order or
business letter issued in Malawiwhere the company's name appears that it is
being wound up in the country of its incorporation. tril
of course on the company's winding up in Malawi under section 819, the court
may direct that its transactions be deemed valid although they were concluded
after it was dissolved or ceased to exist according tothe law of the country
where it was incorporated. tr2l
16.9 Winding up
An external company may be wound up whether or not it has been dissolved or
has ceased to exist in the country of its incorporation. r13r subject to section 319,
provisions of the Act governing the winding up of internal companies also apply
to the winding up of external companies. tlar However, unlike internal companies,
external companies can only be wound up by a court order. And afterthe order is
made, the company will be treated as if it were an internal company so that only
its assets and liabilities in Malawi will be affected by the winding up. nsr
(d) the court is of the opinion that its business or objects are unlavyful or that it
is being operated in Malawi for purposes which are unlawful or that it is
carrying on business which is not authorised by its charter, memorandum
or constitution; or
(f) the court is of the opinion that it is just and equitable that the company
should be wound up.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 247
Chapter Sixteen
1. Subsection (2).
2. Section 314(1).
3. Subsection (4).
4. Section 310(2).
5. Section 314(3).
6. Subsection (5).
7. Subsection (2).
8. Section 313(1).
9. Section 322(3).
10. Subsection (4).
1 1. Section 318(2).
12. Section 319(6).
13. Section 319 (1).
14. Subsection (2).
15. Subsection (5).
16. ln determining whether the company is unable to pay its debts, the coufi
will apply section 213.
i rtF--*
248 - AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI - 249
Class rights
Index alterationof .... ..... 33- 36, 38, 40, 51, 101, 103, 108, 192
Commission
... . 25,72,79,115,136,137,139 -141,143 - 145,151,
paymentof
Accounting records . 53, 60, 67, 17 1, 210, 2'lg, 222, 224 - 226, 229, 234, 235
1 1 1
"L 1-
250 _ AN INTRODUCTION TO COMPANY LAW IN MALAW] AN INTFODUCTION TO COMPANY LAW IN MALAWI - 251
orderofpaymentof... "'225 nature of . . . . . . 28,31, 32, 51, 54, 94,121, 158, 178,
paymentol . . . . 25,72,79, 115, 136, 137, 139 - 141, 143' 145, 151' .... 190,217,224,241
. . . . tsg, 160, 167, 171,210,219,222,224,225,226,228,234,235 f raudu lent preferences
proof ol 224 - 226 avoidanceof .... ....228,229
Declaration of solvency. " " 221,223
Directors
(ieneral meetings
board of . . . ' 13, 47,59,63, 64, 67,76,82, 83, 97, 101
103 - 108, 177 , '178, 194, 22'1, 223 annual general meeting 51, 53, 54, 56, 67,81,84,
collectiveauthorityof ... .'.'.. "'82 87 - 89, 179, 180
as
eligibility for appointment '' 170' 215 extraordinary general meeting 5'l ,102
irrJgularlyappointed """' 95 noticeof ... ...22,25, 35,36,37,52-56,59,60,80
loans to .. . 81, 132' 133 . . . . 92,93, g7 - gg, 102, 113,114,153 - 156,
paymentsto ... 70,230 . . 1 62, 1 67, 204, 205, 21 0, 21 3, 21 5, 21 9, 220, 223, 232, 236
for loss of office "" 79 persons entitled to attend . . . 56
in connection with take-ove proceedingsat... 55-57
remedies against . . 63 ( accounts
ir{)up annual .. . 177
.i!4.- .,.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 253
252 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Profits
Liquidator
receiverand.. .;.... 169, 170 capitalisationof.. ..135
sales
right to recover in certain purchases and ''' 225 revenue .. 141, 143, 185
undercompulsorywindingup.... .--"..208 unappropriated... ...141,142
eligibility for appointment as - ' 170,215 unrealisedcapital ....14'1,'143
Promoters
powersof ... 61-64,82,96,104,171,218-220,222
releaseof ... .'...165 profits
duty to account for secret . . . 13
remunerationof... .......217 liabilityundersection299(1) .......16
--..' 215 Prospectus
validityof actsof ....
undervoluntarywinding up bycreditors... - - ' ' ' ' 223 ...
contentsof ..25,53,54,94
undervoluntarywinding upbymembersl .. .. ' ' ' 219 liabilityforstatementsin.. ....17,123
registrationof ... .. 113, 146,154,155, ,162,244
dutiesof ... 119,184,232 161
Proxies . s7, sB
Prudenceconcept. .......142
Members
call for an extraordinary general meeting by . . . '.. 51
Quorum .52,57,63,74,75,82
maximumnumberof.... ".49
minimumnumberof ... ....49 Receiver
registerof ... ..... 49,50,70,90, 113, 114,153,240 appointmentof .. ..... 54,57,67,95, 159, 164-172
Memorandu m of Association
72,77,78,81, 86, 97,
eligibility for appointment as . . '170,2'ls
effect of 15, 32, 33, 38, 39,63, legalpositionof... ....87,122
114, 118, 134, 137, 144, 151, 162, 170,'188 liquidatorand . . 87, 166, 218,220,222
procedureforalterationof ... ..33'34 receiver/managerand ..... 164
relationtoArticlesof Association.... .'' '. 38
Reconstruction . . .
Name Resolutions
changeof ...
publicationof....
Notice of general meeting
.....20,30,34,37,184
---- 29,76'122,123 "::'::1 : :: iu,i,?u1';fi,,33: ??; 91;3lil3: ?3;l?;31i33:
.'175, 201 - 203, 205, 220, 229, 236, 240, 243
contents of . . . '. 25,53,54, 94 special. . . . . 11 , 1 9, 21 , 22, 24,30, 34, 40, 52,54, 55, 57, 59, 60,71,
lengthof ... .-.....
personsentitledto... ..55'56
53
llrqhtsissue.
:::::::::: : : 1l il ll ll''ln';])u!;,')l;l,L;'j2;,'!f;
....116
Passingoff ... "" 30
Pre-emptive rights. . - -...
118 i ir:heme ol arrangement
't4-16 company'sconsentto.... .......194
Pre-incorporationcontracts..
promotersliabilitYunder. "' 14 courtsanctionof . ..191
Principleof assent ....." 60 definitionof .... ...192
Prof it and loss account . . . 22,23,135, 141 ' 143, 175 ' 177, 179, '180,243 directorscompensationfor. ......200
consolidated.... ..35,95, 113, 162'176,177 take-overand .. ... 2O1
*1." L /
.tF I
l'
254 - AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI - 255
,t absentfromMalawi .... ..69,82'188 . . 105, 107, 114,'116, 118, 145, 186, 191, 193, 194, 196, 205
i:lt e
challenge of alteration of the memorandum by . . ' 34 - 38
I
I
challengeof thecontraventionof the memorandum by... --.. '' ' 32 Whollyownedsubsidiary .....102,178,182
i
I Shareholding
i
,l
changeof ... ...'.20,30,34,37,184
lrl
li(u
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