Financial Training Company

Corporate and
2007 Business Law- F4
(Zimbabwe)
Casebook

Appointment and resignation of Directors

The procedure for appointing and removing directors is invariably governed by the company’s
articles of association. If Table A has been adopted, articles 90-98 specify the formalities for
electing directors and in terms of article 96 the directors shall have power at any time and from
time to time to appoint any person to be a director, either to fill a casual vacancy or as an
addition to the existing directors. At a Board meeting the outgoing director would tender his
resignation and, the Company Secretary, would note the resignation in the minutes. At the
same time the directors would decide at a Board meeting to invite the incoming director to fill
the seat vacated by the outgoing director and this decision would be recorded in the minutes.
The Secretary would delete the outgoing director’s name and details from the Register of
Directors and Secretaries and insert the incoming director’s particulars in terms of s.187 of the
Companies Act. The Secretary would be obliged to complete a CR14 form advising the
Registrar of Companies within one month of the change. At the same time the company’s
letterheads and other printed stationery should reflect the new changes.
The Secretary should send a letter to the incoming director, the new board member
congratulating him upon his appointment and enclosing a copy of the company’s memorandum
and articles of association. The new director should also be reminded that he is required to give
notice of interest that he may have in contracts involving the company as per s.186 of the Act. If
the new director is to be signatory on one or more of the company’s bank accounts, his details
and specimen signatures should be sent to the bank.

The fiduciary duty of directors

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A director owes the company a number of common law and statutory obligations.
The duties of a director can conveniently and usefully be broken down into the following
categories.
(1) fiduciary duties
(2) the duty to exercise powers ‘bona fide in the company’s interest’
(3) the duty not to make ‘secret profits’
(4) the duty not to have personal interest conflicting with those of the company
(5) the duty to disclose
(6) the duty of care and skill
(7) the duty to act intra vires the company’s statutes (memorandum and articles of
association)
At common law a director is subject to certain fiduciary duties which require him to exercise his
powers bona fide and for the benefit of the company. A person possesses fiduciary duties when
he is in a position of trust or occupying a position of power and confidence with respect to
another person such that he is obliged by law to act solely in the interest of that other person’s
rights which he is to protect. It cannot be doubted that directors occupy a position of trust or as
is usually stated, a fiduciary position towards the company similar in some respects to that of an
agent entrusted with the control and management of the money or effects of another person.
The fiduciary duties are owed to the company and to the company alone and not necessarily to
individual shareholders (Pergamon Press Ltd v Maxwell).

The fiduciary duty of directors in respect of the shareholders is akin to the duty owed by the
trustees to their beneficiaries and thus the fiduciary duty can conveniently be broken down into
two parts:
(1) the directors must act bona fide for the benefit of the company and not for an ulterior motive
and
(2) the director must refrain from embarking upon an act which will lead to a conflict of his
interests with those of the
company. Roodpoort Limited Main Rep v Du Toit (1928)
An important consequence of the relationship between a director and his company is the
director’s duty to exhibit utmost good faith in his dealings with the company. He must refrain
from placing himself in a position where his own interests clash with those of the company and
he must never take an improper advantage of his position by acquiring for himself assets or
opportunities that rightly belong to the company. In Robinson v Randfontein Estates Gold
Mining Company Ltd (1921).
The Managing Director of a company using information he acquired in the course of his official
duties bought immovable property worth £60 000, which the company was interested in

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acquiring and using a front immediately resold it to the company for £275 000.000. The court
held that the plaintiff company was entitled to claim from the defendant the profit of £215 000.00
made by him on this transaction. Innes CJ said
‘where one man stands to another in a position of confidence involving a duty to protect the
interests of that other he is not allowed to make a secret profit at the other’s expense or place
himself in a position where his interests conflict with his duty’
In Magnus Diamond Mining Syndicate v Macdonald and Hawthorne (1909), the defendant while
directors and managers of a company acquired information as to the value of certain
diamondiferous property. They thereupon purchased the property
in competition with the company without disclosing their intention to the company. The court
decided that the defendants were obliged to transfer the property to the company and to
account to it for profits already received. The court made the following observation that ‘it is the
duty of all agents including directors of companies to conduct the affairs of their principal in the
interests of the principal and not for their own benefit.’

One of the major statutory duties of the directors is the duty to disclose his interest in contracts
(where he has either a
beneficial direct or indirect interest) between a director and his company. Section 186(1) of the
Companies Act Chapter 24:03 says that ‘it shall be the duty of a director of a company who is in
any way whether directly or indirectly interested in a contract or proposed contract with the
company to declare the nature and full extent of his interest at a meeting of the directors of the
company’.

In the case of Aberdeen Railway Company v Blaikie Bros (1854) the defendant company
entered into a contract to purchase a quantity of chairs from the plaintiff partnership. At the time
that the contract was concluded, a director of the company was a member of the partnership.
The court held that the company was entitled to avoid the contract.

Persons prohibited from being directors

The Companies Act disqualifies certain parties from holding the position of either director or
auditor of the company.
Directors
Section 173 specifies who may not be a director and any of the following persons shall be
disqualified from being appointed a director of a company

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(a) a body corporate, for the reason that the work of a company director requires the personal
involvement of the director.
(b) a minor or any other person under legal disability
(c) save with the leave of the court an unrehabilitated insolvent
(d) save with the leave of the court any person who has at any time been convicted, whether in
Zimbabwe or elsewhere, of theft, fraud, forgery or uttering a forged document or perjury and has
been sentenced therefore to serve a term of imprisonment without the option of a fine or to a
fine exceeding one hundred dollars. In the case of Oliver John Tengende v the Registrar of
Companies (1988) Manyarara JA of the Supreme Court of Zimbabwe cited with approval the
case of Ex parte Boland (1967), the headnote to which says:
.The object of section 150(1)(d) (now section 173(1)(d)) is that the management of companies
should not be in the
hands of unscrupulous or disreputable men ... A director.s position involves trust and section
173 (1)(d) is meant to weed out persons who from their past conduct are likely to breach that
trust.

Trading of shares

The fiduciary duties of directors are:

(i) to exercise their powers for the purposes for which they were conferred and bona
fide for the benefit of the company as a whole; and
(ii) (ii) not to put themselves in a position in which their duties to the company and
personal interests may conflict: Hindle v John Cotton Ltd 1919. At common law
the directors of a company were always freely permitted to hold and deal in the
shares of their company. The only sanction which the common law imposed was
to make actionable the use of certain confidential information belonging to the
company (such as trade secrets). The reason why the common law imposed no
clear prohibition on the use of inside information in share dealings stemmed
largely from the decision in Percival v Wright 1902 which has been followed
consistently by our courts, Pretorious v Natal South Sea Investments Trust Ltd
1965.

In Percival v Wright the court held that there was no duty on the part of a director, who was

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invited by a member to buy shares, to disclose to the member the fact that negotiations were in
progress for the sale of the company’s undertaking at a price representing more per share than
that asked by the member. The basis of this conclusion is that while a director owes a fiduciary
duty to the company, he owes no such duty to individual members.

Subsequently in the case of Allen v Hyatt 1914 the courts did recognise special but very limited
circumstances
in which a duty might be owed by directors to individual shareholders. In this case the directors
had profited through share purchase from members. The directors were held accountable to
them because they had purported to act as agents for the members by inducing the latter to
give them purchase options over each member’s shares, supposedly to facilitate a proposed
amalgamation.

Membership
One facet of a company is that it has its own legal personality and an existence apart from its
members, while another is that it is an association of its members. In the case of a company
limited by shares, a member is a person whose legal relationship with the company arises by
virtue of his shareholding in the company. The terms member and shareholder accordingly refer
to the same person. The concept of membership refers in particular to the right of the
shareholder to participate in the exercise of control by the general meeting. The concept of
shareholding refers in particular to the right to dividends after they have been declared and
participation in the distribution on liquidation. This concept refers, also, to the obligation to pay
the unpaid portion of his shares when the call is made.

It should be emphasised that on the registration of the memorandum and articles of association
the corporate body, comes into existence, and is composed of the subscribers to the
memorandum and all other persons who may from time to time become members. Section 7 of
the Companies Act [Chapter 24:03], refers.
L J Bowen in Nicol’s case (1885) stated that:
‘A person becomes a member of a company
(a) by subscribing to the memorandum of association or
(b) by allotment of shares
(c) by transfer of shares’
A subscriber of the memorandum becomes a member as soon as the company is incorporated,
see Brown v Nanco Pty Ltd (1977 s.30(1). Subscribers of the memorandum, that is, those who
sign their names in the memorandum, are deemed to have agreed to become members in

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terms of s.7 of the Act. There is no need for allotment of shares in this regard, but the
subscription imposes liability to take up and pay for the shares agreed in the memorandum. In
terms of s.8(2) every subscriber is duty-bound to take more than one share.

It is one of the duties of the subscribers of a company limited by shares to state in their own
handwriting in words opposite to his name the number of shares they take (s.8(3)).

Once the subscription process is completed, it is now the duty of the directors to enter the
subscriber’s name in the register. If the subscriber’s name is not entered into the register, this
entitles him to escape liability for calls on the shares for which he has subscribed in terms of
s.8(1)(b)(iv) of the Act. Membership can arise through express or implied consent when a
member’s name is entered in the register of members but the member concerned does not
object. (Section 30(2) of the Act.) Agreement to be registered in the members’ register occurs
through application and allotment (s.65), or by taking transfer of shares from an existing
member (ss.99 and 104 of the Act), by transmission on the death or insolvency of an existing
member. (Section 102). As was emphasised in the case of Brown v Nanco (Pty) Ltd (1977), an
allottee or transferee becomes a member when his name is entered on the register, as
confirmed in terms of s.30(2) of the Companies Act [Chapter 24:03].

It is also vital for the purposes of this discussion to note that for the rights and duties to be
lawfully asserted one needs to have the capacity to become a member. The aspect of capacity
of a person is canvassed under the law of contract. This is, however, subject to the articles of
association of that particular company in question. The articles may make provision for any
person, for instance, minors to be excluded. Note should be taken that a company cannot
become a member of itself nor of its subsidiary. Trevor v Whitworth (1887). Membership may
also arise through estoppel. If a person knowingly allows his name to be added to or to remain
on the register of members, he/she is estopped from denying his/her membership in the
company concerned. Section 30(2) seems
to be raising the aspect of estoppel.
Shareholding in a company establishes the relationship between a company and the
shareholder. The case of Eley v Positive Assurance Company (1922) is instructive on the point.
A member of a company has an interest in the company entitling him subject to the articles to
(a) share in the profits of the company
(b) attend and vote at meetings
(c) a share in surplus assets if any when the company is being wound up.
(d) a limited right to sue for a wrong done to the company where the company itself is
unable to do so due to the wrongful
act of the controlling majority.

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(e) to resist oppression and case law has defined this to mean conduct which is harsh,
burdensome, illegal and unreasonable.

Appointment of an auditor
A number of statutory provisions deal with the appointment of an auditor by two categories of a
company: public companies and other companies. In terms of s.150(1) of the Companies Act
[Chapter 24:03] the first auditor of a public company shall be appointed within one month of the
issue of the certificate of incorporation. The appointment of the first auditor is made by directors
of the company; if they fail to do so, the company in a general meeting may appoint the first
auditor. If neither the board of directors nor the company appoints the auditor, the Minister may
on the application of a member do so. This may happen when a shareholder with a sufficient
voting strength vetoes such appointment. In terms of s.150(2) of the Companies Act subsequent
auditors shall be appointed by the company at the conclusion of each annual general meeting to
hold office until the conclusion of the next annual general meeting.

As regards private companies, the first auditor shall be appointed within 30 days of the issue of
a certificate of incorporation. This is in terms of s.151. However, s.150(7) of the Act provides
that a private company shall not be required to appoint an auditor in the following situations, if:
(i) the number of members does not exceed ten and;
(ii) none of the members is a company and
(iii) all the members agree that an auditor shall not be appointed.

This is dealt with in section 150 of the Companies Act (Chap. 24:03). This section is long and
worded in a complicated manner but in essence it makes it compulsory for every company to
appoint an auditor. The first appointment must be done by the directors. In the case of a public
company, it must be done within a month of the issue of a certificate entitling it to commence
business. In the case of other companies, it must be done within a month of the issue of a
certificate of incorporation.

Once the first auditor is appointed he is required to hold office until the conclusion of the first
Annual General Meeting of the company. Thereafter the appointment is made by the company
at each of its Annual General Meetings. Where, at an Annual General Meeting, an auditor is not
appointed or re-appointed the Minister may appoint a person to fill the vacancy. The company,
however, is required to give the Minister a week’s notice of the fact that an auditor was not
appointed or re-appointed at its Annual General Meeting.

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If the directors fail to appoint the first auditor the company, in a general meeting, may appoint
him/her: and if neither the directors nor the company appoint an auditor, the Minister may do so
on the application of any member of that company. A special notice is required for a resolution
at the company’s Annual General Meeting to appoint, as auditor, any person other than a
retiring auditor. Note that a private company is not required to appoint an auditor if, inter alia,
membership does not exceed ten or if all members agree that an auditor is not necessary.
The Companies Act does not specifically deal with the issue of qualifications of an auditor but it
does disqualify, in terms of s.152, certain persons from being appointed as auditors of a
company. The examples are: an officer or servant of the company, a body corporate, or a
person who is an employer or employee of an officer or servant of the company.

Removal of an auditor
An auditor may be removed at a general meeting and a substitute appointed in his place. This is
provided for in terms of s.150(1) of the Companies Act [Chapter 24:03] which states that a
company may at a general meeting remove an auditor and appoint in his place any person. The
nomination of the substitute auditor shall be made by a special notice by a member of the
company to the other members not less than fourteen days before the date of the meeting.
In terms of s.150(2), a company in the course of ordinary proceedings in a general meeting is
not permitted to dismiss or remove an auditor from office without following the statutorily laid
down procedures. If during the course of the year, an auditor tenders his resignation to the
company or is otherwise disqualified by death or other cause as provided for in s.152 of the Act,
it is not necessary to call a general meeting for the purpose of appointing a substitute, as such a
resignation or disability creates ‘casual vacancy in office of auditor’ which the directors are
authorised to fill in terms of s.150(5) of the Act. When the next annual general meeting is held
the provision of s.150(2) will apply.

The duties of an auditor

The duties of an auditor under the Companies Act

The statutory duties of an auditor are set out in ss.153 and 154 of the Companies Act. These
include the duty
(i) to make a report to members on the accounts examined by him;
(ii) to state in his report that the accounts of the company and the group accounts are properly
drawn up in accordance with the Companies Act so as to give a true and fair view of the

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company’s affairs;
(iii) to include in his report statements which in his opinion are necessary if he has not obtained
all the information and explanations which to the best of his knowledge were necessary for the
purposes of his audit;
(iv) to attend any general meeting of the company.

The common law duties of an auditor include the duty

(i) to act honestly and with reasonable skill, diligence, care and caution. In re Kingston Cotton
Mill Company (1896) the court made the following observation:
‘It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and
caution
which a reasonably competent, careful and cautious auditor would use . . . .’
(ii) to show the company’s true financial position as shown by the books (Tonkwane Sawmill
Company Ltd v Filmalter, 1975)
(iii) to make sure that the amount of stock stated to exist is a reasonable probable figure but the
auditor has no duty to take stock unless there are suspicious circumstances
(iv) to act as a watchdog but not a bloodhound. In re Kingston Cotton Mills (1896), the court
made the observation that an auditor is not bound to be a detective or to approach his work with
suspicion or with a foregone conclusion that there is something wrong. Lord Denning’s remarks
(Fomento v Selsdon Fountain and Others, 1958) are equally instructive. He remarked that an
auditor is not to be confined to the mechanics of checking vouchers and making arithmetical
computations. His vital task is to take care to see that errors are not made, be they errors of
computation or errors of omission or commission of downright untruths.
To perform this task properly he must come to it with an enquiring mind – not suspicious of
dishonesty – but suspecting that someone may have made a mistake somewhere and that a
check must be made to ensure that there has been none.

Persons prohibited from being auditors

As far as the appointment of auditors is concerned section 152 of the Companies Act places
emphasis on impartiality, objectivity and the independence of the auditor. As such none of the
following persons shall be qualified for appointment as auditors of a company.
(a) an officer or servant of the company
(b) a person who is a partner of an officer or servant of the company
(c) a person who is an employer or an employee or an officer or servant of the company.
(d) a body corporate

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(e) a person who is an officer or servant of a body corporate which is an officer of the company.
(f) A person who by himself or his partner or his employee regularly performs the duties of
secretary or bookkeeper to the company.

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