COMPANY LAW AND PROCEDURE

Mr. Bwembya

- Act No. 10 of 2017

- Act No. 9 of 2019
- S.I No.14 of 2019 (Corporate Insolvency Act)

What is Company Law

- It is a branch law which deals with legal rules for the formation,
governance as well as winding up of a company.
- A company is an association of two or more persons (natural or
artificial) who come together in order to undertake business or any
other legal purpose. The association formed is a continuing,
regulated and formal.
- A relationship of two or more people with a view of sharing profit is
called a Partnership.

DIFFERENCE BETWEEN A PARTNERSHIP AND COMPANY

1. The law differentiates the two
2. Formation of the two distinguishes them. Partnership is formed
by agreement while a company is formed by registration once a
certificate of incorporation is issued.
3. A Partnership can be created by estoppel. A company is only
created by registration.
4. A company is a person in law. Meaning that it has a separate
legal existence. The opposite is true for the partnership.
5. The liability of partners is unlimited, where as liability of
shareholders is limited to the amount not yet paid on their
shares.

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 6. Perpetual Succession: A partnership dissolves once a partner
dies, a company does not dissolve when one of the
shareholders die, it continues to exist in perpetuity.

SOURCES OF COMPANY LAW

- Companies Act No.10 0f 2017
- Corporate Insolvency Act No.19 of 2017
- Securities Act No. 41 of 2016 (it deals with members that buy
shares on the stock exchange market).
- Banking and Financial Services Act (Its applicable to companies
that are financial lending institutions)
- The Insurance Act ( It provides regulations to companies in the
insurance industry)
- Competition and Consumer Protection Act
- Articles of Association which is a company constitution governing a
company
- The form of application for incorporation
- Common law

FACTORS TO PROMPT ONE TO FORM A COMPANY

- The size of the business
- The duration of the activities. If the venture is of a fixed duration,
the company is not an ideal venture because of the rigorous
process of dissolution.
- The regulatory regime. There are certain activities that by law
cannot be undertaken as companies e.g Legal Practice, Accounts
Practice
- Government fiscal policy

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 - The nature of the activity. If the activity is one which would thrive
behind the personal attribute of an individual then it would be
appropriate to form a partnership.

FORMATION OF A COMPANY
- A company is formed by registration
 Section 39 of the Companies Act: The applicant must
propose atleast three names in the prescribed form
 Under section 40, the Registrar may reject a name for the
following reasons:
a. The name is likely to cause confusion with a
well known name
b. registration of the name is sought to prevent
another person who is legitimately entitled to
use that name from using it;
c. registration of the name is otherwise
undesirable or inimical to the public interest;
d. the name denotes the patronage of the State
or of the President, Government or
administration of any foreign state, or of any
department or institution of any foreign state;
e. the name is calculated to deceive or mislead
the public, cause annoyance or offence to any
person or is suggestive of blasphemy or
indecency; or
f. registration would suggest or imply a
connection with a political party or a leader of
a political party.

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  The decision of the Registrar can be appealed to the High
Court.
 Once name is cleared, the Registrar will inform the
applicant of its clearance.
 The name clearance is only valid for 30 days.
 Section 41 provides for reservations of the name.
Reservation of the name is 90 days.
1. of Association
- Submit a statement if you are adopting standard articles
- There are amendments, they should accompany the articles.

- Section 13
o Statutory declaration
o Signed consent from the director or company secretary
o A declaration of liabilities
o A statement of beneficial owners. A beneficial owner is
defined in section 2. A natural person who;
(a)directly or indirectly, through any contract, arrangement,
understanding, relationship or any other means ultimately owns,
controls, exercises substantial interest in, or receives
substantial economic benefit from a body corporate; or
(b) exercises ultimate and effective control over a legal person or
legal arrangement; and the terms “ beneficially own ” and “
beneficial ownership ” shall be construed accordingly;
o The person is not named in the articles of association. It is a
criminal offence not to name the beneficial owner.
o A declaration by the applicant that the particulars of the
beneficial owner are true and correct

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 - Section 12 (6)
o An application must be signed by a subscriber in the
presence of the witness to attest that I saw him signing.
o Subsection (8) gives eligibility or being a member of the
company.
o People who lack capacity to contract cannot append their
signatures.
o Subsection (9) a person cannot incorporate a company for
purposes of faith based or religious.
o The checklist prohibits registration under Companies Act as
faith based organisation.

SEPARATE LEGAL ENTITY

The case of Salomon vs Salomon

In Zambia the case of Associated Chemicals Limited vs Hill &

Delamin emphasises the fact that because of the decision in Salomon it
is not necessary in company law to attempt to distinguish between old
and new shareholders or between new and old management or to treat
any transaction involving the company as been between individuals.

The companies Act in section 22 provides that:

- Once a company is incorporated it shall subject to this act and to
such limitations inherent in its nature

Perpetual Succession: it means that a company survives the

shareholders in perpetuity, its existence is not dependent upon who the

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shareholders are at a particular time. Thus in ZCCM & Ndola Lime vs
Sikanyika & Others SC No.24 2002 the Supreme Court of Zambia held
that:
Terminal benefits of former ZCCM employees which had accrued to
them prior to privatisation of the company were still payable by the
company notwithstanding the fact that shareholding had changed hands
from government to private investor.

Similarly the Companies Act in section 22 provides that the company

shall have perpetual succession. In addition to that, section 42(7)
provides that a change of name shall not affect the company’s
obligations.

Limited Liability: This attribute is to the effect that the members of the
company cannot be required to contribute anything more than they owe
on their shares during winding up. This provision is found in the
Corporate Insolvent Act???????????????????

Lifting of veil of incorporation

- By the court
- Or by statutory provision in the Act

Circumstances under which to lift the veil by the court

- When there is evidence that the company was incorporated as a
shame for purposes of avoiding existing legal obligations. The
case of Gillford Motor Company vs Horne. 1933 chd 935
- Where there is need to determine whether the company has an
enemy character for purposes of invoking the common law

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 doctrine of frustration of contracts. Daimler Company Limited vs
Continental Tyres (1916) 2 AC 307
- Where there are companies that belong to the same group and
issues have arisen relating to taxation of those companies, the
courts are at liberty to treat the companies as one entity and
consider the assets at their disposal as one entity.

Lifting the Veil by Statute

The companies Act has many provisions in which shareholders or
directors may be held personally liable for the liabilities of the company if
certain circumstances have arisen. For example section 362 provides for
fraudulent trading..
Without prejudice to the Penal Code, a director of a company who—
a) by false pretences or other fraud, induces a person to give credit
to the company; or
b) with intent to defraud a creditor of the company—
c) gives, transfers or causes a charge to be given on property of the
company to another person;
I. causes property of the company to be given or transferred
to a person; or
II. causes or is a party to an execution being levied against
property of the company;
commits an offence and is liable, on conviction, to a fine not exceeding
two hundred thousand penalty units or to imprisonment for a period not
exceeding two years, or to both.

On fraudulent trading, the case of the case of Ethiopian Airline Limited

vs Sunbird Airline Limited SCJ No.6 2007

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Separate Legal Personality additional cases
- Macaura Limited vs Northern Assurance Limited
- Lee vs Lee’s Airfarming Limited

POST INCORPORATION REQUIREMENTS

1. Meetings
The companies Act requires that every company must hold an
annual general meeting at which decisions of the members
affecting the company will be made through resolutions. Section
57 provides that :
(1) Subject to this section, a company shall hold, within
ninety days after the end of each financial year of the
company, an annual general meeting.

(2) The Registrar may, where an annual general meeting is

not held in accordance with subsection (1), on the
application of a member, direct the convening of an annual
general meeting and give such directions as the Registrar
considers expedient, including directions to modify or
supplement the
(a) Convening, holding and conducting of the meeting; or
(b) Operation of the company’s articles.

(3) A private company may dispense with the holding of an

annual general meeting required in accordance with this
Part, other than the first financial year, if all the members
entitled to attend and vote at the annual general meeting
agree in writing, before the end of the financial year, and
notify the Registrar in the prescribed form.

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 (4) If a company fails to comply with this section, the
company and each officer in default commit an offence and
shall be liable, on conviction, to a fine not exceeding three
thousand penalty units for each day that the failure
continues.

- It is important that the members hold a meeting at the earliest

possible opportunity to discuss among other things:
1. It may be necessary to confirm the director who will named in
the application for incorporation or to appoint new ones.
2. It may be necessary to come up with shareholder agreements
in addition to the articles of association.
3. Members may consider whether the Articles in their current
form meets their aspirations, they may consider amending such
articles in such a meeting.
4. In the meeting its important to consider whether there are pre-
incorporation contracts that need ratification.

2. Records
Apart from holding meetings, there are obligatory records that a
company should maintain. The following are the records:
1. Register of shareholders and beneficial owners (section 195)
2. Register of charges (secured debt or secured by the provisions of
the companies Act as security) against the company’s assets
(Section 231).
3. A company is obliged to maintain or keep accounting record.
Section 325 requires that a company should maintain a register of
all documents that have been lodged with the registrar. Section

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 356 requires that the companies must return records for a
minimum record of 10 years.

3. Annual Returns
The need to file annual returns in accordance with Section 270, the
requirement is that every company should within three months
from its financial year end, file an annual return with the registrar.
The company may be deregister if the company fails to file annual
returns for 2 consecutive years.

Company Promoter
- Any person who undertakes to form a company and takes the
necessary steps such as lodging the necessary documents with
the Registrar. Promoters are important in law because of their
legal consequences before or after the company is incorporated. A
promoter in the eyes of the law is in a fiduciary relationship with
the company even before its incorporated. Once a company is
incorporated, the promoter just like an ordinary agent has a legal
duty to disclose if he or she is making a profit out of the activity of
promoting a company. The promoters become the first
shareholders of the company. The leading case in this regard is
Elanga vs New Sombrelero ......................................

- A promoter who breaches this duty of disclosure places himself in

a position where whatever contract he has entered into with the
company is voidable at the option of the company. To this effect
therefore, the company may opt to rescind the contract. Rescission
is an equitable remedy which has been placed to protect the third
parties.

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It has further been held that Gluksten vs Barnes it was held that it is
not just disclosure, it is to independent directors to who the disclosure
who are capable of making independent decisions in the interest of the
company.

The duties of promoters are not codified in the Act and reliance is placed
on the common law.

PRE-INCORPORATION CONTRACTS
There are two sides to consider when discussing pre-incorporation
contracts:
- The common law
- Statutory provisions
The question that arises is whether a company can adopt contracts
entered into by promoters before it was incorporated. Company law
borrows from the principles of law relating to ratification of contracts by
the principal agent.
- The principal must have been named
- The agent must act on behalf of the principal
The case of Kelner vs Baxter

Statutory Intervention
In Zambia, Section 20 provides that where a person purports to enter
into a contracts not named .............................................................

- The other party to a contract may in accordance with sub section 4

apply to court for an order affixing obligations under this contract

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 so that obligations may be apportioned such that some liability
may be for the promoter and other liability for the company.

Ordinary Resolution
Is not required to be registered with the registrar apart from the
appointment of directors.

Documents Required
The constitution of the company in traditional company law is made up of
two documents, namely the Memorandum of Association and Articles of
Association. The information which was provided for in the memorandum
of incorporation is now provided for in the standard form (Application
form). Some functions which where perfumed by the MOA are now
performed by the standard form (application form) and the AOA.

What is a Memorandum of Association?

This is a document that contains information primarily made to inform
outsiders about some basic facts regarding the company. Of
significance is the “objects clause” which is now contained in the
application for incorporation. In the object clause there are serious
legal implication which flow from the object clause. At common law
the objects clause defines the capacity of the company to contract.
Why because, a company at common law cannot validly enter into a
contract which is not permitted by the objects clause. Any contract
entered by the directors outside the objects clause is invalid and
unenfoceable (ultra vires). The case of Ashburry Railways Carriage
vs Riche.

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 The doctrine of ultra vires extends beyond the object clause. It
extends even beyond the exercise of directors powers. If directors
have done anything beyond their powers, the powers are ultra vires.

Justification of the Doctrine of Ultra Vires at Common Law

The doctrine of ultra vires was premised upon a presumption of law
known as constructive notice. That every document lodged with the
Registrar of companies is in the public domain. Therefore everybody is
presumed to know about the existence of the documents and its
contents. So that third parties who contract with the company’s directors
are not excused that they did not know.

With respect to exercise of director’s powers, the doctrine of ultra vires is

a bit modified in the sense that a third party who deals with the company
whereby directors have acted in breach of an internal rule will not be
jeopardised. This was established in the case of Royal British Bank vs
Turquand, where the principle known as Indoor Management Rule was
discussed. whereby consideration under the issue is one which an
outsider will reasonably be considered to be aware of the internal rules
of the company.

Where is the doctrine of Ultra Vires now?

Section 25 (3) of the Companies Act is a provision that talks about the
Articles of Association. The directors shall not carry any business or
perform any act which they are restricted or permitted by the articles.
Doing so the Directors will be acting Ultra Vires.

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Section 24 provides for presumption of knowledge of the contents of the
articles or any other contents of the company lodged with the Registrar.
This section abolishes the doctrine of constructive notice.

Section 23 clarifies the effects of ultra vires transactions. A person who

deals with a company in good faith shall not be prejudiced only because
the directors have acted in an ultra vires manner. This means that Ultra
Vires contracts are now binding on the company. The effect now is that it
is not to invalidate contracts provided the third party acted in good faith.
The company will not be bound if the third party knew that the directors
had no power to act in the manner they acted (Actual knowledge).

THE ARTICLES OF ASSOCIATION

They are still a necessity or requirement in Zambia, they in fact
constitute the constitution of the company. Section 25 provides that a
company shall have the articles of association that regulates the conduct
of the company. From the way section 25(1) is couched we can
conclude that articles of association are mandatory. Every company
must have the articles of association. 25(2) articles may contain the
types of business that a company can carry on (in other words it
contains the objects clause of the company). there are restrictions as to
what you may put (the shareholders or members) in the articles of
association(Section 24 (4) of the companies Act. Whilst companies are
free to draft the articles in the manner they want, any inconsistency with
the companies Act or any other law shall be invalid to the extent of the
inconsistency.

The articles of association have some other implications in law, the legal
effect of the articles is that the articles constitute a contract. A contract

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between a company and the members and the members amongst
themselves interse. The contents of the articles are the terms of the
contract and can be enforced either by a member against the company
or a member against another member. E.g if the company provides for a
member to be entitled to a dividend, a member can sue the company.
this type of contract sole created by the articles is known as a statutory
contract. It is known as a statutory contract because it is created by
statute section 26 of the Companies Act. The articles bind the company
and the members. It has similarities and differences from the normal
contract. The similarities are that:
1. In order to be a part to the contract one has to provide
consideration. Be privy to this contract you have to buy shares in
the company in order to be able to sue or to enforce any provisions
of the articles. Considerations must be provided. Except in a
situation where the shares are moving from a relative of the same
family
2. The doctrine of privity of contract apply in the statutory contract
just like a commercial contract and therefore only members can
enforce contents of the articles of association.

Significant differences:
1. Enforcement: in a commercial contract parties to the contract can
enforce any terms of that contract e.g price, delivery date,
however, this is not so with a statutory contract, members in a
company can only enforce contents of the articles that have to deal
with membership related rights and entitlements. Any other terms
in the articles of association which are outside the scope of
membership rights cannot be enforced. Example in Elley v
Positive Government Security Limited Assurance Company

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 Ltd 1876 Exchequer Division- the articles contained a clause
which guaranteed that a particular member of the company was to
be appointed company solicitor for life and would remain so for the
rest of his life. A member was not appointed the company solicitor
and sued for breach of contract. It was held that he could not rely
on that clause in the articles as a cause of his action as there was
no contractual relationship between the member as solicitor and
the company. The articles being a statutory contract can only be
enforced on clauses that are relate to membership rights. In order
to be enforced, it should be limited to issues related to the rights,
entitlement or obligations of the company. Where as in a
commercial contract all the terms of the contract are enforceable.
2. In a commercial contract the alteration of any terms requires
consent of all the parties to the contract. This is not so in a
statutory contract, the terms can be altered even if some of the
parties are not in agreement. This is so because section 27 of the
C.A provides that the articles of association may be amended by
special resolution. And in special resolution according to section 2
of C.A it is a resolution passed by 75% majority.
3. In a commercial contract a party who joins the contract cannot be
bound by the terms of the contract unless that part consents to the
terms of the contract. However, in a statutory contract, new
comers are bound by the terms without negotiation and therefore a
person who buys shares in a company is bound by the articles
without negotiation.

When incorporating a company the promoters have two choices,

drawing up their own articles or adopting the standards articles
(companies Act Section 25 (7) C.A.) which are contained as a appendix.

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If the members elect to adopt the standard articles they can exclude
some provisions that they are not happy with. If you are adopting the
standard articles you can exclude certain regulations which are in the
standard articles. If you have excluded, you only file the excluded
regulations and state that in place of the following regulations we have
come up with the following regulations. Standard articles are not to be
filed but a declaration that we have adopted the standard articles. If
modifying the regulations, specify those modifications. In addition to the
articles of association, all the members or some of them may opt to enter
into shareholder agreements. Shareholder agreements are recognised in
law as forming part of the constitution of the company. They perform
pretty much the same function the articles may perform except that they
are private documents which needs not to be filed with the Registrar.
They are enforceable by shareholders against one another or even
against the company if a member is a part to the agreement. In most
cases the shareholder agreements relate to how shareholders are to
exercise their rights in given situations. Section 25 and 12 requires that
you must file articles of association, however there is nowhere in the Act
where it says that the shareholders have to file the shareholders
agreement making them private documents. The shareholder
agreements are advantageous in the sense that they cannot be
amended by a special resolution. The amendment of the shareholder
agreement requires the consent of all the members of the company.
There are limitations to the amendment of the shareholders agreement
just like a commercial contract.

When there is an inconsistency in the articles of association and the

shareholder agreements, and its discovered that all the members were
involved in coming up with the shareholder agreements, it is presumed

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that they have amended the articles and the shareholder agreement
takes precedence. However, if some members took part in coming up
with the shareholder agreement, then the articles if they are inconsistent
to the shareholder agreement take precedence.
- A term in the shareholders agreement which is inconsistent with
the articles may be allowed to stand as if it were a resolution to
amend the articles if all the shareholders where part to the
agreement. This was the principle established in Re Doumatic
1969 2 ChD 365. However in Zambia a difficult would still arise
given that section 27(3) of the Act provides that an amendment to
the articles takes effect from the date of lodgement with the
Registrar or such later date as may be specified in the resolution.
- With regards to agreement, where a company is a party such
agreements cannot be enforced against the company if the
purpose is to deprive the company of an entrenched right provided
for in the Act. In Punt v Symons and Co. Limited 1903 2 ChD
506 it was held that: a company cannot contract out of the
statutory right to alter its share capital. However, the right is for the
company only, and therefore an aggrieved shareholder may still
enforce the agreement against other shareholders for breach of
contract.

Section 27(3) says that the articles shall take effect in the amended form
when the resolution is taken to the attention of the Registrar and the first
date of registration is the day it is lodged with the Registrar. An
amendment to the articles is ineffective until such a time when the public
is aware or lodged with the Registrar. A company cannot be bound by
an agreement that seeks to deprive the company of the right contained

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in the Act. One of the rights is to alter its share capital by passing a
special resolution and informing the Registrar within 21 days.

At the first meeting of the members after the company has just been
incorporated, the members should consider what to put in the
shareholder agreement.

COOPERATE GOVERNANCE
A company is considered a person at law. There are dangers that are
associated with this type of business association. It has the potential of
being abused by shareholders and directors. The generally agreed
principles of cooperate governance are as follows:
- Fairness: this refers to the fact that a company should be conduct
or governed in a manner that ensures equal treatment of all
stakeholders especially my minority shareholders. It requires equal
treatment of shareholders irrespective of the shares they are
holding.
- Accountability: this refers to the responsibility of the directors to
give clear and concise explanations or reasons for any of their
actions. The directors should have systems of presenting
understandable and comprehensive reports to the shareholders
and other stakeholders. They should establish formal and
transparent arrangements for reporting performance of the
company including any risks that the company may be exposed to.
It is a fundamental value of systems put in place where directors
are supposed to report risks. The companies Act has several
provisions which promotes this undertaking of the directors. For
example filling of annual returns by the directors etc...

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 - Responsibility: whilest the board of directors is given authority to
act on behalf if the company that authority should be matched with
responsibility. Directors must be held responsible for their actions
particularly if those actions amount to misfeasance or
malfeasance. While the powers to manage the company are held
in the hands of the directors, the actions of the directors must be
matched with their actions.
- Transparency: this principle is that stakeholders should be
informed about the company’s activities, what it plans in the future
and any risks involved in its business strategies. Cooperate
governance demands that there must be a framework....
It is mandatory that directors file annual returns for the reason that
directors are held accountable for the actions of the company
hence promoting the tenet of cooperate governance.

When we look at Part VII of the Act it provides for issues to do with
cooperate governance. In this part the framers of the law in Zambia have
attempted to look

Directors
Since a company is an artificial person in law, it cannot conduct its own
affairs without the intervention of Human beings, therefore, the law
provides that directors acting collectively constitutes agents through
home the company conducts its affairs. On the other hand, the members
(shareholders) acting in general meetings provide policy direction to the
directors as to how they desire the company’s affairs to be conducted.

Who is a director?

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Section 3 defines a director to be a person appointed by the members of
the company. He carries out the functions of the directors that are
specifically assigned by the Act, then you are a director. This includes an
Alternate Director in the eyes of the Act. There are different terms that
refer to directors:
i. De jure (by law) Director: this is the director appointed or
formally appointed as such in accordance with the Act and
Articles of Association.
ii. De facto Director: this is a person who though not formally
appointed as a director but performs the functions of director or
carries himself out as Director. Because if you carry yourself as
director or performs the functions of the director you will be
estopped from denying that you are director. This director is for
purposes of liabilities of the company.
iii. Shadow Director. This is a person under whose direction the
directors de jure directors are accustomed to carry out their
functions. This is a person for purposes of liabilities only
iv. Alternate Directors: the office of director is personal in
character so that generally speaking once a person is a
director, it is not expected that they can appoint someone else
to act on their behalf. However, the articles of association may
permit the appointment of alternate directors. An alternate
director (Sec 97 of CA) is a person who will act in the directors
place in the even that the director is not available to attend a
meeting of the board.
v. Associate Director: the companies Act does not cover
associate directors but it gives the power to directors to invite
any outsiders who may be expects in a particular field to

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 participate in their meetings. This is a person who may from
time to time be invited to attend and vote at any board meeting.
vi. Executive Directors: They are full time officers of the company
who manage the business of the company on a daily basis but
who are also co-opted onto the board of the company. They are
in employment relationship with the company, the Act provides
for this position in section 101.
vii. Non Executive Director: they have no employment or
executive functions in the company, they operate on a part time
basis and are intended to bring an independent voice in the
management of the company for purposes of good co-operate
governance they constitute an important component of the
board. It is mandatory for public companies to have non-
executive directors.

APPOINTMENT OF DIRECTORS
This is covered in Section 85 of the Act. Directors are appointed by the
members in general meetings by ordinary resolution. The first directors
of the company will be those named in the application for incorporation
and they have consented to act as such. Because of this, it becomes
necessary that the company holds its general meeting to consider those
named in the application for incorporation as being directors. It is also
important to note that the manner in which section 85 is couched
suggest that a company is at liberty to provide a different method of
appointing directors. Because section 85 says that a company shall
unless the articles provide otherwise you can appoint directors in your
own way.

Eligibility for appointment as directors

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Who is qualified?
a. The Act provides a list of persons who are
incapable for appointment as directors.
Section 92 provides that a company shall
appoint a natural person as a director.
b. Further, a person who is a
member/shareholder of the company is not
eligible to hold the office of director unless the
articles permit.
c. A person shall not be appointed director if that
person is under age or declared bankrupt. If
that person is disqualified by the Act to be a
director of the company.
d. If a person has been declared by the court of
competent jurisdiction to be of unsound mind.
Powers of directors
The powers of directors are very wide and can only be limited by either
the Act or the Articles of Association. However, it is important to note
that like any other provision in the act, the provision relating to the
powers of the directors cannot be easily overridden by a provision in
articles of association unless there is indication that the Act intends to
give the power, the power to the members to provide for something
different. Section 86 deals with powers of directors, subject to this Act,
the business of a company shall be managed by or under the direction
or supervision of the board of directors.

Section 87 gives us a limitation of the powers of the Directors of the

company. Where has the directors can do anything, they cannot sale the
property of the company without autrhgor of the company. They cannot

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issue any new shares and begin to sale shares. Though it’s their
responsibility, they can’t do so without the authority of shareholders.
They can’t enter into a transaction that has the company acquiring
liabilities which are equivalent to the value of its assets without the
authority of the shareholders. This is meant to ensure that the
transaction which have a significant impact should have the approval of
the shareholders.

The articles of association cannot provide a regulation which contradicts

this provision.

They have very wide powers to conduct the business of the company
serve for the limitations provided for in section 87.

Management of the company

Section 86 (1) the management of the business is a preserve of function
of directors.
Can a decision of the shareholder overrule the decision of the directors
in the management of the company business? Can they go to the
general meeting and remove the directors? Can they step in the shoes
of the directors?

Relationship between directors and shareholders

The case of ZCCM v Kangwa and Others 2000 ZR Page 109 SCJ. The
supreme court had this to say:
“Shareholders as beneficial owners of the company have and enjoy
has of right overriding authority over the companies affairs and
even over the wishes of mere nominees or directors”. What this

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means is that shareholders have the powers to override the powers of
directors and that they were beneficial owners of the company.
Bank of Zambia vs Chibote Meat Cooperation the Supreme Court
made the same sentiments as that of the case of ZCCM vs Kangwa &
Another.

This position as stated in these two cases above is somewhat

conceptually fraud in that from the knowledge of statutory interpretation,
if the statute vests power in organ, that power can only be exercised by
such an organ.
1. The act in sec 86 expressly gives power to the directors to manage
the company. it is inconceivable how shareholders can step into
the shoes of the shareholders. The court further refers to
shareholders as beneficial owners of the company because
shareholders are not owners of the company, they own shares in
the company. The assets of the company do not belong to the
shareholders but to the company alone so as the liabilities. In
Macaura vs Northern Assurance Limited it was stated that
shareholders do not have an insurable interest in the assets of the
company. The liability of shareholders on shares is limited to the
amount not yet paid on winding up.

The English case of Shaw and Sons Limited v Shaw 1935 2 KB

at 113 illustrates the point that a company is an entity distinct
from its shareholders and directors. Directors may according
to its articles exercise some of its powers; certain other
powers may be reserved for the shareholders in general
meeting. If powers of management are vested in the directors,
they and they alone can exercise those powers. The

25
 shareholders cannot usurp powers which by the articles are
vested in the directors just like the directors cannot step in
the shoes of shareholders and exercise powers which are
vested in the body of shareholders”.

From the foregoing it is clear that the position in the above cited
case represents the proper position of the law with regards to the
relationship between directors and shareholders. Modern
commentaries in corporate governance have repeatedly
emphasized the importance of separation of powers as way of
fostering accountability in the way corporate bodies are managed.
While it is acknowledged that shareholders as investors should
have a say in the way a company is managed, the say should not
extend to stepping into the shoes of directors. The only way they
can control the exercise of powers of directors is to remove them if
the shareholders do not approve of their conduct.

DUTIES OF DIRECTORS
Prior to the enactment of the Act of 2017, reliance was entirely placed
upon the common law in order to identify legal duties of directors. At
common law the directors are viewed as fiduciaries who owe duties to
the company as contained in the English Companies Act 2006. The new
companies act has now provided express duties that the directors owe to
the company.

Section 106 provides for fiduciary duties of the directors:

- Duty to exercise the powers within the framework of the Act and
the articles of association.

26
 - For the purpose for which the power is conferred: this power is
known as Proper Purpose Principle at common law. Meaning that
any exercise of powers by directors for a purpose which is not
consistent with the primary objective of the articles of the company
investing that power in directors is invalid. Any exercise for ulterior
motives is ultra vires.
- They have a duty to promote the success of the company. The
directors have a duty not to cease corporate business
opportunities that belong to the company.
- Duty to avoid conflict of interest: this would arise where a
company is considering awarding a contract and this director has
an interest in the bid, he will surely award the person he has an
interest in. Even when the director does not have an interest but
there are people who are close to the director.

The codification of directors duties to ensure that the people appointed

as directors are able to know their duties clearly. Also as an
improvement of cooperate governance.

To whom are these duties owed?

Sometimes in practice shareholders may be tempted to bring an action
against a director or directors whom they perceive as having breached
their fiduciary duties. The problem arises particularly where the
shareholder feel that these duties are owed to them. The leading case
on this issue is Percival v Wright 1902 in this case the directors were
approached by some shareholders requesting them to buy their shares
at a given price. The directors at that time, had knowledge that there was
a third party who had an interest in buying the shares at a higher price.
The directors without disclosing these facts to the shareholders accepted

27
the offer and bought the shares which they subsequently sold to a third
party for a profit. Upon discovering of this fact, the affected shareholders
brought an action to rescind the contract for breach of fiduciary duty by
the director in particular a duty not to make a secret profit. The directors
where not liable because the fiduciary duty are owed to the company
and not to the shareholders. They had no duty to disclose whether they
were making a profit or not.

This could be decided differently if the directors had told the

shareholders to look for customers at that point the directors will be
acting as agents of the shareholders.

This case cannot be decided the same way today because of the
principle of insider dealing. A director who sales or buys shares and
does not disclose is now liable for breach of fiduciary duty. In Zambia the
law provides that such kind of a contract is voidable at the option of the
third party. This is found in section 115 regarding directors disposal of
shares.

RESIDENTIAL REQUIREMENT OF DIRECTORS

Unlike shareholders who may not be resident in the republic, there is a
requirement that more than half the number should be resident in
Zambia. It is the directors upon court process are served, also notices
from the Registrar. Furthermore, every private company must have
atleast two directors (sec 85 (2)). For a public company not less than 3
director. It is an offence for the number of directors to fall below the
required number of directors (sec 90).

THE COMPANY SECRETARY

28
This is an important part of corporate governance. It is provided for in
section 82. This person is particularly responsible for advising the board
on company law related issues. The company secretary therefore should
be skilled in company law as well as procedures in board matters. in
terms of appointment, the company secretary is appointed by the board
of directors, and is an employee of the company. However, there are
instances when the company secretary may be engaged on a part time
basis. Section 82(5) provides that a person qualifies to be appointed as
company secretary if the person is a legal practitioner, a charted
accountant or a member of the charted institute of secretaries, and that
person should be resident in Zambia. Unlike a director, a company
secretary may be a body corporate. The qualifications set out do not
apply to private small companies, therefore a small company appoint a
secretary who is not a legal practitioner, charted accountant etc. A small
company means any business enterprise whose total investment, annual
turnover and a number of investment does not exceed the prescribed
minimum numerical value.

A person can be both of them (a director and the company secretary)

except that, that person cannot execute a legal document in a dual
capacity.

It is possible to appoint joint company sectaries, for example partners of

a law firm or in an accounting firm can be appointed as joint company
secretaries.

CORPORATE FINANCE

29
 The company like any other type of business association requires
financial resources for its operations. There are basically two types of
sources of corporate finance, these are:
1. Equity
2. Credit finance

Equity refers to resources that are raised through the issuance of

shares
Credit Finance can be in various forms e.g Debentures, Bonds and
some other forms of Security.
EQUITY FINANCE (CAPITAL)
The companies Act provides that every company apart from a company
limited by guarantee should have norminal capital which should be
raised through allotment of shares. A company limited by guarantee
should have a guaranteed amount. The capital of the company will be
expressed in monetary terms and divided into shares of a given amount
each. e.g if the capital is K2000 divided into shares of K1 each. This
declaration of the amount of the norminal capital or authorised share
capital should be declared at the time of incorporation (Sec 12).
Therefore when the company is incorporated the Registrar issues two
certificates i.e the certificate of incorporation and certificate of share
capital.

The value of each share is decided upon by the members at

incorporation though they may alter it during the life span of the
company. The value assigned to each share is called the par value
(norminal value). A company may issue different classes of shares. A
share represents the bundle of rights that the holder thereof has in the

30
company (entitled to). The share also defines the stake that the holder
thereof has in the company.

There are two general classification of shares that may be issued:

1. Ordinary shares
2. Preference shares

Ordinary shares are the most common type of shares and the founders
of the company usually hold ordinary shares because of the rights that
usually attach to this kind of shares. Ordinary shares are entitled for
instance to sharing the residue (remainder) of the assets of the company
during winding up once all other types of shareholders and creditors
have been paid. They are also entitled to hire dividends (share of profits)
during periods when the company is making super normal profits.
Ordinary shares do not get a dividend when the company is not making
profits.

Preference shares are shares that are usually issued to attract new
investors in the company who may not necessarily be entitled to the
rights who the ordinary shares have. They are known as preference
shareholders because they are usually considered first when paying
dividends before the ordinary shares are paid. Preference share will
carry with it a fixed return on investment. They may also be cumulative,
that is to say that the holders thereof will accrue interest even when the
company is making loses. They may also be redeemable that is to say
that the shares can be returned to the company at the option of either
the company or the holder thereof. They may even carry voting rights,
depending on the terms of the agreement.

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 - A group of shares with identical rights is known as a class of
shares
Acquisition of shares in a company: shares may be acquired in a
different way
1. By Transfer of shares: This occurs where an existing
shareholder transfers some or all of his shares to another
person
2. Allotment of shares: an allotment of shares occurs when a
company issues shares to a person
3. Transmission of shares by operation of law: this occurs
where a shareholder dies. The shares held by the deceased
shareholder are automatically transmitted or transferred to that
shareholder’s personal representative (Executor or
administrator) Sec 190.
In the event that the shares where jointly owned by the shareholders, the
surviving shareholder becomes the holder of those shares left by the
deceased shareholder. This person becomes a shareholder even before
making the statutory notification. Where there is still an amount not paid
by the shareholder, the estates of the deceased will be liable for
payment of those unpaid shares. A personal representative who steps
into the shoes of the shareholder has the right to transfer shares even
before making the statutory notification.

Ways of ceasing to be a shareholder

1. A shareholder ceases to be a member when the shares have been
redeemed (if they were issued as redeemable shares). In sec 176
provides that a company may issue redeemable shares. That is
shares that can be returned to the company either at the option of
the company or the shareholder. In some instances, some

32
 redeemable shares are issued for a fixed period of time, and
thereof, the order ceases to be a shareholder at the expiration of
time.
2. Surrender of shares: Section 148 this occurs where the
shareholder voluntarily elects to handover the shares and ceases
to be a member of the company.
3. Forfeiture of shares: Section 148 this happens when a
shareholder fails to pay for shares upon a call (notice issued by the
director) having been made by the company. This therefore is the
confiscation of the shares issued to that member which have not
been paid for at the time of the call. It should be noted that in order
for the call to be valid it must be issued in accordance with the
terms of the articles of association in respect of :
I. Notice period
II. Method of communication
III. Uniformity of attached conditions
4. When the company is wound up in accordance with the corporate
insolvency Act

SHARE CAPITAL STRUCTURE

1. On top you have the nominal capital also known as the authorised
capital. The nominal capital will be comprised of:
a. Issued capital
b. Unissued capital
2. Paid up capital (from issued capital) which will stem from the
total value of the shares which have already being for
3. Unpaid up capital (from issued capital) are those shares which
have been issued but not yet paid for.

33
THE DOCTRINE OF MAINTENANCE OF SHARE CAPITAL
This is a set of legal principles developed to ensure that the capital is
protected from being diluted or unlawfully withdrawn by the shareholders
or otherwise applied to activities that do not promote the existence of the
company as a going concern. Some of these principles are statutory
while others are based on the common law. The principles referred to
above are not restricted to equity alone but to a number of other issues.
this is so because in modern company law, the term capital covers a lot
more than just share capital,
i. Share capital (funds which have been members subscribing for
shares)
ii. Loan capital (funds provided by commercial funds providers.
Company borrows, issues debentures)
iii. All funds raised through retention of profits (when a company
makes a profit, the directors may dividend that we are not going
to issues dividends)
iv. Assets in which all the funds have been invested (all the
vehicles, premises etc that have been bought by the company)

Common law principles of maintenance if share capital

1. Shares should not be issued at a discount
The first principle under this doctrine is that shares should never be
issued at a discount to their nominal value or par value. This principle
was developed in the celebrated case of Ooregan Gold Mining
Company of India v Roper 1892 AC 125. If the consideration for
shares is in kind that is in goods, services properties rather than in cash,
the principle requires that the consideration should be equal in value to
the nominal or par value of the shares.

34
 2. A company must not return shareholder funds paid in respect of
shares: As a general rule at common law, a company must not
return funds for, money paid towards shares. The case of Trever v
Whiteworth.

Modern day company law has started inacting provisions which is

a slight departure from the common law principle of returning
shares, a classic example is the return of redeemable shares.
Some statutes including the Zambian companies Act provides for
the company to buy back its shares. For redemption of shares
refers to the getting back of shares which were issued as
redeemable shares (Sec 176). But buying back shares is a
situation in which the company buys shares that were not issued
as redeemable shares. Redeemable shares are redeemed
according to the provisions of the company’s articles. If the articles
of the company does not provide for redeeming or buying back
shares the company cannot do so.

Hidden distribution
The courts have been willing to hold that payments to shareholder
related parties for no consideration at all constitute disguised payment
out of capital and therefore against the doctrine of maintenance of share
capital. For example in Re Halt Garage 1964 the court held that
payments has remuneration to the majority shareholders wife as
director’s fee when in fact she was not providing any services to the
company constituted a disguised distribution of payment of capital and
therefore against the doctrine of maintenance of share capital. The
concerned shareholder had the obligation of paying back to the
company.

35
STATUTORY PROVISIONS
From the statutory point of view

1. Restriction on financial assistance in acquisition of shares

(Sec 183) (applicable to both public and private companies): a
company should not give financial assistance to a person in order
to enable that person acquire shares in a company. a person who
provides consideration to the company and the directors accept
that consideration which is not adequate that is against the
doctrine of maintenance of share capital.
2. Relaxation to private companies (Sec 184): it is permissible for
a private company to do the following:
1. To award shares to employees freely as part of an employee
share scheme (The are not members)
2. Group companies: where the subsidiary company gives
financial assistance to the holding company less than the par
value
3 Dividends to be paid out of profits only (Sec 159):
Shareholders are not entitled to any payment whatsoever other
than a share of profits. It has been held that a director who makes
payment to shareholders against this rule will be personally liable
to reimburse the company.

Alteration of share capital (Section 140)

When a company is incorporated the certificate of share capital is
issued, as a consequence may be changed at any time during the
lifespan of the company if the members wish to make changes to the
capital. Alteration of share capital refers to structural changes to the

36
capital which in almost all cases does not result in reduction of the
nominal capital. Section 140 gives a list which may happen which
constitute alteration.

140. (1) A company may, unless its articles provide otherwise, by special
resolution, alter its share capital as stated in the certificate of share
capital by—
(a) Increasing its share capital by issuing new shares of such an amount
as it considers expedient;
(b) Consolidating and dividing all or any of its share capital into shares of
a larger amount than its existing shares;
(c) Converting all or any of its paid-up shares into stock and re-
converting that stock into paid-up shares of any denomination;
(d) Subdividing its shares, or any of them, into shares of smaller
amounts than is stated in the certificate of share capital; or
(e) Cancelling shares which, at the date of the passing of the resolution,
have not been allotted to any person, and diminishing the amount of its
share capital by the amount of the shares so cancelled.

The cancellation of shares which have not been allotted to any person at
the time of the resolution to alter the capital constitutes a mere alteration
in share capital although in effect it results into the nominal capital
reducing. In terms of procedure an alteration in share capital can be
effected by special resolution or some other type of resolution as the
articles may provide.

In 140 (4) of the companies Act

37
78. (1) A company shall, within twenty-one days after the passing of a
special resolution, lodge with the Registrar a certified copy of the
resolution.

Reduction in share capital is in section 150 of the Companies Act. At

common law a company is not permitted to reduce its share capital.
Reduction in share capital involves any decision whose effect is to
diminish the value of the nominal capital. The only exception is where
there is a decision of cancellation of unissued shares. In Sec 150 the
company cannot on its own reduce its share capital unless there is
confirmation by the court. There is no other method of passing a
resolution to reduce share capital other than a special resolution.
Section 151 gives powers to the court with regards to confirmation of
the reduction of the share capital. The court has power to order that the
creditor who opposes the reduction be paid first.

The provisions regarding Reduction of Share Capital and Redeeming of

Shares are a departure from the common law position which gives
efficacy to the commercial transactions.

SHARE PREMIUM ACCOUNT

Where shares are sold at a price higher than the par value, they are said
to have been sold at a premium. Sec 145 requires that the difference
between the par value and the price at which the shares have been sold
should set aside in what is called the Share Premium Account. All these
measures are measures intended to maintain the capital. The money is
not meant for shareholders but for the company to maintain the capital.

38
The value of the share premium account shall to all intents and purposes
be treated as paid up capital. Any dealing with the share premium
account should invoke the provisions of section 150. That is to say that
the dealings are for the reductions of share capital. There are a few
exceptional circumstances which shall not be treated as a reduction in
share capital. These are provided for in 145 (2). The money which has
accumulated in the share premium account representing the “profits”,
instead of each member paying for the shares the money will be used to
pay the shares for the unpaid up shares. If the members decided to pay
for the unissued shares using the money in the premium share account
is not a reduction of the share capital.

In writing off the preliminary expenses of the company (expenses which

are incurred at pre incorporation) may be paid off using the share
premium account. The commission (where you engage an agent) may
be paid from the share premium account. Where a company is buying
shares at a premium, you can apply the money from the share premium
account.

PRE-EMPTIVE RIGHTS
These are statutory rights or entitlements of a shareholder that his stake
in the company will be maintained even if new shares are issued. The
articles must allow the shareholders to have the right of first refusal.
Where the company wants to issue shares must be first offered to the
existing shareholders proportionate/rank to voting rights in the company
to their shares already issued in the company. These rights are non
negotiable. Section 144 is intended to protect the rights of minority
shareholders from the majority shareholders. If a company is only
issuing shares which are not identical to already existing shares, the

39
provisions of section 144 do not apply. Minority protection mechanisms
in the Companies Act are several, this one is just one of them. e.g. the
principle in the case of Foss v Harbottle

VARIATION OF CLASS RIGHTS (Sec 143)

It is an inherent right of the company to be able to amend the articles of
association. In amending peradventure may be to the effect that the
rights attached to a certain class of the shares are diminished or
abrogated

It refers to any amendment of the articles whose effect is the abrogation

or diminishing of any rights attached to a class of shares. A class of
shares is a group of shares with identical rights. If the proposed
amendments of the articles amounts to the variation of the class right, it
is not enough to follow the procedure contained in section 27 for
amending the articles of association. Section 143 provides a mechanism
through which the rights of a class may be varied, but in paragraph B of
section 143 tells of circumstances in which the rights of the class rights
may be diminished, but these circumstances will not amount to a
variation therefore the articles can be amended in the normal way.

The following are circumstances:

Greenhalgh v Arderne Cinemas Limited (1946) 1 All ER Page 512, It
is not a variation of class rights for a diminishing effect to occur where
the decision complained of directly related to shareholders of a different
class and the effect on the complainants is simply consequential.

If we are satisfied that what is happening is a variation of class rights.

There are two methods of effecting the variation of class rights:

40
 1. Do the articles permit the variation of class rights? If the articles
forbid, you can only vary with the written consent of the members
of that class or under a court sanction (order) pursuant to the
provisions of the corporate insolvency Act under a scheme of
arrangement. Scheme of arrangement is an arrangement either
with the shareholder and the creditors to forego the rights in order
to give the company breathing space because it is in financial
distress.
2. Where there is no prohibition in the articles and no court order you
can proceed with the written consent of the 75% holders of share
that have been issued in that class or shareholders meet and
agree under a special resolution.
Alteration of Shareholder Right
In variation of class rights, there are decisions or proposals that relate to
members who have identical class rights. Where a decision has been
made which affects the rights of a few members of a different class and
not all of them in those classes, the right procedure to follow will be in
Sec 135 -& 136.

Where a proposal has been made which is likely to affect the rights of
shareholders who belong to different class or where the proposal is likely
to affect the rights of some shareholders in a class and not others, the
provisions of the Act in relation to variation of class rights are not ideal to
be invoked. In such a situation, section 135 and 136 in relation to
shareholder rights will apply. The Act defines an interest group as those
shareholders who are affected by the proposal. Section 136 provides
that a company can only alter shareholder rights if there is consent by
atleast 75% of the members of the affected interest group. Section 136

41
(2) provides for the rights that are affected by the alteration of a
shareholder rights.

Public Issue of Shares

This refers to an offer by a company to the members of the public to buy
the shares. This is dealt with in part 10 of the Act, from 208 to 224. A
company cannot make an offer of shares to the public unless the
company is a public company. Sec 209 requires that before a company
can offer shares to the public it must first issue a prospectus atleast 6
months before the offer is made. The prospectus should be registered
with the Registrar as well as published in a news paper enjoying wide
circulation. It should be noted that matters relating to public issue of
shares are also the subject of the Securities Act. This Act deals with the
instruments that the company can issue for raising money. A prospectus
is a document that contains all the relevant information of a person
interested in buying the shares in the company. The third schedule of the
Act provides for the prospectus.

In law the prospectus (statement of fact) has the same effect as the
representation in the law of contract. When a company has advertised
shares to the company, the advert is an invitation to treat. Because it
contains information about the company, and since the representation is
a statement of fact, any falsehoods contained in the prospectus will
amount to misrepresentation. The same is true, any material omission
will amount to misrepresentation.

There are offences relating to the prospectus, section 217 creates civil
liabilities, section 218 criminalises offences relating to the prospectus.

42
 - Civil liability for misstatement in the prospectus (217): the
people being held liable are the directors. The veil of incorporation
will be lifted so that the directors responsible are held liable.
- Criminal liability for misstatement in the prospectus (218): it is
a serious offence to issue a prospectus that omits material facts or
contains untruths.

CORPORATE FINANCE
Credit Finance: Legal Frame work relating to Credit Finance
Purpose
- Transparency
- To create a method or mechanism to compel companies who are
borrowing
- It seeks also to create some mechanism alerting creditors on some
encumbrances
- To give confidence to those who will be lenders that they are
protected when giving out loans.

Movable Properties (Security Interest) Act of 2016

Debenture
When a company borrows, it will usually issue a document known as a
debenture. This is a document that acknowledges or provides evidence
of the company’s debt. The debts obtained through a debenture may be
secured by a charge on the company’s assets. Sometimes it may not be
secured at all.

Therefore there are two types of charges:

Fixed and Floating

43
Fixed charge is similar to a mortgage in that it entails the company
granting a charge to a creditor over specific and identifiable assets. A
fixed charge in law grants the creditor immediate rights to the property
thereby restricting the borrower’s rights to deal with the assets or the
property in question.

Floating Charges
As the name suggests a floating charge floats over the whole or part of
the borrowers assets which may fluctuate as a result of acquisitions and
disposals. The distinguishing feature of a floating charge is that the
company can continue to deal with the assets the ordinary course of
business without having to obtain the chargees permission. The rights of
the Lender only come into force upon the debt or upon the charge
crystallising.

In order to protect creditors that deal with the company by way of

creating a mechanism for notification about the company’s
indebtedness, encumbrances on its assets and just generally ability to
pay the law or the Companies Act makes it mandatory for every
company to register certain charges with the Registrar. The registration
requirement also serves as a means ranking the charges in terms of
priority. Charges will be ranked according to their dates of registration.

1. You can never have a floating charge that takes precedence of

over fixed charge.
- Section 237: there is a register of charges that are registrable
under this section. The registration should maintain the dates
showing when the charges were registered.

44
 - Section 238 this section provides for some types of charges which
are not registrable under the Companies Act.
o Charges that extends to which the Movable Property
Security interest Act 2016 and the Trade Charges Act 1973
(this is a defunct/obsolete piece of registration) apply.
o Charges on a ship or aircraft should not be registered
because there is a piece of legislation to deal with charges in
the aviation industry and marine industry.
o Charges over shares (assets) in another body corporate
cannot be registered. unless the following conditions are
applicable (exceptions)
 If a charge is in favour of a broker who has paid for the
shares purchased or applied for the company (so that
potential creditors are aware)
 A charge created or accompanied by delivering of
certificates of shares ( if we borrowed and handed over
the share certificate to the lender)

If a charge in question does not fall among the excluded ones, the
charge must be registered with the Registrar within 21 days.

EFFECTS OF NOT REGISTERING

The Companies Act 2017 does not provide for the effect of a failure to
register within the prescribed time. The repealed Act like most statutes in
the commonwealth provided that a failure to register (Sec 99 (11), failure
to register a charge within the prescribed period rendered the charge
void against the liquidator and all creditors i.e the liquidator or other
creditors had the right to ignore that charge (it will not rank in priority).
Further, that Act provided that the debt or the liability became payable
45
immediately upon the expiration of the prescribed time. The only fall
back that the Registrar can do is to charge the company under the
general administrative penalty for failure to comply with the law.

Purpose of the Moveable property security interest Act

It is as a result of the small and medium companies who were failing to
access financial assistance. To increase capacity for small scale
medium enterprises to access finance, there was need to create a
registry and that registry needed a legal framework enhance the
enactment of Moveable property security interest Act. Whether the
borrower is an artificial person (company) or natural person, this Act
applies. If a company places a charge on the movable asset of the
company, the registration procedure is not under the companies Act but
under the Moveable Property Security Interest Act. This is because the
provisions of the Companies Act precludes from registering under the
companies Act.

Section (6) of the Moveable Property Security Interest Act provides that
in the event that there was any other statute that dealt with the
registration of the charge on moveable asset, the Moveable property
security interest Act shall prevail over any other law relating to the
security of the moveable property.

A person who has registered a moveable property under the companies

Act by mistake, the registration will not rank above the person who has
registered under the Moveable Property Security Interest Act.

For real assets (Buildings, Land etc) you register under the registration
of charges under the Companies Act. Registration under the companies

46
Act is mandatory for charges, a failure to do so attracts a penalty. While
under the Moveable property security interest Act it is not mandatory it is
by choice.
(Visit the Pacra website for more details)

DERIVATIVE ACTIONS AND PROTECTION OF MINORITIES

The philosophy of company law is that decisions of the company should
be made by the majority. The majoritarian rule is a guarantee that the
direction that the company will take will be influenced by those members
who hold the largest stake in the company. This is the reason why
decisions of the company are made by resolutions i.e ordinary,
extraordinary and special resolutions. The primary aim of company law
is to ensures that there is democracy in the making of decisions.

However, the law attempts to strike a balance between the need to

enable the majority shape the direction that the company takes and the
need to protect minority interest. It is said that the majority have an
inherent capacity to oppress the minority. In order to achieve this
balance, both the common law and statute have developed rules. The
common law position is founded in the rule in Foss v Harbottle. The rule
is that when a wrong is done or is alleged to have been done against the
company, the proper plaintiff is the company itself. Therefore, ordinarly a
shareholder or shareholders have no right to commence an action in the
name of the company or on behalf of the company. The rationale behind
this rule is that:
1. A company is a separate person
2. Even if there was a complaint against the directors or even some
shareholders for a wrong allegedly committed against the
company such wrong can easily be adopted by the company if the

47
 majority of the members passed a resolution to do so. This
therefore would render an action by some shareholders irrelevant.
3. Prevention of multiplicity of actions: in some companies particularly
public limited companies there are multitudes of shareholders and
therefore allowing shareholders to have locus standi would result
in multiplicity of actions.

There are four exceptions when a shareholder or shareholders can

commence an action. An action commenced by a shareholder or
shareholders is known as a Derivative Action because the powers to
do so are derived from the company. These exceptions constitute part of
the legal mechanisms for the protection of minority interests.
1. Where the act complained of is illegal or is entirely ultra vires the
company.
2. Where the matter in issue requires the sanction of a special
majority or where there has been non compliance with a special
procedure.
3. Where there is fraud on the minority: shareholder/s will be
permitted to sue on behalf of the company where a fraud has been
perpetrated against the company by those who hold and control
the majority of votes. Fraud has been widely described in case law
as being a situation where the majority shareholders are
attempting directly or indirectly to appropriate to themselves
money, property or advantages which belong to the company or in
which other shareholders are entitled to participate.
4. Where an individual shareholder’s rights are being infringed, the
shareholder has a right to commence an action (you sue them in
an individual capacity).

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MINORITY PROTECTION UNDER THE ACT
Derivative Actions in the Companies Act
Section 331 of the companies Act
- The court must be satisfied that there is likelihood of success of
that action for it to allow or grant leave to a natural person
(Directors or shareholders) to bring an action on behalf of the
company. 331 (3) (a – c must be satisfied)
- The above provisions (331) talks about continuing, commencing or
discontinuing an action.

Corporate Insolvency Act

Unfair prejudiced position (Section 56 & 57)
- A shareholder can petition the court to prove that the interests of
the minority shareholders are being unfairly prejudiced by the
majority shareholders.
- Although the petitioner must be a shareholder, his locus standi
does not depend on whether the conduct complained of affects
him in his capacity as a member. (The rule in Elley Positive
Assurance is overridden by this provision of the statute).
- Exclusion from management of the company in his capacity has a
director may suffice
- Re Sam Wheller & Sons Limited 1969 5 All ERL Page 510

Petition for winding up of the company (Section 57 (1) (g)

Petition to wind up a company on the grounds that it is just and
equitable. This provision is another example of statutory mechanism for
the protection of a minority interest. This provision is of very wide
application and may be used by a minority shareholder or shareholders
to move the court to consider equitable grounds and wind up the

49
company if the minority shareholders interests are being unfairly
prejudiced. The case of Ebrahim v Westbourne Galleries 1973 AC
Page 360 the court laid the ground upon which a company may be
wound up on the basis of this ground. Therefore a company make be
wound up is the relationship of the shareholders is personal and akin to
the partnership. If the company has become dysfunctional because of
the acrimonious relationship among the shareholders may lead to the
company winding up.

Meetings and resolutions

All important decisions affecting or determining the direction of the
company are made by the members in general meetings except for
those matters which are specifically reserved for directors and all other
decisions are made by members in general meetings. There are three
type of meetings members may hold, namely:
1. Annual general meetings
2. Extraordinary meetings
3. Class meetings

Annual General Meeting

This is a meeting that in terms of Section 57 every company should hold
within 90 days (3 months) after the end of its financial year. For private
companies, it is possible to dispense with the holding of the AGM
provided they notify the Registrar. However, this discretion is not
available to private companies with respect to the first AGM. It is
mandatory that every company must hold the AGM.

50
In some jurisdictions, there is a statutory requirement to hold the first
meeting of members immediately after incorporation. Notwithstanding
the fact that there is no statutory meeting in the Zambian Companies
Act, it is imperative in practice that the members should hold a meeting
immediately after incorporation. The reasons for this includes;
1. The need to confirm the appointment of individuals who were
named in the application forms as directors.
2. There might be a need to amend the Articles of Association
whether they are standard articles or articles created by the
members themselves.
3. There might be a need to consider whether there should be some
shareholder agreement entered into.
4. The first meeting is necessary for the shareholders to give a
general sense of direction to the directors if the members are not
directors themselves.

Power of the Registrar to cause an AGM

Where a company has not held the AGM the Registrar has the power to
compel the company to hold the AGM. This would be on application by a
member or the director. The member would be applying to say that other
members are not willing to discuss pertinent matters with regards to the
way the company is being run. In addition to that, a member or a director
may apply to court for an order to compel a company to hold the AGM. If
there is reluctant by other members to hold the AGM, a member or
director may apply to court. The court has the power to direct the mode
of adopting the resolutions in that meeting, for instance the court may
order that a single member in attendance at that meeting would
constitute a Coram. That member will be able to pass any resolution e.g.
appoint new directors, winding up the company etc

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Business to be transacted in the AGM
The business to be transacted in the AGM includes:
1. Consideration and approval of financial statements
2. Appointment of auditors
3. Election of directors etc
It may consider the above businesses except those matters which are
specifically reserved for the directors eIther in the Act or the Articles of
Association.

Extraordinary General Meetings

Any meeting of the members called to transact business which cannot
wait for the next AGM.

Class Meetings
Where there are different classes of shares, members of each class
have an inherent power to hold meetings of their class to discuss
matters unique to their class.

Types of resolutions
There are three types of resolutions that may be made in the meetings of
members:
1. Ordinary resolutions
2. Extraordinary resolutions
3. Special resolutions
It is important to note that the type of resolution has no relationship with
the kind of meeting in which it is past. The extraordinary resolutions are
not resolutions of the extraordinary general meetings. The resolution
type is determined by the method of adopting the resolution.

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Ordinary Resolutions
According to section 3 it is a resolution that requires only a simple
majority to be adopted.

Extraordinary Resolution
This is a resolution that requires 75% majority for it to be adopted. These
are resolutions which the members have stated

Special resolution
This is a resolution that by law or by statutory provision has been
designated as such or they are made pursuant to some provisions in the
Act. It is the Act that tells you that such and such a thing shall be done
by a special resolution. For example reduction of share capital

Written resolutions by private companies

The companies Act permits private companies to pass resolutions.

Section 77 of the Companies Act provides an exception for Private

Companies. It provides that private companies can pass written
resolutions, meaning that members in private companies need not to
meet physically.

On the other hand section 78 provides for lodgement of resolution. It

provides for every special resolution to be lodged with the Registrar
within 21 days of passing that resolution. Every special resolution
should be embodied (affixed or attached) in the articles of association.

FOREIGN COMPANIES

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This is a company incorporated outside the Republic but having a
branch or an established place of business in Zambia. In terms of the
Companies Act, an established place of business in Zambia means
(Section 300) a branch or management office, an office for registration of
transfer of shares.
A factory or a mine or any other fixed place of business in Zambia.
Established place of business cannot be said to exist if there is an agent
based in Zambia who does not habitually or frequently exercise general
authority to negotiate and conclude contract on behalf of the foreign
country.
You cannot say that there is an established place of business in Zambia
if there is a merchandise agent or a factor who does not also frequently
stock that foreign company’s goods.

If the foreign company has a broker in Zambia, who sales goods for the
foreign company on commission in the ordinary course of that brokers
business cannot be said to be the established place of business of that
foreign company.

How to Register a Foreign Company in Zambia

The registration checklist is in section 299 of the Companies Act. This
section outlines everything the foreign company has to submit. It must
submit certified copies of the incorporation documents in the company of
origin. They must also provide information in relation to beneficial
ownership in relating to shareholders.

Name of the Registered Entity

Section 308 provides that a foreign company can be registered in
Zambia by the name which it is called in the country of incorporation. If

54
the name of the company is not in English, they may register under a
translation (they must translate the name) or do what is known as
transliteration. The same section provides that the Registrar can refuse
to register the name if the name is in any way undesirable, offensive or
inimical. If the name will cause confusion with the already registered
name, the Registrar will not accept registration of the name.

Directors
Section 303 requires that the foreign company must appoint atleast one
local director. The person to be appointed as local director must meet
qualifications for one to be appointed as director e.g must not be a
minor, must be discharged bankrupt, must be a natural person, must not
be of unsound mind.
The local director so appointed has all the powers to bind the company,
the company will be bound to any transaction that a local director would
enter into. Unless in terms of section 304 the company can provide
evidence that the third party had actual knowledge of the lack of
authority on the part of the local director.

Service of Process on Foreign Company

Section 305 provides how service of process can validly be conducted.
Documentary agent is the person named in the registration document on
whom service of process should be done on behalf of the company. If
the company has no documentary agent, the process has to be left at
the registered office.

Charges and Assets

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Section 310 provides that all charges on the assets of the company
situate in Zambia should be registered in accordance with section 238 as
if the company where incorporated in the republic.

Notification of Winding Up
Section 311 provides that if the company in its company of origin is
being wound up for whatever reason, the local director has an obligation
to notify the Registrar of the process. All official documents of the foreign
company should have sufficient notification to the public that the
company is going through winding up (e.g on the letter head XYZ in
receivership). The same provision criminalises the act of continuing to
transact or doing business once the company is dissolved in the country
of origin.

There is nothing that stops a company to wind up voluntarily on its own,

this is provided for under section 312. This is however subject to the
Corporate Insolvency Act modifications. The directors must make a
declaration that the company has no outstanding debts and this
declaration comes after the passing of the special resolution to wind up
the company.

A foreign company incorporated outside Zambia may incorporate a

subsidiary company in Zambia under section 12 of the Companies Act.
this subsidiary company becomes a Zambian company.

CONVERSION OF COMPANIES
When a company is incorporated, it is not cast in concrete that the
company will remain in the same form until it is wound up. Different
circumstances may lead the members into making the decision to

56
convert the company from its original form to another. The procedures
for converting the company from one form to another are contained in
Part V of the Act.

1. Some of the reasons for converting could be the change in the

objects of the company.
2. It could be inspiration from the government on policy to do with tax
3. It could be that the members have realised that they have a big
project and want to transform
4. It could be that the company was incorporated as a company
limited by shares and what to convert to unlimited company where
the liability of members is unlimited
5. It could be also that in order for the company to raise revenue and
convince lenders, conversion could be the way to go.

PROCEDURES
Sections 48 to 53 provides different types of conversions and are known
as conversions sections because they provide specific procedures for
conversion of companies.

Section 48 provides for conversion of a private company limited by

shares to a company limited by guarantee. When you identify the type of
conversions, you then go to section 54 of the Companies Act. Section 54
is applicable to all manner of conversions. The requiems for this
conversion are that:
1. There are no liabilities on the unpaid shares
2. The members agree in writing to the conversion of the company
3. The members surrender their shares for cancellation (ignore the
provisions of section 150 of the Act)

57
 4. The members pass a special resolution to amend the articles to
convert the company.
5. Each member makes a declaration of guarantee

Once the above is done, we have satisfied the requirements and then
now go to section 54 of the Act. You then lodge with the Registrar the
documents, the documents are:
1. The company’s Certificate of incorporation
2. A copy of each amended paragraph in the articles
3. A copy of the written agreement or a special resolution
4. A statutory declaration signed by the director or secretary of the
company that the company is solvent. Solvent meaning that its
asset exceeds the liabilities. However, if the liabilities of the
company exceeds the assets you cannot convert.
Once the above is satisfied, the company will be converted.

The conversion of the company in accordance with section 54(5) does

not alter the identity of the company. This does not mean that you have
formed a new company. It does not affect any rights or obligations of the
company except as specified in this section. It does not affect or render
any legal proceedings invalid against the company. Even if the company
has changed the name under section 40, it does not change its
obligations and rights and does not mean it has formed a new entity.
- Section 49 provides for conversion a private company limited by
shares into unlimited company
- Section 50 provides for conversion of company Limited by
Guarantee to a Private company limited by shares or unlimited
company. In all cases the share capital you agree must not be less
than the statutory minimum requirement.

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 - Section 51 Conversion of Unlimited Company to a Private
Company Limited by Shares. At inception of the company, the
members agree to have unlimitation of liabilities and at this point
agree to have a company limiting the liabilities. When you convert
a company from unlimited company to limited shares, all the debts
that were incurred by the company before conversion, there will be
no limitation of liability on the part of member.
*The former shareholders will not escape liability even if they left
10 years ago simply because they are nolonger members. Unless
liabilities that are incurred after they have ceased to be members,
they are not liable.

- The limitation of liability commences on the date of the new

certificate when it is released.
- Section 52 conversion of Public Company into a private limited by
shares, all members must agree and put it in writing. You must
satisfy the requirements of section 9 of the Act. A private company
cannot have morethan 50 members. For a private unlimited
company the number can be unlimited.
- Section 53 Conversion of a private limited company to a public
limited company.

The conversions sections do not have the provisions for conversion of a

Private Unlimited Company to a Public Company.

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