COMPANY LAW

For ICAM students

Table of Contents
CHAPTER PAGE

Table of Contents

Syllabus

Foreword
COMPANY 2

LAW
Chapter 1: Formation of a Company

Chapter 2: The Constitution of a Company

Chapter 3: The Legal Status of a Registered Company

7

27

36
For ICAM Students
Chapter 4: The Management of a Registered Company 44

Chapter 5: Company Directors 61

Chapter 6: Corporate Liability 80

Chapter 7: Majority Rule 90

Chapter 8: Company Finance; Share Capital 99

Chapter 9: Maintained of Share Capital 115

Chapter 10: Company Finance; Loan Capital 124

Chapter 11: Company Accounts and Auditors 139

Chapter 12: Company Liquidation 146

Addendum; List of Important Cases 158

ALLAN HANS MUHOME

LLB(Hons) (MW)
[2014 Edition]
6 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 COMPANY LAW
For ICAM students
Syllabus
1. AIMS
To develop the students’ understanding of company law theory and
principles.

FORMAT OF THE EXAMINATION PAPER

Candidates will be required to answer 5 questions out of 8. All questions will
carry equal marks i.e. 20 marks.

2. TOPICS

Section (A): Legal Personality and the Nature of a Limited Company

This section deals with the nature of a limited company and the concept of
separate legal personality and their significance in a business environment.
(1) The limited company distinguished from partnership
(2) The consequences of separate legal personality
(3) The relationship of legal personality to limited liability.

Section (B): Company Law

This section explores some basic features of company law so as to understand
the essential framework of a limited company.

(1) Types of Companies

(2) Formation of a company and the memorandum
(3) The formalities and the role of the registrar
(4) Membership, shares, charges, directors, meetings, and the corporate
personality
(5) The contractual capacity of a company
(6) Statutory books, records and returns.

7 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Section (C): Capital and Financing of Companies
This section deals with the capital and financing of companies, covering share
and loan capital and will enable an accountant to understand the financial
frameworks on which companies are based.

Share Capital
(a) Issue and transfer of shares
(b) Purchase and redemption of shares
(c) Dividends
(d) Charges to capital.

Loan Capital
(a) Borrowing powers
(b) Types of debentures and their creation
(c) Company charges
(d) Registration
(e) Remedies of loan creditors

Section (D): Management and Administration of a Company

This section takes an overview of the legal obligations of the management in
relation to the administration of the company. The role of key personnel is
identified and the rights and obligations they have are explored. The role of
the company is dealt with enabling an understanding of its significance in the
management of a company.

Directors
(a) Appointment and termination of office
(b) Duties and powers
(c) Contractual capacity of directors
(d) Self-dealing by directors
(e) Shareholder remedies
(f) Board of directors and division of power between the board and
general meetings.

8 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Company Secretary
(a) appointment
(b) duties

Shareholders
Majority control and the rights and protection of minorities

Auditors
(a) appointment
(b) removal, resignation and replacement
(c) duties

Company Meetings
(a) Annual General Meeting
(b) Extraordinary General Meetings
(c) Resolutions

Section (E): External Regulatory Bodies

This section identifies important external regulatory bodies and their role,
structure, duties, powers and procedures in relation to the work of an
accountant.

(1) The Malawi Accountants Board

(2) The Commissioner of Taxes

Reading Guide
The Malawi Companies Act, 1984;
C. Chilumpha: Company Law
K.R. Abbot: Company Law
A.H. Muhome: Company Law for ICAM Students

9 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 COMPANY LAW
For ICAM students
Foreword

This manual is carefully designed by the author to give the much needed assistance
to Company Law students sitting for Public Accountants Examination Council (ICAM)
examinations in Malawi.

The manual gives the student examinable principles of Company Law in Malawi.
Further than that the manual includes past examination questions on Company Law
after each of the twelve chapters. The manual will take the student through the
practical realities of company management in the industry. All in all, it is a bulk of
worth that each company law student must resort to!

The author of this manual, Allan Hans Muhome esq. obtained his Honours Law
Degree from the University of Malawi in the year 2006 and has worked for the
Attorney General in the Ministry of Justice and later proceeded to private practice
with a renowned legal firm styled Sacranie, Gow and Company and is currently
employed by Indebank Limited. The author has had the passion to promote the
study and teaching of the law and in that regard he lectures in law courses at one of
the privately owned successful colleges, by the name PACT College. In the year 2012
the author published a book on Labour Law in Malawi. The author is currently
pursuing a Masters in Business Administration at the Malawi Polytechnic. To crown it
all the author is also involved in setting law examinations and is a marker of various
law papers with local and international professional bodies.

Author’s Contacts: [email protected] Cell +265 888 304 274

10 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER ONE: Formation of a Company

1.1 Introduction

If one wants to do business, he has at least three basic options open to him;

(a) He can operate the business on his own as a sole trader/sole proprietorship;
(b)He can go into a partnership with someone as partners;
(c) He can register a company under the Companies Act 1984.

An overview of a partnership

A partnership is an unincorporated association, where two or more persons associate

for the purposes of business. No other separate legal personality is brought into
existence on the formation of the partnership, and the business and all its assets
remain the property of the partners. The Partnership Act defines a partnership as
‘the relation which subsists between persons carrying on a business in common with
a view of profit’ and it specifically excludes the relationship which exists between the
members of a company.

However, while companies can never be considered as partnerships, companies

themselves can be the partners in a partnership, for example, as part of a joint
venture with other companies.

Each partner is an agent for the others and, hence, can affect the legal rights and
obligations or matters connected with the business. Partnerships can be formed by
deed or quite informally and, in contrast to companies, can be formed simply in
writing, orally or even by conduct. It is normal, however, to have a partnership
agreement which sets out the terms on which the partners are associated. In the
absence of any agreement to the contrary, when one partner wishes to leave or
retire, the partnership has to be dissolved and then perhaps re-formed among
remaining partners. Furthermore, when a new partner wishes to join, there has to be
unanimous consent of the existing partners. Again, as we shall see, this is in contrast
to the registered company.

11 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
An overview of a registered company

This course is concerned with doing business using a company. A company is a form
of business association which has become the most important and powerful in many
economies across the globe.

The basic idea of using the registered company as a tool or medium for trade and
commerce is straightforward. A company is formed or ‘incorporated’ by a promoter.
Shares are issued by the company to shareholders (who are initially ‘the subscribers’
to the company’s constitution), who then enjoy control over the company by voting
in meetings, in proportion to the number of shares they hold.

The day to day running of the company’s business is then delegated to directors
who are appointed by the shareholders and are usually, but not necessarily, from
among their number.

In the simplest model, the company acquires its money and assets by issuing shares.
The consideration which is used to pay for the shares is then known as the ‘capital’.
But, in many cases, the money provided by issuing shares is irrelevant to the amount
of money which the company actually uses in its business, which will, in fact, be
provided by loans. Even the shareholders may, for instance, prefer just to take one
share each and then lend money to the company under a loan.

Importantly, any assets accumulated by the company are owned both legally and
beneficially by the company alone and the shareholders have no direct interest in
them at all. This is as a result of the fact that a registered company is an
incorporated association and that, on its formation, a new legal personality, with its
own legal rights and obligations, is created in addition to and separate from those
persons who are associating together. It is this new personality or entity which owns
the accumulated assets. As an illustration of this, a person who owns most of the
shares in a company can still be convicted of stealing from the company.

12 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
In Malawi companies are primarily governed by the Companies Act 1984 as well as
case law. In answering examination questions, your answers must be supported,
where appropriate by either provisions of the Companies Act or decided cases. These
are together called authorities i.e. the source from which the law is taken.

1.2 Definition of a company

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

common capital contributed by the members composing it, such capital being
commonly divided into shares of which each member possesses at least one, and
which are transferable by the owner.”

1.3 Advantages of a company over a partnership or sole trader-ship or an

association (a club)

(a) The single most attraction of a company as a means of carrying on

business is that it offers members limited liability for its debts. Where
the company is limited by shares, the limit will be any sum that remains
unpaid on a member’s share. Where the company is limited by
guarantee, it will be the sum that he undertakes to pay in the event of
the company winding up with unsettled debts. Unlike a partnership or a
sole trader, a member’s private properties cannot be seized to settle
debts of the company if the member has fully paid up his shares.
(b) A company once incorporated becomes a separate legal entity from its
members.
(c) A company owns and disposes of property in its own name.
(d) A company can sue and be sued in its own name.
(e) Transferable membership is only available in a company.
(f) Perpetual succession – a company continues as a going concern despite
the death, bankruptcy, transfer of shares or other change of interest or
title of any member.
(g) Flexible Borrowing facilities – a company can borrow money using its
assets as security in form of debentures, fixed and floating charges.
(h) A company is allowed to issue shares to raise capital.

13 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 (i) Management of a company is entrusted to specific persons, the
directors, whilst in a partnership every partner can manage the
partnership.
(j) There is no requirement for common interest in a company.

1.4 Limited liability comes at a price [disadvantages of forming a company]

Having looked at the advantages of forming a company, it must be borne in mind

that such advantages come at a price;

(a) A company must follow the stringent provisions of the Companies Act
and common law with regard to registration of the Memorandum of
Association (memorandum) and Articles of Association (articles).
(b) A company must file various returns and other notices and resolutions
with the Registrar of Companies.
(c) There are strict rules on meetings and how decisions are arrived at in a
company.
(d) Companies are also subjected to peculiar tax regimes.

1.5 Promotion and Formation

Promoters

A promoter is a person who takes or participates in taking, steps necessary for the
formation of a company and to set it on its feet.

Per Lord Cairns – in Erlanger vs New Sombrero Phosphates Co. [1878]

Promoters have their hands in the creation and moulding of the

company; they have the power of defining how, and when, and in
what shape, and under what supervision, it shall start into existence
and begin to act as a trading corporation. Similar sentiments were
expressed in Twycross vs Grant (1877)

There are various things that the promoter may do including the following:-
14 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 i. He may conceive the company and its business;
ii. He may find directors for the company;
iii. He may make statements and invitations for its shares and debenture;
iv. He may pay its preliminary expenses;
v. He may hold money or property on its behalf;
vi. He may acquire property for its use after incorporation and enter into
transaction for its benefit
vii. He may engage services of a lawyer, an accountant or other professional
adviser

From the afore going it will be seen that there is likelihood of abuse of the
promoter’s powers. The Companies Act and common law in turn seek to discourage
such potential and actual abuses. Below is a discussion of legal mechanisms
preventing abuse of office by promoters;

(a) Duties of a Promoter

A promoter owes fiduciary duty to the company he is forming; he therefore has the
following duties:-

(i) Not to make secret profit;

(ii) Not to let his personal interest conflict with that of the yet-to-be-formed
company;
(iii) Duty of care and skill.

It was stated by Lord Cairns in Erlanger vs New Sombrero Phosphates Co. Ltd
[1878] (facts appear below) that ‘a promoter... is in a fiduciary position to the
company which he promotes or causes to come into existence’.

(b) Duty not to make secret profit

A promoter is prohibited from making secret profits. If a promoter makes such a

profit, he must disclose it to an independent board of directors or the company’s
existing and future shareholders. Should he fail to do that, the company may do the
following;
15 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
  It may compel him to account- Gluckstein vs Barnes [1900]- A syndicate
bought property for £140,000 and resold it at £180,000 to a company. In
effecting that transaction, the syndicate had made a profit of £20,000
which it did not disclose. Held; that the syndicate was bound to pay the
company the secret profit of £20,000.

 The company may rescind the contract- in Erlanger vs New Sombrero

Phosphates Co. Ltd [1878] the appellants formed a syndicate which
bought an island at £55,000. Subsequently, the syndicate created a
company to which it resold the island at £110,000. No disclosure was
made of the profit made by the syndicate on the deal. It was held that the
company was entitled to rescind the contract of sale.

 The company may sue the promoter for damages for breach of his
fiduciary duties. Damages means compensation represented by a sum of
money.

(c) Liability under pre-incorporation contracts

Apart from breach of the fiduciary duty, a promoter may also be liable because of
what are called “pre-incorporation contracts”. These are contracts entered into on
behalf of a company not yet formed to procure goods or property which it will need
to operate after incorporation.

Quite commonly, a promoter will have to enter into contracts with third parties on
behalf of the proposed company, at a time when the company has not yet been
formed.

Third parties would face a problem in such a situation if, for instance, the company is
subsequently never formed or is formed but goes into liquidation before the bill is
paid. They would have no one to enforce the contract against. This is because the
promoter would claim only to be standing in the position of an agent for the
company and, therefore, not to be personally liable on the contract. The company

16 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
would argue that it was not in existence at the time the promoter went into a
contract on its behalf.

The law must then come out clear on who is liable in such circumstances so that the
innocent party is protected.

To begin with promoters are not agents of the yet to be formed company. It is a
basic principle of the law of agency that one (an agent) cannot act on behalf of
another person (principal) who does not exist. This principle is supported by section
20 of the Companies Act.

You will need to learn what section 20 and its sub-sections provides as a question in
the exam may require that you thoroughly apply it.

Section 20 (1) provides that any person who purports to enter into a contract in the
name of or on behalf of a company, before incorporation shall be personally bound
by the contract.

Illustration 1

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

Illustration 2

In Kelner v Baxter (1866), the plaintiff supplied promoters of a proposed hotel

company with wine which the company later failed to pay for. It was held that the
company was not liable but the promoters were personally liable.
17 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Section 20(1) [above] provides a general rule to which are attached two exceptions
as follows;

 Under Section 20 (2) a company is allowed to adopt/ratify a written contract

concluded on its behalf before it came into existence. [The promoter may
however be jointly and severally liable through a Court order applied for by
the creditor under-Section 20 (3)]. The company may as well enter into a
totally new contract with the third party based on the same subject matter as
the contract between the third party and the promoter. This is referred to as
novation.

 Under Section 20 (4) where there is an express provision in the contract

which excludes the liability of the promoter, then the promoter will not be
personally liable.

A contract may also provide that once the company is incorporated the promoter’s
liability terminates.

Liability under section 299 (1)

A promoter is liable for a misappropriation of funds during the promotion but which
is discovered by the liquidator or any creditor at the time the company is winding
up.

Liability by virtue of section 22 (1)

Section 22 (1) prohibits a company from carrying on business or any object that is
restricted by its memorandum or articles. This means a promoter cannot enter into
contracts which are prohibited or restricted by the company’s memo or articles – he
will personally shoulder the liability.

18 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Termination of a promoter’s office

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

1.6 Registrar of Companies

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

1.7 Incorporation

A company comes into being upon incorporation which is registration of a company

with the registrar of companies. The mode of incorporating a company is described
in section 4 of the Act as follows

Any two or more persons associated for any lawful purpose may by
subscribing their names to a memorandum of association and
otherwise complying with the requirements of this Act in respect of
registration, form an incorporated company.

19 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Let us now briefly analyse section 4;

 Two or more persons – means that one person cannot form a company;
 Associated for any lawful purpose – means the objects of the company should
not be illegal (i.e. against the law);
 Subscribing their names to a memorandum – means signing the memo in the
presence of witnesses;
 Otherwise complying with the requirements of this Act- this indicates to us
that there are various requirements which we shall meet as we progress into
the provisions of the Companies Act;

The memo is then delivered to the registrar of companies with:

(a) Full name, residential and postal address and occupation of each of
the company’s first directors, and company secretary;
(b) the situation and postal address of the company’s registered office;

Registration fees paid are paid and are based on the capital of the company. The
Registrar then gives the company a “designating number” and a Certificate of
Incorporation which is conclusive evidence that all the requirements of registration
have been complied with and that the company has been duly registered.

1.8 Certificate of Incorporation

Legal effect of the certificate of incorporation [section 15(2)]

Section 15 (2) provides that ‘from the date of incorporation mentioned in the
certificate, the subscribers to the memorandum together with such other persons as
may from time to time become members of the company, become a body corporate
by the name contained in the memorandum capable forthwith to exercise all the
functions of an incorporated company having perpetual succession and power to
hold land.’ (See Salomon v Salomon)

20 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Conclusiveness of the certificate of incorporation (section 16)

A certificate of incorporation by section 16 of the Act is conclusive evidence that the

formalities of registration have been complied with. This means that even if it is
subsequently discovered that the formalities of registration were not in fact complied
with, the registration will not be held invalid. The reason for this is that once a
company has commenced business and entered into contracts, it would be
unreasonable to void the contract because of a procedural defect in the registration
of the company. The affected party can at any time request the Registrar to remedy
the defect in the registration. In other words, the certificate of incorporation is
enough proof of the existence of the company.

1.9 Classification of Companies

Broad classification

There are two broad classes of companies. First are statutory companies (also called
parastatals) which are created by an Act of Parliament/statute/legislation. Examples
are Water Boards. These companies are usually created to provide a social service
and not necessarily as profit making entities. Second are companies created under
the Companies Act which is our major concern.

Classification of companies under the Companies Act

(a) Limited and unlimited companies

Section 5(1) (c) says that an unlimited company has no limit on the liability of its
members. At winding up members are personally liable for all the debts of the
company. Please do not confuse this type of a company with a partnership which we
discussed at the opening of this chapter. You will appreciate that there are very few
companies registered as unlimited as lack of limited liability makes them similar and
arguably inferior to partnerships. In a limited company the amount of capital to be
contributed by a member of the company is fixed by agreement between him and
the company such that his liability attaches to the unpaid amount on any share the

21 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
member holds if the company is limited by shares or the amount guaranteed if the
company is limited by guarantee.

Conversion of a limited company to an unlimited company and vice-versa

A limited company may be converted into an unlimited company by following these

conditions;
Condition 1; all members of the company must give written consent to the
conversion;
Condition 2; the company must adopt memorandum and articles appropriate to its
new status
Condition 3; the following documents must be delivered to the registrar
a. Certificate of incorporation.
b. A copy of the new memorandum and articles.
c. A copy of the special resolution sanctioning the company’s adoption of
the memorandum and articles.
d. A statutory declaration by the company’s directors and secretary
confirming that the company has fulfilled the conditions above.

Take note that an unlimited company cannot be converted into a limited company
unless it is solvent on the date of the conversion; an auditor’s report must confirm
this plus a statutory declaration by the directors and the company secretary. The
reason for this is apparent. Namely that members of the unlimited company may
connive to evade liability which they have accumulated under the unlimited company
and are failing to discharge the same.

(b) Companies limited by guarantee and those limited by shares

There are three distinguishing elements between a company limited by guarantee

and one limited by shares. Firstly, a company limited by shares has a contributed
capital through issue of shares whilst a company limited by guarantee does not have
a contributed capital; it is prohibited by the Companies act from issuing shares.
Secondly, the liability of members of a company limited by shares is limited to the
amount, if any, unpaid on their shares whilst the liability of members of a company
limited by guarantee is limited to a fixed amount guaranteed or pledged or
22 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
promised by the members. Lastly, a company limited by shares is primarily
established with the view of making profit. A company limited by guarantee is
actually prohibited by the Companies Act from making profits. It is created for
charitable purposes.

Conversion of a company limited by shares to a company limited by guarantee

A company limited by shares may be converted into a company limited by guarantee

by following these conditions;
Condition 1; the company’s shares must be fully paid up.
Condition 2; all members of the company must give written consent to the
conversion.
Condition 3; the company must adopt memorandum and articles appropriate to its
new status.
Condition 4; each member must guarantee payment of a fixed sum at winding up.
Condition 5; the following documents must be delivered to the registrar;
a) Certificate of incorporation.
b) A copy of the new memorandum and articles.
c) A copy of the special resolution sanctioning the company’s adoption of
the memorandum and articles.
d) A statutory declaration by the company’s directors and secretary
confirming that the company has fulfilled the conditions above.

(c) Public and private companies

According to section 5 (3) there are three distinguishing elements between a private
company and a public company. Firstly, a private company through its memorandum
or articles restricts the right to transfer shares whilst shares in a public company are
freely transferable. Secondly, a private company limits the total number of its
members to fifty while membership in a public company is limitless. Lastly, a private
company is prohibited from offering its shares or debentures to the public while a
public company freely offers its shares and debentures to the public as a means of
raising capital.

23 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
In practice, private companies are owned by a smaller group of individuals who
might be, at a basic level, family members or friends. No wonder, the majority of
registered companies are private companies. On the other hand a public company
draws its membership from a more diverse shareholding. There are a handful public
companies in Malawi about 14. These are companies which are registered on the
Malawi Stock Exchange, also called the Capital Market. List of public companies in
Malawi as at 30th Dec 2013 follows:-

1. Blantyre Hotels Limited listed on 25 March, 1997

2. First Merchant Bank listed on 19 June, 2006
3. Illovo Sugar Malawi Limited listed on 10 November, 1997
4. Malawi Properties Investment Company Limited listed on 12 November, 2007
5. National Bank Of Malawi listed on 21 August, 2000
6. NBS Bank listed on 27 June, 2007
7. NICO Holdings Limited listed on 11 November, 1996
8. National Investment Trust Limited listed on 21 March, 2005
9. Press Corporation Limited listed on 9 September, 1998
10. Standard Bank Limited listed on 29 June, 1998
11. Sunbird Tourism Limited listed on 8 December, 2002
12. Old Mutual plc listed on 12 July, 1999
13. Real Insurance company listed on 29 September, 2008
14. Telekom Networks Malawi listed on 3 November, 2008

Would you at this juncture discuss the merits and demerits of a

public/private company? How do you think companies turn around the
Malawi economy? Would it make a difference if the Companies Act
were never enacted by Parliament?

Let us now recount some of the privileges enjoyed by a private company over a
public company:

1. In a private company, alteration of its memorandum is more difficult to

effect therefore members are assured that outsiders will not easily join
them;

24 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 2. It is easier to convert a private company into a public company than it is
to convert a public company into a private company; [Remember that a
public company may have thousands upon thousands of members whilst
a private company has a maximum of fifty only]
3. A private company is not under duty to send to its members copies of the
Profit and Loss account and Balance Sheet. [The assumption here is that,
after all, most, if not all, members may have had a hand in the day to day
management of the company unlike a public company]
4. A private company is not obliged to accompany the Annual Return with
the Profit and Loss account and Balance Sheet.
5. There are strict rules on the payment for shares in a public company that
is to say that the payment must be in cash whilst in a private company
the payment may be otherwise [see Chapter 9].

Conversion of a private company to a public company

A Private company may be converted into a public company by following these

conditions;
Condition 1; the company’s shares must be fully paid up.
Condition 2; all members of the company must give written consent to the
conversion.
Condition 3; the company must adopt memorandum and articles appropriate to its
new status.
Condition 4; the following documents must be delivered to the registrar
a) Certificate of incorporation
b) A copy of the new memorandum and articles.
c) A copy of the special resolution sanctioning the company’s adoption of
the memo and articles.
d) A statutory declaration by the company’s directors and secretary
confirming that the company has fulfilled the conditions above.

It is not unusual for the examiner to ask what a student understands by the phrase
corporate status. Corporate status is the form in which a company is established or
exists for example a company limited by shares. (This must be contrasted with
corporate personality and corporate democracy)
25 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 (d) External companies

Section 306(2) defines an external company as ‘a body corporate formed outside

Malawi which establishes or maintains a place of business in Malawi.’ There are
slightly different rules applicable to these types of companies which are not within
our discussion. Are PEP stores and Game stores examples of external companies?

(e) Holding and Subsidiary companies

A holding company is one that owns or holds shares in another company called a
subsidiary company therefore;
(i) It can appoint, remove or prevent the appointment or removal of at
least half of the subsidiary company’s directors.
(ii) It holds more than half of the nominal value of the subsidiary
company’s share capital.

A local example of a holding company is Press Corporation whose subsidiaries

include NBM, Maldeco, e.t.c.

26 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER ONE: Formation of a Company
(A selection of past questions)
-----------------------------------------------------------------------------------

Companies, partnerships and sole tradership

1. Outline six legal differences between a public company limited by shares and an
association (6 marks- Dec 2004 & Dec 2008)
2. Mention four advantages of converting a partnership or sole tradership to a
company (8 marks- Dec 2001, Dec 2002, June 2003, June 2008)

Promoters

1. Who is a promoter of a company (3 marks- Dec 2000, Dec 2001, Dec 2003, June
2005 June 2007 June 2010 Dec 2011)
2. Explain the significance of a promoter in the formation of a company (5 marks-
Dec 2002)
3. Mention four activities that a promoter has to undertake in the course of
establishing a company (6 marks- June 2003 & Dec 2006)
4. What duties does a promoter owe to the company? (6 marks- June 2001 Dec
2005 & June 2010)
5. Explain the duty of a promoter regarding any profits he may make in relation to
the company (4 marks Dec 2011)
6. The case of Erlanger v New Sombrero Phosphates Co. (1878) holds that
promoters of a company stand undoubtedly in a fiduciary position. Mention four
consequences of this fiduciary relationship in dealings between the company and
the promoters (8 marks- June 2001)
27 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
7. Define the fiduciary duties of a promoter. (6 marks- Dec 2000)
8. What remedies do members have against promoters who breach their duties
during the incorporation of a company (6 marks- Dec 2001, Dec 2006 & June
2010)
9. Who is liable to pay for the price of goods bought by the promoters on behalf of
the company, once the company is incorporated? (8 marks- Dec 2001, June
2003, Dec 2006 & June 2010)
10. Discuss the legal position regarding the effect of pre-incorporation contracts to a
company after its incorporation. (4 marks- Dec 2000, Dec 2003, June 2005, June
2007 Dec 2009 Dec 2011)
11. State two exceptions to the legal position discussed in the question above (4
marks- Dec 2000 June 2005 Dec 2011)

Classification of companies

1. Mention two common features between a company limited by shares and a

company limited by guarantee (4 marks- June 2001, June 2004 & June 2008)
2. Mention three differences between public companies and private companies in
relation to payment for shares (3 marks- Dec 2004)
3. What is a private company as defined by the Companies Act (3 marks- June
2009)
4. Mention two types of companies limited by shares (2 marks- June 2001, Dec
2011)
5. State and define types of companies under the Companies Act (7 marks- Dec
2005, Dec 2010)
6. Distinguish a limited company from an unlimited company (4 marks- June 2000,
Dec 2000, June 2004, Dec 2006, Dec 2009, June 2011, Dec 2012)
7. Distinguish a public company from a private company (5 marks- Dec 2002, June
2003 & Dec 2009 )
8. Distinguish a company limited by guarantee from one limited by shares (4 marks-
June 2000, Dec 2000, Dec 2009, June 2011, Dec 2012)
9. Distinguish a holding company from a subsidiary company (5 marks- Dec 2002,
Dec 2009)

Conversion of companies
28 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Outline the procedure in converting
(a) a limited company to an unlimited company (6 marks- June 2000, June 2004,
Dec 2006, June 2011, Dec 2012)
(b) a company limited by shares to one limited by guarantee (6 marks- June 2000,
June 2003, June 2004, Dec 2006, June 2009, June 2011, Dec 2012)
(c) a private company limited by shares to a public company limited by shares (5
marks- June 2003)

Incorporation and Registration

1. Give five functions of the registrar of companies (5 marks- June 2007 & Dec
2008)
2. What is meant in company law by the term ‘incorporation’?
3. Explain the legal effect of the certificate of incorporation. (5 Marks- Dec 2009)
4. Discuss the legal position where a company enters into a contract and it is
subsequently discovered that it did not follow certain registration requirements. Is
the contract valid? Give reasons for your answer.

Others

1. Union Bus Company (UBC), once a successful passenger transport company, is

now on the verge of liquidation mainly due to stiff competition from minibus
operators. Of immediate concern to UBC is its failure to pay its suppliers most
notably General Tyre Merchants Ltd (GTM) whom UBC had contracted to supply
it with K10 million worth of tyres. In its present financial position, the only
option available to UBC is to have the sale agreement rescinded without
attracting a legal suit for loss of business. In their desperate bid to justify the
intended rescission of the contract, UBC conducted a search at the Registrar of
Companies. To UBC’s delight the search has revealed that while GTM is a duly
registered company No. M0922490, some formalities required for registration of
a company had not been fulfilled. Mr Chifisi, the Managing Director of UBC, has
approached you for advice eager to confirm his conviction that although
registered, GTM Ltd is an illegal company and therefore cannot enforce or in any
way sue on the contract.
29 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 Required:- Advise Mr Chifisi whether or not the information discovered justifies
the rescission of the contract. (7 marks- Dec 2004) (10 marks- June 2007) (7
marks- Dec 2008)

2. Mr Kamowa, a chartered accountant, was engaged by a consortium of

businessmen “to do everything necessary” for the establishment of a limited
liability cement manufacturing company to be known as Kumanga Ltd. The
consortium put a lot of money and other resources at Kamowa’s disposal but
also urged him to be accountable and sternly warned him against making any
secret personal profit out of the project.

Required:-

(a) Mention any four essential activities that Kamowa, as a promoter, will have
to undertake in the course of establishing Kumanga Ltd. (6 marks- June
2003) (6 marks- Dec 2006)

(b) Was the warning to Kamowa by the consortium against making secret
personal profit out of the project valid? (6 marks- June 2003) (6 marks-
Dec 2006)

3. During the establishment of Kumanga Ltd not only did Kamowa make secret
personal profits, but also failed to pay several suppliers with whom he had
entered into contracts although fund for such payments had already been
provided for by the consortium. Makombo Ltd was one such frustrated supplier
but having discovered recently that Kamowa was a mere promoter, has resorted
to sue the newly formed and operational Kumanga Ltd for payment.

Required:-

(i) Advise Kumanga Ltd on the recoverability of the secret profits from
Kamowa. (4 marks- Dec 2006)

30 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 (ii) Advise Makombo Ltd on the proposed legal suit for payment against
Kumanga Ltd (4 marks- Dec 2006)

4. Wanangwa Jere, acting as a promoter for a prospective fruit juice company to be

known as Golden Canners Co. Ltd, borrowed K10 million from Horizon
Investment Bank Ltd in March 2006. The loan agreement expressly stipulated
that Wanangwa was contracting the loan as an agent of a group of investors of
the proposed company. The conviction of the bank was that the incorporation of
the company was underway. In fact, on a number of occasions, Wanangwa had
shown Mr Brown, the Bank Manager, a number of legal documents to that
effect. The loan was repayable by April, 2008 the bank having been convinced
that by then the company would have been incorporated and be in a position to
effect the repayment. Contrary to expectations, Golden Canners Co. Ltd is yet to
be incorporated and consequently no single instalment has been paid on the
loan to date. Mr Brown is now under intense pressure from the Head Office,
Durban, South Africa, to have the loan recovered immediately.

Required:- Advise Mr Brown on the recoverability of the loan in the

circumstances. (10 marks- Dec 2008)

31 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER TWO: The Constitution of a Company

2.1 Introduction

Every club, society or association needs a constitution or set of rules to regulate the
way the business of the association is conducted. The registered company is no
different and its constitution is contained in two documents, the memorandum of
association and the articles of association. As earlier observed, both are filed with the
registrar of companies when the company is formed and they remain open for public
inspection. Together, they form the complete constitution.

In a nutshell, the memo sets out the company’s broad framework-it gives each
company’s distinctive characteristics such as its name, address, first directors and
members. The articles on the other hand are rules of the companies’ internal
management.

2.2 The Memorandum of Association

The memorandum is the more fundamental of the two documents and is the one to
which the original parties forming the company will subscribe their names. These
subscribers agree to take a certain number of shares in the company and become its
first members. The memorandum is the more fundamental both because of its
content and because, if conflict arises between the terms of the memorandum and
the articles, the memorandum takes precedence.

We can now turn to quick but very examinable points about the memorandum:-
a. This document must be sent to the registrar of companies for registration.
b. The format of the memorandum depends on whether the company is limited
by shares, by guarantee or unlimited.
c. The memorandum for a company limited by shares must comply with Table
B which is a standard set.
d. The memorandum for a company limited by guarantee must comply with
Table C which is a standard set.

32 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
The general contents of the memorandum are found in section 6 of the
Companies Act. The memorandum must contain the following:-

i. name of the company;

ii. restrictions, if any, imposed on the company’s business;
iii. company’s authorised capital and number of shares into which the capital
is divided;
iv. classes of shares; rights and privileges of members and conditions for
each class;
v. whether the company is private or public limited;
vi. that liability of members is limited;
vii. full name, address and occupation of each subscriber;

The subscribers should express their wish to be formed into a company and the
number of shares indicated opposite their names.

There are additional contents for a company limited by guarantee, namely;

(1) maximum number of membership, if any;

(2) that its income will be used solely towards its objects (i.e. charitable
purposes)
(3) guarantee as to contribution of each member upon winding up
(4) State what organisation will take over its assets upon winding up, such
organisation must be a charitable organisation/company limited by
guarantee.

The name of the company is regulated by section 19 of the Act and some of its
contents are as follows:-

 Where the company has limited liability the word ‘limited’ must appear at
the end of the name. This serves as a warning to investors and the public
that the liability of its members is limited.
 The name must be used for all business purposes including correspondence;
 The registrar may refuse a name if resembling another company’s, it is
misleading or undesirable;
33 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
  The Minister may direct that a company’s name be changed within six weeks
if it is misleading or undesirable;
 The name may not contain protected/restricted names such as national or
Malawi. There is need to obtain consent from the office of president and
cabinet before such words may be used.
 It is an offence in the law of tort called ‘passing off’ where one uses another
company’s name. An injunction will be granted to restrain such wrongful use!
 A company’s name may be altered in three circumstances namely:-

i. By the company itself by passing a special resolution in a general

meeting. The change must then be approved by the Registrar in
writing and his decision is final and one cannot appeal to the court.
The company has a duty to send to the Registrar within 21 days after
the date of the resolution, the company’s certificate of incorporation
and a copy of the said resolution for registration. The registrar then
issues a new certificate of incorporation bearing the new name.
ii. As a result of a ministerial order. This is where the Minister is of the
opinion that the name of the company is misleading or undesirable. In
such a case, the minister may direct such a company to change its
name and the company shall do so within six weeks.
iii. Through a court order- courts have always enjoyed wide powers to
regulate companies generally and specifically their names. If an
application is brought by an injured party that the defendant if using a
similar name to the applicant’s (commission of the tort of passing off),
the court may issue an injunction against such wrongful use and order
the defendant to change its name.

The registered office and postal address

 It is usual to include the registered office (physical) and postal address of the
company in the memo. The address is important for general communication
and in particular service of summons and other legal documents;
 The name of the company must appear in easily legible Roman letters at the
company’s registered office;

34 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
  The company may change any of the 2 addresses by notifying the registrar
in 21 days.

The authorized business [section 22 (1)]

The business/objects clause of the memorandum will set out the parameters of the
company’s activities so that if it does anything outside those limits it would be
exceeding its powers. It will be acting ultra vires which is illegal or voidable at the
option of members or debenture-holders who can sue for an injunction. Acting intra
vires means acting within the company’s powers which is legal. Void means of no
effect. Void ab initio means of no effect from the beginning and voidable means
that the innocent or injured party has the option of choosing whether to regard the
contract as having come to an end or not.

The passing of the Companies Act in 1984 affected the application of the doctrine of
Ultra Vires as follows: prior to the passing of the Companies Act, it was the practice
of every company to list down all the objects it wished to carry on. In Ashbury
Carriage Co. Ltd vs Riche (1875), a company was formed with the objects of
making, selling and mending railway carriages (trams/rail cars). The company
purported to build a railway line. It was held that the company’s decision to build a
railway line was ultra vires and void. This was so regardless of the directors’ and
general meeting’s ratification.

But now with the coming into force of the Companies Act 1984, things have become
easier for newly formed companies because all they have to state in their
memorandum is whether or not there is any restriction on the company’s business.
[See later- Royal British Bank vs Turquand (1856) and section 22 (1) and section
22(2)]

The memorandum is alterable at any point. However the following conditions must
be met if a company wishes to alter its memorandum, namely:-
 The alteration must be effected by a special resolution passed in a general
meeting;
 The alteration is not binding if it imposes shares on a member unless that
member consents;
35 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
  The alteration must be legal for example not against a court order;
 The alteration must be bona fide- not oppressive or ill-founded.

2.3 The Articles of Association

Every registered company has to have, in addition to a memorandum, articles of

association. This document will contain the basic regulations for the management of
the company, covering such matters as:-
1. the issue and allotment of shares;
2. the calls on shares;
3. the rules relating to the transfer of shares;
4. the procedures to be followed at general meetings;
5. the regulations relating to members voting;
6. the appointment, removal and powers of directors;
7. the payment of dividends and the capitalisation of profits.

In contrast to the memorandum, which are rules regulating the conduct of the
company and outsiders, the articles are rules for internal management of a company.
Section 11 of the Companies Act says that the articles are ‘Regulations for the
conduct of the companies’ affairs.’

Relationship between memorandum and articles

The memorandum takes precedence over the articles therefore where there is a
conflict between the two, the memorandum is followed, however since the two
documents are contemporaneous (i.e. formed at the same time) the articles are used
to explain or clarify any ambiguity in the memorandum.

In Re Duncan Gilmour and Co. Ltd [1952] the memorandum provided that
preference shareholders had priority in the distribution of the company’s assets on
winding up. The articles, on the other hand, provided that preference shareholders
had no priority but that distribution of surplus would depend on whether a
member’s shares were fully paid up or not, regardless of whether one was a
preference or an ordinary shareholder. It was held that the memorandum would take

36 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
precedence therefore preference shareholders were entitled to preference in the
distribution of the company’s assets.

Effect of the memorandum and articles

According to section 17 of the Companies Act, the memorandum and articles create
a contract under seal between the company and its members (and not outsiders)
and between the members themselves. This means that both the company and
members have individual rights and obligations such that failure to comply with the
memorandum and articles amounts to breach of contract entitling the innocent party
to sue.

Illustration 1

In Hickman vs Kent [1915] the articles of the company required that any dispute
between the company and a member be referred to arbitration. There was a dispute
between the plaintiff member and the company. The plaintiff member ignored the
articles and decided to sue the company. It was held that the company would be
allowed to compel the plaintiff to refer the dispute to arbitration before suing.

Illustration 2

In Rayfield vs Hands [1958] the articles required the company to buy a member’s
shares at a fair price if he intended to transfer them. The company refused to buy
the shares and it was held that the company had to buy the shares.

We need to be clear that the memorandum and articles bind members of the
company and not outsiders. Thus in Ely vs Positive Government Security Life
Association Company Limited [1876] the articles provided that the plaintiff should
be the lawyer for the company. The Plaintiff lawyer was not a member of the
company. The defendant company terminated his contract and he sought to rely on
the articles. It was held by the court that he could not rely on the articles because he
was not a member of the company.

37 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Alteration of articles

The company is always at liberty to alter its articles but there are conditions which
must be met:-
(i) The alteration can only be done by a special resolution;
(ii) The alteration must be legal i.e. not in conflict with the Companies Act
or any other laws;
(iii) According to section 8 of the Companies Act, a member is not bound
by an alteration which requires him to take up more shares and pay
for them, unless he agrees in writing;
(iv) The alteration must be in agreement with the memorandum. This is so
because if the alteration is in conflict with the memorandum it will be
a useless alteration as the memorandum takes precedence over the
articles;
(v) At common law an alteration will be void if ill-founded (not bona fide).
In is illustrated by the case of Brown vs British Abrasive Wheel
Company Limited [1919] where the defendant company needed more
capital and the majority (98%) were willing to provide the capital if the
minority (2%) shares were sold to them. The minority refused to sell
their 2% and the majority sought to alter the articles to provide for
compulsory acquisition. It was held that the alteration was invalid since
it would merely benefit the majority and was not directly concerned
with the provision of the capital which the company needed. In other
words the alteration was not made bona fide in the interest of all the
members of the company.
(vi) Where a company has entered into a contract with a third person, a
subsequent alteration of the articles may put the company in breach of
the contract and liable to pay damages. However, it was held in Punt
vs Symons and Co. [1903] that the statutory right of a company to
alter its articles would normally be sufficient to prevent the granting of
an injunction to restrain an alteration. This means that an injunction
cannot be granted to prevent the adoption of new articles.

38 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER TWO: The Constitution of a Company
(A selection of past questions)
-----------------------------------------------------------------------------------

1. Mention the basic constitutional document of a company limited by shares and

state its usual contents (2 marks- Dec 2000, Dec 2009)
2. What is the relationship between a Memorandum of Association and Articles of
Association? (3 marks- June 2001, June 2003, June 2004, June 2008 & June
2010)
3. What is the relationship between Memorandum of Association and Articles of
Association in case of a conflict between the two? (4 marks- Dec 2000, June
2001 & June 2008)
4. What is the contractual effect of the Memorandum of Association and Articles
of Association (3 marks- June 2001)
5. State the effect of the Articles of Association upon the company, its members
and outsiders (9 marks- June 2000, June 2004, Dec 2006, June 2007, June 2010,
June 2011)
6. Explain the significance of the following in the formation of a company;
 Memorandum of Association (5 marks- Dec 2002, Dec 2003, June 2005
June 2007 Dec 2011)
 Articles of Association (5 marks- Dec 2002, Dec 2003, June 2005
June 2007 Dec 2011)
7. Define the following;
i. Memorandum of Association (1 mark- June 2003)
ii. Articles of Association (1 mark- June 2003)
8. Outline the information required to be contained in the Memorandum of
Association (7 marks-June 2000, Dec 2002, June 2003, June 2004, Dec 2006 &
June 2007)
9. State seven compulsory clauses that should be contained in a memorandum of
association of a company limited by shares (6 marks- June 2009, June 2011)
10. What conditions, if any, should be followed if a company wishes to alter its
Articles of Association or what is the legal position with regard to the alteration
of the altered Articles of Association. (8 marks Dec 2005)
11. State any four legal provisions regarding the alteration of articles of
Association. (8 marks Dec 2012)
39 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
12. State any four legal rules which govern the alteration of Articles of Association.
(8 marks Dec 2010)
13. Advise a shareholder where the company alters its Memorandum of Association
thereby making the shareholder take more that those shares initially allotted to
him and he is opposed to the alteration. (5 Marks- Dec 2012). Would it make a
difference if the shareholders agreed to be bound by the alteration? Give
reasons for your answer. (2 Marks -Dec 2012)
14. How would a company, registered under the Companies Act, change its name?
(6 marks- June 2009)
15. State what you understand by the doctrine of ultra vires in Company Law.
(5marks – Dec 2002, Dec 2006, June 2011, Dec 2012).
16. How has the Companies Act affected the application of the doctrine of ultra
vires? (5marks – Dec 2002 & Dec 2006, June 2011, Dec 2012).
17. How has section 6 of the Companies Act relaxed the application of the doctrine
of ultra vires? (5 marks- Dec 2000)
18. How far is the doctrine still important? (4 marks- Dec 2000)
19. Timber Industries Ltd is proposing to alter its articles of association. The effect
will be to render Timber Industries Ltd incapable of performing its part of the
contract entered into between itself and Kachimera who, upon learning of this
move, intends to restrain Timber Industries Ltd from effecting the alteration by
an injunction.

Required:- Advise Kachimera if, under the Companies Act, he can restrain
Timber Industries Ltd from altering its articles of association. (5 marks- Dec
2005, Dec 2010, Dec 2012)

40 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER THREE: The Legal Status of a Registered Company

3.1 Corporate personality

According to Lord MacNaughten in Salomon vs Salomon and Co. [1897] the

company is at law a different person altogether from the subscribers to the
memorandum, and though it may be that after incorporation the business is
precisely the same as it was before and the same persons are managers and the
same hands receive the profits, the company is not in law the agent of the
subscribers or a trustee for them. This is the legal status or personality of a company
which contrasts with that of a partnership or sole trader.

The facts in Salomon vs Salomon were as follows:- Salomon incorporated his

business as a limited company, which consisted of seven members of his family and
himself. He held all the shares except seven, and also debentures to the value of
£10,000, representing a loan which the company borrowed from him. The debentures
entitled him to a first charge on the assets of the company. Thus, when the company
went into liquidation, Salomon claimed that, as a debenture-holder, he was a
‘secured’ creditor. The other creditors claimed that Salomon and the company were
the same person, and that a man cannot owe himself money. The House of Lords,
however, held that a company, once incorporated has a legal existence of its own,
which was quite independent of the existence of any individual member.

This position is buttressed by the Companies Act through section 15 (2) which states
that:-

from the date of incorporation mentioned in the certificate of

incorporation, the subscribers of the memorandum, together with such
other persons as may from time to time become members of the
company, shall be a body corporate by the name contained in the
memorandum, capable forthwith of exercising all the functions of an
incorporated company, having perpetual succession and power to hold
land.

41 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Section 21(1) adds by providing that the company acquires “the capacity of a
natural person of full capacity.” A person of full capacity is an individual of 21 years
and above whom the law allows to exercise various rights including holding land. A
person below the age of 21 is called a minor and does not have full capacity.

Summary of corporate personality- Corporate personality is when upon

incorporation, a company assumes a legal personality distinct from its members
whereby the company becomes an artificial person with rights and duties similar in
many ways to those of a natural person. (Contrast with corporate status and
corporate democracy)

Some effects of incorporation

(a) Members of the company are not personally liable for the company's debts as
long as it is a going concern. In Naidoo vs. Madzi Import and Export and
Chongwe [1985], the plaintiff and the 2nd defendant formed the 1st defendant
company. The plaintiff and the 2nd defendant being directors and
shareholders. The 2nd defendant incurred some expenses in the name of the
company. The issue was whether or not the plaintiff could recover those
expenses from the 1st and the 2nd defendant. It was held that since the
company is a distinct legal personality the expenses could be recovered from
it and not from the 2nd defendant. This conforms to the accounting principle
of separate legal entity.

(b) The company’s property (assets) belongs to it and not its members or
creditors. Thus in Macaura vs Northern Assurance Company Limited [1925]
the appellant owned a timber estate. He assigned it to a company in return
for the allotment by the company of fully paid up shares to him. Later, he
insured the timber in his own name against fire. The timber was later
destroyed by fire. He sought compensation from the company. It was held
that the company was not obliged to compensate him since he had no
insurable interest in the timber which belonged to the company. In other
words the appellant had insured property which did not belong to him. The
law of insurance demands that one can only insure property in which he has
some interest called ‘insurable interest’.
42 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 (c) Shareholders cannot validly pay money belonging to the company into their
personal accounts or draw money from its accounts for their personal use.
This also corresponds with the accounting principle of separate legal entity.

(d) A company is immortal; it does not come to an end because of death of one
or all of its shareholders. It enjoys perpetual succession.

(e) Under the Taxation Act a company is charged to tax on its own income and
not as an agent for its shareholders.

(f) A person may perform multiple functions as a director, shareholder and

employee of the same company. In Lee vs Lees Air Farming Limited, Lee
formed a private company to carry on a crop spraying business. He held all
the shares except one; he was the managing director and also employed as a
chief pilot. He was killed while piloting the company’s aircraft. The court held
that his widow could claim compensation under the Worker’s Compensation
Act.

3.2 Lifting the corporate veil

The fundamental principle of English Company Law which is the foundation of

Malawi Company Law was laid down in the case of Salomon vs Salomon and Co.
[1897] namely that a company duly incorporated is a separate legal entity with its
own rights and obligations distinct from those of its shareholders.

However there are instances where the law will depart from this rule. The law goes
behind the corporate veil (facade) to expose the real actors. Such exceptions are
referred to as ‘lifting the veil of incorporation’ or ‘piercing the veil of incorporation’.

There are two instances through which the veil of incorporation may be lifted. First
under an Act of Parliament and second under common law (case law/by the courts).
Let us now turn to details of lifting the corporate veil under both instances.

43 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
Lifting the corporate veil though Acts of Parliament

The Companies Act regulates most of the instances of lifting the veil of incorporation
by Parliament. In the examinations priority should be given to the Companies Act.
Examples are as follows:-

1. Where one member carries on the business of a company for six months,
he is liable jointly and severally with the company. This may also be
presented as ‘where the number of members falls below two’ (Sections 4
and 42);
2. If upon winding up, evidence is found that an officer of the company
contracted a debt knowing that the company would be unable to pay it,
he will be personally liable (Section 337);
3. Where one is conducting company business with intent to defraud
creditors or anybody he will be personally liable. (Section 337) In the
Matter of National Bank of Malawi, Continental Traders Limited and
Mary Nyandovi-Ker (2003) Nyandovi-Ker was a shareholder and director
of Continental Traders Limited. The company obtained through her an
overdraft facility with an undertaking to constitute her house in Zomba as
security. After obtaining the overdraft, but before executing a charge over
the house, she sold the house to a third party. The court lifted the veil of
incorporation under section 337 and held her personally liable for having
conducted the company business with intent to defraud National Bank of
Malawi;
4. The company must trade in its own name such that if an officer signs a
cheque or bill of exchange wherein the name of the company is not
accurately mentioned, he will be personally liable (Section 130);
5. Since a company cannot be imprisoned, any criminal liability will fall on
an individual officer of the company. For example, under section 335 an
officer who wilfully makes a false return, report, certificate, account or
other document is personally liable to imprisonment for two years and a
fine of one thousand kwacha.

Other instances of lifting the corporate veil include section 119 of the Taxation Act
which provides that where a company is liable to a penalty, every person who at the
44 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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time of the offence was an officer of the company shall also be liable to the same
penalty. Under the Trade Descriptions Act where a company is accused of an
offence under that Act (such as advertising at a lower price than at which the goods
are offered), and the offence is the result of default on the part of one of the
company’s employees, it is the employee who may be convicted of the offence.

Lifting the corporate veil under common law (by the courts)

Examples;

(i) Where a company is using the veil of incorporation to evade legally binding
obligations;

Illustration I

Gilford Motor Company Limited vs Horne [1933]:- An employee undertook

not to solicit his employer’s customers after the termination of his
employment. Soon after termination, he formed a company of which his wife
and another person were directors and shareholders. In violation of the
undertaking he sent out circulars to customers of his former employer. It was
held that the company was formed as a sham to get around his obligation
under the contract. An injunction was granted against the circulars.

Illustration II

Jones v Lipman [1962] Here, L entered into a contract to convey a parcel of

land to J. Subsequently, he changed his mind and, in an attempt to avoid
being compelled to convey the land, he formed a company, A Co, of which he
and a clerk were the only shareholders and directors. L then conveyed the
land to A Co. The court granted an order for specific performance against
both L and A Co to convey the land to J because the company was a creation
of L as a device and a sham or a mask which he held before his face in an
attempt to avoid recognition by the eye of the law.

45 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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(ii) Where an individual controls a number of companies as if they were his
property, the court may ignore the distinction between him and the
companies, and hold him responsible for their acts. In Wellersteiner vs Moir
[1974] the plaintiff was a financier who controlled a number of business
concerns. He would keep the money at a bank, in which he was a chairman
and made most of the decisions himself. It was held that although the
concerns were distinct legal entities, the court would lift the veil of
incorporation and treat them “as being creatures for whose doings he should
be responsible.”

The famous judge in that case Lord Denning MR stated that:-

... I am quite clear that [the companies] were just the puppets
of Dr Wallersteiner. He controlled their every movement. Each
danced to his bidding. He pulled the strings. No one else got
within reach of them. Transformed into legal language, they
were his agents to do as he commanded. He was the principal
behind them. I am of the opinion that the court should pull
aside the corporate veil and treat these concerns as being his
creatures – for whose doings he should be, and is, responsible.

(iii) The court may lift the veil of incorporation if it feels that the company’s
corporate personality is being used for illegal purposes such as tax evasion
and money laundering. In Unit Construction Company vs Bullock [1959] a
holding company in the United Kingdom created many subsidiaries in Kenya
in order to evade tax. The court held that since the subsidiaries were
managed in the UK and were resident in that country, the parent company
would be liable to taxation in the United Kingdom.

(iv) In a group company situation, the court may lift the veil by refusing to
recognise that a holding company and its subsidiaries are separate legal
entities and holding them to be a single economic unit. In Smith, Stone and
Knight vs Birmingham Corporation [1939] it was held that the parent
company which owned property which was compulsorily acquired by
Birmingham Corporation could claim compensation for removal and
46 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 disturbance, even though it was a subsidiary company which occupied the
property and carried on business there. This was because the subsidiary was
operating on the property, not on its own behalf, but on behalf of the parent
company.

(v) For security reasons such as during a period of war, the veil of incorporation
may be pierced to identify the true nationality of a company; in Daimler
Company Limited vs Continental Tyre and Rubber (GB) Limit (1916) the
court lifted the veil to determine whether the defendant company was an
"enemy" during the first world war as the shareholders were German, the court
determined that the company was indeed "an enemy". Thus, the court
maintains a watchful eye on any misuse of the corporate form.

47 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER THREE: The Legal Status of a Registered Company
(A selection of past questions)
-----------------------------------------------------------------------------------

1. What is meant by ‘lifting the corporate veil’? (5 marks- Dec 2004, June 2005 Dec
2008, June 2010, June 2011, June 2012, Dec 2012)
2. Though it is generally accepted that a limited company is a separate legal entity
distinct from its shareholders, there are instances when the courts look behind
the company as a legal person to discover who is behind it. Outline four
circumstances in which the courts may act in the manner mentioned above. (8
marks- Dec 2001)
3. Mention three circumstances under which the veil of incorporation may be lifted
under the provisions of the Companies Act, 1984 (6 marks- Dec 2004, Dec 2008,
June 2011,)
4. Discuss the legal principle expounded in the classic case of Salomon v Salomon
(5 marks- June 2005, June 2010, June 2012)
5. Discuss how the veil of incorporation may be lifted;
 Under statutory law (5 marks- June 2005, June 2010, June 2012, Dec 2012)
 Under common law (5 marks- June 2005, June 2010, June 2012, Dec 2012)
6. Define the following terms;
 Corporate personality (2 marks- Dec 2004 & Dec 2008)
 Corporate democracy (2 marks- Dec 2004 & Dec 2008)
 Corporate status (2 marks- Dec 2004 & Dec 2008)

48 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 CHAPTER FOUR: The Management of a Registered Company

4.1 Company membership

As earlier stated, the law allows any two or more persons associated for any lawful
purpose to form an incorporated company by subscribing their names to a
memorandum of association and by otherwise complying with the requirements of
the Companies Act in respect of registration- section 4. This means that every
registered company must have at least two members. We also mentioned that a
private company limits the total number of its members to fifty. A public company
has no limit on membership and a partnership’s membership is restricted to 20
partners.

Notes on membership

A minor- is a person below the age of 21. The contract to purchase shares in a
company entered into between a minor and the company is voidable at the option
of the minor. This means that the minor has the option of abandoning the contract
before his 21st birthday. In Steinberg v Scale (Leeds) Ltd (1923) a minor applied for
and was allotted 500 £1 shares for which she paid 50p per share. She repudiated (i.e.
disowned) the shares when she was still under 21 and tried to recover the £250 she
had paid. It was held that she could repudiate the shares and cease to be a member
but could not recover the money back as she had enjoyed some benefits out of it
(i.e. there was no total failure of consideration)

A personal representative is a person who handles the affairs of a deceased person.

[This is a generic name however where one dies leaving behind a valid will his
personal representative is called an executor for male and executrix for female. He
is an administrator if the person dies without a will] A personal representative can
be a member representing the estate of a deceased member. A personal
representative will only be registered as a member upon production of letters of
probate or letters of administration. These are official court letters proving a person
as a representative of the deceased.

49 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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A trustee in bankruptcy- is treated as a legal owner of the shares of a bankrupt
member. A trustee in bankruptcy has the same rights and obligations as a personal
representative. He has three options open to him;
1) He may apply for registration as a member in his own name
2) He may sell the shares
3) He may disclaim them without registering as a member.

A company- may be a member of another company if it is permitted by its memo.

Commencement of membership

There are four ways through which one becomes a member of a company as
follows:-
(a) By subscribing to its memorandum, these are original members;
(b) By agreeing to become a member of the company and having his name
registered in its register of members;
(c) Where shares are voluntarily transferred to another person as a gift or for
value;
(d) Where shares are transferred by operation of law i.e. involuntarily.
Examples are Death- where one dies the shares devolve to an executor
(executrix) or survivor if a joint holder. Where a member of a company is
declared bankrupt his shares devolve to a trustee in bankruptcy. Note
that bankruptcy law is governed by the Bankruptcy Act. Under the
Forfeiture Act, which is no longer part of the law, the one party
government would forfeit a member’s shares in the name of public
security. In modern days Parliament may pass a law requiring foreign
companies to sale their shares to the indigenous people similar to what is
called ‘black empowerment’ in South Africa.

Cessation of membership

There are similarly four ways through which one can ceases to be a member of a
company as follows:-
a) by transferring his shares to another person gratuitously or for value;
b) by his shares being forfeited under some Act of Parliament;
50 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 c) by his shares being sold by the company under some provision in its
articles for example enforcement of a lien;
d) by death.

Register of members

Section 32 of the Act requires every company to keep a register of its members. The
contents of the register are as follows:
1) full name, address and occupation of member;
2) date of entry in the register;
3) date on which he ceases to be a member;
4) a statement of shares held by each member;
5) amount paid on each share.

The High Court has power to rectify the register on application of a concerned
member. This may be useful for example where one buys share but it takes
unnecessarily long to have his name in the register, he can thus apply to the court
for entry of his name into the register.

Note that according to section 37 the register is prima facie evidence of its contents.
This means that if a name appears in the register it is evidence that the bearer of
that name is a member unless contrary evidence is brought.

Rights and duties of members

Ownership of shares is comparable to ownership of any other property. Ownership of

property entails enjoyment of certain rights and shares are no different. A member
has the following rights:-
1. Right to attend and vote at the company’s general meeting. This is the most
important way through which members influence the policy and direction of
the company;
2. Right to receive dividends;
3. Right to receive back capital if upon winding up some assets of the company
remain.

51 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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Rights correspond with duties and the main duty of a member is to pay in full for
the shares allotted to him/her.

4.2 Company meetings

Introduction

At the heart of company law lies the issue of who controls the company. The answer
to this question will ultimately determine how the company’s property is used, what
transactions are entered into or approved and whether persons who have caused
harm or loss to the company will be pursued.

There are two primary decision making bodies within a company, the general
meeting of shareholders and the board of directors. In theory, there is a great deal
of emphasis placed on collective decision making in company law. The Companies
Act places importance on the shareholders’ meetings and has a considerable number
of provisions regulating when and how they should be held.

In reality, though, most important commercial decisions are taken by the board, by a
committee of the board or, perhaps, even by the managing director or chief
executive who is a delegate of the board, and the Companies Act, in contrast, has
very little to say prescriptively about the board meeting.

In order to obtain an overview as to how power is exercised in the company, it is

proposed to deal first with the statutory provisions and articles dealing with the
general meeting, then those relating to the board.

General meetings

First we have to look at the types of meetings that members of a company may
have.

1) Annual General Meeting (AGM) - this is a meeting for all members

conducted every year. This is the forum in which members contribute to the
company’s decision-making. According to section 104(1) of the Companies
52 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 Act, every registered company must hold at least one general meeting for the
year so that 15 months should not pass between one meeting and the next. A
company however, by a written agreement of the members to attend the
meeting may waive the holding of such a meeting for a particular year. Failure
to hold the meeting without written agreement of the members entitled to
attend it, is an offence under section 104(5).

2) Extra-ordinary General Meeting- this is any other meeting of the company

other than an annual general meeting. This meeting is generally convened by
directors when they deem it fit. However members can call for the meeting as
long as they hold at least 5% (one twentieth) of the total voting rights of all
the members who have the right to vote at the company’s general meeting.
This is called calling for an extra ordinary general meeting by requisition. The
law lays down conditions for the requisition:-
(vi) The requisition must state the nature of the business to be
transacted at the meeting;
(vii) It must be signed by the requisitionists.
(viii) It must be deposited at the registered office of the company. If the
directors do not call for the meeting within 21 days, the
requisitionists may convene it themselves. They must convene the
meeting within three months from the date of deposition.

3) Class meetings-section 47 allows a registered company to create different

classes of shares by attaching certain rights or restrictions to some of its
shares. Members of a class may therefore hold meetings called class meetings.
According to the case of Carruth vs Imperial Chemical Industries [1937] if
holders of other types of shares are also present, that may affect the validity of
the meeting. However, if these members come in after deliberations are over
and voting is about to start, and the legitimate participants do not object to
their presence, the meeting will still be valid.

53 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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Notice of general meeting

The power vested in the directors to call general meetings and send out notices is a
power which is potentially open to great abuse. First, the notice given for a meeting
may be extremely short, giving shareholders little opportunity to make arrangements
to attend or mount an effective opposition to the directors’ proposal. Secondly, the
circular accompanying the notice, being drafted by the directors, will not only, of
course, put the directors’ views forward but may also not present a true picture. As a
result, both the courts and the legislature have had to intervene to assist
shareholders.

The Act, in section 108, requires 21 days notice in respect of an annual general
meeting and 14 days notice for other meetings.

In order to be valid, the notice itself must specify the place; the day; the hour and
the general nature of the business to be transacted at the meeting (agenda). The
specifics are not necessary. The usual business is as follows:-
 To consider financial statements;
 To have auditors and directors reports;
 To appoint auditors;
 To elect directors;
 To declare dividends; and
 Any special business.

If there is insufficient disclosure of the business, the resolutions passed at the

meeting will be invalid. In Tiessen vs Henderson [1899] the purpose of the general
meeting was to pass special resolutions for the company’s financial reconstruction.
Directors of the company would receive commissions if the resolution was passed
but this was not disclosed. Members sued and it was held that the failure in the
notice to disclose the directors’ financial interest in the success of the proposed
reconstruction rendered the special resolutions approving it not binding.

According to section 107 the following are entitled to notice:-

(1) Every member who has the right to vote at such meetings;
(2) Every member to whom ownership of shares devolves by operation of law;
54 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 (3) Every director of the company;
(4) Every auditor of the company.

It is apparent that the secretary is not entitled to notice. The reason is that it is the
company secretary himself who prepares the notice.

If any person entitled to notice does not receive one, any resolution passed at the
meeting will be of no effect.

The High Court on its own motion or on application has power to order that a
meeting be convened and such a meeting shall for all purposes be deemed to be a
meeting of the company dully called. This may be helpful where the company has
two shareholders and due to differences they cannot meet.

Persons entitled to attend the general meeting

Section 111 (1) gives all persons who are entitled to notice of the general meeting
and the company secretary the right to attend general meetings. For the purposes of
clarity the following are entitled to attend:-
(1) Every member who has the right to vote at such meetings;
(2) Every member to whom ownership of shares devolves by operation of law;
(3) Every director of the company;
(4) Every auditor of the company;
(5) The company secretary.

Persons prohibited from attending and voting at the general meeting

The company may through its articles prohibit attendance by a member if sums
payable by him in respect of shares held by him in the company have not been paid
for in full. Where such is the case, the same must be raised at the meeting through
an objection because if the prohibited person attends or votes, the decision may still
be valid if there is no fraud or ill-intention.

55 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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4.3 Proceedings at the general meeting

Quorum

Section 112 provides that 2 or more persons who are members or hold proxies are
enough to form a quorum. However the articles will usually provide for a different
kind of quorum for example 51% of members.

One person cannot constitute a meeting even if he attends in more than one
capacity. However this rule does not apply to class meetings if there is only one
member for that class.

A meeting if called by members and there is no quorum within 30 minutes- the

meeting stands dissolved. Where a meeting is called by directors and there is no
quorum within 30 minutes, the meeting stands adjourned to the same day, place and
time in the following week.

Voting

Voting comprises one of the most basic principles of corporate democracy i.e. that
members have the right to influence the company’s policy by making independent
choices at the general meetings.

Issues at a meeting are decided by a vote- either by show of hands or by a poll.

Where a poll is not demanded, show of hands is enough. A member is entitled to
one vote where voting is by show of hands. On a poll, every member is entitled to
one vote for each share held by him.

The case of Re Horbury Bridge Coal, Iron and Wagon Co. [1897] illustrates the
application of the voting rules in a general meeting. Here, at a meeting where 5
members of the company were present a resolution was passed to wind up the
company. The company then proceeded to elect its liquidator by show of hands.
There were two candidates, A and B. A, got 3 votes while B got 2 votes which were
cast by the majority. No poll was demanded by the majority. The chairman decided
that B, who got 2 votes, was duly elected. The minority challenged this decision. It
56 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
was held that the chairman erred because no poll was demanded and in a vote by
show of hands the candidate who gets more votes carries the day regardless of the
fact that he has been voted in by the minority. Therefore, A, who got 3 votes should
have been declared the liquidator.

Members can demand a poll on any issue therefore articles may not limit such right.
Note, however that according to section 114(1) (b), the articles can exclude the right
to demand a poll if the demand is made by:-
1. less than three members
2. less than 5% (one twentieth) of the total voting rights.

There are two situations where members may not demand a poll namely election of
the chairperson and adjournment of the meeting. These are probably quick decisions
that should better be decided by show of hands.

Proxies

Section 113 (1) allows every member of a registered company who is entitled to
attend and vote at its meeting to appoint another person to attend the meeting and
vote in his stead. Such a person can appoint more than one person, each
representing such number of his shares as he may specify in the instrument of
appointment called a power of attorney. The appointee is known as a ‘proxy’. A
proxy need not be a member of the company. The notice of the general meeting
must specify that a member can attend a meeting through a proxy. The proxy is not
himself entitled to a notice of the meeting- after all the company does not know him
and his contact details.

The Chairperson

It is usual for the chairperson of the board of directors to preside over the general
meeting. However, if he cannot, members will choose a chairperson from amongst
themselves. The chairperson has the duty of preserving order in the meeting;
ensuring that the meeting is conducted in accordance with legal procedures;
deciding any incidental questions for instance disallowing votes which are objected
to and he holds the casting vote in a tie.
57 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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Resolutions

There are two types of resolutions- ordinary and special:-

According to section 120 (1) an ordinary resolution is passed by a simple majority

for example in the ratio 3:2 3 wins. There is no need for notice to members that an
ordinary resolution will be passed. Instances requiring an ordinary resolution include-
increasing capital and removing a director/ auditor.

According to section 120 (2) there are three conditions that a special resolution
must satisfy (i) 21 day’s notice must have been given (ii) the notice must show the
intention to propose the resolution as a special resolution at the general meeting (iii)
it must be passed by at least three-quarters (75%) of the votes cast. Some special
resolutions require court confirmation for example a special resolution altering the
memorandum in terms of its business; a special resolution for variation of class rights
and a special resolution for reduction of a company’s share capital.

SPECIAL RESOLUTION ORDINARY RESOLUTION

1. Alteration of its objects 1. Appointment of directors

2. Alteration of its articles 2. Appointment of auditors
3. Alteration of its name 3. Removal of directors
4. Reduction of Capital 4. Removal of auditors
5. Conversion of a company from one type 5. Increasing capital
to another 6. Voluntary winding up
6. Variation of class rights

NB: tables are not allowed in the exam, this table is only for illustration. All answers
must come in an essay format, i.e. paragraph after paragraph.

58 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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The principle of assent

A general meeting is necessary where a discussion is required and dissenting or

opposing views are likely. However, the law knows that sometimes there will be no
dissent and thus all members assent to a particular policy therefore they can simply
sign a resolution without actually meeting-section 121. This assent cannot be a
substitute to a general meeting in matters involving the removal of the company’s
auditor or director since they have to be heard before a decision is arrived at.

Ratification of director’s acts done in breach of their duty

The general meeting may ratify acts of directors done in breach of their duty. What
is required is that the members must have all material facts before them. Further
than that, a director who is also a member but is in breach of his duty as a director
may also be allowed to vote. In North West Transportation v Beatty (1877), a
director sold a ship to the company at a fair price. A general meeting was called to
approve the sale. He was permitted to cast his votes (in his capacity as a member)
for the resolution to approve the sale. However ratification is, by law, not allowed in
the following circumstances;

(a) If the director’s act is illegal or utlra vires (See Ashbury Railway Carriage v
Riche (1875) discussed in chapter two)
(b) If the directors defraud the company, the majority cannot sanction the fraud
[In Cook v Deeks (1916)) directors who were also a majority shareholder
took in their own names a contract meant for the company and it was held
that that act could not be sanctioned by the general meeting as it
constituted fraud on the company.]
(c) The company cannot, in a general meeting, waive or relax the principle that a
director must exercise his powers bona fide in the interest of the company.
(d) If the directors allot shares to alter the balance of votes in a general meeting,
the votes attached to those shares may not be cast to support a resolution
approving the issue (In Bamford v Bamford (1970) the directors had used
their share issuing powers for improper purpose and the said issue of shares
was void)

59 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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Board Meetings

Whereas the 1984 Act contains many sections prescribing the form and procedure
for holding general meetings and passing resolutions, the Act is relatively silent on
the question of board meetings. So, for the regulation of board meetings, regard
must be had primarily to the relevant provisions of the articles and to the common
law.

In a nutshell Table A (the standard articles for a public company) provides as

follows:- the directors may meet together for the dispatch of business, adjourn and
otherwise regulate their meetings as they think fit. Questions arising at any meeting
shall be decided by a majority of votes. In the case of an equality of votes, the
chairman shall have a second or casting vote.

A director may, and the secretary on the requisition of a director shall, at any time
summon a meeting of the directors. It is unnecessary to give notice to a director
who is absent from Malawi.

The quorum necessary for the transaction of the business may be fixed by the
directors and unless so fixed shall be two.

The directors may elect a chairman of their meetings and determine the period for
which he is to hold office, but if no such chairman is elected, or if at any meeting the
chairman is not present within five (5) minutes after the time appointed for holding
the same, the directors present may choose one of their number to be chairman of
the meeting.

The directors may delegate any of their functions to committees consisting of such
member or members of their body as they may think fit. A committee may elect a
chairman of its meeting, if no such chairman is elected, or at any meeting the
chairman is not present within five (5) minutes after the time appointed for holding
the same, the members present may choose one of their number to be the chairman
at the meeting.

60 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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That said, a valid board meeting can be held informally, as long as all directors who
should be informed are informed, and agree to the informality. An informal board
meeting cannot be held against the wishes of one or more of the directors, as was
shown in Barron vs Potter [1914], where one of the two directors of the company
attempted to convene an informal board meeting on the platform of Paddington
Railway Station as the other alighted from a train and against his wishes. It was held
that the additional directors who had been purportedly elected at this ‘meeting’ by
the use of a casting vote had not been properly appointed.

Section 148- Resolution in lieu of a meeting: - Where directors are unable to meet,
for whatever reasons, the company secretary may prepare a resolution in lieu of a
meeting.
 It must be in writing.
 Signed by all directors entitled to vote thereon.
 Such a resolution is only possible in situations where the Companies Act or
articles do not expressly require a meeting to be held.

61 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 CHAPTER FOUR: The Management of a Registered Company
(A selection of past questions)
-----------------------------------------------------------------------------------

Membership

1. Mention four ways in which one can become a member of a company limited by
shares (5 marks- Dec 2000, June 2001, June 2003, June 2007, June 2008, June
2010, Dec 2010, Dec 2011)
2. Mention four ways in which one can cease to be a member of a company limited
by shares (5 marks- June 2001, June 2003, June 2007, June 2008, Dec 2011)
3. What principle rights does a shareholder have in a company (6 marks- Dec 2001,
June 2005, June 2007, June 2012)
4. What is the principle duty of a shareholder in a company (2 marks- Dec 2001,
June 2005, June 2007, June 2012)
5. What main preferential rights accrue to holders of preferential shares in a
company (4 marks- Dec 2001, June 2005, June 2007, June 2012)
6. What are the contents of a register of members of a company limited by shares
(5 marks- Dec 2000, Dec 2004 & June 2007)
7. A register of members of a company may reflect the name of a particular person
as a member when in fact he is not. Do you agree with this statement? Give
reasons for your answer. (3 marks- Dec 2005, Dec 2010)
8. State the legal position with respect to the following named types of members
regarding their eligibility to become members of a company;
(a) a minor (4 marks- Dec 2000)
(b) a personal representative (2 marks- Dec 2000)
(c) a trustee in bankruptcy (3 marks- Dec 2000)
(d) a company (1 marks- Dec 2000)

Meetings

1. Who may convene an Extraordinary General Meeting by requisition? (2 marks-

June 2001, Dec 2001, Dec 2003, June 2005, June 2007, June 2008, June 2012, Dec
2012)
2. How is an Extraordinary General Meeting convened? (3 marks- June 2003)
62 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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3. What is the statutory minimum voting power requirement for company
member(s) to requisition an extra-ordinary general meeting? (1 mark- June 2010)
4. Which persons are entitled to receive notices of General Meetings of a company?
(4 marks- June 2001, Dec 2003, June 2007, June 2008, June 2010, June 2012, Dec
2012)
5. What do you understand by the following:-
(a) An Annual General Meeting (3 marks- June 2000, June 2003, June
2004, Dec 2006, Dec 2008, June 2011)
(b) An Extraordinary General Meeting and how it is convened (5 marks-
June 2000, June 2003, June 2004, Dec 2006, June 2011)
(c) A Class Meeting and its major difference from a General Meeting (6
marks- June 2000, Dec 2006, June 2011)
6. What is the length of notice required to convene
(a) An Annual General Meeting (1 mark- June 2001, Dec 2001, Dec 2003,
June 2005, June 2007, June 2008, June 2012, Dec 2012)
(b) An Extraordinary General Meeting (1 mark- June 2001, June 2007, June
2008, June 2012)
(c) A meeting other than an annual general meeting for the passing of a
special resolution (1 Mark -Dec 2012)
7. Which persons are entitled to attend and speak at any General Meetings of a
company? (5 marks- June 2001, Dec 2003, June 2007, June 2008, Dec 2008, June
2012, Dec 2012)
8. What are the rights of a member’s proxy at a General Meeting? (3 marks- June
2001, Dec 2003, June 2007, June 2008, June 2012, Dec 2012)
9. What is the legal requirement for a valid special resolution of a General Meeting?
(3 marks- June 2001, Dec 2003, June 2007, June 2008, June 2012, Dec 2012)
10. Mention four acts which a company can only do by special resolution (4 marks-
June 2001, June 2003, June 2007, June 2008, Dec 2011)
11. What is the difference between an ordinary and a special resolution of a
meeting? (3 marks- Dec 2001, June 2005)
12. Mention any five corporate decisions that a company can make in a General
Meeting. (5 marks June 2010)
13. Can a general meeting ratify a director’s act which is in breach of his duty and if
so would such a director, being also a member, be allowed to vote at such a
general meeting? (5 marks- Dec 2000)
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14. State four circumstances under which ratification is, by law, not feasible. (4
marks- Dec 2000)
15. At a company’s meeting a resolution may be decided by voting either by show of
hands or by ballot:
Required:-
(1) State two situations where the Companies Act prohibits the demand for
a poll (4 marks June 2004 & Dec 2008)
(2) Can a right to demand a poll be excluded by the Articles? (2 marks -June
2004 & Dec 2008)
(3) In what circumstances would a provision in the companies’ Articles be
void where it has the effect of denying the right of demand for a poll (4
marks -June 2004 & Dec 2008)

16. Chabwera a prosperous farmer in Jali area was on Monday morning awakened by
a loud knock on his door. Two men then entered his house and greeted him with
the news that he had been elected as a member of a newly formed Jali Farmers
Ltd. He was greatly surprised as he neither had prior knowledge nor had he
heard of the formation of such a company. He then answered his two visitors: ‘I
decline to be a member of your company. Let those people interested join you.’
One of the two men then retorted, ‘that does not matter but you are, by law,
obliged to take up thirty shares allotted to you.’

In his confused state, Chabwera has now called on you for advice.

Required:- Advise Chabwera whether or not he is, by law, really obliged to take
up the shares. Give reasons for your advice. (10 marks- Dec 2005)

17. Preference shareholders of Pamodzi Milling Co. Ltd convened a meeting to

discuss changing some of the rights attached to their class of shares. The
meeting was, however, attended by members of other classes of shares who felt
the move intended by preference shareholders was prejudicial to their rights. The
intended resolution was not reached because members, other than preference
shareholders also voted at this meeting. Preference shareholders did not turn the
other shareholders away as they genuinely thought that the whole group

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comprised of preference shareholders. They have now discovered that members
of other classes of shares also attended the meeting and actually voted.

Required:- Advise the preference shareholders on what action to take. (5 marks-

June 2000) (5 marks- Dec 2005, June 2011)

65 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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CHAPTER FIVE: Company Directors and Other Company Officers

5.1 Introduction

Since a company is an artificial legal person, it needs individuals who can act for it,
represent it and make decisions concerning how it is to be run. These individuals are
the directors, who are officers of the company. Directors lie at the centre of
corporate governance. The Cadbury Report defines corporate governance as ‘the
system by which companies are directed and controlled’. This chapter will be
concerned with the nature of this office, the appointment to it and the duties and
responsibilities that go with it. We shall also briefly discuss other company officers,
key among them, the company secretary.

Definition of Directors

Section 140 of the Act defines directors as ‘those persons, by whatever name
called, who are appointed to direct and administer the business and affairs of the
company.’

Number of Directors

Section 141(1) states that ‘every company shall have at least three directors.’ There
is however no maximum specified. The penalty for carrying on business with less
than the required number of directors is twofold
(i) Up to two months every member, director and the company will be liable
to a fine of K10 each day;
(ii) Beyond two months, every director and member will be jointly and
severally liable with the company.

Appointment of Directors

The first directors of the company will have been appointed by the subscribers to the
memorandum. Appointment of additional directors may be left to the board of

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directors but the general meeting still maintains the power to appoint and dismiss
directors at any time.

Normally, the articles will provide that all first directors should retire at the
company’s first annual general meeting and that one third of them must also vacate
their posts at every subsequent annual general meeting. This is referred to as
retirement by rotation. The retired directors can be re-elected.

Eligibility for Appointment

The Act outlines persons who are ineligible for appointment as directors:
1. A body corporate;
2. An infant or any person under legal disability for example insanity or
incompetence due to old age or illness;
3. Those restricted by a Court Order;
4. An undischarged bankrupt can only be appointed as director with a Court
Order;
5. A person removed from an office of trust on account of misconduct can only
be appointed as director with a Court Order;

In addition the director must give written consent to his appointment in writing.

Residential Requirements

The Act requires that the majority of directors being not less than three including
the managing director must be resident in Malawi. If the company contravenes this
requirement for more than 2 months, it may be wound up on the Attorney General’s
application.

Share Qualification

As a general rule, there is no need for a director to hold a share in the company.
However, if articles require a director to hold a certain number of shares, he must
acquire them within 2 months of his appointment. If he fails to do so, he must vacate
his office and cannot be re-appointed. Where the share is required to be held in the
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director’s own right he does not become a director until his name is registered in the
register of members.

Register of Directors and Secretaries

A company must keep a register of directors, excluding alternate directors, and

secretaries at the registered office. Its contents include the present names of the
director; former names of the director; residential and postal address; and business
occupation, if any.

5.2 Types of directors

1. Directors- meaning those appointed through the memorandum or in the

general meeting.

2. Alternate Directors
Section 147 (1) allows a director, if not prohibited by articles, to appoint a
fellow director or with the approval of the board, any other person as an
alternate director. Such appointment must be in writing and signed by both
the appointor and the appointee and lodged with the company. An alternate
director acts when the appointor is outside Malawi or is unable to act for
whatever reason.

An alternate director acts as an officer of the company and not as an agent of

his appointor. However, he cannot himself appoint an alternate director nor is
he required to hold shares in the company. The company cannot pay
remuneration to both the alternate director and his appointor.

3. Casual Directors – fill a casual vacancy that arises between General Meetings
because of death or resignation of a director.

4. Shadow Directors – these are persons in accordance with whose instructions

the directors are accustomed to act. They exert “real influence” over the
company’s affairs. Professional advisers acting in that capacity are exempt
from being shadow directors.
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 5. Note that corporate governance requires that a distinction be made between
executive and non-executive directors. A director who is an employee of the
company working under a contract of service is called an ‘executive director’.
Such a director will be expected to perform a specified role for the company.
The articles will usually empower the board of directors to appoint such
employees for example the managing director or chief executive. Under the
Act a managing director is not subject to retirement by rotation. Directors
may delegate their duties to the managing director. Non-executive directors,
on the other hand, are officers of the company who do not have such an
employment relationship with the company and are usually only awarded a
relatively small fee for rendering their services. Such directors bring an
independent judgment to bear on issues of strategy, performance, resources,
including key appointments and standards of conduct.

5.3 Director’s powers of management and their limits

Powers of Management

It is usual that powers of management will be restricted to directors and the general
meeting will not be allowed to exercise that power or instruct directors on how to
exercise it. (Article 53 of Table A). In John Shaw & Sons Ltd vs Shaw [1935] general
power of the company’s management had been delegated by the articles to the
directors. The general meeting passed a resolution stopping certain court
proceedings instituted by the directors in the company’s name. It was held that a
company is an entity distinct alike from its shareholders and its directors; some of its
powers may, according to its articles, be exercised by directors; certain other powers
may be reserved for the shareholders in general meetings. If powers of management
are vested in the directors, they and they alone can exercise these powers. It was
thus wrong for the general meeting to interfere with the directors’ decision.

Powers of management for directors are extensive under the Companies Act but
include the following:- borrow money, issue debentures and charge company
property as security for the loan; determine how negotiable instruments and receipts
for money paid to the company are to be executed; appoint other directors; pay
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interim dividends; appoint the managing director; ensure that accounting records are
kept and that accounts are prepared and laid before the company in a general
meeting; delegate their powers to committees of directors or the managing director;
issue shares and determine the rights and restrictions which may be attached to
them; convene general meetings.

Limits on Directors’ Powers

Limits on director’s powers are derived from both statute and common law. We shall
first briefly examine statutory limitations and then common law limitations.

An example of limits on directors’ powers is to be encountered in the Companies Act

and a company’s articles; for instance, issuing of shares is subject to the Act and any
resolutions of the company. Directors cannot do any of the following without the
sanction of an ordinary resolution of the company:-

a) sell or lease the whole of or substantial part of the company’s business or

property;
b) issue new or unissued shares in the company;
c) create or grant any right or option which entitles the holder to acquire any
class of shares in the company.

On the other hand, under common law if directors exercise their powers in an unfair
way, those who are adversely affected can sue. Again directors’ powers of
management are conferred on the directors collectively as a board. This means that
the powers will be exercisable at board meetings of which appropriate notice has
been given and at which a quorum is present. In the case of Metalimpex vs AG
Leventis & Co. Ltd [1976], the company’s board of directors had power to indorse
and deal with bills of exchange. A single director indorsed a bill of exchange which
the company failed to pay. The plaintiff sued the company for the failure to pay. The
court held that powers were given to the board and not a single or group of
directors, the company was therefore not liable. (Note that the director could be
sued directly).

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The company in general meetings has the residuary power to exercise director’s
powers of management if they are unable or unwilling to exercise the powers. In
Barron vs Potter [1914] company’s articles gave the board of directors’ power to
appoint an additional director. However, because of personal differences between
existing directors, the board could not meet to make the appointment, consequently,
the company in a general meeting appointed the director. It was held that the
appointment was valid.

This means that a company through the general meeting maintains ultimate control
over directors because of its power over their tenure of office i.e. it is the general
meeting that appoints and dismisses the directors – even all at once.

5.4 Duties of directors

The wide decision–making powers of directors and their virtual exposure to the
company’s assets creates potential for abuse by the directors themselves at the
expense of shareholders. The law therefore comes in with strict rules on duties of
directors, breach of which entails certain sanctions.

The basic legal duties of directors are to act in good faith in the interests of the
company and for a proper purpose; and to exercise care and skill. These are derived
from common law and are common to all directors. The duties are owed to the
company, meaning generally the shareholders collectively, both present and future,
not the shareholders at a given point in time.

For the sake of convenience, the duties of directors can be categorised into three
and will be discussed in that order in this section:-
(a) Fiduciary duties;
(b) The duty of care and skill;
(c) Duty to act in conformity with the memorandum and articles.

Fiduciary Duties

A fiduciary is someone entrusted with a duty to act on behalf of and in the best
interest of someone else, especially the management of someone else’s property.
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Fiduciary duties arise in that relationship. Examples of fiduciary relationships include
director and company, trustee and beneficiary, guardian and ward, lawyer and client.

Directors must display utmost good faith towards the company as a whole. Director’s
powers of management must be exercised for the purpose for which they were
conferred and bona fide for the benefit of the company as a whole.

Illustration 1

In Re W & M Roith Ltd [1967] a shareholder and director entered into a contract
whereby on his death his wife would be entitled to a pension for life from the
company. It was held that the contract was not in the interest of the company as a
whole. Its sole object was to provide for the widow therefore the agreement was not
binding on the company. The director had breached his fiduciary duties.

Illustration 2

In Howard Smith Ltd vs Ampol Petroleum Ltd [1974] a majority shareholder

rejected a takeover bid. Subsequently, the directors honestly believing that the
takeover was in the interest of the company allotted new shares to individuals who
favoured the bid so that the majority could change. It was held that the directors
had used their power over the company’s shares purely for the purpose of
destroying an existing majority or creating a new majority which did not previously
exist and so the allotment was void.

A director must not let his personal interest conflict with the interest of the company;
he must therefore declare any personal interest. Consequences;

1) No secret profit- in Boston Deep Sea Fishing Co. Ltd vs Ansell [1888]
a director was paid a secret commission for entering into a contract on behalf
of a company. It was held that he must account to the company for the
commission.

2) A director must disclose his interest in a contract- A major aspect of a

director’s fiduciary duty is that he must not let his duty to the company come
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 into conflict with his personal interests. It is not a breach of duty per se for a
director to allow such a conflict to occur, but he is under a disability from
entering into any transaction where such a conflict exists. Therefore, a
transaction which a director makes on behalf of the company from which he
derives a personal benefit is voidable and can be set aside at the option of
the company. Thus a director must account for the opportunity, profit or
property he obtains for himself behind the back of the company. In the case
of Industrial Development Consultants Ltd vs Cooley [1972] a director
resigned in order to clinch a contract for himself for the supply of gas to the
company from which he had resigned. He got the contract. When members
sued it was held that he should account for the benefit made under the
contract to the company.

Under section 150 a director who is materially interested in a contract

involving the company must disclose the nature and extent of his interest.
Where a director discloses his interest, the contract is voidable at the option
of the company; it is not void. During the vote the director should not take
part, unless the articles allow the same. Re Greymouth Point Elizabeth
Railway & Coal Co. [1904]- Two directors advanced money to their company.
A meeting was arranged to decide whether to issue debentures in their
favour. The meeting was attended by the two directors and another director
and they issued the debentures. It was held that there was no quorum. The
director who is interested is not supposed to vote– the resolution was
therefore invalid.

3) Rule against inside dealings - directors must not exploit information which
they have on the company’s securities (shares, debentures, bonds, stocks), for
their own benefit or someone else’s. The case in point is Diamond vs
Oreamuno [1969] – decided in the United States of America. Here, realising
that their company’s profit had fallen drastically, directors sold their shares on
the market at $28 a share, before the fall was made public. Subsequently, the
value of the shares dropped to $11 per share. It was held that although the
company had suffered no loss from the directors’ conduct, the directors were
liable to account to it the difference between $28 and $11 per share (i.e. $17).

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 Note that under the Securities Act 2010 company directors are prohibited
from abusing information on securities acquired in their role as directors.
Suffice it to say that this Act establishes and regulates the Malawi Stock
Exchange. As far as its details are concerned, they are outside our discussion.

The Duty of Care and Skill

The starting point of any analysis of the duty of care imposed upon a director is
usually the judgment of Romer J, in Re City Equitable Fire Insurance Co Ltd [1925].
Here, the company had lost a large amount of money, due partly to the fraud of the
chairman of the board. In the winding up, the liquidator brought this action against
other directors, who, although honest, had allowed the frauds to take place; the
liquidator alleged that this occurred through their negligence. In the event, Romer J
did find that two of the directors were guilty of negligence but they were saved by a
clause in the company’s articles which exempted directors from liability for
negligence except losses caused by the directors’ own ‘wilful neglect or default’. Take
note that the Companies Act, section 163, has since provided that such a provision in
the articles exempting officers from liability is void.

Still more there are three useful points that Romer J makes in this case which
constitutes the position on the director’s duty of care and skill as follows:-

First, he states that: ’... a director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected from a person of his
knowledge and experience.’ This is illustrated by the case of Re Brazilian Rubber
Plantations and Estates Ltd [1911]. Here a company was formed with the object of
purchasing rubber estates. Its directors knew nothing about rubber estates though
they were informed that statements made about an estate which they intended to
buy were untrue. They still went ahead to purchase the estate. They were sued when
the company went into liquidation. It was held that the directors were not liable for
the breach. They did not have special knowledge on rubber estates therefore they
could not be expected to show skills of an “expert”.

Secondly, Romer J stated that: ‘A director is not bound to give continuous attention
to the affairs of his company. His duties are of an intermittent nature to be
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performed at periodical board meetings and at meetings of any committee of the
board upon which he happens to be placed. He is not, however, bound to attend all
such meetings, though he ought to attend whenever, in the circumstances, he is
reasonably able to do so.’ This is a reflection of the Marquis of Bute’s Case [1892]
where the Marquis became the president of the Cardiff Savings Bank on the death of
his father, when he was six months old. He attended only one board meeting in 38
years before the bank was wound up. It transpired that frauds had been committed
against the bank by an officer but the court held that the Marquis could not be held
liable in damages for failing to attend to the business of the company.

Note that this proposition is, today, likely to apply only to non-executive directors.
Executive directors are likely to have their attendance obligations specified in their
contracts.

Thirdly, Romer J stated that: ’In respect of all duties having regard to the exigencies
of business and the articles of association, which may properly be left to some other
official, a director is, in the absence of grounds for suspicion, justified in trusting that
official to perform such duties honestly. This principle is demonstrated in Dovey v
Cory [1902] where a director relied on the judgment and advice of the chairman and
general manager of the company when he assented to the payment of dividends and
to loans from the company’s funds. He had no reason to doubt the balance sheets
presented to board meetings nor did he have any reason to doubt the competence
of the general manager. In fact, the dividends were paid out of capital and the loans
were made without proper security. It was held that this director was not negligent.

The duty to act in conformity with the memorandum and articles

Section 22 (1) prohibits a company from carrying on any business or exercise any
power which the company is restricted by its memorandum or articles. Directors, in
their management must abide by the memorandum and the articles. See Royal
British Bank vs Turquand [1856] [Turquands Case] where directors could borrow
money after authorisation by the general meeting borrowed money from the plaintiff
bank without authority. It was held that, clearly what the directors did was
inconsistent with the constitution of the company but for other reasons the company
was held to be bound to repay the loan (Reasons are discussed later in Chapter 7).
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5.5 Directors’ remuneration

Remuneration

A director is not an employee of the company merely by reason of holding office,

further, he is not entitled merely by holding office to any remuneration for the
services he performs. He is not, prima facie, entitled to any remuneration for his
service. Therefore, for a director to get remuneration, he must show some contract or
agreement to be inferred from the articles.

Directors are managers and controllers – they are entitled to remuneration as

decided from time to time by the general meeting if no decision is made, they are
not entitled to anything. A director cannot claim a quantum meruit [payment in
proportion to work done] from the company if he undertakes work for it as a
director but is not paid remuneration under the authority of the articles. This rather
harsh position of the law is necessary to prevent directors from helping themselves
out of the assets of the company. If the law was not so, how much would directors
pay themselves?

A company is not under legal obligation to disclose directors’ remuneration in its

annual financial accounts, instead a note is attached to the accounts indicating the
aggregate amount of the director’s emoluments and pensions. The aggregate should
include fees, expenses, allowances, salaries, interests and sums paid under pension.

Payment for loss of office

A payment may also be made to a director for loss of office; where there is a service
agreement between the company and the director, the director is entitled to
compensation for loss of his directorship. Section 153 requires that such payment be
disclosed to the members and be approved by an ordinary resolution, otherwise it
shall be deemed to have been received in trust for the company.

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Payments in take-over bids

Directors may receive payments in connection with take-over bids. The rule is that
where there is an offer for the acquisition of a company’s shares and payment is
made to directors or shareholders this must be disclosed otherwise the law will treat
it as a secret profit.

Loans to directors

There are general restrictions on a company’s power to make a loan to a director or

any person connected with a director. The basic prohibition and exceptions to it are
contained in section 151. This section prevents a company from making a loan to a
director of the company or of its holding company, or from entering into any
guarantee or indemnity, or from providing any security in connection with a loan
made by any other person to the director.

Nevertheless the following exceptions apply:

(i) a company may grant a loan to its subsidiary or holding company;
(ii) a company in the business of lending money can lend money to its
directors (for example a commercial bank);
(iii) any company can lend money to its directors to meet expenses incurred
by them for the purposes of the company but this must be approved by
the general meeting.

5.6 Remedies against directors

Where a director breaches any of the above duties:

i) he may be ordered to account for the profit [section 150 (1)];
ii) he may be ordered to indemnify the company [section 151(5)];
iii) if the breach involves sale of shares, the buyer or seller who is victimised may
rescind/cancel the contract [section 152 (1)];
iv) the company may obtain an injunction against the director’s breach
v) the director be ordered to pay a fine/imprisonment
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Note that a company cannot through its constitution, exempt its directors (as well as
auditors) from liability or take out an insurance policy to cover their liabilities. The
same would encourage directors and auditors to breach their duties.

5.7 Termination of appointment (Cessation/ vacation of office)

The position of a director is not for life. It can come to an end through the following
ways:-

1. Removal from Office by the company (general meeting) - section 146 (1) allows
a company to remove from office all or any of its directors. This means that
despite any provision in the articles or service agreement, for instance, for a
director to serve for a certain period, the company can still more remove him
from office before the expiry of that period. However, where the removal
breaches a service agreement the director is entitled to compensation. The
removal must be sanctioned by an ordinary resolution. The procedure, which is
not uncommon in the exam, is as follows: a Special notice of such a resolution
must be given to the company 35 days before the meeting; a copy of the notice
must be given to the director concerned; The director must be allowed to speak
at the general meeting or make written representations i.e. defend himself – as
he has got the right to be heard; no weighted voting is allowed (i.e. giving the
director more votes on a share. This is prohibited by the Act).

2. Share qualification (section 144) – if a director does not hold the specified
number or shares after appointment within two months must vacate his office.

3. Removal from Office by the court- where the director is removed from an office
of trust on account of misconduct (Section 145).

4. Removal from Office by the court- where the director is adjudged bankrupt
(Section 145).

5. Legal disability- Where the director becomes insane or incompetent through age
or illness (Section 145)
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6. Retirement- All first directors must retire at the company’s first general meeting.
A third of them must retire at every annual general meeting (except the
managing director). This is called retirement by rotation; the retired directors are
however eligible for re-appointment.

7. Resignation (section 145)- the resignation must be by notice to the company in

writing.

5.8 Other Company officers

It is important to know who the company officers are especially in situations where
the veil of incorporation is lifted. Section 2 of the Act states that a company officer
includes:-
(a) Every director
(b) Company secretary
(c) Receiver appointed by a debenture-holder (see Chapter 8 & 9)
(d) Liquidator appointed by the members in a voluntary winding up (see
Chapter 8 & 9)
A company officer does not include the following:-
(e) Receiver or liquidator appointed by the Court or creditors. (see Chapter 8 &
9)
(f) Company auditor.

We have comprehensively discussed directors as company officers. In this section we

shall discuss the company secretary who is also a company officer. The receiver and
liquidator are discussed later in chapters 8 and 9. Take note that an auditor is not a
company officer.

Company Secretary

Section 156 provides that ‘every company shall have a secretary’ who shall be
resident in Malawi. Unless the articles provide otherwise, the secretary is appointed
by the directors for such term, at such remuneration and upon such conditions as

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they may think fit, and may be removed by them, subject however to his right to
claim damages from the company if removed in breach of contract.

The secretary may be a body corporate. But recall that a body corporate cannot be a
director. The act also allows two or more persons to jointly act as company
secretary.

The function of the secretary can be summarised as follows:- the secretary being the
chief administrative officer of the company with exclusive administrative duties and
responsibilities, he runs the day to day administrative duties of the company. In most
circumstances his basic duties will include making sure that the company complies
with its memorandum and articles; making sure that the company complies with
corporate laws such as the Companies Act, the Taxation Act, the Capital Market
Development Act, the Public Accountants and Auditors Act e.t.c. The secretary
organises and manages board meetings and general meetings, as seen, he prepares
the notices for such meetings and sends them out to members or directors as the
case may be. This means that the secretary provides corporate governance to the
board of directors. He also manages the company’s intellectual property (copyright,
patents, trademarks, designs e.t.c.); he administers the pension fund and manages
the company’s property portfolio; he handles official communication for the company
especially on legal matters and generally handling legal matters.

External regulatory authorities

For convenience we shall discuss external regulatory authorities in this section. There
are two external authorities that regulate an accountant’s work namely the Malawi
Accountants Board and the Commissioner for Taxes.

The Malawi Accountants Board is established under the Public Accountants and
Auditors Act. The core functions of the Malawi Accountants Board, which are
examinable, are as follows:-

1. To regulate conditions of service under registered training contracts for

accountants and to prescribe fees payable for the transfer of such contracts;

80 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 2. To prescribe fees in respect of the registration of a person and a certified
public accountant or a diplomate accountant;
3. To make arrangements for the training and examination of accounting
trainees;
4. To prescribe the degrees and diplomas and other qualifications which shall
entitle any person exemption from all or any of the requirements to be
complied with by persons desiring to be registered as certified public
accountants or diplomate accountants;
5. To take any steps which may be expedient for the maintenance of the
integrity, the enhancement of the status and improvement of the standards
for the qualifications of accountants and auditors and to encourage research
in connection with problems relating to any matter affecting the
accountancy profession;
6. To advise the minister on accountancy and cognate matters;
7. To assist in the procurement of educational facilities for registered trainees.

The office of the Commissioner for Taxes is established under the Taxation Act and
falls under the Malawi Revenue Authority (MRA). The main function of the
Commissioner is to oversee the general administration of the Taxation Act and other
Acts touching on taxation such as the VAT Act and the Customs and Exercise Act. His
specific tasks include;

(a) Assessment of taxes due from an individual or corporate taxpayer;

(b) Collection of such taxes;
(c) Remittance of such taxes to the Treasury;
(d) Hearing tax appeals in the first instance.

81 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER FIVE: Company Directors and Other Company Officers
(A selection of past questions)
-----------------------------------------------------------------------------------

1. Who is a director? (4 marks- Dec 2003, Dec 2006, Dec 2007, June 2011, June
2012)
2. Describe the duties of a director. (10 marks- Dec 2006, June 2011)
3. What is the position of directors in relation to the company? (5 marks- Dec 2002,
Dec 2004 & June 2010)
4. What is the position of the managing director in relation to the company? (4
marks- Dec 2001, June 2010)
5. How does the position of managing director differ from that of other directors?
(5 marks June 2009Dec 2011)
6. Outline the nature and extent of the common law duties that a director of a
company owes to a company as outlined in the case of Re City Equitable Fire
Insurance Co. [1925] (8 marks- June 2001)
7. Outline the three most important fiduciary duties of a director (6 marks- June
2005)
8. Mention four categories of persons that are not eligible for appointment as
directors of a company (4 marks- June 2001, Dec 2003, June 2005, Dec 2006,
June 2007, June 2011, Dec 2011, June 2012)
9. State two circumstances under which a director of a company may cease to hold
the office of a director. (2 marks- Dec 2003, Dec 2006, June 2011)
10. Under what circumstances would a person be disqualified from acting as a
director (4 marks- Dec 2001, June 2010)
11. How can a director of a company be removed from office? (2 marks- June 2001,
June 2007, Dec 2011)
12. What procedure is to be followed in removing a director? (8 marks- June 2004,
Dec 2004, Dec 2005, Dec2006, June 2007, Dec 2010, June 2012)
13. Explain by giving four examples how the law provides for remedies for directors’
breach of duty to the company (4 marks- Dec 2000, June 2005)
14. Define the following:
(i) Casual Director (4 marks- Dec 2002, Dec 2004, June 2009, Dec 2011)
82 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 (ii) Alternate Director (4 marks- Dec 2002, Dec 2004, June 2009, Dec 2011)
(iii) Shadow Director (4 marks- Dec 2002, Dec 2004, June 2009, Dec 2011)
15. What is the prescribed minimum number of directors a company may have? (5
marks- Dec 2002, Dec 2004, June 2007, June 2009, Dec 2011, June 2012)
16. What is the penalty stipulated for carrying on a business with less than the
statutory minimum number of directors (1.5 marks- Dec 2007, June 2012)

17. At an annual director’s retreat for Madzi drillers Co. Ltd held in Mangochi
recently, Mr Phokoso, Chairman of the board of directors, almost spoiled the
party. He was in an uncompromising mood. Citing a number of dubious dealings
between some of the directors and the company, he threatened to henceforth
take drastic action against any director who compromised his or her fiduciary
duties towards the company.

Required:- Discuss the warning in relation to a director’s fiduciary duty to avoid

conflict of interest when dealing with the company. (10 marks- May 2008)

18. Bombay Motors Ltd through Mahommed, their local director, entered into a
contract with Capital Computers Ltd for the purchase of computers worth K5
million. The Articles of Association for Bombay Motors Ltd, however did not
authorize the directors to enter into contracts involving sums in excess of K3
million without the sanction of an ordinary resolution of a general meeting. No
such resolution was passed in this case.

Required:- State whether or not Bombay Motors Ltd are liable to pay Capital
Computers the whole sum of K5 million. (10 marks- June 2004) (10 marks- Dec
2006) (10 marks- Dec 2008)

Bombay Motors Ltd would like to remove Mahommed from his office as director
for having put the company into unnecessary financial problems without its
sanction and because of the strong rumours that Mahommed received a bribe
from Capital Computers. The problem however is that the Articles of Association
of Bombay Motors Ltd stipulate that Mahommed is to hold the office of director
for ten years and the period has not yet elapsed.

83 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 Required:-

(a) Can Bombay Motors Ltd remove Mahommed from the office of director
before the expiry of ten years? Give reasons for your answer. (2 marks-
June 2004) (2 marks- Dec 2006) (2 marks- Dec 2008)

(b) What procedure would be followed if Mahommed were to be removed? (8

marks- June 2004) (8 marks- Dec 2006) (8 marks- Dec 2008)

Company Secretary

1. The directors of your company are too busy to attend a meeting of the board
of directors. Assuming you were the secretary of the company, how would
you go round this problem? (6marks – June 2001, June 2003, June 2007, June
2008 Dec 2011).
2. What duties does a secretary of a company perform in a company? (4marks –
Dec 2001, June 2010)
3. How many secretaries may a company have? (2marks – Dec 2001, June 2010)
4. Can a corporate entity act as a secretary of another company? (2marks – June
2001).

External regulatory authorities

1. Give five functions of the Malawi Accountants Board (5 marks -June 2009).
2. Give functions of the Commissioner for taxes (5 marks- June 2009)

84 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER SIX: Corporate Liability

6.1 Introduction

Companies, even though they are fictitious legal persons, can be held to be
criminally liable. There are a considerable number of important regulatory statutory
offences for which companies can be prosecuted. As a general rule in a criminal case
the prosecution must prove that the alleged criminal act was done intentionally. How
can it be shown that a company had a criminal intent?

The courts use what is now referred to as the identification theory to establish the
company’s mens rea (intention). In the words of McNaghten J:

It is true that a corporation can only have knowledge and form an

intention through its human agents, but circumstances may be such
that the knowledge and intention of the agent must be imported to
the body corporate. ... If the responsible agent of a company, acting
within the scope of his authority, puts forward on its behalf a
document which he knows to be false and by which he intends to
deceive ... his knowledge and intention must be imported to the
company.

Apart from criminal liability, a company is quiet often liable for torts which are civil
offences such as defamation, trespass and negligence. Corporate liability may be
vicarious. Vicarious liability arises where the company is held responsible in law for
its employees’ wrongful or unlawful acts or omissions. The employee must have been
acting in the course of his employment not on a frolic of his own.

This chapter however concentrates on corporate liability through acts of individuals

who are not its employees i.e. directors and company secretary.

85 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
6.2 Liability through directors’ acts

The liability of a company through the acts of its directors may arise in two ways:-

1. Through the director’s control of the company’s affairs because a company acts
through living persons. In this situation a director is acting as the embodiment
of the company i.e. company itself and not employee, agent or delegate. The
leading case is Lennard’s Carrying Co. Ltd vs Asiatic Petroleum Co. Ltd
[1915] where a company owned a ship which sank and caught fire causing her
cargo to be lost. The managing director knew of the ship’s unseaworthiness but
allowed it to carry on with the journey. It was held that a company has no mind
of its own therefore its directive will must be sought in a living person. In this
case the director’s action was the action of the company itself therefore the
company was liable.

The judge in that case Viscount Haldane LC, stated that:-

... a corporation is an abstraction. It has no mind of its own any

more than it has a body of its own; its active and directing will
must consequently be sought in the person of somebody... who
is really the directing mind and will of the corporation, the very
ego and centre of the personality of the corporation.

According to Lord Denning ‘a company may in many ways be likened to a

human body. It has a brain and nerve centre which controls what it does. It also
has hands which hold the tools and act in accordance with directions from the
centre. Some of the people in the company are mere servants and agents who
are nothing more than hands to do the work and cannot be said to represent
the mind or will. Others are directors and managers who represent the directing
mind and will of the company, and control what it does. The state of mind of
these managers is the state of mind of the company and is treated by the law
as such.’ The fact that a company acts through living persons was also
emphasised in Tesco Supermarkets Ltd vs Nattrass [1972].

86 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
2. Where directors are regarded as agents of their company and so the law of
agency applies. The general rule is that a company is liable as the principal
where a director (agent) acts within his actual authority, express or implied. In
Hely – Hutchinson vs Brayhead Ltd [1968] R who was chairman of a company
acted without appointment as Chief Executive and managing director of the
company. The company’s board was aware of this but acquiesced (did not
protest/object or question). R went into a contract which the company later
objected that he did not have power to sign a contract on behalf of the
company. It was held that although R had no express authority from the nature
of his office to sign documents, the company had, by its acquiescence, implied
that he had authority to bind it in the transaction.

Note that a company may also be bound by the acts of its directors as its
agents because they have ostensible or apparent authority under the
memorandum. Ostensible authority is authority as seen by third parties.
However, if the third party knew that the director had no such power he cannot
rely on the ostensible authority.

6.3 Limitation of Director’s Authority

A company may limit the director’s authority through its memorandum and the
articles but for the limitation to apply, again the third party must have had
knowledge about the limitation [Section 140 (4)].

Section 343 on the other hand abolishes “constructive notice”. Before the
abolishment of this rule, once a company registered its memorandum and articles,
any third party and the public at large were deemed to have seen or read them. This
rule was abolished by section 343 thereby granting more protection to third parties
who could be defrauded by crooked directors.

6.4 Irregularly Appointed Directors

Section 162 provides that any irregularity in the appointment of a director (or
secretary) does not excuse the company from liability for his acts which are within his
87 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
actual or ostensible authority. The acts are valid regardless of the defect in the
director’s appointment or qualification.

However, since this provision applies where the director was actually appointed, it
will not apply where the irregularity consists in the fact that no such appointment
was made - Morris v Kanssen [1946].

Forgery or Fraud

At common law (Ruben vs Great Fingall Consolidated Ltd [1906]) a director’s

action which involves forgery or fraud cannot bind the company. This is so because a
forgery is a nullity and no legal consequences can flow from it. However, under
statute a company is still liable according to section 139. The Act again aims at
protecting the unsuspecting third party BUT of course the company can claim
indemnity from the director in the wrong.

6.5 Royal British Bank vs Turquand [1856] [Turquands Case]

The rule in Turquands Case states that a company will only be bound by the acts of
a person who purports to act on its behalf as a director if he was appointed as such,
and was acting within his authority. Thus if he was not appointed as director and was
not held out as having authority to bind the company, the company cannot be held
liable for his acts. However if he is appointed but lacks authority his acts may still
more bind the company.

This absence of appointment and authority will not affect a third party (an outsider)
unless the outsider actually knew or ought to have known that the purported
director had no authority. An outsider is further protected because he is not bound
to inquire whether or not the company has followed its internal rules.

Thus persons contracting with a company and dealing in good faith may assume that
acts within its constitution and powers have been properly and duly performed and
are not bound to inquire whether acts of internal management have been regular.

88 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
The facts in Turquands Case were that according to the memorandum and articles
of a company, directors could borrow money after authorisation by the general
meeting. The directors borrowed money from the plaintiff bank without authority. It
was held that what they did was clearly inconsistent with the constitution of the
company. However, since externally the directors appeared to comply with the
company’s constitution, the company was bound by the loan. The bank (third party)
was not bound to check whether or not the resolution had been passed; a third
party is entitled to infer/assume the fact that a company complies with its
constitution in its dealings.

6.6 Exceptions to the rule in Turquand’s Case

1. Insider exception – where the third party knew or ought to have

known of the non-compliance with the company’s rules of internal
management, he is an insider through knowledge and so not
protected by the rule in Turquand’s case. In Howard vs Patent Ivory
Manufacturing Co. [1888] directors had power to borrow up to
£1,000 and needed the general meeting’s consent to borrow above
that figure. The directors themselves lent more than £1,000 to the
company without the general meeting’s consent. It was held that the
company liable up to £1,000 only.

2. Suspicious circumstances- The law requires a reasonable person to

make proper inquiries where circumstances are suspicious. In
Underwood Ltd vs Bank of Liverpool and Martins Ltd [1924] a
director paid company cheques into his own account and
misappropriated the funds. It was held that the fact that the director
paid the cheques in his own account rather than the company’s
account put the bank under a duty to enquire from him or the
company. Since the bank failed to make that enquiry, it could not rely
on Turquand’s case to assume that he had the authority.

3. Forgery: the rule does not operate to protect outsiders from the
consequences of forgery. If a document is discovered to be a forgery,
it is a nullity, and no legal consequences can flow from it.
89 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 4. The rule in Turquand’s case is subject to Section 22(1) [See notes on
the duty of directors to act in conformity with the memorandum and
articles and Chapter 2, Ashbury Carriage Co. Ltd vs Riche (1875)].

However, if directors enter into any transaction in breach of section

22(1), the transaction will not be void but voidable at the option of
shareholders (i.e. they can apply for an injunction or endorse the
transaction).

Note also that whenever there is a conflict between common law (in
our case Turquand’s Case) and an Act of Parliament (in this case
section 22 of the Companies Act, we follow what is provided for in the
Act of Parliament)

Note on the rule in Turquand’s Case and its applicability to trading

companies and statutory companies:- the rule in Turquand’s Case applies to
companies because even if the objects clause does not provide for the power
to borrow, an implied power to borrow arises from the fact that the company
is a trading company. On the other hand a third party will not be protected
by the rule if he deals with a statutory corporation which is particularly
prohibited from borrowing by the Act of Parliament creating the corporation
and because mostly statutory bodies are non trading companies.

6.7 Liability through company secretary’s acts

A company secretary has apparent authority and so can bind the company. In
Panorama Development Ltd vs Fidelis Furnishings Fabrics Ltd [1971] a company
secretary hired cars signing as ‘company secretary’ but in fact they were used for his
own purposes. The car hire company sued the company and the court held that the
company was liable because the secretary had apparent or ostensible authority to
enter into contracts on behalf of the company.

90 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER SIX: Company Liability
(A selection of past questions)
-----------------------------------------------------------------------------------

1) Outline the circumstances in which a director who is not a managing director

can exercise the power of a managing director. (5 marks- Dec 2002, Dec
2011)
2) Discuss the position regarding directors that have been irregularly appointed
in relation to the company’s capacity to contract. (6 marks- June 2004, Dec
2010)
3) Write short notes on the rule in Royal British Bank vs Turquand (5marks –
Dec 2001).
4) State the rule in the case of Royal British Bank vs Turquand (10marks – June
2000, Dec 2002, June 2003, June 2004, Dec 2004, Dec 2006, June 2007, June
2009, Dec 2010, June 2011, Dec 2012).
5) State the insider exception to the rule in Royal British Bank vs Turquand
(7marks – June 2000, June 2004, Dec 2010).
6) The rule in Royal British Bank vs Turquand must be considered as being
subject to Section 22(1) of the Companies Act, 1984 which obliges a company
not to carry on business for which it is restricted. Do you agree with this
statement? Give reasons. (4marks – Dec 2004 & June 2007).
7) With the aid of decided cases, state and discuss any two ways in which a
company may incur liability through the acts of its directors. (12marks – Dec
2005 & Dec 2010).
8) Luso Furnishers Ltd borrowed K2 million from Union Bank Ltd (now in
liquidation). Unknown to the bank at that time, Luso Furnishers Ltd’s objects
clause in the Memorandum did not include the power to borrow money,
although the objects clause contained no restrictions. The bank had also, in
December 2003, lent a sum of K3.5 million to Lakeshore Fisheries Corporation,
established to empower small scale fishermen in Malawi. Unknown to the
bank at the material time, the Corporation did not have the power to borrow
money. In fact a clause in the Act of its establishment expressly excluded such
power. The liquidator of the bank has approached you for advice since the

91 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 companies are refusing to pay. The reason given by both is that the
borrowing was ultra vires.

Required:-

(a) Advise the liquidator whether he can successfully claim the money from
each of the companies. (8 marks)
(b) Apart from claiming payment from debtors of the bank, what other
statutory duties does the liquidator have? (4 marks- May 2008)

9) The Directors of Tiyese Milling Company Ltd had powers to borrow only up to K2
million without leave of the shareholders. The articles of the company expressly
provided that any borrowings beyond K2 million had to be subject to prior
approval of the shareholders at a general meeting. Six months ago Investment
Bank advanced to Tiyese Milling a K20 million loan on the strength of the
directors’ representation that they had fully complied with all the formalities to
enable them raise the money. The truth of the matter, however, is that the
directors had borrowed the money without the said approval of the shareholders
at a general meeting. Investment Bank Ltd has sued Tiyese Milling Company for
recovery of the loan. Management of Tiyese Milling have refused to settle the
loan stating that the directors that had transacted the loan did not have the
power to procure the loan.

Required:- Advise Investment Bank Ltd whether its claim will succeed in view of
the argument from the management of Tiyese Milling. (5 marks- June 2001) (8
marks- May 2008)

10) Bombay Motors Ltd through Mahommed, their local director, entered into a
contract with Capital Computers Ltd for the purchase of computers worth K5
million. The Articles of Association for Bombay Motors Ltd, however did not
authorize the directors to enter into contracts involving sums in excess of K3
million without the sanction of an ordinary resolution of a general meeting. No
such resolution was passed in this case.

92 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 Required:- State whether or not Bombay Motors Ltd are liable to pay Capital
Computers the whole sum of K5 million. (10 marks- June 2004) (10 marks- Dec
2006) (10 marks- Dec 2008)

Bombay Motors Ltd would like to remove Mahommed from his office as director
for having put the company into unnecessary financial problems without its
sanction and because of the strong rumours that Mahommed received a bribe
from Capital Computers. The problem however is that the Articles of Association
of Bombay Motors Ltd stipulate that Mahommed is to hold the office of director
for ten years and the period has not yet elapsed.

Required:-

(a) Can Bombay Motors Ltd remove Mahommed from the office of director
before the expiry of ten years? Give reasons for your answer. (2 marks-
June 2004) (2 marks- Dec 2006) (2 marks- Dec 2008)
(b) What procedure would be followed if Mahommed were to be removed? (8
marks- June 2004) (8 marks- Dec 2006) (8 marks- Dec 2008)

11) Despite widespread rumours in the locality that Lazaro Ngozo had been removed
from the board of directors of United Distillers Ltd, Mr Mbuzi Phiri advanced
money to him when the said Lazaro Ngozo was offering shares on behalf of
United Distillers Ltd. When Mr Mbuzi Phiri wanted to find out whether any shares
had been allotted to him, there were no records at the registered offices of
United Distillers Ltd that he had made a payment for the shares as Lazaro Ngozo
had had ceased to be a director of at the time of the payment. Lazaro Ngozo
now has no money. Mr Mbuzi Phiri would like to recover his money from United
Distillers Ltd.

Required:- Advise him if he can recover his money from United Distillers Limited.
(7 marks- Dec 2007)

12) Top Range Car Hire Ltd acquired two vehicles from United Car Dealers Ltd on
credit. It has now transpired that one of the directors who constituted the board
of Top Range, which approved the deal was at the time of his appointment to
93 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
the board, serving a two year suspended sentence for embezzlement of public
funds. Top Range have now stopped payments on this account and have
indicated their intention to cancel the whole contract. Top Range argue that the
contract is unenforceable because it was approved on its part by a board that
comprised director who was defectively elected by reason of his conviction.

Required:-

(i) Advise United Car Dealers Ltd on the enforceability of the contract. (6
marks- June 2005)
(ii) Mention four groups of persons who are disqualified from
appointment as director. (4 marks- June 2005)
(iii) Outline the three most important fiduciary duties of a director. (6
marks- June 2005)
(iv) The law does not give directors a blank cheque. It provides remedies
for directors’ breach of duty to the company.

Required:- Illustrate this by giving four examples. (4 marks- June 2005)

13) Total Financiers Ltd lent money to Khobwe Traders Ltd and Kabula Museums
Corporation. Khobwe Traders Ltd is a trading company that deals in legumes.
Khobwe’s objcts clause in the memorandum of association, however, does not
include the power to borrow money. Khobwe Traders Ltd also does not have
an unrestricted objects clause. Kabula Museums Corporation is a statutory
corporation that runs museums in the city of Kabula. It also does not have the
power to borrow money as its enabling statute expressly excludes it. Both
Khobwe Traders Ltd and Kabula Museums Corporation do not want to pay
back money, contending that the borrowing was ultra vires.

Required:- Advise Total Financiers Ltd whether it can successfully claim the
money from the two companies. (4 marks- June 2001)

94 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
 CHAPTER SEVEN: Majority Rule and Minority Protection

7.1 Introduction

The starting point for any consideration of the position of minority shareholders is
the rule in Foss v Harbottle (1843). This rule, which has two strands, precludes a
shareholder from bringing an action to pursue wrongs which have been done to the
company.

Firstly, the directors have been appointed to manage the company’s affairs and they
owe their duties to the company; any misfeasance (wrong), appropriation of
corporate property or breach of duty on their part is a wrong done to the company
and, as a separate legal person, the company is the proper plaintiff in any
subsequent legal proceedings.

Secondly, where there are irregularities in the way the company is run and, also, in
many cases where directors are in breach of their duties to the company, the
majority of shareholders in general meeting may, by ordinary resolution, ratify and
adopt what has been done.

In those circumstances, the courts will not allow a minority shareholder to bring an
action pursuing a matter which it is competent for the majority to approve on behalf
of the company. The majority rule holds that a shareholder who buys shares in a
company must accept that the majority (controllers) will prevail.

There are however certain situations where the law will depart from the majority rule
and protect the minority. These situations are exceptions to the rule in Foss v
Harbottle which is also called the majority rule or the proper plaintiff rule.

7.2 The Rule in Foss vs Harbottle [alias majority rule or “proper plaintiff” rule]

The Rule as eluded to above states that directors owe their duty to the company. If
the duties are broken it is the company which suffers and so it should be the

95 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
Lecturer in Law Courses
company itself seeking redress and not any of its members or creditors. The
company itself means the general meeting and not an individual shareholder or
group of shareholders.

Rationale/reason for the rule/practical advantages: in the first place the rule
promotes proper management of a company; there would be chaos if the law
allowed every member the right to complain i.e. there would be multiple actions
leading to loss of time and money. In the second place, the rule supports the
fundamental rule in Salomon v Salomon i.e. since a company is a separate legal
entity, once a wrong is done to it, it is the company which suffers therefore the
proper plaintiff will be the company itself. Lastly, if a member who could sue a
person who had caused loss to the company and the company then ratified that
person’s act at a general meeting, the legal proceedings would be quite useless for
the court will naturally hold that the will of the majority prevails.

Facts: Directors of a company bought their own land for the company and paid
themselves an exorbitant price for it. Two members brought an action on behalf of
themselves and other members, except the directors, against the directors to compel
them to reimburse the money to the company.

It was held that as there was nothing to prevent the company from suing the
directors if it so wished, the action would fail i.e. the company (general meeting) had
to sue by itself and not through individuals.

7.3 Limits to the Majority Rule

The problem with the rule is that it may lead to remedial action not being taken for
abuse of power by the majority or the board of directors hence there are several
exceptions, both statutory and common law, to the application of the rule.

There are five common law exceptions as follows:-

(a) Where the abuse infringes the personal rights of a shareholder the majority
rule will not apply. Examples are contravention of any provision of the

96 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 articles or their alteration which requires him to take more shares in the
company than those which he already holds.

(b) Where the abuse amounts to an illegal act the rule in Foss vs Harbottle will
also not apply.

(c) The rule will not apply where the wrong amounts to a non-compliance with
the company’s procedure, for example requirements of a special resolution.
In Baille vs Oriental Telephone & Electrical Co. Ltd [1915] an
extraordinary general meeting was convened to pass special resolutions to
effect alteration of the articles by increasing the director’s remuneration. The
notice did not give particulars of the remuneration as required by the
company’s procedures. Mr Baille a shareholder sued on his own behalf and
on behalf of other shareholders. The lower court applied the rule in Foss vs
Harbottle and dismissed the case but on appeal it was held that the action
was maintainable by him and the resolutions increasing the remuneration
were declared not to be binding on the company. Rationale: the law will
not allow those in control of a company to violate the company’s own
procedure without remedy.

Note however that the court will not interfere with a decision of the
company which does not comply with internal procedures where the
decision can be rectified by the company itself by convening anther general
meeting or where the decision would not have been different had the
company followed the correct procedures. In McDougall v Gardiner [1875]
it was held that

if the thing complained of is a thing which in substance the

majority of the company are entitled to do, or if something has
been done irregularly which the majority of the company are
entitled to do regularly, or if something has been done illegally
which the majority of the company are entitled to do legally,
there can be no use in having a litigation about it, the ultimate
end of which is only that a meeting has to be called, and then
ultimately the majority gets its wishes. Is it not better that the
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 rule should be adhered to that if it is a thing which the majority
are the masters of, the majority in substance shall be entitled to
have their will followed?

(d) A shareholder can also bring an action for the controllers’ or directors’
abuse which constitutes “fraud on the minority”. “Fraud”: includes
appropriation by the controllers or directors of money, property or any
benefit belonging to the company since the same is owned together with
the minority shareholders. In Cook vs Deeks [1916] directors took in their
names a construction contract which they should have taken up on behalf
of the company. By the reason that they had controlling interest they
secured an approval for their action in the general meeting. A shareholder
sued them to account. It was held that the benefit which the directors
obtained from the contract was held on trust for the company and so they
had to account for it.

(e) A majority decision which unjustifiably disadvantages minority shareholders

may also be challenged in court by the latter if it is not taken in the bona
fide interest of the company as a whole. See Brown vs British Abrasive
Wheel Co. Ltd [1919] (Discussed in chapter two)

There are four statutory exceptions as follows:-

(a) Court Injunction under Section 22 (2): Section 22 (1) says that a company
must act within its constitution. If a company acts outside its constitution (utra
vires) section 22 (2) allows an individual shareholder to bring an action
against the company i.e. he can obtain an injunction against the decision
which is utra vires.

(b) Court order under Section 203: an individual shareholder can apply to Court
for an order under S.203 if (a) directors exercise their powers in an oppressive
manner or (b) if other shareholders’ resolutions are unfairly discriminatory or
prejudicial.

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 What is oppressive is such conduct as to warrant the inference that there has
been, at least, an unfair abuse of power and an impairment of confidence in
the probity or integrity with which the company’s affairs are being conducted
(Elder vs Elder). Mere lack of wisdom, inefficiency or carelessness on the part
of the controlling shareholders or board of directors is not enough. In Re H.R.
Harmer Ltd [1959], Harmer founded a firm which he later incorporated as a
company. He and his wife held a majority of shares and so run the company
as if it was his exclusive property. He disregarded board of directors and
general meetings’ resolutions. Shareholders sued the majority shareholders
under a section similar to section 203. The court granted an order restraining
the Harmer from interfering in the company’s affairs except in accordance
with decisions of the board of directors.

What is unfairly prejudicial comprises conduct which is unjust and detrimental

to the petitioner’s interests as a member of the company. To constitute unfair
prejudice, the board of directors’ and the controlling shareholders’ action
must adversely affect the quality or value of the complainant’s interest in the
company.

Orders that may be made by the court under S. 203:-

(a) The court may direct or prohibit any act or cancel or vary any
transaction or resolution;
(b) The court may regulate the future conduct of the company’s
affairs;
(c) The court may provide for the purchase of the shares of any
member by the company.
(d) The court can make any order deemed fit.

(c) Compulsory winding up under Section 213(1): the minority shareholders may
petition the court for an order under section 213 (1) that it is just and
equitable that the company should be compulsorily wound up. This is clearly
illustrated by Ebrahimi vs Westbourne Gallaries [1973] where E & N carried
on business as partners and later incorporated the partnership, the two of
them being directors. Later N’s son became an additional director. E & N
were involved in a dispute and N and his son (the majority) removed E from
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 his position as director. E sued that it was just and equitable for the company
to be wound up. It was held that the company should be wound up because
the past relationship between E & N and subsequent events made it unjust
that N and his son should remove E from his post.

Note that the petitioner will not be granted a winding up order if he has an
alternative remedy. The order is discretionary and this happened In the
matter of Mapanga Estates Ltd [1988] where a company had shareholders
who held 49% and 51% of its shares. Differences arose between them and the
minority sought an order winding up the company. The court dismissed the
petition on the ground that the company was viable and prosperous and
instead ordering the minority to sell her shares to the majority.

(d) Annulment of the majority decision under Sections 10 and 48:- the minority
of 5% can challenge decisions of the majority for instance on alteration of the
business clause of the memorandum under section 10 or variation of class
share rights under section 48.

Lastly there are three ways of bringing a minority action by a shareholder as

follows:-

(a) He may commence a derivative action on behalf of the company

therefore any benefit recovered will accrue to the company.
(b) He may combine a derivative action with a representative action. In
this case he represents both the company and all shareholders.
(c) He may combine a representative action with a personal claim for
damages if he has personally suffered some injury.

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 CHAPTER SEVEN: Majority Rule and Minority Protection
(A selection of past questions)
-----------------------------------------------------------------------------------

(1) Outline/describe/explain the facts and rule in Foss v Harbottle (8 marks- June
2001, Dec 2001, Dec 2002, June 2003, June 2005, Dec 2005, Dec 2009, Dec
2012)
(2) State two main advantages of the rule in Foss v Harbottle (2 marks- Dec 2009)
(3) What are the exceptions to the rule in Foss v Harbottle? (6 marks- June 2001,
Dec 2001, June 2005)
(4) State the principles which have led the courts in relaxing the ‘proper plaintiff’
rule. (5 marks Dec 2000)
(5) Without outlining its exceptions, state the facts and rule in the case of Foss v
Harbottle (8 marks- Dec 2007, June 2012)
(6) The main point of the ‘majority rule’ with regard to company decisions is that if
the majority of members take a decision that is merely foolish, then only the
majority can reconsider the matter. Discuss with reasons, the effect of this rule.
(8 marks- Dec 2005, Dec 2007 & Dec 2010)
(7) State three things that may be done by a shareholder in bringing a minority
action (6 marks Dec 2000)
(8) How are minority rights enforced through the following circumstances;
 variation of class rights
 alteration of authorised business
 compulsory winding up (9 marks Dec 2000)
(9) The majority of shareholders of Vision Breweries Ltd entitled to attend and vote
at an extraordinary general meeting convened to decide the removal of Chibwe,
Company Secretary of the said Vision Breweries Ltd, voted in favour of the
proposal for his removal. The procedural requirements for holding such an
extraordinary general meeting as outlined in the articles of association were,
however, flouted. The notice of the extraordinary general meeting was only
signed by one director instead of all the three directors and further the
directors themselves had not held a meeting prior to the preparation of the

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 notice. There was, however, no indication that had the procedure been
followed, the result of the poll would have been otherwise.

Chibwe now contemplates seeking a court injunction restraining Vision

Breweries Ltd from acting on their decision to remove him because the correct
procedure was not followed.

The news has reached Vision Breweries Ltd and it has approached you for
advice. Required:- Advise Vision Breweries Ltd whether Chibwe can successfully
obtain the contemplated court injunction. Give reasons for your advice. (12
marks- Dec 2007, June 2009 & Dec 2010)

(10) Maliro was company secretary of Zipatso Canners Ltd. A majority of the
shareholders of Zipatso Canners Ltd entitled to attend and vote at an
extraordinary general meeting convened to decide the removal of Maliro, voted
in favour of the proposal for his removal. The procedural requirements for
holding such an extraordinary general meeting as outlined in the articles of
association were, however, not adhered to. The notice of the extraordinary
general meeting was only signed by one director instead of all the three
directors and further the directors themselves had not held a meeting prior to
the preparation of the notice. There was, however, no indication that had the
procedure been followed, the result of the poll would have been otherwise.

Maliro, now contemplates seeking a court injunction restraining Zipatso Canners

Ltd from acting on their decision to remove him because the correct procedure
was not followed. The news has reached Zipatso Canners Ltd and it has
approached you for advice. Required:- Advise Zipatso Canners Ltd whether,
under the Companies Act, Maliro can successfully obtain the contemplated
injunction. Give reasons for your advice. (12 marks- Dec 2005, Dec 2010)

(11) Last month, Fwasani received an envelope from Mbambande Wholesalers Ltd
of which he was a minority shareholder. In it was a letter from the managing
director of the said Mbambande Wholesalers Ltd stating that in exercise of his
powers of managing the affairs of the company and upon consultation with the
rest of the shareholders, he had considered it appropriate to decide to
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 compulsorily acquire all the shares held by Fwasani. Fwasani was disturbed by
the news. He had not given his consent to the compulsory acquisition of shares
as required by the articles of association and in any case he would not want to
cease to be a shareholder of Mbambande Wholesalers Ltd. Required:- Advise
Fwasani on what to do, giving the grounds for his action and the expected
results thereof. (12 marks- Dec 2007, June 2012, Dec 2012)

(12) Dziko, Makala and Chikopa formed a limited liability company named General
Merchants Ltd with 1,200,000 shares valued at K12.50 each. Dziko took 100,000
shares, Makala 108,000 shares and Chikopa took 992,000 shares. Dziko and
Chikopa later formed another company called Kameza General Dealers which
offered to take over General Merchants Ltd. Dziko and Chikopa accepted the
offer and gave notice to Makala of their intention to compulsorily acquire his
shares in the name of Kameza General Dealers. Makala objects to this
compulsory acquisition. Required:- Advise Makala. (10 marks- Dec 2005, Dec
2010)

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 CHAPTER EIGHT: Company Finance- Share Capital

8.1 Introduction

It is obvious that a company will need finances to run. There are many ways of
raising funds for a registered company and they include capital contributed in
exchange for shares; long-term loans; bank overdrafts; credit in form of deferred
payment of goods and services and retained profits. The Companies Act thoroughly
regulates share capital and loan capital. In this chapter we shall dwell on share
capital.

8.2 Shares

The capital of a company limited by shares must be divided into shares and
according to Lord farewell in the case of Borlands Trustee v Steel [1901] –

... a share is the interest of the shareholder in the company measured

by a sum of money, for the purpose of liability in the first place, and of
interest in the second but also consisting of a series of mutual
covenants entered into by all the shareholders inter se in accordance
with [section 17]...

This definition, which is examinable, characterises the shares as a bundle of rights

stemming from the section 17 contract which was discussed in chapter two. Typical
of the rights which the shareholder enjoys are the rights to vote, to participate in
dividends when a distribution is made and to the return of capital when the
company is wound up. There is no doubt that, from this bundle of contractual rights,
the share has emerged as a piece of personal, intangible property, that is to say, it
is a chose in action. It can be owned, bought and sold, mortgaged and it will form
part of the estate of a deceased person.

A share may also be understood as a unit of account for measuring a member’s

interest in a company which can be transferred from one person to another
gratuitously as a gift or for value.

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Each share will have a monetary value called the nominal value or par value for
example 1 share = K1. This is the value that appears on the face of a document
recording an entitlement such as a share certificate, this value is an arbitrary amount
and shares usually trade on the market above that value.

Where shares are trading above the par value, the difference between the par
value and the market value is called the share premium. There are at least two
reasons why the law permits a company to sell its shares above nominal value:-
(1) the net assets of the company may exceed the nominal value of the
shares; or
(2) because previously issued shares of the same class have a market value
(demand) in excess of their nominal value.

Note also that a company is disallowed from selling its shares below their nominal
value. This is the reason why the nominal value is always kept to a smallest value
such as 1 share = K1.

The nominal value is what the holder of the share is liable to contribute to the
company’s capital. If fully contributed then no further liability arises at winding up of
the company otherwise the shareholder will be liable to pay any unpaid sums on the
shares at winding up. This is what is meant by limited liability.

A company indicates in its memorandum its maximum share capital. This is called the
authorized share capital or registered share capital or nominal capital for example
K50,000, K100,000 or K1 million etc. A company does not have to issue all the shares
which it is entitled to do but the aggregate nominal value of the shares which it
does issue is known as the issued share capital.

The shareholders to whom the shares are issued are not necessarily required to pay
for them either in whole or in part, although frequently, nowadays, the shares will be
fully paid. So, another term, paid up share capital, refers to the amount of money
paid to the company in respect of the shares. If the company has issued partly paid
shares and wishes to obtain more money, it can make a call on the shares, in which
case, the shareholders are contractually bound to pay the amount specified in the
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call. Called up share capital means the aggregate amount of the calls made on the
shares (whether or not those calls have been paid).

A group of shares is called a share stock. For instance, 500 shares of K1 each can be
converted into K500 stock. However, converting shares into stock is not permitted
under the Companies Act but a company may still issue its contributed capital in
share stock from the beginning i.e. at the point of incorporation.

The power to allot shares is usually delegated to the board of directors. Before a
share is taken it is unissued. When the share is taken it is issued. The name of the
member is then entered into the register of members of a company. This process is
called allotment of shares. After allotment the company sends a share certificate to
the shareholder within two months. The company must send to the registrar monthly
returns (reports) of allotments made and to whom made.

Section 44 states that each issued share in a company must be distinguished by a

definite number. That number is called the share distinguishing number. The object
of this, it is thought, is to facilitate easy tracking of shares i.e. there must be a
definitive way of establishing to whom the shares are issued and whether they are
fully paid up or not. This is practically important in say a public company which may
have thousands or millions of issued shares.

8.3 Share certificate

We have stated that an allottee of shares will be issued with a share certificate within
two months. The share certificate is evidence of the fact that the allottee holds the
specified shares in that company. The contents of the certificate are the name,
address and occupation of allottee; number and class of shares and whether they are
fully paid up or not.

There exists a common law rule that a company cannot deny the authenticity
(genuineness) of a share certificate. Thus in Dixon vs Kennaway Co. Ltd [1900] an
employee of a company fraudulently sold shares belonging to another shareholder
to the plaintiff. The employee was bankrupt at the time of this action and so it was

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held that a company should compensate the plaintiff because he was misled by the
certificate until it was too late to recover from the employee.

There is a limit to this rule under section 53 which states that a share certificate is
only prima facie evidence of the holder’s title to the shares shown on it. His
entitlement to the shares and rights on them depends not on the certificate but
entry of his name in the company’s shareholders register. According to section 37
the register itself is also prima facie evidence of its contents. Under section 35 the
High Court is granted power to rectify the register- See chapter four.

Section 45 of the Act prohibits a company limited by shares from issuing a share
warrant in respect of any of its shares. There are two differences between a share
certificate and share warrant namely that in the first place a warrant will state that
the holder (bearer) and not the person named in it, is entitled to the shares specified
in it and in the second place it is a negotiable instrument; it can change title or
ownership by mere delivery. This makes it an easy target for fraud.

8.4 Classification of shares

Section 47 allows a company to classify its shares according to the mode of

payment and entitlement to dividends; voting rights and return of capital e.t.c. Shares
of the same class rank pari passu, meaning on the same level with the same rights or
restrictions. A company issues shares that are authorized by the company’s
memorandum or articles and not any how! In the event of variation, the general
meeting decides on variation of class rights and those affected must give consent to
the changes-section 48. The usual classification of shares is as follows:-

1. Ordinary Shares (main type)

(a) They are the most basic type of shares which a company limited by
shares can issue;
(b) If a company has one class of shares, these will be ordinary shares;
(c) Where a company has more than one type of shares, it must have at
least one ordinary share;

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 (d) They are sometimes described as a residual class because they consist of
rights that remain after the rights of other classes of shareholders (if any)
have been satisfied;
(e) They are also sometimes described as equity capital because they
represent the owners’ stake in the company and almost always carry the
right to vote;
(f) Ordinary shareholders control resolutions at general meetings because
they are usually in a majority.

2. Preference Shares (main type)

(a) Holders have priority in the receipt of dividends in any financial year;
(b) The articles may also state that holders shall have priority in the return of
capital on the company’s winding up;
(c) If this is not stated the assets of the company will be distributed pari
passu between the shareholders;
(d) A preference shareholder has priority over dividends once declared by
the company; he cannot compel the company to declare them;
(e) As a general rule, the right of a preference shareholder to a dividend is
cumulative for example if given nothing this year, then the following year
he will be given twice as much. Articles may provide that preference
shares are non-cumulative. The right to accumulation may cease to exist
where the company is going into liquidation.
(f) The right to vote is usually restricted except in class meetings;
(g) Preference shares are designed to appeal to investors who want a steady
return on their capital with high level of safety.

3. Redeemable Shares
(a) Generally a company cannot buy back its own shares from its members, it
can do so only if the shares are redeemable;
(b) These are shares allotted, paid up and redeemable at the company’s
option or at the end of a specified period.

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 4. Deferred Shares
(a) These are shares issued to founders of a company;
(b) No dividend can be paid to deferred shareholders unless ordinary
shareholders are paid a certain amount of dividend in that financial year.

Under the Act an offer of a company’s shares must first be made to existing
shareholders before the shares are open to the public. This is called rights issue or
pre-emption rights i.e. shareholders have a right to further issue of shares. Without
any rights of pre-emption, an existing shareholder in a company would run the risk
of the directors allotting new shares to others (either to an outsider or another
existing shareholder), thus reducing the percentage of votes held by the shareholder
and, therefore, the legal control he is able to exercise in general meeting. On the
part of the company the pre-emption has the advantage of cutting down on
paperwork and other expenses involved in offering shares to the public.

Articles or a resolution may provide for issuance of shares to directors, other officers
of the company or employees in a scheme as an incentive to the employees to work
harder. In the case of employees, this is referred to as an Employee Share
Ownership Plan- ESOP. The articles or resolution, inter alia must provide:
(a) if there are any restrictions on the number of shares;
(b)method of administering the scheme;
(c) terms and conditions of payment for the shares;
(d)limitation on the transferability of the shares;
(e) voting and dividend rights.

Section 50(3) prohibits a public company from imposing any restriction on the right
to transfer any shares of the company however this prohibition does not apply to
directors, employees or other officers.

8.5 Transfer of shares

Transfer of shares is understood as the voluntary conveyance of rights and duties of

a member as represented in a share from a shareholder to a person who desires to
become a member.

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It must be understood that shares are part of a holder’s estate, and movable
property for example clothes and motor vehicles, they are therefore readily
transferable – a company cannot as a general rule restrict transferability of shares.
The restriction may apply in the following instances:-
1. Where the shares are not fully paid up;
2. Where the buyer is an infant or person of unsound mind;
3. Where the shares are owned by directors, employees and other officers of
the company;
4. Where the company is a private limited company.

Transfer procedure

Shares can be transferred by a written instrument in the prescribed form under the
Act called ‘share transfer form’ or in any other form approved by the directors. It is
important that the instrument must be executed by or on behalf of the transferor.
The instrument must be registered by the company by either transferor or transferee.
This is so because a share transfer is incomplete before registration therefore the
transferee does not enjoy any rights on the shares up until they are registered. The
company will then issue new share certificates within two months.

Certification of transfers-section 51

If the transfer is of part only of shares represented by a share certificate, the

instrument of transfer together with the share certificate must be delivered to the
company for certification. This process prevents fraud by the transferee who may
alter the number of shares being sold to him. The company eventually produces new
certificates bearing the new transfers.

Transmission of shares by law Section 54 (2)

Death: where a shareholder dies, his survivor, where he was a joint shareholder or
his legal representative can be registered as a shareholder in his place.

Bankruptcy: under the Bankruptcy Act where a member is declared bankrupt,

ownership devolves to his trustee in bankruptcy.
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Receivership or liquidation: where a company is in receivership/liquidation –
ownership of shares which the company holds in another company will be
transmitted to its receiver or liquidator, as the case may be.

There may also be an involuntary conveyance of shares on the enforcement of

security by a mortgagee.

Insanity may be another cause; thus where a shareholder goes insane his guardian
holds the shares on trust for him.

A court order may also force a shareholder to transfer his shares. See In the Matter
of Mapanga Estates Ltd [1988] (Chapter 7).

Take note that where shares are transferred by operation of law, prior to registration
(unlike other modes of transmission) the new holders will be entitled to the same
dividends; rights and remedies as if they were already registered, however they
cannot vote in a meeting without a court order.

8.6 Offering shares to the public

Section 164 of the Act allows a public company to issue its shares to the public and
makes it unlawful for any other company to offer its shares to the public. Shares may
be offered to the public voluntarily or involuntarily. The most common offer is
voluntary at the company’s option to raise capital. In very rare circumstances, a
company may be forced to offer its shares to the public by the minister where he
deems it to be in the economic interest of the company that there should be local
participation in the company’s capital structure- section 3.

The prospectus

The Act does not define the term prospectus. However, a lawful invitation to the
public to take shares in a company will involve issuing a document which provides
information about the company and shows the benefits of investing in it. This

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document is called a prospectus. It is a document issued by a corporation disclosing
its financial information to current and prospective investors.

The prospectus must be registered by the registrar six months before it takes effect.
Every prospective allotee must be supplied with a copy of the prospectus. The
contents of a prospectus include the following:-
1. Full name of the company;
2. The situation of the company’s registered office;
3. The nature of the company’s business and its brief history;
4. Details of the company directors;
5. The company’s authorized capital.
6. Full description of the securities which the public are invited to acquire;
7. Auditors report on the company’s profits, losses, assets and liabilities.
8. Details of the company auditors;
9. Details of the company’s bankers, stockbroker and legal practitioners;
10. Details of the underwriter, if any;

Every copy of the prospectus should state that it has been registered and the date of
registration is indicated. The prospectus must be signed by every director of the
company.

Invitation to the Public

It is a crime to invite the public to acquire any share or debentures of a company

when the company is not a public company. A contract so made is voidable at the
option of the innocent party. An invitation to the public will have been made in the
following instances:-
a. publishing through newspaper, broadcasting or other means ;
b. made to any section of the public comprising more than 15 persons;
c. made to any person that he may renounce or assign the benefit of his
shares to another person;
d. the issue of any form of application for shares or debentures will be
deemed to be an invitation to acquire those shares.

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Note that in terms of section 165(1), an invitation shall not be treated as having been
made to the public:-

i) if it can properly be regarded in all circumstances of the case as being

a domestic concern of the persons making and receiving it or
ii) an invitation made to existing shareholders and debenture holders and
existing employees.

Liability for misrepresentations or misstatements in prospectuses

The liability for misrepresentations or misstatements in prospectuses may either be

criminal or civil. Civil liability under the Act (section 173) arises where a person
suffers loss because of acquiring shares in a company in reliance on false or
misleading information in a prospectus. He is entitled to compensation from the
directors or any person so making the invitation including the promoter.

Civil Liability under common law arises where an innocent party is affected by a
misstatement in a prospectus. He has two remedies (1) he may claim damages where
the statements are made fraudulently. In Derry v Peek [1889] directors stated in
their prospectus that they had obtained a licence to operate a train run by steam
power (trains were then run by animals/horses) when in fact they hadn’t. It was held
that the innocent shareholders were entitled to damages. (2) The innocent party may
rescind the contract. In Re Pacaya Rubber & Produce Co. Ltd [1914] a company
issued a prospectus inviting subscriptions for shares for the purpose of buying a
rubber estate. The prospectus contained extracts from the report of an expert on the
value of the estate. In fact the report was false. It was held that since the accuracy of
the report was the basis of the contract to take shares in the company and the
company did not disassociate itself from the report then the contract could be
rescinded.

Criminal Liability under the Act (section 176) arises where any person authorizes
publication of a prospectus containing a false statement, that person commits a
crime. It is also criminal to deceptively induce any person to offer or accept shares.
These crimes attract a seven year imprisonment and a fine.

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The Securities Act (2010) requires certain disclosures and prohibits a number of
activities relating to publicly traded company securities. The Act establishes the
Malawi Stock Exchange Market which is governed by regulations called ‘Listing rules’.
Examples of disclosures are that every issuer of securities (shares, stock, treasury bills,
notes, commercial paper, certificates of depositor, bonds and debentures) must
disclose all material information to the public and the capital market; the issuer must
disclose his business and must provide periodic reports to the stakeholders i.e.
brokers, dealers, underwriters, investment advisors e.t.c. Examples of prohibited
activities include prohibition against bribery; pegging (fixing or stabilizing the price of
securities) and insider dealing

8.7 Consideration for shares

Company shares cannot be allotted free of charge. The company must receive some
consideration from the allottee. Consideration must be in the form of cash or
otherwise i.e. property, goodwill or entire business undertaking. If no consideration is
given, the allottee will be liable to pay the full nominal value of the shares and any
premium payable on them.

The law establishes more stringent rules in the case of public companies because
they are partly owned by the public and this prevents fraud whereby the company
(directors) accept consideration that is in fact worth less than the issue price of the
shares. There are therefore the following differences in payment for shares between a
public company and a private company:-
(i) A public company must not accept as payment for its shares an undertaking
to do work or perform services for the company.
(ii) There is no minimum payment for a private company.
(iii) In case of payment by non cash asset, the asset must be transferred to the
public company within the minimum period required.
(iv) For non cash asset transfer to the public company, the asset must be
independently valued by an expert and a report made to the company.
(v) A public company cannot acquire non cash assets from its subscribers in the
two years following registration unless such assets were independently
valued by an expert and a report made to the company.

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(vi) The subscriber to the memorandum of a public company must pay cash for
shares taken in pursuance of an undertaking in the memorandum.

115 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 CHAPTER EIGHT: Company Finance- Share Capital
(A selection of past questions)
-----------------------------------------------------------------------------------

1. Describe the main types of shares issuable by a company. (4 marks – Dec

2004, June 2007, Dec 2009).
2. Define the following terms:-
(i) Ordinary Shares
(ii) Deferred Shares
(iii) Preference Shares (6 marks – June 2000, June 2003, Dec 2005 June 2009
& Dec 2010)
3. What main preferential rights accrue to holders of preference shares in a
company? (4 marks – June 2004).
4. Discuss the following:
(a) share distinguishing number (3 marks- Dec 2003, June 2011)
(b) share certificate (3 marks- Dec 2003, June 2009, June 2011)
5. Discuss what you understand by “transfer of shares” (3 marks –June 2000,
June 2003, Dec 2005, Dec 2010, Dec 2011).
6. Outline the procedure in the transfer of shares (3 marks – June 2000, June
2003, Dec 2005, June 2009, Dec 2010, Dec 2011).
7. Explain the procedure for a complete and valid share transfer. (5 marks- June
2010)
8. Outline instances of transfer of shares by operation of law (3 marks – June
2003, Dec 2005, Dec 2010).
9. Distinguish between voluntary and involuntary transfer of shares (4 marks-
June 2009, June 2010)
10. What is a share? (3marks – Dec 2004, June 2007, Dec 2009).
11. What two options does a shareholder have if he wants to raise funds using
the shares? (June 2012, Dec 2012)
12. Write short notes on any five of the following: Share; Share certificate; Share
stock; Ordinary share; Preference share; Share capital. (10 marks- June 2010,
Dec 2011); Share warrant (4 marks – June 2011); Share trust (4 marks – June
2011)
13. Mkontho Brewaries Ltd paid dividends to, among other registered members,
Vitumbiko, who had in fact held the shares in trust for his cousin Tinkhani.
116 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 Tinkhani is now contemplating suing Mkontho Brewaries Ltd on the grounds
that it should not have paid those dividends to Vitumbiko who has since
squandered the dividends and is now bankrupt as he (Vitumbiko) had no
beneficial interest in shares he was holding. Required:- advise Mkontho
Brewaries ltd whether or not Tinkhani can successfully sue them. (4 marks -
June 2011)
14. Define the concept of limited liability. (5 marks June 2009)
15. Explain how a sale of a share above the par value is legally permissible and
why such a sale is practiced by companies. (8marks – Dec 2004, June 2007,
Dec 2009).
16. What is a prospectus? (2marks – June 2000, Dec 2000, Dec 2004, June 2009,
June 2010, Dec 2011).
17. State some of the information a prospectus should contain (3 marks June
2000, June 2009, June 2010)
18. What requirements relating to a prospectus must be complied with to make
an invitation lawful? (12marks – Dec 2004, Dec 2011)
19. Explain the requirements relating to a prospectus which must be complied
with to make an invitation lawful. (10 marks- Dec 2011)
20. Outline instances of common law civil liability for misstatements in the
prospectus (4 marks- June 2000, June 2009, June 2010)
21. In what circumstances will a company be deemed to have made an invitation
to the public? (4marks – Dec 2003, Dec 2004, June 2009, June 2010, Dec
2011).
22. In what circumstances will a company be deemed not to have made an
invitation to the public? (2marks – Dec 2004, Dec 2011).
23. Mention three differences between a public company and a private company
in relation to payment for shares (3 marks- Dec 2008)
24. The news that Nico Holdings Co. Ltd was offloading some of its shares in NBS
Bank Ltd triggered a public scramble for shares. The shares however, were
sold at K25 each, K5 more than what was stated in the memorandum of NBS
Bank. The memorandum states that the shares are K20 par value each. Mr
Chipeta, a wealthy businessman, has approached you for some clarification on
this issue.

Required: Explain to Mr Chipeta the following;

117 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 i. What a share is (3 marks)
ii. The main types of shares that NBS Bank Ltd may issue (4 marks)
iii. How the NBS Bang sale of shares is legally permissible at K25
and why they should be sold at a price above par value. (7 marks)
25. Outline five uses of the share premium account allowed under the Companies
Act, 1984. (6 marks)(20marks- Dec 2004) (20marks- June 2007) (20 marks- Dec
2008)
26. When Kampunga heard that he could acquire shares in Indebank Ltd through
the Malawi Stock Exchange, he rushed to his cousin and borrowed K100,000
with which he purchased a few shares. Upon arrival at his home in Mbayani,
he declared to his wife that with immediate effect want of money had
become a thing of the past to them because they were now owners of
Indebank by virtue of his purchasing shares in the Bank. Naturally, his wife
was delighted. The next day, a charcoal seller whom the family owed K400
approached Kampunga complaining of the overdue debt. Kampunga wrote a
short letter advising Indebank to remit K400 to the bearer thereof and gave it
to the charcoal seller. ‘Go present that to any teller at any Indebank branch.
He will give you the money. We own that bank,’ he boasted. When later in
the day the charcoal seller brought back the letter, which had been rejected
by the bank, Kampunga furiously approached the Bank Manager and declared
that he could not tolerate arrogant tellers in his bank.

Required:- You are the Bank Manager. Advise Kampunga. (10 marks- Dec
2005, Dec 2010 Dec 2011), Could the position be different if Mr Kampunga
was a majority shareholder?

27. Mr Bwemba is one of the minority shareholders of Vision Bank Ltd which was
recently floated on the Malawi Stock Exchange. During the Christmas season,
as usual, he overstretched his budget and in the January next he had financial
difficulties. He then approached the manager of Limbe Branch of Vision Bank
demanding to be loaned K10,000 immediately. When the bank manager
rejected the order on the ground that it was un-procedural, Bwemba was
furious and dressed down the manager by reminding him that as shareholder,
he owned the bank, that the bank manager himself was in fact his employee
118 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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whom he could dismiss any time; that the value of shares that he held in the
bank was in excess of the petty K10,000 he was demanding and that in any
case the K10,000 could be deducted from his annual estimated dividend. To
Bwemba’s disbelief, the bank manager stood his ground. Furious, Bwemba has
approached you for advice.

Required: Advise Bwemba. (6 marks- Dec 2003)

119 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 CHAPTER NINE: Maintenance of Share Capital

8.1 Introduction

It is important that the capital of a company be maintained since it enables a

company to carry on its business activities. Again, it enables the company to
discharge its debts and liabilities on winding up since this could be the only fund
available to a company’s creditors in that event. The law therefore provides various
mechanisms or rules for the maintenance of capital which is the concern of this
section.

8.2 Prohibition of the return of capital while the company is a going concern

While the company is a going concern it is not allowed to return its paid-up capital
to its members or reduce their liability. Capital can only be repaid on winding up
after the company’s creditors have been paid. There are however two exceptions to
this rule; the company can legally redeem its redeemable shares leading to reduction
of capital and the company can reduce its capital in an authorised manner under the
Act (discussed below).

Note that the only other payment by a company to its members is through
dividends. In the case of Moxham vs Grant [1900], which is an important case, the
directors of a company distributed a portion of its capital among its shareholders. On
winding up the liquidator applied for a Court Order that the directors should repay
money. It was held that directors were liable to replace the money and since the
shareholders received the funds knowing they were made out of the share capital,
the shareholders had to indemnify the directors.

8.3 Prohibition of financial assistance by a company for the purchase of its

shares

Section 72(1) says that it is unlawful for a company to give financial assistance by
means of a loan or guarantee or provision of security to any person for the purposes
of purchasing its shares or those of its holding company. Thus a subsidiary company

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is prevented by law from financially assisting any person to buy the shares of its
holding company. Why is this so?

This is so because the holding company will have advanced money to the subsidiary
company in exchange for its shares. This means that there is danger that the
subsidiary company may be using the same money to purchase shares in the holding
company thereby preventing diversification of business, which is the very reason for
the creation of the subsidiary.

There are exceptions to this rule. It will not be an offence under section 72(1) for a
registered company to:-
1. Lend money in the course of its business where money lending is part of
that business;
2. Provide money as part of a scheme for the purchase of fully paid-up shares
in the company by the employees;
3. Grant loans to its employees to enable them purchase fully paid up shares.

8.4 Prohibition of the acquisition by a company of its own shares

Section 73(1) prohibits a registered company which is limited by shares from

holding an interest in its own shares. The leading case on this point is Trevor vs
Whitworth [1887] where a shareholder sold his shares to his company and received
part of the payment for them. When the company went into liquidation, he brought
an action to claim the balance. It was held that he could not recover the money
because a company is not allowed to buy its own shares except in circumstances
allowed by law for example under the Companies Act a court can order a company
to purchase its own shares to relieve an unfairly prejudiced minority or where the
company is redeeming redeemable shares.

Redemption of redeemable shares:- once redeemable shares are redeemed, they

are cancelled and their nominal value is deducted from the company’s share capital
account. No redeemable share can be redeemed unless it is fully paid-up. In order to
bring its capital back to the amount authorised by the memorandum, the company
may make up for this reduction in two ways:-first by raising more share capital and
second by retaining profits which should have been declared dividend. If the shares
121 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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are redeemed at a premium, the premium must be paid out of the company’s profits
or share premium account.

Payment of commission or discount on shares:- a company is considered as

issuing its shares at a discount if the consideration it receives is less than the shares’
nominal value. A company is not allowed to issue its shares at a discount. A
company is also prohibited from using its contributed capital for payment of a
commission, or allowance to any person because he has subscribed to the company’s
shares. So long as the allottee pays the full nominal value for the shares, they will
not have been allotted to him at a discount nor will the company have paid a
commission on them simply because their market value at the time of allotment
is higher than their nominal value.

An allowable commission will be paid where a company does not want to sale its
shares on its own. In that case, it may agree with someone called an underwriter to
sale the shares on its behalf. The underwriter agrees to take any of the shares which
are not taken by the prospective buyers. In exchange for that agreement the
company will pay the underwriter a percentage of the price at which the shares are
being offered. The commission must be authorised by the company’s memorandum
or articles; it should not exceed 10% of the nominal value or that authorised by the
memorandum or articles whichever is lesser and where shares are not offered to the
public, the rate of the commission should be communicated in a statement to the
registrar for registration before payment. Any commission which does not comply
with these requirements is unenforceable and renders the paying company liable to a
fine.

A company is also permitted to pay a reasonable brokerage for its shares. Brokerage
is a fee paid to a person who introduces a company to potential shareholders.
Brokerage is payable only to a person carrying on business as a broker. If the payee
is not a broker, the payment will be illegal and no action can be entertained to
enforce the agreement to pay it.

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8.5 Application of share premiums

The Companies Act through section 61 allows a company to issue shares at a

premium if its memorandum or articles allows it to issue shares at a premium. The
premium must be transferred from the capital account to an account called the
“share premium account”. This account is treated as the company’s paid-up share
capital and so no dividend can be declared out of it. The account can only be
reduced through special procedures as follows:
1. To pay for unissued shares of the company to be issued to its members as
fully paid-up bonus shares;
2. To write off the company’s preliminary expenses;
3. Writing off expenses incurred in the issue of any of its shares or debentures;
4. To provide the premium (interest) payable on the redemption of redeemable
shares;
5. To provide the premium (interest) payable on the redemption of any
debentures of the company;

8.6 Payment of dividends

A trading company is formed with the sole reason of making profit for its members.
The profits are distributed to them as dividends. A company limited by guarantee
cannot pay any dividend or make any distribution to its members as it is not a
trading company but charitable in nature.

A dividend is that portion of a company’s profit legally available for distribution

among its members which is received by each of them according to the constitution
of the company. A dividend must be declared. The dividend is different from interest
on a loan which is a debt against the company. A dividend may be interim or final.
An interim dividend is one paid between annual general meetings. It is paid by
directors. Usually the payment is made in respect of the first half of the financial year
based on midyear accounts. The amount will be less than the final dividend as a
matter of prudence should the latter half of the year not come up to the
expectations. A final dividend is declared at the general meeting usually at the close
of the financial year. The general meeting declares the final dividend as
recommended by the directors.
123 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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To ensure that the distribution does not involve unauthorised reduction of share
capital, dividend can only be made out of profits. Section 74 prohibits a registered
company from dealing with any unrealised capital profits in its Profit and Loss
account. Such profits will arise from the revaluation upwards of the company’s capital
assets and will represent a mere paper gain. A company can pay dividends out of
profits made in previous years, but it is not obliged to recover losses from those
years before distributing a dividend in the current year i.e. there is no legal
requirement to accumulate realised losses and deduct them from distributable
profits in any accounting period. However, although unrealised capital profits must
be disregarded in the computation of distributable profits, foreseeable future losses
are relevant for that purpose – accounting concept of prudence.

Only when the dividend has been declared does it become payable and enforceable
as a debt against the company.

Instead of distributing all the distributable profit by way of dividend, the company
may decide to capitalise the profit and issue bonus shares to members. This issue is
known as a capitalisation issue. The profit is transferred to the share capital account,
essentially to pay for the bonus shares, which are then issued to the shareholders as
either fully or partly paid up. The issued share capital of the company is then
increased by that amount. In this way, the shareholders are receiving extra shares
rather than cash.

8.7 Alteration of Share Capital Resulting into an Increase of share capital

The company is allowed to increase its share capital by passing an ordinary

resolution. This is achieved by creating and issuing new shares. (Compare this with
rights issue)

8.8 Alteration of Share Capital Resulting into Reduction of share capital

Much as it is important to maintain capital, the law also allows a company to reduce
its capital by a special resolution. There are three specific ways:-

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 1. Extinguishing or reducing outstanding liability on partly paid-up shares (This
is similar to bad debts);[reduction of capital is the decrease in the amount of
issued share capital] This is to say, the company will not make further calls on
wholly unpaid or partly paid shares.

2. Cancelling paid-up share capital which is lost or not represented by available

assets, otherwise the company will be overstating its liquidity. This is also
called diminution of capital. Cancellation of capital is also understood as the
decrease in the nominal capital of the company.

Illustration
A company whose issued share capital is K100,000, made up of 100,000 K1
shares, may wish to reduce its capital if the assets owned by the company are
now only worth K25,000. One way to achieve this would be to reduce the
nominal value of each share to 25t. The reason for doing this is often that,
after a wastage of capital, the company’s profit and loss account will stand in
debit and, therefore, a distributable profit cannot be declared (until such time
as the company has made sufficient profits to extinguish the debit). By
reducing the capital, the company immediately extinguishes the debit and
writes off the loss and is more likely to be able to pay a dividend).

3. Paying off paid-up share capital which is in excess of the wants of the
company i.e. refunds. Where a private company converts into a public
company and makes an initial public offer (IPO) its shares may be over-
subscribed and it will need to reduce its capital by making refunds.

The procedure for the reduction is that the reduction must be authorised by the
memorandum or articles; the reduction is effected by a special resolution; the capital
clause in the memorandum is then altered accordingly; and the company must apply
to the High Court for an order confirming the reduction. This affords an opportunity
to disgruntled members to be heard.

The court’s role in that situation is not simply to endorse but to consider whether the
reduction procedure has been complied with and to determine the effect of the
proposal on the company’s shareholders and creditors. The Court may endorse the
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reduction with conditions it thinks fit. The Court Order must be sent to the registrar
together with a minute containing;
o The company’s new share capital;
o The number of shares into which it will now be divided and;
o The amount to be deemed paid up on each share as at the date of the
registration.

The registration of the court order and the minute marks the reduction of share
capital.

Protection of creditors in the event of reduction of capital:- if the reduction of share

capital affects creditors, the court will not give its confirming order unless the court
first settles the list of creditors who are objecting to the reduction. The court will not
make the confirming order unless the creditors;
i. Agree or consent to the reduction of capital; or
ii. Are paid off; or
iii. Are given adequate or acceptable security.

8.9 Alteration of Share Capital Without a Reduction in Share Capital

In addition to reducing its share capital, a company may also alter its capital without
necessarily reducing its share capital through the following ways:-
a. By consolidating and dividing all or any of the share capital of the company
into shares of a larger amount;
b. By subdividing all the shares, or any of them, into shares of smaller amount.

Consider what circumstances will compel a company to alter its share capital without
reducing the share capital.

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 CHAPTER NINE: Maintenance of Share Capital
(A selection of past questions)
-----------------------------------------------------------------------------------

1. What do you understand by a company issuing shares

(i) At a premium (2marks – June 2001).
(ii) At a discount (2marks – June 2001).
2. Explain how the sale of shares at a premium is legally permissible and why
they should be sold at a premium? (paraphrase Dec 2008)
3. How are funds in the share premium account applied? (6marks – June 2001,
Dec 2004, June 2007, Dec 2008, Dec 2009).
4. What is a dividend and how does it differ from an interim dividend? (5 marks-
Dec 2009)
5. When does a dividend become payable and enforceable as a debt against the
company (5 marks- Dec 2009)
6. Discuss the following:-
(i) Reduction of capital by a company (2.5 marks- Dec 2002, Dec 2009)
(ii) Cancellation of capital by a company (2.5 marks- Dec 2004, Dec 2009)
7. What conditions must be satisfied if a company wishes to reduce its capital
and alter its memorandum or articles accordingly. (5marks – Dec 2002, Dec
2004, Dec 2009).
8. State three acceptable grounds for the reduction of a company’s capital
under the Companies Act (1984) (10marks – Dec 2001, Dec 2002, Dec 2004,
June 2007, Dec 2009).
9. State four ways in which a company’s share capital may be altered (June
2012).
10. Share capital is what allows a company to run its business activities. As much
as possible, the law provides devices to ensure that issued shares must not
generally be reduced except as allowed by law. Discuss the following devices:-
(i) The prohibition against the return of capital while the company is a
going concern (3marks – June 2003).
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 (ii) The prohibition of financial assistance by the company for the
purchase of its own shares (6marks – June 2003).
(iii) The prohibition of the acquisition by the company of its own
shares (6marks – June 2003).
11. Even though a reduction of capital is generally prohibited, this does not
include payment of a reasonable brokerage from its shares. Discuss this
statement (5marks – June 2003).
12. State the provisions of the Companies Act that protect the interest of
creditors where a proposed reduction of capital affects the company’s
creditors. (5marks – Dec 2004 Dec, 2009).

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 CHAPTER TEN: Company Finance- Loan Capital

9.1 Introduction

Borrowing is an important means by which a company can finance its activities and
the overwhelming majority of companies have the power, express or implied, to
borrow money. Any document by which a company creates or acknowledges a debt
may be called a debenture, although this term is rarely applied to short term debts,
indeed, the term tends to be used in business circles only to secured loans.

Loan capital can be divided into two categories. First, sums owed by the company as
a debt, such as a loan by an individual or institution, most probably the company’s
overdraft, and, secondly, marketable loans. Marketable loans are, in essence,
potential debts which may be issued (sold) to investors. Loan capital may be listed
(that is, sold through a stock market) or unlisted. Marketable loans are more relevant
for larger companies (those listed on the stock exchange market), whereas the
overdraft is a fact of life for companies large and small.

A person lending money to a company has such rights as are given by the contract
creating the loan. Typically, the contract will include provisions for repayment of the
loan and the payment of interest. Though not a legal requirement, a prudent lender
may insist on having some claim upon the assets of the company if the loan is not
repaid or is in arrears.

Where the contract of loan provides that if the company fails to meet its obligations,
the lender can have recourse to the company’s assets and can obtain the sums
outstanding by selling the assets or receiving income generated by those assets, the
lender has a direct security. The assets of the company covered by this security are
said to be charged and the lender may be called a chargee; the person (the
company) whose assets are secured can be called a chargor.

In addition to (or instead of) a contract of direct security, a lender may have some
claim upon a third party if the company does not meet its obligations under the
contract of loan. Such a claim may be by way of indemnity or by a contract of

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guarantee. A guarantor may also charge his assets to the lender as security for
meeting his obligations under the guarantee– this is a contract of collateral or
indirect security. Thus, a company might charge its assets to secure its overdraft with
its bank and a director of the company might guarantee that, if the company failed
to repay the debt, he would do so and charge his property (perhaps the matrimonial
home) as security should he be called upon to meet his guarantee.

9.2 Debenture & Debenture Stock

Section 76 (1) allows a company to borrow money by issuing debentures or

debenture stock to the lender. Remember that this mode of borrowing is not
available to other forms of businesses such as partnerships and sole traders.

A debenture is a document or instrument issued by a company which creates or

acknowledges indebtedness on the part of the company. The word “debenture” is
used to include debenture stock, bonds and any other security of a company,
“whether constituting a charge on the assets of the company or not”.

Debentures may be issued in three manners as follows; (note that these are not
classes of debentures which are discussed later)
(i) Single debenture; which acknowledges a single loan agreement. This means
there is a single creditor. There is no need for a trust deed.
(ii) Series debenture; which acknowledges several loan agreements entered into
between the company and many other creditors.
(iii) Debenture stock; is similar to a series of debentures in that it involves
borrowing from a number of creditors. However, there are differences as
follows;
(a) Whereas in a series of debentures the money is borrowed from different
people from within the company itself, in a debenture stock loans are
raised from the public (even through the stock exchange market);
(b) In a debenture stock each lender receives transferable stock, whereas a
single debenture is only transferable as a whole;
(c) The terms of a debenture stock are expressed in a trust deed and
trustees are appointed to administer the same. A trust deed is usually
not applicable to a series debenture and a single debenture.
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Instead of obtaining the money sought from a number of individuals and issuing a
single debenture to each one of them, the loan may be in the form of a fund to
which the lenders contribute. This is called a debenture stock and each lender is
given a debenture stock certificate as evidence of the portion of money he advances.

Advantages of debenture stock include the fact that it can be transferred in sub-units
whilst a single debenture can only be transferred as a single unit. As far as the
company is concerned, in a debenture stock there is no need for separate
agreements with lenders; the company simply consolidates the loan into one mass as
debenture stock and then issues to each lender a debenture stock certificate
representing his part of that loan.

Debenture Trust Deed

Unlike in the case of shares, a company which issues a series of debentures or a

debenture stock will set up a trust on behalf of the debenture holders.

The effects of the trust are as follows:-

Effect 1 – holders will not deal with the company directly. They are beneficiaries, the
trustees deal directly with the company;
Effect 2 - the loan agreement to pay the principal sum and interest will be between
the company and the trustees and not between the former and the debenture
holders;
Effect 3 - alterations in the certificate can be effected between trustees and the
company;
Effect 4 - trustees enforce the security on behalf of holders. In practice trustees are
skilled, and have the time for management of the trust.
Liability of the trustees

Trustees for debenture holders will have the same duties of care and diligence as any
trustee and no contract can exclude their liability (compare liability of directors).

The following are persons ineligible for the appointment to the office of a debenture
holder trustee:-
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 i. Infants or persons under legal disability;
ii. Persons prohibited by court order;
iii. An undischarged bankrupt, except with the leave of the court;
iv. A director or other officer or auditor of the company, except with the
leave of the court.
v. A person convicted of an offence involving fraud or dishonesty in the
preceding 10 years;
vi. A person removed from the position of a trustee by a court in the
preceding 10 years.

9.3 Classification of Debentures

1. Redeemable and Irredeemable Debentures

A debenture may be redeemable at the option of the company at a fixed date or on

the occurrence of a contingency. Once a debenture has been redeemed, the
company cannot re-issue it or issue a new debenture in its place on the condition
that the new debenture must have the same priorities as the previous debenture. In
an irredeemable debenture the holder does not have the right to demand
repayment of the loan in respect of which the debenture is issued until on the
company’s winding up but the company may redeem the debenture earlier.

2. Registered Debentures

There is no general requirement to register company debentures but a company may

keep a register of debentures such as where the company issues debentures in a
series which is important in transfers. Debentures are generally freely transferable. If
there is any restriction as to transferability, the same must be disclosed before
issuance. Debentures are not negotiable instruments therefore, the transferee takes
them subject to all claims which the company may have against prior holders at the
date of the transfer.

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3. Bearer Debentures

Section 45 of the Act prohibits a company limited by shares from issuing bearer
debentures. A debenture issued to a bearer is transferable by mere delivery to the
transferee. It is considered to be a negotiable instrument so that the bearer is
entitled to be paid the money thereby secured although the transfer is not registered
by the company. A bearer debenture is therefore an easy target for fraud.

4. Convertible Debentures

Convertible debentures give the debenture holder the option of exchanging it for
fully paid-up shares of the company; therefore the loan ceases to exist.

Unlike shares, debentures may be issued at a discount. However, for debentures to

be issued at a discount, they must not be convertible to fully paid up shares equal in
nominal value to the par value of the debentures because this is tantamount to
issuing shares at a discount.

9.4 Security for Debentures

A debenture may be secured or unsecured. A secured debenture holder has a right

against specified property of the company if the loan or interest payable by the
company is in arrears or not paid at all. Where a charge exists, the property is said to
be “charged” with meeting the financial obligation created by the debentures.

A company charge is defined as the right to seize property that a debtor gives to
the creditor as security for his indebtedness to the creditor. This form of security is
non-possessory in nature because it does not give the creditor immediate possession
of the property over which it is created. The property remains with the debtor until
he commits a default under the credit agreement and the charge thereby becomes
enforceable. A charge created over real property is known as a mortgage and a
charge created over personal property is called a bill of sale.

The charge may be fixed or floating (see below). An Unsecured debenture holder has
no security on which to fall back should the company fail to repay the loan. Unless
133 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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there is a guarantor who undertook to be responsible for the loan in that eventuality,
his only remedy is to bring a contractual action against the company as a debtor.

Fixed Charge

A fixed charge is a charge on a specified and identifiable asset of the company such
as a building or motor vehicle. Fixed charges are governed by both statute and
common law.

Floating Charge

A floating charge is a charge on present or future property of the company for

example stock-in-trade. It does not attach to any specific asset but crystallises upon
some eventuality. The charge hovers over the property charged.

According to the case of Re Yorkshire Woolcombers Association [1903] a floating

charge is;
(i) A charge on a class of assets of a company, present or future;
(ii) Which is, in the ordinary course of the company’s business, changing from
time to time; and
(iii) Until the holders enforce the charge, the company may carry on business
and deal with the assets charged.

A floating charge does not remain as such forever; there are situations whereby it
crystallises. Crystallisation is a situation whereby a floating charge becomes fixed to
some property. Here are examples of situations where a floating charge may
crystallise according to the case of Indefund vs Manguluti & Manguluti [1985]:-
(i) the principal or interest payable on it is in arrears; or
(ii) the security is in jeopardy; or
(iii) the company commences winding up proceedings; or
(iv) the company ceases to operate.

134 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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Advantages of a fixed charge from a lenders point of view

(i) A fixed charge confers on the lender an immediate right to seize the asset
over which it is created. Where a company disposes of the charged asset,
the company must pay the lender or the subsequent buyer of the asset
takes it subject to the charge.
(ii) A fixed charge gives the lender certainty as to the assets which are his
security.

Disadvantages of a floating charge from the lender’s point of view

(1) A floating charge ranks after a fixed charge (see below);

(2) Before crystallisation, the lender does not know for sure which assets
constitute his security;
(3) Preferential debts of the company must be paid out of the proceeds before
the holder of a floating charge is paid [Section 95(1)];
(4) A floating charge created on a company’s stock-in-trade may lose priority to
the unpaid seller who has reserved his title to the goods (Romalpa case)
(The full title of the case is Aluminium Industrie Vaasen BV vs Romalpa
Aluminium [1978])

9.5 Registration of Charges

Certain charges created by the company must be registered with the registrar of
companies within 21 days after the date of creation. The reason is to prevent the
company from charging the same property to different lenders. Prudent lenders or
investors will have to cross check with the registrar on whether the company’s
property has already been charged or not.

The following charges require compulsory registration:-

1. A charge securing any issue of a series of debentures;
2. A charge on uncalled share capital of a company;
3. A charge on the whole or part of the business of a company;
4. A charge on land or any interest in land e.g. mortgage;
5. A charge on any present or future book debts of a company;
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 6. A charge on called but unpaid share Capital;
7. A charge on a ship or aircraft or any share in that vessel;
8. A charge on goodwill, patent, trademark or copyright;
9. A charge on shares in another body corporate; and
10. A charge which if executed by an individual would require registration as a
bill of sale or farmer’s stop order.

The procedure for registration of charges takes two steps step 1: within 21 days of
creation of the charge, its particulars together with a certified copy of the instrument
creating or evidencing it must be sent to the registrar for registration (section 86)
step 2: after entering details of the charge, the registrar must issue a certificate of
registration which is conclusive evidence that the requirements of the Act relating to
registration have been complied with (section 88).

Non-registration of a registrable charge does not affect the validity of the charge.
However, if the company subsequently creates other charges on the same property
and gets them registered, the unregistered charge may lose priority to the registered
charge.

9.6 Priority of Charges

Through agreement, debentures issued in a series may rank pari passu despite being
issued at different dates. However, the general rule is that debentures rank in priority
in accordance with date of issue.
Rules under Common Law as to priority of Charges

Before crystallisation of a floating charge, the company has power to create a fixed
charge which has priority over the floating charge. The reasons for this are that:-
(i) A fixed charge attaches to the property over which it is created from
the date of its creation whereas a floating charge will become attached
to the property only after crystallisation.

(ii) According to Re Yorkshire Woolcombers Association Ltd [1903]

before a floating charge crystallises, the company has licence to deal
with and dispose of the property charged in the ordinary course of its
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 business. That includes the power to create further charges on the
charged property.

Note that an agreement creating a floating charge may include a clause prohibiting
the company from issuing further charges in respect of its property. On the other
hand, in relation to one another, floating charges have priority in accordance with
the dates of their creation.

Rules under the Companies Act as to priority of charges

Sections 89 says that company charges have priority in accordance with the times of
their registration therefore a floating charge may rank in priority to a fixed charge as
long as it is registered earlier. Further, if a company creates more than one floating
charge over the same property, the first one to be registered among them will have
priority over the rest although it was not the first to be created. However, application
of these rules is subject to any consent given by the person who would otherwise be
entitled to priority. So in SEDOM vs Gep Shoe Co. Ltd & Indefund [1991] Gep
obtained a loan form Indefund. Due to financial problems there was need to get
another loan from SEDOM. Indefund despite taking priority consented to rank pari
passu with SEDOM. When Gep Shoe Co. made no financial improvements, Indefund
appointed a receiver unilaterally. It was held that since Indefund had agreed to rank
pari passu with SEDOM, it could only appoint a receiver in consultation with SEDOM.

9.7 Satisfaction of Charge or Release of Property

Once the sums due on a loan have all been paid, the charge will have been satisfied
and the property will be released from meeting the financial obligations established
by the creation of the charge. Here are specific examples:-
1) A charge is satisfied if the debt for which it was given has been paid in
whole or, through agreement, in part;
2) A charge is also released if the charged property is lawfully sold;
3) The satisfaction or release must be communicated to the registrar in a
prescribed form-signed by both the chargor and chargee.

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9.8 Remedies for Debenture Holders

A debenture holder is like any other creditor of the company. His remedies depend
in whether he is secured or unsecured.
Remedies for an unsecured debenture-holder:-
a. He can sue the company or the guarantor, if any, for the arrears;
b. He can petition the Court for compulsory winding up of the company.

Remedies for a secured debenture-holder:-

(a) He can sue the company or the guarantor, if any, for the arrears;
(b) He can petition the Court for compulsory winding up of the company;
(c) He may appoint a receiver (see SEDOM vs Gep Shoe Co. Ltd & Indefund)
through power in the trust deed; or his trustees may apply to court for the
appointment of a receiver);
(d) He can apply for foreclosure (selling/taking of the company property by the
creditor/debenture holder).

We now have to consider in some detail the position of the receiver. The function of
a receiver is to manage or realise the assets which are given as security for the
money borrowed by the company. The object is to pay out of those assets what is
due to the debenture holders whom he represents. If he manages to discharge the
debt, he will vacate his office and the directors will resume full control of the
company again. Once a receiver has been appointed any unsecured creditor must
immediately register his claim with the receiver. If the company is insolvent, it will
have to be wound up. In that case a liquidator will have to be appointed to deal with
that.

In Indefund vs Manguluti & Manguluti [1985] the two defendants formed a

company which borrowed money from the plaintiff, the defendants guaranteeing to
pay if the company did not. A floating charge was issued in favour of the plaintiff
empowering the plaintiff to appoint a receiver in the event that the company failed
to pay back the loan. When the loan fell into arrears – the plaintiff appointed a
receiver whom the defendant argued was inappropriately appointed. It was held that
the receiver correctly appointed.

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Eligibility for Appointment as Receiver

The Act renders the following people ineligible for appointment to the office of the
receiver:-
1. Body corporation;
2. An infant or a person under legal disability;
3. A person prevented by Court Order;
4. An undischarged bankrupt, except with the leave of the court;
5. A director or other officer of the company, except with the leave of the
court;
6. Except with the leave of the court, a trustee under any trust deed involving
the company;
7. A person convicted of an offence involving fraud or dishonesty in the
preceding 10 years;
8. A person removed from the position of a trustee by a court in the
preceding 10 years.

Effect of the Appointment of Receiver

1. Any floating charge created by the company will crystallise and become
fixed; the company is not allowed to deal with it;
2. Director’s powers of control over the company are suspended. They become
functus officio but can institute proceedings on behalf of the company.
3. If the receiver is appointed by the court, the company’s employees are
automatically dismissed however the receiver has the option of re-employing
them;
4. Communication by the company such as letters, invoices, order etc must
state that the company is in receivership.

The receiver must do the following things:-

a) A receiver appointed on behalf of a debenture holder secured by a floating
charge must pay prior ranking debts of the company before paying the
principal or interest on the debenture
b) The receiver must obtain information on the following:
(ii) particulars of the company’s assets, debts and liabilities;
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 (iii) names and addresses of its creditors; and
(iv) the dates when the securities were given

c) The registrar of companies must be informed of the appointment of the

receiver.

The Legal Position of the Receiver depends on the method of his appointment. A
receiver appointed by the court is an officer of the court he therefore acts in
accordance with the instructions and directions of the court. On the other hand, a
receiver appointed outside court (under the debenture trust deed) is an agent of the
company (not his appointer) and he must comply with the agreement under which
he is appointed. But of course can seek Court directions. The receiver has similar
duties to those of a director.

Differences between a debenture-holder and a shareholder

(1) A debenture holder is a creditor of the company whilst a shareholder is one of

the owners of the company, as a consequence, a debenture holder does not
enjoy the rights of the shareholder such as attending meeting, voting etc;
(2) In liquidation, debenture holders get their money back in full before the
members who get back the capital after repayment of debts;
(3) Debenture holders are entitled to interest which is payable even out of capital
whereas members are entitled to a dividend which is only payable out of
distributable profits;
(4) Debentures can be readily redeemed or purchased by the company whereas a
company is restricted from buying its own shares.

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 CHAPTER TEN: Company Finance- Loan Capital
(A selection of past questions)
-----------------------------------------------------------------------------------

1. What is a debenture? (3marks – Dec 2000, June 2001, June 2008, Dec 2012).
2. Debentures may be classified into;
- single debentures
- series of debentures
- debenture stock
(i) How does a single debenture differ from a series of debentures (4
marks- Dec 2000)
(ii) Compare and contrast a series of debentures with debenture stock
(4 marks- Dec 2000)
3. Explain the advantage of a debenture stock over a debenture (3 marks- Dec
2003)
4. Explain the effect of creating a debenture trust (3 marks- Dec 2003)
5. Outline the categories of persons disqualified from being appointed as
trustees for debenture-holders (3 marks- Dec 2003)
6. State three differences between a debenture-holder and a shareholder (3
marks- Dec 2003)
7. Define a floating charge. (5marks – June 2001 & June 2008).
8. What is the advantage of a floating charge to a borrower? (3marks – June
2001 & June 2008).
9. Describe three ways in which debentures issued by a company may be
secured (6marks – Dec 2001, Dec 2007, June 2012, Dec 2012).
10. Mention any five types of charges that may be created by a company that
must be registered with the Registrar of companies. (5marks – June 2000, Dec
2001, June 2010).
11. State the procedure in the registration of charges (3 marks- June 2000, June
2010)
12. State the effect of non-registration of registrable charges (4 marks- June 2000,
June 2010)
13. What is a bearer debenture and what is the effect of its transfer without the
knowledge of the company? (3 marks- Dec 2000)

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14. What remedies does a debenture-holder have when the issuer of the
debentures has defaulted in payment? (10 Marks – Dec 2001, June 2012, Dec
2012).
15. What are the remedies available to a holder of an unsecured debenture
against the company? (8marks – June 2003, June 2007, Dec 2011).
16. What are the remedies available to a holder of a secured debenture against
the company? (8marks – June 2003, June 2007, Dec 2011).
17. Outline the duties of a receiver (2marks- Dec 2003, June 2011, Dec 2011)
18. In what circumstances is a receiver appointed? (4 marks- Dec 2003, June 2011,
Dec 2011)
19. Discuss the effect of the appointment of a receiver (7 marks- June 2004)
20. What is the legal position of a receiver (7 marks- June 2004)
21. What do you understand by the term ‘charge’? (3marks – Dec 2000, June
2004 & June 2008).
22. Distinguish a fixed from a floating charge (6marks – Dec 2000, Dec 2003, June
2004, June 2005, June 2011, Dec 2011).
23. Outline major disadvantages of a floating charge to the lender. (8marks – Dec
2000, June 2004).
24. Outline the advantages and disadvantages of a floating charge. (6marks – Dec
2003, June 2005, June 2011).
25. What is the major difference between a receiver and a liquidator?
26. State three circumstances under which a floating charge will crystallise
(3marks – Dec 2000, Dec 2003, June 2004, June 2005, June 2008, June 2011,
Dec 2011).
27. State the legal position of priority of charges at common law on;
(i) fixed in relation to floating charges (4 marks- June 2000, June 2010)
(ii) floating charges in relation to other floating charges(4 marks- June
2000, June 2010)

28. Mr Chidza has read in one of the daily newspapers that Mahewu Breweries
Co. Ltd is now under receivership at the instance of New Investment Bank Ltd
whom the breweries owe K20 million on a secured debenture. The breweries
also owe Mr Chidza an unsecured debt of K2 million in maize supply invoices
dating back to july 2006. Meanwhile Mr Chidza has established that Mahewu
brewaries Ltd obtained the loan from the bank only in April 2007 and was not
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 to become due until July 2010, only that the company has been in default on
some interest payments prompting the bank to move in as it has done in
terms of the debenture. It is also a known fact that the breweries owe a
number of unsecured maize suppliers a lot of money and that some of them
have already obtained court judgements against the company. Mr Chadza is
therefore annoyed and surprised that the bank ‘could have the termerity to
put the brewery company into receivership as if it was the only creditor of the
creditor with the longest outstanding loan.’

Required:-

i. Discuss the legality of New Investment Bank’s appointment of a receiver.

(2 marks)

ii. Discuss the legal position of a receiver (7 marks)

iii. Discuss the effect of the appointment of the receiver on Mahewu

Brewery Co. Ltd. (7 marks)

iv. What course of action should Mr Chidza take? (2 marks) (June 2004)(Dec
2008)

29. Lathu Sugar Exporters Ltd issued a debenture to Zabweka, who then
transferred the debenture to Matiki who did not duly get registered by Lathu
Sugar Exporters as a holder of the transferred debenture. One of the clauses
in the debenture stipulated that the principal sum and interest would be
payable without regard to any equities between the company and the original
or intermediate holder of the debenture. It has just been discovered that, in
fact, Zabweka had obtained the debenture from the company by
misrepresentation, without paying anything for it. Matiki now wants to claim
the benefits of the debenture. The managing director of Lathu Sugar
Exporters Ltd has just told Matiki that in the circumstances, there is no way
he, Matiki, can benefit from the debenture.
Required:- Advise Matiki on whether or not he can benefit from the
debenture. (7 marks- Dec 2003)
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 CHAPTER ELEVEN: Company Accounts and Auditors

10.1 Introduction

If companies are to function properly as vehicles for investment, in which passive

investors and creditors can have confidence, then there has to be an accurate,
rigorous and verifiable system of accounts. There has been an enormous growth,
during the 20th century, in the volume of provisions relating to the preparation and
disclosure of accounts. It is not appropriate, for the purposes of this manual, to
examine in detail the accounting requirements of the Companies Act but it is
important to appreciate in outline what those requirements are. It is also important
to examine the role, duties and liabilities of the company’s auditor, who is, of course,
closely linked with the company’s accounts.

10.2 General requirements

Part X of the 1984 Act contains the main accounting and auditing provisions. Section
180 of the Act begins by requiring that:

Every company shall cause to be kept proper accounting records with respect to:
(a) All sums of money received and expended by the company;
(b) All sales and purchases of the company;
(c) The assets and liabilities of the company; etc

The accounting records are supposed to be kept at the registered office of the
company or at such other place in Malawi as the directors think fit.

If there is a failure to comply with these requirements, then every officer who is in
default is guilty of an offence and can be subjected to a fine. The Act further requires
that every company shall once at least in every calendar year deliver to the registrar
for registration an annual return in the prescribed form. Some of the contents of the
annual return include:- the name of the company; the nature of the business of the
company; its postal and physical address; particulars of its directors and secretaries
and particulars of charges issued by the company.

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According to section 182, in every year, the directors are responsible for the
preparation and dispatch to every member and debenture-holder of the following
documents:-

1. Profit and loss account and balance sheet;

2. A report by the auditors;
3. In the case of a public or group company, a report by directors.

There are various provisions on the presentation of the profit and loss account and
the balance sheet. The standard form is found in the Third Schedule to the Act. The
accounts must be approved by the board of directors and signed on their behalf by
two directors.

Director’s Report-section 189

The director’s report consists of a report by the directors on the state of the
company’s affairs and the amount, if any, recommended to be paid by way of
dividend. The report must be approved by the board of directors and signed by two
directors on behalf of the board.

Auditors Report- section 190

The auditor’s report consists of a report addressed to the members of the company,
by an auditor or auditors, duly qualified and appointed as auditors of the company
on the books of account of the company and on every balance sheet, profit and loss
account and all group accounts. The auditors must state whether, in their opinion the
accounts have been properly prepared in accordance with the provisions of the
Companies Act and whether in their opinion a true and fair view is given by the
company’s balance sheet and profit and loss account or group accounts.

10.3 The Company Auditor [External]

In order to ensure that a company’s accounts serve the purpose for which they were
intended, that is, to give both the members of the company and the public accurate
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information about the financial position of the company, the accounts must be
subject to professional scrutiny by auditors.

Appointment and Remuneration

Section 191 governs the appointment of an auditor. It says that within three months
of incorporation and thereafter at each annual general meeting a company must
appoint an auditor or auditors. The first appointment may be done by subscribers to
the memorandum i.e. original members. If the subscribers do not make the
appointment within a month, the directors can appoint the auditor. The directors
may also fill any casual vacancies that may arise in the office of the auditor between
one annual general meeting and the next. The occurrence of any change in the
auditors must be notified to the registrar. The Registrar is empowered by the Act to
appoint an auditor if a company operates without an auditor for a continuous period
of three month.

The remuneration of an auditor is usually fixed by the general meeting by passing an

ordinary resolution but where the auditor is appointed by the directors, subscribers
or the registrar, such appointor may fix the remuneration up to a time when the next
annual general meeting will take place.

Qualification

Section 192 provides for the qualification of an auditor and states that an auditor
shall be a person qualified and eligible as such under the Public Accountants and
Auditors Act. In addition he must give consent to such appointment.

Duties

The principle duty of an auditor is to make a report to the members on the accounts
examined by him, which accounts are laid before the general meeting. However
according to section 194 the auditors while acting in performance of their duties
under the Companies Act shall act in such a manner as faithful, diligent, careful and
ordinarily skilful auditors would act in the circumstances. There are no special or
extra ordinary standards required.
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Recall that a company cannot exempt auditors and directors from liability through
their constitution or by taking an insurance cover.

Powers or Rights

Powers or Rights of an auditor are provided for in section 194 and they are
threefold:-

1. A company auditor is entitled to have access at all times to its place of

business and to all its accounts and accounting records. He is entitled to
obtain information and explanation from company officers and employees;
2. He is entitled to notice and to attend any general meeting and speak if
necessary;
3. He may apply to court for directions in relation to any matter arising in
connection with the performance of his functions.

Liability of Auditors

The auditors’ liability extends and covers every loss occasioned by the breach of the
duty imposed on section 194 of the Act. The company once wronged (or its
liquidator if the company is undergoing liquidation) will have to assess such loss and
lodge a claim against the auditors. In Re: Thomas Gerald’s & sons a director of a
company falsified the company’s accounts by fraudulent entries. The auditors were
suspicious and asked the director for an explanation, but made no further
investigations. As a result of their estimate of the company’s profits was wrong and
the company declared dividends which it could not have done, paying tax which
would otherwise not been payable. The company went into liquidation and the
liquidator took proceedings against the auditors. It was held that damages were
recoverable against the auditors and that these damages included the dividends,
costs of recovering the tax and any tax not recoverable.

In Re London and General Bank (No 2) [1895] Lindley LJ stated what the extent of
the auditors duties were at common law, in the following way:

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 An auditor ... is not bound to do more than exercise reasonable care
and skill in making inquiries and investigations. He is not an insurer; he
does not guarantee that the books do correctly show the true position
of the company’s affairs; he does not even guarantee that his balance-
sheet is accurate according to the books of the company. If he did, he
would be responsible for error on his part, even if he were himself
deceived without any want of reasonable care on his part, say, by the
fraudulent concealment of a book from him ... Such I take to be the
duty of the auditor: he must be honest – i.e. must not certify what he
does not believe to be true, and he must take reasonable care and skill
before he believes that what he certifies is true.

There has been a recent spate of litigation in the United Kingdom concerning the
liability of auditors in negligence, where the issue has been whether any persons
other than the company which appoints the auditor to office can claim damages for
loss. The leading case is Caparo Industries plc v Dickman[1990]. In its decision, the
House of Lords examined the statutory requirements for the auditing of accounts
and the role of the auditors. The conclusion was that the work done by the auditors
was for the benefit of the company, that is, not for the benefit of individual
shareholders but for the benefit of the shareholders collectively. Therefore, no duty
of care was owed by the auditors to outside investors who may see the accounts
before buying shares. Nor, for example, was a duty of care owed by the auditors to a
bank which was considering lending money to a company on the basis of the
audited accounts. Further, the auditors did not owe a duty to existing individual
shareholders.

There would have to be a special relationship between the auditor and the third
party in order for a duty of care to arise. To impose a general duty of care on
auditors to persons other than the company would be to subject the auditor to a
liability ‘in an indeterminate amount for an indeterminate time to an indeterminate
class’.

This line of reasoning compares favourably with the principles laid down in the cases
of Salomon vs Salomon and Co. [1897] and Foss vs Harbottle (1843).

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Termination of Appointment

The termination of appointment of an auditor may come about in three principle

ways. First, where he ceases to be qualified under the Public Accountants and
Auditors Act (instances include where he is declared bankrupt and loss of requisite
qualifications); second where he resigns and lastly where he is removed by an
ordinary resolution.

Section 193 regulates the removal of an auditor from his office; (1) the ordinary
resolution must be passed at a general meeting; (2) 35 days notice of the intention
to move such a motion must be given to the company; (3) the company must send a
copy of the notice to the auditor- he has the right to be heard; (4) the company then
gives 21 days notice to its members for the meeting; (5) the auditor must be allowed
to speak at the general meeting or make written representations i.e. defend himself
– right to be heard; (6) where a resolution is passed removing the auditor, the
auditor is entitled to remuneration up to the termination of his appointment.

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 CHAPTER ELEVEN: Company Accounts and Auditors
(A selection of past questions)
-----------------------------------------------------------------------------------

1) What is the principal duty of auditors of a company? (5marks – Dec 2001,

Dec 2002).
2) What standard of skill and care must an auditor exercise in carrying out his
duties (5marks – Dec 2001, Dec 2002).
3) Describe the manner in which an auditor must conduct himself or herself
whilst acting in the performance of his or her duty. (4marks - June 2012)
4) What are the statutory provisions relating to:
 The qualification of an auditor (2marks – June 2005, Dec 2011)
 The removal of an auditor (8marks – June 2005 Dec 2011).
5) When does an auditor cease to act as such? (5marks – Dec 2001 & Dec
2002).
6) Which persons are qualified to be appointed as auditors in Malawi? (2marks
– Dec 2001 & Dec 2002).
7) What rights do auditors have? (6marks – Dec 2001 & June 2008).
8) Give five statutory duties and powers of auditors. (5marks – June 2003, June
2004, June 2005, June 2007, June 2008, Dec 2011, June 2012).
9) ITL once a successful company has suddenly gone into liquidation. The
shareholders set up a commission of inquiry headed by a High Court judge.
The inquiry has revealed that the auditors of the company never followed up
or investigated clearly suspicious transactions conducted by the company
directors.

Required:- Advise the liquidator on:-

 The liability, if any, of the auditor (2 marks Dec 2011)
 The remedies, if any, available to the company (3 marks Dec 2011)

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 CHAPTER TWELVE: Company Liquidation

11.1 Introduction

The existence of a company is brought to an end by winding up and, ultimately,

dissolution. ‘Winding up’ which is synonymous, and is here used interchangeably,
with ‘liquidation’ is a process whereby a company’s property and assets are identified
and realised to pay off its debts and the surplus, if any, distributed among the
company’s members in accordance with their entitlement under the memorandum or
articles. Thereafter the company is formally dissolved i.e. struck off the registrar of
companies. The terminology in English law is that a company does not go bankrupt
but an individual; a company may be insolvent and go into liquidation.

The process of liquidation is governed by the Companies Act 1984 and Companies
(Winding-up) Rules, 2010.

11.2 Types of Winding Up

According to section 204 of the Act, there are two modes of winding up namely
compulsory, which is done by a court order and voluntary which does not require a
court order. We shall now discuss these modes one after the other.

Compulsory Winding Up

As earlier stated, compulsory winding up is effected by a court order. We must then

turn to persons who can apply for such an order (section 212):-
1. The company itself, meaning the general meeting;
2. Any creditor of the company;
3. A member or representative of a deceased shareholder or trustee in
bankruptcy of a bankrupt member;
4. The Attorney General;
5. The liquidator appointed in a voluntary winding up.

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The above persons cannot obviously apply for the winding up of the company
without reasons. There must be grounds for compulsory liquidation in section 213
such as:-
1. Where a company passes a special resolution to that effect;
2. Where the number of members falls below two;
3. Where a company does not commence business within a year or suspends
business for a whole year;
4. Where a company is unable to pay its debts;
5. Where, in the opinion of the Court, it is just and equitable;
6. Where the period fixed for its duration expires or an event for its
termination occurs;
7. If the business or objects of the company are unlawful;
8. If the company is being operated for illegal purposes;
9. If the company has persistently failed to comply with any provisions of the
Companies Act.

Notes on the grounds for compulsory winding up

(a) Temporary suspension of business is not ground enough for compulsory winding
up per Re Middlesborough Assembly Rooms Co. Ltd [1880] where a company
was formed to build and use assembly rooms. Due to a depression in the trade,
building was suspended for 3 years. The company intended to resume its
operations when business prospects improved. It was held that shareholders’
petition for compulsory winding up would be dismissed.

(b) According to section 213 (3) a company will be deemed to be unable to pay its
debts in three situations:-
(i) If a creditor who is owed by the company more than K100 serves on it
a written demand for payment of the debt and it neglects, within the
next 21 days, either to pay or to secure or compound the debt to his
reasonable satisfaction. In the matter of Kumchenga Industries
Limited, the company owed the applicant about K80,000.00. He served
on the company a notice demanding payment of the money which the
company did not honour in 21 days and when the applicant later
petitioned the court for compulsory winding up, his petition was
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 granted. However, if the company bonafide disputes the debt, it will
not be held to have neglected to pay the debt;
(ii) If a creditor obtains judgment against the company and execution in
his favour is returned unsatisfied in whole or in part;
(iii) If taking into account its contingent and prospective liabilities, it is
proved to the court’s satisfaction that it is unable to pay its debts.

(c) Just and Equitable [Section 213(1)(f)]

A member of a company may apply for compulsory winding up of a company on
the ground that it is just and equitable for the court to order it. Following are
situations deemed just and equitable to wind up the company:-
(1) Where the main object of the company has failed;
(2) Deadlock in management;
(3) Where a company is formed for fraudulent purposes;
(4) Where a company never in fact has any business or property;
(5) Where a director who has voting control refuses to hold meetings,
produce accounts or pay dividends.

However this remedy is discretionary – i.e. if there is an alternative remedy the

court will resort to it. See In the Matter of Mapanga Estates Ltd [1988] and
Ibrahimi vs Westborne Galleries.

Consequences of the commencement of the compulsory winding up

1. After the petition is presented, the court is empowered to appoint the official
receiver or a provisional liquidator until the winding up order is granted;
2. The company or a member may apply to court for a stay order in respect of
action pending against the company;
3. Unless the court orders, any disposition of the company’s property and any
attachment, sequestration, distress or execution against its estate are void;
4. The winding up order must be served on the Registrar, the Company
Secretary, Receiver or Liquidator if any;
5. No proceedings may be commenced or continued against the company
without Court’s consent;
6. Property of the company vests in the liquidator;
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 7. Every correspondence, letters, invoices etc must bear the expression “In
Liquidation”;
8. Director’s control ceases – it is transferred to liquidator;
9. Contracts of employment will automatically come to an end;
10. The company must prepare a statement of the company’s affairs and submit
it to the Liquidator. The statement must contain:- particulars of the company’s
assets, debts and liabilities; names and addresses of its creditors; securities
held by each creditor.

Note that the liquidator must submit a report to the High Court showing the amount
of company’s capital, the estimated amount of its assets and liabilities etc.

Voluntary Liquidation

According to Section 245 a company may be wound up voluntarily in the following

circumstances
(1) When the period, if any, fixed for the duration of the company has expired
and an ordinary resolution is passed.
(2) If the company so resolves by special resolution.

Voluntary liquidation is further broken down into two types – members or creditors.

Voluntary Liquidation by Members

This takes place where members opt to make a written declaration of the company’s
own solvency – where no such decision is made the winding up will be creditors
voluntary winding up.

Directors must make a written declaration that they have fully examined the
company’s affairs and are of the opinion that it will be able to pay its debts and
liabilities within 12 months of the commencement of the liquidation. A statement of
affairs must be attached to the written declaration containing the following: assets of
the company and their value; liabilities of the company and expenses of liquidation.

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Factors giving effect to the declaration are that:-
a) The decision must be made by the Board of Directors;
b) Five weeks before the general meeting sanctioning the winding up; and
c) The declaration must be registered with the registrar before the general
meeting.

The function of the declaration is to assure creditors that their monies will be repaid
and as an advantage to the members, they may appoint a liquidator themselves.

Voluntary Liquidation by Creditors

This takes place where members do not make a written declaration of the company’s
own solvency. A general meeting is convened and a special resolution is passed.
Creditors are given 7 days notice of a creditors’ meeting in the Gazette or local
newspaper. The creditors meeting must be attended by at least one director and the
company secretary to present a statement of affairs. It is usual for the creditors to
appoint a liquidator.

There are two effects of voluntary winding up according to section 247:-

(1) The company ceases to carry on business, except so far as in the opinion of
the liquidator is required for the beneficial winding up thereof; and
(2) Any transfer of shares without the liquidator’s sanction or alteration of a
member’s status is void.

Commencement of liquidation

Voluntary winding up is deemed to commence upon passing the resolution, while

compulsory winding up is deemed to commence upon the presentation of the
petition to the court.

The procedure to be followed after passing the resolution to wind up a company

voluntarily [S. 245(2)] is as follows:-
1. The company must deliver a copy of the resolution to the Registrar within 7
days;
2. The registrar must publish the resolution in the gazette within 14 days.
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11.3 The Liquidator

Upon commencement of winding up proceedings, directors’ control of the company

ceases and passes over to the liquidator.

Functions and powers of the liquidator

(1) To identify and realise the company’s assets;

(2) To settle the company’s debts and repay the remainder to members;
(3) To carry on the business of the company to the extent necessary for the
beneficial winding up of the company;
(4) To apply to court for the appointment of a special manager to assist him;
(5) To bring and defend actions on behalf of the company;
(6) Draw, accept, make and endorse any bills of exchange in the name of the
company;
(7) Raise on the security of the assets of the company any money requisite;
(8) Appoint a legal practitioner or an agent to do things which he cannot himself
do;
(9) To take out letters of administration of the estate of any deceased member or
debtor;
(10) To join bankruptcy proceedings against a member or a creditor.

The following persons are disqualified from acting as a liquidator:-

i. A body corporate;
ii. Infants or persons under legal disability;
iii. Persons prohibited by court order;
iv. An undischarged bankrupt, except with the leave of the court;
v. A director or other officer of the company, except with the leave of the
court.
vi. A person convicted of an offence involving fraud or dishonesty at any
time;
vii. A person removed from the position of a trustee by a court at any time.

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Note that an auditor of a company may be appointed its liquidator and any defects
subsequently discovered in the appointment or qualifications of a liquidator do not
affect the validity of his acts.

Protection of Company Property

When liquidation is pending or has commenced, there is danger that the assets of
the company may be abused. The law puts up various mechanisms to counter such
abuse:-
 Once the winding up process commences, directors lose their control over
company property, the liquidator gains custody and control;
 Any disposition, attachment, sequestration, distress or execution after
commencement of the liquidation is void;
 It is a criminal offence to breach the Companies Act e.g. giving false records
to the liquidator etc;
 Section 289 renders invalid any floating charge on the company property
created within 12 months before commencement of winding up – if the
company was insolvent. The purpose is to prevent an unsecured creditor from
unfairly gaining priority over other creditors through such a charge;
 The liquidator must claim any excess in a sale by company officers of
property at an excessive price or buying from a company at an undervalue;
 The liquidator is allowed to disclaim any property which is onerous i.e. which
is more of a liability than an asset.

Liability of Members

If the assets of a company on winding up are not enough to settle liabilities,

members will be called upon to contribute to the company’s assets only if such a
member’s shares are not fully paid for. This we said is the concept of limited liability.
If the company is limited by guarantee, contribution is limited to the amount
undertaken or pledged or promised or guaranteed. Past members liability is limited
to debts incurred while they were members and the company is wound up within a
year of their ceasing to be members.

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Payment of Debts

The major function of the Liquidator is to pay off the company’s debts – however
before a debt is paid, it must be proved against the company

Proof of debts will be done on a date set by the Court or the liquidator. A creditor
must swear an affidavit verifying each debt showing particulars of the debt e.g.
receipts/vouchers etc. He must indicate whether the debt was secured or not. If he
fails to prove his debt until after a final distribution of the company’s assets, the debt
is not payable by either the company or its members.

Order for the Payment of Debts

The general rule is that all debts rank in pari passu. There however two exceptions as
follows:-

The first exception is that secured creditors are entitled to payment out of their
securities in priority to all the other creditors. As observed earlier on, once winding
up proceedings commence, a receiver will be appointed to realise the security and
pay off its holders. A secured creditor may do any of the following:-
(1) Surrender his security and prove for his debt like any other creditor;
(2) Rely on the security and not prove his debt at all;
(3) Realise the security and prove as an unsecured creditor for any balance;
(4) Value the security and prove for any balance.

The second exception is that after secured creditors have been paid off, surplus is
available to unsecured creditors and members of the company. However, unsecured
creditors do not rank pari passu. The Companies Act provides that points 1 to 3
below are preferential debts:-
1. costs and expenses of liquidation;
2. wages in respect of 12 months before commencement of winding up;
3. tax, duty, or rates payable by the company to the government;
4. unsecured non-preferential debts:
(i) Ordinary bank overdrafts;
(ii) Short term debts;
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 (iii) Any part of a secured creditor’s debt that remains unsatisfied after
the realisation of his security.
5. shareholders according to entitlements under the articles:
(i) Preference Shareholders;
(ii) Ordinary Shareholders;
(iii) Deferred Shareholders.

Liquidator’s Release

At the end of the liquidation process, the liquidator must prepare an account of his
work to be laid before the general meeting and the creditors meeting. After the
meetings he must send to the registrar for registration a return showing that the
meetings were held. Once the registrar receives the return, he will strike the
company’s name off the register and publish notice in the Gazette to that effect. The
company dissolves from the date of the publication of the notice. The liquidator
applies to Court for a release order which if granted gives him immunity from any
subsequent claims.

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 CHAPTER TWELVE: Company Liquidation
(A selection of past questions)
-----------------------------------------------------------------------------------
1. On what eight grounds may a court order the winding up of a company? (8
marks – June 2000, Dec 2000, June 2001, Dec 2002, June 2004, June 2007,
June 2008, Dec 2008, Dec 2010, June 2011, June 2012).
2. State eight statutory grounds for winding up of a company by the court.
(8marks – Dec 2004, Dec 2005, Dec 2006).
3. Mention five circumstances under which a court may order the winding up of
a company (10 Marks- Dec 2012)
4. Which persons may petition a court to wind up a company? (5marks – June
2001, Dec 2001, Dec 2002, June 2004, Dec 2005, June 2007, June 2008, Dec
2010, June 2012).
5. On whose application can a registered company be wound up compulsorily
by a court order? (5marks – June 2000, Dec 2003, Dec 2004 & Dec 2008).
6. Under what circumstances shall a company be deemed to be unable to pay
its debts? (5marks – Dec 2000, Dec 2002, Dec 2003, Dec 2006, June 2011).
7. Section 213(3) of the Companies Act, 1984 outlines the circumstances under
which a company is deemed to be unable to pay its debts – discuss these
circumstances (6 marks – Dec 2000, Dec 2008, Dec 2012).
8. How does voluntary liquidation differ from compulsory liquidation with regard
to their mode of commencement (2 marks- Dec 2000)
9. State five occasions on which the Court will exercise its powers to wind up a
company on the ground that it is just and equitable to do so. (5marks – Dec
2002, Dec 2003, Dec 2006, June 2011, Dec 2012).
10. State the circumstances under which a company may be wound up
voluntarily. (2marks – June 2003, June 2008, June 2012).
11. What is the procedure to be followed upon the passing of a resolution for
voluntary winding up of a company? (2marks – June 2003, June 2012).
12. At what time is a voluntary winding up of a company deemed to commence?
(2marks – June 2005, June 2012).
13. What is the effect of the commencement of voluntary winding up of a
company? (4marks – June 2005, June 2012).
14. Where it is proposed to wind up a company voluntarily the directors of the
company shall make a declaration to the effect that they have made full
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 inquiry into the affairs of the company and have formed the opinion that the
company will be able to pay its debts and liabilities in full. To the declaration
must be attached a statement of affairs of the company.
Required:-
(i) What should the statement of affairs show (3marks – June 2005, June
2012).
(ii) What factors will give effect to the declaration? (3marks – June 2005,
June 2012).
15. Due to stiff competition posed by imported second hand clothes popularly
known as ‘Kaunjika’ on the textile market, Town Fashions Ltd was forced to
wind up voluntary. One of the requirements for voluntary winding up of a
company is that directors of the company should make a declaration to the
effect that they have made full inquiry into the affairs of the company and
have formed the opinion that the company will be able to pay its debts in
full. To the declaration must be attached a statement of affairs of the
company.

Required:

 What should the statement of affairs show? (3 marks)

 What factors will give effect to the declaration (5 marks- May 2008)

16. Mkontho Brewaries Ltd (MBL) was incorporated more than a decade ago. As
its name suggests, the idea behind its incorporation was the production of
opaque beer and almost the raw materials used was wheat, all of which was
being imported from the neighbouring state of Bushland. Owing to a civil war
that had later pervaded the state of Bushland, it became impossible to import
any more wheat from there. As there was no alternative, MBL was forced to
close until such time that it would be more feasible to import wheat from
Bushland.

Fifteen months after the closure of MBL, one of its vocal shareholders, Mr
Kabichi Gama, decided to petition for MBL’s dissolution on the grounds that it
had ceased carrying on business for more than one year. He has come to you
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 for advice on whether he has sufficient basis to petition the winding up of the
company.

Required:- Give him the necessary advice. (6 marks- June 2000, Dec 2005, Dec
2010)

17. Chozemba was a director of Mahewu Ltd. He misappropriated a large amount

of company funds by making false entries into the books of accounts. The
auditor of the company, Maseko, was informed of this but made no
investigations. As a result of this, the company declared dividends which it
would not have made had the auditor acted otherwise. The company has now
gone into liquidation.

Required: Advise the liquidator. (6 marks- June 2003, June 2006)

162 Company Law for ICAM Students by Allan Hans Muhome LLB (Hons) Mw
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 COMPANY LAW
For ICAM students
List of important cases

I. Formation of a Company
(a) Erlanger vs New Sombrero Phosphate Co.
(b) Tywross vs Grant
(c) Gluckstein vs Barnes
(d) Nali Farms Ltd & Kholomana vs National Seed Co.

II. The Constitution of a Company

(a) Ashbury Railway Carriage Co. Ltd vs Riche
(b) Re Duncan Gilmour and Co. Ltd
(c) Hickman vs Kent
(d) Rayfield vs Hands
(e) Ely vs Positive Government Security Life Association

III. The Legal Status of a Registered Company

(a) Salomon vs Salomon
(b) Naidoo vs Mazi Import and Export and Tchongwe
(c) Macaura vs Northern Assurance Co. Ltd

IV. The Management of a Registered Company

(a) Steinberg vs Scale
(b) Carruth vs Imperial Chemical Industries

V. Company Directors
(a) In Re City Equitable Fire Insurance Co
(b) Re Brazilian Rubber Plantations and Estates

VI. Corporate Liability

(a) British Royal Bank vs Tarquand (Tarquand’s case)
(b) Lernnard’s Carrying Co. Ltd vs Asiatic Petroleum Co. Ltd
(c) Hely-Hutchison vs Brayhead Ltd

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VII. Majority Rule
(a) Foss vs Harbottle
(b) In the Matter of Mapanga Estates Ltd

VIII. Company Finance – Share Capital

(a) Borlands Trustee vs Steel
(a) Moxham vs Grant
(b) Trevor vs Whitworth

IX. Company Finance – Loan Capital

(a) Re Yorkshire Woolcombers Association
(b) Indefund vs Manguluti
(c) Sedom vs Gep Shoe Co. Ltd and Indefund
(d) Aluminium Industrie Vaasen vs Romalpa Aluminium (Romalpa case)

X. Company Accounts and Auditors (No case)

XI. Company Liquidation

(a) Middleborough Assembly Rooms Co. Ltd
(b) In the Matter of Kumchenga Industries Limited
(c) Ibrahimi v Westborne Galleries

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