Winjie Siwale BCom.

LLB (Rhodes) LLM (UWC-Humboldt)

Company law and Procedure – mr bwembya

Lecture 1
We will be examined on provisions identical to provisions in the current Act.
TAKE A KEEN INTEREST TO UNDERSTAND THE UNDERLYING FACTORS THAT HAVE LED TO
THESE REFORMS. THESE ARE EXAMINABLE.

Company law obviously is about companies. So, what is a company?

Most scholars agree that there is no precise definition but have come up with a
working definition:

“A continuing regulated and formal association of two or more persons, natural or

legal who come together to undertake business or any other legal purpose.”

This def presupposes legality. The constitutive provision is section 12 of the

Companies Act No. 10 of 2017. This section is helpful as it supports scholars’ pre-
supposed legality unlike Sec 6 of Cap 388 which was a shortcoming of legislative
drafting.

There are other forms a business can take:

• Partnerships as formed and created in according to the Partnership Act of 1890;

• Sole Traders
• Cooperative society formed and managed collectively for socio-economic
benefit
• Clubs and societies

There are certain factors that may influence your advising on whether to form a
company:

I. Size of the business – whether the undertaking is large may be an influencing

factor in deciding that the corporate form may be better. A large enterprise may
opt to do so because:
➢ Prospects of capital raising eg through issuing debentures, bonds
II. Nature of the activity – eg if a client wishes to establish an entity which would
thrive behind personal attributes of shareholders, have money but no

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

knowledge about mining for example, then a company is a better option as they
can appoint knowledgeable people as directors and managers.
III. Duration of the activities – some are for a fixed duration for a specific task in
which case a company may not be the best option as there is an assumption of
a going concern concept and perpetual succession. A partnership would be
better so that it dissolves
IV. Regulatory framework – there could be some regulatory provisions which
demand that certain activities cannot be undertaken by companies and vice-
versa. Eg the Legal Practitioners Act does not allow lawyers to incorporate and
operate as companies for the reason of holding the parties personally
accountable for the opinions and advice given to clients. Neither does the
Accountants Act but must be partners instead.
V. Legislation and government Policy – e.g. Taxation Legal Framework may be
such that it is advantageous for a client to incorporate a company as opposed
to be a partnership. Currently, turnover tax (a tax whereby the business just
pays 3% of their sales as total tax); income tax is much more complicated in the
way it must computed, and the tax rate is higher. Partnerships are not allowed
to pay by way of turnover tax only income tax which is higher. Natural and
juristic persons can pay turnover tax.
VI. Fees applicable - the fees applicable are stipulated in S.I 53 of 2014. The higher
the capital of a company, the higher the fees – [consider this when advising
your client] (2.5% of share capital to be paid in fees).

There are however could be more factors outside the ones cited above to be
considered.

SOURCES OF COMPANY LAW

This branch of law has its sources:

The Companies Act No. 10 2017 of the Laws of Zambia is the primary Act
supplemented by other statutes such as:

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

1. The Banking and Financial Services Act which regulates companies that are in
the financial sector
2. The Securities and Exchange Commission Act which regulates Public liability
companies, ie those that sell shares to the public. Its provisions are part of
Company law
3. The Competition and Fair-Trading Act – although it essentially regulates fair
comp in the economy, it has provisions that touch on company law, eg mergers
and acquisitions require authority from the Consumer and Competition
Commission to prevent creation of Monopolies.
4. The Articles of Association of each Individual Company become part of the law
and are a source of the law.
5. The Application for Incorporation Form forms part of your consideration as
lawyer as certain aspects of the form have legal implications, eg doctrine of
ultra vires (touches on the purpose for which the company was incorporated).
MOA has been abolished in Zambia, the objects clause is now stated on this
form.
6. Case law – decisions of the courts

General propositions as to what company law seeks to achieve (Purpose):

1. The Majority rule and minority protection – to create a company as a

democratic entity in which the majority rule and make decisions, in which the
minority are protected against oppression. E.g. a company may alter its Articles
of Association by special resolution, can only be passed by 75% of majority
[section 3]
2. Investor protection – the investment put in by the shareholders needs to be
protected from misappropriation by the Directors, e.g. at common law,
Directors have a fiduciary duty, i.e. to act in best interest of the company
3. Creditor protection – shareholders can abuse their position because of separate
legal liability, limited liability concepts that may have them hide behind the
corporate veil. The law has however allowed for lifting the corporate veil under

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certain circumstances, e.g. if a company is formed as a mere sham. One of the

reasons however is to protect creditors,
➢ E.g. provision against fraudulent trading under s362 of the Companies
Act which provides that any director who contracts debt on behalf of the
company whilst aware that the company cannot pay commits an offence
and may be imprisoned upon conviction. This section creates civil
liability that such a person will be liable personally. Other methods
include provisions in the Companies which require publication of
certain info about the company.
➢ Eg s238 – requires that whenever the company borrows and provides as
collateral any of its assets, such a transaction must be registered with
the Registrar within 21 days of such a transaction occurring. This is
publicity because documents in the Registrar’s hands are open to public
domain upon paying of a certain fee.
➢ The protection of Capital – doctrine of maintenance of share capital: a
set of principles which are aimed at protecting the capital from being
diluted so that creditors’ interests are protected. This ensures that the
capital is not depleted. E.g. the law requires that dividends can only be
paid out of profits. E.g. A common law principle that the company
should never refund shareholders even if they returned their shares
unless the shares in question are “redeemable shares”.
➢ The rules or regulations on receiverships allow creditors to have a
bigger say than the shareholders and directors. When a company is
placed into receivership, the liquidator makes decisions which would
otherwise be made by directors.

Types of Companies

Can be formed either through the Companies Act or by an Act of Parliament. Statutory
companies are formed by way of an Act of Parliament to achieve certain specific social
objectives, e.g. NAPSA, and are not subject to the provisions of the Companies Act.

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

Companies formed under the Companies Act are the subject of our discussion.
Companies may be classified as follows:

Section 6 of the Companies Act provides for types of companies that may be
incorporated under this statute. It recognises two principle types:

1. Public Companies
2. Private Companies – these may further be classified into the following:
i. Private Company limited by shares
ii. Private Company limited by guarantee
iii. Private unlimited company

Public Companies

A public company is a company Incorporated as such. It is a company permitted by

law to invite members of the public to subscribe for shares in it. Characteristics:

I. Has share capital – raises its funds by sell of shares [s7(1)]

II. Has capacity to enter any business unless it is restricted by its articles [s22]
III. It is bound by its Acts even if they are contrary to its Articles
IV. Limited liability [s125] If it is wound up and its assets are insufficient to cover
its liabilities, the shareholders shall contribute the debts of the company. For
example, if X Limited is would-up and if at the time of winding-up the
shareholders had paid for their shares in full, they will have no liability to the
company. But if they had not paid in full, they will be required to contribute
to the extent of their unpaid shares [sec 7(4)].
V. Sec 7(5) prohibits public companies from restricting transferability of shares.
Shares in a public company must be freely transferred.

Private Companies Limited by Shares – [sec 9]

Represent the majority of companies on our registers. These are companies that are
formed usually for purposes of creating profit under s9 of the Act. They have limited
liability and the basis is s125 and sec 9(3).

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According to s8(1) cannot have more than 50 members, limited to 50. The rationale is
that private companies are not as regulated as public companies so that the risk of members of
the public being swindled is higher.

Private company limited by Guarantee – [sec 10]

Created by sec 10. Has no share capital, i.e. no shareholders. Not permitted by law to
carry out business for purposes of profit to its member or anyone responsible for its
management, e.g. Churches, NGOs [sec 10(6)]. It is also not allowed to invite members
of the public to apply for shares. Members are called guarantors because they
guarantee that “in the event of debt I will contribute so much”. Sec 10(3) restricts the
contribution of the members to the amount guaranteed. You become a member by
subscribing and signing form 2.

[Companies Statutory Instrument 30 of 2005 has all the Companies prescribed forms
if you need hard copies].

Companies limited by guarantee have had a practical problem whereby churches are
subject to regulation but not under the Registrar of Societies. Regulation of which has
a religious and constitutional dimension. Section 12(9) prohibits incorporation of an
entity as a company for purposes of carrying out religious or faith-based activities.

Unlimited companies – [sec 11]

Created by sec 11. This is the third type of private company. Form 4. Similar to
company limited by shares. The liability of shareholders is not limited. Sec 8(2)
provides this type of company may have more than 50 members, subject to any
specified conditions under its articles. The only reason people may form this is to
attract credit financiers by showing that members are not hiding behind the concept
of limited liabilities. [only about two on the Companies Register].

THE INCORPORATION CHECKLIST

Refers to a step that you must take in order to bring a Company into existence. The
first step is to choose a name and then consider the factors above as to whether

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forming a Limited company is the most viable option. The first contact with the
Registry is to try and seek name clearance. There is a form prepared for admin
purposes, not a prescribed statutory form. You submit three names to the Registrar
so that you are advised which of those are available for use.

You the proceed to determine what type of a Company you want to incorporate.

Sec 40 of the Act provides the circumstances under which the Registrar may refuse to
grant the name applied for such as if the name is likely to cause confusion once
registered, or it is otherwise undesirable or inimical to public interest.

Section 349(2) of the Act provides that any document filed with the Registrar for which
prescribed fees have not been paid shall be deemed to not have been filed.

There is a requirement that every company must have a registered office as per sec 28
of the Act and notify the Registrar in the prescribed manner where there is a change
in registered office. It is only at the registered office that you can duly serve court
process. The registered office must be distinguished between a records office which is
simply a notification to the Registrar as to where the documents of the Company will
be kept.

FORMS FOR INCORPORATION OF DIFFERENT COMPANIES

• Public Liability Company – The relevant form is Companies Form 1 to be

accompanied by Companies Form 5 (declaration of consent to act as Director
or Secretary). A Statutory Declaration pursuant to sec 13 of the Act - Companies
Form 11 (declaration of Compliance with the Act) [Minimum capital is K1.5mil]
• Private Limited Company – [be mindful of the nominal capital and the
minimum capital which is K15,000] the first form is Companies Form 2
(application for incorporation) accompanied by Form 5 the rationale being the
fiduciary duties placed on Director, therefore need for proof of their consent.
Companies Form 11 (declaration of Compliance – equivalent to an Affidavit).
• Private Unlimited Company – min capital is K15,000; reg fee 2.5% of nominal
Capital. Form 5 and 11 also applicable. Application form is Companies Form 4
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• Companies limited by Guarantee – this company has no share capital,

members only guarantee that they’ll contribute to the company’s debts, so fee
payable is a fixed amount as it cannot be determined based on non-existent
nominal capital. Relevant forms are: Companies Form 5; Form 11 and Form 3
(application for incorporation).

Once satisfied that forms have been duly filled in, together with the prescribed fees,
they are filed with the Registrar. The Companies Act requires that forms filed with the
Registrar must be typed and printed. Cannot fill them in pen.

Registrar will issue:

• Certificate of Incorporation which is sent by email. Once issued, it is conclusive

evidence of the existence of the Company [sec 15]. Sec 12(8) gives the
qualifications of people who can apply to form a Company.
• Certificate of Share Capital – stipulates the amount of nominal capital that the
company has and how its divided into shares.

Memorandum of Association

Traditionally, the forms for incorporation were accompanied by two documents:

Memo of Association and Articles of Association. MoA states the purpose for which
the company has been formed and there raises the issue of ultra vires. AA spelled out
the distribution of power among different parties in the company, eg voting patterns,
payment of dividends. In 1994, the Current Act dispensed the requirement to file the
MOA, only the AA was maintained which can also now stipulate restrictions of what
the company could do, as part of efforts to simplify the process for incorporation of
companies. The Application for incorporation has replaced the MOA, which
depending on the company being formed the form changes. By implication, the
common law principle of ultra vires is still applicable though modified. Secs 22-25 are
relevant to determine the status of this doctrine currently in Zambia.

Sec 25(3) provides that a company shall not carry on any business or exercise any
power in a manner contrary to its articles. It codifies the principle of ultra vires, the
effect of this at common law was null and void. The doctrine has thus not been

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

abolished by virtue of the MOA being no longer a requirement. What then is the effect
of the Directors doing anything they are restricted from doing? = sec 23(1) which
provides that no act of the company shall be invalid by reason only that its contrary
to the articles. The statute is removing the null and void effect of the doctrine of ultra
vires at common law, but still holds the company bound. Rationale is to protect
innocent third parties who are dealing with the company.

If the directors are acting in an ultra vires manner, it’s up to the shareholders to deal
with the Directors and not disadvantage innocent third party.

The doctrine of ultra vires was based on one assumption – the doctrine of constructive
notice which was to the effect that any document filed with the Registrar is deemed to
be in the public domain.

Sec 24 provides that even if a document is filed with the Registrar no person will be
presumed to know, unless s/he has actual knowledge. It thus abolishes the doctrine
of constructive notice in Zambia. It is aimed at protecting innocent third parties who
have no knowledge of a defect in the Directors’ powers not a party who has actual
knowledge that the directors have no power to do what they’re doing.

Articles of Association

Sec 25(1) of the Act provides that a company shall have articles regulating the conduct
of a Company

Sec 25 (7) “A company may adopt the Standard Articles set out in the Schedules or
any specified regulation therein.”

Sec 26(1) of the Act says that once a company is incorporated, the incorporation creates
a contract between the members and the company, as well as amongst the members
inter se. This is a statutory contract. The terms of the contract are contained in the
articles of association. Similarity with standard contract:

• Privity of contract – need to be a party to the contract to enforce a provision in

the articles or bring an action. You thus need to acquire shares to do so.

Difference:

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• Enforcement of the provisions is restrictive, can only be done in the capacity as

a member. E.g. Beattie v Beattie Ltd 1938 Chancellor Division 708 – the plaintiff
was both a shareholder and a director. Provision in the articles said that if there
is a dispute between a shareholder and the company, matter must first be
referred to arbitration. There was a dispute between him and the company, in
his capacity as director. He raised the provision in the articles, but the court
refused because the matter related to him in his capacity as director and not as
shareholder.
Elley v Positive Government Security Life Assurance Company Ltd 1876 Exchequer
Division 88 – prov in articles which stated that plaintiff was going to be the first
Solicitor of the Company and would remain so for the rest of his life. He was
also a shareholder. The other shareholders passed a motion to have him
removed as solicitor. He invoked the provision, but court held that you can
only bring an action as member qua member.
• Need of consent of the parties to alter the contract. Members can by special
resolution amend the terms, all you need is a majority as opposed to requiring
everyone.
• New parties cannot negotiate the terms of the contract because the articles have
already been determined, have to negotiate with the other parties.

The Articles of Association can contain all sorts of things because of dispensing of the
MOA which has been replaced by the Incorporation Forms.

NB: the application for incorporation forms have some historical significance. Sec
27(1) says the articles can be amended but these forms cannot be amended even if you
decided to change your nature of business. They shall remain as when the company
was incorporated. All you do is file a notice by way of a letter that we would like the
objects of the company to be updated. You will not file in another form 2 for example.

POST INCORPORATION PROCEDURES

Once the company is incorporated it is NB that the Shareholders hold their first
meeting in which they have to make decisions on the way the company is to be
governed. In the previous Act, there was a requirement for a mandatory meeting to

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

be held after incorporation and have their minutes filed with the Registrar. This has
however been omitted in Cap 388, which has been identified as a gap in the Act.

The company will need to make certain decisions that have far reaching implications,
known as Shareholders Agreement. Cannot put everything in the articles because it
has disadvantages such as:

• Need to be filed with the registrar – makes them public documents unlike the
SHA which remains private.
• Can easily be amended by majority, binding on those who are privy to it. A
SHA needs consent of all the parties to be amended.

At common law, a company could not ratify contracts entered by promoters before
the company was formed. (Baxter)

Sec 20(3) provides that a company can ratify contracts entered before it was
incorporated provided:

• Contract was reduced to writing

• Ratification must have taken place within 15 months of its incorporation

Once a company has been incorporated, statutory requirements are:

• The filing of annual returns with the Registrar – a document which gives the
status of the company as at the date of its submission in terms of basic
information such as how its shareholding is, its registered office, who the
directors are as at the date of filing, etc. failure to do so may result into the
company being struck off the Register for non-compliance. Sec 270 provides
that a company must file within three months at the end of its financial year. It
dispenses with the extra month given to companies that did not have an AGM
under Cap 388.
• Notification of changes - Any change must be filed with the Registrar as far as
the registered particulars are concerned within the period prescribed. E.g. Sec
27 allows amendment of articles by special resolution, gives period of when
changes must be filed.

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CONVERSION OF A COMPANY FROM ONE TYPE TO ANOTHER

Part V of the Act provides for this. Secs 48-55 are called conversion provisions because
each of these sections provides for a particular conversion. Sec 54 is a general
provision applicable to all manner of conversion. The procedure to be followed is thus
dependent on the type you are converting to. Sec 54 would then take you what general
steps to take.

1. Conversion of a Private company limited by shares to a Private Company

Limited by Guarantee – sec 48 provides that:
a) There should be no unpaid liability on any shares. The shareholders must
satisfy themselves that none of them is still owing on his shares.
b) The members must agree in writing to such conversion. This seems
problematic in the sense that logically, an amendment of the articles is what is
required to convert the company. Sec 27 of the Act deals with amendment of
the articles, which can be done by way of special resolution. Sec 3 defined
different types of resolutions, a special resolution however, is one passed by
members in a special meeting where 75% of the members are in favour of the
resolution. One the wonders why all the members must agree in writing when
a 75% majority would suffice to amend the articles. So, what then should they
put in writing when it is clear that to make any decision it is by resolution?
c) The members must pass a special resolution amending the articles in order to
satisfy the requirements of sec 10, which is the provision that creates a
company limited by guarantee.
d) Each member must make a declaration of guarantee specifying the amount
s/he undertakes to contribute to the assets of the company in the event of the
company being wound up.

Once the members have satisfied the above, they must then satisfy sec 54 which
requires that within 21 days after passing of the resolution and putting it in writing,
the company must file with the Registrar an application in the prescribed form. Upon
receipt of the application, the Registrar will issue the Company with a new Certificate,

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

a Replacement Certificate of Incorporation, stating the name that it was, what it now
is, and the date of incorporation.

2. Conversion of a Private Company Limited by Shares to an Unlimited Company

– sec 49
a) Members are required to agree in writing to its conversion
b) Must pass a special resolution
c) Satisfy the provisions of sec 54
3. Conversion of a Private Company Limited by Guarantee to a Company Limited
by Shares or an Unlimited Company – sec 50: provides for two scenarios
a) Members agree in writing
b) Pass a special resolution
c) Members must state the share capital of the Company and how its divided into
shares. Each member must agree in writing to take up the specified number of
shares
4. Conversion of an Unlimited Company to a Private Company Limited by Shares
Sec 51
5. Conversion of a Public Company to a Private Company Limited by Shares Sec 52
Section 52 provides that, “a public company may be converted into a private
company limited by shares if a special resolution is passed that: -
a) approves the conversion; and
b) amends the articles to satisfy sections 8 and 9, if the company’s articles do not
satisfy those sections.”
6. Conversion of a Private Company Limited by Shares to a Public Company – sec
53
Note that it is only a private company limited by shares that can be converted into
a public limited company. Therefore, a private company limited by guarantee or
unlimited company cannot be converted into a public limited company.

Legal Effect of Conversion

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Section 54(5) of the Act provides that, “the conversion of the company under this
section shall not alter the identity of the company, nor affect any rights or obligations
of the company except as mentioned in this section, nor render defective any legal
proceedings by or against the company.”

This means one cannot use the medium of conversion to run away from legal
obligations/ liabilities incurred under the old type of company. If it had any actions
before court, it can still pursue those because a company has perpetual succession, the
entity is a going concern even if it changes its form. In sec 42, a Company may change
its name by passing a special resolution to alter its articles.

Membership of a Company

It was dealt with in Part III of Cap 388. Section 45 of the Act required that for a
company with capital, the members should be shareholders or stockholders (same
thing), but an argument sometimes, could be raised as to whether the use of the name
member meant that a member was automatically a shareholder. The truth is that a
person could be a member but not a shareholder. E.g. section 69 of Cap 388 created an
instrument known as a share warrant. A member by definition is a person who is on
the register of members. The share warrant is an instrument created by the law to
enable shareholders to be able to easily transact using their shares and convert them
into money easily. A share warrant is a negotiable instrument, i.e. any document
whose title is transferable by delivery only. Whoever is in possession of the document,
is a shareholder entitled to all rights of shareholders such as dividends. This person is
not supposed to be entered on the register of members because this instrument
changes hands quickly. He is a shareholder but not a member, therefore caution
should be exercised to using the terms interchangeably.

The provisions of section 190 provide for the transmission of shares by operation of
law which supports this argument. It provides that in the event of death of a
shareholder, the shares of the deceased shareholder, are automatically transferred to
his personal representative without any procedure by operation of law. The PR
becomes a shareholder but not a member until he puts himself on the register of
members.

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Ways of becoming a member

I. By subscribing to the incorporation forms. These are known as founding members

and more often than not, these are the people who were taking the necessary steps
to bring the company to life.
II. By allotment of shares in the company – allotment arises from the company
passing shares to someone after it has been incorporated, thereby, making this
particular person a shareholder.
III. By transfer of shares – transfer of shares means an existing shareholder passing
some or all of his shares to another person.
IV. By transmission of shares by operation of law – occurs where an existing
shareholder dies, and the personal representative automatically becomes the
shareholder without following any formalities.

How to Cease being a Member

A person ceases to be a member when removed the register for any of the following
reasons:

1. When a member transfers all his shares to another person

2. By forfeiture or surrender of shares – a forfeiture of shares is a compulsory
confiscation of shares by the company for non-payment. The Companies Act
now provides for forfeiture and surrender of shares under section 148. This
however, is to be done in accordance with the articles. It is therefore, imperative
that drafters of the articles of association must bear this in mind and provide for
the forfeiture of shares. If you are a company that has adopted the standard
articles, they will provide for this. There are common law principles associated
with forfeiture of shares: In order for a company to successfully confiscate shares
for non-payment, there must be evidence that the directors made a call, i.e. notice
to shareholders that they need to pay a specified amount, made in the manner and
form prescribed by the articles. This is to protect shareholders from losing their
shares in an unfair manner. The conditions attached to the call must be uniform
for all shareholders in that class. If a forfeiture is validly done, then the company
can confiscate the shares and the person ceases to be a member.

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Surrender on the other hand, is when a person voluntarily hands away his
shares to the company. Care must be taken when dealing with surrender of shares.
It is trite law that a company must never ever return money paid for shares to its
shareholders, even a shareholder who surrenders shares must not be refunded.
This is because it would be a dilution of the share capital and an abrogation of the
doctrine of Trevor v Whiteworth. The company can only refund a shareholder if the
shares were originally issued as redeemable shares in accordance with sec 176.
These are shares which are issued so that the shareholder is only one for a fixed
period of time – maybe as a capital raising venture.
3. When a member dies – shares automatically transmitted to personal representative
4. When the company is dissolved – all members cease to be members.
5. When a member becomes of unsound mind – sec 12(8)(c) of the Act sets out that
people of unsound mind cannot be shareholders.
6. Sale of shares to another person – vendor ceases to be a shareholder.

SHARE CAPITAL AND SHARES

This is provided for under Part IX of the Act. Share Capital refers to the following:

a. Funds provided by the shareholders,

b. funds borrowed by the company,
c. the assets bought using those funds

Share capital is one of the peculiar features of companies which are limited by shares
as opposed to companies which are limited by guarantee, Section 12(5) of the Act
provides that, “where a company being incorporated is required to have share capital,
the applicant shall state on the application for incorporation the:

a) amount of share capital of the company;

b) division of the share capital into shares of fixed amount; and

c) number of shares each subscriber agrees to take.”

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Nominal or Par Value Shares

Statutory Instrument 53 prescribes the minimum nominal capital for different

companies, set in fee units which are determined by the Minister of Finance. Currently
the fee unit is 0.30 ngwee. The division of the share capital into shares to each
subscriber is the par value. It has been argued that the par value is no longer necessary
because when selling shares consideration is given to the market value.

Once the company has stated its par value, shares must never be sold below the par
value. When you divide the share capital into shares of a fixed amount of say K1 or
K5, the shares will give rise to par value or nominal value of each individual share.
For example, 10,000,000 shares divided into K1 nominal value or par value. The
common Law rationale for this requirement for nominal value was stated in Ooregum
Gold Mining Co. of India Ltd v Roper & Wallroth (1892) AC 125 – shares must never
be sold at a discount, that is, below the par value.

SHARE CAPITAL

Authorized or nominal share capital - This is the total amount of authorized Capital
that the Company is allowed to issue, and which is stated on the form of
incorporation. Authorized capital implies that the company would not be permitted
to issue shares in excess of the authorized share capital unless allowed to increase the
share capital. This means alteration of the share capital, which entails creation of new
shares by passing a special resolution.

Issued or allotted share capital – this is the capital which is actually issued to
members. It represents the nominal value of shares which are appropriated to the
shareholders. The capital clause in the Incorporation Form is significant in that it
specifies the maximum number of shares that can be allotted at any given time and it
is thus a limitation on the company’s power of allotment of shares.

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Authorized (or nominal)

share capital (K5
million) C

Issued share capital Unissued share capital

(K2.5 million) A (K2.5 million) B

Issued & Paid (K500,000)

Issued but unpaid
A1
A1 + A2 + B = C
(K2,000,000) A2

Once the company is incorporated, it does not mean that the capital will remain static;
the company may want to increase or even want to change the value of each share.
The Companies Act provides for alteration of share capital and reduction of share
capital.

Alteration

Section 140 provides that a company may unless its articles provide otherwise, by
special resolution alter its share capital by doing the following:

i. By increasing the share capital - by way of adding new shares of such amounts
as the Company finds expedient
ii. consolidating and dividing all or any of its share capital into shares of a larger
amount than its existing shares. e.g. share capital is 20,000 divided into shares
of K1 each, can choose to consolidate into shares of larger amounts such as K2
to make the shares 10,000. Nothing has been done to change the share capital.
iii. converting all or any of its paid-up shares into stock, and re-converting that
stock into paid up shares of any denomination
iv. subdividing its shares, or any of them, into shares of smaller amounts than is
stated in the certificate of share capital;
v. cancelling shares which, at the date of the passing of the resolution, have not
been allotted to any person, and diminishing the amount of its share capital by
the amount of the shares so cancelled. [this is not a reduction even though the

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capital would be reducing, because the decision to cancel shares which have
not be allotted is not to the detriment of the creditors. The liability is limited to
the amount not paid on the shares as per section 125]

Reduction in share capital

Provided for under section 150. At common law, the company could not reduce its
share capital for the sake of protecting the interests of the creditors. But, it does not
make commercial efficacy, that’s why by statutory intervention section 150 comes into
play.

Reduction is something the law approaches very cautiously because shareholders can
abuse the concept of separate legal liability by borrowing in the name of the company
so that when it winds up they have no liability. It is not as easy as alteration. Section
150 outlines the circumstances and procedure to be followed.

Subject to confirmation by the court, a company may if so authorized by its articles

and by special resolution reduce its share capital in any way, and in particular,
without prejudice to the generality of the foregoing power, may:

(a) extinguish or reduce the liability on any of its shares;

(b) either with or without extinguishing or reducing liability on any of its
shares,
i) cancel any paid-up share capital which is in excess of the wants of
the company;
ii) pay off any paid-up share capital which is in excess of the wants of
the company; departs from the common law limitation placed by
trevor v whiteword that a company must never refund a shareholder.
(c) Accept the surrender of shares by any of its shareholders

and may, if and as far as is necessary, reduce the amount of its shares accordingly
except that such share capital shall not be reduced below the prescribed minimum.

Sec 150(12) gives the court wide powers to even call creditors who may have
objections to the reduction. Section 150(14) provides circumstances when the High

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Court may dispense with this requirement for creditors to object to reduction of
capital, i.e.

a) Where the company has admitted a claim or particular debt and has made
arrangements to settle the claim or debt in full as such a creditor’s interest
shall have been taken care of;
b) Where the company does not admit the claim or debt but the Court itself
proceeds to fix the amount due after adjudication, as the Court would have
taken care of the interest of the creditor.

The Powers of the Court (section 150)

The order confirming a reduction may require that once the company has been
issued with a replacement certificate of share capital pursuant to section 151(2)(b) of
the Act, it should publish an appropriate notice announcing the reduction in capital.
By section 151(2), “where the Court makes any such order it may, if for any special
reason it thinks it proper so to do, make an order:
a) Directing that the company shall, during a period specified in the order, add
to its name as the last works thereof the words “and reduced”, or
b) Requiring the company to publish
i) a notice of the reduction in the prescribed form on receipt of the
replacement certificate of share capital; or
ii) reasons for the reduction or such other information in regard thereto as
the Court may think expedient with a view to giving proper
information to the public.”

The adding of the words “and reduced” is a warning to the members of the public
that there have been some changes in the share capital.

Reduction requires court confirmation and a creditor may object to the reduction
unlike in the case of alteration.
DOCTRINE OF MAINTENANACE OF SHARE CAPITAL

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Arising from the realisation that the attributes of incorporation may sometimes be
abused by those who incorporate companies (shareholder, directors), go on a rampage
borrowing on behalf of the company without care, knowing they will be shielded by
concept of limited liability in sec 125; they may be drawing assets, and money from
the company thereby making the financial position weak to the detriment of the
desired going concern concept, employees and creditors. In order to protect such
interest, the law has developed a set of principles aimed at protecting the capital as
it represents the life blood of the company. These are together referred to as the
doctrine of maintenance of share capital.
This is founded both at common law, also codified into statute.
1. Shares must never be sold at a discount, that is, at a value less than the par value
[Ooregum Gold Mining Company of India v Rob – decision in this case is that shares must
never be sold less than the par value. For if you were to give discounts on the par value,
you are diluting the capital, the resources available to the creditors and to the company to
finance its operations. The open market value is often than not more than the par value].
2. [Trevor v Whiteworth 1887 12 Appeal cases 409] – the principle in this case is that a
company must never return funds to shareholders for the shares surrendered.
There should never be a refund to any shareholder even as he surrenders shares.
To give commercial efficacy to this, we now have a class of shares called
redeemable shares which may be issued if permitted by the AA of a Company,
provided for in section 176. They are the type of shares were at the option of the
company or the shareholder, the shares may be returned, and shareholder
refunded – this widens the possibility of a company raising share capital.
Shareholders may want to raise money for a project without signing up members
in perpetuity. Although in common law, the rule in this case is that a refund is not
possible, by statutory intervention it is possible provided that it is a refund on
redeemable shares.
3. Dividends may only be paid out of profits [section 159]. Thus, shareholders are not
entitled to dividends paid out of anything but profits otherwise they would be
liable for such amounts. This prevents them from diluting the share capital.

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4. Section 183(1) provides a restriction on financial assistance in respect of acquisition

of shares. The company must never give financial assistance to a person in order
to enable that person acquire shares in the company. Shares must not be given for
free using disguised ways or otherwise obvious. Have to scrutinise if a transaction
is an arms-length one to disguise this.
5. Section 183(4) relaxes this sec 183(1) restriction, giving an exception to giving
financial assistance. These include:
a. Where the company is giving financial assistance in the normal course of
business, e.g. a bank
b. Where the financial assistance is given as loans to persons, other than directors,
employed in good faith by the company with a view to enable those persons
acquire fully paid-up shares, other than nominees of the company.
c. Where the financial assistance is given as part of an employee share scheme.
Usually given as a reward to motivate employees.
6. In respect of payments to shareholders and their closely related associates, the
courts sometimes have gone to the extent of stating that payments made to
directors who are also shareholders need to be scrutinised closely, to ensure that
those payments are for consideration. E.g. if a person is a shareholder and
receiving director’s fees for providing no service at all, such are deemed as
disguised payments and contrary to the doctrine of maintenance of share capital.

THE CONSIDERATION OF CLASSES OF SHARES AND RANK OF SHARES

When a company is formed, and the articles are silent about shareholder’s rights, the
presumption is that all shares rank equally. This is true and similar to a partnership
where there is a presumption of equality among partners unless the partnership
agreement stipulates otherwise. It will be assumed that they have equal rights to:

a. Dividends
b. Receiving a return on any surplus when a company is winding up in a solvent
state
c. The right to attend meetings and vote

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In this regard both sections 7(3) and 9(2) [dealing with PLC and PVT], state that shares
shall rank equally apart from differences due to their being in different classes. The
company has a power to create different classes of shares with different rights, where
such power will be contained in the articles. In the standard articles, Reg 2 provides
that without prejudice to any special rights previously conferred on the holder of
existing…it is up to the shareholders to pass a resolution to create different classes and
ranking of shares if they so wish. If adopting standard articles, there are certain things
you need to amend in order to suit the needs of your clients. E.g. the standard articles
(sec 59) restrict the directors from borrowing over a certain amount, to a small amount
such that no company would survive, which results in Directors acting in an ultra
vires manner. It thus important to amend this regulation and any other unfavourable
regulations by filing with the Registrar that section which you’re amending.

TYPES OF SHARES

1. Ordinary shares – most common type, and in traditional form. Holders of these
shares are entitled to information such as to be notified about meetings and
attend such meetings and participate in the deliberations. Most founder
members of companies hold ordinary shares. The number of shares held will
determine your voting power. The rights attaching to this class of shares
include;
❖ the right to a dividend,
❖ the right to participate in surplus capital on winding up.
Usually, the ordinary shares carry the highest capital in the company.
2. Non-voting Ordinary shares
The rights attaching to this type of shares are the same as in (1) except the right
to vote. It is a type of share used to raise share capital.
3. Preference shares
They are so labelled because of the preferred manner in which they enjoy the
rights associated to them. Preference shares obviously will carry rights which
are preferred in relation to ordinary shares in the following ways:
a. The right to a fixed dividend

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b. The right to a return of capital at winding up, and they will be paid first
before the ordinary shareholders are paid

This type of share is also issued in order to attract people to buy these shares
and raise capital. They also make sure that such shares have limited rights in
terms of voting for example. They have two disadvantages:

a. They usually do not carry voting rights, so they don’t participate in

managing the affairs of the company
b. They do not partake in any excess profits upon winding up and even as
the company is operating as a going concern because they have a fixed
dividend.
4. Founder shares
Sometimes called “deferred shares” are rarely issued. Usually reserved for the
founders of the company. It is more of an ordinary share except that the holders
of founder shares receive a second dividend after everyone has been paid. It is
up to the founders to create this type of shares.
5. Redeemable Preference Shares
A company may if permitted by its articles to issue redeemable shares. This is
only by authorisation of the Articles (otherwise the decision in trevor v
Whiteworth holds.)
6. Golden Shares
This share carries a super vote and can be used to out-vote other shareholders.
It is not permissible to sell such shares on the Stock market, so it carries with it
a very strong voting power. Prof Gowa criticises this type of share that it has
caused a lot of distortion in Company Law, saying its not necessary and the
voting power should have been left to the number of shares a shareholder has.
However, sometimes, it is used when government has interest in a company,
where it may use it to out-vote other shareholders in the interest of the
Republic.

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VARIATION OF CLASS RIGHTS

A company may wish to vary any rights attaching to a class of shares. Variation means
a change in the rights attached to the share enjoyed by members of that class. Section
143(1) defines a variation of rights as being:

1. When the rights attached to a class of shares are abrogated

2. When a company passes a resolution, which has the effect of diminishing the
proportion of the rights (voting and dividends distributions payable) attached
to that class.

Procedure to Vary Class Rights

Described in section 143(3). Starting point are the Articles – they must provide a right
of variation to class rights. If the articles forbid any variation of the rights of a class,
they may not be varied, unless with the written consent of all members of that class,
or with the sanction of the court under a scheme of arrangement made in accordance
with the Corporate Insolvency Act.

HOW A COMPANY RAISES RESOURCES

1. A public company may raise money by offering shares to the public. There are
however procedures to be followed: not every company can raise money from the
public, only a public company is permitted. Private companies are not subject to a
rigorous regulatory framework and enticing members of the company would be
putting them at risk.

Section 210 sets out the requirements that are needed with public issue of shares.

What is meant by invitations to the public? Part X of the Act deals with this. Sec
119 of Cap 388 provided that it is not an invitation to the public if:

• a company invites 15 or lesser people; or

• if you make an invitation to 50 or fewer people with a condition that the shares
are not assignable/transferrable
• you invite employees of the company to buy shares with a condition that the
shares are not transferrable

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This does not however seem to be the position under Act No.10.

In terms of sec 211 a company that wishes to make an invitation must within 6
months before making the invitation register a prospectus – a doc which gives the
public disclosure about the company: its profitability, directors, shareholders to
enable them to make informed decisions. Section 212 outlines the minimum
information that should be contained in a prospectus. The prospectus must comply
strictly with what is outlined in the section.

The information contained in a prospectus amounts to a statement of fact in law,

that is, a representation. Therefore, any information contained in a prospectus
which is false amount to a misrepresentation. Any Director who appended their
signature to a prospectus with false information or omission of material facts
incurs a liability for misrepresentation. A person who suffers as a result of this
misrepresentation may retire the shares and be entitled to compensation. But such
a remedy is only possible where restitution is possible. If a party has borrowed
funds from the bank and has bought shares, there is a third-party interest and
rescission may not be possible but rather opt for damages. The same principles in
the Law of Contract apply insofar as misrepresentation in a contract is concerned.

2. The other method a Company may use to raise capital is by way of borrowing –
mortgages and charges. Sec 86(2) provides that the directors may exercise the
power of the company to borrow money…and may use any assets of the company
as security for those debts. This provision must be read together with the powers
given in the articles – in case there is a restriction on the amounts the directors may
borrow. A charge is nothing but a transaction in which a company places on an
asset.

Companies borrow by issuing a document known as a debenture –

acknowledgement of debt. The document will stipulate the principle amount that
has been borrowed, interest, etc. Sec 238 of the Act states generally a charge over
the property or undertaking of a company does not apply. Transactions over which
a company creates a charge to which section 238 applies must be registered with

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the Registrar within 21 days. The rationale is to protect third parties, particularly
credit financers because information is available for inspection by the public.

Sec 99(11) of Cap 388 gave the effect of a failure to register such a transaction saying:

a) the charge shall be void against a liquidator and any creditors of the company

b) the full debt secured by the charge shall become payable by the company

There is no similar provision under Act No.10.

The Movable Properties Security Interest Act of 2016 – enacted primarily to create a
registry known as collateral registry in which all transactions involving movable
assets as security are to be registered. The creditor is entitled by this statute to register
such a transaction, meaning this creditor will rank in priority to all subsequent
creditors who will have an interest in that property. It further provides mechanisms
for enforcement of such transactions. In order to foster confidence in the financial
sector, this Act has been enacted so that Financial Institutions can be encouraged to
lend to SMEs even if they have just a laptop as collateral for example.

Section 6 of this Act provides that this Statute shall have supremacy over all other
statutes in respect where movable properties are presented as collateral. The meaning
is that it shall override even the provision of the Companies Act insofar as movable
assets are concerned. The Trade Charges Act for example deals with the Provision of
Goods in Trade as collateral, the effect is that the above statute trumps this even if
there was a transaction dealing with goods in trade as movable assets.

In order for a creditor to be able to enforce his debt in accordance with the MPSIA the
transaction must be registered.

What effect has this statute had on section 238? A floating is not a charge on any
specific assets, but hoovers over until it crystallises. The assets which will be the
subject of this charge will be both movable and immovable assets when it crystallises.
What happens if during the subsistence of this transaction the company had provided
as collateral any of its assets and the creditor has registered its assets under the MPS?
The person to be recognised as a secured creditor is one who has registered the

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transaction under the MPS Act. This will in practice create some problems. In practice,
registration of floating charges requires dual registration – both under the Companies
Act and under the collateral registry, so that in terms of immovable asset your debt as
a creditor will be secured under section 238 and rank in priority under the MPS Act.

The Companies Act of 2017 equally does not to a large extent resolve this problem. it
excludes those transactions which are supposed to be registered under the MPS Act
that they do not need to be register. However, a floating charge will hoover over both
movable and immovable assets therefore for creditor protection, dual registration is
necessary.

COMPANY OFFICERS

Reference to officers of the company refers to Directors and the Company Secretary.

Directors

Section 86(1) of the Act provides that the business of a Company shall be managed by,
or under the direction or supervision of, a board of directors. It tells us that
management of the day-to-day affairs is a function of the Directors who can perform
any function which is not specifically conferred upon the members. It important to
note that the term Director refers to any person whose duty is to perform the functions
given in sec 86 irrespective of what title is given to that person. The Companies Act
does not define the term Director. Determination of who is a Director is simply by
looking at the functions he is performing.

The relationship between the Company and Directors is described as the fiduciary
relationship of principal and agent. All the principals of law relating to principal and
agent apply to Directors because they are agents. Although of course in law they are
not trustees per se, they occupy a position of trust so that the common law duties of
agent apply to Directors in relation to a Company. These are:

• loyalty – directors must act in good faith and in the best interests of the
company

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• compliance – they must exercise their collective power in accordance with the
law, the articles of association, and in accordance with the form of
incorporation (which contains the objects clause of the Company).
• Not to make secret profits – they must not use their positions to use company
property or profit from the assets of the company
• Independence of judgment – required to exercise independent judgment
under section 106 as a fiduciary duty.
• Conflict of interest – they must not allow their personal interests to conflict
with those of the company.
• Duty to act with fairness as between shareholders – they are required to treat
all shareholders equally irrespective of a stake that a shareholder has
• Duty to exercise reasonable care and skill – required to exercise diligence in
dealing with company affairs. What constitutes reasonable care is a question
of fact, a subjective test.

The Companies Act No 10 of 2017 attempts to list down these duties although it is a
partial attempt. Sec 106 of the 2017 Act refers to the fact that Directors have fiduciary
duties and the only duties listed are the duty to act for proper purposes - act in
exercising a power only for the proper purposes for which these powers were
conferred. It also talks about the duty to act in the best interests of the company but
does not codify the full duties of agents as we know them, so we continue to rely on
common law.

Persival v Wright 1902 2 CD 421 – the decision in this case is a celebrated one as being
exemplary of how the Directors relate with the shareholders insofar as these duties
are concerned. There were some shareholders who wanted to sale their shares, so they
approached the directors asking to sell to them. The directors accepted to buy these
shares at that given price, but they did not disclose to the shareholders that there was
in fact a third party who wanted to buy those shares at a higher price. They bought
and resold to the third party at a profit. The shareholders sued so that they could
recover their money and have this contract rescinded. The question was, did the
Directors owe this fiduciary duty to the shareholders? The answer was no, the duties

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are owed to the company and so there was no need for them to disclose about the
third party.

This decision would have been different if the shareholders had approached the
directors with the intention of them selling the shares on their behalf because they
would then have become agents of the shareholders. Although this case is a decision
that we use to demonstrate the relationship between the shareholders and the
company, the provisions of Cap 388 would not have allowed this - sec 220 created a
statutory duty of directors in connection with sales or companies securities (shares,
bonds, debentures…) to disclose any information that a director may have regarding
the price changes in the share price if dealing with a third party. Failure to disclose
such information rendered the contract voidable at the option of the buyer or seller
whichever case it may be. This contract would thus have been voidable at the option
of the sellers. At common law such avoidance must take place within reasonable time,
which is a question of fact. Sec 220 provides that such avoidance must take place
within 12 months of the date of agreement to sell or buy.

Appointment of Directors

Sec 85(1) provides that a company shall, unless the articles provide otherwise, appoint
a person as a director by ordinary resolution (sec 3 -requires simple majority) passed
at a general meeting of the company. The first directors of a company are those who
are named as such in the application for incorporation pursuant to section 95 of the
Act. Section 94 makes it mandatory to give consent in the prescribed form before
appointment as Director There are some persons who are deemed to be directors by
default notwithstanding such an appointment. Sec 85(5) a person not been a duly
appointed director of a company who holds himself out or knowingly allows himself
to be held out as a director of a company shall be deemed to be a director for all
purposes of duties and liabilities including criminal sanctions. It is also a criminal
offence for a person who is not a director to hold himself out as one.

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The scope of Directors’ authority

Dealt with in sec 85(7) – no limitation upon the authority of a director of a

company…shall be effective upon a person who has no knowledge of the limitation,
unless, considering that person’s relationship with the company the person ought to
have had knowledge of the limitation. A third party who deals with a director and
does not know that they are limitations on the authority of the director will be deemed
to have acted in good faith and therefore the Company would be bound. In order for
the Company not to be bound by acts of Directors who act ultra vires, one must show
that this person had either actual knowledge or because of his relationship with the
company he ought to have known.

Their authority is wide, but their powers can be limited, which must be communicated
to third parties who are dealing with the directors.

Numbers of Directors

Sec 85(2) – at least two directors for a private company and at least three directors for
a public company at every stage. This is because both organs of the company, Board
of Directors and Shareholders make decisions through resolutions in meetings. You
cannot pass a resolution alone.

Eligibility of Appointment

The Companies Act makes provisions for eligibility or qualifications of appointment

of directions dealt with in sec 92. It essentially addresses us on who is ineligible:

❖ A body Corporate – although a person in law cannot be appointed as director

because the fiduciary duties conferred are personal and can only be enforced
against a natural person.
❖ An infant (under 18) or a person under a legal disability or any person
disqualified from acting by an order of a High Court
❖ A person undischarged bankrupt by court process
❖ A person who fails to satisfy any additional qualifications for directors
provided in the articles.

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A company can in its own articles add further prohibitions as to the qualification for
appointment as Director in practice.

Residential Requirements for Directions

Sec 91 – provides that at least half the number of Directors must be resident in the
Republic because it is the Directors who are agents of the Company and is upon them
that Company documentation should be served. The same is not true about
shareholders – they can all be resident outside the Republic. This does not mean that
they must be nationals, can be foreigners but resident in the Republic.,

Vacation of Office

A company can in its own AA provide the circumstances under which a person can
vacate office. In terms of sec 99 a director vacates office:

i. When he resigns and upon giving notice in writing

ii. When a director dies;
iii. Is removed from or vacates office on accordance with the articles or this Act;
iv. Becomes disqualified to hold the office of director as specified in the Act (e.g.
Has been absent of meeting held within 6 months without the consent of other
director; when a director holds any office of profit under the company except
as managing director; For purposes of transactions in which a Director has an
interest. At that time such a person will be deemed not to be a director so that
you do not participate in meetings where the issues being discussed are to do
with the issues in which you have interest).

Types of Directors

a) Alternate Directors – a person who will act in the Directors place in the event
that the Director is not available to attend a meeting (sec 97)
b) Associate Directors – the Companies Act does not provide for this type of
Director, but Reg 67 of the standard Articles provides that Directors may from
time to time appoint any person to be an associate Director who may from time

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to time terminate any such appointment. Shall have the right to attend and vote
at any Board meeting with the consent of the Directors, by invitation only.

Powers of Directors

It is important to note that the way sec 86 is couched is such that the Directors have
wide powers unless limited in the Articles. This wide power has a limitation in sec 87–
there are four things that Directors cannot do without the consent of a resolution of
the members in acting in a general meeting:

❖ They cannot sell, lease or otherwise dispose of either in whole or part of the
undertaking of the company
❖ No power to issue any new or unissued shares in the company – they cannot
alter the capital on their own without a resolution of the shareholders
❖ They cannot create or grant any rights or options entitling the holders thereof
of acquiring shares in the company – they cannot borrow money and confer a
right on a creditor to acquire shares in the company without a resolution
❖ They cannot enter into a transaction that has or is likely to have the effect of the
company acquiring rights or interests, or incurring obligations or liabilities the
value of which is the value of the company’s assets before the transaction

Relationship between Directors and Shareholders

Do the shareholders have the power to override any decisions of the Directors?

The Supreme Court of Zambia in ZCCM v Kangwa and Others 2000 ZLR 109 said:
“shareholders as beneficial owners of the company have and enjoy as of right, overriding
authority over the company’s affairs and even over the wishes of mere nominees or Directors”.
This statement has been repeated in Bank of Zambia v Chibote Compensation. If it is true
that shareholders are the BO of the company, then even the assets of the Company are
theirs. But there is separate legal personality of a shareholder and that of a company.
The assets of the Company belong to the company alone, therefore it is conceptually
flawed to state that shareholders own a company.

The Companies Act in sec 86 gives the power to manage the Company to the Directors
and this power cannot be exercised by anybody except the Directors. The shareholders

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cannot exercise the power of managing the Company. The shareholders cannot pass
a resolution and override the power of the Directors even when Directors have validly
exercised a power.

Shaw and Sons Limited v Shaw 1935 2 Kingsbench Division 113 – “a company is an entity
distinct from its shareholders and its Directors. Directors may according to its articles exercise
some of its powers, certain other powers may be reserved for shareholders. If powers of
management are vested in the Directors, they and they alone can exercise those
powers. The only way in which the general body of shareholders can control the exercise of the
powers vested in the Directors by the articles is by altering the articles…shareholders cannot
take up the powers vested in the Directors just as the shareholders cannot take up the powers
of the Directors”

THE COMPANY SECRETARY

Is an officer of the company created by statute in sec 82 of the Act, and appointment
to this office is firstly when the company is incorporated; the first secretary will be the
person(s) named in the form for incorporation. In the Act (under Part 7), the functions
of the Company Secretary are outlined and the purpose is to clear doubt that has for
many years surrounded the expected roles of the Company Secretary, including in
certain instances the difficulties that have been encountered in determining whether
a Company Secretary has breached any of their duties.

The CS is the officer of the company responsible for providing legal advice to the BOD
as well as the members in meetings. The qualification for appointment in Cap 388 was
not defined, and therefore, legal analysts stated that this was partly responsible for
the poor corporate governance system that we have experienced in the Zambian
scenario. Since it left it open for any person to be appointed company secretary, failure
to comply with most statutes and particularly the Companies Act was alluded to the
fact that companies appoint incompetent person. The amended Act now provides the
qualification for those to be considered for appointment. The Act provides that:

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For a person to be eligible for appointment as CS, in sec 82 the amended Act provides
that an individual shall not be eligible if:

• If the individual is not a legal practitioner or, If not a chartered accountant or

a member of the chartered institute of secretaries.
• The Company Secretary must be resident in Zambia

It is NB to note that, unlike Directors, a body corporate can be appointed as secretary.

A person can be appointed both a director and CS. One of the directors can be
appointed as CS. The only qualification is that a person so appointed as both director
and CS cannot execute a document in dual roles. The CS is also appointed by Directors
unlike Directors who are appointed in a general meeting. The CS is therefore an
employee of the company who can either be full-time or part-time.

If a person is appointed as named in the incorporation doc as Company Secretary, that

appointment expires at the end of the financial year. It is either renewed or a new
company secretary is to be appointed. The CS is also an agent of the company,
therefore is a fiduciary and can bind the company insofar as legal issues are concerned.
Need to understand, eligibility for appointment, responsibilities (check current Act).

The CS just like Directors, irrespective of title is deemed to be CS by virtue of the

nature of functions being performed.

GENERAL MEETINGS AND RESOLUTIONS

Meetings are provided for in part VI of the current Act. The organs of the company
make their decisions collectively through resolutions passed in meetings. In the Act,
reference to meetings is about meetings of members (shareholders, guarantors…etc)
and not of Directors. Although management of the company is by statute placed in
the hands of Directors, there are some powers retained by the members, which powers
they exercise in general meetings.

Categories of Meetings

There are three types of meetings that can be held:

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

I. Annual General Meeting (AGM)

II. Extraordinary General Meeting
III. Class Meetings

Previously, in the Act before 1994, there used to be something called a statutory
meeting and still exists in most commonwealth jurisdictions. It’s a mandatory meeting
that must be held by a company after the expiration for a prescribed period of time
soon after its incorporated. In some countries it could be 6 months and in others 1
year, prescribed by statute. The important thing is that its purpose was that it was
during that meeting that the company should consider whether to

• approve or confirm the appointment of directors,

• appoint the first auditors of the company,
• members consider whether the articles need to be altered.

It is argued that the statutory meeting in Zambia has been abandoned by provisions
of the Act. To answer this, we consider sec 57(1) of the Act which however, does not
refer to a statutory meeting. It provides that every company must hold an AGM every
3 month after the end of the financial year. Subsection (3) is saying a private company
may dispense with this requirement if all the members agree in writing and notify the
Registrar. You cannot dispense holding an AGM in the first financial year. This
suggests that the statutory meeting still exists, and the prescribed period is 1 year, the
first financial year even though the Act does not expressly state that this a statutory
meeting.

I. The Annual General Meeting

The AGM is an ordinary meeting of the members which every company is required
to hold within three months after its financial year – a scheduled meeting. The Act in
sec 57(2) provides that if the company fails to hold this meeting within 3 months, any
shareholder can apply to the Registrar of Companies for causing the meeting to be
convened. The powers of the Registrar in such circumstances are to compel the
company to hold the AGM and if in the opinion of the registrar some members are
avoiding holding this meeting, the Registrar can:

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• Ignore the provisions of this company as to how quorum is supposed to be

formed for example - The Registrar can direct that it shall be deemed to be a
meeting even if one person attended and the resolutions will be deemed to be
resolutions of a company as if passed with quorum.

Appointment of Directors is by ordinary resolution, so if the Registrar deems that the

attendance of one member shall suffice to meet quorum, that one member can appoint
Directors and those Directors will be duly appointed. The idea is to protect the
interests of members from abuse by Directors. The provision however, has omitted to
expressly state the power to direct that one member of the company present in person
(or by proxy) shall be deemed to constitute a meeting. Regardless of the omission,
such power is deemed to still be in existence as the provision is so broad that the
registrar should be able to exercise that power.

Notice Requirements for Convening the AGM

21 days’ notice must be given before the AGM is held. However, the Act provides that
the articles of Association may prescribe a longer period of notice, but such period
may not be more than 30 days. This means that a shorter notice period is also
acceptable. The notice of AGMs must be given in writing. However, the mere fact that
there has been an omission to notify the member does bot invalidate the meeting or
resolutions passed in that meeting, what is key, is whether the quorum was formed.

Section 62 (1) provides that any person who is on the day before the last day on which
notice of the meeting may be given to – a member with voting rights, auditor, director,
and any person entitled under the Articles, shall receive notice of the meeting.

Meetings of companies incorporated in Zambia shall be held be in Zambia and the

nature of the meetings is that they must take the plenary form – no member entitled
to attend shall be deprived of the right to be heard.

Typically, the business to be transacted in the AGM (ordinary resolutions) is the

following:

▪ Appointment of Directors
▪ Appointment of Auditors

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▪ Consideration and adoption of financial statements

▪ Receipt of auditor’s reports

The above issues are passed by way of an ordinary resolution. An ordinary resolution
in accordance with sec 3 of the current Act is a resolution made by simple majority.

II. Extraordinary General Meeting

An EGM is not a scheduled meeting – it is a meeting intended to transact specific

business which cannot wait until the next AGM. Its provided for in sec 59 of the Act.
The Directors can convene this meeting anytime they deem fit. The notice period is
also 21 days. If the AGM is an ordinary meeting and the resolutions are ordinary
resolutions, it follows that the resolutions passed in an EGM are extraordinary
resolutions. Sec 3 provides that an extraordinary resolution requires 75% majority
vote. Extraordinary resolutions relate to those resolutions which would normally be
transacted in the AGM except they are now being transacted in a meeting specifically
called to deal with them. If you call an AGM to appoint new Directors at a time when
it is not time to call an AGM, it must be by extraordinary resolution and will require
75% majority as opposed to simple majority of an AGM. The reason is that not every
member may be resident in the Republic, therefore the higher requirements are to
protect absentee members.

III. Special Meetings

The Directors may call an EGM but to transact business which is not normally
transacted in an AGM. It ceases to be an EGM and becomes a Special meeting whose
resolutions become special resolutions requiring a 75% majority vote. E.g. the
decisions to alter/reduce share capital or alter its articles. Sec 3 defines a special
resolution as one passed in a meeting specifically called to pass a special resolution –
not helpful but examples of what business can be transacted in the Act.

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IV. Class Meetings

Meeting that is called and restricted to members of a class of shares, not open to all
members. This meeting can be convened either by the directors or by two or more
members of that class who hold at least 5% of shares in that class [section 60].

Sec 771 allows private companies to pass resolution by way of signing of the members
– written resolutions, but to be effective, all members must consent, does not apply
to PLC because they are highly regulated.

Registration of Special Resolutions

There is a general requirement that every special resolution be registered with the
Registrar within 21 days of such resolution (sec 78).

For Ordinary resolutions, unless the Act prescribes registration, there is no mandatory
provision to register. E.g. the Act requires that when directors are appointed the
Registrar must be notified within a specified period of time.

TAKEOVERS AND THE PROTECTION OF MINORITIES

It is not uncommon in Commerce to come up with a situation where two companies

either get together by way of one of them transferring assets to the other so that they
exist as one; or where two companies come together for purposes of taking advantage
of economies of scale and merge to form one new company. What are the implications
of companies doing either of the two? Schemes of arrangements have to do with only
one company, either the creditors or members are giving up some of their legal
entitlements to give breathing space to the company.

1The members of a private company may, in accordance with this section, pass a resolution in writing without
holding a meeting, and such a resolution shall be as valid and effective for all purposes as if it had been passed
at a meeting of the appropriate kind duly convened, held and conducted.

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

Important Terminologies

1. Merger – occurs when two companies join together under the name of one of
them or as a new company formed for a particular purpose. Can also be
referred to as an amalgamation.
2. Takeover – describes the acquisition by one company of sufficient shares in
another company sometimes referred to as the transferee company. This occurs
in order to enable the purchaser to control the target company.

The Position of Legislation

Section 48 of the Corporate Insolvency Act deals with reconstruction and

amalgamation of companies.

Just like an arrangement the starting point is for the shareholders to pass a special
resolution that they would want either the company to acquire shares in another or to
join another, whatever the case.

They must also apply to court pursuant to section 204 to approve the arrangement.
Section 236(1)(b)(i)-(vi) give situations as to what the court may be approving.

The most interesting part of the procedure or the implications are contained in section
237 referring to the power to acquire shares of the minority when a takeover takes
place, that is, acquiring at least 90% of shares in another company. Holders of the
remaining 10% are minority shareholders whose interests can be suffocated by the
entity holding the 90%. It is thus important that the law offers some protection to the
minority shareholders. The following is required to protect the interests of the
minorities:

• Immediately give notice to the minority shareholders that we intend to buy

your shares. Those MS have a right of refusal by applying to court that they
don’t want their shares acquired or apply to court to determine the price at
which their shares should be bought. E,g Airtel Zambian minority shareholders
were not happy with the amount being offered so went to court for the
purposes of determining what fair value is.

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• Sec 237(2) the transferee company may within a period of two months
beginning when (1) is satisfied…
(a) give notice of desire to acquire shares;
(b) if no action is taken by the shareholder the shares will be compulsorily
acquired by the shareholder
(c) the alternative that will apply e.g. you become a debenture holder i.e. a
creditor entitled to periodic payments
• section 237(4) – at any time after satisfying subsection (1), within three months
when subsection (1) was satisfied a shareholder may apply to court for an order
that the shares may not be compulsorily acquired; the terms of
• sec 238 applies where the purchasing company has acquired 75% of the shares
in a target company. This is not a takeover but a substantial acquisition,
therefore providing some protection for the minority shareholders. This section
gives a right to MS to say no to have 25% of shareholding whether in a class or
entire shareholding have a right to compel the purchasing entity to purchase
their shares… [para (c) doesn’t have to be 75% of the entire shareholding but
could even be 75% of a particular class of shares]

whether takeover or merger, there is a regulatory body that has conditions to be

satisfied before such as an arrangement is done. The Competition and Consumer
Protection Commission (CCPC) is concerned with competition in the industry. It
regulates takeovers and mergers to ensure that they don’t result in the stifling of
competition. Act No.4 of 2010 requirements must first be satisfied before effecting
what is contained in the Companies Act.

Whenever a material or substantial change in control is taking place in a company, sec

24 of the CCPA requires that permission must be sought from the CCPC. Material
change is where one company is acquiring or is going to control at least 50 % of
shareholding. It is not all companies subject to their jurisdiction, only those whose
combined turnover of the companies involved is K15mil or above. Sec 27 gives the
CCPC wider powers that if in the opinion of the CCPC a takeover or merger will

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impact significantly on competition even though the combined takeover is low they
would have to satisfy the requirements.

In addition, to the protection to minorities offered by sec 237 and 238, there is a general
provision in sec 239 – the remedy against oppression. This does not only apply where
there has been a takeover or merger but can be invoked at any particular time where
the minorities feel that they are being oppressed. It attempts to define an oppressive
act…the definition is very unhelpful. But generally speaking oppressive may refer to
a situation where the underpinning intention is to disadvantage minorities. E.g.
directors make a proposal for dividends and the majority at the AGM refuse because
in person they are also directors and want many years to go buy without declaring a
dividend to frustrate minority shareholders. The court has power pursuant to sec
239(3) to prohibit an oppressive act and make any orders that it may deem fit to ensure
that the minority are not oppressed. If the court feels that this oppression may
continue, and the only remedy is to compel other members or the company to buy
back the shares of the particular individual, if it is the company which has been
compelled it is a reduction in shareholder.A company may also be wound up on the
basis that there are oppressive acts which are so acrimonious that the company should
not continue. It is up to the members who feel they are oppressed to select which issues
they may pray for before the court.

EXAM

8 questions, 1 compulsory question

CAP 388 is the primary statute of reference

Almost all the questions are based on Cap 388 except for a test of a general
understanding as to what the reform under the 2017 Act is all about

No need to come into the exam with Act No. 10 of 2017

Need a copy of the Movable Property Security Interests Act

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

Need your S.I’s which are helpful in describing some procedures or demonstrating
some higher level knowledge

The Mid-Year Exam examines more the understanding of the law. There is focus on
some procedures to show an understanding of certain procedures but there are more
situational cases examining on the understanding of the law.

Identification of the legal issues contained in the story stated by way of short
questions.

Exam Revision

Same topics will be examined in the final. Therefore, mid-year paper is useful tool for
revision.

Question 1

a) Requires discussion of procedure of incorporation vis a vis name clearance;

identify some of the things the Registrar will consider

- Application for name clearance is made on an application form and a

prescribed fee to be paid

- Application can be made online

- Requirement that they submit three names

- Restrictions are guided by the law – section 41 of the Companies

Amendment Act No. 24 of 2011 – may refuse to register a name where it is
likely to cause confusion, name of an existing company or is otherwise
undesirable.

- Suggested names FU Fashions or Great University Trends – if in the opinion

of the Registrar this denotes an undesirable name, the Registrar may not
accept

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- Essence is to have monopoly over the name – have they come up with
anything that can protect the name?

- Other guidelines by practice such as if it denotes patronage of the state e.g.

XYZ National Limited

b) Post-incorporation issues

- Formalisation/Ratification of pre-incorporation contracts (sec 28 – within

15 months)

- Consider formalising appointment of Directors or changing or adding

directors to those names in the application for incorporation

- May want to enter into shareholder agreements which are binding amongst
themselves. These are better entered into immediately after incorporation

- If the standard articles are the applicable articles, they may consider
amending some of the provisions

- Must bear in mind that there is a requirement for filing of annual returns
and anything changed to their registered particulars. There is need for
notification to the Registrar.

Question 2

a) Whether the charge is void on account of non-registration

- Section 99 requires registration of charges within 21 days of executing such

a charge

- Section 99(11) renders an unregistered charge void against a liquidator and

other creditors, therefore not bound to recognise it as a secured debt

- One may agree that a charge registered outside time a liquidator is bound
to ignore it

- But although registered out of time, the Registrar issued a certificate

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- Section 100 provides that a certificate is conclusive evidence that the

requirements of registration have been complied with. Therefore, this
certificate cannot be challenged regardless of its anomaly because the
Registrar overlooked it

- Therefore, the validity of this charge cannot be challenged

- Look up Rene Eric Holmes 1965 CD 1052; Reene C.L NYE 1971 CD 442

b) A company that creates a floating charge can without the consent of the holders
of the charge deal with the assets. Can also later create a fixed charge which
takes priority over earlier floating charges.

- Fixed charges are superior to floating charges

- The exception is when there is a clause within the instrument creating the
fixed charge known as a negative pledge and acts as a prohibition

- The registration of a floating charge alone does not entail notification of

other charges

- Where there is no disclosure that there is a negative pledge the prohibition

would be ineffective since there was no actual knowledge

- NB to demonstrate how floating charges relate to fixed charges even if you

concluded wrongly

Question 3

Discuss distinctive features of the AA as a statutory contract

- Section 21

- Incorporation has effect of creating contract between members and

company and members inter se

- Privity of contract for enforcement by subscribing to the shares

- Differences with ordinary contract

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- Contents of articles are part of terms of this contract but can only enforce
those provisions which relate to you as member qua member; Beatty v
Beatty; Elley v Positive

- Consent of all parties to change terms of contract in ordinary contract, but

AA can be amended by way of special resolution – only 75% (sec 156)
therefore does not require consent of all parties

- Etc

Question 4

Starting point with such a question is to isolate the individuals

a) Katie

- Has power of veto. Can she exercise this power of veto? Can they override
the provisions of the articles?

- Discuss generally the nature of the articles and their effect in law – i.e.
constitute statutory contract among members and company qua member

- Can only enforce rights given to them in their capacity as members Sheep
breeders Association case; Beattie v Beattie

- Veto power relates to her in her position as Executive Advisor and not in
her capacity as member

- The power to approve a purchase of premises is given to her as Executive

Advisor so it is most likely that she may not succeed if she brought an action
to enforce the power of veto right

- Argument can be extended further by relying on the exception to the rule

in Fals v Abaton? that if a member wants to compel either the directors or
whomsoever to run the company according to the articles can obtain an
injunction or court order without reference that she is insisting on her right.
This is an indirect route.

b) Sales manager’s bonus

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- Although it is in the articles can this sales manager enforce the provisions
in the articles? No Elley v Positive can only enforce something given to you
as member qua member

c) Perry’s voting rights

- Any shares voted by perry shall be allotted 5 points per share

- Concern that he might protest to their proposed resolution

- Companies can consolidate their shares into shares of higher …section 74

therefore not illegal

- The other shareholders might alter the articles in accordance with sec 78 by
way of special resolution

- But he has an entitlement when it comes to voting, is it right to deprive him

of this? Can they just change and count his votes as 1? Yes they can change
the articles and omit the part that gives him 5 points per share. But in law
that amounts to a variation of class rights

- Section 62 deals with variation of class rights – need for consent from Perry

- Perry will have a good case and can rightly bring an action to prevent or
reverse that decision if it was passed

Question 5

Practical implications of Enactment of Movable Property Securities Interest Act

- Section 99 – registration of all floating charges within 21 days of their

creation’

- Once a floating charge crystallises on both movable or immovable property,

the charge holder takes precedent over all other creditors

- The MPSI creates a new registry on registration of charges on movable

properties. It is supreme to all other statutes that deal with registration of
security in charges

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- A person who registers a floating charge under sec 99 may suffer loss if a
person registers a charge under the MPSI

- In practice this means that priority ranking for immovable assets is in

accordance with the Companies Act but in terms of movable property you
may lose out priority if you have not registered under the MPSI

- There is need for dual registration for movable property.

THE PROTECTION OF INVESTORS AND CREDITORS BY WAY OF

DISCLOSURE

The Companies Act has a number of provisions which require the company to disclose
certain things by way of notices to the Registrar, the intention of legislators being to
protect investors and creditors. They create some level of transparency through
readily available information in the Registry. The publicity requirements are in four
ways:

1. The requirement for official notification of certain matters in the Government

Gazette

2. Registration of certain information at the Company’s registry

3. Compulsory maintenance of certain registers by the Company which can be

examined by any person entitled to do so

4. Requirement to make an annual return and disclose the company’s financial

position (applicable to public liability companies only)

Official Notification in the Gazette

It is a requirement of the Act that the appointment of a receiver or a liquidator must

be announced in the GG.

The idea is that if a company is in financial distress, creditors must be made aware.

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Matters requiring Notification to the Registrar

There are numerous provisions in the Act which require certain decisions of the
Company to be notified to the Registrar. Examples include

❖ resolution to alter the articles

❖ Notice of change among directors

❖ a notice of change in the situation of the registered office of the company

❖ any order of the court for winding up or dissolution of the company

Generally speaking, all special resolutions are in terms of section 158 required to be
registered with the Registrar within 15 days of making such resolutions. Some of these
resolutions would be of interest to creditors and would-be investors of the company.

However, section 74 of the Act creates a problem. it deals with alteration of share
capital and provides that the company may alter its share capital by passing a special
resolution which must be registered with the Registrar within 21 days. This is
inconsistent with the 15-day requirement of section 158. This was an oversight by the
drafters.

Registers which must be maintained by the Company

The Companies Act requires a number of registers to be maintained which may be

inspected by any entitled person.

i) The register of members in accordance with section 48 of the Act –

disclosure of who the shareholders are is NB for the investors and creditors

ii) Registers of directors and secretaries – the appointment of any director must
be notified to the Registrar. This is one of the few ordinary resolutions
required to be registered by law. Because the directors are the ones who
manage the day-to-day affairs of the company.

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Maintenance of Financial Statements

Sections 182 and 183 require that a company must maintain financial statements for a
period of not less than 10 years. The idea is that if there is an interested person who
wants to invest, these records must be available for inspections. Similarly, would-be,
and existing creditors would have an interest in the company’s financial performance
therefore need for accessible records.

Other disclosure requirements

i) Notice of charges, registration of charges in accordance with section 99

ii) There is talk in modern company law of disclosure of beneficial ownership

– this refers to who the real controlling persons in a company are. It is
common practice that the people named as shareholders are just the
custodians of other persons. This is in accordance with international efforts
in the fight against terrorist financing and money laundering. Failure to
disclose beneficial owners will constitute a criminal offence. Cap 388 has
been criticised by many commentators as being completely void of this
modern-day mechanism of disclosure because it doesn’t compel the
company or shareholders to disclose who the real controllers of the
company are.

The above mechanisms of disclosure though not conclusive are necessary safeguards
and must be looked at and considered with all other safeguards available.

FOREIGN COMPANIES

This is another type of company, one incorporated outside Zambia but with a
registered office in Zambia. The corporate citizenship remains its country of
incorporation notwithstanding the established place of business of Zambia. Section
241 states that the leading condition for having a place of business in Zambia is if it
has any of the following:

• Branch or management office in Zambia

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• Manufacturing, mining or money in Zambia

• Any other fixed place of business

We must distinguish with the provisions of section 6. We are not talking about
incorporation here because it already exists. Note, a foreign company may decide to
incorporate a subsidiary in Zambia operating under the same name of the company
of origin. Such subsidiary incorporated in terms of the procedures of section 6 does
not mean that it is incorporated in Zambia, it is only registered. It just means they have
a branch here. They have an option to incorporate here, then it would not be a foreign
a company. Registration and incorporation must be distinguished. Further note that
the mere fact that a foreign company is dealing through an agent who carries on
business of being an agent and receiving commission, does not mean it has established
a place of business in Zambia and is not required to register as a foreign company.

By the provisions of section 244, the procedure for registering a foreign company is
that:

➢ Lodge an application in the prescribed form providing the following

information:

• name,

• nature of business and main objects,

• relevant particulars of one or more individuals resident in Zambia or

body corporate that is a documentary agent (i.e. person who is the
contact person here for service of court process if need be, can be
corporate or a natural person);

• names of the individuals who are to be the local Directors of the

company (at least one Director must be resident in Zambia);

• share capital;

• number of shares;

• certified copies of constitutive documents;

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• registered office of the company in the country of incorporation;

• proposed physical address in Zambia

The requirement for registration of foreign companies is mandatory provided they

have an official place of business in Zambia [section 246]. Failure to do so constitutes
an offence. There is no classification as a public company or private company
regardless of its status in the incorporating company when registered as a foreign
company. They cannot do what a company incorporated as a PLC in Zambia can do
even if they are a PLC in the country of origin. Unless where they incorporate a
subsidiary which is a PLC in Zambia which will be regarded as a Zambian Company.
Post registration requirements as similar to the Zambian companies. One of the
unique requirements for foreign companies is that they must furnish the Registrar
with details of any changes in registered particulars of the company in the country of
incorporation. All other post-incorporation requirements such as the filing of annual
returns also apply to them.

Section 248 which deals with appointment of Directors was amended by No.24 of 2011
– requirement is that foreign companies must appoint at least one local Director. It
further requires that if they appoint more than one Director, at least half the number
of appointed Directors must be resident in Zambia.

THE RESPONSIBILITIES OF LOCAL DIRECTORS

The primary responsibility of local directors is to act ostensibly on behalf of the

company in the course of carrying on the business. The act of the director(s) shall bind
the company. Care must be taken to realise that the documentary agent referred to
above is not a director and therefore cannot bind the company but merely serves to be
a recipient of letters from the Registrar or service of court process. Service on a foreign
company is effected personally on the documentary agent (if natural person) or by
leaving at his or her address (if a juristic person) and is considered to be effective
service. The third method is service on a local director. Fourthly, the documents can
also be left at the registered address of the foreign company. Lastly, through the
normal channels of service in a foreign jurisdiction by serving it on the original

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company in its country of incorporation -this will require comply with normal rules
of service in a foreign jurisdiction.

NAME OF A FOREIGN COMPANY

Ordinarily the name of a foreign company must be its name in the country of
incorporation. However, section 253 allows that the company may register under a
different name or under a translated name into English in Zambia if its name in the
country of incorporation is in a foreign language.

The Registrar may refuse to register the name of a foreign company if that name is
likely to confuse confusion with the name of an existing company in Zambia. The same
rules of name clearance will apply as we know them. Under the same section, the
Registrar has the power even after registering a foreign company to require it to
change its name in Zambia if in the opinion of the Registrar the name is causing
confusion or is otherwise undesirable. The same principles in section 41 dealing with
Zambian companies will apply. Failing to comply may result in the Registrar
removing the name and replacing it with its registration number, this also constitutes
an offence for failure to follow directions. The use of a name which is not registered
constitutes an offence.

In terms of section 255, registration of charges by foreign companies is required if a

company provides as security any of its assets and section 99 will apply mutatis
mutandis. Registration of charges does not include assets that are in their country of
incorporation.

How then does a foreign company wind up its business in Zambia?

Section 266 provides for how it may exit the jurisdiction.

Winding up may be by order of court and as regards the circumstances which the
court may order it to wind up, the appropriate proceedings should have been taken
by a person entitled to petition. The grounds are the same as those applicable to
Zambia companies for winding up under Division 13.2. section 272 specifically gives
circumstances under which a company may be wound up.

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It is NB to note that the mere fact that the company is winding up in its country of
origin does not mean that even here the registered entity is wound up. It however
good ground to petition the court to wind up the company the entity in Zambia.

Annual returns of a foreign company have unique requirements, there is a

requirement that the annual return must be accompanied by audited accounts which
is not applicable to private companies. The idea is to try and make the entities
transparent as to how they are operating and for the protection of local creditors.

We will now be considering the Corporate Insolvency Act and the New Companies
Act of 2017.

The Act in Part 2 repeats the provisions of the repealed law as regards receivership.
The interpretation and procedures are largely the same.

Part 3 of the Act deals with business rescue proceedings which is a new insolvency
procedure in Zambia.

In part 4 the Act brings about schemes of arrangement and compromise – the law has
not changed much from Cap 388

Part 5 is winding up of companies.

The regulations to put into practice what is contained in the substantive clauses are
not ready. The forms and fees however still remain valid pursuant to a saving clause.

BUSINESS RESCUE PROCEEDINGS

Our corporate law regime has been criticised over the years for a lack of a proper and
effective mechanism that can guarantee to a higher degree that financially distressed
companies can be given a fresh breath of life, back to profitability. Receivership,
schemes of arrangement and compromises, although in away designed to try and give
some breathing space to a company that is in financial trouble have been fond to be
quite ineffective. Studies have shown that jurisdictions were the number of companies
that go into liquidation have reduced, the results have been attributed to certain
modern concepts such as administration. They have introduced in their laws modern

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concepts that are aimed at business rescue so that liquidation must be the very last
resort.

The legislature in answer to this has under part 3 of the new companies act introduced
administration. It is a procedure whereby a company that is in financial trouble but
has possible prospects of being turned around can be saved from collapse by being
placed under the supervision of a qualified insolvency practitioner and also fencing
the company off from creditors enforcing their rights. This insolvency practitioner is
known as an Administrator.

Commencement of Business Rescue Proceedings

Section 21 of the Act provides one of the two methods of commencement of business
rescue proceedings. The Act provides that the first method is that company may, by
special resolution, resolve that the company voluntarily begins business rescue
proceedings and place the company under supervision of an Administrator. Further
reading of these provisions suggest that there are further pre-conditions that must be
satisfied:

1. the Board of Directors must have reasonable grounds to believe that the
company is financially distressed. Section 2 of the Act defines financial distress
as follows: “a company is likely to be insolvent within the immediately ensuing
6 months”, i..e. inability to pay its debts.
2. Section 21(1) - There are prospects that the company can be rescued.

Section 21(1)(b)(i)-(iii) gives the purposes for which BRP may be began:

• To maintain the company as a going concern;

• To achieve a better outcome for the company’s creditors as a whole than is
likely to be if the company where to be placed in liquidation;
• To realise the property of the company in order to make a distribution to one
or more secured or preferential creditors;

The law further says that a company cannot valid pass a resolution to commence BRP
if liquidation proceedings have already been commenced [section 21]. The legislators

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are trying to avoid a situation where the creditors have already started the process of
liquidation which is selling the assets of the company and paying off the creditors and
members frustrate such process where creditors have already exercised their rights of
enforcement. The purpose of insolvency law is to protect all stakeholders including
creditors by balancing out the rights of creditors on the one hand and attempting to
rescue the company. BRP is available if liquidation proceedings have not been
commenced.

Once the resolution has been passed, it must then be filed with the Registrar. There is
no prescribed period for filing, however, the Act says that the resolution shall become
effective after it has been filed with the Registrar. The reading of sec 21 is that it only
says that it shall become effective after not on the date. The reason is that it is the
members themselves who should appoint the effective date of this resolution and give
notice within 30 days after filing it to all affected persons indicating the effective date
of the resolution. Who are these affected persons? Section 2 defines them as to include
“a regulator, shareholder, member, director, creditor, employee, former employee,
registered trade union and the Registrar.” Use of the term includes means that the list
is not limited to these. The members can then now proceed and appoint a business
rescue Administrator.

Section 21(4) when you have appointed a Business rescue Admin, you should within
7 days of such appointment publish a copy of the notice of appointment to each
affected person. Section 21(5) A failure to give a notice of a resolution under sec 21(3)
and a notice of appointment under sec 21(4) would mean that if you have failed to
follow either procedure, within 60 days after passing the resolution, the resolution
shall lapse. This means that the company will not be under Administration and is
effectively not fenced off/protected.

When a resolution has been passed, section 22 provides for ability to oppose this
resolution. Any affected person may apply to court to oppose the adoption of the
resolution and the application to set aside this resolution should be based solely on
the grounds prescribed in section 22. Section 22(1)(a), (b) and (c) gives the grounds
upon which the court may set aside this resolution:

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1. No reasonable basis for believing that the company is financially distressed;

2. No reasonable prospect for rescuing the company;
3. The company has failed to satisfy the procedural requirements set out in section
21, e.g. no notice given;
4. The business rescue administrator is not qualified to act as such. Section 30 of
the Act provides that a person may be appointed as a business rescue admin if
that person qualifies to be appointed as a receiver or meets other qualification.
Accreditation is valid for 1 year. The regulations under the corporate
insolvency act provides for qualifications.

Section 23 provides another means by which BRP may be commenced. Through a

court process. An affected person may apply to court for an order to place a company
under supervision and begin BRP. The regulations will state what is the method of
commencement. The applicant shall serve a copy on the company, the registrar and
the official receiver – the Administrator General and notify each affected person of the
application in the prescribed manner. If the court is satisfied, they make an order to
put the company under supervision. Section 23(4) conditions:

1. Financially distressed,
2. failed to pay an amount under obligation in relation to employment matters;
3. if it is equitable that a company be placed under supervision. This is a wide
power which may go beyond the restrictions placed under sec 21.

In all cases the prospects of turning around the company must be present.

Section 23(7) creates a problem: commencement of BRP as provided for in this statute
whether by special resolution or by court is something premised on the SA Insolvency
Act. This provision has been found to be a big problem in SA and there is talk of
having an amendment to be made. Section 23(7) reads “if liquidation proceedings
have been commenced by or against the company at the time an application (by an
affected person) is made as provided in (1), the liquidation proceedings shall be
suspended. Until then, the court as shall adjudicate upon that application…if there are
proceedings going on in court to liquidate the company, the moment an affected
person files an application, liquidation proceedings shall be suspended. The problem

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that has been found is that the Act does not define the term liquidation proceedings.
Does this refer only to court proceedings before the final order of liquidation is given?
At what point shall you say that these are just liquidation proceedings and liquidation
itself has not commenced? Liquidation in SA is being frustrated left, right and centre.
This goes against the spirit of insolvency law. Liquidation entails that the company
has no prospects of rescue, it is a terminal stage. If it has commenced why are you
stopping it?

The Court in SA said “it is in my view remarkable that the legislature did not refer to
the company already under liquidation. Although there is no definition of what
exactly liquidation entails, the legislature does not include a liquidated company. In
attempting to determine what the legislature intended rules of interpretation are clear
by considering the use of the plain language…legislature would have stated clearly if
that was the intention that business rescue is possible even after the liquidation order.”

If there are no problems with commencement, automatically the fencing off starts.
This is known as a moratorium, a period within which creditors lose their right of
enforcement against the company. Section 25 – there can be no legal proceedings
against the company during this period except with the written consent of the
business rescue administrator or with leave of court. This moratorium does not extend
to criminal proceedings against directors or officers of the company. Any proceedings
against the company for purposes of setting off what the company had claimed in
another proceeding, e.g. against a third party are not prohibited under a moratorium.

The procedures require that the Administrator must from time to time call for
meetings, submit a report and a plan which must be approved by the creditors. The
moratorium will go on for the period that the creditors agree with the Administrator.

Section 36 provides that the creditors will participate in the business rescue plan by
way of voting. The creditors would have concerted to the duration of the proceedings.
Section 38 provides for participation by the shareholders who will vote for the
approval of that plan.

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The insolvency practitioner has to make periodic reports to these interested parties so
they will be very much a part of the proceedings.

The BR plan – section 44 shows what processes it has to be put through: a vote by the
creditors and shareholders; pursuant to section 44 if the plan is rejected by these two
parties, the options available are

i. administrator may seek approval of the meeting that he produces a revised

plan or;
ii. he may inform the meeting that the company shall apply to court to set aside
the results of the vote on the grounds that it was inappropriate. H will
probably be arguing that this is the best plan that can be crafted and will go
to court to prove so
iii. section 44/2 provides that if the administrator does not do either of these
two things, an affected person can call for a vote of approval from the
holders requiring the administrator to be given an opportunity to submit a
revised plan;
iv. any affected person can also inform the meeting that that affected person
will be applying to court to set aside the results of the vote on the grounds
that it was inappropriate.

TERMINAL PROCEEDINGS FOR COMPANIES

These are proceedings available to bring the lifespan of a company to an end.

1. Deregistration by the Registrar – Part 15 of the Act. The exercise of the power
by a registrar to deregister should be distinguished from the company being
wound up. Deregistration is a process by which the registrar strikes the name
of a company off the register. It is different from winding up which is a process
by which a company’s assets are realised, sold, credit has been paid, and the
remainder of the assets distributed among the members, i.e. a liquidation
process.

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Under what circumstances can a company be deregistered? Section 317

provides that the register may deregister where:
a) A company has not filed annual returns for two consecutive years;
b) The court on an application by a registrar issues an order that the company
be deregistered;
c) The registrar has reasonable cause to believe that company is a dormant
company - section 2 defines a dormant company – a company which is not
carrying on business or is not in operation from the date of incorporation or
for a prescribed period. The idea is that you do not want to have companies
remaining on the register that are not in operation (how about charging
them for maintaining the register?) – shelf companies are not recognised in
this jurisdiction.
d) The company itself applies on grounds that it is dormant
Contrary to cap 388, the procedure for deregistration has been abridged. All
the registrar needs to do is give notice in a prescribed manner and give
reasons for deregistration, requiring the company to show cause as to why
is should not be deregistered. If the company does not take remedial
measures within 30 days, the registrar may deregister the company. Need
to publish the notice of deregistration through the government gazette or a
widely circulated newspaper or other media.
What is the effect of deregistration? Renders the company dysfunctional –
loses capacity to contract. Section 317/8 provides that a company that has
been deregistered shall not from the date it receives notice of deregistration
i. Enter into any form of contract in relation to its business
ii. Renew or vary a contract relating to the affairs of the company

Section 317/9 states that the Corporate Insolvency Act shall apply to a
company which has been deregistered in accordance with sub section 1/a
and b, i.e. on deregistered because of failure to file annual returns or as a
result of a court order. For a dormant company, there is no need to invoke
provisions of the Insolvency Act because it has not been in operation
therefore by implication has no debts.

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If the Registrar strikes a company off the register, it is still alive except it
loses contractual capacity, doing so is an offence. The lifespan of any
company ends through winding up processes.

WINDING UP OF COMPANIES

A non-dormant company has to go through the processes of winding up pursuant to

the Insolvency Act. It is the process by which a liquidator is appointed to realise the
debts

1. Voluntary winding up by the members

A member’s voluntary winding up is initiated when the members of the company

adopt a special resolution for the voluntary winding up of the company. It should be
noted that a VWU is only possible where the company is solvent – the assets of the
company exceed its liabilities. Therefore, the Insolvency Act requires that the directors
must sign a Statutory Declaration of Solvency in writing pursuant to section 91 of the
Corporate Insolvency Act (CIA) declaring that they have carried out an enquiry into
the affairs of the company and that they are satisfied that the company meets the
solvency test2.

If the company is not solvent, then VWU is not possible because you need to be able
to pay the debts. The idea is the protection of creditors otherwise the corporate vehicle
would be abused. Failure to pass the solvency test means that the winding up
procedure becomes the creditor’s voluntary winding up.

2. Creditors Voluntary Winding Up

It is initiated when the members adopt a special resolution for VWU without a
Statutory Declaration of Solvency by the Company’s directors. A Creditor’s VWU is

2 Means a test to determine that:

a) A company is able to pay its debts as they become due during the course of business
b) The value of its assets is greater than the value of its liabilities including contingent liabilities (those
likely to come up)

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invoked in relation to insolvent companies. It should be noted that the involvement

of court is not required in initiating this process.

3. Compulsory Winding Up by the Courts

The court may issue an order that company winds up on the application of the
following persons:

1. The registrar or the official receiver

2. The company itself
3. A creditor
4. A member
5. A person who is a personal representative of a deceased member
6. The liquidator if of the company, if the company is in liquidation initiated by
way of member’s VWU
7. The trustee in the bankruptcy of a member [under the Bankruptcy Act if you
are declared bankrupt you cease to act on your own but by way of a trustee]

It should be noted that the grounds upon which the court may compulsorily wind up
a company are limited. They are specified in section 57 which says

a) The company has resolved by special resolution that the court wind up the
company;
b) On the grounds that the court carries out an enquiry and is of the view that the
company is unable to pay its debts;
c) If the period fixed for the duration of the company by the articles expires or an
event occurs of which the articles provide that the company is to be dissolved;
d) If the number of members is reduced to below two;
e) If the company was formed for an unlawful purpose;
f) ? what is f?
g) If in the opinion of the court it is just and equitable that the company should be
wound up – this is broad, what is ‘just and equitable’? Ebrahimi v West Bourne
Galleries Limited 1973 AC 360 – read HOL judgment. The House of Lords says
that “there has been a tendency to create categories or headings under which

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cases must be brought if the clause is to apply. This is wrong. Illustrations may
be used but, general ways should remain general and not be reduced to the sum
of particular instances. In companies that are quasi-partnerships, the question
should always be ‘would it be unjust and inequitable for the petitioner to be
forced to remain a member of the company?’”.

In a nutshell, the principles established in Ebrahimi case are that

a) The just and equitable clause to wind up a company may apply even though
the respondents acted within their strict legal rights
b) The just and equitable clause may apply when the complaint relates to
behaviour that is contrary to the settled and accepted course of conduct
between parties whether or not, reinforced by contract, or by the articles.

Other Circumstances [Examples]

1. The just and equitable close to wind up accompany will be applicable where its
substratum or the principle object of the company has failed. This principle will
normally apply where a company was formulated to pursue a particular
adventure. Re Germany Coffee Company 1882 20 CHD 169 – the only object of the
company was to acquire and work a patent, but they failed to acquire the
patent. E.g. also, If the object of the company is to work a mine and then it is
found that its not a mine because there are no mineral deposits. See also Re
Kitson and Company Limited 1946 1 All ER 435.
2. It is just and equitable to wind up the company where there is a complete
deadlock in management. In most cases, the courts will hold that there is no
deadlock where there exists sum legal means to get decisions made using some
procedure under either the articles or the general law.
3. It is just and equitable to wind up a company where there is a justifiable lack of
confidence in the management of the affairs of the company. See Loch v John
Blackwood Limited 1924 AC 783 – illustrates the circumstance under which you
might say that there is a genuine lack of confidence. There was a deceased
person who through a will/ trust deed left a company to be managed on behalf

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of beneficiaries and this person stop giving reports. He was the only person
who was knowledgeable to run it, so it could not go on.

What are the effects of winding up proceedings on the company?

When a petition has been received by a court for the winding up of a company, and
the proceedings have commenced:

1. section 62 prohibits the disposition or selling of any of the assets of the

Company including things in action. Sale of shares – prohibits new members
and surrender of shares when winding up proceedings have begun – this is for
creditor protection.
2. Section 63 says an attachment, sequestration, distress processes, execution put
in place on assets of a company after winding up processes have begun is void.
3. Section 66 provides that no action against the company, except with leave of
court can be commenced. The court can refuse or accept that you commence
such action.
4. Section 67 provides for appointment of liquidator by court – the court my either
appoint an individual as provisional liquidator (interim – to give chance to the
creditors or members to appoint a substantive liquidator) or as liquidator. If the
court has not appointed either a provisional/liquidator, then the official
receiver is automatically the liquidator.
Powers of the liquidator are contained in section 74 and the powers are wide:
a) To pay any class of creditors in full subject to priority ranking of the Act
b) Make any compromise or arrangements with the creditors (may accept less
than full amount that they are owed or waive their interests if any attached
to a debt)
c) Dispose or the assets by public tender or in the most transparent manner,
etc

The liquidator does not operate in isolation but has a responsibility to give account to
the court as an officer of the court. He also has to work according to the comments
given to him by the committee of inspection provided for in section 77 consisting of
creditors or members of the company and their agents. This is the committee which

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will be taking care of the interests of the members and creditors, appointing a few
amongst themselves. He has to present periodic reports to them.

Discussion of the Statutes

We are working with the new Companies Act and the new Insolvency Act in the exam.
The exam will not really require us to look for provisions in the new Act.

NB is the new features in the incorporation of companies. A company must provide

articles or association or a statement that they have adopted the articles. Makes it an
obligation for a company to state that they are adopting standard articles if they are.

Beneficial ownership – the promoters must state if the people who are named in the
application are not the beneficial owners. Come as a result of universal requirement
for transparency to fight money laundering and terrorist financing. Failure to adhere
is a criminal offence.

The Act also with reference to Directors duties now tries at codifying the traditional
directors duties which were being borrowed from common law. Note that the
provision relating to this is incomplete, so must be read with the common law
position. This takes centre stage in the exam because these are the main drivers of the
company.

The law relating to articles of association is also NB because it has many implications
in law. It’s the constitution of the company, but apart from that is also a statutory
contract. Revise the law relating to AA and its implications.

All the questions are situational questions except part of the compulsory question
which attempts to focus more on procedure. Almost all the questions have a number
of issues that need to be identified and discussed.

The law relating to share capital, shareholding, variation of share and class rights,
rights of shareholders, are you able to identify a situation and know that this
constitutes a variation of class rights? Are you able to identify as many issues as
possible in a given scenario? Did the directors act without authority or exceed their
authority? Was the right procedure followed in amending the articles? Etc

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The public issue of shares’ provisions are almost identical to cap 388 and are NB to
understand.

Formation of companies – Cap 388 suggested that a company is formed when the
promoters file with the registrar – part 13 concept of amalgamation in Act No 10
couched in a different way. Two ways for amalgamation:

1. One gets swallowed by another and becomes part of that company. Registrar
to issue certificate of amalgamation
2. Where the two merge and form a different company, should issue certificate of
incorporation

Corporate Insolvency Act

Introduction of BRP – new concept so will definitely be in the exam. NB to understand

procedure in terms of its meaning and the procedures involved in its commencement,
moratorium, duration, legal implications for stakeholders, directors powers,
appointment of administrator…

Schemes of arrangements and compromise, receivership also need to be understood

and know how they relate with the new concept of administration.

Winding up, compulsory winding up, circumstances under which the court may wind
up, requirements for voluntary winding up.

Not expected to go into greater detail as regards distribution of assets, periodic reports
of the liquidator.

Section 238 of Act 10 – registration of charges by companies – the practical

implications as where explained was that the way sec 99 had been couched was need
for dual registration. Section 238 removes requirement for registration under the Act
if the asset being dealt with is subject to the Trade Charges Act or the Movable
Property Security Interests Act. Note that there is a gap in section 238 – no specific
provision for implications for failure to register a charge. This provision is silent. For
now, we rely on the gen provisions for sanctioning non-compliance with the act but
this is still not sufficient.

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 Winjie Siwale BCom. LLB (Rhodes) LLM (UWC-Humboldt)

Is Sec 138 is an attempt to codify the position in Foss v Harbottle? He does not think
that rules in foss v Harbottle become irrelevant by virtue of sec 138. Where there is a
gap in the Act, you can refer to common law.

67 | P a g e
“Work as if everything depends on you and pray as if everything depends on God!”